Investment firm shares comments on CSA initiative, along with supportive findings from other markets
The eponymous instigator of the Vanguard effect in Canada has weighed in on the contentious issue of deferred sales charges (DSCs).
In a letter addressed to the Ontario Securities Commission (OSC), Kathleen Bock, managing director at Vanguard Investments Canada, shared the company’s comments on the proposed OSC Rule 81-502 and its proposed companion policy, which seek to restrict the use of the DSC option for mutual funds.
“Rooted in our mission to put the interests of all investors first, we believe in regulatory initiatives that improve the investment environment for Canadians,” the letter said. “We agree with the investor protection concerns raised by the CSA [Canadian Securities Administrators], including the significant conflicts of interest created by the DSC structure and liquidity constraints that harm investors.”
It went on to voice Vanguard’s support for a full ban on all forms of embedded commissions in Canada, citing potential positive impacts such as reduced conflicts of interest, enhanced fee transparency to support fairer comparisons of investment products and services, and encouraging competition and innovation in the Canadian asset-management space.
“The payment of embedded commissions to intermediaries can cause product bias whereby decisions are made based on the commission paid by the investment product rather than on the suitability of the investment product,” the letter said.
Citing Vanguard’s direct experience in other jurisdictions such as the UK and the Netherlands, the letter said bans on embedded commissions have led to reduced risks of intermediary conflicts of interest and increased fee transparency. Those, in turn, have led to positive impacts such as ensuring the primacy of suitability over dealer and advisor compensation in investment decisions, as well as a wider range of lower-cost, high-quality investment products and services.
The letter also countered critics’ contentions that banning embedded commissions will result in an advice gap for retail investors, pointing to studies in the UK and the Netherlands showing the vast majority of consumers are willing to pay for reasonably priced financial advice. It further cited a survey conducted as part of the UK’s Financial Advice Market Review that revealed people mainly went without advice mainly because they felt they didn’t need it, rather than due to a lack of access.
“Admittedly, in the UK, there was an initial decline in adviser numbers following the introduction of a ban,” the letter said. “That was in part driven by higher professional standards for financial advisers … However, there is evidence that the advice market is increasingly delivering the services needed by consumer.”
It also noted how in 2019, the OSC Investor Advisory Panel (IAP) found evidence of potential shortfalls in the financial advice Canadian investors get, particularly those with smaller accounts.
While being generally supportive of the principles behind the OSC proposals, Vanguard called a broader prohibition that would extend a ban on DSCs to younger investors as well as investors under $50,000.
“We believe investors in Ontario deserve the same investor protection as other Canadians,” the letter said. “Therefore, we strongly encourage the OSC to harmonize its approach with the CSA and ban the sale of mutual funds through the use of all forms of DSC option.”
