An International Perspective: The Evolution of Financial Services in Canada

Journal of Financial Planning: September 2020


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Jason Pereira CFP®, is a Toronto-based financial planner and serves as the founding president of the Financial Planning Association of Canada.

Alexandra Macqueen, CFP®, is a founding member of the Financial Planning Association of Canada. Her work focuses on retirement income planning.

Editor’s note: Keeping up to speed on regulatory issues is critical for financial planning professionals. In this age of a global economy, it’s also important for U.S. planners to be informed on what’s happening on a regulatory front around the world. Efforts being made in Canada are an important part of the overall progression to solidify financial planning as profession.

For the past several years, the Canadian financial services industry has been undergoing a slow-moving evolution, and in spite of the COVID-19 crisis, 2020 is shaping up to be another year of continued change.

Canadian Primer

To better understand how it’s changing, let’s look at the current state of the Canadian financial services landscape. Canada’s population of 37.6 million is spread across 10 provinces and three territories, in the second largest (by landmass) country in the world. Canada has two official languages, English and French, and while most of the country is governed by common law, the province of Quebec follows the civil code. Structurally, Canada is a confederation of provinces plus a federal government.

Financial industry regulation in Canada has largely fallen under the purview of the provinces (as they have constitutional jurisdiction over “property”) and carried out in practice by a handful of inter-provincial self-regulating organizations. This piecemeal approach has meant fragmented securities regulations and has complicated efforts toward financial and securities market reform.

Comparing Neighboring Systems

Canada’s licensing of market participants has many similarities with the U.S. system. There are three primary regulatory channels in Canada, under which licenses to distribute financial products are available: 

Mutual funds licensing is similar to the Series 6 license and governed by the Mutual Fund Dealers Association (MFDA), a national self-regulating organization.

Securities licensing is similar to the Series 7 license and governed by the Investment Industry Regulatory Organization of Canada (IIROC), another self-regulating body.

Portfolio manager licensing is similar to the U.S. RIA licensing and governed at the provincial/territorial level. Similar licensing is also available through the broker-dealer channel.

Despite these similarities, the outcomes in Canada and the U.S. are surprisingly different. The Canadian market is dominated by six large national banks who, in turn, own the six largest broker-dealers in the country. Combined, the “Big Six” control an estimated 75 percent-plus of all assets under management, with the remaining fraction spread amongst independent broker-dealers (in both the securities and mutual fund channels), and independent portfolio management firms. Unlike in the U.S., where Canadian banks like TD and RBC provide services to independent advisers, in Canada they compete directly with independent advisers in search of market share.

While the U.S. RIA market has been growing at double-digit rates, the same growth hasn’t materialized in Canada. This is, in large part, due to higher regulatory barriers to entry, higher costs, and much more limited support structures in the form of modern, API-enabled custodial offerings and adviser technology.

It is in the area of fees, however, that the most notable differences between Canada and the U.S. arise. Canada is repeatedly singled out as burdening consumers with some of the highest mutual fund management expense ratios (MERs) in the world, with balanced mutual funds coming in at an average of between 2.25 percent and 2.50 percent per year. This figure needs to be decomposed a bit, however, to enable comparison.

Unlike other nations, the majority of Canadian mutual funds are sold with embedded adviser compensation, with an average 1 percent adviser trailing commission built in. When adviser compensation plus (value-added) sales taxes of approximately 13 percent and higher administrative costs (due to lower economies of scale) are factored in, the difference in management fees between Canada and the U.S. is far less notable, but there are other, bigger, underlying issues with Canada’s mutual funds fee practices. First, the practice of embedded adviser compensation limits transparency; and second, a fair percentage of consumer mutual-fund dollars are placed using the equivalent of U.S. B-class units, which pay the Canadian adviser an upfront commission of 5 percent with a redemption schedule of up to seven years.

One particularly frustrating issue for Canadian consumers is that those in the industry have largely been free to use whatever job title they chose, so long as that title doesn’t run afoul of securities legislation. This has resulted in few limitations on the use of the titles “financial planner” and “financial adviser,” regardless of licensing, certification, or education.

