Securities regulators in every province and territory across Canada – except Ontario – are adopting a ban on upfront sales commissions for certain types of mutual funds.
The affected funds carry a deferred sales charge (DSC) option, which leads to hefty redemption fees for investors who cash out before the end of a fixed term usually spanning several years.
The ban by all but one of Canada’s 13 securities watchdogs displays a point of divergence in what has been a recent period of regulatory cooperation, and comes after an even rarer public statement from Ontario’s government decrying the intent of regulators to ban the upfront sales commissions paid to dealers by investment funds.
Following months of consultations under the national umbrella of the Canadian Securities Administrators, regulators including the Ontario Securities Commission concluded in June of 2018 that such commissions should be banned because they incentivize dealers to recommend the investment products over others with lower costs and no redemption fees.
Doug Ford’s Progressive Conservative party was swept to power in Ontario that same month and, in September 2018, then financial minister Vic Fedeli said the government did not agree with the bans proposed by regulators and planned “to explore other potential alternatives” with other provinces and territories that were more in keeping with its “Open for Business” policies.
This week, in an interview with the Financial Post, CSA chair Louis Morisset said the umbrella group for securities commissions across the country did look at alternatives following the Ontario government’s statement, but could not find anything else that would fully address the conflict of interest and incentives built into the upfront sales commissions earmarked for the ban.
“Unfortunately, Ontario could not join us in the ban,” said Morisset, who is also chief executive of Quebec’s Autorité des marchés financiers.
“They had to live with what their government said publicly.”
In a statement Thursday, the CSA said the ban on upfront sales commissions would “eliminate an incentive for dealers to recommend investment products that provide them with an upfront commission” instead of “other suitable investments that have lower costs and do not have redemption fees.”
The OSC issued a separate notice Thursday, which said the regulator would be considering “alternative approaches” to address concerns related to mutual funds with deferred sales charges (DSC). Among the potential options would be banning sales of such funds to seniors, banning the use of borrowed money to purchase the mutual funds, putting limits on account size, shortening the terms the investments must be held without penalty, and giving investors “hardship exceptions” from redemption penalties.
Despite the absence of Ontario’s regulator from enacting the total ban on DSC mutual funds, all 13 regulators were able to come together on the banning of another commission structure – trailing commissions paid to dealers that only execute orders and do not provide advice, notably discount brokers.
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Morisset said it would be difficult for any regulator to make a case for maintaining that commission structure, which infers a payment for advice.
“There’s no advice provided – it just seems quite obvious,” he said.
Both rule changes will be formally published next year, and there will be at least a two-year phase-in period, according to the CSA.
Morisset said it will be up to mutual fund companies to decide whether it is worthwhile to create different commission structures for use in a single province where the rules differ.
Noting that some large mutual fund companies have already phased out funds with deferred sales charges — Winnipeg-based Investors Group, for example, discontinued the DSC purchase option for its mutual funds in 2017 — he said it is possible others will opt for a single model across the country.
“I think the trend will probably swallow Ontario,” Morisset said.
It is certainly not unheard of for provincial market watchdogs to take different approaches to regulation across Canada, as an attempt to build a single cooperative federal-provincial capital markets watchdog has been polarizing and slow. But there has been a recent period of collaboration.
Last year, for example, the CSA announced common targeted reforms governing the relationship between advisors and their clients across the country, even though regulators in Ontario and New Brunswick had been planning to adopt a broader overarching standard that would have required the best interest of retail investors to be paramount in every decision.