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FAIR Canada Supports Ban on Embedded Commissions

FAIR Canada has commented on CSA Consultation Paper – 81-408 regarding the elimination of embedded commissions. At issue is whether investment funds such as mutual funds should continue to be allowed to be sold that include third party payments from the fund manufacturer to the dealer – payments such as trailing commissions and deferred sales charges (“DSCs”).

FAIR Canada continues to support the elimination of third party payments or embedded commissions and other forms of conflicted remuneration. FAIR Canada believes that banning embedded commissions from all investments is an essential step so that Canadians can receive professional objective advice free from damaging conflicts of interest.

FAIR Canada emphasizes in its comments that embedded commissions in investment products produce a system of inherent conflicts of interest that subvert the interests of investors to the interests of dealers, individual registrants and investment fund manufacturers. As a result, Canadians have been receiving product recommendations driven more by payments their advisor and the dealer will receive, rather than what would be best for the consumer. In addition, investor outcomes and market efficiency are harmed. Canadians cannot save what they otherwise would have (at best) or lose their hard-earned capital from accepting the “advice” of registrants (at worst). They are not provided with the advice they need and deserve to receive. This is a concern to all Canadians as our economy and society suffers as a result.

Discontinuing embedded commissions will improve financial outcomes for Canadians. FAIR Canada continues to press for the adoption of a statutory best interest standard and reforms that will prevent or avoid other conflicted compensation arrangements. What is needed is the avoidance of conflicted compensation arrangements rather than the permissive world of “managing” conflicts that firms now inhabit, which allow for the creation of personnel and compensation policies and practices that create conflicts. A focus on this is urgently needed along with effective compliance oversight and enforcement.

FAIR Canada calls for the immediate elimination of embedded commissions from investment products sold at discount brokerages given that IIROC Dealer Member Rules do not permit discount brokerages to provide recommendations. This is an unjust situation that needs immediate rectification.

FAIR Canada highlights the numerous benefits to eliminating embedded commissions including:

  • Simplification of the fund fee structure
  • More effective price competition
  • Shift in product recommendations to lower-cost and passively managed products
  • Market innovation to serve consumers
  • Increase in transparency
  • Ability to comparison shop for advice and assess value against costs
  • Enhance professionalism and quality of advice given reduction in conflicted product sales.

Our comment letter makes a number of points, including that disclosure is not effective to protect consumers or ensure a well-functioning market. It will also not address the problems that have been identified. We make recommendations focused on vertically integrated firms, and recommend that regulators prohibit dealers and their advisors from obtaining any fees or commissions in respect of investments made using borrowed funds or referral fees associated with lending arrangements that incent unsuitable borrowing to invest strategies.

FAIR Canada supports the requirement for direct pay arrangements – hourly fees, flat fees, upfront commissions, and fees based on a percentage of assets under administration. We do not agree that payment for advice be permitted to be automatically deducted from the consumer’s account by the investment fund manager given our concerns that this could encourage the dealer to continue relationships with certain investment fund managers, which may not be in the best interests of the client. There is a need to separate the relationship between advice and product recommendations.

FAIR Canada notes that Canada currently has an advice gap because not all Canadians with investments, as of today, “can obtain the amount of advice they desire at the price they are willing to pay”. Canadians with embedded investments are not obtaining objective advice or are getting no advice if they bought these investments through a discount brokerage. Governments and regulators need to remove structures that impeded a properly functioning market.

FAIR Canada urges all jurisdictions to adopt a statutory best interest standard along with accompanying reforms that are needed (including increasing proficiency and restricting the use of titles). Those jurisdictions that support a best interest standard should move forward quickly to prohibit embedded commissions, as a best interest standard should include a prohibition on embedded commissions and other forms of conflicted compensation.

June 16, 2017