The good news for Canadian investors is that all of these issues are in a state of change.

The Quebec Exception: Vive la Différence!

One Canadian organization that deserves to be singled out for its efforts to professionalize financial planning and protect consumers is the Institut québécois de planification financière

(IQPF), or the Quebec Institute of Financial Planners.

For over 25 years, the IQPF has been working to “protect the personal finances of the public by training financial planners and establishing standards of professional practice.”1 In that time, they have managed to successfully limit the titling and act of financial planning to only those professionals who carry the IQPF’s Financial Planner (F. Pl.) designation. And they’ve raised the bar for this designation to include not only a qualifying program of study culminating in an exam, but also a degree or certificate from a recognized post-secondary institution in either financial planning or an equivalent university program in a relevant topic area.

Today, Quebec stands out as providing one of the world’s highest standards for financial planning certification, despite not receiving the equivalent recognition of the U.K. or Australia.

Securities Regulation: Progress Toward Integration

The fragmented regulatory system of Canada forever changed in November 2018 when a landmark decision by the Supreme Court of Canada2 paved the way for the consolidation of securities market regulation under the Canadian Securities Administrators (CSA). Since then, the regulatory industry has been in a period of flux as the provincial regulatory bodies and SROs work to develop a new framework for governance.

Currently, the CSA has entered a comment period seeking guidance on how it might reorganize the self-regulating organizations of the MFDA and IIROC within the context of a national regulatory framework that would oversee all areas of financial markets. While we do not yet know what will come out of the reorganization of the Canadian system, there is now a clear mandate for enhanced coordination and simplicity, the reduction of regulatory burdens, and increased consumer protection.

In fact, enhancing consumer protection has already been at the forefront of current regulatory efforts with the creation (and now, pending implementation) of a proposal accurately entitled “Client-Focused Reforms.”3 This proposal outlines a series of changes covering most aspects of client interactions, including reforms to regulations in the areas of “know your client/know your product,” conflicts of interest, referral arrangements, suitability, and other areas.

The CSA has more recently moved to ban the sale of all mutual funds carrying deferred sales charges by mid-2022. To date, all but one provincial government has agreed to move forward with a complete ban on deferred sales charges, with Ontario—the most populous province and the country’s financial center—considering options for a partial ban.

Title Reform: Who, What, When?

In 2019, the Ontario government tabled draft legislation to regulate titles for financial professionals as a means of protecting both consumers and practicing professionals. Over time, this led to the 2019 Financial Planners Title Protection Act, which seeks to regulate the use of the titles “financial planner” and “financial adviser.” The goal is to limit the use of those titles to only those professionals who have demonstrated sufficient proficiency, as evidenced by credentials that meet standards for proficiency and credibility as set out by the body that will enforce the legislation, the Financial Services Regulatory Authority of Ontario.   At the time of this writing, the framework for title regulation was still in development. Note that Canada is not lacking in financial industry designations. Canada is home to over 16,000 CFP® professionals, 15,000 CFAs, 217,000 CPAs, and 1,800 trust and estate practitioners (TEPs). And yet, a large proportion of the estimated 100,000-plus people licensed to sell financial products in Canada do not hold any of those designations. Titling legislation will serve as an important first step in separating out those with planning and advising proficiency from those who simply sell products.

Other provinces have taken note of Ontario’s efforts and plan to pursue similar legislation. The first to step forward has been taken by Saskatchewan, with The Financial Planners and Financial Advisors Act4, and Alberta is expected to follow. If it does, over 75 percent of the Canadian population will have some assurance of proficiency when selecting a financial planner or adviser.

Progress Toward a Canadian RIA Market

Canadian companies have noticed the growth of the U.S. RIA market, and more than a few players are now looking to try to build the infrastructure to implement this structure in Canada. Various custodians servicing independents are undergoing modernization projects and opening up APIs to vendors. And companies are being formed to provide services to those looking to make the transition and provide TAMP services as a means of providing infrastructure. Several independent broker-dealers are also expanding on TAMP-like and related services that could eventually offer said services to independent portfolio managers outside of the broker-dealer arrangement.

