The OSC’s Roundtable on the Option of Discontinuing Embedded Commissions was held on Monday September 18, 2017.
The OSC Roundtable also included remarks by OSC Chair Maureen Jensen who stated “As regulators, we are very concerned about the conflicts that arise from embedded compensation. At the same time, we have heard compelling arguments about the unintended consequences, including that an outright ban could result in no access to advice for small investors and reduced competition in the marketplace.” She continued, “…we are not here to debate whether the harms for embedded compensation warrant regulatory action, but to discuss what that action should be. The status quo is not an option.”
Maureen Jensen also communicated that the core issue for regulators is “…with conflicts of interest, and we can’t ignore the evidence that the current model does not work for many investors. We know that when commissions are embedded in investment product, advisors may be incented to recommend products that maximize their compensation and are not best for their clients. And the conflicts of interest under the current embedded compensation structure are not just limited to the advisor.”
Marian Passmore, FAIR Canada’s Director of Policy and COO was a panelist on the topic of discontinuing, or implementing additional standards for the use of the deferred sales charge (DSC) purchase option. Ms. Passmore stated “…in today’s environment there is no place for deferred sales charges any longer.” She spoke of the financial incentives to recommend and keep people in DSC funds. She also mentioned the small benefits of solely removing DSCs as the redemption fee schedule would no longer exist and the cost of the upfront commission would no longer be borne by all investors in the fund.
She also spoke about the current advice gap that exists resulting in a lack of objective, proficient advice and lack of consumer choice.
On competition, Ms. Passmore advised that “… if we solely remove DSCs, but don’t also remove embedded commissions, we won’t have enough transformation to have a more competitive market for investors…where objective advice is provided to Canadians at a reasonable cost so that they can have adequate savings for their retirement…If we remove choices that are sub-optimal and harm market efficiency and investor outcomes, we will transform our market and be able to move to a model where we have the ability to get rid of conflicted advice and compensation structures that don’t serve investor’s interests and be able to move to better models where advice in the best interests of the client can be provided. Ms Passmore she would like to see the market evolve to one where clients can control the cost of advice themselves as costs are a huge predictor of future returns.
For more on Maureen Jensen’s comments and the Roundtable on the Opton of Discontinuing Embedded Commissions, see the full transcript here. See also Clare O’Hara of the Globe and Mail, click here for a story from Clare O’Hara of the Globe and Mail or here for article by James Langton of the Investment Executive.