The de­bate over CRM3

Grow­ing re­sis­tance to the MFDA’s plan to in­crease dis­clo­sure

Investment Executive - - FRONT PAGE - BY JAMES L ANGTON

the in­vest­ment in­dus­try is di­vided sharply over the prospect of the Mu­tual Fund Deal­ers As­so­ci­a­tion of Canada’s (MFDA) lat­est ini­tia­tive to ex­pand dis- clo­sure be­ing pro­vided to in­vestors re­gard­ing the costs of in­vest­ing. That’s be­cause the in­dus­try now faces the prospect of sweep­ing re­forms from the Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors (CSA) that are de­signed to im­prove in­vestor pro­tec­tion and re­shape the re­tail in­vest­ment land­scape.

The MFDA pub­lished a dis­cus­sion pa­per in April that raised the idea of in­creas­ing the dis­clo­sure clients now re­ceive un­der the sec­ond phase of the client re­la­tion­ship model (CRM2). The goal now is to do a bet­ter job of cap­tur­ing the full range of costs that clients face be­yond charges levied by a dealer, which is the fo­cus of the ex­ist­ing re­quire­ments.

The MFDA’s idea, known by some as “CRM3,” re­ceived broad sup­port among the in­dus­try when the MFDA first broached it in a pa­per pub­lished to­ward the

end of 2015 and be­fore the fi­nal CRM2 re­forms took ef­fect.

How­ever, the feed­back on the MFDA’s lat­est pa­per points to grow­ing re­sis­tance to the idea of fur­ther ex­pand­ing dis­clo­sure. In ad­di­tion to the in­dus­try’s stan­dard com­plaints about in­creas­ing com­pli­ance costs, there also are in­creas­ing doubts about the ef­fi­cacy of dis­clo­sure in gen­eral and con­cerns about pos­si­ble over­lap with other planned reg­u­la­tory re­forms.

Since the MFDA pa­per was is­sued, the CSA un­veiled a set of pro­pos­als, known as the “client­fo­cused re­forms,” which could trans­form the in­dus­try fun­da­men­tally by in­cor­po­rat­ing “best in­ter­est” prin­ci­ples into sev­eral ex­ist­ing rules. At the same time, the CSA sig­nalled that it in­tends to ban de­ferred sales charges and trail­ers paid to dis­count bro­ker­ages but al­low em­bed­ded fee struc­tures to re­main.

The reg­u­la­tors won’t be pre­pared to im­ple­ment these pro­pos­als for a few years, but some play­ers in the in­dus­try now sug­gest that CRM3 should be put off un­til these other ini­tia­tives have crys­tal­lized.

The sub­mis­sions to the MFDA con­sul­ta­tion from both the In­vest­ment In­dus­try As­so­ci­a­tion of Canada and the Port­fo­lio Man­age­ment As­so­ci­a­tion of Canada (PMAC) stress that de­ci­sions about ex­pand­ing cost re­port­ing must take the im­pact of the CSA’s lat­est re­form pro­pos­als — as well as the CSA’s re­view of the ef­fects of the ini­tial CRM2 re­quire­ments and the new pointof-sale (POS) regime for in­vest­ment funds — into con­sid­er­a­tion.

“This will avoid im­ple­ment­ing an­other set of cost dis­clo­sure re­port­ing re­quire­ments that do not re­sult i n full trans­parency and com­pa­ra­bil­ity of prod­ucts,” PMAC’s sub­mis­sion states. “To [im­ple­ment CRM3 be­fore assess­ing the im­pact of CRM2 and the lat­est CSA pro­pos­als] would be a dis­ser­vice to in­vestors in two ways: the costs to [the] in­dus­try to im­ple­ment such changes with­out a cor­re­spond­ing in­vestor ben­e­fit would be bur­den­some; and would com­pound con­fu­sion and ob­fus­cate true costs for in­vestors.”

One of the MFDA pro­posal’s sharpest crit­ics is Toronto-based in­vest­ment fund gi­ant In­vesco Canada Ltd. Its sub­mis­sion warns that “the in­dus­try is headed down a de­cid­edly bad path” if the sel­f­reg­u­la­tory or­ga­ni­za­tion pursues ex­panded cost dis­clo­sure: “In­vesco has gen­er­ally been sup­port­ive of reg­u­la­tory ini­tia­tives to en­hance trans­parency and in­vestor pro­tec­tion and to re­duce con­flicts of in­ter­est. How­ever, we have come to the view that dis­clo­sure is a rather in­ef­fec­tive way to ad­dress ma­te­rial (in the eye of the be­holder) con­flicts of in­ter­est.”

