The Canadian Securities Administrators (CSA) has issued final rules governing how information about group scholarship plans (GSPs) is disclosed to retail investors. The rules are to come into force on May 31, 2013 and will require the disclosure of a two-page, double sided, Plan Summary document which is designed to highlight the potential benefits, risks and costs of investing in a GSP. The CSA notes that the number of investors in scholarship plans, particularly investors with low or modest incomes, has grown substantially since the Canada Education Savings Grant was introduced. As of December 2011, the aggregate value of assets held in scholarship plans was $9.1 billion and is approximately 29% of all assets currently held in RESPs. It notes that for many of these consumers a scholarship plan is the only security they will ever purchase, that many of these consumers have little or no financial literacy and, in some instances, they may not speak or understand English or French as a first language.
The Plan Summary
The Plan Summary is a significant improvement to the previous disclosure regime. It highlights that the child will not receive educational assistance payments (EAPs) and will lose their earnings, government grants and grant contribution room if the child does not enroll in a school or program that qualifies under the plan or if the child leaves the plan before it matures. It requires disclosure of the consequences of missing contribution payments or if the child misses a deadline or does not attend a qualifying school of program under the plan. It requires disclosure in bold font that sales charges are paid up front and, if you cancel early on, you can end up with much less than you put in. It requires the disclosure of the Cancellation Rate (how many of the last five years’ plans were cancelled before their maturity date (as a percentage); the number of months it will take to pay off the sales charge (based on a unit of the plan); and the percentage of the contributions that will be invested in the plan during the time it takes pay off the sales charge. It requires disclosure that “under this plan, fewer programs will qualify for an EAP than would otherwise qualify under the government’s rules for RESPs” (if applicable). Ellen Roseman of the Toronto Star has written about the new rules and the problems with scholarship plans.
Substantive Regulation Required
Substantive changes to the regulation of GSPs have been deferred to later policy developments. FAIR Canada supports the CSA reforms and is of the view that more than better disclosure is required in order to adequately protect consumers who are sold GSPS, given the way they are designed, the aggressive manner in which they are marketed and advertised and the misalignment of incentives between the salespersons and consumers. We have made a number of recommendations including not permitting GSPS to further restrict the programs and schools that are eligible for grants and investment earnings beyond the criteria set by the government; capping upfront fees (so as to reduce incentives to place individuals in these plans when they are unlikely to be able to meet the contribution requirements and are thereby likely to default and lose their money); and improving corporate governance. The CSA has responded that such suggestions “will be considered in the context of future policy developments concerning scholarship plans.” We hope that other phases of the Modernization Project (Phases 2 and 3), which were to encompass issues such as corporate governance of group scholarship trusts, membership in a self-regulatory organization and sales communications and calculation and disclosure of performance data, will move forward quickly.
OSC Finds Major Deficiencies at 4 of 5 GSPs
The OSC has completed compliance reviews of five scholarship plan dealers and issued Public Interest Orders against four of them as a result of significant compliance deficiencies. Among other things, the orders require the GSPs to retain independent monitors to examine their policies, practices and procedures.
OSC Brings Enforcement Proceedings
The OSC has also recently made allegations against group scholarship plan dealer Global RESP Corporation, the plan’s investment manager, Global Growth Assets Inc., the ultimate shareholder and ultimate designated person of both companies, Issam El-Bouji, and Global RESP’s chief compliance officer Margaret Singh. The allegations include the claim that Bouji and Global Growth Assets Inc. directed that over $30 million in funds received from plan subscribers be used to purchase subordinated notes of Pacific and Western Bank of Canada (contrary to the advice of the Plan’s registered advisor) and that a company owned by Bouji received $2 million in finders’ fees/commissions as a result. The transactions were allegedly not approved by the board of directors or the Independent Review Committee.
Helpful RESP Guidance for Canadians
FAIR Canada encourages Canadians to check out www.SmartSaver.org for useful tips and information about how to start a Registered Education Savings Plan (RESP) and obtain government money for their children’s post-secondary education. The SmartSAVER website provides clear, unbiased information about RESPs in 16 different languages and includes brochures from RESP providers with (i) no enrolment fee; (ii) no annual fee; and (iii) no minimum contribution.
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