How comforting it must be for Bay Street to see government standing up for the overdog in matters related to consumer protection.
Two recent developments highlight the power banks, brokers and mutual fund companies have to shape the regulations that protect consumers from financial firms. One is the surprise announcement on Thursday that the Ontario government does not agree with modest changes to mutual fund commissions that were proposed by provincial securities regulators.
The other is the news that a third big bank, Bank of Nova Scotia, has decided to stop participating in the Ombudsman for Banking Services and Investments. In the federally regulated world of banking, OBSI is your independent recourse when you complain to your bank about a service or product and are told to take a hike.
Both the Ontario and federal governments have reams of legislation that guide and restrict the financial industry’s behaviour – this isn’t the Wild West. But from time to time, the financial industry wins a battle that it would have cleanly lost if governments were looking out for the interests of consumers and investors.
After six years of consultations, provincial securities regulators issued proposals on Thursday to ban deferred sales charges on mutual funds (you pay a fee to sell a mutual fund within seven years of buying it) and stop online brokers from collecting advice-related commissions on mutual funds they sell to clients. Online brokers are strictly prohibited from providing any advice.
In a statement that could have been dictated by the mutual fund industry, Ontario Finance Minister Vic Fedeli said the province disagrees with regulators. Their approach results "from a process initiated under the previous government and, if implemented, will discontinue a payment option for purchasing mutual funds that has enabled Ontario families and investors to save toward retirement and other financial goals.”
Please. DSC exists because it pays a bigger upfront commission to the seller than other sales options, and a lesser continuing commission for service to the client. If you’re an adviser who puts an emphasis on short-term selling over long-term advice, DSC’s a winner.
The investment industry is at its most parochial when it argues for DSC. It says DSC is an effective way of compensating advisers for serving small accounts that might otherwise not get advice. But this ignores a fast-growing cohort of new financial players that manage investments and produce financial plans at low cost for everyone, regardless of how much they have to invest.
Another argument for DSC is that the seven-year schedule of declining redemption fees is an incentive for investors to resist the emotional pull to sell funds that are down in value. But it’s the adviser’s job to make this case to clients. Charging people a fee to get their own money back is a predatory business practice and an embarrassment to all righteous investment advisers and financial planners.
Scotiabank’s departure from OBSI is the latest development in the long-running devaluation of OBSI as a place to go for independent review of a complaint against a bank. OBSI is still the go-to complaint window for investors who can’t resolve a dispute with their adviser or investment firm. But the departure of Royal Bank of Canada, Toronto-Dominion Bank and now Scotiabank pushes OBSI closer to fringe status on banking.
RBC and TD direct unhappy clients to the private, for-profit ADR Chambers Banking Ombuds Office (ADRBO), and Scotiabank will as well. The Canadian Foundation for Advancement of Investor Rights has compared ADRBO unfavourably with OBSI. “We have serious concerns about the conflicts of interest, misaligned incentives, and level of transparency and accountability at ADRBO,” FAIR said in a recent statement.
Federal banking laws allow banks to leave OBSI, and so they’re exiting one by one. A federal government looking out for consumers would corral all the banks in OBSI and stop the practice of banks picking their own dispute-resolution services.
An Ontario government looking out for investors would let securities regulators go ahead with their proposals on mutual fund commissions. Enough with government support for the overdog.