Remarks of Glorianne Stromberg1 at the
Strategy Institute National Conference on Mutual Fund Regulatory Reform
Metro Toronto Convention Centre
Toronto, Ontario
October 15, 1998


Good afternoon. As the program says that I am here to talk about "consumer protection strategies," it is only appropriate that I start by talking about one of the most useful consumer protection strategies devised in recent years. This is the use of the "best before" dates on consumer products.

I unfortunately find myself face-to-face with this strategy as the Report that I have been working on for Industry Canada's Office of Consumer Affairs is not yet ready to be released. Certainly, its release prior to today's remarks would have been a desirable "best before" date to meet.

To your question of: "When will the Report be released?", the answer is "soon". The timing is dependent on the logistics of printing and production.

Before I say anything more, I should mention that anything I say to you today is said in my personal capacity and not as a Commissioner of the Ontario Securities Commission. My views are not necessarily shared by the Commission or anyone involved with the Commission or with any of the other Canadian Securities Administrators. I should also mention that my views are not necessarily shared by Industry Canada's Office of Consumer Affairs or by any other branch of Government.

Despite missing the "best before" date, there are still some things that I can say that I hope you will find helpful.

Consumer Protection and Regulatory Reform

Firstly, I think it is evident from the public discussion that consumer protection and regulatory reform are ideas whose time have come. Suddenly, the ideas of my 1995 Report2 do not seem to be as radical or as threatening to the financial services industry and its regulators as they once did.

The 1995 Report

As most of you know, the recommendations in the 1995 Report relate to two simple concepts - "fairness and integrity" and "information and knowledge". The recommendations contemplate a strong self-regulatory role for the industry that is supported by the regulatory structure and is founded on these core concepts.

The 1995 Report focuses attention on how the investment funds industry regulates itself, on sales practices and incentive schemes, on gaps in consumer and industry education, on fund governance issues, on problems with the disclosure system, and on numerous other matters.

The 1995 Report also identifies the need for structural reform in how the industry is regulated. It contains recommendations for the establishment of a means to bring about unified national (but not federal) regulation. It also contains recommendations for creating a vehicle to coordinate the work done by the regulators of the different sectors of the financial services industry to ensure that there are no regulatory gaps and to coordinate the work of the national regulators with that of their international counterparts.

The 1995 Report generated a lot of attention both here in Canada and internationally. One of the reasons it did so was because it approached the question of the regulation of investment funds from the perspective of the consumer/investor. Apparently, this approach was unique - even if I didn't recognize it as being so. It always has just been the way that I have thought about investment funds. Investment funds belong to the people who invest in them. It's their money.

The OECD Paper and the 1998 Report

The 1998 Report builds on the ideas expressed in the 1995 Report and in the subsequent background paper that I prepared for an OECD meeting in 19973. It includes some core suggestions aimed at integrating, rationalizing and simplifying our regulatory structure to reflect today's realities. These realities include:

  • the blurring (and indeed, in some cases, the fusion) of product, advice and function;
  • a regulatory structure that has not kept pace with this; and
  • a growing realization that the status quo is not an option.

The 1998 Report includes core suggestions aimed at addressing the recognition by consumer/investors of their need to gain a better understanding of what they need to know:

  • to enhance their abilities to plan and manage their financial resources;
  • to improve their personal economic circumstances; and
  • to provide a clearer context for decision-making.

The biggest preoccupation of consumer/investors today is with their economic well-being and security. Most people are worried about their retirement and the future that lies ahead for their children. I am told that there is no area of daily life for which most Canadians feel more ill-prepared than that of economic life - the decisions that people are called on to make on a daily basis as workers, consumers, investors, savers, borrowers, voters, entrepreneurs or whatever.

A core premise in the 1998 Report is that there is no need for this state to continue and indeed we cannot, as a country, afford to let it continue. The efforts to remedy this situation need to be supported by the educational system, by employment and labor laws, by tax laws, by pension laws, by securities laws and by the basic laws relating to property rights. This support needs to be coordinated and to be complementary across the legal and regulatory system. The 1998 Report includes proposals to achieve this coordinated and complementary result.

These proposals have been framed with the integrated financial needs of consumer/investors in mind and with regard to the fact that a governmental, business or regulatory model that is not driven by the integrated financial needs of consumer/investors will fall short of both public and private expectations and needs.

