Investment industry trade groups agree that regulators should embrace alternatives to an outright ban on embedded commissions in the investment fund business, but they aren’t unanimous on just which steps regulators should take.
The Independent Financial Brokers of Canada (IFB) is echoing recommendations that the Investment Funds Institute of Canada (IFIC) put forth last week in calling on the Canadian Securities Administrators (CSA) to consider other options for addressing their concerns about industry compensation structures rather thanbanning embedded commissions.
Specifically, the IFB’s submission to the CSA calls on the regulators to standardize embedded fees, to set service standards for receiving trailer fees and to outlaw trailers in the discount brokerage channel. In addition, the IFB recommends that regulators allow deferred sales charge (DSC) structures to remain, albeit with shorter (three-year) redemption schedules; and that they step up enforcement of existing rules concerning compensation-related conflicts.
Yet, the Investment Industry Association of Canada (IIAC) rejects the idea of capping embedded commissions, as it says in its submission to the CSA that this approach would allow existing conflicts to remain and that it does not believe that “the CSA should interfere with the fees charged in the investment industry.”
Instead, the CSA should consider other alternatives, the IIAC says in its submission. For example, the IIAC indicatesthat it would support the elimination of DSCs. It also suggests improving guidance on managing compensation-related conflicts and stepping up efforts at ensuring compliance in this area.
The one thing the trade groups agree on is that a ban on embedded commissions would have serious repercussions for dealer firms and their financial advisors. In particular, the IFB reports that a survey of its members found that about two-thirds of advisors said that they would leave the industry if embedded fees and trailers were banned — 21% said they would retire and 46% said they would look to sell, or otherwise exit the business.
The comment period for the CSA’s consultation on a possible embedded commission ban closed on June 9. Regulators have indicated that they intend to decide on a policy direction within the year.
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