Getting it Right – Lessons Learned from Regulating Limited Investment Advice

Introduction

Regulation that fosters a dynamic and competitive financial services industry is critical for the promotion of economic growth and productivity. While Canada’s financial sector has lagged behind other Organisation for Economic Co-operation and Development (OECD) countries in its contribution to overall productivity growth (Kronick 2018), there are lessons to be learned from Canada’s outperformance in discrete financial market segments.

This E-Brief focuses on one such success: Canadians’ widespread access at reasonable cost to personal “limited”¹1 This type of advice is also referred to as “one-time” advice and “no frills” advice. investment advice that is suitable for investors beginning their investment journey with modest amounts to invest.²2 While other low-cost channels are growing for the do-it-yourself investor, the majority of investment fund purchasers still use the services of an investment advisor. The 2024 Investment Funds Institute of Canada survey found that 72 percent of the most recent mutual fund purchases were made through someone providing advice, and 48 percent of the last ETF purchases were made with advice. See Canadian Mutual Fund & Exchange-Traded Fund Investor Survey, Pollara Strategic Insights, 2024.

The objective is to highlight how the Canadian securities regulatory system and investment industry facilitated this widespread access to a degree that outpaces Canada’s OECD peers.

The paper sets this success within the broader evolution of the investment fund industry as well as the regulatory developments that supported its growth. It also makes recommendations for translating this success into other areas of financial services regulation, such as insurance.

Investment Advice and the Modest Investor

The “modest investor”³3 Other terms used to describe this investor group are “mass affluent investor” or “mass market household.” is a household with financial instruments and investments, held for the purpose of accumulating and preserving wealth, of less than $100,000. According to recent surveys, a majority of advised investors in Canada have $100,000 or less of investable assets.⁴4 See, for example, CIRO 2024 Investor Survey, Innovative Research Group, May 2024, https://www.ciro.ca/sites/default/files/2024-06/2024-Investor-Survey-Report-EN.pdf and Investment Funds Institute of Canada, Financial Advice in Canada whitepaper, November 2022.

Mutual fund dealers, provincially licensed representatives, and firms restricted to the sale primarily of mutual funds have been instrumental in providing modest investors with investment advice and assistance. According to the Mutual Fund Dealers Association⁵5 See the MFDA Client Research Report of 2022. The Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada (IIROC) merged in 2023 to form the Canadian Investment Regulatory Organization (CIRO). (MFDA), mutual fund dealers serve approximately 9.4 million Canadian households, and 78 percent of those households have less than $100,000 in financial wealth. The average household wealth of MFDA member clients is approximately $89,000.

The bridge from saving to investing is trust. In 2017, the Investment Funds Institute of Canada (IFIC), now the Securities and Investment Management Association (SIMA), commissioned the Brondesbury Group to explore how investors themselves understand advice. The report found that financial services clients understand advice to be personalized communication that responds to specific questions and concerns, in the context of an ongoing trusting relationship (Brondesbury Group 2017).

The challenge for regulators is in determining how to preserve and enhance access to investment advice for modest investors at the very low or non-existent up-front price they are prepared to pay (Rousseau 2017). The challenge for the investment fund industry is to deliver limited advice that meets regulatory standards at a reasonable, cost-effective price.⁶6 The regulatory landscape is evolving to enhance the advice channels for do-it-yourself investors. Discount brokers who offer an order-execution only platform are prohibited from providing personalized investment advice. However, firms like Wealthsimple offer personalized hybrid advice models (human and digital). In addition, CIRO is developing guidance to clarify what forms of limited advice are permissible for self-directed investors.

Investment Funds

Investment funds allow investors to pool their money together to invest in a diversified portfolio of assets, with the benefit of full-time, experienced professional wealth managers and advisors.⁷7 Investment funds include traditional mutual funds and exchange-traded funds (ETFs) unless stated otherwise. Investment funds provide Canadians of modest means with easy access to domestic and global investment opportunities without having to monitor the markets or study trading strategies themselves.

Investors who use an investment advisor have better investment outcomes than those who invest without advice. The research demonstrates that Canadians who have a financial advisor accumulate greater investment wealth over time than comparable investors who do not have an advisor. In addition, it shows that advised investors are more disciplined about staying the course during uncertain economic times.⁸8 See Montmarquette, Claude, and Nathalie Viennot-Briot. 2016. “The Gamma Factor and the Value of Financial Advice.” CIRANO Working Paper 2016s-35. Montreal: CIRANO; Montmarquette, Claude, and Alexandre Prud’homme. 2020. “More on the Value of Financial Advisors.” CIRANO Project Report 2020RP-04. Montreal: CIRANO.

