FAIR Canada believes that group scholarship plans are generally poor savings vehicles with little or no benefits to consumers. They are often aggressively marketed and advertised, and commonly target modest or lower income Canadians. Many purchasers are urged to invest in these plans to take advantage of the government grants associated with them.
It is FAIR Canada’s view that disclosure is not enough to adequately protect investors. Disclosure alone will only create the illusion of consumer protection, and needs to be supplemented with more substantive changes to these investment vehicles.
FAIR Canada offered these and other comments in a letter recently submitted to the Canadian Securities Administrators (the CSA). Among FAIR Canada’s key recommendations were the following:
1) Disclosure is not enough. Substantive changes are needed to group scholarship plans to better protect Canadian investors. FAIR Canada recommended to regulators that they:
- Prohibit group scholarship plans from further restricting the programs and schools that are eligible for grants and investment earnings beyond the criteria set by the government.
- Regulate fees and set a maximum of 10 per cent or less of the contributions in any one year that can be charged as a fee.
- Require group scholarship plan dealers to become members of an existing self-regulatory organization, either the Mutual Fund Dealers Association of Canada or the Investment Industry Regulatory Organization of Canada.
- Require mandatory participation in the Ombudsman for Banking Services and Investments’ dispute resolution service. Participation should be required of group scholarship dealers immediately.
- Require salespersons to act in their clients’ best interests when offering group scholarship plan products.
- Require salespersons to explain that there are other types of education savings plans available to Canadians.
- Ensure that salespeople make specific representations to prospective purchasers about the potential unsuitability of scholarship plans for some consumers, drawing attention to that point, and discussing potential alternatives.
2) The Plan Summary for group scholarship plans needs to be improved so that it discloses in a clear and informative way the benefits, risks and costs of the investment to investors. Several areas in need of particular attention are:
- disclosure of alternatives to group scholarship plans,
- disclosure of the more restrictive criteria as to what schools and programs qualify,
- fee disclosure,
- disclosure of conflicts of interest, or of the misalignment of incentives between buyer and financial salesperson, and
- risk disclosure.
3) Group scholarship plan dealers should be required to deliver the Plan Summary to potential purchasers before or at the point of sale.
FAIR Canada also urged the Canadian securities regulators to move quickly on modernizing and improving the regulation of group scholarship plans in Canada. It is FAIR Canada’s view that a timely response is necessary to better protect Canadians.
The Canadian Advocacy Council for Canadian CFA Institute Societies (the CAC) made similar recommendations in its January 16, 2012 comment letter to the CSA. The letter questioned “whether scholarship plans, something deemed suitable for retail investors but sold by commissioned sales agents with minimal licensing standards, fits within an enhanced investor protection model and would be permitted by the CSA if it was a new product. If not, then perhaps the time has come to phase them out.” [emphasis added]
FAIR Canada supports the comments of the CAC and agrees that regulators need to ask fundamental questions about investment products and investor protection, and not simply make changes to disclosure. While improved disclosure for these products is necessary, it is simply insufficient to produce improved outcomes and protection for Canadian retail investors.