OSC HEAD TAKING AIM AT FUND FEES

Jensen uses first speech to raise possibility of ban

Ontario Securities Commission chair Maureen Jensen says Canada’s compensation model for mutual funds is fundamentally flawed and that regulators are looking at an outright ban on embedded fund fees as a “possible solution.”

“The current compensation model consists of fees set by the fund manager to incent sales,” Jensen said Tuesday in her first major address since taking the helm of the country’s largest market watchdog. “This does not put the investor’s i nterest fi rst, and that’s a fundamental flaw that needs to be addressed.”

Following the luncheon speech at the Toronto Board of Trade, Jensen told media it is up to the investment industry to come up with a viable alternative to a ban.

She said some suggested alternatives, such as capping the embedded fees, do not go far enough because they don’t eliminate conflicts of interest at the heart of the current system.

“We know this would be a major change for investors and the industry,” she told the business crowd during her speech.

“That’s why input from all of our stakeholders is necessary throughout this process.”

The Canadian Securities Administrators, an umbrella organization for provincial commissions, will publish a consultation paper by the end of the year that looks at the potential impacts of an outright ban on embedded fees for investment funds, including mutual funds.

It is the culmination of an examination that has been under way for more than three years.

The investment industry has fought strongly against curtailing embedded mutual fund fees, which have been banned in other jurisdictions such as the United Kingdom.

Industry groups argue that banning the embedded fees in favour of a set annual fee for advice would squeeze some investors out of the investment game because they either cannot afford or will not pay the fee.

Industry representatives have also argued that new rules requiring greater disclosure of fund fees will improve outcomes for investors by giving them a better understanding of what and how they pay for advice.

Jensen called these “critically important” changes, but said “disclosure alone is not enough.”

In her speech, she cited research from the National Bureau of Economic Research that she said suggests a combination of embedded fees and unsuitable portfolio construction has caused the investment returns of advised clients to lag passive market benchmarks by two to three per cent a year.

“The impact of these fees on investor returns is significant,” she said. “Investors experiencing this kind of outcome on a consistent basis would never break even and would, in fact, be worse off.”

Jensen, who took the helm at the OSC in February, also used the speech to announce that the regulator will be the first in Canada to launch a hub to work directly with fintech companies. The official unveiling of LaunchPad is to take place in a few weeks, and the plan is to help the upstart financial technology firms navigate — and even potentially tailor — the regulatory framework.

The upstarts, which use technology and data to compete in traditional financial services business lines from lending to investment advice, don’t fit “neatly” into current regulations, Jensen said, acknowledging that some requirements “might not make sense” for the new business models.

“Based on our experience so far, many fintech companies ‘ don’t know what they don’t know’ about operating in a regulated industry, and that can threaten their ability to do business,” she said.

She added that another recent OSC initiative, a paid whistleblower program with rewards of up to $ 5 million for tips that lead to successful cases against those who breach securities laws, has already proven “fruitful.”