facilitator's report: seniors roundtable - Ontario Securities Commission

SENIORS ROUNDTABLE CONSULTATION SEPTEMBER 29, 2014 HOSTED JOINTLY BY ONTARIO SECURITIES COMMISSION OFFICE OF THE INVESTOR AND INVESTOR ADVISORY PANEL

FACILITATOR’S REPORT

By:

D. Scott Ferguson, B Com, CPA, CA, CMC, CPF, PCC Facilitator & Business Leadership Coach

Date: December 12, 2014

HELPING ORGANIZATIONS SEE THEIR OPTIMAL FUTURE MORE CLEARLY AND REALIZE IT MORE QUICKLY AND EASILYTM

SENIORS ROUNDTABLE FACILITATOR’S REPORT TABLE OF CONTENTS

INTRODUCTION

1

CONSULTATION INPUT 1. Challenges posed by demographics, distribution of wealth and an aging population, including challenges of diminished capacity

4

2. Challenges seniors face in effectively planning for retirement security

14

3. Challenges in ensuring suitable advice for making investment decisions and preventing financial fraud and financial abuse

16

CLOSING REFLECTIONS AND NEXT STEPS

19

APPENDICES A: List of Participants and Observers

21

B: Suitability vs. Best Interest Standard

23

HELPING ORGANIZATIONS SEE THEIR OPTIMAL FUTURE MORE CLEARLY AND REALIZE IT MORE QUICKLY AND EASILYTM

INTRODUCTION

SENIORS ROUNDTABLE INTRODUCTION OBJECTIVE AND SCOPE On September 29, 2014, the Ontario Securities Commission’s (OSC) Office of the Investor and the Investor Advisory Panel hosted an inaugural Seniors Roundtable as part of their effort to establish an ongoing dialogue and partnership with key groups that work directly with seniors. The OSC is the regulatory body responsible for overseeing Ontario’s capital markets, whose mandate is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets. The Office of the Investor leads the OSC’s effort to identify and understand investor issues and concerns through Investor outreach and research initiatives and ensures the investor perspective is considered and addressed in OSC policy and operational activities. The Investor Advisory Panel is an independent advisory committee created by the OSC in 2010. Its mandate is to: 

solicit and represent the views of investors through written submissions on the Commission’s policy and rule-making initiatives, and



engage in investor outreach and research in discharging its mandate.

Effective and open communication among experts and stakeholders develops a common understanding of issues, different perspectives and helps create a stronger environment for protecting senior investors. The extensive experience and insights of the Roundtable participants will be helpful to assist the OSC and the Investor Advisory Panel to better understand the issues, challenges and opportunities for regulatory action.

WHY FOCUS ON SENIORS? A consultation to focus specifically on senior investors is important for several reasons: 

Canada has a rapidly aging population



Seniors are enjoying longer lives



More seniors will require more money to finance a longer retirement



Workplace pension plans are in decline and there is a shift away from defined benefit plans



Investment choices are increasingly complex, and

The OSC is increasingly considering the implications of behavioural studies for investor protection policy and conducting research to better understand investors and the issues and challenges that they face.

progressconsulting.com (905) 717-3242

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Seniors’ Roundtable September 29, 2014

INTRODUCTION

THREE CONSULTATION THEMES This consultation sought input regarding three major themes: 1. Challenges posed by demographics, distribution of wealth and an aging population, including challenges of diminished capacity 2. Challenges seniors face in effectively planning for retirement security, and 3. Challenges in ensuring suitable advice for making investment decisions and preventing financial fraud and financial abuse.

WIDE RANGE OF PARTICIPANTS The event involved a wide range of participants. Representatives of the Ontario Securities Commission and Investor Advisory Panel observed. A list of participants and observers appears in Appendix A. Participants and observers received a comprehensive consultation paper in advance.

INDEPENDENTLY FACILITATED TM

The consultation was designed and led by an independent facilitator, Scott Ferguson of Progress Consulting . Mr. Ferguson has more than 25 years of experience in facilitating stakeholder consultations and working with the financial sector. This document is the facilitator’s report of the key themes that arose in the discussion. This report is intended to be a resource for the OSC, the IAP, the consultation participants and their organizations.

SCOPE Some of the consultation input addressed seniors’ financial needs beyond the scope of the Ontario Securities Commission mandate. Nonetheless, such comments were received and documented as helpful input. Throughout the course of the day, participants used the term “investment professionals” as a generic term to include investment advisors, salespeople, planners and those who carry out their work under a professional standard of care. Not all investment professionals are regulated by the OSC.

INPUT, NOT NECESSARILY A CONSENSUS This event was designed to obtain stakeholder input, not to build a consensus among stakeholders. Accordingly, the views described in this report are not necessarily shared by all the participants. Where participants expressed significant differences of opinion, those differences are explained.


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INTRODUCTION

A SUCCESSFUL EVENT Participants actively engaged in nearly five hours of discussion. Of those who provided written feedback: 

96% agree/strongly agree that the consultation paper was useful



83% agree/strongly agree that the consultation focused on the right issues



82% agree/strongly agree that the consultation included the right choice and balance of experts



100% agree/strongly agree that participants had the opportunity to voice their opinions



100% agree/strongly agree that the discussion was well facilitated



86% rated the overall quality of the discussion as very good/excellent



82% gave the roundtable an overall rating of very good/excellent.


