CARP Calls on Ontario to Support Investor Protections

CARP calls on the Ontario government to reverse opposition to overdue investor protections.
Deferred sales charges pay financial advsiors an extraordinarily high commission that bears no relationship to the services provided to the client. These charges must be prohibited.
See our open letter to the Ontario government below.

The Honourable Vic Fedeli, MPP
Minister of Finance
Frost Building South
7 Queen’s Park Crescent, 7th floor
Toronto, Ontario M7A 1Y7
September 19, 2018
Dear Minister Fedeli,
We are writing to you on behalf of our more than 300,000 members to express our grave concerns with your government’s reversal of support for the Canadian Securities Administrators’ (CSA) reforms.
With more than 200,000 CARP members in Ontario alone, issues of financial security are of primary importance to our organization. Seniors are the largest voting bloc in this province, and this country; 98% of our members vote in every election.
We are calling on your government to endorse the Canadian Securities Commission (CSA) and Ontario Securities Commission (OSC) proposed amendments to the National Instrument 81-105 Mutual Fund Sales Practices (Embedded Commissions).
These needed reforms would allow seniors to age with significantly improved financial security. Financially secure seniors do not require assistance through social welfare programs; these reforms not only make seniors safer, they save the government money. We urge you to reconsider your recently announced opposition to these needed reforms, which were developed with six years of consultation with stakeholders, the financial sector, regulators and investor advocates. They represent an important first step in increasing investor and consumer protection, while improving market efficiency.
In purchasing a fund with an embedded deferred sales charge, a client is locked into an arrangement where their financial advisor unduly benefits by receiving an extraordinarily high “up front” commission.
Failing to prohibit deferred sales charges negatively influences clients as their financial advisors are incented to sell investments which often underperform the market, but which pay a high guaranteed commission. This guaranteed “up front” commission is typically 5% of assets invested – an extraordinarily high payment that bears no relationship to the services performed by the advisor for the client.
This extraordinarily high fee creates market inefficiencies by rewarding financial advisors who invest their clients’ funds into high-fee paying funds, rather than by investing their clients’ dollars in lower-fee products with historically better performance.
This skewing of the market makes it harder for people to save, invest in housing or business ventures, or fund their retirements. Ontarians lose out. Governments will be impacted by the losses suffered by Ontarian investors with demands for increased social programming and higher health care costs. The economy will also suffer with reduced business investment and decreased economic productivity. In short, the people and the government of Ontario lose, and a few financial advisors in the marketplace are unduly enriched. This system does not make sense and is not fair.
There is clear and compelling research that shows embedded fees result in a mismatch between investment dollars and mutual fund performance; investors’ assets are invested in mutual funds that pay the highest fees, not those that have historically generated the best return1. Even the Mutual Fund Dealers Association (MFDA) in its own compliance reviews noted numerous instances where funds with deferred sales charges have been sold inappropriately. Seniors are the overwhelmingly majority of those harmed by these deferred sales charges.
Without these needed CSA proposed reforms, people, markets and the government will all lose. Ontarians will not be able to save, invest or fund their retirements effectively. Financial markets will continue to be skewed at a time where efficiency and effectiveness has never been more important. The Ontario government will have to outlay significantly increased costs in social programs and loss of business investment, which will be exponentially more with the aging demographic.
We urge your government to support the proposed CSA / OSC reforms to National Instrument 81-105 Mutual Fund Sales Practices (Embedded Commissions). We respectfully request a meeting with you and your Ministry at your early convenience to discuss the above.
Wanda Morris, CPA
Chief Advocacy and Engagement Officer
Laura Tamblyn Watts, LLB
Chief Public Policy Officer

1Cumming, Douglas J. and Johan, Sofia and Zhang, Yelin, A Dissection of Mutual Fund Fees, Flows, and Performance (February 8, 2016). Available at SSRN.