Fur­ther­more, In­vesco’s sub­mis­sion warns of “the dan­gers of dis­clo­sure,” such as the pos­si­bil­ity of giv­ing li­cence to con­flicted be­hav­iour, mis­lead­ing in­vestors and, if ex­ces­sive, con­fus­ing clients.

The sub­mis­sion from the Fed­er­a­tion of Mu­tual Fund Deal­ers echoes some of these con­cerns, not­ing that ex­pand­ing cost dis­clo­sure won’t solve the short­com­ings in the ex­ist­ing regime. That sub­mis­sion rec­om­mends that the MFDA and other reg­u­la­tors “look at ways to de­crease dis­clo­sure in other re­lated ar­eas while they pro­ceed with these dis­cus­sions.”

Even sup­port­ers of ex­panded cost dis­clo­sure agree that what’s needed is more ef­fec­tive — not just more ex­ten­sive — dis­clo­sure.

The sub­mis­sion from Dan Hal­lett, vice pres­i­dent and prin­ci­pal with Oakville, Ont.-based HighView Fi­nan­cial Group and a strong ad­vo­cate of im­proved dis­clo­sure, states: “Sim­ply adding dis­clo­sure is the easy part. Mak­ing it in­vestor-friendly and un­der­stand­able is the hard part, and that’s where a lot of ef­fort needs to be fo­cused. While CRM2 was a good first step, mean­ing­ful, in­vestor-friendly, to­tal cost dis­clo­sure is long over­due. As the broader in­dus­try has failed to cre­ate this trans­parency, it is up to reg­u­la­tors to leg­is­late it.”

The sub­mis­sion from the Cana­dian Foun­da­tion for Ad­vance­ment of In­vestor Rights (a.k.a. FAIR Canada) agrees there’s a need for more ef­fec­tive dis­clo­sure, stat­ing that ex­panded dis­clo­sure should be sub­ject to in­de­pen­dent test­ing with in­vestors “to en­sure it is mean­ing­ful, com­pre­hen­si­ble and in their best in­ter­est.”

To that end, the sub­mis­sion from the On­tario Se­cu­ri­ties Com­mis­sion’s In­vestor Ad­vi­sory Panel pro­poses that dis­clo­sure be re­vised be­yond the re­port­ing of an­nual fees and charges so that in­vestors can com­pre­hend the long-term, com­pound­ing im­pact of fees: “Un­der­stand­ing an­nual costs sim­ply doesn’t trans­late into un­der­stand­ing ul­ti­mate costs. Few in­vestors re­al­ize that 1% or 2% an­nual fees can, over the long term, con­sume 25%-50% of their to­tal in­vest­ment re­turns.”

Given the chal­lenge of man­dat­ing dis­clo­sure that’s truly mean­ing­ful and ef­fec­tive for a vast, di­verse pop­u­la­tion of in­vestors, even some ad­vo­cates of ex­panded dis­clo­sure pri­or­i­tize al­ter­na­tive ap­proaches.

“FAIR Canada be­lieves in­vestors would be best served by elim­i­nat­ing con­flicts of in­ter­est rather than by more ful­some dis­clo­sure of the costs of con­flicted com­pen­sa­tion,” the group’s sub­mis­sion states. “The ab­sence of con­flicts of in­ter­est should be the goal.”

The In­vest­ment Funds In­sti­tute of Canada (IFIC) is one in­dus­try group that still strongly sup­ports en­hanced dis­clo­sure. IFIC’s sub­mis­sion out­lines a pro­posed cal­cu­la­tion method­ol­ogy for ex­panded dis­clo­sure, high­lights pos­si­ble im­ple­men­ta­tion chal­lenges and rec­om­mends a three-year tran­si­tion period once the re­quire­ments are fi­nal­ized.

“CRM2 was an im­por­tant first step in giv­ing clients more in­for­ma­tion on how deal­ers are com­pen­sated and an op­por­tu­nity for en­hanced client dis­cus­sions,” IFIC’s sub­mis­sion states. “Ex­pand­ing cost re­port­ing is the log­i­cal next step in mak­ing clients more aware of the to­tal costs of in­vest­ing in in­vest­ment funds.”

Sep­a­rately, IFIC is launch­ing a re­search project along with Toronto-based BE­works Inc., a be­havioural eco­nomics con­sult­ing firm, to iden­tify best prac­tices for de­liv­er­ing ef­fec­tive dis­clo­sure to in­vestors. IFIC plans to de­velop mod­els based on the study’s find­ings.

The CSA is the other ma­jor in­vest­ment in­dustr y player ex­press­ing sup­port for the MFDA’s ini­tia­tive. But how this pro­posal fits along­side the CSA’s lat­est re­form pri­or­i­ties is not yet clear.

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