Specifically, the research found that after 15 years, investors had accumulated 2.7 times more assets in 2010, 3.9 times in 2014, and 2.3 times in 2018 than comparable non-advised investors. In explaining why advised investors saved more, the researchers identified higher savings rates, a greater allocation of non-cash investments, and disciplined behaviour acquired through financial advice (Montmarquette and Prud’homme 2020).

Between 1982 and August 2025, the market value of Canadian investment fund assets increased from $4 billion to over $3 trillion.⁹9 Securities and Investment Management Association (formerly the Investment Funds Institute of Canada) Monthly Investment Fund Statistics, August 2025. https://www.sima-amvi.ca/en/stats/. It is estimated that investment funds make up about 50 percent of the $2.1 trillion of financial assets in Canadian voluntary individual retirement plans. In 2005, mutual funds overtook deposits as the largest component of Canadians’ financial wealth (Pugh, Sheikh, and Webley 2025). Finally, Canadians hold the highest proportion (20 percent) of their financial assets in investment funds compared to other OECD countries. In 2022, 19.7 percent of Canadians held investment funds as a component of their financial assets, compared to 4 percent in the UK and 11.5 percent in the United States.¹⁰10 OECD National Accounts Statistics: National Accounts at a Glance (2022 data).

Aside from better access to investment advice, there are other drivers of Canadian investment fund asset growth that explain Canada’s performance compared to its OECD peers. The entry of the large Canadian banks into investment fund management and the use of the bank branch distribution networks were major changes in the Canadian financial services landscape. The Canada Pension Plan wage replacement rates for a full-career average wage earner are below the OECD average replacement rates by about 10 percent, and this provides a strong incentive for private savings growth compared with many OECD countries.¹¹11 Canada Pension Plan (CPP) and Old Age Security (OAS) benefits provide a future net replacement rate of about 53 percent. The OECD average net replacement rate for an average-wage full-career worker is approximately 61-62 percent. Most OECD state pensions are pay-as-you-go, with current workers paying the pensions of retired workers. The sustainability of these schemes, in light of increasing longevity and falling fertility rates, is questionable.

Nevertheless, the availability of limited investment advice enables a modest investor to build a trusted relationship, which is the foundation of investor confidence. Basic investment advice that encourages regular savings, staying the course in times of market turmoil, diversification, understanding inflation risk, and goals-based investing all help overcome the behavioural biases that lead to suboptimal investment outcomes (Ariely, Huber, and Wertenbroch, 2005).

While Canada has preserved better access to investment advice for modest investors relative to its peers, there are concerns that this access may be diminishing. Increasing compliance costs and industry-driven consolidation will challenge the ability of the industry to maintain access to limited investment advice (Edwards 2025). Furthermore, there remain significant access challenges to even limited investment advice for investment accounts of less than $10,000.

Canadian securities regulators have pursued a dual mandate to protect investors and foster a competitive and dynamic securities industry. Below, this paper explores some of the regulatory developments, some unique to Canada, that have fostered continued access to limited investment advice.

Regulatory Framework Supporting Access to Advice

Disclosure and Conduct Rules: The 81 Series of National Instruments

The 81-series of National Instruments provides the regulatory framework for publicly offered, open-ended investment funds in Canada. Aimed at the retail investor, they provide plain language disclosure and limits on investment funds’ exposure to higher risk investments and trading strategies.¹²12 NI 81-102 imposes strict limits on the use of funds for concentration, illiquid assets, securities lending, short selling, and derivatives. In addition, implementation of the “Fund Facts” and “ETF Facts” documents has shifted retail investor disclosure from the prospectus to a concise plain language disclosure document describing the fund’s costs, objectives, strategies, performance, changes, and risks that must be delivered to the investor before they make an investment.¹³13 NI 81-101. The rules are also designed to address misaligned sales incentives and conflicts of interest.¹⁴14 NI 81-105. The client-focused reforms and total cost reporting rules¹⁵15 Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations are scheduled to come into force on December 31, 2026. are meant to ensure a level of transparency concerning conflicts, returns, and fees tailored to the needs of modest investors.¹⁶16 NI 81-101 – 107.

