FAIR Canada welcomes the CSA ban on embedded commissions for mutual funds

TORONTO, Dec. 19, 2019 (GLOBE NEWSWIRE) — FAIR Canada welcomes the announcement today from the Canadian Securities Administrators (CSA) that all Canadian securities regulators will ban trailing commissions paid by mutual fund organizations to dealers who only execute orders and do not provide advice, such as discount brokers.

The industry rationale for trailing commissions is that they compensate investment advisors for ongoing advice to investors who have purchased a mutual fund. The fact that discount brokers and other order execution only dealers do not provide advice and are prohibited by industry regulations from providing investment advice has, until recently, been conveniently overlooked by the industry.  Canadian investors have paid significant amounts in fees to discount brokers resulting in $200 million class action lawsuits.

We also support the announced ban in all jurisdictions except Ontario on upfront sales commissions paid by mutual funds to dealers, which will lead to the end of the Deferred Sales Charge (DSC) and associated redemption fees.

DSCs are a form of embedded commission (paid at the point of sale) the needs to be prohibited.  They are rife with conflicts of interest, target the most vulnerable investors and there is strong evidence of mis-selling.  Even the securities industry associations that advocate on behalf of dealers support a ban on DSCs and admit there are problematic conflicts of interest.

“The move away from DSCs is an important step forward in simplifying the mutual fund fee structures that consumers simply do not understand”, said Douglas Walker, Deputy Director of FAIR Canada. We believe that it will enhance the professionalism of the financial services industry. Large upfront DSC payments to investment advisors incentivize them to sell the highest free products and don’t provide an incentive to provide ongoing advice and financial planning since the client is locked into the DSC mutual fund for five or more years.

Over time the financial industry will move to a more consumer friendly fee structure. Leading financial institutions have already decided to stop selling DSC mutual funds and more will come on board over time. We believe that in time the elimination of DSCs will encompass all of Canada, including Ontario.

FAIR Canada has actively advocated against these forms of imbedded commissions in mutual funds for many years.  Imbedded commissions harm market efficiency and investors.  These reforms will improve financial outcomes for Canadians.

Ermanno Pascutto
Executive Director, FAIR Canada
647-256-6693
ermanno.pascutto@faircanada.ca

Douglas Walker
Deputy Director, FAIR Canada
647-256-6691
douglas.walker@faircanada.ca