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THEME 1: DEMOGRAPHICS AND CAPACITY

RESULTS OF CONSULTATION: THEME 1 CHALLENGES POSED BY DEMOGRAPHICS, DISTRIBUTION OF WEALTH AND AN AGING POPULATION, INCLUDING CHALLENGES OF DIMINISHED CAPACITY INTRODUCTION The following key messages emerged: 

seniors have particular needs



seniors’ needs can vary



seniors’ needs are not always unique, and



seniors can be better served and protected

SENIORS HAVE PARTICULAR NEEDS Some consultation participants believe that the factors listed under “Why focus on seniors?” (page 1) provide the perfect storm of vulnerability. In describing the particular needs of seniors, participants mentioned several commonly known and readily apparent factors such as: i.

Inadequate financial literacy and understanding of financial terminology

ii.

Less time to recover from investment losses and therefore becoming increasingly risk averse as they age

iii.

The need for more liquidity as expenses, particularly health-related and personal service expenses, rise

iv.

Diminishing capacity in cognition, vision and hearing

v.

Insufficient time, confidence or perseverance to conduct due diligence or to lodge or pursue a complaint

vi.

The "shame factor" that discourages a victim from reporting a fraud or even admitting it to family and friends

vii.

Vulnerability to family members whose interests may be in conflict with the senior

viii.

Fear of change.

Participants also identified somewhat more subtle factors such as: ix.

Many seniors have limited exposure to dealing with the industry and therefore find comfort in "going to the bank", thus not being aware of or considering the full range of products and providers available to them

x.

Misunderstanding risk, such as perceiving that an investment that is described as “low risk” has no likelihood of losing some or all of its value, especially due to a meta-event such as a market correction

xi.

Discomfort with technology among many seniors: as the industry shifts from in-person and hard copy communication to online services, access automatically declines for those who are not comfortable with technology

xii.

Tendency not to revisit, review and reassess an investment subsequent to the initial transaction, such as in the context of changing circumstances


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xiii.

The fact that cognitive capacity (including the ability to recall what they have learned, discussed and agreed to over the course of multiple conversations about a particular investment) diminishes over time and a person's significant shifts in cognitive capacity may be underestimated or go unnoticed, particularly in the context of relationships that have been built up over time (eg: a senior’s trust in a professional or family member may increase over time while their cognitive ability to assess that person’s trustworthiness declines)

xiv.

Spending more money to support their children and saving less for retirement

xv.

Supporting their children in ways they do not fully understand, such as understanding the risk and implications of loan guarantees

xvi.

Misunderstanding that not all health services are provided by government; the perception that they have “paid taxes all their lives" and that government will provide them with retirement income and all of the health-related services they will need; such misunderstandings can lead to inadequate levels of saving

xvii.

Misunderstanding the tax status of their investments; forgetting that all payments from an RRSP are taxable and that, beginning at age 71, the balance must be brought into taxable income

xviii.

Not benefiting from RRSPs as they had hoped; for example, earning returns in RRSPs at historically low rates and then having them taxed in their 70s when many of today’s seniors, unlike previous generations, continue to earn other income and are taxed at high rates

xix.

Other misunderstandings such as the difference between a power of attorney and a will

xx.

Being spending averse; living an excessively meagre lifestyle and being excessively reluctant to spend for fear of running out of money

xxi.

Financial management by those older females, particularly as a surviving spouse, who have not been informed, involved or experienced in managing the family finances

xxii.

Surviving spouses discovering that their financial situation is more dire than they had long understood. Many surviving spouses did not get involved in their retirement or financial planning earlier and are now having to deal with financial matters that they are not familiar with

xxiii.

Many current investment products are significantly different than what many seniors are used to

xxiv.

As seniors age, many increasingly defer to professionals

xxv.

Many seniors rely more on family members than professionals

xxvi.

Lower income seniors who do not know where to go for investment advice and therefore rely primarily or exclusively on their families

xxvii.

Complex families such as multiple marriages and financial linkages or obligations that are extended and complicated by blended families and common-law relationships

xxviii.

Many seniors evaluate financial professionals based on rapport rather than on credentials or a proven track record

xxix.

Being approached with offers of investment strategies, such as solar electricity that are promoted based on their capacity to generate a steady monthly income, which some seniors interpret as an income that is guaranteed

xxx.

Perpetrators of fraud viewing seniors as attractive targets

Compounding factors such as immigration (not understanding the financial industry in Ontario and institutions designed to serve and protect them), cultural factors and English as a second language. progressconsulting.com (905) 717-3242

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THEME 1: DEMOGRAPHICS AND CAPACITY SENIORS’ NEEDS CAN VARY Although seniors share many factors in common, there are significant variations within this subset of the population. While seniors are typically considered to be those persons 65 years of age or older, many businesses now provide special services or “senior” discounts to all of their customers over the age of 60, 55 or even 50. Also, greater life expectancies can cause the interests and needs of younger seniors (in their 60s) to be considerably different than seniors who are much older (e.g.: in their 90s or beyond). For example, as seniors age, their need for liquidity tends to increase. Baby boomers are increasingly entering the seniors’ ranks. Their life experiences and views can differ from those of older seniors. For example, pre-baby boomers are often more trusting of professional credentials and "blue-chip" reputations than their baby boomer counterparts. As a result, seniors' vulnerabilities vary by age and by the nature of their experiences. Financial well-being also leads to varied needs. The concerns and vulnerability of those with meagre financial resources are far greater than those who have considerable financial wealth and the resources to engage highly sophisticated financial professionals to assist them. Nonetheless, risks of undue influence by professionals or family members over the financial decisions of a senior can exist regardless of the senior's wealth. Overall, seniors are best served when their particular needs are identified, appropriately stratified and specifically addressed. SENIORS’ NEEDS ARE NOT ALWAYS UNIQUE Seniors’ needs are not always unique compared to those of other investors. For example, investors of all ages can struggle to: 

Develop and maintain adequate levels of financial literacy



Comprehend complex financial disclosures, and



Properly understand the competencies and ethical and legal obligations of various financial professionals.

