WARNING! OSC to Engage in “Mystery Shopping” – Dealers and Advisors Beware!

For Dealers and Advisors and their Representatives

The Ontario Securities Commission (the OSC) has recently announced that it will engage in “mystery shopping” research involving dealers and advisors this fiscal year to gauge the suitability of advice currently being provided by registrants.  The purpose of the research is to identify areas of concern that may assist the OSC in targeting future suitability sweeps.

“Mystery shopping” is a research technique whereby individuals pose as potential customers and measure, assess and report on the quality of their ‘shopping experience’ which, in this case, will be on the suitability of the investment advice provided to them by a registrant. The mystery shopper’s specific identity and purpose will generally not be known by the registrant being evaluated.

The OSC states that once its research is completed, it expects to publish its findings.

Issues and concerns

This year, exempt market dealers (EMDs) portfolio managers and their clients were subjected to the OSC’s suitability sweeps without any prior industry consultation.  The results of the OSC’s suitability sweeps can be found here.

One of industry’s concerns with the OSC’s suitability sweeps was that little information about the program, process and telephone call protocol were shared with registrants or investors before it was implemented. There is now more information available today that has been published by the OSC.

Registrants understand that calling investors is one means for the OSC to investigate what registrants are advising investors and what prospectus exemptions are being relied upon.  However, it would be helpful if the OSC provided more information to registrants about its mystery shopping sweep program, protocol and process before it is implemented.  This type of transparency is important to all capital markets participants.

So what should the OSC do?

Top  10 questions – guide to mystery shopping

It would be helpful if the OSC published a Guide to Mystery Shopping that addresses what and how it will undertake its mystery shopping review. Specifically, it would be helpful if this Guide addressed the following questions:

1.  What is mystery shopping?
2. Why is the OSC not doing this in consultation with the other CSA members?
3. Why is the OSC undertaking a mystery shopping exercise?  More importantly, has the OSC published appropriate guidance on what is expected of registrants involving the focus of its research or will it use the mystery shopping data as a means to publish such guidance?
4. What process did the OSC go through in selecting the firm to do the mystery shopping research?
5. What specific securities knowledge and training does the mystery shopper have to qualify him or her as the best individual to undertake a mystery shop?
6. How will the OSC select registrants to be mystery shopped?
7. How will the OSC use the mystery shopping findings?
8. Can mystery shopping results be used in any referral to enforcement against a registrant and/or its dealing representative or advising representative?
9. How big will mystery shopping samples be?
10. How will the OSC analyze and report on the results?

Recording of mystery shopping interviews

One of the big issues that registrants will likely have with mystery shopping is whether the interviews will be recorded.  If they are recorded, registrants will want to know what legal authority the OSC has to record such interviews without their consent and whether they will be allowed to listen to the interviews or obtain transcriptions after-the-fact.

UK mystery shopping guide

I do not claim any particular insight into the questions above, but found such valuable information in a Mystery Shopping Guide published by the United Kingdom’s Financial Services Authority (today called the Financial Conduct Authority) in November 2006.  A copy of the UK’s Mystery Shopping Guide can be found here.

Please comment

Please comment on this blog post and advise if you agree with the OSC’s mystery shopping research initiative or not and any issues or concerns.

What do you think?