The use of commissions and fees could face additional regulation depending on the CSA's findings
Upfront commissions or fees paid by investors to dealers or dealer representatives when buying securities are to come under scrutiny from Canadian regulators.
Specifically, mutual fund chargebacks will be reviewed to determine whether there should be additional regulation amid the Canadian Securities Administrators’ (CSA) drive to ensure appropriate modernization of securities rules.
It comes as an experienced advisor spoke to Wealth Professional and questioned whether regulators are going too far in the “premise” of consumer protection due to “the odd bad apple.”
Chargebacks occur when investors redeem their securities before a fixed schedule as determined by the dealer firm, and the dealing representative is required to pay back all or part of the upfront commission/fees.
The CSA announced the review Thursday and said it is responding to “concerns about potential conflicts of interest associated with this practice.”
The process will include submissions from fund managers on how they use chargebacks and will involve staff from the Canadian Investment Regulatory Organization (CIRO), the merged IIROC/MFDA regulator previously called the New SRO.
Seg funds
The review of mutual fund chargebacks follows a similar action on segregated funds and individual variable insurance contracts.
Public consultation on a discussion paper was instigated by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO).
In May this year the regulators called for control measures to protect consumers from risks related to advisor chargebacks for those products and expressed concern that their use could lead to consumer harm.
“For example, upfront commission may motivate advisors (particularly less experienced advisors who have lower incomes) to sell this product to customers for whom the product is not suitable,” they said.
Same risk, less prevalent
In announcing its review of chargebacks in the mutual funds industry the CSA acknowledged that their use is less prevalent than in the seg funds space.
However, it believes that there is the same potential for conflicts of interest.
“The information obtained from this review will help us determine whether further regulatory reform is needed to align certain mutual fund sales practices with the interests of clients,” said Stan Magidson, CSA chair and CEO of the Alberta Securities Commission.
The review of mutual fund chargebacks will complement its previously announced review of the practices of mutual funds that have principal distributor relationships with registrants to distribute their securities.
This began in September 2022 and the outcome of both reviews will inform the CSA’s decision as to whether regulatory reforms to National Instrument 81-105 Mutual Fund Sales Practices or other instruments are needed now that the Client Focused Reforms have been implemented.
