Canadian Lawyer

56 M A Y 2 0 1 9 w w w . c a n a d i a n l a w y e r m a g . c o m regulators need to catch up to the modern world. For many investors, websites and apps have displaced the traditional relationship between a registered financial advisor and their client, but the regulatory regime is still built according to the blueprints of that one-on-one dynamic, she says. "So, the challenge for us as lawyers and for the businesses themselves and the regulators, to a certain extent, is how to tailor the regulation to fit the specific product," she says. Cowdery says these new products, which allow a customer to quickly open an account, answer questions determining their investment objectives and risk tolerance before the site fits them with the right portfolio, is a positive achievement for investors. But as robo-advisors emerged, regulators were concerned with the lack of any human relationship between investor and advisor — how can the firm know the client and make suitable investments if they've never met? — and the commissions had a "very cautious and conservative" approach, which is still the norm, Cowdery says. "The regulatory system still expects full 'know-your-client' suitability analysis," she says. The regulators initially considered requiring robo-advi- sors to call everyone who opened an account to go over the answers they gave — which Cowdery says would be a waste of time. Ensuring the questions properly appraised the custom- ers' intentions and having a registered portfolio manager go over all the accounts on the back end turned out to be enough, she says. However, there's a "whole slew" of other requirements, which haven't been adjusted to fit the shape of robo-advising, and the key for lawyers is to show they're in compliance with regulations that were written for "one-on-one" advisor-client relationships, Cowdery says. Robo-advisors are "required to collect a robust client onboarding process" either through face-to- face communication or an online questionnaire approved by the Canadian Securities Administrators, says Mary Lou Frazer, senior public affairs specialist at the Ontario Securities Commission. "They're not telling Wealthsimple you don't have to com- ply with this, that and the other thing. You do have to comply with everything," Cowdery says. Mark Wright, director of communications and stake- holder relations at the Ombudsman for Banking Services and Investments, says that, although they are still new and fewer complaints tend to be made during a positive market environment, the OBSI has received few complaints about robo-advisors. "We're talking one or two cases a year at this point," he says. While he was chairman of the OSC from 1993 to 1997, Edward Waitzer says, regulators were grappling with the tech- nological transformation of industry at that time, too. But, in 2019, Waitzer, a partner and head of the corporate gover- nance group at Stikeman Elliott LLP, says it is artificial intelli- gence that is "fundamentally changing" investment decisions, financial product marketing and distribution channels. This calls for forward-thinking legislators and regulators, as there needs to be protections that ensure customer interests are a priority that is built into the algorithms. He adds that a lot of the existing regulation may not be necessary in an AI world. "The real regulatory challenge is how do you get politicians and reg- ulators to think longer term, to think forward and longer term in a world where the politi- cal calculus — unfortu- nately supported by the media — is very short term," he says. On the wider regu- latory front, there have recently been sev- eral key developments in the regulation of wealth management, says Harold Geller, an associate in the finan- cial loss advisory group at MBC Law PC. One aspect of Geller's practice is representing plaintiffs who are suing stockbrokers, mutual fund representatives, insurance agents and financial planners. Canada's financial industry is regulated by provin- cial commissions. Unlike most countries in the devel- oped world, Canada has traditionally classified a federal regulator such as the U.S. Securities and Exchange Com- mission as unconstitutional. This may change, after the November 2018 Supreme Court of Canada decision Refer- ence re Pan-Canadian Securities Regulation. The decision sets the stage for a pan-Canadian regulator overseen by a council of ministers representing provincial and territorial governments. "Given the present deregulation, buyer beware, businesses-first approach of the present Ontario government, further watering down of consumer protections are likely and no progress toward transparency or fairness is anticipated." Harold Geller, MBC Law PC

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