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Two groups of investors are pushing ahead in separate class action lawsuits against Canada’s largest discount brokerages, alleging the companies incorrectly charged billions of dollars in fees for advice they did not provide.

The Supreme Court of British Columbia has scheduled a judicial management conference in a proposed class-action lawsuit against 11 major discount brokerage firms, including the online trading divisions of Canada’s six biggest banks, those run by Laurentian Bank and HSBC Canada, and smaller discount brokers such as Qtrade. The suit estimates that since 1993, discount brokers have been incorrectly paid about $5-billion in “trailing commissions.”

The commissions are typically paid annually by a mutual fund to brokers and other fund sellers to compensate them for providing continuing advice and service to investors who bought the fund. But discount brokerages only take orders from clients and are prohibited from providing advice.

The B.C. court conference will take place the first week of September, and will determine the next steps in the proceeding, including a hearing for the plaintiffs’ application for certification as a class action.

At the same time, a similar class-action lawsuit against discount brokerages by another group of investors in the Ontario Superior Court has scheduled a case management conference for Sept. 22. The Ontario case also includes allegations against online broker Questrade Inc.

Typically, class-action suits can take several years to be resolved in court. The two cases are moving along quickly, lawyers say, without any delays since the onset of the novel coronavirus pandemic.

In both cases, according to court documents, the plaintiffs allege that various brokerage firms improperly collected trailing commissions on mutual funds held in do-it-yourself investment accounts for decades.

Trailing commissions are generally part of the annual management expense ratio (MER) of a fund – the yearly bundle of fees charged to investors. But do-it-yourself investors using discount brokerages usually do not work with advisers to purchase investment products and do not receive advice.

The discount brokerages have not yet filed statements of defence in response to the lawsuits. Several firms contacted by The Globe and Mail declined to comment because the matter is before the courts.

Kirk Baert, a partner with Koskie Minsky LLP – the firm leading the Ontario class action – wrote in a statement of claim that, in “almost all circumstances,” the group of investors had no idea they were paying these trailing commissions or for what purpose.

“Discount brokerages act improperly and unlawfully every time they sell a mutual fund with a trailing commission,” Mr. Baert wrote.

For investors who purchased funds through Questrade, however, there is a fee rebate program. The online company began rebating trailing commissions in 2009 for mutual funds, but it charges investors $29.95 a month to do so. Therefore, plaintiffs who did not have fees exceeding this amount allege they did not receive an appropriate refund.

In a submission to the Ontario Securities Commission earlier this year, Questrade said its executive team “did not deem it fair to keep trailer fees when the firm was not providing advice.” But the firm had to charge the fee to cover the “administrative cost” for managing the program.

For the B.C class action, Investigation Counsel PC and Bates Barristers PC are expecting to hear if the case will move forward next month, less than a year after the two law firms filed the first class action for a group of investors last November.

Mutual funds that charge advice fees – known as Series A funds – account for 68 per cent of the total value of mutual fund assets in Canada, according to the Investment Fund Institute of Canada. These funds are intended to be sold through investment advisers and typically charge an annual MER between 1.5 per cent and 2.5 per cent.

Over the years, however, fund managers have developed lower-cost funds that strip out advice fees – known as Series D funds – that charge an MER of less than 1 per cent.

Discount brokers have never been allowed to provide advice to investors as per regulatory rules. But they have often collected trailing commissions on funds that have an advice fee bundled in. In 2017, the Canadian Securities Administrators, an umbrella group for all provincial securities commissions, published research showing that of the $30-billion held in mutual fund products in discount brokerages across Canada, more than $25-billion remained in fund series that bundle in an advice fee.

Investor advocates and industry groups have objected to discount brokerages accepting trailing commissions for years, placing the blame on regulators for not ending the practice. Last December, the CSA announced it would ban discount brokers from collecting trailer fees. The rule change is expected to be published in 2020 – but it will most likely provide discount brokers a two-year transition period.

“This is theft of individuals’ money and the CSA should have put out an alert years ago to investors that this practice was occurring,” prominent investor advocate Ken Kivenko said. “This is a travesty that investors have been robbed like this for so long. It doesn’t even need a rule, it is common sense that those firms who do not give out advice should not be paid for it.”

Other investors blame the fund management companies that paid the commissions to discount brokerages from investors’ mutual fund fees.

Earlier this year, Ontario Superior Court Justice Edward Belobaba certified a class-action lawsuit against TD Asset Management Inc. regarding more than $200-million in fees paid out to discount brokers on some TD mutual funds.

Seven other class action lawsuits have been filed against each of the mutual fund divisions for all six of the major banks, as well as Mackenzie Financial Group Corp.

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