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Canada unlikely to see a ban on fund commissions

Canada unlikely to see similar moves meant to halt misselling


Canadian investor advocates praised British regulators for banning financial advisers from accepting commissions on mutual funds and other financial products to stamp out misselling, but are skeptical of a similar move here soon.

This model could come to Canada if there were regulators with "fire in their belly, and a mission to improve investor protection," Ermanno Pascutto, executive director of the Canadian Foundation for Advancement of Investor Rights (FAIR), said yesterday. "But the pace of investor-protection reforms in this country is frustrating and painfully slow."

Canadian regulators have trumpeted a point-of-sale disclosure document for mutual funds to improve investor protection, but it hasn't happened yet even though discussions began a decade ago, he said. "And I am talking about producing a one-or two-page summary document of the prospectus."

Last Friday, Britain's Financial Services Authority announced a ban after 2012 on adviser commissions on investments products to restore consumer confidence after some misselling scandals. It said advisers instead would have to charge consumers directly for their services.

"Firms will have to be upfront about how much they charge for their services, and no longer hide the cost of their advice behind the cost of a product," it said. (The regulator was referring to continuing trailer commissions that are part of the management expense ratio (MER) paid by fund investors.)

Canadian regulators should emulate Britain's move in getting rid of continuing trailer fees that advisers receive when keeping their clients in a mutual fund, Mr. Pascutto said.

"The client is essentially paying these fees, but is not aware they are paying these fees," he suggested.

Ken Kivenko, a Toronto-based investor advocate, likes what Britain has done, but doubts a similar move will take place in Canada.

"It would take real leadership ... to make it happen, and he'd be up against the banks, the mutual fund companies, the big insurance companies," said Mr. Kivenko, who is also chairman of the advisory committee of the Small Investor Protection Association.

"I just don't see anyone like that," he said. "The whole distribution system for mutual funds is based on embedded commissions."

Glorianne Stromberg, an investor advocate and a former Ontario Securities Commission commissioner, suggested that it is going be hard for Canadian regulators to ignore Britain's initiative given that Australia and other countries are looking at it.

"It is imperative that this be looked at it sooner rather than later," she said. "It addresses a problem that has been long recognized, but never dealt with - that people don't understand that they are paying a continuing commission ...

"Paying that trailing commission really substantially cuts down on the investor's reasonably expected return so it has made mutual funds a very expensive way of investing," she said. "These commissions really put the adviser in conflict with his or her client."

But Joanne De Laurentiis, chief executive officer of the Investment Funds Institute of Canada (IFIC), defended the current system of selling funds in this country.

"We don't see it [British model] needed here," said the head of the fund industry group. "We have decided that - from a regulatory perspective - the best framework is an excellent disclosure mechanism, and that is what we have got."

She was referring to the fact that mutual funds are sold to investors by a prospectus, and that there would be further improved disclosure with a plain-language, point-of-sale document in the near future.

While investors may not always read prospectuses, they can discover MERs and what goes to advisers in commissions through "conversations that they have with advisers," Ms. De Laurentiis said.

Dan Richards, president of, a marketing consultancy to the financial services industry, said it's hard to argue against more disclosure, but suggested that most investors are aware of the embedded fees they pay when they buy mutual funds.

"In today's environment, there is much higher level of awareness among investors ... than it was 10 years ago," Mr. Richards said.

Bill Holland, CEO of fund giant CI Financial Corp., acknowledged the British move has significant ramifications because it is "a substantial change to the way that investment products have been sold over the last 30 years or so ...

"It's a knee-jerk reaction to a [financial] crisis that left a lot of egg on peoples faces that make the regulatory rules out there."

© 2007 The Globe and Mail. All rights reserved.

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