Canadian regulators have identified “several areas of concern” with the sales culture inside the country’s bank-owned

mutual fund

dealers following a comprehensive survey, and they are now working directly with the banks to determine if regulatory action will be necessary to ensure compliance with securities law.

Among the findings that sparked concern in the anonymous survey of nearly 3,000 mutual fund dealing representatives employed by

Royal Bank of Canada

,

Bank of Montreal

,

Canadian Imperial Bank of Commerce

,

Bank of Nova Scotia

and

Toronto-Dominion Bank

is that one in four said products or services have been recommended to clients, at least sometimes, that are not in their interest.

The full survey, which was conducted beginning last November and focused on sales environment, sales pressure, range of products and knowledge of mutual fund representatives, suggests this concerning outcome for clients could be tied to compensation practices, incentives and performance metrics, or to “the high degree of sales pressure that representatives reported experiencing,” the regulators said.

“While it’s clear many bank representatives are prioritizing quality advice, it is also clear that sales pressures and incentivization may be driving concerning behaviours,” Grant Vingoe, chief executive of the

Ontario Securities Commission

, said Wednesday as the regulators released the results of the survey in a 24-page report titled Sales Culture Concerns at Five of Canada’s Bank-Affiliated Dealers. “The focus of the bank representatives should be the best interests of their customers and clients — not feeling heightened pressures to meet sales targets.”

The

Canadian Bankers Association

said in a statement that its members will be reviewing the report and value collaboration with regulators.

“Building and maintaining strong customer relationships is a key focus for banks in Canada,” a CBA spokesperson said in the emailed statement, adding that they are committed to providing “needs-based” advice that helps clients reach their financial goals.

The statement said consumer and investor protection is prioritized at the banks, which strive to put customer interests at the centre of all product and service recommendations.

The report, produced with the

Canadian Investment Regulatory Organization

, a national self-regulatory agency that oversees all investment dealers, mutual fund dealers and trading activity on Canada’s debt and equity markets, was based on the more than 2,800 responses to the survey, which was sent to about 17,000 mutual fund dealing representatives at the bank-owned dealers.

Regulators said the responses provided a large enough sample to generalize the findings across the bank-affiliated mutual fund dealers.

In the report, they highlighted the widespread use of management tools within the banks such as “scorecards” that keep track of an individual’s performance — measuring things like product sales and client contact at regular intervals — which can impact compensation and the sales pressure mutual fund representatives face. A full 40 per cent said they believe scorecards influence product and service recommendations to clients.

“Representatives reported that scorecards not only increase pressure to meet sales targets, but also influence the products recommended to clients, posing a risk to the interests of retail investors,” the regulators said in their report released Wednesday.

Close scrutiny of these scorecards will be part of their continued assessment of how the bank-owned mutual fund dealers are operating and managing conflicts of interest, said Sonny Randhawa, executive vice-president of regulatory operations at the OSC.

“An element of sales pressure is expected in a sales environment, I don’t think that’s unusual,” he said. “I think where we would have a concern, which we’ve now had some sense of a (red) flag here in this survey, is that that may actually influence behaviours in a way that is not in the best interest of the client.”

The next steps for the OSC and CIRO include going directly to the banks for information and data and meeting with “key individuals” to gain a full understanding of the sales practices in place at the banks and how they can impact the behaviour of mutual fund representatives, as well as what controls dealers have in place to address any material conflicts of interest arising from sales practices including compensation, incentives and performance metrics.

“We’re going to focus on the controls around scorecards, just as an example,” said Randhawa. “How are these potential conflicts (managed) in a scenario where, for example, a rep may have multiple choices of products or services? Are they doing what’s in the best interest of the clients versus what’s something that’s getting them the recognition on their scorecard?”

The regulators are also urging the bank-owned fund dealers to take steps to remedy the concerns highlighted by the survey to make sure sales practices put client interest first.

“Once we have completed our review and analysis of the information from each of the five bank-affiliated mutual fund dealers, we will consider our regulatory tools available and determine whether further action is required to ensure ongoing compliance with securities laws,” the regulators said in the report.

Randhawa said it would be premature to discuss what tools could be used and how.

“It’s too early to make an assessment of that,” he said. “To the extent we’re not satisfied that the controls are managing those conflicts, we’ll be looking at other regulatory tools and options that are available to us at that point.”

In the early part of this decade, Canadian regulators phased in a series of “client-focused reforms” aimed at raising the obligations dealing representatives have to their clients. The changes were aimed at improving disclosure, dealing with material conflicts in the best interest of the client, and improving dealer knowledge of clients and products, but they fell short of imposing a higher-level fiduciary obligation on all investment representatives that some investor advocates and regulators had been pursuing.

Another area of concern highlighted in Wednesday’s report dealt with the level of knowledge inside Canada’s biggest bank-owned mutual fund dealers and factors that could lead representatives to “fail to provide correct information in certain areas.”

For example, one in three surveyed reported that clients have, at least sometimes, been provided with incorrect information about products and services being recommended to them.

One troubling finding was that 23 per cent were not able to identify the definition of management expense ratio (MER), an important component of the cost of the mutual funds they sell that can materially influence clients’ investing decisions. However, the report noted that a smaller subset — 12 per cent — answered incorrectly when asked to identify the impact of MER on mutual fund performance.

“These results indicate that Canada’s bank-affiliated mutual fund dealers should assess their current training programs and make any required enhancements to ensure that clients are provided with accurate product information,” the regulators said. “Taken together, the results of this survey highlight several areas of concern with respect to the sales culture and environment.”

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A potential bright spot in the report for Canada’s bank-owned fund dealers, which have faced criticism in recent years that don’t offer shelf space or make recommendations to third-party funds, is that the OSC-CIRO survey found dealers were generally satisfied with the range of funds available to them. However, they also indicated that a broader range of products that would include external mutual funds could be beneficial in offering clients more choices.

• Email: bshecter@nationalpost.com