Group RESPs: Under review

However, unlike individual plans, investors in group RESPs commit to a contribution schedule. If an investor doesn’t keep up the required contributions, that investor’s RESP may be terminated, which means losing access to both the investment income earned by the plan and the matching government grants. Also, there is no restitution of fees, which, in most cases, are paid up front when the investor enrolls.

And, in most cases, the rules for paying out benefits from group plans are more restrictive than the government’s rules for individual plans, particularly concerning the schools and educational programs in which the beneficiaries can enrol to be eligible for the scholarships.

The upside for investors who do qualify for these benefits is that they can share in the income earned by those who either drop out or fail to qualify. Administrators of group RESPs also maintain that fixed contribution schedules encourage regular savings, so investors save more than they would otherwise.

Although the peculiar risks of group RESPs generally are disclosed in their prospectuses, the CSA has found that under the current rules, the disclosure is inconsistent and difficult for investors to understand. As a result, the CSA is proposing to overhaul group RESPs’ disclosure requirements to compel the plans to spell out these and other risks in standardized plain language.

The first version of the CSA’s proposals was published for comment in 2010 and, in response to some of the input the regulators had received, a second edition was published in late 2011.

UNDULY NEGATIVE

Group RESP dealers’ comments on these latest proposals argue that the proposed disclosure regime is prescriptive, unduly negative and focused too much on the risks of these products while ignoring the benefits.

“In our view, the high degree of prescriptiveness,” says the comment letter from the RESP Dealers Association of Canada, “…is both unprecedented in the financial services industry and unwarranted.”

The association’s comment argues that the CSA is demanding language that overstates the risks and seems calculated to deter people from setting up group plans, and that much of the mandatory disclosure sounds like a consumer warning put out by an advocacy group rather than the traditional sort of disclosure required by dealers and issuers.

For investor advocates, however, the cautionary language is just a start. They argue that regulators should be going far beyond a disclosure overhaul to ensure investor protection.

For example, the comment letter from Toronto-based Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) says the proposed disclosure requirements still need beefing up to ensure investors can fully understand what they are buying. That comment letter also says that disclosure alone is not sufficient for these products — which FAIR Canada characterizes as “generally poor savings vehicles with little or no benefits to consumers.”

Says FAIR Canada’s comment letter: “Disclosure alone will only create the illusion of consumer protection and cannot be an end in itself, given the problems with the design of group scholarship plans, the aggressive manner in which they are marketed and advertised, and the misalignment of incentives between the salespersons and consumers.”

In order to protect consumers, FAIR Canada’s comment letter says, more dramatic changes are needed. The letter demands that regulators intervene and regulate the fees charged, and that group plans be prohibited from imposing restrictions that are tighter than those designated by the government.

FAIR Canada also calls on regulators to require that:

> plan dealers join a self-regulatory organization (the Mutual Fund Dealers Association of Canada or the Investment In-dustry Regulatory Organization of Canada);

> dealers be required to join the Ombudsman for Banking Services and Investments dispute-resolution service;

> plan salespeople should be obliged to act in their clients’ best interests;

> reps should have to point out to prospective clients that these plans may be unsuitable for some clients, and that reps should be required to discuss education-savings alternatives.

Some investor advocates would go even further. The Canadian Advocacy Council for Canadian CFA Institute Societies also questions the merit of scholarship investment funds, and suggests the product be eliminated outright. The council’s letter questions whether these products would be permitted by the CSA if they were new to the market: “If not, then perhaps the time has come to phase them out.”

The idea that regulators must go beyond conventional methods to ensure investor protection is gaining currency in the wake of the 2007-08 global financial crisis. As the Ontario Securities Commission notes in its latest statement of priorities: “Traditional approaches to investor protection alone, such as setting disclosure requirements and business conduct rules, as well as enforcement, are no longer sufficient.”  IE