The Canadian Securities Administrators (CSA) is considering a ban on advisor chargebacks “to better align the interests of dealing representatives with the interests of their clients.” The 90-day public comment period on the regulator’s proposed amendments to National Instrument 31-103 closed Sept. 24.
The use of chargebacks is not widespread, but that’s not to say it won’t become so should the CSA’s proposed prohibition not proceed.
Chargebacks require dealing representatives to pay back all or some of the upfront commission they received if the client exits a holding before a predetermined period.
Their defenders argue that chargebacks discourage short-term investment decisions and align advisor incentives with client retention. The current regulatory framework already prevents the kind of bad behaviour the proposed ban is designed to address, they say. This additional step would make Canadian financial regulation even more onerous and inconsistent (advisor clawbacks are common in the life insurance industry, for example).
Those in favour of the chargeback ban say that they work as a kind of deferred sales charge (DSC) in reverse. The dealing representative pays the early redemption penalty instead of the client.
Just as DSCs incentivized advisors to sell product that may or may not have been in the best interests of clients, chargebacks give advisors a financial stake in whether a client exits a holding. If a client instructs an advisor to sell an investment within the predetermined period, the advisor takes a financial hit.
It is reasonable for dealers and investment firms to cover the expenses that come with short-term client decisions, but that should not come in the form of advisor chargebacks. They put advisors in a clear conflict of interest, one that is inconsistent with best practices associated with advisor-client relationships.
The regulatory overreach argument would be more persuasive if CIRO was proposing the removal of a standard industry practice. This isn’t a case of unwinding something, it’s about ensuring a conflict of interest doesn’t come into being.
The CSA should nip advisor chargebacks in the bud. They should be banned before their use becomes the norm.
36 years and counting
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This article appears in the November 2025 issue of Investment Executive. Read the digital edition or read the articles online.
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