DSCs 'target the most vulnerable investors'

IFIC disappointed with CSA but Vanguard and FAIR Canada support bans on certain commissions

DSCs 'target the most vulnerable investors'

The CSA’s announcement that deferred sales charges will be banned across the board except Ontario has been met with opposition from the Investment Funds Institute of Canada trade group.

IFIC responded to the news that CSA will outlaw two types of commissions in some mutual funds purchases: the elimination of upfront sales commissions by investment fund organizations to dealers, which will lead to the end of the DSC option and associated redemption fees; and the end of trailing commissions by investment fund organizations to dealers who only execute orders and do not provide advice, such as discount brokers.

Ontario has signed up to the latter but did not commit to the ban on DSCs. The Ontario Securities Commission (OSC) said it is instead considering a number of elements, including restricting sales to seniors, prohibiting the use of leverage in DSC sales and setting limits of redemption fee schedules.

IFIC remained cautious and said it would have preferred a nationally harmonized approach.

It said: “IFIC will closely review the Canadian Securities Administrators and Ontario Securities Commission statements issued today, as well as the final rule amendments and additional information they will provide in 2020.

“With regard to the ban on the deferred sales charge payment option, the investment funds industry would have preferred a nationally-harmonized approach that preserved payment choices for investors with full fee transparency.”

Elsewhere, the industry broadly welcomed the move, with the consensus that it will better serve and protect Canadian investors.

Kathy Bock, managing director and head of Vanguard Canada, told WP: “We support the decision announced today by the CSA and are encouraged that the Canadian market, like many other regions around the world, is moving towards aligning the sale and distribution of investment products with the best interests of all Canadian investors.

“Understanding the investment fees you pay and the services you receive is a fundamental part of achieving investment success and we hope to see continued progress on that front.”

FAIR Canada, a national investor rights group, welcomed the bans and stressed that DSCs need to be totally prohibited  as they are “rife with conflicts of interest, target the most vulnerable investors and there is strong evidence of miss-selling”.

It added that 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.”

The group also supported the ban on trailing fees paid to dealers who only execute orders and do not provide advice, such as discount brokers. 

It said in a statement: “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.”


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