CSA invites comments on proposed embedded fees ban

Regulator group’s request for comment may signal the end for embedded commissions

CSA invites comments on proposed embedded fees ban

A new consultation paper from the CSA is making waves throughout the financial advice industry, according to the Financial Post.

The paper outlines the mechanics of a possible ban on embedded commissions and trailer fees; it also examines possible positive and negative effects of such a move. The consultation period has been set at 150 days, far longer than the usual commenting period.

“To address the investor protection and market efficiency issues that have been raised regarding embedded commissions, we believe that transitioning to direct pay arrangements must be considered and evaluated,” said CSA Chair and President Louis Morisset, who is also CEO of the Autorité des marchés financiers. “This is a consultation process, and we are mindful of the need to carefully assess potential impacts before making a decision.”

The elimination of trailer fees has long been mulled over by the watchdog group, which has gathered evidence since 2012 to suggest that such a payment scheme introduces conflicts of interest and market efficiency issues. The current consultation paper also says that embedded commissions reduce investor awareness, understanding, and control of dealer compensation costs. To protect investors, therefore, a more transparent compensation system that charges fees upfront has been suggested.

Some have contended that making investors pay fees upfront could have a chilling effect on the industry. A University of Calgary study has found that investors tend to balk at such fees, leading them to make their own financial decisions, which tend to be “sub-optimal” and ultimately detrimental to Canadians’ retirement prospects, the paper said.

OSC Chair Maureen Jensen has taken a contrary stance, asserting that the current compensation model where fees are set by the fund manager to incentivize sales is not acceptable. “This does not put the investor’s interest first, and that’s a fundamental flaw that needs to be addressed,” she said in a speech last September.

While fee-based compensation has been the most widely discussed alternative to embedded commissions, the CSA has suggested other measures, including “upfront commissions, an hourly fee, a flat fee, a fee-based arrangement, or another suitable compensation arrangement [that is not embedded and is paid exclusively by the investor].”

Positive effects seen from this ban include the introduction of new lower-cost product providers and distributors and better alignment between the costs investors pay and the service they receive from dealers and representatives. Negative effects include possible reduced willingness among lower-wealth investors to seek financial advice and decreased choice in how investors pay for financial advice.

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