Investor Advisory Panel voices support for embedded-commissions ban

The group also urged other actions and policies from regulators to protect investors

Investor Advisory Panel voices support for embedded-commissions ban
Responding to the Canadian Securities Administrators’ (CSA) consultation on embedded commissions, the Ontario Securities Commission’s Investor Advisory Panel agreed with the conclusion that such commissions raise conflicts of interests, limit investor awareness and control on costs, and generally do not align with the services that clients receive.

“We call for the prohibition of any compensation or embedded commissions that put the interests of firms and registrants ahead of clients or create a conflict of interest between firms or registrants and investors,” said Ursula Menke, the chair of the panel, in a letter to the CSA.

The group also questioned warnings of an “advice gap” from certain industry players. Noting statistics from a previous CSA survey, Menke said that just over half of Canadian investors work with an advisor. She also cited a study from the UK’s Financial Conduct Authority (FCA) showing that investor outcomes improved after embedded commissions were banned.

“When it comes to an advice gap, let’s be very clear: no industry should address the concerns of people who do not want to pay for a service by charging them anyway and hiding the costs,” she said.

Weighing in on other payments to possibly ban, the group supported prohibitions on referral fees, underwriting commissions, and managers compensating dealers in connection with marketing and educational practices. They also voiced concern that letting managers collect fees on dealers’ behalf would perpetuate the lack of transparency in financial services.

“The dependence of the industry on the embedded commission revenue stream would indicate it is unlikely to voluntarily do away with them,” Menke said, arguing that a ban would be the only way for the practice to stop.

The letter also discussed other practices that created conflicts between investors and approved persons, particularly those reviewed by the CSA previously in a survey of incentive and compensation schemes at financial firms. They paid particular attention to misleading titles, incentives designed to favour proprietary products, and referral arrangements.

“In addition to banning embedded commissions, we call on the CSA and OSC to immediately address the [conflicted] compensation structures and incentives referred to in CSA Staff Notice 33-318,” Menke said.

As part of its final recommendations, the group urged various other measures to enhance investor protection, including regulation of titles and proficiency among advisors, the advancement of the best-interest standard and targeted reforms, and improved enforcement of rules.

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