Canada’s provincial and territorial securities regulators are set to ban two controversial types of mutual-fund fees, but Ontario has opted not to adopt one of the key reforms that will outlaw charging investors early-withdrawal fees.
Last fall – after a six-year review – the Canadian Securities Administrators (CSA), an umbrella group for all provincial securities regulators, proposed a prohibition on what are known as deferred sales charges (DSCs).
The fees are charged to investors when they pull money out of a mutual fund before a set date. The adviser who sells the fund receives an upfront commission that is often higher than commissions for other types of mutual funds. Regulators have argued it is not appropriate that advisers have an incentive to recommend DSC funds over more flexible funds with lower costs.
Regulators also proposed banning some advisory fees charged to do-it-yourself investors who buy mutual funds through discount brokerages where they receive no advice.
On the same day that regulators opened a comment period on the proposals last year, the Ontario government released a statement opposing the ban on DSC funds. Then-Ontario finance minister Vic Fedeli provided almost no explanation for the opposition, stating only that it would work with other provinces and territories to “explore other potential alternatives.”
Now, without the approval of the provincial government, the Ontario Securities Commission will have to step aside as the rest of Canada’s provincial regulators move ahead on banning DSC funds.
At the same time, the CSA announced Thursday that all provincial securities commissions – including Ontario – will proceed with plans to ban mutual-fund trailing commissions paid to investment dealers who do not make recommendations to clients – such as discount brokerages.
Both bans will have a transition period of at least two years, the CSA said.
Dan Hallett, vice-president and principal with HighView Financial Group, has advocated against the sale of DSC funds for decades, arguing the structure was only created to preserve generous commissions for mutual-fund sales.
He said Ontario’s decision to go its own way and expect other provinces to follow was an “arrogant” approach.
“The statement says that the rest of the country is wrong and Ontario knows better; and that they’ll meet with others to make them see the light. I applaud other CSA members for moving forward with the right decision.”
DSCs force clients to pay as much as 6 per cent to cash out their mutual funds, a fee that tends to fall by one percentage point each year, down to 0 per cent after investing for five to seven years. While only 10 per cent of all mutual-fund assets in Canada carried the DSC option at the end of 2018, it still accounted for more than $155-billion of investor money sitting in the funds.
The CSA said participating provinces plan to publish final amendments for adoption in early 2020.
“The ban on upfront sales commissions from investment funds to dealers will eliminate an incentive for dealers to recommend investment products that provide them with an upfront commission from the fund company, instead of recommending other suitable investments that have lower costs and do not have redemption fees,” the CSA said in a statement.
The Ontario Securities Commission – in a separate notice on Thursday – said it is considering other ways to restrict the use of DSC funds to “mitigate negative investor outcomes.”
Such restrictions may include: banning sales to seniors; shortening the length of time to hold a fund while incurring withdrawal penalties; banning the use of borrowing funds to purchase an investment; putting limits on account size; and offering investors a “hardship exception” to avoid a withdrawal penalty.
“We want opportunities to be available for all types of investors, while balancing the need to ensure investors are protected and are using products that are right for them," Emily Hogeveen, a spokesperson for the Ontario Ministry of Finance, told The Globe and Mail.
“That is why we are not moving forward with this ban, but will be considering options to strengthen investor protections surrounding the use of deferred sales charges."
In the coming months, Ontario will work with the CSA to finalize the ban on trailer fees at discount brokerages.
Of the total $30-billion in assets held in mutual-fund products in discount brokerages across Canada, more than $25-billion remain in fund series that bundle an advice fee within the product, according to a CSA paper released in 2017.
The controversial payment, which has already charged DIY investors millions of dollars in fees for advice they do not receive, has sparked several class-action lawsuits filed against some of Canada’s largest asset-management companies. The first class-action certification motion – against TD Asset Management – will be heard in court on Jan. 10.
Clare O’Hara