Special Feature

The end of embedded commissions? How we got here

The Canadian Securities Administrators (CSA) published a consultation paper on Tuesday in which it proposes to consult with stakeholders for an extended comment period of 150 days on the option of discontinuing embedded commissions and making a transition to direct pay arrangements.

 

The move to consider a ban on embedded fees follows research the CSA commissioned from York University professor Douglas Cumming in 2015, which showed that these compensation structures distort sales and impact investment performance.

 

Included in this special feature are the notable developments in this area over the past few years highlighting how we got to the release of the CSA's consultation paper. Photo copyright: cherezoff/123RF.

From the Regulators

Status reports conclude more work is necessary in both areas

By James Langton |

Canadian regulators have decided to consider the possible introduction of a fiduciary duty for financial advisors, and possible changes to mutual fund fee structures, together — but they aren't promising to do anything in either area.

The Canadian Securities Administrators (CSA) today published summaries on both of these major consultations — which the CSA launched last year — setting out the key themes that the regulators heard from the industry and investor advocates. The summaries conclude that, as the issues that emerged in both consultations are similar, the regulators' efforts in these areas should be co-ordinated.

"The similarity of the feedback received from stakeholders demonstrates a connection between the two consultation initiatives and suggests a need for CSA staff to co-ordinate their policy considerations on these initiatives," it says. However, the regulators are not promising any concrete regulatory action.

For now, all the CSA is planning is further consideration of the issues raised in these consultations. Indeed, the CSA says its staff will "continue to consider and discuss the information gathered through our consultation process with a view to determining next steps. We anticipate communicating in the coming months what, if any, regulatory actions and/or research we intend to pursue."

The CSA reports that it identified several key themes in the fiduciary duty consultation. Namely, that there was significant disagreement about whether the current regulatory framework for advisors adequately protects investors; and, what regulatory response is required.

Additionally, it says that it heard that: any best interest standard must be clear; the potential negative impact on investors and capital markets must be carefully assessed; and, ultimately, that more work is needed.

Similarly, in the mutual fund consultation, the CSA says that it heard disparate views from the industry and investors. It says that the industry maintains that there's no justification for changes in the mutual fund fee structure; that banning embedded compensation will have unintended consequences for investors and the industry, including, less access to advice, the elimination of investor choice, and an un-level playing field with competing products; and, that regulators should assess the impact of other reforms before moving ahead with any further changes.

From investors, the CSA says that it heard that embedded compensation should be banned; that there needs to be a "best interest" duty for advisors; and, that regulators must increase advisor proficiency requirements, and regulate the use of titles.

The CSA has concluded that more work is necessary in both areas, but evidently, not much more at this stage.

"We are pleased with the level of engagement and the input we received during our consultation process, and have summarized for stakeholders the various themes we heard in the interest of driving these discussions forward," said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC).