KYC and KYP led banks to push in-house products more, exec says

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Investment Executive | Rudy Mezzetta | Sep 2, 2020

bay street toronto - KYC and KYP led banks to push in-house products more, exec saysIncreasing compliance requirements — such as enhanced know-your-product rules — provided cover for Canada’s banks to focus ever more exclusively on selling their in-house investment products, shutting out independent products and limiting client choice, says Sheila Murray, a corporate director and former president of CI Financial. 

“Under the guise of compliance and risk aversion, and doing the right thing for their clients, [banks] moved in favour of their own products to the detriment of having a balanced product shelf,” Murray said, speaking on a panel presented by NEO Exchange on Wednesday. The topic: Ontario’s Capital Markets Modernization Taskforce consultation paper, released in July.

Murray made the comments in support of proposal in the paper that banks be directed to offer independent providers greater access to their distribution channels. The task force set a deadline for Sept. 7 for comments, and intends to provide a final report with recommendations to the Ontario Minister of Finance before the year’s end. 

See:  NCFA Response to the Modernizing Ontario’s Capital Markets Consultation Taskforce

It’s really difficult [issue], but I think [the task force] is going in the right direction of encouraging more open shelf and transparency on the shelf,” Murray said. 

In its paper, the task force proposed that closed product shelves/proprietary-only shelves be banned in the bank-owned distribution channel. The task force noted that an estimated 80 per cent of product distribution currently goes through bank distribution channels, and that such concentration encourages the sale of proprietary product. 

The task force also proposed that bank-owned dealers be required to include products on their shelves if requested by an independent provider — unless the bank has determined “on a reasonable basis that a particular product isn’t suitable. Bank-owned dealers would have to document “a detailed rationale” for excluding a product and provide that documentation to the requesting producer. 

Finally, bank-owned dealers would report on the percentage of proprietary versus independent products on the shelf or sold on a quarterly basis to the Ontario Securities Commission.

Murray says independent providers, such as her former firm, were already having a difficult time gaining access to bank channel distribution, and “that only became more difficult with enhanced know-your-client and know-your-product rules, [and other] enhanced compliance obligations.

Banks “understandably” decided to concentrate on selling their own products rather than expend effort on assessing the risk profile of competitor products, she said. 

See:  C.D. Howe Institute Report: Open Banking Holds Promise, Risks for Consumers

In reply to Murray’s comments, panellist Cindy Tripp, a task force committee member, and founding partner and former co-head of trading at GMP Securities LP, said,

“I think we all agree that there were unintended consequences from know-your-client and know-your-product [rules].” 

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