New Morningstar report finds U.S. and Canadian systems haven't kept up with pace of reform in other jurisdictions
While Canada’s regulation and taxation of the fund industry is generally efficient at enabling investor success, it gets below-average marks compared with the rest of the world.
That was the conclusion of Morningstar in the second chapter of its sixth biannual Global Investor Experience Report.
“[W]e are looking for policy … like tax incentives that encourage individual investment and effective regulation of funds that promotes transparency and limits misleading statements and conflicts of interest,” said Aron Szapiro, head of policy research at Morningstar and a co-author of the study.
The firm found that since 2017, the broad trend toward strong regulation to protect mutual-fund investors has persisted, with more markets taking steps to formulate special tax incentives or regulations that encourage lower fees, such as mandatory disclosures.
Canada — as well as Australia, New Zealand, and the United States — showed adequate regulation around mutual fund operations and distribution, satisfying basic standards and allowing an experience that can be “quite good” for investors.
However, Morningstar said those countries fell short of the standards set by other markets, particularly when it came to conflicts of interest and incentives for investing.
The report acknowledged the variety of tax-advantaged investment plans that Canadian investors can access. It also noted the “sound and robust” regulatory framework in Canada that requires disclosures to retail investors through mandatory fund facts documents that lay out the type of fund they’re purchasing, how they are being charged, and the risk associated with the fund according to a standardised system.
Canada also earned points for how all working Canadians are compelled to contribute to either the Canada Pension Plan or the Quebec Pension Plan, as well as approvals to regulations requiring advisors to address material conflicts of interest, put clients’ interests first in making suitability determinations, and do more to clarify what clients should expect from registrants.
However, the report noted that in taxable accounts, realised capital gains and dividend income are typically additive to the investor’s income for the year, and that there’s no minimum requirement dictating how many independent directors a fund should have on its board.
“Additionally, investors in Canada typically pay the costs of distribution out of fund assets,” Morningstar added.
