FAIR Canada recently made a submission to the Canadian Securities Administrators (“CSA”) in support of proposed cost disclosure and performance reporting requirements. Reform is required because consumers need to be provided with essential information so that they can answer two basic questions about their investments: (1) What did I pay? and (2) How did my investments perform?
FAIR Canada agrees with the provision of aggregate performance reporting and information on charges and compensation (ultimately paid by consumers) as it will assist retail investors in understanding basic facts about the cost and performance of their investments.
Disclosure of Amount of Embedded (Trailing) Commissions
We fully support a requirement for registered firms to disclose any trailing commissions (in dollars) that they have received which is charged to the investor through the management fee (“MER”) in respect of mutual funds. Retail investors have a very low awareness of trailing commissions and do not understand the extent to which such commissions diminish their investment returns. It is thus essential that this information be provided in a clear, plain language and meaningful manner so that investors can make an informed assessment. In FAIR Canada’s view, the requirement to disclose the amount of trailing commissions is absolutely essential in order to provide meaningful cost disclosure to retail investors, and is a de minimis step given more far-reaching reforms which are underway in other jurisdictions.
As noted by the Ontario Securities Commission’s Investor Advisory Panel (“IAP”) in their submission: “Disclosure of commissions (trailing or in relation to fixed income products) is particularly important given the conflict of interest that these payments create and the absence of a legal fiduciary duty that would require advisers to prioritize their clients’ interests.” The IAP letter urged the CSA not to dismiss the idea of banning commissions outright.
In our submission, FAIR Canada recommended that the CSA require that the trailing commission information also be provided to clients of discount brokerages. Further, we supported new rules to ensure that commissions on fixed income securities are properly and accurately reported.
FAIR Canada Encourages the CSA to Make Additional Improvements for Investors
FAIR Canada endorses the direction taken by the CSA and urges it to go further and require one single report rather than two reports so that it is easier for consumers to compare costs to performance. Additional recommendations included the following:
- Each investment’s performance and costs should be disclosed, not simply account-wide performance and costs.
- The liquidation value of each investment (that is, the market value net of all charges and fees (such as deferred sales charges and early withdrawal penalties) that would be payable as of the date of the report, if the investment were to be sold) should be reported.
- The five-year GIC rate should be mandated as a benchmark in the performance report rather than its use only being encouraged.
- Reports should be required to be provided every six months (rather than annually), in accordance with investors’ stated preference.
- The format of the performance report should be prescribed so that there is a standardized, uniform presentation of the information.
- The performance report should break out the data item “change in the market value of your account” to show the amount of interest, the amount of dividends, and the change in the market value of the investments, in a year.
- Group scholarship plans should not be exempted from the proposed requirements.
Transition Period and Industry Opposition
We urge the CSA to shorten the transition period as we see three years to be unnecessarily long and unacceptable given the long lead time that registered firms have had to overhaul their systems so as to meet the impending requirements.
Industry continues to complain about the costs to implement the proposed requirements. Rob Carrick in the Globe and Mail article “Investing fees: full disclosure is worth the added cost” takes issue with IFIC, the mutual fund lobbyist, on its view that the added cost exceeds the benefits. Rob Carrick believes that meaningful information is worth the cost, stating:
“The proposed rules are among the most important and widely inclusive measures that regulators have ever taken on behalf of individual investors in Canada (it’s not a high hurdle). They roll back decades of investment-industry hegemony over the information investors receive and introduce a whole new level of accountability and transparency. They are, in a word, overdue.”
On the cost of implementation, Tom Bradley in the Globe and Mail article “Investors finally get the ultimate asset: transparency” points out that the requirements will “…cost a fraction of what’s spent on product development and marketing, and yet it will arguably do more to improve client returns. What are the benefits to clients knowing what they’re paying and how they’re doing? How about priceless?” In Bradley’s view, “[t]he new rules….are likely to have more impact on individual investors than anything we’ve seen in decades.”
FAIR Canada hopes that the CSA resists industry pressure to delay and implements the new requirements in a timely manner.