When one focuses on the integrated financial needs of the Canadian consumer/investor, it immediately becomes evident that there is an added challenge and complexity to meeting these needs. This is created both by the division of powers under the Canadian constitution and by the structural division of the way the powers within each of the respective federal, provincial and territorial jurisdictions are exercised.

One cannot readily change the reality of the constitutional and intra-governmental structures but one can strive to make the structures work better to serve the needs of the Canadian consumer/investor regardless of where he or she lives in Canada.

Making the structures work better is the place where the work needs to start. Where there is a will, there is a way and I am hopeful that the perspectives in the 1998 Report will support both the "will" and offer an appealing "way".

I'd like to say more but it would be inappropriate to do so before the Report is released.

Viewing Investment Funds as Consumer Products or Services

What I propose to do is to talk about investment funds from the perspective of their being a type of consumer product or service. While at first blush this seems to be an odd categorization, when you analyze the situation you quickly recognize that the traditional problem areas that people sometimes encounter with consumer goods or services are the same ones that they sometimes encounter with investment funds.

Similarly, when you compare the traditional consumer protection measures that are used to address these problem areas, you quickly recognize that they are the same.

For example, the traditional problem areas for consumers with respect to consumer products or services relate to:

  1. reasonableness of price;
  2. quality or suitability for purpose;
  3. availability and choice;
  4. safety and fitness for purpose;
  5. adequacy of information; and
  6. availability of redress remedies.

These are the same areas that sometimes present problems for people who invest in investment funds. The traditional consumer protection measures used to address the problem areas for consumer goods or services fall into seven main categories. These relate to:

  1. disclosure of the material facts relating to the product or service;
  2. registration or licensing of the intermediary and/or of the product or service, with proficiency requirements, capital requirements and insurance and bonding requirements that vary according to the nature of the product or service;
  3. prohibition of transactions where there are conflicts of interest;
  4. prohibition of unfair trade or business practices;
  5. prohibition of misleading advertising;
  6. Fitness for purpose or product suitability requirements, contractual formalities and withdrawal rights; and
  7. redress mechanisms if problems occur as a result of the consumer acquiring an unsuitable or defective product or service including compensation funds.

Overlaying all of these measures are efforts to improve people's knowledge and awareness.

Securities Legislation is Consumer Protection Legislation

If you look at the securities legislation of the respective Canadian jurisdictions from this perspective, you recognize the use of the same traditional consumer protection measures. It is just that in the effort to deal with the complexity of the current securities legislation and the minutiae of the detail necessary to achieve "certainty", the tendency during the last three or so decades has been not to think about securities legislation in basic consumer protection terms.

However, we have in our securities legislation a "consumer model" of regulation in place. The challenge is to make sure that this model continues to protect consumer/investors. Meeting this challenge will be easier if we remember that the provisions in securities legislation (and the recommendations that have been made to enhance them) are basic consumer protection measures applied to specific types of consumer goods and services.

I have dwelt at some length on this matter because I think it should be helpful to industry participants (and to regulators) to keep this "consumer-model" perspective in mind as they deal with their clients and the public instead of thinking of the provisions of securities legislation as being unique to the financial services industry and as perhaps unwarranted interference with the way business is done.

Disclosure as a Consumer Protection Strategy

In the remaining time, I am going to talk about disclosure. Disclosure is one of the two cornerstones on which our current regulatory and supervisory system is based. It also is a key consumer protection strategy. There is a lot of concern about the current disclosure system. These concerns relate to whether it is working as well as it should be and what can be done to make it work more effectively.

One of the reasons why the disclosure system is not working as well as it needs to is because it is too focused on "documents" and, in particular, on the prospectus documents. These documents - instead of consumer/investors - have become the repositories of "disclosure". These documents have become ends in themselves as opposed to a means to an end.

Disclosure is about more than documents. It is about consumer/investors having ready access to information and using it (with or without the help of an adviser) to make decisions effectively, with a full understanding and comprehension of the significance or the lack of significance of the information that is provided or is not provided. Disclosure only works effectively when it is used in combination with other key strategies, such as education, and when there is a competitive environment in which consumer/investors have a real choice as opposed to simply have a choice of the same thing packaged under different labels with or without a price differential.

There are three key elements of disclosure. These are:

  1. the identification of what information is relevant information;
  2. the communication of the relevant information; and
  3. the comprehension or understanding of the relevant information.

