Investors are seeking court approval for a class-action lawsuit against a mutual-fund division of Royal Bank of Canada, arguing that the fund company did not provide unbiased advice when it offered higher compensation to advisers to sell its own proprietary funds.
Two Ontario-based law firms, Investigation Counsel P.C. and Bates Barristers P.C., filed a suit against Royal Mutual Funds – a fund dealer wholly owned by RBC. The certification hearing for the class action is scheduled for Jan 22.
In a 2018 settlement agreement, Royal Mutual Funds agreed to pay a $1.1-million penalty and $20,000 in costs to the Ontario Securities Commission after the regulator voiced concerns surrounding its mutual-fund sales practices.
The OSC found that between November, 2011, and October, 2016, Royal Mutual violated regulatory rules by offering and paying advisers 10 basis points more in commissions for the sale of RBC Portfolio Solutions funds than for the sale of third-party funds.
OSC regulations prohibit a mutual-fund company from providing incentives to any of its representatives to recommend its own mutual funds over other funds for which it is a participating dealer.
The enhanced compensation paid out to RBC advisers totalled more than $24.5-million – on average, between $4,848 and $6,282 for each individual. The $1.1-million fine by regulators received widespread criticism from the investment community as being too lenient for a company that generated millions in revenue during the enhanced-compensation program.
Now, a group of RBC investors say they were not aware of the compensation arrangements and, therefore, those who bought the company’s mutual funds through a Royal Mutual adviser did not receive suitable investment advice that was unbiased and free of “unlawful conflicts of interest.”
RBC declined to comment on the class-action allegations, stating “we do not comment on anything that is before the courts.”
But in a court filing, Royal Mutual says the class action should not proceed as the plaintiff investors who filed the suit did not directly purchase the mutual funds through a Royal Mutual financial adviser. Rather, the client purchased the funds through a financial planner who does not get paid on a commission basis, Royal Mutual says.
“As the plaintiffs did not purchase mutual funds from a [Royal Mutual] adviser who was eligible for, or who received, enhanced compensation, they have no claim," Royal Mutual said in the filing.
Investors are asking the mutual-fund company for restitution of the amounts the company “unlawfully received” in the sales of the proprietary funds, which would have brought in more than $245-million in revenue for the fund company.
As well, the class action is seeking compensatory damages for investors – which in the preliminary filing is estimated to be about $335-million.
During the 2018 settlement, the OSC stated that the increase in compensation had no bearing on fees charged to clients for any of the funds, and there was no harm to clients as a result of investments in the proprietary funds.
But investor advocates disagree that providing financial incentives to sell propriety funds doesn’t directly harm the client.
“It is very hard to see how the best interests of clients were represented by this sales-practice abuse,” said Ken Kivenko, president of Kenmar Associates and a prominent investor-rights advocate. “The proprietary funds chosen might not be the best performing, least expensive or the least risky, in which case investors would be at risk of opportunity losses.”