Mutual Fund Representative and Mutual Fund Dealer Registration

Canada is the only OECD country with a category of registration restricted to the sale of investment funds.¹⁷17 In Canada, registration as a mutual fund dealer or representative permits the person to sell mutual funds, ETFs, labour-sponsored investment funds and exempt securities. The investment dealer category of registration permits the sale of the full range of investment products. For example, registration regimes for investment dealers or financial advisors in the US, the UK, the EU, Australia, and New Zealand allow dealers to offer a wide variety of products, including stocks, bonds, funds, and derivatives, once minimum requirements are met.

The legislative provisions that implement the mutual fund representative and dealer category of registration are relatively straightforward.¹⁸18 For example, the Ontario Securities Act requires anyone dealing with or advising in securities to be registered in one of five categories, one of which is a mutual fund dealer. A “dealing representative” is an individual employed by a mutual fund dealer who is approved by an SRO. A “mutual fund dealer” is a company registered in the category of mutual fund dealer and may act as a dealer in respect of any security of a mutual fund. Firms and individuals registered as mutual fund dealers are subject to many of the same conditions of registration as investment dealers. However, many of those rules are tailored to the more limited activity carried out by a mutual fund dealer.¹⁹19 For example, rules relating to proficiency, capital, record keeping, reporting, risk management, and investor protection fund requirements. In addition, some investment dealer rules do not apply to mutual fund dealers.²⁰20 For example, margin rules and the Universal Market Integrity Rules (UMIR) are intended to regulate trading on exchanges. The limited range of securities-related activities allows a Canadian mutual fund dealer to operate its business with lower operational and compliance costs than a full-service investment dealer.

There continues to be an important policy discussion around the proficiency requirements for mutual fund representatives. Are the credentials of a mutual fund representative of sufficient quality to provide valuable limited investment advice to a modest investor?

The Canadian Investment Regulatory Organization (CIRO) has introduced a new proficiency model for investment dealers and will likely incorporate the mutual fund dealer representative requirements into this model.²¹21 Under the new CIRO proficiency model (effective January 1, 2026), most course prerequisites are removed, but three types of training remain mandatory: CIRO’s own conduct training, dealer member post-approval training for RRs/IRs, and CIRO-prescribed annual continuing education modules. Alongside regulatory credentialing reforms, investment fund managers have developed model portfolios for advisors. These model portfolios are built around low-cost multi-asset investment funds, so that advisors can consistently align models with client risk profiles and time horizons. By outsourcing portfolio construction, monitoring, and rebalancing, advisors can leverage the data and expertise of large investment managers and allocate more time to managing their relationship with their clients.

Self-Regulation

Prior to 1998, mutual fund dealers and non-Investment Dealers Association (IDA) member securities firms were regulated directly by the provincial securities commissions; however, the commissions, due to limited resources, provided minimal oversight.²²22 For example, in 1998, the Ontario Securities Commission (OSC) had five compliance officers dedicated to auditing hundreds of non-SRO member mutual fund dealers. The CSA, recognizing this regulatory gap, commissioned Glorianne Stromberg to investigate and provide recommendations. The Stromberg (1995) report called for sweeping regulatory reforms, including improved governance for investment funds, common standards for financial planners, and improved disclosure requirements. In addition, Stromberg recommended the creation of a single, national self-regulatory organization (SRO) for all mutual fund and investment dealers. In 1998, the CSA went halfway to implementing this recommendation by authorizing the newly incorporated MFDA to provide front-line regulation for mutual fund dealers.

Self-regulation of securities dealers and stock exchanges has a variety of meanings both in Canada and globally.²³23 See: Carson, John. 2011. “Self-Regulation in Securities Markets.” World Bank Policy Research Working Paper 5542. Front-line regulation of the Canadian securities industry is provided by CIRO.²⁴24 CIRO is recognized as the self-regulator for investment dealers in all provinces and territories. CIRO is the product of the recent merger of the MFDA and the Investment Industry Regulatory Organization of Canada (IIROC).²⁵25 The recent consolidation of IIROC and the MFDA was itself the result of the consolidation of the member and market regulation responsibilities of the Alberta Stock Exchange, the Vancouver Stock Exchange, the Montreal Stock Exchange, the Toronto Stock Exchange, the Investment Dealers Association, Regulatory Services Inc., Investment Industry Regulatory Organization of Canada (IIROC), and the MFDA.

