Bank reps under pressure to sell: OSC and CIRO

Following a review of sales practices at the Big Five banks’ fund dealers, regulators are calling on the banks to review their approach to reps’ compensation, performance metrics and the pressure that reps face to meet sales targets.

The Ontario Securities Commission (OSC) and the Canadian Investment Regulatory Organization (CIRO) published a report detailing the results of a voluntary, anonymous survey of almost 2,900 reps at the fund dealers affiliated with the Big Five banks — BMO, CIBC, RBC, Scotiabank and TD Bank — which found that many reps report that they feel pressure to sell, which can result in product and service recommendations that aren’t in clients’ interests.

In particular, regulators found that the use of scorecards to track reps’ sales and other activities are tools that, “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.”

That conclusion was seized on by investor advocates, who have long criticized industry sales practices.

“This report confirms what we’ve been saying for years: sales pressure and conflicted pay structures are still deeply embedded in Canada’s financial system,” said JP Bureaud, executive director of the investor advocacy group, the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada), in a statement.

“There’s a growing gap between what the rules are meant to do and what’s actually happening on the ground. Regulatory intent is being lost in translation — and investors are paying the price,” Bureaud said.

Indeed, these kinds of worries are not new to regulators. Ever since mutual funds emerged as the dominant retail investment product in the mid 1990s, regulators have been grappling with concerns about industry sales practices and potential harm to investors.

More recently, these concerns have focused on the bank-owned dealers, as the banks have taken a greater share of the retail fund business, and started limiting their branch-based reps to selling proprietary products in the wake of client-focused reforms adopted at the end of 2021.

In 2022, the federal Financial Consumer Agency of Canada documented its concerns about the sales culture at the big banks after an extensive mystery shopping exercise found that, “a sharp focus on sales was turning bank branches into ‘stores,’ increasing the risk of banks placing sales ahead of customers’ interests.”

While that report looked at a range of banking products (including bank accounts and credit cards), the joint OSC/CIRO review focused on investments. Rather than posing as consumers, the securities regulators sought insight directly from industry reps themselves.  

“The approach we took on this work is innovative for a regulator,” said Sonny Randhawa, executive vice-president of regulatory operations at the OSC. “It shows how the OSC’s horizon scanning and regulatory functions work together to spot, understand and respond to potential issues.”

Among other things, the regulators’ survey found that 40% of reps said that they believe that performance-tracking tools, such as scorecards, have influenced product and service recommendations to clients; a third of reps say that clients have sometimes received incorrect information about those recommendations; and that 25% said that clients have sometimes received recommendations that aren’t in their interests.

“The OSC and CIRO believe the sales environment, compensation, incentivization and performance tracking may be contributing factors to these results,” the regulators noted.

Indeed, the report said that the data, “showed a statistically significant association” between reps reporting that they face sales pressure, and reps reporting that clients have received recommendations that are not in their interests.

The survey also found that 32% of reps reported that their compensation was driven more by sales volumes than by the quality of their advice to clients. Reps said that meeting sales targets was the primary way to increase their compensation, compared with factors such as client satisfaction or referrals.

“You can’t fix the system without fixing the internal culture and incentives. Too often, internal sales targets still matter more than the quality of advice,” Bureaud noted.

In the wake of their research, the regulators are calling on the bank-owned dealers to take a look at their businesses, and their approach to the provision of sales and advice in bank branches.

FAIR Canada echoed the regulators’ call.

“Canadians want advice that puts their interests first — not products packaged as advice. The real test now is whether the big institutions are ready to walk the talk,” Bureaud said. “Changing the culture isn’t just about compliance — it’s about setting the tone at the top.”

The regulators will be following up too — with their attention focused on dealers’ scorecards.

According to the report, they plan to meet with bank executives and collect more data from the dealers on the issues raised by their survey of reps.

“This next phase will enable us to obtain an understanding of the sales practices in place and how they may impact the behaviour of mutual fund dealing representatives, as well as any potential impacts to investors. We also want to understand the controls the dealers have in place to address any material conflicts of interest arising from the sales practices, including the compensation, incentives and performance metrics and experiences of sales pressure,” the report said.

After that, the regulators will decide whether further action is required.

“Our work on sales practices with CIRO and the banks is continuing as we now look to understand the drivers of the concerns we identified and find solutions,” Randhawa said.

Industry trade group, the Canadian Bankers Association (CBA), said that the banks will be reviewing the survey’s results — and, in the meantime, it stressed that they are committed to serving clients’ needs.

“Building and maintaining strong customer relationships is a key focus for banks in Canada,” the CBA said, in a statement. “Our members are committed to providing needs-based advice that helps clients reach their financial goals. Banks and their employees prioritize consumer and investor protection measures and strive to put customer interests at the centre of all product and service recommendations.”

Additionally, the group said that the banks value collaboration with regulators, which they see as, “fundamental to a robust, stable, and innovative financial sector that serves the interests of Canadian consumers, investors and the broader economy.”