The royal commission’s recommendation that brokers work under a best interest duty has been called “an impossible standard” by an association CEO and former regulator who saw Canada try and fail to do the same.
In 2016, Canada’s regulatory body the Canadian Securities Administrators (CSA) announced it would introduce a best interest standard after a four-year investigation exploring how the requirement would alter the market.
Within two years, each of the country’s regional regulators had scrapped the duty having failed to define “best” or sufficiently demonstrate how the value judgment could be enforced.
“When you’re talking about the ‘best’, it’s just an impossible standard. How are you supposed to nail down all the options?,” said Samantha Gale, CEO of the Canadian Mortgage Brokers Association in British Columbia.
“When push came to shove, when the principle was explored in terms of application, everybody had a hard time trying to figure out what it meant and what it would require. It sounds good, it sounds like the right thing to do, but it wasn’t quite clear what it meant.
“It’s an unreachable, unsurpassable, unattainable standard,” she told Australian Broker.
Several articles that circulated after the duty was discarded pitted the interests of financial advisers as conflicting with those of the consumer.
To Gale, this is not a fair representation. She explained, “The two [parties] aren’t necessarily opposed to each other. Looking after yourself in a professional capacity means that you need to be compensated. Looking after your client means they need to be the recipient of your professional services. Hopefully, you’re both satisfied.”
On the spectrum of possible regulatory models, Gale places rule-based regulations on one end and principle-based regulations on the other. The proposed best interest duty falls in the latter group.
“With rule-based regulations, there’s complete clarity. The law says, ‘You must do a, b, c.’ But principle-based regulations say, ‘we have these lovely standards and you must abide by these lovely standards, so figure out a plan to do that’,” she said.
In Gale’s experience, regulators typically shy away from providing clarity due to liability concerns, despite the fact that regulated professionals require and tend to even explicitly request, clear rules. It is a contractual business relationship between lawyer and client, with both parties understanding the terms of the arrangement.
"Regulators are good at coming up with standards, but they're short on applying that to practical circumstances so the industry is left to wonder, 'what does this mean and how does it apply?' That's the challenge of it," Gale said.
When it comes to the future of the duty in Australia, Gale foresees the need for “balanced rules that provide for standards, but that also provide clarity.”
“Without that it’s like you’re trying to connect dots, trying to figure out what the right answer is, but the regulators are moving the goalposts along the way,” she concluded.
There will be more on this story in the next issue of Australian Broker and on Brokernews.com.au next week