Provincial legislation allows securities commissions to recognize an SRO if doing so would be in the public interest.²⁶26 For example, section 21.1(1) of the Ontario Securities Act (OSA), allows that the OSC may recognize an entity as an SRO if doing so is in the public interest. CIRO’s recognition by the statutory regulators is dependent upon its compliance with its recognition order (RO). Provincial legislation requires a recognized SRO to regulate the operations, standards of the practice, and business conduct of its members in accordance with its by-laws, rules, and regulations.²⁷27 An important feature of CIRO’s member regulation activities is its public discipline process. In 2024-25, CIRO conducted 176 investigations, completed 57 enforcement proceedings, and imposed $10.3 million in fines, costs, and disgorgement. The RO will typically contain terms and conditions relating to governance, organizational structure and ongoing reporting. For example, the Ontario Securities Commission RO requires CIRO to act in the public interest and maintain an independent SRO board of directors.²⁸28 Independence in this context means a board with a majority of non-industry independent members. In addition, the CSA conducts an annual audit of CIRO to ensure it continues to comply with its RO.²⁹29 Oversight Review Report of the Canadian Investment Regulatory Organization, July 23, 2025, https://www.osc.ca/sites/default/files/2025-07/ciro_20250723_oversight-review-report.pdf.

Government oversight and accountability have facilitated the delegation of the statutory powers to register individuals and firms to CIRO.³⁰30 While some CSA members currently delegate some or all registration of investment dealers and mutual fund dealers, all CSA members are currently considering the delegation of registration to CIRO. In addition, to strengthen enforcement, recent amendments to provincial securities legislation give CIRO the authority to compel evidence from members of the public, to file its discipline panel decisions as orders of a superior court, and provide statutory immunity to CIRO staff for acts done in good faith in carrying out their public interest mandate.³¹31 For example, see Securities Act, R.S.O. 1990, c. S.5. Alberta, Newfoundland and Labrador, New Brunswick, Nova Scotia, Prince Edward Island, and Quebec have provided similar authority in provincial legislation.

Self-regulation for mutual fund dealers was a conscious choice by the CSA, not only because the statutory regulators lacked the resources to effectively regulate the mutual fund dealers, but also because it was already working well for the regulation of investment dealers. While not a direct measure, the fact that mutual fund investors do not “run for the exits” during times of financial market volatility is,³²32 During the Asian financial crisis in August 1998, the S&P/TSX composite index declined by 20.2 percent, but Canadian equity fund sales saw redemptions of only 0.9 percent of total equity assets under management. At the height of the dot-com bubble, between March 2000 and October 2002, the S&P/TSX composite index declined by 31.6 percent. Over the same period, the industry actually sold more equity funds than were redeemed, with positive sales totalling 13.2 percent of equity assets. In the 2008 financial crisis, the S&P/TSX composite fell by a dramatic 42.4 percent, while the industry saw redemptions of 3.2 percent of total industry equity assets. at least in part, the result of their confidence in the industry’s commitment to investor protection and self-policing (Frankel 2002).

The Benefits of Self-Regulation

Given effective government oversight, self-regulation can benefit investors and the industry. For Canada’s fragmented regulatory landscape, a single national SRO can provide more effective coordination and oversight of the industry, as well as reduce duplication with provincial securities regulators.

Self-regulation also ensures industry input in rulemaking so that rules and policies more closely reflect the business and market realities of the regulated industry. SRO staff typically bring private sector experience in securities trading, financial compliance, and business conduct. SRO disciplinary panel judgments and penalties have a national effect, streamlining the enforcement and fine collection processes. All of these factors can result in more effective and efficient front-line regulation of the industry.

This model of front-line supervision – supported by statutory recognition, oversight by the provincial securities commissions, and an industry-sponsored investor protection fund³³33 The Canadian Investor Protection Fund protects CIRO member clients against the loss of their cash and securities up to $1 million per person per account as a result of the insolvency of the member firm. – has been an important factor in building public trust and confidence in mutual funds and the investing process.

Should Self-Regulation be Considered for Other Financial Services?