Where investors face common challenges, the experiences and concerns of all investors should be taken into account to arrive at comprehensive solutions for consumers.

SENIORS CAN BE BETTER SERVED AND PROTECTED Participants provided the following suggestions to better serve and protect seniors. 1. Promote Advanced Retirement Planning – both financial and for care One of the best ways that seniors can protect themselves is through early, advanced retirement planning, including planning for their care. The existence of a comprehensive plan provides the senior with a welldesigned lens through which to: 

assess the significance of changes in their circumstances and assumptions, and



evaluate emerging investment and caregiving opportunities.

Any steps by the industry or regulators to encourage and facilitate early, advanced retirement planning would be beneficial to seniors. progressconsulting.com (905) 717-3242

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2. Educate Seniors and Pre-Seniors Participants expressed differing views on the value of education as a means to serve and protect seniors. One view is that it is important and beneficial to inform seniors on such matters as the investment industry, regulatory safeguards, complaint mechanisms, types of investments, the capabilities and responsibilities of various types of investment professionals, features and differences between wills and powers of attorney and the benefits of comparative shopping as a means to protect themselves from inappropriate investments or unfair pricing. Such education should be aimed at two distinct audiences who have different needs: 

pre-seniors to prepare them for advanced retirement planning (#1, above), and



seniors who are now living in their retirement years.

Another appropriate focus point for education is for seniors as they near the age of 71 when their tax-deferred retirement savings must begin to flow into taxable income. Education should: 

expand beyond financial planning (pre-seniors) and financial management (seniors) to include advanced care planning and address “taboo conversations” such as about diminishing cognition, diminishing mobility, dying and death and family relationships, and



include members of the family or other responsible persons, although those persons may be in a conflict of interest: o financially, or o in conversations about family relationships.

A contrasting view is that, at some point, additional education of the consumer: 

has diminishing returns (ie: additional messaging doesn't get through; a possible exception is messaging about fraud, which is addressed under Theme 3), and



provides insufficient protection of the consumer (ie: should not be an attempt to equip the vulnerable to protect themselves; does not take the place of regulation and enforcement).

Other concerns were: 

Who or what organizations, or collaborations among organizations, are best suited to diagnose and address the education needs of seniors and pre-seniors?



What are effective modes of delivery, especially to a pre-social media generation?

Government, NGOs and business institutions do not have enough information on the impact of education, particularly on seniors and those preparing for their senior years. More research on impact is warranted.

3. Increase Accessibility of Information Information is not accessible to seniors if they cannot obtain and comprehend it. To assist seniors to obtain information, it should be more readily available where seniors are located, such as seniors' residences and where seniors tend to gather socially. It should also be available in a form that seniors can readily access, such as hardcopy and person-to-person communication. As mentioned, the continuing shift of communication to online formats likely excludes more seniors than other members of the population. Additional or more detailed disclosure is not necessarily beneficial disclosure. To assist seniors to comprehend information, comprehensibility should be a key objective of disclosure. Otherwise, the complexity of the information makes seniors more reliant on and vulnerable to professionals and family members. Disclosure progressconsulting.com (905) 717-3242

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should be as brief and simple as possible to communicate key information that well informs the decision-making of senior investors. In addition, information should be provided in a variety of languages. Senior investors are at a disadvantage when important investment information is not provided in a language they understand. Disclosure should unbundle and achieve the transparency of elements such as: 

Principal and return of principal



Income



Costs



Real rate of return.

Participants are encouraged by the upcoming reforms in disclosure as this is an area where many of them believe that much more needs to be done.

4. Clarify Labels, Classifications and the Regulation of Professionals Consumers, and especially seniors, often attach special meaning to labels such as "advisor", "consultant", "professional”, “expert" and "specialist". For example, many seniors assume that professionals with such titles are: 

certified



regulated



subject to professional discipline, and/or



bound by the best interest standard.

In many cases, “advisors” are actually salespeople and the advisor label is misleading, perhaps intentionally so. This is especially troubling because seniors, in particular, are likely to seek an “advisor” and avoid “salespeople”; in these cases, the “advisor” label misdirects them. Senior investors would be well served by clarifying such labels and communicating the competencies, ethics, standards, enforcement, discipline and complaint processes that relate to each. Unfortunately, the clarification of titles and labels does not necessarily achieve an accurate understanding of such designations among consumers. Individual consumers are likely to attach their own meaning to these titles. Regardless of the challenge, clarification would be beneficial. In addition, the industry and regulators need to achieve a greater understanding among consumers, especially senior consumers, of: 

the nature, benefits and shortcomings of self-regulation, and



the role of organizations such as MFDA, IIROC, OBSI and when and how to access their support.

Participants in this consultation differ on the wisdom and value of self-regulation. Some respect and support self-regulation. Others equate self-regulation with self-interest. This difference of opinion may be indicative of the broader consumer population as well.


