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Auditor General of Ontario Bonnie Lysyk's recent report found the Ontario Securities Commission’s unwillingness to ban some types of mutual fund fees has cost investors billions in commissions since 2016.Frank Gunn/The Canadian Press

Investor advocates are slamming Ontario’s securities watchdog after a recent report by the province’s Auditor-General found the regulator’s unwillingness to ban some types of mutual fund fees has cost investors billions in commissions since 2016.

In a review released earlier this month as part of her annual report, Auditor-General Bonnie Lysyk found the Ontario Securities Commission has dragged its feet in banning trailing commissions, which have been banned in Britain and Australia since 2012. The report says the inaction has cost Ontario investors an estimated $13.7-billion over four years.

“Investors could be better protected if the OSC simply followed what has already been done for investors in other countries, by eliminating trailing commissions still paid to full-service dealers,” Ms. Lysyk said in her report.

Trailing commissions are payments a mutual fund company gives annually to an investment dealer for selling its investment products. They are supposed to compensate advisers for providing continuing advice to investors, and are embedded in a fund’s management expense ratio.

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“If this was the financial industry saying they were overcharged $13.7-billion, there would be a task force set up tomorrow to get to the bottom of it,” Jean-Paul Bureaud, executive director of investor advocacy group FAIR Canada, said in an interview.

“The vague and non-committal response to these findings in the Auditor-General’s report from the OSC and the Ministry of Finance suggests a sense of complacency rather than urgency.”

Ms. Lysyk’s report also took aim at industry lobbyists and the Ontario government for interfering with the rule-making process.

The report follows a controversial, nearly decade-long mutual fund fee review by the Canadian Securities Administrators, an umbrella group for all provincial securities commissions.

In 2016, the CSA walked away from an outright ban on trailing commissions. Instead, the CSA proposed less ambitious reforms in 2018 that would prohibit mutual funds with deferred sales charges and ban funds with trailing commissions from being sold through discount brokerages, which do not provide advice to investors.

But shortly afterward, then-Ontario finance minister Vic Fedeli released a public statement opposing the recommendations, along with Advocis, an industry group for financial advisers, and mutual fund dealer Primerica Canada.

The rest of the provincial commissions in Canada went ahead without Ontario, and set a ban to take effect on June 1, 2022. In May, 2021, the Ontario government changed its position and the OSC announced it would join the other provinces in banning DSCs next June.

Mr. Bureaud said the government’s meddling has left a “black stain” on the industry and he’s not “sure what is worse for Ontario investors, the fact that it took so long and so much public outcry to protect investors from these unfair fees” or that the Ontario government and the OSC “seem unconcerned about the A-G findings.”

“This report raises disturbing questions about public accountability and undue influence, including whether the agency created to protect investors in Ontario is able to do its job,” Mr. Bureaud said.

Ministry of Finance spokesperson Emily Hogeveen said in an e-mail to The Globe and Mail that “stakeholder engagement is a regular component of the government’s policy development process” and “during the normal course of policy development, the Ministry of Finance meets with a number of stakeholders who discuss several policy issues relevant to them.”

Investment companies and asset managers have been given almost two years to prepare for the coming changes. The bans on DSCs and trailing commissions at the discount brokerages are set to come into effect next June 1.

Often hidden from investors, DSCs force clients to pay an early withdrawal fee that can be as much as 6 per cent of the value of their investment to cash out of their mutual funds. The fee tends to fall by a percentage point each year, down to zero after holding funds for five to seven years.

Long-time investor advocate Ken Kivenko says the “lengthy” transition period for introducing the reforms has allowed “further harm to occur to investors,” as investment advisers are still allowed to sell DSC funds that could potentially lock investors into seven-year contracts with early withdrawal fees being charged until 2029.

Discount brokerages have also been given the same June, 2022, deadline to stop charging for advice that they are not permitted to provide.

“It’s shameful,” Mr. Kivenko, said in an interview with The Globe. “It’s just shameful, and it comes right out of the people who can least afford it. These are not the wealthy people that are sold DSCs; it’s people of modest income.”

An OSC spokesperson told The Globe in an e-mail that the agency’s “primary concern with embedded fees is transparency of total fees and costs paid by investors.” It aims to address this in its new project on total cost reporting disclosure for investors.

Of the estimated $13.7-billion in fund fees paid by Ontario investors from 2016 to 2020, $13.2-billion were trailing commissions and $36-million were penalties paid by investors who exited DSC funds. Also, from 2016 to 2019, $400-million in trailing commissions were paid to discount brokerages for investment advice they did not provide. (2020 data for discount brokerages are not yet available).

Ms. Lysyk noted in the report that an outright ban of trailing commissions for all investment funds would not lead to a total savings of $13.2-billion, as investors would still need to pay advisers a fee for advice under a new compensation model.

The CSA’s ban on trailing commissions for discount brokerages is aimed at do-it-yourself investors who do not rely on advisers for investment help, so should not have to pay fees for the service.

The controversial fee has sparked several class action lawsuits against some of the country’s largest asset management companies.

The Auditor-General’s report recommends that if new regulatory reforms that are set to come into effect at the end of this year are not sufficient, the OSC should consider a “complete elimination of trailing commissions.”

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