usiness team in a meeting looking at a sheet of paper

A combination of government meddling and industry lobbying that prevented regulatory action has cost investors billions of dollars in excess investment fund commissions, a report by Ontario’s auditor general’s office found.

The provincial auditor released the results of its review of the Ontario Securities Commission (OSC) as part of its annual report, finding that the regulator could have acted sooner to address “hidden and unfair” fund fees — trailing commissions and deferred sales charges (DSCs) — that cost investors billions of dollars.

“In part because of government intervention and heavy financial industry lobbying, it will have taken more than a decade to ban deferred sales charges and partially ban trailing commissions,” the auditor said, noting that these fee structures have been outlawed in the U.K. and Australia since 2012.

“Investors here could be better protected if the OSC simply followed what has already been done for investors in other countries, by eliminating trailing commissions still paid to full-service dealers,” said Auditor General Bonnie Lysyk in a release.

The report also noted that the OSC could do more to protect investors with higher conduct standards. The client-focused reforms represent a watered-down compromise with the industry and other provincial regulators that are more complicated than a simple fiduciary duty (or best interest standard), the report said, and allow systemic industry conflicts of interest to remain.

In addition to concerns about investor protection, the report highlighted the OSC’s lack of effective enforcement powers, including collection tools that are available to some other regulators (such as the British Columbia Securities Commission), and a lack of investor restitution activity. It also found shortcomings in its vetting of certain issuers.

Overall, the report makes 26 recommendations for improvement at the commission.

“New OSC reforms fall short when it comes to protecting investors and need to be strengthened,” Lysyk said. “Moreover, the OSC needs stronger authority to penalize violators, enforce securities laws and seize assets to better protect Ontario investors.”

Kristen Rose, public affairs manager at the OSC, said the report’s “thoughtful findings” would enhance the commission’s ability to regulate Ontario’s capital markets.

“These findings align with the OSC’s goal to protect investors while continuing to balance multiple complex mandates and working within the parameters of the unique Canadian capital markets regulatory framework,” she said.