New rules for on-line investors
Investors who trade securities on-line no longer require the approval of their brokers to execute trades. David Brown, chairman of the Ontario Securities Commission (OSC), announced the CSA’s decision that “order-access only” traders may now be exempted from the suitability rule.The OSC is one of 13 members of the Canadian Securities Administrators (CSA), an umbrella group of Canada’s provincial and territorial securities regulators.
The so-called “Know Your Client” rule requires brokers to review clients’ orders against their risk profiles before executing trades and prevents dealers or advisers from recommending unsuitable investments. Discount brokers, whose clients buy and sell securities over the Internet, and day-traders are among the groups most affected by the new rule.
Previously, the rule applied to advice-giving, full-service brokers as well as to discount brokers, whose interactions with their clients are generally more limited. For many investors who buy and sell securities through discount brokers and who neither ask for nor want advice, the rule has been a sticking point. Now, with the exemption, there’s no need toeview an order for suitability when no advice or information is given on the trade, said Brown.
Investors growing self-reliance spur changes
Behind the rule change is the ever-increasing number of independent investors who look to their brokers for order execution only rather than investment advice. By the end of this year, online trading, which comprises a large part of the operations of many discount brokers, will account for about 40 per cent of retail stock trades in Canada, according to estimates by the Investment Dealers Association.
This “buy side” of the market – which sees investors taking the initiative on trades versus the traditional relationship of a broker “selling” securities to a client – is growing and spurring changes to the rules for consumer protection.
“Requiring that brokers know their customers has no impact if the customers are making their own decisions, based on their own information,” said Brown.
In fact, it’s giving the investor something the investor doesn’t want, and ultimately will have to pay for, he added. Among the qualifications for the exemption, is a requirement that a client acknowledge in writing that no advice or recommendation will be given by the dealer.
Education to play bigger role
While he acknowledges that forgoing the suitability rule could leave some investors vulnerable to fraud and bad investments, Brown sees increased knowledge as the key to protecting oneself.
“That’s why the investor education thrust. … We have to make sure that with that empowerment they have the necessary tools to be able to exercise this new freedom,” said Brown.
Campaign targets teens and seniors
Investor Education Week last April, marks the third year in which industry players have banded together to put consumer knowledge in the spotlight. This year’s campaign included various initiatives aimed specifically at two groups that may have the most to gain – and lose – from today’s fast-paced investing environment and changing regulations: teens, who will benefit from early financial literacy, and seniors, who may be question their own know-how.
“Even though seniors are among the most actively invested, a large segment are among the least confident of their investment knowledge,” said Brown, who cites a 1999 survey showing that three-quarters of retirees, many of whom are online, hold investments in mutual funds or other vehicles.
The OSC has also launched the Foundation for Investor Education, an initiative to help educate Canadians about financial matters. Funding for the new organization will come from the settlements made as a result of the OSC’s policing efforts in the industry.