hand holding a megaphone

Even though there have been years of debate and consultation regarding mutual fund compensation structures, the Canadian Securities Administrators’ (CSA) latest consultation has prompted new voices to speak up.

Individual retail investors, many of whom are baffled by the lack of regulatory action on the issue, finally have offered their opinions.

The CSA published policy proposals designed to address the long-standing concerns with mutual fund fee structures this past September. In short, the CSA proposes rule changes to eliminate deferred sales charges (DSCs) and put an end to the practice of funds paying trailer fees to discount brokerages. The consultation period closed in December.

The CSA’s policy prescriptions are intended to combat the following concerns about investor harm that have existed for years: fears that mutual fund unitholders may be unknowingly paying recurring fees that undermine their returns; that DSCs shackle unitholders to certain funds; and that discount brokerages are collecting fees that are charged – at least, partly – for advice that they’re prohibited from providing.

These issues have been debated for years within financial services industry and regulatory circles, with much of the investment industry defending trailer fees and DSCs, and investor advocates calling for the elimination of those fees. During this latest consultation period, the usual players made familiar arguments – both for and against – the CSA’s plans. And, for a change, individual retail investors and others spoke up as well.

These individuals support the CSA’s proposals in general, but still were critical of the regulators – expressing frustration that regulators’ efforts to tackle perceived industry abuses are taking so long.

On the issue of DSCs, one investor wrote: “You have known for far too long about the dangers to investors of this option, which benefits only the salesperson and the securities firm. If anything, one could argue that your reluctance to take any action serves to demonstrate that regulatory capture occurred long ago.”

Another investor called the practice of funds paying trailers to discount brokerages “one of the biggest financial scandals in Canadian history” and demanded that the CSA take enforcement action, seeking redress for “the millions of Canadians who have been overcharged” as a result of the practice of paying trailer fees.

Indeed, this issue is before the courts, with several of Canada’s largest asset-management companies facing proposed investor class-action lawsuits seeking hundreds of millions of dollars in damages over trailer fees paid to discount brokerages over the years. Those allegations haven’t been proven, and the lawsuits have not yet been certified as class actions.

Other investors criticized the length of time the CSA has taken to reach the point of actual policy action on these topics. “It is shameful that this topic is still being discussed,” states one investor’s submission.

States another investor’s submission: “Surely, the CSA knows what must be done to protect investors without this time- consuming consultation. All [that effort] requires is the backbone to make the obvious call.”

Yet another critic’s submission states: “I used to think the CSA and the [self-regulatory organizations] did not understand the situation that small investors face when dealing with the financial services industry. I am no longer under that optimistic delusion. You know exactly what goes on, yet you fail to take appropriate actions. If there were an impartial, independent ombudsman for handling complaints against negligent regulators, I would be sending my comments there.”

The CSA’s concerns about industry fee structures do have a long history. The most recent go-round regarding these issues began with a pair of consultation papers published in 2012. In fact, these issues have flickered on and off the regulators’ radar for the past 25 years or so – ever since the fund industry arose as the dominant investment vehicle for the average retail investor in the mid-1990s.

Yet, previous efforts to address these issues have fallen victim to opposition from the industry, regulatory inertia and other factors that have conspired to prevent decisive action.

An investor’s submission states: “Further consultations on this issue are pointless and merely serve to distract from the plain and obvious fact that the CSA, elected politicians, industry-related self-regulating organizations and, yes, even the public have dropped the ball and naively allowed the mutual fund industry to flourish by engaging in unlawful, immoral and harmful acts for decades.”

Still, despite mounting criticism from individual investors, the CSA faces a new roadblock to policy action: political interference. At the same time the CSA was publishing its policy proposals in September, Ontario’s new Progressive Conservative government issued a statement declaring its opposition to the idea of outlawing DSCs, labelling the investor protection initiative as “anti-business.”

That unusual step prompted a backlash. For example, the submission from Harvey Naglie, a financial policy expert who served as senior policy advisor on financial matters with the Ontario government from 2006 to 2016, states he hadn’t planned to participate in the latest CSA consultation, but “that was before the Ontario government’s precipitous and preemptive announcement that it did not agree with the proposed amendment.

“The premature timing of this announcement, combined with the absence of any meaningful justification for it, should not go unchallenged,” Naglie’s submission continues. “The significance of [the CSA’s] proposed amendments, together with the thorough and thoughtful process that preceded their formulation, make it imperative that no single stakeholder group be permitted, absent evidence and consultation, to arbitrarily impose its view.”

The submission from the Markham, Ont.-based Small Investor Protection Association, a relatively infrequent contributor to the policy process, states that the Ontario government’s intervention has motivated the group to wade into the debate to support the regulators’ efforts: “Refreshingly, the CSA is siding with average Canadians when the little guy needs those in power to demand accountability from the wealth management industry.”

One industry veteran who supports the elimination of DSCs, Dan Hallett, vice president and principal of Oakville, Ont.-based HighView Financial Group, also is pushing back against the government’s action, stating in his submission that the Ontario government’s position appears to be “motivated by politics, not by investor protection objectives.”

Furthermore, Hallett’s submission notes, the DSC was originally created to benefit mutual fund dealers and financial advisors, not investors, and adds that there’s “no compelling reason to retain the DSC.”

Industry efforts to preserve the DSC model are misguided, Hallett’s submission suggests. Instead, he calls on dealers, advisors and investment fund firms “to focus on how each of them would want to be treated as clients of the industry and focus efforts on creating feasible ways of delivering what clients need and deserve.”