Previously, we broke down how advisor chargebacks work and how they can distort the advice Canadians receive. In our latest comment letter to the CSA, we’re calling for a full ban.
What are Chargebacks?
Chargebacks are a compensation structure in which advisors receive a commission that can be clawed back if the client sells the investment within a specified period. The structure creates a built-in conflict of interest. By providing a healthy form of compensation up front, advisors may be tempted to recommend products that include chargebacks. And because of the claw-back, advisors may try to discourage clients who want to sell their investment within the claw-back period—even when it’s clearly in the client’s best interest.
The CSA’s proposal to prohibit chargebacks for some investment funds is a good start, but it doesn’t go far enough. If the ban applies only to certain products, firms may simply shift the practice elsewhere. Investors deserve consistent protection, no matter what they buy.
Compliance reviews have shown that many firms fail to properly identify, disclose and manage conflicts. These failures raise serious doubts about whether firms can effectively address the structural conflicts inherent in chargebacks. The only way to eliminate the risk is to eliminate chargebacks.
Our comment letter makes it clear: a partial ban won’t cut it. We’re calling on the CSA to ban chargebacks for all securities and issuers, without exception. We’re also calling on them to work with insurance regulators to ban chargebacks in the sale of segregated funds and similar insurance products.
Partial bans leave gaps and put investors at risk. Let’s end conflicted compensation and put investors first.