FAIR Canada
FAIR Canada Newsletter

September 2011

Senate National Finance Committee to Examine Mutual Fund Fees

FAIR Canada wrote an open letter to the Minister of Finance, Jim Flaherty, urging him to send the issue of the high cost of owning mutual funds for Canadians compared to Americans to the Senate National Finance Committee, to be included as part of its review of the price differential between U.S. and Canadian products generally.


The Globe and Mail has reported that mutual funds "will be added to the request to the committee", as it "would be an issue that fits within that mandate" according to Mr. Flaherty's spokesman Chisholm Pothier. 


In the letter, FAIR Canada says that part of the blame for excessively high mutual fund fees rests with the Canadian regulatory system.  "Canadian financial firms charge high fees to consumers simply because they are able to do so under the current regulatory environment where there is limited price competition."  The letter points out that while "provincial securities regulators have done a good job of fostering competition in other areas of the financial markets, they have not done enough to encourage price competition among mutual funds and other financial products sold to retail investors." 


The letter also points out that the regulatory system does not provide true transparency in fees and that the lack of a mandatory best interest standard allows the advisor to take advantage of the client's unawareness, maximizing the financial compensation to the advisor at the expense of the client. 


Price competition in Canada would benefit millions of Canadians and would be supportive of the government's objective to improve the retirement savings adequacy of Canadians. 


Rob Carrick, columnist at the Globe and Mail, comments on the open letter and argues that the costs of advice should stop being hidden in the MER. Rob Carrick calls on securities regulators to do away with trailing commissions and instead require advisors to set their own fees, which would improve transparency and encourage price competition.  To review the Morningstar Global Fund Investor Experience 2011 report's analysis of Canada's total expense ratio compared to other countries, referenced in FAIR Canada's letter, click here.
 

In-depth Analysis of the Costs of Owning Mutual Funds

 

Marc J. Ryan, the founder of Independent Investor, wrote an excellent three-part article on the many costs of owning actively managed mutual funds. The article analyzes how much actively-managed mutual funds cost investors and provides some cost comparisons to US funds.  

 

Cost and Performance Reporting Would Improve Transparency of Costs, Charges and Fees Investors Incur

  

FAIR Canada recently made a submission to the Canadian Securities Administrators in support of proposed cost disclosure and performance reporting requirements. Investors are in need of clear and complete information regarding the costs and performance of their investments in order to enable them to make informed decisions to meet their investment goals and objectives. The benefits of such information reaching investors will be improved financial literacy, heightened investor awareness, greater transparency of the costs, charges and fees investors incur (directly or indirectly) and increased competition among products (and therefore decreased costs to investors). In the submission, FAIR Canada calls for additional information to be provided to investors, including the reporting of benchmarks.

The OSC's Investor Advisory Panel has also endorsed the steps proposed by the CSA, noting that the Panel is "struck by the lack of transparency that exists in cost disclosure and performance reporting at the current time" and believes that the proposed rules are "long overdue". The submission notes that investors have significantly less information than advisors, and reiterates the Panel's call for the imposition of a fiduciary duty for Canadian financial advisors and salespeople to act in their clients' best interest. In the submissions, both FAIR Canada and the Panel call on the CSA to implement a standardized format for performance reporting; suggest that providing such information will facilitate better decision-making by investors; note that group scholarship plans should not be exempted; and view the two year transition period to be unduly long.

FAIR Canada Supports New Rules for Securitized Products and Urges Reform of the Exempt Market

 

FAIR Canada has written a submission to the Canadian Securities Administrators in support of new rules that narrow the class of investors who can buy securitized products on a prospectus-exempt basis. 


FAIR Canada makes a number of recommendations to improve the proposed rules for the benefit of retail investors. Most importantly, we believe that securitized products should only be permitted to be sold to persons meeting a minimum proficiency level of objective, active knowledge about the specific products they are purchasing and their attendant risks. The existing exemptions are too broad and leave the category open to many investors who are not sophisticated. Regulators should abandon their approach to using wealth or income as a proxy for sophistication. The mere ability to absorb losses should not be used as a criterion of investor sophistication. The accredited investor exemption merely encourages promoters of poor products to target unsophisticated consumers including seniors looking for income from their savings in the current zero interest environment. FAIR Canada believes that the new approach of active investor knowledge is required not just for securitized products, but for the entire exempt market.


FAIR Canada recommends that the Northwestern Exemption orders (as noted in the CSA Notice), which exempt individuals and firms (in British Columbia, Alberta, Saskatchewan and the territories) from the dealer registration requirements of National 31-103, be revoked given the serious investor protection concerns that have arisen as a result of this carve out. For a discussion of recent concerns of regulators regarding Exempt Market Dealers, see James Langton's article in Investment Executive. If the problems are this bad with licensed EMDs, one can only imagine what regulators would find if they looked under the rocks of the Northwestern Exemption. 

 

Independent Review of OBSI Released
On September 17, 2011 the Board of Directors of OBSI formally accepted the independent review report from Phil Khoury of The Navigator Company of Australia, an international expert in financial ombudservices, who has reviewed similar services in the U.K., Australia and New Zealand. The report found that OBSI compares favourably with international external dispute resolution ("EDR") services and found "no substantive basis for the level of local criticism." It states that "OBSI's approach to investment loss is based on sound logic, provides a fair and transparent platform for well-founded, consistent decision-making and is consistent with other jurisdictions". The Chair of OBSI's Board of Directors, Dr. Peggy-Anne Brown, stated: "We welcome the report and will act on it, in consultation with all of our partners and stakeholders - including regulators, industry, financial consumers and investors."   

 

 

Analysts Need to Be Held Accountable to Protect Retail Investors Interview on BNN

On September 19, 2011 FAIR Canada's Executive Director, Ermanno Pascutto, appeared on BNN's Headline with Howard Green to discuss investor protection and analyst accountability. Ermanno called for regulators to oversee the release of "analyst" reports by unlicensed "analysts" and regulations to prevent selective disclosure of price sensitive reports to short sellers prior to public release of the reports. He noted that there is a need for regulatory oversight of unlicensed analysts in order to protect retail investors and prevent market manipulation.


FAIR Canada also calls for a task force to examine emerging market listings in Canada.  It is FAIR Canada's view that Canada is attracting some of the highest risk emerging market listings, including companies that other exchanges with greater expertise with such listings have refused to list. The track record clearly shows that the Canadian financial services industry does not have the expertise to do proper due diligence for emerging market listings and regulators are unable to effectively regulate, investigate or prosecute.
 

 

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