Self-regulation has been a key element in the investment fund success story. Should it be applied to other areas, such as the insurance industry?

The sale of insurance³⁴34 Life, health, property, personal liability insurance, and segregated funds are typically sold by agents to individual consumers. to consumers has many of the same consumer protection issues associated with the sale of securities: conflicts of interest, coercive sales tactics, misaligned incentives to sell higher-paying or unsuitable products, and provision of false or misleading information.

The regulatory framework for the distribution of insurance products, like securities, is fragmented. Life and health insurers are prudentially regulated at the federal level by the Office of the Superintendent of Financial Institutions (OSFI) (for federally incorporated companies) and at the prudential/conduct level by provincial insurance regulators. Also, many insurance registrants are dually licensed to sell mutual funds. This can result in regulatory arbitrage between segregated funds, which combine investment potential with insurance guarantees and mutual funds.

Importantly, there is no equivalent in insurance regulation to a comprehensive framework for the registration and regulation of dealer solvency, or for sales practices similar to NI 31-103³⁵35 National Instrument 31-103 provides a comprehensive regulatory framework for all categories of individual and dealer registration, sales and financial compliance, products, and distribution channels. for the retail distribution of insurance products. A national insurance SRO would be able to provide front-line regulation to the sale of insurance with consistent, predictable, and enforceable national standards.³⁶36 CIRO rules essentially mirror the terms of National Instruments, including NI-301.

Fragmentation results in gaps in the regulatory framework. For example, the delegation of agent screening, training, and monitoring by the insurer to Managing General Agents (MGAs) can blur accountability for agent misconduct. It is also confusing for clients who may not know that the insurer remains ultimately responsible for agents selling their products. Finally, a national SRO would be able to impose national terms and conditions on a registrant.

CIRO-type enforcement, separate from compliance, would not rely primarily on firm audits to uncover misconduct and could provide more timely and targeted investigations and prosecutions. A national SRO like CIRO – with centralized registration and complaint intake, uniform sanction guidelines, and enforcement staff in Canada’s major financial markets – would provide an additional deterrence to misconduct.

Self-regulation along the lines of the CSA model should be considered for insurance registrants and the distribution of insurance products. The analysis would have to compare whether stronger, harmonized enforcement and conduct standards under a CIRO-type SRO would outweigh the complexity, duplication, cost, and constitutional realities of implementing an SRO.³⁷37 Any national SRO would need provincial legislative recognition from each jurisdiction. In addition, Quebec has an insurance SRO – the Chambre de l’assurance de dommages (ChAD).

Payment Options

There are three main ways Canadian investors pay for investment advice when they purchase an investment fund: (i) an up-front sales commission at the time of purchase, (ii) an ongoing fee that includes a fee for advice embedded in the management expense ratio (MER,)³⁸38 The MER also includes investment management fees, operating expenses, trading costs, and sales tax. or (iii) an ongoing charge based on a percentage of the value of the assets in the account.

Further, there are two forms of embedded sales commission: trailer commissions and commissions associated with deferred sales charges (DSCs).³⁹39 The CSA banned the sale of mutual funds with a deferred sales charge effective June 1, 2022. The embedded commission is paid by the investment fund manager to the dealer and is the portion of the MER that covers the advisor’s fee for advice.

In June 2017, the CSA asked for feedback on a proposal to discontinue embedded sales commissions.⁴⁰40 CSA Consultation Paper and Request for Comment 81-408. This consultation followed a 2012 CSA Discussion Paper that included the option of “discontinuing the practice of advisor compensation being set by mutual fund manufacturers and embedded in the fund product.”⁴¹41 CSA Discussion Paper and Request for Comment 81-407 – Mutual Fund Fees.

