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After a half-decade of study and consultations, Canada’s securities regulators have released their final recommendations for changing mutual fund fees – but the proposals fall short of what many industry players expected.

Under the proposed new rules, regulators will prohibit deferred sales charges, or DSCs, and will also curtail trailing commissions collected by discount brokerages − or do-it-yourself investing services. But they stopped short of banning such trailer fees altogether.

Trailer fees, which are embedded commissions paid by mutual-fund companies to compensate financial advisers and firms that sell their funds, were widely viewed as the main target of the regulators’ review.

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“Truly massive disappointment,” portfolio manager and investor advocate John De Goey wrote in an e-mail. “Most investors still have no idea what trailing commissions are and this does nothing to address the information asymmetry and the biased advice it entails,” he added.

The Canadian Securities Administrators (CSA) − an umbrella group for all provincial securities commissions – also released proposals to amend and update the rules around what advice, and which products, are in a client’s “best interest.” However, the amended framework does not set hard-and-fast rules. Instead, the proposals include broad language about what makes a suitable investment.

In an interview, Louis Morisset, head of Quebec’s Autorité des marchés financiers and the current chair of the CSA, called the proposals a “thoughtful response” that can be moulded to firms of different sizes. However, he acknowledged that it remains a “principle-based approach” rather than one with strict guidelines.

The new proposals come after the CSA launched a review of mutual fund fees in December, 2012. The regulators took particular aim at mutual funds because they are this country’s most commonly held investment product.

The CSA held rounds of consultations with everyone from industry firms to investor protection advocates. Two independent studies on the impact of embedded fees were also commissioned. A final ruling appeared to be coming in 2016, but then regulators announced that more consultations were necessary.

Two years later, the CSA has announced its final proposals, and some say they don’t go nearly far enough to actively protect investors.

Like Mr. De Goey, Dan Hallett, a vice-president at HighView Financial Group, was disappointed by the CSA recommendations, but said he was encouraged that at least some action is being taken.

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The new proposals are “clearly not what investor advocates have been pushing for,” he wrote in an e-mail. “But the measures announced today still represent movement in the right direction; that is toward a more client-friendly and more transparent regime.”

When launching its review in 2012, the securities regulators said outright that embedded commissions are bad for investors and that they distort investment choices.

Typically, advisers are paid trailer fees of half-a-percentage-point or 1 per cent of the amount invested in a fund each year. In 2011, mutual fund companies paid an estimated $4.6-billion in trailing commissions to advisers and their firms, according to the CSA, and accounted for 64 per cent of an adviser’s book of business.

More recently, a specific type of trailer fee has come under focus. While the investment industry has long argued that trailer fees reward investment advisers for providing good financial counsel, such commissions are also collected by discount brokerages that let users self-direct their investments. In other words, hardly any advice is given, yet the fees are still paid.

The CSA didn’t go so far as to place an outright ban on these forms of trailers, but they will be hard to justify under the new regime, which would only permit trailers when advisers determine that the related funds are “suitable” for their clients.

“In our view, the fees paid by a vast majority of [do-it-yourself] investors in this channel do not appear to align with the execution-only nature of the services they receive,” the regulators stated. “We also observe no justifiable rationale for the practice of paying discount brokerage dealers an ongoing trailing commission for the sale of a mutual fund.”

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Of the total $30-billion in assets held in mutual-fund products in discount brokerages, more than $25-billion were of the type that charge for advice, according to a 2017 CSA report. However, this is a small segment of the the total mutual fund market, which totals $1.49-trillion, according to the Investment Funds Institute of Canada.

The proposed rules for DSCs are much clearer. These commissions are paid by investors if they redeem their fund before a certain date, and the fee declines the longer they hold the investment. The DSC paid by an investor is typically around 6 per cent in the first year, and usually declines by about 1 per cent each year.

At the end of 2016, 18 per cent of all mutual fund assets were held in the DSC option, according to the CSA. In the United States and Europe, the equivalent figure is around 1 per cent of all mutual fund assets.

Going forward, such commissions will be banned.

The third leg of the new rules, which involves updating “best interest” and “suitability’” rules, largely amend existing regulations, and there are few specific rules. Because there is so much wiggle room around what makes a specific product suitable – depending on a client’s account size, age and financial knowledge, among other things – the guidelines have historically proved to be tough to enforce.

Asked about the lack of concrete details and examples, Mr. Morisset of the AMF acknowledged there won’t be a revamp − but he argued the resulting changes in behaviour will be substantial.

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“We’re not reinventing the wheel to a certain extent, but we’re significantly increasing the responsibilities of registrants,” he said.

The new guidelines “give a clear indication on what you should and should not be doing,” Mr. Morrisset added.

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