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  6 | INVESTMENT EXECUTIVE NEWS Caution a winning
February 2020
single digits. And the dichotomy is likely to get worse, says Chris Kresic, head of fixed-income and asset allocation with Jarislowsky Fraser Ltd. in Toronto.
“The old idea was that you would save in your working years and then retire and spend what you saved,” Kresic says. “Now it turns out that bonds do not pay enough, so people have been sav- ing more. That has taken away from the stimulative value of policy rate cuts. The dilemma will persist until the older popu- lation starts to spend more.”
Households desperate to build their accounts with seem- ingly safe fixed-income invest- ments face a hard choice. Short bonds or cash equivalents pay, at best, a fraction of 1%. Long bonds have strong appreciation poten- tial if rates drop and a matched potential for loss if rates rise. That’s the risk embedded in long bonds — and what any conscien- tious financial advisor can tell a concerned client.
If the demand for loanable funds increases and interest rates rise, bond losses will be inevitable. That is the risk for individual investors. You may want to tell your clients that 2020 is a year not to overweight mid- to long-term bonds. IE
    play in 2020
The coming year looks to be a period in which bond markets catch their breath. The Bank of Canada and the Fed appear ready to stand pat
ratios have risen because of ele- vated prices rather than because of higher earnings, Tal notes. The trend toward higher P/E ratios in the U.S. helped to drive money into bonds for speculative rea- sons rather than income, and those moves were rewarded with exceptional gains.
In spite of geopolitical tur- bulence, investment markets appear to be valuing fundamen- tals rather than speculating on geopolitical events. That is only sensible, says Sal Guatieri, dir- ector and senior economist with Bank of Montreal in Toronto.
“Our outlook for interest rates is for calm in the year ahead,” Guatieri says. “Neither the Bank of Canada nor the Fed will change policy rates this year. They are likely to hold at 1.75% in each country and if there is a cut, it is more likely to be done by the Bank of Canada because our economy has underperformed in the past year.”
Moreover, Guatieri adds, lowering the Canadian policy rate would mitigate pressure to push up the foreign exchange value of the loonie.
A move toward lower rates also would be a tonic for Canada’s lagging econ- omy. “Rather than going from
strength to strength, Canada’s economy has been moving from weakness to weakness,” states a Jan. 7 release from Montreal- based National Bank of Canada. “The Citi economic surprise index for Canada has been in free fall, trudging around the lowest levels seen since the [2008-09] global financial crisis.”
A bias toward lower interest rates is reinforced by high debt levels that are inhibiting spend- ing by consumers. That’s eco- nomic drag. Rising oil prices also tend to slow the economy: although there are benefits to energy firms, the wider economy is hindered.
Anish Chopra, partner with Portfolio Management Corp. in Toronto, sums up the problem: “The global economy is slowing. In Canada, consumer debt levels are high. The U.S. dollar is losing value against the Canadian dol- lar. If that trend continues, the Bank of Canada will look at cut- ting rates for trade reasons.”
On the buy side, individual fixed-income investors are in a dilemma. Government bonds are fine for speculation if you think interest rates may drop, but those bonds will pay few of your bills, given coupon rates in low
This year could turn out to be a year in which bonds are tortoises rather than hares. But much depends on risks
where bond prices and
yields will go in 2020 depends on a balance of market expectations and political events. The year 2019 was a remarkable year of drop- ping rates that drove up Canadian bond returns by 6.87% on the FTSE-TMX Canada universe bond index and by 8.72% according to the Bloomberg Barclays aggregate index for all U.S. bonds.
Dropping rates also pushed some long European and Japanese senior bonds further into negative yield territory. In a general sense, a Niagara of money to be lent met fee- ble demand for loanable funds. Dropping interest rates in senior markets around the world was the well-known outcome. That’s over. The scenario for 2020 is likely to be rate stability.
The year 2020 looks like a per- iod in which bond markets catch their breath. On Jan. 22, the Bank of Canada announced it would
keep its overnight rate at 1.75%. The U.S. Federal Reserve Board, for its part, is widely viewed as ready to stand pat — subject, of course, to events. This year could turn out to be a year in which bonds are tortoises rather than hares. But much depends on risks and how markets view them.
Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce in Toronto, discounts politics. “Fundamentals are unchanged,” he says. The market will not speculate on politics, he adds, but will seek certainty in sys- temic trends, including energy prices in Canada, trade funda- mentals and labour costs in the U.S. and Canada.
Bonds — which encapsulate interest rate trends in govern- ment bonds and earnings fun- damentals in corporate bond issues — remain the alternative to stocks. Price to earnings (P/E)
    MFDA hopes its CE system will be working by end of this year
> CONTINUED FROM PAGE 1 re-examine self-regulation in the
year ahead. A merger between Canada’s two investment indus- try self-regulatory organizations (SROs), the Investment Industry Regulatory Organization of Canada and the MFDA, may be on the table.
