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Report On Business High-cost fund sales fell after Britain’s fee reform, regulator says

Britain’s move to ban investment advisers from collecting embedded fees and sales commissions from mutual fund companies has ‎led to a rapid drop in sales of the most expensive fund products to clients, a senior U.K. regulator says.

Stefan Klein/iStockphoto

Britain's move to ban investment advisers from collecting embedded fees and sales commissions from mutual fund companies has led to a rapid drop in sales of the most expensive fund products to clients, a senior U.K. regulator said Thursday.

Mark Wheatley, who stepped down as chief executive officer of Britain's Financial Conduct Authority (FCA) last month, told a Toronto audience that after the British regulator banned embedded commissions in 2013, the highest-cost mutual funds went from 60 per cent of all products sold by advisers in the three months before to just 20 per cent six months later.

"And what we saw being sold were … a lot of products which were perfectly viable products which were never [previously] pushed through the channels because they weren't paying enough to the adviser," he said.

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Canadian regulators are studying similar reforms and are expected to announce in early 2016 whether they will change the rules to ban embedded commissions for fund sales, moving Canada toward an upfront fee model.

Both Britain and Australia have already banned mutual fund commissions, arguing they create a conflict of interest and encourage advisers to recommend high-fee funds. In both countries, investors now pay upfront fees for financial advice.

Mr. Wheatley, who serves as an adviser to the board of Britain's financial industry regulator, told the Ontario Securities Commission's annual Dialogue Day conference the change has had an impact on the advisory industry in Britain because less wealthy investors are reluctant to pay advisory fees that can cost up to $2,000 to cover the hours of work required for advisers to open new client accounts.

He said many major banks are moving away from providing investment advisory services to retail clients because they couldn't provide the required level of advice at a cost investors are willing to pay. Instead, smaller financial advisory firms are growing because they are willing to compete on costs, he said.

But he said the FCA is still concerned that small investors aren't getting the advice they need. He said he is hopeful that new online technology, such as "robo-adviser" websites, can "exploit this gap that exists in the market."

"The challenge is how you make sure you get advice to people who have relatively simpler and smaller sums to invest," he said.

OSC chairman Howard Wetston said Canadian regulators are still reviewing how to deal with new adviser regulations. "We are very engaged in the consideration of this issue," Mr. Wetston told the conference.

An independent research report on trailer fees, commissioned by securities regulators to guide policy decisions, is expected later this month.

Also at the Dialogue Day event, some of Canada's largest institutional investors said the country needs solid financial regulation to drive international growth.

Bruce Flatt, CEO of Brookfield Asset Management, which has $200-billion of assets under management in 25 countries around the world, said financial services – including investment funds – have become Canada's greatest export. As a result, he said the reputation of Canada's banks and pension funds has become a crucial backstop for Canadian investors as they operate abroad.

"The governance of the Canadian capital markets and the regulations that are put in place are incredibly important to the outward-looking nature of this country and that's really what will drive this country for the next 25 years," he said.

Canada Pension Plan Investment Board CEO Mark Wiseman warned that some new global regulations since the 2008 financial crisis have had unintended negative consequences, including elements of the Basel 3 banking reforms and new U.S. banking regulations that could potentially cause "massive liquidity problems" in the market.

"The things you're going to do to solve the first problem will cause the second one," he warned.

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Mr. Wiseman also said it makes no sense for a country the size of Canada – which has just 3 per cent of global capital market investment – to have 13 provincial and territorial securities regulators.

"It makes no sense and it creates all kinds of inefficiencies," he said.

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