Major concerns about scholarship plans were identified in an August 2008 report published by Human Resources and Social Development Canada (HRSDC). The report outlined a number of concerns about the multi-billion dollar scholarship plan industry, including:

• the risk that scholarship plan sales representatives, in order to generate a higher amount of fees, may try to make people commit to contributions they cannot maintain in the long run,
• the extremely high enrolment fees that are frequently paid by investors in full and up front, and
• the fact that scholarship plan benefits are often paid out to a very small number of beneficiaries, since plans use the investment pool generated from all investors but only pay out benefits to a very restricted class.

In response to a number of the concerns noted in the HRSDC Report, particularly the trouble that many investors have in understanding the unique features and complexity of scholarship plans, the Canadian Securities Administrators (the CSA) published a request for comments in March 2010 describing its plan to modernize the regulation of scholarship plans, including through the introduction of a three-page, plain language “Plan Summary” document.

In its recently submitted comment letter, FAIR Canada applauded the CSA for undertaking this initiative. However, FAIR Canada also outlined a number of substantive comments regarding the CSA project, including the following:

1. Require all Advisors to Put Clients’ Best Interests First. The suitability standard should be strengthened to meet the problems identified in the HRSDC Report, to require that advisors act in their clients’ best interests when offering scholarship plan products.

2. Strengthen the Plan Summary. In the Plan Summary, FAIR Canada recommended that:

(a) a clearer discussion about fees, particularly upfront fees, be mandated;

(b) the Plan Summary mandate simple disclosure of the financial performance of the plan; and

(c) the Plan Summary and the Prospectus (and the advice provided by salespeople) recommend consultation with advisors/salespeople about alternative education savings plans.

3. Consider Substantive Regulation of Fees. In order to align the interests of investors and advisors/salespeople, the CSA should consider substantively regulating fees. One option is to limit the extent to which contributions are used to pay enrolment fees in any one year.

4. Support for SRO Membership. With respect to the proposed third phase of the initiative, FAIR Canada supports requiring scholarship plan dealers and salespersons to become members of an SRO – this could lead to increased oversight and supervision.

Click here to view the Executive Summary of FAIR Canada’s Recommendations.