A waiting game

However, the matter has not gone as smoothly as the regulators, or investor advocates, had hoped. Now, the research results probably won’t be ready for the CSA until the early summer – and, thus, a policy decision isn’t likely until early 2016.

Rhonda Goldberg, director of the Ontario Securities Commission‘s (OSC) Investment Funds and Structured Products Branch, says the CSA is hoping to have the results of the research, being conducted under the direction of York University finance professor Douglas Cumming, in June.

Goldberg anticipates that the CSA will make its decision on the possible need for regulatory intervention before the end of the OSC’s next fiscal year (March 31, 2016).

The delay is not welcome news for investor advocates.

“It’s unfortunate that [the researchers] have encountered efforts to impede their research, but delay tactics from many parts of the investment industry have become predictable,” says Neil Gross, executive director of Toronto-based investor advocacy group, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada). “Fortunately, our regulators can see through all that – so the CSA’s conclusions, and much needed reforms, should be forthcoming quickly now.”

The mutual fund industry maintains that although the CSA’s research is delayed, that isn’t affecting the timing of a possible policy decision.

“It was always our understanding that a decision on fund fees would not be made in 2015. What we were expecting in early spring 2015, and which is now somewhat delayed, was a status report on what the research was telling [the CSA],” notes Joanne De Laurentiis, president and CEO of the Investment Funds Institute of Canada.

The delay in the research stems – at least, in part – from a lack of industry co-operation with the regulators. However, Goldberg adds, the initial process of commissioning the research through public tender took longer than expected, although that tendering process does not seem to be hampering the delivery of another report the CSA ordered.

An examination of the impact of commissions vs fees on investors’ return outcomes, which is being carried out by Toronto-based research firm Brondesbury Group, is close to being final, Goldberg reports.

It’s expected that the Brondesbury report will be released in the next month or so. However, that research involves only a review of the existing literature on this topic; the Brondesbury study does not require the analysis of original data from the mutual fund industry, as the work by York University’s Cumming does.

Cumming’s research will be coming in later than expected because of a delay in receiving the necessary data from the fund industry. Last year, CSA chairman Bill Rice sent a letter to Canada’s mutual fund companies that asked them to contribute extensive data to the research project by mid-January. However, only a handful of companies honoured that request by the deadline.

One of the stumbling blocks to providing the data purportedly is industry concerns about the security and privacy of its data. So, in early February, the CSA drafted a signed undertaking between Cumming and the fund companies that is meant to assuage those fears and assure the companies that their data will be used only for this project, that the data will be kept safe, and that the data will be destroyed once the research is completed.

These assurances seem to have done the trick in breaking industry resistance to providing data. Goldberg says that many companies came through with the requested data after the undertaking was provided and, she adds, the regulators are pleased with that response.

Moreover, she says, Cumming now has the necessary data to carry out his planned analysis: “For all the different ways that Cumming intends to slice and dice that information, he is quite confident – and we are, as well – that he has sufficient data to proceed.”

This analysis will include adequate representative samples for companies of various sizes, distribution models and fund types. That means that the CSA expects to receive sound, statistically valid results from this research project that should help to guide the regulators’ approach to fund industry fee structures.

Despite the fact that the results of the research, and a subsequent policy decision, is delayed, investor advocates are pleased with the approach being taken by the CSA. “FAIR Canada strongly supports the CSA’s decision to conduct research necessary for sound policy-making,” Gross says.

The OSC’s independent Investor Advisory Panel (IAP) also is confident in the CSA’s process. The IAP expects that the research ultimately will lead the CSA down a path of intervening with investment industry fee structures.

“The IAP supports evidence-based regulation,” says Connie Craddock, chairwoman of the IAP. “We hope that the CSA will act decisively and promptly upon receiving the results of this latest research study.”

That view assumes the research will demonstrate that advisor compensation structures influence the advice and product recommendations that clients receive – which they may well do, if experience in other markets is any guide.

Craddock points to the U.K., in which a ban on embedded commissions apparently has led to less biased product recommendations. In 2012, the U.K.’s Financial Conduct Authority (FCA) imposed a ban on embedded commissions, along with more stringent proficiency requirements and other measures intended to reduce conflicts of interest and to ensure the independence of financial advice. According to a report released in mid-December by the FCA, these reforms, known as the Retail Distribution Review (RDR), seem to be working.

The RDR report, commissioned from independent research firm Europe Economics, found that the RDR reforms have reduced product bias for retail investors.

“In particular, there has been a decline in the sale of products that had higher commissions pre-RDR and an increase in the sale of those which paid lower or no commission pre-RDR,” according to the FCA report. “This is a sign that commission is no longer a driving factor in advisors’ recommendations.”

“The evidence from the U.K. regulator’s 2012 ban on third-party commissions is clear and compelling,” Craddock says. “U.K. investors are now seeing the benefits of reduced product bias because their advisors’ recommendations and advice are no longer influenced by commissions [advisors] receive from product providers.”

Goldberg stresses that research isn’t the only factor driving the CSA’s policy in this area. “The research is a key input, but it’s not the only input to the decision-making process,” she says, adding that there is other policy work going on behind the scenes, both within the regulators and at the CSA level.

As to the direction the regulators may take, Goldberg indicates that all of the options set out in the CSA’s initial paper “remain on the table.” Indeed, regulators may consider other alternatives, she adds.

“We’re looking, in totality, at a range of regulatory options,” Goldberg says, “and thinking through – depending on what that research may tell us – where we think we could be most impactful for retail investors.”

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