angry client meeting

Securities and insurance regulators are teaming up to address long-standing concerns about cost disclosure from investment funds and segregated funds.

The Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR) jointly published proposals to provide investors with ongoing reporting of the total fees and costs involved with holding funds. The proposals released Thursday would apply for both for investment funds (such as mutual funds and ETFs) and for seg funds.

Under the proposal, securities firms would be required to disclose the fund expense ratio — defined as the sum of the management expense ratio (MER) and the trading expense ratio (TER) — for each fund, presented to investors as a percentage in their client account statements.

Annual cost and compensation reports would have to include disclosure of these charges in dollar terms, along with any other direct charges such as redemption fees and short-term trading fees.

Fund managers would be required to provide the information needed to make these disclosures to the dealers and advisers who prepare the client reporting.

The proposals would require insurers to provide similar disclosure. Firms would have to include the fund expense ratio for each fund held within a seg fund contract, expressed as a percentage. For the overall contract, they would provide annual disclosure of fund expenses, the cost of insurance guarantees and all other expenses in dollars.

“The proposals are part of the Canadian securities and insurance regulators’ harmonized response to concerns we have identified relating to current cost disclosure and product performance reporting requirements for investment funds and segregated funds,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF), in a release.

Concerns about the adequacy of cost reporting were raised in the immediate aftermath of the client relationship model (CRM2) reforms taking effect in 2016. Those rules provided investors with greater insight into distribution costs but didn’t fully capture investors’ costs.

The disparity between disclosure demands in the securities industry and the insurance industry has long been an issue, particularly when it comes to similar products such as investment funds and seg funds.

“We seek to enhance investor protection by improving investors’ and policy holders’ awareness of the ongoing embedded costs of owning investment funds and segregated funds, which include management fees and trading expenses,” Morriset added.

In addition to the investor protection benefits, the regulators noted that enhanced cost transparency “may encourage more competition, which would benefit investors and policyholders.”

The proposals, which are out for comment until July 27, are intended to come into effect by September 2024. This assumes that government approvals are secured by the second quarter of 2023, providing the industry with a transition period.

Under this timetable, dealers would have to start providing clients with quarterly account statement disclosure for the fourth quarter of 2024, with the first annual disclosure required by the end of 2025. Insurers would also have to provide annual disclosure by the end of 2025, with semi-annual disclosures taking effect in mid-2025.

“We recognize that developing and implementing system enhancements to implement the proposals will require a significant investment of time and resources by industry stakeholders. However, we firmly believe that providing both investors and policyholders with essential information about the ongoing embedded costs of investment funds and segregated funds at the earliest possible date is a priority,” the regulators said in their joint proposal.

The regulators also suggested that the industry start planning for the changes, noting that the proposals are based on consultations that have already taken place with investor advocate and industry groups, and investor testing.

“We strongly encourage registrants and insurers to consider reviewing their systems and conduct advanced planning as soon as possible in order to have all of the necessary resources for implementation in place on time, following the final publication and subject to the required ministerial approvals,” said Morisset.

The proposals were jointly developed by the CSA, the CCIR, the Canadian Insurance Services Regulatory Organizations, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.

As with the CRM2 reforms, the self-regulatory organizations are expected to introduce their own amendments to adopt the new requirements in their rules.