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5. Centralize Licensing Provincially Some participants are concerned that the regulatory structure does not provide seniors (and other consumers) with “one stop shopping” when they have a complaint. Consumers are left to educate themselves and sort through the various organizations, and all of their websites or telephone helplines, to determine where to go for help. By contrast, it would be helpful if a senior with a question or complaint could go to one centralized “location” (both virtual and actual) to choose a path of assistance from among the available alternatives.

6. Train Investment Professionals to Deal with Seniors There are proficiency standards for investment advisors regarding knowledge of products and clients, but not necessarily regarding knowledge of the specific needs of seniors. The industry should provide adequate training to investment professionals on the particular needs of seniors, including indications of cognitive decline, and how best to meet seniors’ needs, which includes how to: 

ask seniors broader, more open and more generic questions to develop a broader understanding of the senior's situation,



ensure that “Know your client” (KYC) enquiries appropriately include questions about the person’s health status, care needs, spouse’s interests and involvement in investments and roles of family members particularly in the senior’s decision-making and finances, and



how to enter into “taboo conversations” described in #2, above.

Investment professionals, their organizations and their staff members should be “senior friendly” in terms of their: 

accessibility (physically and virtually)



processes



information



language (comprehendible; not inadvertently insulting), and



tone (respectful; not inadvertently paternalistic).

Training should be: 

stratified (eg: address the varying needs of the consumer population at various life stages)



continuous (not “point in time” in the investment professional’s career)



kept up-to-date (with changes in the investment marketplace and to incorporate evolving understandings of seniors and their needs), and



competency-based.

The merits and experience of the Australian competency-based model of continuous training on elder issues should be considered.

7. Perhaps Certify Specialists Participants mentioned three models of specialization: 

exclusivity



discretionary



none.

With exclusivity, only a person who is a certified specialist can work with seniors. progressconsulting.com (905) 717-3242

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In a discretionary model, the consumer decides whether to work with a specialist or with someone who is not certified as a specialist. The third model is one of no certified specialization. Some participants propose that: 

the investment industry provide a specialist designation (either the exclusivity or discretionary model) so that seniors can choose a specialist to serve their needs, and/or



firms voluntarily provide specialists from among their representatives.

The certification of specialists is one way to deal with the “labelling” issue described in #4, above, as long as the certification regime prevents non-certified persons from labeling themselves as specialists. Other participants believe that a specialist designation would bring confusion. For example, there could be investment professionals without the designation who do a better job of meeting seniors' needs than one who does. The benefits of such a designation may not justify the challenges, costs or risk. And, under the exclusivity model, the industry may not be able to supply sufficient numbers of certified specialists to meet the needs of the large population of baby boomers who are entering or have entered the senior ranks.

8. Eliminate Regulatory Arbitrage such as from Multiple Licensing Consider eliminating the practice whereby firms or individual investment professionals carry licenses to provide different kinds of products (often insurance and securities) possibly as a way to capitalize on loopholes in regulatory systems and to circumvent unfavourable regulation. However, doing so may be difficult given that some investment professionals may have dual licenses for the very valid reason that enables them to provide investors with a broader selection of products.

9. Address the Evaluation of and Response to Shifts in Cognition Train investment professionals to ask questions to ensure that clients understand what they're committing to. Also, consider training them to identify signs of an investor's declining or inadequate cognition. Mental health organizations perform research and develop tools and techniques to detect potential red flags of cognition problems. Consider adopting or adapting, and not reinventing, these tools. Even if an investment professional suspects diminished capacity, what are professional’s appropriate rights and responsibilities? Under the law, a person is considered to be cognitively capable until proven otherwise. The onus, or legal responsibility, to diagnose cognition problems should not be placed on investment professionals. On this, the law is clear. Under the Health Care Consent Act, only an appropriate health professional can make such a diagnosis. The combination of these factors can leave: 

the investment professional in an ambiguous predicament, and



the investor vulnerable.


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Where an investment professional becomes concerned about a senior's cognitive ability to understand and adequately evaluate the information, perhaps the best that he or she can do is to act in good conscience, such as to: 

disclose observations and concerns to the senior's family or caregiver



recommend low risk investments, and/or



withhold or withdraw services.

10. Address the Evaluation of and Response to Undue Influence A similar dilemma arises where the investment professional becomes concerned that the investor is subject to undue influence. Research indicates that approximately 2/3 of elder abuse comes from family members or care givers. If the investment professional suspects excessive influence, what are the appropriate competencies, rights and responsibilities to intervene? Who should be told about these concerns? In some cases, it may well be that the only available family members or caregivers are those persons whose behaviour cause the concern. Also, such concerns tend to be subjective which makes them risky for the investment professional to disclose or act upon. This is an area that the industry and regulators should investigate further.

11. Ensure a Sufficient Variety of Investments Some participants are concerned that there is not a sufficient variety or volume of low-risk investments available for seniors to consider.

12. Perhaps Limit Types of investments In light of the complexity of many newer investment vehicles, some participants find it appealing to limit the types of investments that are offered to a senior. This can be accomplished by regulations that will apply to all investors of a certain age or based on their income or net worth. However, such regulation would unfairly discriminate against those seniors who have the cognitive and financial capacity to assess complex investments. Another way to accomplish the same objective is to require that investment professionals adhere to a best interest standard, which is analyzed under Theme 3. Other participants believe that imposing regulations that limit the types of investments sold to seniors is impractical or inappropriate.