Near the top of the MFDA’s list is the client-focused reforms (CFRs), which include obliga- tions for firms and reps to put their clients’ interests before their own, and revise the rules on suitability, conflicts of inter- est and know-your-client proced- ures, among others.
The provincial regulators adopted the CFRs at the end of 2019. Next up are changes to the SRO rules. Most of the detailed requirements will be phased in over the next two years.
As with the CRM reforms, the SROs must revise their rules to ensure they conform with the requirements imposed by the CFRs — ultimately enabling firms that fall under SRO oversight to be exempt from the Canadian Securities Administrators’ (CSA) version of the rules.
At the same time, an industry working group has been delib- erating potential compliance and implementation issues for the CFR requirements. Both the MFDA and IIROC are expected to be able to publish their proposed rule changes in April or May.
Proposed revisions to the SROs’ guidance are likely to
follow that, and the MFDA indi- cates that it will revise its com- pliance exam program so the SRO can begin testing firms and reps for their adherence to new requirements that will take effect as part of the CFRs.
Alongside the CFRs, which are a CSA-driven initiative, one of the MFDA’s big policy efforts — one that has been in the works for the past couple of years — is the introduction of continuing education (CE) requirements.
The MFDA has passed rules to introduce CE requirements, and the provincial regulators have approved those rules. Before the framework can come into effect, however, the MFDA has to final- ize its standards for accrediting CE courses and develop a report- ing regime so the MFDA can track compliance.
Last year, the MFDA pub- lished a consultation paper on a proposed approach to accreditation, which contem- plates outsourcing the SRO’s authority for approving CE courses. The MFDA aims to pub- lish its accreditation standards in the next couple of months. The timing for getting its CE system up and running remains uncertain, but the MFDA hopes to have the system operational by the end of 2020.
Major projects, such as the CFRs and the CE framework, are well underway, but there are a couple of other areas in which the MFDA has its eye on possible future work. One is expanding the client reporting
that was implemented as part of the CRM2 reforms to include not only the fees paid to dealers, but also management fees and other operating costs — an idea that has been called “CRM3,” but which the MFDA now refers to as “total cost” reporting.
The MFDA’s bulletin states that the SRO favours investors having complete information to inform their investing decisions.
“This year, we will continue to explore total cost reporting alternatives and collaborate with other regulators,” the MFDA bulletin states. Whether this will lead to the development of CRM3 proposals is not clear.
Another area that the MFDA has its eye on is the account-transfer process. A long-standing industry com- plaint is that transfers between industry firms — and particu- larly from one industry sector to another — often take too long to complete.
The MFDA states that delayed transfers “can have a significant impact” on clients. The SRO acknowledges that a delay may be understandable in certain cir- cumstances — given the types of assets involved, whether they are held in client name or not, among other factors — but main- tains that “there should not be unnecessary systemic obstacles that create delays.”
In the year ahead, the MFDA states, it will initiate an indus- try consultation to understand the transfer issue better, and will develop recommendations
for improving the process and enhancing outcomes for clients. On the compliance front, the evergreen subject of suitabil- ity will remain the top priority for the MFDA’s examiners — especially regarding vulnerable investors, such as seniors and others who may be particularly
harmed by unsuitable advice. The MFDA is continuing to ramp up its use of data to help target its compliance work. Last year, the SRO reported on a pro-
ject to focus on reps with high- risk books; that project was based on client data the SRO col- lected in 2017.
That initiative targeted reps whose books carried certain red flags, such as a hefty concentra- tion in risky sector funds; virtu- ally identical KYC information throughout their client base; books with interchangeable KYC info; and many undiversi- fied portfolios (for example, with clients invested 100% in equity funds).
In this year’s reviews, the MFDA will be looking at the steps dealers have taken to address the SRO’s original findings with their sales forces. The MFDA also will
be looking at firms’ efforts to implement supervisory policies to detect similar issues in the future.
Now, armed with even more extensive data on the industry’s clients, thanks to a second major client-data collection exercise in 2019, the MFDA plans to dive even deeper to root out possible compliance issues.
In particular, the MFDA is reviewing data on client account performance for signs of irregu-
larities or evidence of inaccurate reporting to clients.
The SRO also is looking at dealer referral arrangements amid ongoing concerns about the incentives and possible con- flicts of interest that can arise as a result of these deals.
The original version of the CFRs would have addressed some of these concerns by introducing curbs on referral arrangements. However, those provisions were dropped from the final version of CFRs that was ultimately adopted by the CSA.
Still, referrals will remain under scrutiny as the MFDA undertakes its own regulatory agenda. IE
 Both the MFDA and IIROC expect to publish their proposed client-focused reform rule changes in April or May

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