New ideas from the financial services sector on possible alternatives to banning embedded commissions were in short supply at the Ontario Securities Commission’s (OSC) roundtable discussion in Toronto on Monday.
The meeting, which is part of the Canadian Securities Administrators’ (CSA) ongoing consultation on the subject, featured a trio of panels that included both investment industry and investor advocates to review possible policy alternatives — such as standardizing or capping trailer fees, eliminating deferred sales charges (DSCs), or enhancing disclosure.
Regulators are trying to determine how to address the investor harm embedded commissions structures cause. That harm includes the conflicts of interest that embedded compensation creates; the fact many clients aren’t aware that they are paying trailers; and that it’s difficult for investors to ensure they’re getting value for money. Research carried out for the CSA has validated these theories, which found that trailer fees drive mutual fund sales and impact investor returns negatively.
“We’re not here to debate whether the harms from embedded compensation warrant regulatory action, but to discuss what that action could be,” said Maureen Jansen, OSC chairwoman and CEO, in her opening address to the meeting. “The status quo is not an option.”
Yet, just where regulators will land on this remains unclear — and the roundtable did little to clarify the issue. The CSA proposed various possible policy responses in a 2012 consultation paper; then, the regulators had seemingly determined that banning embedded commissions is the preferred option when they issued a second paper this past January that zeroed in on a ban, and dismissed the other alternatives as inadequate.
Now, however, regulators appear to be backtracking in the face of industry resistance. “While our analysis of the issues seems to suggest that banning embedded commissions is the path we should take, we have heard the concerns about potential unintended consequences,” Jensen said. “We are open to considering other credible solutions if they address the harms we have outlined in our paper.”
The industry has argued that requiring investors to pay directly for advice by banning embedded compensation will discourage them from seeking advice; and could, at the same time, cause firms to further retreat from serving smaller clients, among other criticisms of a possible ban.
These familiar arguments were repeated yet again at the OSC roundtable, which reconsidered some of the options offered in the CSA’s 2012 paper, but broke little new ground in the search for an optimal answer to long-standing concerns with embedded commission structures.
Indeed, as Dan Hallett, vice president and principal with Oakville, Ont.-based HighView Financial Group, noted at the meeting, the shortcomings with the trailer fee model have been well known for more than 20 years — when securities lawyer and then OSC commissioner Glorianne Stromberg produced her groundbreaking report on the mutual fund industry in 1995.
Several times in the intervening years, concerns about the impact of the conflicts embedded compensation create, and the distorting impact on the market for advice, have surfaced, only to be met with modest policy efforts, such as beefing up disclosure.
Yet, after determining that those efforts have been inadequate, it now appears that regulators are once again struggling for answers. As the consultation process continues, regulators are hoping to reach a decision by the spring.
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