13. Add a Cooling-off period One view is that a cooling-off period allows the investor time to give appropriate second thought to an 1 investment decision before it becomes binding.

1

Note: Securities law does provide a cooling off period for certain types of investments.


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Another view is that such a cooling-off period would add cost to the investment process and not necessarily improve the investor's decision-making or likelihood of obtaining other opinions. The merits of cooling-off periods should be investigated.

14. Register Powers of Attorney In Ontario, powers of attorney are not registered. Accordingly, there is a risk that an investment professional could enter into a contract with the senior whose financial decision-making has been placed in another person's hands. Consider a registration system.

15. Promote the Complaint Process Communicate and promote the complaint process such as by: 

mandatory notes on investors' statements



mandatory discussion during the investment process



mandatory periodic discussion over the life of the relationship between the investment professional and the investor, and/or



public education such as through written materials and advertising.

OSC has a contact centre. It is unclear how many senior investors are aware of the OSC contact centre or when or how to use it. Regardless of how well consumers understand the complaint system, many seniors may not find it to be accessible. Inaccessibility can be in several forms. For some it means physical access; for others it means comprehensibility; and for those who have suffered a significant loss, inaccessibility may be financial whereby they no longer have the funds to seek advice or to engage a lawyer or other advocate. Where accessibility to the complaint process is an obstacle to using it, this should be addressed.

16. Simplify the Complaint Process Investigate ways to modify the complaint process so that a senior investor will be more likely to lodge and persist with the complaint. For example, the process should: 

be easy to access



be easy to understand



be simple to pursue



be friendly; not intimidating



require a minimum amount of the investor's time and attention, and



provide a fair result for all parties.

17. Remove Unnecessary Regulatory Distinctions Some participants believe that the distinction between regulating institutions and regulating individuals should be eliminated.


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18. Battle silos; engage with organizations that work with seniors Consultations like this are an example of how organizations with a common interest in serving and protecting seniors can and should work together to develop comprehensive solutions that prevent seniors from “falling through the cracks” that exist between mandates of the organizations that are designed to serve them. There are many opportunities to collaborate, such as by sharing, adopting or adapting resources of other organizations.

19. Consider a Best Interest Standard Many of the concerns and dilemmas in meeting the needs of senior investors may be addressed by applying a best interest standard. This is addressed under Theme 3.


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THEME 2: RETIREMENT SECURITY

RESULTS OF CONSULTATION: THEME 2 CHALLENGES SENIORS FACE IN EFFECTIVELY PLANNING FOR RETIREMENT SECURITY The following key messages emerged: 

Seniors’ confidence about their financial well being varies



There are better ways to protect seniors.

SENIORS’ CONFIDENCE IN THEIR FINANCIAL WELLBEING VARIES Some seniors lack confidence in their financial well being. Many do not fear death as much as they fear running out of money. In some cases, their concern is warranted. As reported under Theme 1, there are other cases where seniors avoid spending and live an excessively meagre lifestyle because they underestimate their wealth or overestimate their future expenses. Sadly, in some of these cases, their excessive thrift may be influenced by family members who have a conflict of interest. Those who have more money tend to be more confident about their financial well-being. However, there are exceptions. Some seniors are overconfident, such as in the following ways: 

The more seniors trust their investment professional, the more confident they tend to be; among seniors, this trust is often rooted more in rapport than backed by fact.



Many seniors or pre-seniors do not realize that they haven’t saved enough or that their portfolios are not building sufficient wealth to finance their retirement.



As mentioned under Theme 1, some seniors: o do not really understand how much money they will need to retire o spend money to support their adult children rather than use those funds to save for retirement o do not fully understand the tax status of their portfolios, such as the fact that their RRSP is fully taxable and that, if they have other sources of income, it may become taxed at high rates, or o assume that most or all of the health services they will need are funded by government.

Many seniors mitigate their risk by choosing not to retire in the traditional way. They work part-time, under contract or in a new career or type of work to supplement their investment income. While this reduces their reliance on their savings and investments, it may also cause their RRSP withdrawals and other investment income to be taxed at a higher rate. The risk of overconfidence can be tempered by the sobering effect of highly publicized frauds (eg: Bernie Madoff) and by seniors’ experience with the impact of the liquidity crunch of 2007 and the financial crisis of 2008. Some seniors invest in annuities by default because they are not fully aware of, or confident about, the alternatives, and they may be advised by an investment professional who is a salesperson for annuities.


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THEME 2: RETIREMENT SECURITY

THERE ARE WAYS TO BETTER PROTECT SENIORS The following proposals under Theme 1 were also proposed under Theme 2: #1. Promote advanced retirement planning – both financial and for care #2. Educate seniors and pre-seniors #3. Increase accessibility of information #4. Clarify labels, classifications and the regulation of professionals #6. Train investment professionals to deal with seniors #11. Ensure a sufficient variety of investments #12. Perhaps limit the types of investments #17. Remove unnecessary regulatory distinctions #18. Battle silos; engage with organizations that work with seniors #19. Consider a best interest standard.

COMMENTS ABOUT THE BUSINESS MODEL Participants were asked what business model would help seniors be more confident about their retirement security and help them achieve it. Some participants disapprove of the present model where an investor can be served or advised by someone who has an inherent conflict of interest that is disguised by: 

unclear or misleading labelling of investment professionals, or



disclosure that is inadequate or not transparent.

