The Investment Funds Institute of Canada (IFIC) is proposing a series of alternative reforms to mutual fund industry fee structures — including capping trailers, enhancing transparency and eliminating trailers for funds sold through discount brokers — in an extensive response to the Canadian Securities Administrators' (CSA) consultation paper, which contemplates a ban on embedded commissions and a requirement that dealers utilize direct pay arrangements instead.
"We think there is another way to address the concerns raised by the CSA without the cost and disruption that a ban on embedded commissions would create and without the possible unintended consequences of reducing access to financial advice for mass-market investors," the IFIC submission states. "Instead of a prohibition, IFIC proposes a number of reforms which, if implemented, would address most of the harms identified by the CSA and would continue to allow investors the choice of paying for a mutual fund investment indirectly or directly, and avoid the unintended consequences created by a prohibition."
To avoid a ban, IFIC recommends capping, or standardizing, embedded commissions; restricting the sale of funds that pay a trailer for advice to distribution channels that provide advice; enhancing disclosure; and adopting guidelines for deferred sales charge (DSC) funds.
These changes would mitigate the conflicts of interest the current fee structure poses, improve investors' control over the fees they pay and better align the services investors receive with the fees they pay, the IFIC submission states.
"The discussion paper emphasizes that Canada's regulators have not made a decision to discontinue embedded commissions and invites the industry to create market-driven solutions that address the concerns raised in the consultation paper," says Paul Bourque, president and CEO of IFIC, in a statement. "Before proceeding, regulators should understand the impact of banning embedded commissions on millions of mutual fund investors and whether a ban will reduce access to financial advice for mass-market Canadians."
However, the CSA has already contemplated several of the reforms that IFIC proposed and rejected them as inadequate. For example, the CSA explicitly rejects the idea of capping embedded commissions in its consultation paper for a variety of reasons.
"It's not being further considered by the CSA at this time, either as a stand-alone option or as an interim step toward discontinuing embedded commissions because, as the shortcomings demonstrate, many of the issues we have identified would likely continue to persist in the presence of a fee cap," the CSA's consultation paper states.
The CSA also warns that capping commissions could have unintended consequences, such as causing average prices to rise.
"Accordingly, it would be very challenging to determine and justify the appropriate cap rate in the circumstances," the CSA says in its consultation paper, adding that this approach would also require regulators to take on the new role of setting fee caps for investment products, "rather than implementing measures intended to promote market efficiency."
Friday is the deadline for submissions to the CSA consultation.
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