INTERVIEW-Canada eyes reforming financial adviser payments

*Britain to ban commission-based compensation for advisers

*Australia also looking at moving to fee-based system

*Head of Canada regulator says concept “very compelling”

*Considering U.S.-style “circuit breakers” for stocks

By John McCrank

NIAGARA FALLS, Ontario, June 14 (Reuters) - Canada is watching closely moves by Britain and Australia to ban commission-based compensation for financial advisers, but it is too soon to say if it will follow their lead, the head of one of Canada’s major regulatory bodies said on Monday.

Britain’s Financial Services Authority will ban commission-based compensation for advisers beginning in late 2012, and Canada is studying the plan, Susan Wolburgh Jenah, president and chief executive of the Investment Industry Regulatory Organization of Canada, said in an interview.

IIROC is a national self-regulatory organization that oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. Under the British plan, advisers will move to fee-based payments, which they would negotiate with their clients, rather than receiving compensation for selling investment products -- some of which may not be in a client’s best interests. “They’re talking here about those who hold themselves out as offering personalized investment advice and they’re saying if you do that, then you shouldn’t be paid by a manufacturer of a product,” said Wolburgh Jenah on the sidelines of the Canadian Institute of Financial Planners annual conference.

“You should be paid by the client who has engaged your services as an adviser. It’s a fairly simple and yet very compelling concept.”

The Australian Securities and Investments Commission is also looking at moving to a fee-based platform for advisers.

“ASIC spoke of this initiative as something that they are very supportive of and they are looking to ban certain forms of compensation ... , which is a new development in the regulatory environment,” Wolburgh Jenah said.

“Typically, regulators have focused on disclosure of commission as opposed to directly banning certain forms of it, so for that reason, it could be very game-changing.”

Regulators are looking for ways to enhance confidence in the financial services industry. In the United States, following on the heels of Bernie Madoff’s $50 billion Ponzi scheme, proposals have been made to impose a fiduciary standard on advisers toward their clients.

Wolburgh Jenah said it is unclear what exactly such a rule would entail, adding it is an initiative that “still has a long way to go for us to understand really what it is”.


Looking at stock markets, Wolburgh Jenah said IIROC was working with the Canadian Securities Administration to find ways to limit volatility. She said that may include introducing so-called “circuit breakers” on stock trading. Last week, the U.S. Securities and Exchange Commission approved a six-month trial period for circuit breakers. [nWEN5746]

Under the SEC plan, aimed at preventing market drops that spiral out of control such as the nearly 1,000-point plunge on the Dow on May 6, stocks that fall more than 10 percent in five minutes are halted for five minutes.

“The notion behind it is that this very short halt allows time for providers of liquidity to enter back into the market

-- for, effectively, human behavior to enter into the equation -- for, effectively, human behavior to enter into the equation and not simply allow electronic systems to drive the market completely,” Wolburgh Jenah said.

The circuit breakers would control volatility on the upside, as well as the downside, she added.

The other issue IIROC and the CSA are looking at is the interaction between certain order types that can accentuate big moves in the current high-speed market environment.

Wolburgh Jenah pointed to stop-loss orders -- buy or sell orders executed immediately at current stock market prices -- as opposed to limit orders -- orders to buy stocks at not more, or sell them at not less, than a specified price.

“Clearly, this interacted and helped to cause ... the volatility on May 6,” Wolburgh Jenah said.

The Toronto Stock Exchange’s main index briefly fell around 4 percent in response to the 9 percent plunge on the Dow on that day.

One of the reasons the drop on the TSX was not as severe seems to have been that Canadian rules on order protections are more stringent than in the United States, Wolburgh Jenah said.

(Editing by Peter Galloway)

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