It was clear from the tenor of these papers that, by 2017, CSA staff supported banning embedded sales commissions.⁴²42 The Stromberg report also recommended banning trailer fees because there were no standards for the ongoing services and advice the investors were paying for, but acknowledged that a ban could lead to some representatives abandoning their clients after the sale. Nevertheless, while recognizing embedded sales commissions’ lack of transparency and conflicts of interest, the CSA ultimately decided to allow embedded sales commissions to continue. The CSA concluded that a ban would require advisors to charge an upfront fee for advice. Account fees, separate from the mutual fund purchase cost, impose higher costs for advice on smaller accounts (PWC 2017). The evidence demonstrated that a modest investor would be less likely to afford and willing to pay a separate account fee, resulting in reduced access to investment advice. In addition, there was no evidence of any widespread non-compliance with investment fund managers’ duty to act in their funds’ best interests and advisors’ duty to deal with their clients fairly, honestly, and in good faith.⁴³43 CSA Staff Notice 33-318 “Review of Practices Firms Use to Compensate and Provide Incentives to their Representatives” (December 15, 2016);” MFDA Review of Compensation, Incentives and Conflicts of Interest” (December 15, 2016); IIROC “Managing Conflicts in the Best Interest of the Client – Status Update” (December 15, 2016); and IIROC “Managing Conflicts in the Best Interest of the Client – Compensation-related Conflicts Review” (April 27, 2017).

This regulatory forbearance preserved, in the Canadian marketplace for investment funds, the option of paying for advice bundled with the cost of the mutual fund purchase.⁴⁴44 The CSA did, however, ban embedded commissions for mutual funds sold with a deferred sales charge option, and embedded commission payments by fund organizations to dealers who do not make a suitability determination, such as order-execution-only (OEO) dealers.

Embedded Sales Commissions and the Advice Gap

Some important jurisdictions, notably the UK, Australia, and the EU (for non-bank distributors), banned this purchase option through a regulatory directive. In the UK and Australia, there is evidence that modest investors pay more and generally have less access to advice than they do in markets where embedded fee models exist. For example, in the UK in 2016, Andrew Bailey, then CEO of the Financial Conduct Authority, stated that,

In simple terms the Retail Distribution Review has achieved its objective of removing opaque charging through commissions and improving the training and qualification of advisors but had – along with a number of other significant developments – contributed to an advice gap opening up for the less well-off and those in need of single event type advice (Bailey 2016).

His comments were based on the final report of the Financial Advice Markets Review (FAMR) released in March 2016, which found that less affluent investors were unable or unwilling to pay for comprehensive face-to-face advice. The FAMR report recommended a number of regulatory measures to make “one-off” or “limited” advice available to modest investors.

More recently, research by Open Money (“The UK Advice Gap 2021”) found that the affordable advice gap has increased in the UK, and it attributed that to a lack of trust and perceived value as well as higher fees. Importantly, Open Money found that restoring people’s faith in the benefits of financial advice is crucial to closing the advice gap.

The Australian government, in the aftermath of the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, implemented a series of reforms, including heightened professional standards for advisers and a ban on embedded sales commissions. A large number of long-serving registered financial advisers exited the profession.⁴⁵45 According to Boal and Brown (2024), the number of advisers fell from 28,000 in 2019 to 15,000 in 2024. By comparison, Canada has approximately 100,000 registered investment dealer and mutual fund dealer representatives.

Like the UK, there were concerns about a gap for modest investors. In 2020, the Australian Securities and Investment Commission (ASIC) launched a consultation on ways to promote access to affordable advice for consumers by promoting the delivery of “limited advice.” ASIC issued guidelines on how financial advisors could meet their statutory obligations and still provide good quality limited advice. ASIC has also proposed a new class of financial advisers, referred to as “qualified advisers.” With lower barriers to entry than professional advisers, it is anticipated that qualified advisers will be able to provide cheaper advice on less complex financial matters (Boal and Brown 2024).

What the UK and Australian experiences show is that when you eliminate the economic model that delivered limited advice to modest investors (and the incentives that went with it), it is very difficult to restore it by regulatory edict.

The question that both the UK and Australian regulators are trying to answer, through additional regulation, is: what kind of investment advice does a modest investor actually require? In the case of a proposed ban on embedded sales commissions for mutual funds, the CSA had to balance the risk of reducing access to investment advice for modest investors with the risk of harm from the lack of fee transparency and the conflict of interest inherent in payments by the fund company to the dealer. Rather than prohibiting all embedded commissions, the CSA managed the residual risk of misconduct with rules that require annual individualized reports of all fees and charges, including investment fund fees and resolving conflicts of interest, and making investment recommendations in the best interests of their clients.⁴⁶46 See the Client Relationship Model, Client Focused Reforms and Total Cost Reporting amendments to NI 31-103 Part 13 Dealing with Clients – individuals and firms.

