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Recent Mutual Fund Point of Sale Proposal Falls Short

FAIR Canada applauds the Canadian Securities Administrators (CSA) for continuing to move forward on this long-delayed and important initiative, and is pleased that the existing two-day withdrawal right for investors has been retained as we recommended. However, FAIR Canada continues to be of the view that there are several serious deficiencies in the Point of Sale proposal that undermine the goal of protecting consumers who purchase mutual funds:

1.  Risk Disclosure Defective. The proposed risk disclosure regime may oversimplify and may actually mislead individual investors into taking greater risks with their investments than they realize. We understand that most Canadian equity funds may be rated as “moderate” risk under the CSA proposal. We agree with SIPA that it is unlikely that the average consumer will understand that a “moderate” risk investment means that an investor could lose 30% or more in one year. 

2. No performance benchmarks are required. Investors need to be equipped with as much useful information as possible when making investment decisions. Performance benchmarks are crucially important to an investor’s understanding of the performance of a potential investment.

3. Fees should be described upfront in the Fund Facts document. We do not agree with the current layout of the Fund Facts document. Given the potential impact of fees on an investor’s total returns, we believe that the section entitled “How much does it cost?” should precede the section entitled “How has the fund performed?”.

Ermanno Pascutto, Executive Director of FAIR Canada noted that: “Canadian investors pay billions in extra fees each year compared with their counterparts in other countries, and this has a real impact on returns not only over the short-term but, more importantly for many investors, the long term. Investors in the average Canadian equity mutual fund can give up more than 35% of their total returns due to high MERs.”

4. Delivery of the Fund Facts document should be at or prior to the sale of the mutual fund. The Fund Facts document should not be delivered after the salesperson/advisor has sold the mutual fund to the consumer. Investors need to know what they are buying before they buy it, not after they have bought it.

5. Product Key Facts Needed for Other Complex, High Fee Products. Finally, we continue to encourage the CSA to move quickly to consider how the point of sale initiative can provide a platform for future regulatory reform for other types of investment funds and high-fee or complex products. A 2-3 page summary of the key facts (especially fees and risks) for complex and high fee products, such as leveraged commodity ETFs and structured products, is urgently needed.

We note that, in response to the financial crisis, the Hong Kong Securities and Futures Commission announced a package of investor protection reforms in May 2010. Among other things, the Hong Kong regulator was able to introduce, in less than 1 year, its equivalent of a Fund Facts document and has applied the rule to its equivalent of mutual funds, segregated funds, ETFs, and structured products.

In comparison, Canada’s Point of Sale initiative, which regulators have been developing for the past decade, is still more than a year away from implementation. Further, the Canadian initiative is limited to mutual funds and segregated funds – it does not apply to other high fee and complex products sold to retail investors, such as structured products or leveraged and commodity ETFs. FAIR Canada continues to be disappointed with the slow pace of investor protection reforms in Canada, particularly when compared with timely, comprehensive reform in other jurisdictions, and the lack of investor protection initiatives taken in response to the financial crisis.

July 09, 2010