CSA is consulting on the “option” of discontinuing embedded commissions, instead of moving more quickly to an outright ban. That leaves some analyzing the challenges of moving to a fee-based model, and others lamenting the slow pace of regulatory change.
The proposal is “provocative,” says Lynn McGrade, a partner with Borden Ladner Gervais in Toronto, and indicates that regulators “haven’t completely made up their minds.”
But the onus is now on industry participants, if they’re disappointed with the proposal, to bring other options into the mix by commenting on the paper. “They’re going to have to produce evidence-based research to come back to the regulators to make their case,” she says.
Ken Kivenko, president and CEO of Kenmar Associates in Toronto, says he isn’t surprised CSA proposed the option of a ban instead of a ban itself, because mere talk about commissions has been around a long time — since the 1995 Stromberg report.
“Everybody’s way ahead of [Canada],” he says, listing Australia, New Zealand and the U.K. “Advice in Canada is still a transaction, and that’s a problem.”
Marian Passmore, director of policy and COO at the Canadian Foundation for the Advancement of Investor Rights in Toronto, says academic and independent research shows that Canada has some of the highest mutual fund fees in the world. She appreciates the recognition by the regulators that both investors and market efficiency suffer thanks to embedded commissions.
But moving ahead with the proposal could prove challenging.
Bernard Pinsky, a partner at Clark Wilson in Vancouver, says, “People tend to not recognize the value of advice, and therefore they will not want to pay upfront fees,” which could potentially force investors away from mutual funds into riskier securities. Further, if robo-advisors take up the slack, he questions if Canadian investors, who may know little about financial products, can effectively use them.
Although the proposal suggests a ban would result in the promotion of lower-cost, passive products, Pinsky says it could promote churning as brokers become dependent on commissions from sales and repurchases.
(The proposal recognizes the potential for reverse churning: brokers collect upfront fees and do little else for clients.)
Pinsky expects even greater consolidation as the industry goes fee-based. “Lots of advisors and dealers […] are not going to be able to compete if this comes into play.”
Ian Russell, president and CEO of the Investment Industry Association of Canada, says the industry needs time to transition to fee-based accounts and to develop new low-cost advice mechanisms and products for small investors.
But time may not be on the proposal’s side. If the proposal doesn’t pass before the OSC is subsumed into the Capital Markets Regulatory Authority — set to launch in 2018 — “this initiative would lose [its] primary leadership,” says Kivenko.