Phase 3 of the client relationship model reforms (CRM3) is shaping up much like the original project did, with investor advocates and financial industry firms sharply divided.
The consultation period for proposals from the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR) to enhance and harmonize cost disclosure reporting for investment funds and segregated funds closed at the end of July.
For the securities industry, the proposals represent the next stage of the CRM2 reforms, which were adopted in 2016 after years of bitter wrangling. Those reforms introduced new annual reporting to investors regarding dealer and advisor compensation, but ignored the other costs investors pay to fund managers. Talk then immediately turned to CRM3, which would capture the full costs of investing.
Around the same time, the CCIR began consulting on its own improvements to the cost and performance reporting requirements for seg funds.
Now, the two sets of regulators want to provide investors with more comprehensive, ongoing disclosure of built-in investing costs (in both dollar and percentage terms). The hope is that added disclosure will allow investors to make more informed decisions, and that greater transparency will foster more competition based on cost.
The regulators also hope that harmonizing the requirements for investment funds and seg funds as much as possible will make it easier for investors to compare insurance and securities products.
While these objectives are widely — although not unanimously— supported, the consultation exposed dramatic differences between what investor advocates say regulators should be doing and what the industry sees as desirable or even feasible.
The regulators want the cost reporting rules to take effect in September 2024, with investors receiving their first quarterly disclosures for Q4 2024 and their first annual reports for the year 2025.
However, industry groups called for the CSA to limit the requirements to annual reports, and asked for more lead time.
The Investment Funds Institute of Canada (IFIC) suggested the industry would need 3.5 years to implement the proposed changes. IFIC’s submission stated the rules should take effect in September 2025, assuming the requirements are finalized by Q2 2023. Other submissions argued that the end of 2026 would be an optimistic deadline.
The industry also raised practical concerns about implementation. Submissions questioned how dealers would receive the required data for reporting from fund managers, how ETFs would provide data (as there’s no equivalent to FundServ in that part of the business), and how requirements would apply to foreign funds.
Investor advocates and certain industry voices, however, insisted the industry should act quickly.
The Financial Planning Association of Canada asked regulators to resist industry foot-dragging. “The lack of full and complete disclosure of costs on client statements, in our view, is nothing short of injustice to investors,” the submission said. “As such, we encourage the CSA and CCIR to accept no delay tactics or excuses from the industry and instead to ensure that these changes happen as soon as possible.”
Other submissions argued the investment industry has had plenty of time to prepare for enhanced cost disclosure, even though this proposal was only released in the spring. Back in 2015, before the final CRM2 reforms had even been implemented, the Mutual Fund Dealers Association of Canada (MFDA) initiated a consultation on expanding CRM2 reporting. The MFDA also issued a discussion paper on the subject in 2018.
Other submissions for the current consultation pointed out that the need for comprehensive cost disclosure has been evident since at least 2004, when the Ontario Securities Commission first proposed the fair dealing model that became the basis for the CRM2 reforms.
The Canadian Advocacy Council of CFA Societies Canada called total cost reporting “long overdue” in its submission, and rejected an extended implementation period, given that “total cost reporting has been on the regulatory agenda for almost 20 years.”
Some submissions, in fact, argued for speeding up the timeline.
“Given how quickly the industry jumps into action when exploiting a revenue-generating opportunity — e.g., liquid alts — it is embarrassing that the industry admits to sitting on its hands for such a long-overdue disclosure for clients,” said Dan Hallett, vice-president, research, and principal with Oakville, Ont.-based HighView Asset Management Ltd., in his submission.
Firms should be able to provide the required disclosures within 12 months, Hallett said. If for some reason they can’t, they should at least provide clients with estimates of their costs in their 2022 annual statements.
And the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) said delaying total cost reporting would “fuel the perception that investor protection mechanisms often take years or decades to implement, whereas burden reduction initiatives seem to occur more quickly.”
However, other submissions questioned the wisdom of the project altogether.
The Investment Industry Association of Canada (IIAC) argued the proposed reforms could actually hurt investor interests:“We do not believe that the CSA’s policy objectives can be achieved through the initial proposals, and as currently conceived, they may result in significant harm to investors and the capital markets.”
Further, implementing the proposed CRM3 reforms “will be far more complicated than it was for CRM2,” the IIAC said, pointing to the need for dealers to collect accurate cost data from external fund managers before reporting it to clients.
The IIAC added that other regulators, such as the U.S. Securities and Exchange Commission, have considered and then backed off from similar reforms, concluding that the practical challenges of delivering third-party cost disclosure are too great.
Given these concerns, both IFIC and the IIAC recommended the regulators convene an industry working group with operational expertise to shepherd these kinds of projects to fruition.
That idea was echoed by the Investor Advisory Panel (IAP), which said that relying solely on the industry to design and build the systems needed to implement investor-friendly reforms has left the regulators (and investors) vulnerable to repeated industry intransigence.
“We urge the CSA to explore alternatives, including more collaborative processes for operationalizing future systems-dependent regulatory initiatives aimed at enhancing investor protection,” the IAP said.