The most significant change in the business model would likely be the introduction of the best interest standard, discussed under Theme 3. Other significant changes to the business model, among the proposals referred to above, would be: #1. Promote advanced retirement planning – both financial and for care #2. Educate seniors and pre-seniors #4. Clarify labels, classifications and the regulation of professionals #6. Train investment professionals to deal with seniors #11. Ensure a sufficient variety of investments #12. Perhaps limit the types of investments.


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THEME 3: SUITABLE INVESTMENTS; PREVENTING FRAUD AND ABUSE

RESULTS OF CONSULTATION: THEME 3 CHALLENGES IN ENSURING SUITABLE ADVICE FOR MAKING INVESTMENT DECISIONS AND PREVENTING FINANCIAL FRAUD AND FINANCIAL ABUSE The following key messages emerged: 

Seniors feel vulnerable



Most fraud and abuse against seniors is outside of the investment industry



Much fraud and abuse goes unreported



Seniors can be better protected



Consider the best interest standard

SENIORS FEEL VULNERABLE Some seniors feel vulnerable to unsuitable advice or financial fraud and financial abuse. Others are naïve and are more vulnerable than they realize. Most are probably not capable of accurately evaluating the quality of the advice they are receiving. As mentioned under Theme 1, they may be dealing with salespeople who are labeled as “advisors” and whom they chose because their title implied that the professional acts in the senior’s best interest. Many seniors are more likely to complain about unsuitable returns or results they didn't expect rather than fraud or abuse, per se. After seniors suffer a significant financial loss, whether because of fraud, unsuitable investments or simple misfortune, there is a risk that they will take less care of themselves which leads to poorer health and increased morbidity. A related factor is that the magnitude and volume of major decisions that seniors’ face as they enter their retirement years and as they further age, and the influence of family members, are often greatest just at a time when their cognitive abilities are beginning to decline, which contributes to their feeling of vulnerability.

MOST FRAUD IS OUTSIDE OF THE INDUSTRY Most fraud perpetrated against seniors is outside of the regulated investment industry in the form of mobility scams (via telephone, door-to-door or the internet), home renovation scams, illegal lotteries, family/friend scams, new best friend scams, long-lost relations or romance scams or families with emotional, legal or substance abuse problems. Within investments, "too good to be true" promises of high returns, such as through Ponzi schemes, are particularly tempting in a low interest rate environment. Media publication of high profile frauds, such as Bernie Madoff, help to make some seniors appropriately cautious. Other common financial frauds or examples of abuse relate to misuses of powers of attorney, joint bank accounts, off-book investments and ignoring or exploiting the investor’s cognitive decline. Consumers are at risk when they deal with investment professionals who have no formal certification and perhaps inadequate training and experience, especially when they practise under a title such as “advisor”. FAIR Canada has published a report entitled, “A Canadian Strategy to Combat Investment Fraud”, which provides insight into the extent of investment fraud and ways to address it. progressconsulting.com (905) 717-3242

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MUCH FRAUD GOES UNREPORTED Compared to other segments of the population, seniors are less likely to report, even admit, that they have been victims of fraud or inappropriate investments because of shame and embarrassment.

SENIORS CAN BE BETTER PROTECTED The following suggestions reported under Theme 1 can also protect seniors from unsuitable investments and fraud: #1. Promote advanced retirement planning – both financial and for care #2. Educate seniors and pre-seniors (see below) #3. Increase accessibility of information #4. Clarify labels, classifications and the regulation of professionals #5. Centralize licensing provincially #7. Perhaps certify specialists #8. Eliminate regulatory arbitrage such as from multiple licensing #9. Address the evaluation of and response to shifts in cognition #10. Address the evaluation of and response to undue influence #12. Perhaps limit the types of investments #13. Add a cooling-off period #14. Register powers of attorney #15. Promote the complaint process #16. Simplify the complaint process #17. Remove unnecessary regulatory distinctions #18. Battle silos; engage with organizations that work with seniors #19. Consider a best interest standard (see below).

OTHER WAYS TO PROTECT SENIORS Particular ways to protect seniors from from fraud and abuse include: 

education



mystery shoppers, and



consideration of the best interest standard.

Education Under Theme 1, participants in this consultation promote the value of education and caution that, at some point, attempts to further educate seniors generates diminishing or no returns. Protecting seniors against fraud may be an exception. Compared to general education about investments, messages about the risk of fraud can be easier for seniors to understand, particularly in that they lend themselves to storytelling. A campaign of televised messages by the British Columbia Securities Commission is a good example. progressconsulting.com (905) 717-3242

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Mystery Shoppers The use of mystery shoppers can be an effective way to evaluate the suitability of investment advice. Consider a Best Interest Standard Compared to the suitability standard (of investments) that is in place today, the best interest standard, described in Appendix B, whereby the investment professional has a professional obligation to provide investments in the investor's best interests, appears to be an effective means to: 

protect seniors from diminished cognitive capacity (Theme 1)



protect seniors from the complexity of financial instruments and disclosure (Theme 1)



better prepare seniors for their retirement (Theme 2)



guide seniors to optimize their financial resources during retirement (Theme 2), and



protect seniors from unsuitable investments (Theme 3).

