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Canada’s mutual-fund regulator is looking to further expand the way investment fees are reported to investors to include ongoing costs – such as management expense ratios – in annual reports.

On Thursday, the Mutual Fund Dealers Association of Canada (MFDA) released a discussion paper asking for industry feedback on how to improve the transparency around total costs for investors. Currently, there are expenses associated with owning investment funds – as well as other investment products such as structured notes and market-linked guaranteed investment certificates – that do not need to be disclosed under existing cost-reporting requirements.

In July, 2017, regulatory changes known as the second phase of the client relationship model – or CRM2 – were put in place to provide investors with greater transparency concerning the fees they pay for financial advice.

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But CRM2 only focuses on the amount paid either directly or indirectly by an investor to an investment firm. This includes trailer fees – commissions paid out to investment advisers for the length of time an investor holds a fund – but for mutual funds, it does not include the amount paid to the investment manager, known as the management expense ratio, or MER.

“Investment fund MERs generally represent the largest component of costs associated with owning an investment fund,” the MFDA said in the paper. “Currently, clients are provided with MER information through the delivery of the Fund Facts document. However, clients receive this information for each fund separately and there is no mechanism for clients to receive regular MER reporting for all their fund holdings.”

As a result, investors are left with an incomplete picture of what they are paying in financial fees, which could prevent clients from fully understating their total costs.

Karen McGuinness, senior vice-president of member regulation and compliance for the MFDA, said the regulator has heard from a number of stakeholders including both investment advisers and mutual fund firms stating they support the move to include the full cost of investing on reports.

“CRM2 was an important first step in giving clients crucial information to make informed investment decisions and I think as a regulator we are always looking at how we can improve upon that,” Ms. McGuiness said in an interview. “The MFDA’s discussion paper expands on the considerable work already undertaken by the Canadian Securities Administrators. Hopefully the industry feedback will provide us with alternatives and solutions so that clients can have more fulsome cost reporting.”

In the discussion paper, the MFDA considers four areas that are currently not covered in the existing cost reporting requirements.

These include:

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Continuing costs of owning investment funds, which include mutual funds, exchange-traded funds, labour sponsored funds and commodity pools. Currently, only trailing commissions are required to be reported on the annual charges and compensation report sent to investors. However, there are still costs associated with the continuing management and operation of these funds that are not required to be disclosed, such as portfolio-management fees and fund-operating expenses.

Transactional costs charged by investment funds. In addition to the continuing cost of owning an investment fund, there are other costs to clients associated with transactions in funds that are usually charged by the fund manager. These costs include redemption fees and short-term trading fees.

Costs paid by clients directly to third parties for account administration. These costs include custodial or intermediary fees that are taken directly from a client’s account. As these costs are not charged by or paid to the registered firm, they are not required to be reported.

Costs related to other investment products. There are other investment products that are currently not included in the annual charges and compensation report. These could include products such as notes, exempt securities and market-linked guaranteed investment certificates. The MFDA has not proposed to include them in the expanded cost reporting at this time.

“Such investments generally have limited automated data available to registered firms. Including them in cost reporting would require significant structural changes across the entire industry,” the MFDA said in the discussion paper.

The comment period is open until July 20, 2018.

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