Investor advocate group reiterates past calls for reform, urges changes for better client protection
FAIR Canada has thrown its support behind the Ontario Securities Commission’s (OSC) proposals to limit the use of DSC options for mutual funds.
In a letter to the OSC, the investor advocate group restated its longstanding calls to protect the interests of investors, including submissions and statements urging a ban on DSCs and embedded commissions.
“Most recently, FAIR Canada has called on the financial services industry to recognize the substantial financial hardship that the COVID 19 pandemic has presented to many Canadians,” the group said, asserting that clients forced to prematurely withdraw money from or transfer investments in DSC mutual funds should be protected through a suspension of redemption fees.
It acknowledged that the OSC’s proposed restrictions, which don’t go as far as the total DSC ban proposed by the Canadian Securities Administrators (CSA), were borne out of the Ontario government’s decision to not accept the CSA proposals. All other provinces have said they are in favour of a ban on DSCs.
Generally, FAIR Canada agreed with the spirit of the OSC’s proposed amendments, but recommended numerous changes.
“[W]e note that the OSC Proposed Rule has an effective date of June 1, 2022 and will permit DSC redemption schedules for mutual fund sales that take place prior to the proposed effective date to continue unaltered,” the group said. “[W]e recommend that the OSC Proposed Rule, in particular the restriction on the Maximum Term, should become effective on December 31, 2020.”
And while the OSC seeks to stop the sale of DSC mutual funds to investors at least 60 years of age, FAIR Canada urged that the rule proposal be expanded to include other vulnerable investors such as those suffering from cognitive impairment and terminal illnesses.
The group cited one provision within the proposals that seek to restrict DSC fund options to clients with a maximum client account size of $50,000 as a “disincentive” for fund organizations, noting that several dealers have recently announced decisions to stop selling DSC mutual funds.
But it aired a concern that small investors who end up in DSC mutual funds would be left with the highest financial burden, without any evidence that they are getting meaningful beneficial advice. That issue was reflected in a 2019 study by the OSC Investor Advisory Panel (OSC IAP), which raised doubts over the quality of advice received by mass-market investors and those with small portfolios.
FAIR Canada recommended that advisors to such clients be provided with “more explicit expectations around documenting advice and suitability determinations with clients,” as well as an assessment of how effective dealer firms’ policies are at addressing conflicts of interest inherent in advisors’ acceptance of upfront sales commissions associated with CSA mutual funds.
Other changes urged by the group were:
- Eliminating the use of leverage to purchase mutual funds;
- A “financial hardship” provision to protect DSC fund investors who are forced by an unforeseen financial problem to withdraw funds prematurely; and
- A requirement for dealers to document their reasons when a DSC mutual fund is selected for a particular client, including detail of other options considered and the best interests of the client.