All three of these elements need to be present in order to have disclosure.

One of the reasons why disclosure is not working as effectively as it should is because our securities regulatory system (unlike most consumer protection laws) does not require the prospectus to be delivered to investors before the transaction is entered into. In addition, it permits information that consumer/investors are deemed to have received to remain in regulatory files instead of actually being delivered to them.

Information that has not actually been delivered to consumer/investors has not been communicated to them and, in the absence of delivery and communication, consumer/investors cannot be considered to have understood such information. In other words, "disclosure" has failed.

We need to recognize that information that is not delivered to consumer/investors until after they have made their investment decision is of little use to them in making an investment decision.

Providing for delivery after the fact combined with the concept of deemed delivery operates to the disadvantage of consumer/investors who attempt to seek redress as a result of a failure to disclose material information or as a result of the receipt of negligent advice.

In other words, the delivery provisions of applicable securities laws result in the information in the various documents being able to be used to protect the investment fund, its manager(s) and intermediaries as opposed to being a consumer protection measure aimed at enabling consumer/investors to make effective decisions or to give their informed consent to various transactions.

Accordingly, these delivery provisions are inconsistent with a consumer protection strategy that is aimed at promoting effective decision-making by consumer/investors. Instead of doing this, the current disclosure system has the opposite effect of allowing key disclosure documents to be converted into liability-limiting documents.

I think it is important that regulatory strategies support effective decision-making by consumer/investors, with or without the help of a third party adviser. I believe that as the knowledge and awareness level of consumer/investors increases (which is happening rapidly) consumer/investors are realizing that what they need is more information rather than less - but they want this information to be timely, relevant, readily comprehensible and accessible. In other words, they are looking for quality information plainly and simply presented that will help them make effective decisions, with our without professional assistance.

I believe that it is possible to have full, true and plain disclosure which is simply presented and that it is possible to combine information, communication and understanding. I believe that presenting information plainly and simply does not require that relevant information be eliminated or be re-categorized as non-relevant information.

There are many suggestions in the 1998 Report for making disclosure more useful to consumer/investors in their decision-making while at the same time making disclosure more useful to regulators and to the industry as a supervisory strategy. Again, the details will have to await the release of the Report.


Let me summarize what I have said today.

  • Investment funds are a type of consumer good or service and securities legislation is a form of consumer protection legislation.
  • Regulatory reform and consumer protection are ideas whose time have come.
  • The soon-to-be-released 1998 Report will contain a blueprint for integrating, rationalizing and simplifying our regulatory structure to reflect today's realities and the integrated financial needs of consumer/investors.
  • The proposals in the 1998 Report have been framed with regard to the fact that a governmental, business or regulatory model that is not driven by the integrated financial needs of consumer/investors will fall short of both public and private expectations and needs.
  • The 1998 proposals focus on ways to make the regulatory structures and strategies work better.
  • One of the core areas where improvements can be made relates to the regulatory strategy of disclosure. The 1998 Report will suggest several ways of doing this in order to support effective decision-making by consumer/investors, with or without professional assistance.

In concluding I simply want to say that we are all consumer/investors. We all need to work together to find better ways to meet the challenges that face us as we seek to become better decision-makers and in doing so to provide for our financial security. We need to remember that in the end, it is people who make things happen and it is people who keep things from happening. Where there is a will, there is a way. Let's see how much we can do!

1 The views expressed in these remarks are the personal views of Glorianne Stromberg. They do not necessarily reflect the views of the Ontario Securities Commission, any of the other Canadian Securities Administrators, staff of any of the Canadian Securities Administrators or of other Commissioners of any of the Canadian Securities Administrators. They also do not necessarily reflect the views of Industry Canada's Office of Consumer Affairs or any other branch of Government.

2 Regulatory Strategies for the Mid-90s - Recommendations for Regulating Investment Funds in Canada, prepared by Glorianne Stromberg for the Canadian Securities Administrators, January 1995.

3 Regulation and Supervision of Investment Funds in the New Financial Landscape - A Canadian Perspective presented by Glorianne Stromberg as part of the background material for the third session of the Expert Meeting on Institutional Investors organized by the OECD Committee on Financial Markets in July of 1997. (1998 OECD Publications, Institutional Investors In The New Financial Landscape, Page 449)


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