Ontario’s decision to interfere in a national review of mutual fund fees has thrown the six-year study into disarray, raising questions about the prospects for change, including the elimination of early-withdrawal fees.
On Thursday, the Canadian Securities Administrators, an umbrella group for all provincial securities watchdogs, proposed changes that would prohibit the fees, known as deferred sales charges (DSCs), on mutual funds. The review included public consultations and research papers, and the provincial regulators supported the recommendations.
Shortly after the proposals were formally announced, Ontario Finance Minister Vic Fedeli released a statement opposing the recommendations. In doing so, the province has stalled the planned reforms, raising the possibility that no changes will take place. That would mean some customers will continue to be subject to the fees, of which they are often unaware.
The watchdogs say their public comment period for the proposals will remain open for the next 90 days. “As with all CSA consultations, [regulators] will carefully consider all feedback and comment letters received,” the group said in a statement. However, the OSC is the largest of the provincial regulators, and has acknowledged it must adhere to the desires of the provincial government – leading analysts and advisers to believe the fees will continue.
Calling Ontario’s opposition an “unexpected development,” CIBC World Markets analyst Paul Holden noted the provincial finance ministry has final approval on regulatory proposals from the OSC. “Our assumption then is that DSC is here to stay,” he wrote in a research report.
Based on this assumption, financial advisers and money managers concerned about investor costs expressed dismay at the government’s sudden intrusion. Because of the early-withdrawal fees, investors often find themselves unable to access their own money for years.
“The zeitgeist right now is a move towards transparency and flexibility," said David O’Leary, founder of Kind Wealth. By contrast, the Ontario government wants to fight a ban on what is widely viewed as an archaic fee structure at a time when wealth management giants such as Fidelity are introducing no-fee funds.
“They’re going to be on the wrong side of history,” he added.
DSCs force clients to pay as much as 6 per cent to cash out their mutual funds, a fee that tends to fall by 1 per cent each year, down to 0 per cent after holding for five to seven years. While 18 per cent of all mutual fund assets – about $300-billion – in Canada carried the DSC option at the end of 2016, DSCs are used on only 1 per cent of mutual fund assets in the United States and Europe, the CSA says.
Historically, DSCs were thought to benefit lower-income investors, because they allowed them to buy mutual funds without paying upfront. (Mutual funds used to cost as much as 9 per cent to buy in.) Investment advisers also liked DSCs because they would receive a 5-per-cent commission from the mutual-fund manufacturers for selling funds with these fees to their clients, giving them a reason to take on lower-income clients.
At the same time, the penalty for selling a fund within seven years of purchase forced buyers who were aware of the fees to hold onto the investments, something thought to encourage investing discipline during market hiccups.
Although other Western countries have largely abandoned DSCs, some Canadian mutual fund and adviser lobby groups supported Ontario’s opposition to the ban. “The DSC is a good payment option for some investors who would not otherwise have access to financial advice," Paul Bourque, president of the Investment Funds Institute of Canada, said in a statement.
Over the years, however, regulators found an increasing number of investors were incorrectly sold DSC funds – specifically retirees who do not have long-term investment horizons.
Mr. Fedeli did not respond to a request for comment.