One advantage of the Canadian players’ late arrival is that they are starting with a clean slate. Many of the technologies available to this market are newer, non-legacy solutions. Several of them are also homegrown solutions, as Toronto is ranked as one of the top fintech hubs in the world.5

More recently, Canadian regulators have begun to reduce the administrative requirements to operate under this model. In particular, the CSA recently moved to permit outsourcing the role of chief compliance officer for a portfolio manager to a third-party service provider outside the portfolio management company. Prior to this announcement, the portfolio manager or another full-time employee was required to complete this work.

The Push for Open Banking

One of the bigger lobbying battles happening publicly in the Canadian financial space is the fight for open banking. While the federal Department of Finance has begun consultations to explore the concept of open banking, progress has been slow and, more recently, delayed by COVID-19. Meanwhile, several key influencers have written public statements about the vital importance of open banking approaches to the future development of Canada’s financial system, competitive landscape, and consumers.

Not surprisingly the oligopoly players who control Canada’s banking sector have not been eager to embrace the concept. In fact, their actions have demonstrated their disdain for open banking, even taking measures to make data aggregation—table stakes in U.S. planning software, but still limited in Canada—more difficult. Further consultations have been pushed back until later in 2020 at the earliest.

Gaining Momentum

As the wave of financial services modernization that is taking hold in the U.K., Australia, and the U.S. continues to gain momentum, it has not gone unnoticed in Canada. To be sure, Canada has a long way to go. There has been no ban on embedded compensation, and the concept of a fiduciary standard for financial advisers is a fringe idea at best.

Late 2019 saw the launch of the Financial Planning Association of Canada. This small grassroots organization of financial planners has dedicated themselves to transforming financial planning into a profession of qualified, evidence-based, fiduciary professionals dedicated to the betterment of the financial lives of all Canadians. While small in numbers, the association has set a high standard for membership and has been working to build out committees, relationships, and resources to drive forward with its vision for the future.

Every change described here is the result of Canadians looking at what was happening elsewhere and realizing that we had to evolve as well. The gains outlined here are just the first steps in far more change to come


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Sidebar: FPA of Canada: How We’re Changing the Rules of the Game

by Jason Pereira, CFP®

Nashville, Tennessee would seem like an unlikely birthplace for a new Canadian financial planning association, but as host of the 2017 FPA Annual Conference, Nashville unwittingly provided the setting for the creation of the Financial Planning Association of Canada (FPAC).

FPA’s annual conference attracts over 2,000 attendees from more than 20 countries, and I’m a frequent attendee. In 2017, the international attendees came together prior to the first day of the conference; that’s where I met some of the members of FPA NexGen, which supports new and aspiring planners in the early stages of their careers.

Intrigued by my conversations with NexGen planners, I attended their presentation the following day, and the experience left me in awe. Not from the presentation’s content (although their ideas were music to my ears), but from what happened next. After the presentation, more than 50 new-to-the-profession planners stayed behind to passionately discuss how they could push the profession away from a focus on “sales” and toward professionalism and a fiduciary standard; empowering Americans by providing planning to as many people as possible.

At the time, I couldn’t think of 50 Canadian planners I could have a conversation with about the same ideas, never mind with the same enthusiasm. While a feverish debate about fiduciary responsibility was taking place in the U.S., the subject almost never came up in Canada. I left the room in a state of shock; I so astounded and taken aback that when I found my fellow Canadians they asked what had happened to me.

To understand the depth of my reaction, recall the situation in Canada (see “An International Perspective” beginning on page 42). At first blush, our financial industry looks similar to yours, but there are some key differences. In 2017 these included:

No national securities regulator.

A weak licensing equivalent to the RIA model, hampered in practice by higher regulatory barriers to entry.

No robust ecosystem of integrated technology and service providers.

An investment marketplace dominated by six major banks, their broker-dealer divisions, and their mutual fund and ETF companies.

A mutual fund landscape featuring some of the highest fees in the world.

Since 2017, there have been a number of positive developments, including:

Regulatory changes paving the way for the creation of a national securities regulator, which has also led to a reorganization (and likely future consolidation) of the self-regulating organizations which currently operate in Canada.