A change in standards is not likely to significantly protect consumers from fraud (Theme 3) in that fraud, by its nature, is designed to violate rules. While the suitability standard is typically applied when the consumer makes the initial investment, the best interest standard can continue to provide protection over the life of the investment. Thus, it addresses an investor’s changes in circumstances more that the suitability standard does. Standards that govern trustees may provide very helpful guidance. Participants differed slightly on the definition of a best interest standard. Some believe that it is equivalent to a fiduciary responsibility while others believe that a fiduciary standard is higher. As explained in Appendix B, the best interest standard does have drawbacks and risks. Some participants expressed concern that the standard: 

places the investment professional in a precarious situation where two similar investment opportunities offer different mixes of benefits and the professional is responsible to determine which mix is in the investor’s best interest



may inhibit or prevent the practice of incentive-based selling, and



is likely to have unforeseen implications that, if it is implemented without great care, could lead to unintended consequences that are not necessarily in investors’ best interests.

While some participants in this consultation wholeheartedly endorse the best interest standard, others recommend that it be considered very carefully and, if chosen, implemented very cautiously.


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CLOSING REFLECTIONS AND NEXT STEPS PROPOSALS SERVE OTHER INVESTORS Participants provided the proposals in this report within the context of serving and protecting seniors. Nonetheless, their suggestions can be beneficial to other categories of investors.

THERE ARE ISSUES THAT WARRANT FURTHER INVESTIGATION Participants’ proposals are based on their experience and observations and in some cases on evidence that is significantly anecdotal. It was suggested that regulators and the industry investigate the issues that this consultation raises. CLOSING REFLECTIONS Observers of this consultation ended the day by reflecting on what they learned from the discussion. The 2 following are examples:

2



there are varied levels of understanding of the regulatory system today √



none of the answers are simple



many diverse organizations and agencies are concerned about seniors' issues and we have more in common than I realized



while we have much in common regarding the objective to better serve and protect seniors, we have differences of opinion on how best to do so √



some views are quite entrenched



I heard about many different perspectives of those caring for the elderly and their expectations of industry and regulators



I can and will consider seniors' issues from a more holistic perspective, and particularly seek out other government agencies to identify how to engage, message and respond to seniors' needs



today I learned that seniors are more vulnerable to abuse than I had previously understood



I am motivated to work in seniors' advocacy



although the issues are complex, there is considerable commonality about some of the things that could be done regarding advice, education and suitability √



there are varying issues that are sensitive to seniors at various ages



there are differences of opinion as to what terms or standards should apply to serve and protect the "senior" demographic



there are steps the industry and regulators can take to better protect all investors, not just seniors



there is considerable interest in adopting a best interest standard



consideration of the best interest standard can be informed by elder law and trustee and guardian law √



we, as an industry, may be behind other sectors on the issue of seniors’ needs; if so, we should speed up reforms and not let industry self-interest unduly slow our efforts

Checkmarks (√) indicate multiple submissions of the same comment


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Participants in this consultation also reflected on what they learned. The following are examples:

3



the particular needs and vulnerabilities of seniors are more varied and significant than I had realized √



there are varied levels of understanding of the regulatory system today √



investment services are not governed by a best interest standard √√√√√



titles of investment professionals can be misleading √



there are many subtle differences of views regarding the need to protect seniors and their financial wellbeing



the issues we discussed today warrant additional depth than a consultation can provide



while we have much in common regarding the objective to better serve and protect seniors, we have differences of opinion on how best to do so √



perhaps we need a specialized, regulated designation for investment professionals who work with seniors



there is a lot of scope and opportunity for different agencies, regulators and governments to coordinate on outreach to seniors



advocates of seniors' issues may not be fully aware of existing evidence that can serve their cause; this information needs to be made more accessible in the interests of the seniors it is intended to serve √√



I have a lot more to learn and think about on this issue



there is much to be done to better serve and protect seniors



achieving meaningful change in the interests of senior investors will be more of a challenge than I had expected



consensus can be elusive but it is well worth pursuing



collective knowledge should be powerful enough to tighten and toughen the planning and oversight of seniors' retirement security



consultations that are properly structured and facilitated can be useful.

NEXT STEPS The OSC and its Office of the Investor and Investor Advisory Panel will:

3



report the results of this consultation to consultation participants, and



continue to engage with the Roundtable participants and other organizations in joint efforts to best meet the needs of senior investors.

Checkmarks (√) indicate multiple submissions of the same comment


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APPENDIX A: PARTICIPANTS AND OBSERVERS

Participants and Observers Consultation Participants Organization

Name

Title

Alzheimer Society of Ontario

Ms. Deila Sinclair

Canadian Foundation for Advancement of Investor Rights (FAIR) Canadian Pensioners Concerned

Mr. Neil Gross

Public Policy and Stakeholder Relations Coordinator Executive Director

Ms. Barbara Kilbourn

President

Canadian Pensioners Concerned

Ms. Gerda Kaegi

Centre for Canadian Elder Law

Ms. Laura Tamblyn Watts

Senior Fellow

Community Psychiatric Services for the Elderly, Sunnybrook

Dr. Carole Cohen

Clinical Director

Consumer Council of Canada

Mr. Ken Whitehurst

Executive Director

Financial Planners Standards Council

Mr. Cary List

President and CEO

Investment Industry Association of Canada (IIAC)

Mr. Craig Schleyer

Investment Industry Association of Canada (IIAC)

Mr. John Morton

Investment Industry Regulatory Organization of Canada (IIROC) Kenmar Associates

Ms. Marsha Gerhart

Chair IIROC CLS Seniors SubCommittee Former Chair IIROC CLS Seniors SubCommittee Vice President, Member Regulation Policy Chair, Advisory Committee

