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Battle lines are being drawn over early withdrawal fees for mutual funds.

While investor advocacy groups are urging the Ford administration to reconsider its opposition to fee reform, several investment companies are applauding the Ontario government’s move to block such reform.

The Canadian Securities Administrators (CSA), an umbrella group for provincial securities watchdogs, proposed changes on Sept. 13 that would prohibit the fees, known as deferred sales charges (DSCs).

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Shortly thereafter, Ontario Finance Minister Vic Fedeli released a statement opposing the recommendations, throwing into doubt any regulatory action that might follow a six-year study that included public consultations, research papers and support from all provincial regulators.

Ontario Finance Minister Vic Fedeli applauds alongside Premier Doug Ford after speaking to members of his caucus in Toronto, Sept. 24, 2018.

Christopher Katsarov/The Canadian Press

DSCs charge clients as much as 6 per cent to cash out their mutual funds, a fee that typically falls by one percentage point each year, down to 0 per cent, after five to seven years. While 18 per cent of all mutual fund assets in Canada – about $300-billion – carried the DSC option at the end of 2016, DSCs apply to just 1 per cent of mutual fund assets in the United States and Europe, the CSA says.

Some in the industry believe DSC funds help smaller investors gain access to financial advice, as the model does not require an upfront payment from clients. It may also prevent investors from making early withdrawals from their retirement savings.

Fidelity Investments Canada ULC – Canada’s fourth-largest asset manager – issued a statement last week saying it was in favour of the Ontario government’s opposition to changes. “We support Minister Fedeli’s goal of enabling families and investors to save towards retirement and other financial goals. We encourage the idea of working with stakeholders to explore potential alternatives including declining to implement a ban on deferred sales charges in mutual funds," it said.

Primerica Canada – which has approximately 6,800 mutual fund licensed advisers – was also quick to respond to Mr. Fedeli’s statement.

“We applaud the statements by Minister Fedeli regarding the Ontario Government’s commitment to enabling families and investors to save towards retirement and other financial goals," CEO John Adams said in his own statement. "We share in this commitment.”

But many in the investment community were dumbfounded as to why the provincial government opposes a more transparent environment for retail investors. DSCs are often viewed as an industry relic, and many firms have already implemented changes to eliminate or curtail them. Investors Group, Canada’s largest independent asset manager, stopped selling funds with DSCs in January, 2017.

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“DSC was created to provide discipline to long-term investing, but the marketplace has evolved,” chief executive Jeff Carney said in a statement at the time of the announcement. Investors Group continues to be opposed to the use of such fees in its funds.

, and an approach that “remains unchanged” for the firm today.

CARP, an advocacy association for older Canadians, wrote to Mr. Fedeli, asking the government to reconsider and endorse the proposed recommendations.

“There is clear and compelling research that shows embedded fees result in a mismatch between investment dollars and mutual fund performance; investors’ assets are invested in mutual funds that pay the highest fees, not those that have historically generated the best returns,” wrote Wanda Morris, the chief advocacy and engagement officer at CARP.

“We urge you to reconsider your recently announced opposition to these needed reforms, which were developed with six years of consultation with stakeholders, the financial sector, regulators and investor advocates. They represent an important first step in increasing investor and consumer protection, while improving market efficiency.”

Peter Whitehorse, a retired senior and investor advocate with the Small Investor Protection Association, also pressed the Ontario government in an open letter last week.

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“This is a lesson on democratic subversion when somehow, political influences have come to block the actions of the authorities who have the responsibility to implement the rights of the individual," Mr. Whitehorse wrote.

“Ontario’s Ministry of Finance has declared that it doesn’t agree with the proposed approach, which was developed under the previous Liberal government. It was not the previous Liberal government that developed the new embedded commissions changes. This is in fact a [CSA] national final decision that is now being overridden by a new provincial government. This action is publicly undermining their own securities commission.”

With files from Tim Kiladze

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