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Desjardins Financial Services Firm Inc. has agreed to pay a $1-million penalty after industry regulators found it was offering its financial advisers higher compensation to sell its own proprietary mutual funds.

On Wednesday, the Financial Markets Administrative Tribunal approved an agreement between Quebec’s securities watchdog Autorité des marchés financiers (AMF) and Desjardins Financial Services after an investigation revealed that the company’s compensation structure breached regulatory rules.

The AMF alleged that from 2009 to 2016, Desjardins operated a sales plan that favoured the sale of Desjardins funds over non-Desjardins funds. The company also made participation in the plan mandatory for its advisers during 2016. (Prior to that, the program had been optional).

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Neither the company nor the regulator disclosed details of the compensation system or how much in total was paid out in commissions to advisers for selling such funds.

In addition, the AMF found that Desjardins had failed to monitor compliance and manage risks for its sales practices as required by regulators. As part of the agreement, Desjardins admitted to all the alleged facts and failures.

A spokesperson for Desjardins told The Globe and Mail the company will not contest the penalty and voluntarily changed its incentive compensation plans in 2017.

The tribunal said in a statement that Desjardins’ compensation arrangements were prohibited by regulations and “undermine, compromise or conflict” with the obligations financial firms have to their clients.

In recent years, regulators have been keeping a closer eye on the types of compensation structures used by Canada’s largest financial institutions. In 2018, Royal Mutual Funds Inc. - a division of the Royal Bank of Canada - was given a $1.1-million penalty for paying advisers 10 basis points - or one-10th of a percentage point - more in commissions for the sale of its own mutual funds.

Immediately following the Royal Mutual settlement, investor advocates slammed the Ontario Securities Commission, saying the regulator did a disservice to the industry by not having a stiffer penalty to deter similar behaviour in the future.

AMF spokesperson Sylvain Théberge said the Desjardins investigation was part of a wider industry review that began in 2016 with other provincial regulators across the country.

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“The objective of this joint initiative was precisely to obtain a better understanding of the methods of remuneration of brokers and to ensure that the practices of mutual fund brokers and investment fund managers comply with [regulatory rules],” he said in an e-mail.

During the Desjardins review, the AMF found that between 2009 to 2015, when the compensation plan was optional, the company also failed to keep proper records of who bonuses were paid to.

“By not keeping such registers, including the identities of representatives under the plan, [Desjardins] failed in its obligation to monitor compliance and manage potential conflicts of interest resulting from the incentive compensation,” the tribunal said.

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