Ministry of Attorney General

Ms. Jaël Marques de Souza

Ministry of Finance

Mr. Frank Allen

Counsel, Office of Public Guardian & Trustee Assistant Deputy Minister

Ministry of Finance

Mr. Harvey Naglie

Senior Policy Advisor

Ministry of Government and Consumer Services

Mr. Noah Gitterman

Senior Policy Advisor

Ministry of Government and Consumer Services

Ms. Barbara Duckitt

Director, Consumer Protection

Mutual Fund Dealers Association (MFDA)

Mr. Shaun Devlin

Senior Vice President

Mutual Fund Dealers Association of Canada (MFDA)

Mr. Ian Strulovitch

Director of Public Affairs

National Initiative for the Care of the Elderly

Ms. Lynn McDonald

Scientific Director

Ombudsman for Banking Services and Investments (OBSI)

Mr. Sasha Angus

Director Deputy Ombudsman and Chief Operating Officer

Ontario Seniors’ Secretariat

Ms. Juanita Dobson

Assistant Deputy Minister

Public Interest Advocacy Centre

Mr. John Lawford

Executive Director and General Council

Retirement Homes Regulatory Authority

Mr. Chris Jodhan

Board Member, Vice Chair


Ms. Mary Catherine Lindberg

Chair of Board


Ms. Mary Beth Valentine

CEO & Registrar

The Canadian Advocacy Council for Canadian CFA Institute Societies The Society for Trusts and Estates Practitioners Canada Toronto Central Community Care Access Centre

Mr. Robin Pond

Toronto Society

Ms. Kim Whaley

Director

Mr. Frank Wagner

Bioethicist


Dr. David Yudelman

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APPENDIX A: PARTICIPANTS AND OBSERVERS Observers – Ontario Securities Commission Mary Condon, Commissioner Maureen Jensen, Executive Director Eleanor Farrell, Director, Office of the Investor Tula Alexopoulos, Director, Executive Director’s Office Leslie Byberg, Director, Strategy & Risk, Strategy and Operations Branch Rhonda Goldberg, Director, Investment Funds and Structured Products Branch

Observers – Investor Advisory Panel Connie Craddock, Chair Harold Geller Ken Kivenko Alison Knight Ursula Menke Louise Tardif Caroline Cakebread, Writer/Researcher

Facilitator Scott Ferguson, Progress Consulting


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APPENDIX B: SUITABILITY vs. BEST INTEREST STANDARD

SUITABILITY vs. BEST INTEREST STANDARD This appendix compares the suitability standard to the best interest standard and describes a Canadian Securities Administrators’ (CSA) Consultation on this issue. The CSA is considering the potential benefits and competing considerations of introducing a statutory fiduciary, or “best interest” standard for securities advisors when they provide advice to retail clients. We are trying to determine whether a statutory best interest standard should be adopted, whether another policy solution would be more effective or whether the current Canadian regulatory framework is adequate. Under the current regulatory framework, securities advisors must:  Deal fairly, honestly and in good faith with their clients 

Collect know-your-client (KYC) information, conduct know-your-product (KYP) due diligence and perform suitability analysis when their clients buy or sell securities



Identify and respond to conflicts of interest by avoiding, controlling and/or disclosing them



Comply with various other principle and rule-based requirements

A fiduciary duty is a duty to act in your client’s best interest. This generally means that:  Client interests are paramount 

Conflicts of interest are avoided



Clients are not exploited



Clients are provided with full disclosure



Services are performed reasonably prudently

Securities advisors in Canada are generally not subject to a statutory fiduciary duty in securities laws. However, the courts may determine that a fiduciary duty exists at common law (also known as “judge-made” law). The courts make this determination based on several factors, including the degree of vulnerability, trust and reliance of the client, the level of discretion of the advisor and the professional rules or codes of conduct to which the advisor is subject. The CSA has identified five areas of concern with the current regulatory framework:  There may be an inadequate principled foundation for the standard of conduct owed to clients 

The current standard of conduct may not fully account for the information and financial literacy imbalance between advisors and their retail clients



There is an expectation gap because investors incorrectly assume that their advisor must always give advice that is in their best interests



Advisors must recommend suitable investments but not necessarily investments that are in the client’s best interests



The application in practice of the current conflicts of interest rules might be less effective than intended

The CSA has also identified several competing considerations related to a statutory best interest standard, including:  The current regime may be functionally equivalent to a fiduciary duty 

It may impose greater costs on providing advice



It may have a negative impact on investor access to, and choice and affordability of, advisory services


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APPENDIX B: SUITABILITY vs. BEST INTEREST STANDARD 

It may have a negative impact on certain business models



It may have an uncertain impact on advisor compensation practices



It may require more guidance with respect to its application and operation in specific circumstances


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APPENDIX B: SUITABILITY vs. BEST INTEREST STANDARD

On October 25, 2012, the CSA published Consultation Paper 33-403 The Standard of Conduct for Advisors and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients. The Consultation Paper explores the potential benefits and competing considerations of introducing a statutory fiduciary or best interest standard for advisors and dealers when they provide advice to retail clients. The Consultation Paper describes a possible statutory best interest standard. Under this standard, every securities advisor that provides advice to a retail client with respect to securities or derivatives must, when providing this advice, act in the best interest of the client, and exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstances. The term “retail client” is defined to include any individual with net financial assets of $5 million or less.


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