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InsightsBig Six branches continue to bar sales of non-proprietary product

September 06, 2023 • 4 MIN READ Author Avatar

As OSC review gathers dust, regulators continue to question the ethics of proprietary-only product shelves

By: Katie Keir | Investment Executive | August 23, 2023

The Big Six banks continue to allow their branch-based advisors to sell house-branded products only — despite regulators’ concerns that the practice may present a conflict of interest.

Earlier this month, the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) highlighted compliance deficiencies they uncovered at certain firms that offer solely proprietary product.

“Some firms we reviewed did not recognize that a registrant trading in, or recommending, proprietary products, is an inherent conflict of interest that is almost always material, given the potential for registrants to ignore clients’ best interest,” the regulators said in a report detailing their review of 172 firms.

These results landed as the Ontario Ministry of Finance told Investment Executive (IE) that it’s still reviewing the Ontario Securities Commission’s (OSC) report that investigated concerns about Canada’s big banks restricting their branches’ product shelves to proprietary funds — a report the ministry received more than 18 months ago.

The ministry said in an email that it’s still considering the OSC’s “response and recommendations” around potentially anti-competitive practices at Canada’s major banks.

Five of the Big Six told IE that their product shelves for mutual fund-licensed, retail branch advisors remain relatively unchanged from a year ago, maintaining that access to third-party funds is available within their own products. Branch advisors remain able to transfer in third-party products for clients but cannot add to those positions.

Only Royal Bank of Canada said it had adjusted its shelf in the past 12 months. RBC was one of three banks that announced in 2021 that it would restrict its shelf to proprietary products in response to the client-focused reforms, with the exception of transfers in of third-party funds by new clients.

“We did add to our [branch] product shelf,” said Michael Walker, vice-president and head, mutual funds distribution and RBC Financial Planning. New offers have included the RBC Global Choices Portfolios, which “invest in a curated list of third-party funds,” he said, as well as RBC index ETF funds.

Branch clients can access third party-branded funds through both RBC Direct Investing, the bank’s online discount brokerage, and RBC Dominion Securities, Walker said. Regular product reviews will continue and the bank will “make changes as we need to.”

Regular product shelf reviews for retail advisors also occur across the other five big banks.

Bank of Montreal said in an email that developing new product offerings remains part of its strategy to evolve service in its branches.

National Bank of Canada (NBC) pointed out that it continues to use only third-party portfolio managers. National Bank Investments Inc., a subsidiary of NBC, chooses “top-tier” managers and “has not been shy of changing managers when they were not performing, just to make sure that our clients had the best asset mix,” said Nancy Paquet, NBC’s senior vice-president of personal banking, who will become executive vice-president of wealth management on Nov. 1.

“I understand that regulators are looking into [products], but we feel very confident that our process is robust,” Paquet added.

In their report, the CSA and CIRO made several recommendations to any dealers with house-only shelves. They included ongoing documentation of their research and reasoning for using a proprietary-only model; clear client disclosure that only proprietary products will be used; and a willingness to turn away clients who don’t fit the investor profile that is best suited for their products.

Ken Kivenko, president and CEO of investor advocacy organization Kenmar Associates, is concerned about the lack of action from the Ontario Ministry of Finance.

“What has happened to the initial outrage? In the meantime, Ontarians are exposed to restricted product shelves, material conflict of interests and less choice. That is not how [the client-focused reforms were] supposed to work,” he wrote in an email.

“The recent CIRO/CSA sweep of conflicts of interest indicates firms have basically ignored the CFRs. We expect complaint volumes to rise as retail investors become aware of their rights.”