Lessons Learned

What can we learn from Canada’s experience with limited investment advice? Here are three recommendations for consideration:

1. Consider a self-regulatory strategy for the regulation of the retail distribution of insurance products (for example, life, property and casualty, and term insurance). A CIRO-type SRO for insurance could provide a single set of rules, provide consistent registration and discipline standards, and reduce duplication with provincial regulators. However, any decision to expand self-regulation to other retail financial services should include an analysis of the current capacity, costs, and service standards of provincial regulation of insurance retail distribution channels. Beyond costs, the analysis would also have to include an assessment of whether self-regulation would result in better client outcomes, including lower fees and commissions, greater transparency, and improved compliance.
2. Direct more regulatory attention to policies that aim to foster a more competitive and dynamic financial services industry. Overall, approximately 85 percent of Canadian financial regulatory initiatives primarily target consumer protection. A much smaller percentage (around 18 percent) aim to enhance efficiency and promote economic growth (Bourque and Caracciolo 2024). Recent regulatory developments suggest regulators are now paying more attention to their mandate to make regulation more efficient and responsive by reducing the regulatory burden.⁴⁷47 See for example CSA proposals to reduce regulatory burden in continuous disclosure regime for investment funds: https://www.securities-administrators.ca/news/csa-reduces-regulatory-burden-in-continuous-disclosure-regime-for-investment-funds/. OSFI proposals to modernize regulations and balance stability with economic growth: https://briefglance.com/articles/osfi-modernizes-regulations-balancing-stability-with-economic-growth. However, regulators need to move beyond simply identifying and repealing superseded, redundant, and duplicative rules and determine whether any new rule is truly necessary and represents the optimal regulatory intervention strategy. Policymakers should also carefully assess the applicability of rules from other peer jurisdictions before adopting those approaches. Questions of scale, complexity, and implementation costs must play an important role in the analysis by Canadian financial regulators. As we have seen, the approach adopted by the CSA to the problem of embedded mutual fund commissions has avoided the additional rulemaking of the UK and Australia, aimed at restoring access to limited advice.
3. Subject new rules to a fulsome public consultation process. Effective consultation must allow enough time for both industry and consumer advocates to provide useful feedback. Complex policy proposals, sometimes years in development, frequently require careful and extensive consideration by the affected stakeholders. Comment closing periods, usually 60 or 90 days (but sometimes as short as 30 days), are frequently insufficient to respond in a meaningful way to these types of proposals. From an industry perspective, the debate more often is not about the merits of a new rule but about regulatory expectations concerning the time and expense of implementation. A great deal of time can be saved by regulators through early consultation with industry, especially those with expertise in IT and operations. These discussions often disclose important new information about business and operational issues relevant to the estimated costs and timing of implementation. Effective consultations can build trust and confidence among investors and industry players.

Conclusion

This paper looks at how Canada developed trust in the investment process and, at the same time, encouraged financial advisers to deliver “limited” investment advice tailored to the needs of clients with small amounts to invest.

Without investing experience, modest investors have no basis to assess the value of investment advice. This is a key behavioural barrier to seeking investment advice: the retail investor must learn, test, or experience its value before they are ready to pay directly and explicitly for the service.

Canada has been successful in providing modest investors with access to limited investment advice. The regulatory framework allows firms to reduce costs by limiting their product offering to mutual funds. Self-regulation provides effective and efficient regulatory oversight. The investment fund industry has leveraged these developments to provide access to limited investment advice for thousands of Canadians of modest means, at a reasonable cost in large and small communities from coast to coast to coast.

The preservation of limited investment advice is an example of how government and industry can combine to create a uniquely Canadian success story.

This E-Brief has provided recommendations of how this success story can be applied to other areas of financial services: exploring opportunities to realize the benefits of self-regulation, putting more regulatory focus on rules that foster competitive and dynamic financial services, ensuring new rules are truly necessary, asking whether policies adopted elsewhere are likely to succeed in Canada, and recognizing the importance of public consultations with consumer and industry advocates.

In an increasingly competitive global market for investment, it is more important than ever that regulators and the industry identify and exploit these opportunities for success. In today’s fragmented and uncertain global markets, the Canadian regulatory framework cannot simply be as good as our competitors. It must be better.

The author extends gratitude to Jeremy Kronick, Alexandre Laurin, Peter MacKenzie, and several anonymous referees for valuable comments and suggestions. The author retains responsibility for any errors and the views expressed.

References 

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