A handful of organizations building support structures, such as TAMPs, in order to create platforms for bank-owned, broker-dealer advisers to more easily transition to independent broker-dealers or to the Canadian equivalent of the RIA model.

A growing ecosystem providing modern technology and services to advisers.

A near country-wide ban on deferred sales charges (with Ontario a notable exception), the Canadian version of B-unit mutual funds.

Two provinces are in the process of developing legislation to protect and regulate the titles “financial adviser” and “financial planner.”

FP Canada, which regulates the CFP® designation in Canada, has increased conduct standards to a level of “client best-interest.”

Despite this progress, there’s still much work to be done to professionalize the Canadian financial advice and financial planning industry.

A Call to Action

After that first encounter with NexGen, I went—along with another Canadian conference attendee—to the NexGen town hall so I could show him what I was talking about. We weren’t disappointed! The drive and determination to transform the industry into a profession permeated everything we heard; so much so that at the close, I felt the need to stand up and say something to make sure they all appreciated what they had. The response? A challenge to work toward the same goal in Canada.

That interaction left me inspired, yet deeply troubled about how to move forward. I had two things going for me: my profile within the industry and a large network of both young and experienced planners I had cultivated over the years. I knew already that I was not alone in my concern about the state of affairs in Canada. In fact, I found dissatisfaction was growing as more and more Canadian planners were sharing their view that it “didn’t have to be this way.”

Here, Michael Kitces and his podcast deserve special credit. Almost universally, my contacts in Canada mentioned Michael’s podcast as a source of inspiration, some even saying they had just about abandoned the industry until they found it.

Word about the potential for positive change was getting out; we just needed to form the tribe who would carry a torch to the new reality.

I and several colleagues batted around ideas, discussed options, and ultimately concluded that the best—and perhaps only—option to move forward was to start a new association in Canada.

The Need for a New Choice

Three major associations claim to be “the voice” for advisers or planners. (I'm a current director of one that sets a high bar for membership.) Despite this, everyone I spoke to agreed that Canada still lacked a body with both sufficient size and a clear mandate to push the agenda of professionalization, and to stand in opposition to other groups lobbying against that agenda.

To that end, a small group of us developed an organizational charter that set out clearly defined goals for the desired end state of “professionalization” for the financial planner or adviser: a fiduciary, evidence-based, and highly proficient professional dedicated to enabling the financial lives of Canadians.

Our goal was to head off debate about what direction to head in. That is, if you wanted to become a member of this new association, you knew at the outset the organization’s end goal. But beyond setting out an agenda for future accomplishments, the budding association also imposed a current standard on prospective members: a fiduciary pledge, attested to when the membership application is made, plus a two-year deadline to update the member’s practice standards—for evidence-based planning and proactive disclosure—to the standards we set.

Making a Brand and Raising the Bar

When it came time to name our new association, the choice was obvious. The name was drawn from both the profession we represented and the organization whose conference provided the genesis for the organization: the Financial Planning Association of Canada.

After a year of brainstorming, collaboration, and feedback, our 36-page charter spelled out the association’s mission, vision, values, structure, and—most importantly—our overall goal of professionalization of the industry.

A soft launch in the spring of 2019 gave us founding members and start-up capital, thanks to a generous grant from the IFID (Individual Finance and Insurance Decisions) Centre. The following months were spent hammering out legals, developing strategic resources, and preparing for a public launch in November.

We launched with industry-wide coverage and positive reception. Since then, the members have been generously volunteering their time to build various initiatives, such as creating pro bono planning resources for low-income Canadians and other resources to better the knowledge of our membership.

Moving Forward

With the creation of the Financial Planning Association of Canada, the passion and determination I’d been inspired by in Nashville in 2017 has come to fruition here at home. Canadians finally have an organization whose sole focus is professionalizing the practice of financial planning, and a tribe of people committed to standards that will position them, as financial planners, ahead of the pack—raising the bar for Canadians who entrust us with their financial futures. 

Jason Pereira, CFP®, is president of the Financial Planning Association of Canada

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