Page 6 - CU Jan 2020.pdf

6 | INVESTMENT EXECUTIVE NEWS March 2020 Majority of early contributions go toward sales charges
CONTINUED FROM PAGE 1
usually are non-refundable when
an investor cancels their sub- scription in a GSP before the plan matures. The cancellation rates in these plans can be high, particu- larly among low-income investors who can’t afford to keep up with monthly contribution schedules.
The Canadian Securities Administrators (CSA) launched a proposed three-phase project to update the regulations governing scholarship plans in 2010 — but the project never got past its first phase. In that first phase, the CSA published new rules for scholar- ship plan prospectus forms that took effect in May 2013.
SPDs now must issue plan summary documents that tell investors how long paying off the sales charges applied to GSPs will take. Those charges often amount to thousands of dollars. Typically, the majority of a subscriber’s early contributions goes toward paying down the sales charge rather than being invested. Plan summaries also must include the percentage of the SPD’s GSPs that were can- celled before their maturity date over the previous five years.
Fern Karsh, policy coun- sel and corporate secretary with the Canadian Foundation for Advancement of Investor Rights, says the stronger disclo- sure rules are “important,” but adds that disclosure alone won’t ensure parents are fully aware of the risks of investing in a GSP.
“Are immigrants and people whose first language isn’t English or French going to have the eas- iest time understanding a docu- ment that’s intended to improve disclosure?” Karsh asks. “Or does more need to be done?”
Karsh suggests several improvements could be made to the regulation of GSPs, such as putting a cap on upfront sales charges. “Securities regulators do have a history of evaluating and, in some cases, banning certain fee structures,” she says, noting the CSA’s recent decision to ban deferred sales charges for mutual fund dealers in every province except Ontario.
Jesse Vu, CEO and finan- cial advisor with Calgary-based Exceedia Consulting Ltd., says GSPs’ upfront sales charges could motivate sales reps to act in their own interest rather than in the interest of their clients.
“As an advisor who sells this [product], you are highly incen- tivized to take advantage of somebody by maxing out how much money they contribute [per month], because your sales charge comes off the top,” Vu says. “You shouldn’t be having a conversation about saving for education and giving someone a $3,000 bill up front.”
Another aspect of GSPs some find troubling is the plans’ attri- tion rates. According to the latest plan summary from Children’s Education Funds Inc. (CEFI), an SPD, an average of “40% of the plans in each group were can- celled before their maturity date” over the past five years.
The CEFI document states that subscribers who drop out of their plans before maturity will not be eligible to have their sales charges
refunded, and the income earned on their contributions will remain in the investment pool.
Other SPDs have similar rules.
“The people who do collect [on a GSP investment] are doing it on the backs of all the poor kids who dropped out along the way,” says Brad Brain, an independent cer- tified financial planner operat- ing under the umbrella of Aligned Capital Partners Inc. in Fort St. John, B.C. “What in the hell kind of tontine is that?”
Brain also questions the quali- fications of GSP sales reps. To sell GSPs, reps must pass the Dealing Representatives Proficiency Course offered by the RESP Dealers Association of Canada (RESPDAC). “Having a one-course qualification, to me, is woefully inadequate,” Brain says. “To release these people on the mater- nity wards of the country saying, ‘This is what you need for your infant child’ is an accident wait- ing to happen.”
Paul Renaud, executive direc- tor of RESPDAC, stated via email to Investment Executive (IE) that the proficiency course for schol- arship plan sales reps is approved by the CSA. He added that RESPDAC believes the scholar- ship plan industry is “well-regu- lated in its current form.
“Firms have robust [know- your-client] and suitability pro- cesses in place, provide clear and detailed disclosure to customers at the point of sale and require deal- ing [reps] to complete compre- hensive proficiency and product knowledge training, both when first registered and on an ongoing basis,” Renaud’s email states.
But a 2018 report on the regulation of GSPs, published jointly by the non-profits SEED Winnipeg Inc. and Momentum (Calgary) as well as Winnipeg- based Menno Simons College, suggests that these plans often are unsuitable investments for the people who buy them.
The joint report notes that in 2018, the average pre-maturity cancellation rates disclosed by Canada’s five GSP dealers for the previous five years ranged from 10.6% to 44%. Two GSP dealers had average pre-maturity can- cellation rates that exceeded 40% during that time frame.
“The high rate of plan cancel- lation suggests that these plans may have been unsuitable for many of the subscribers to whom they were sold,” the joint report states.
The report adds that inter- views with 48 low-income GSP investors in Winnipeg and Calgary revealed that several “felt pressured to invest more money into the group plan RESP than they were comfortable investing.”
Forty per cent of the inves- tors who were interviewed for the report said they “experi- enced difficulties” in meeting their contribution schedules — a number in line with the attrition rates published by some SPDs.
The CSA might have ad- dressed such issues had its plan to update scholarship plan regu- lations progressed past the first phase. For Phase 2, the CSA had planned to create a new operational rule for scholar- ship plans, replacing National
Policy 15: Conditions Precedent to Acceptance of Scholarship or Educational Plan Prospectuses.
An email to IE from the CSA states that after completing Phase 1 of the scholarship plan project, “the CSA decided to focus on approaches to implement solu- tions to outstanding issues rather than work on a new operational rule for [scholarship] plans.”
After the CSA abandoned its regulation update project after Phase 1, the regulator went on to require SPDs to file an under- taking with their renewal pro- spectuses. The undertaking expands the school eligibil- ity rules for scholarship plans, allows scholarship plans to invest a limited amount in equi- ties and requires SPDs to use the Ombudsman for Banking Services and Investments for resolving investor complaints.
In the third phase of the CSA’s original plan, the regulator would have considered whether SPDs should belong to a self-regulatory organization (SRO). The SRO idea resurfaced last month, when the Mutual Fund Dealers Association of Canada (MFDA) published a discussion paper pitching the
CSA on the formation of a sin- gle SRO that would be staffed by members of the MFDA and the Investment Industry Regulatory Organization of Canada (IIROC). (See story, below.)
The proposed SRO would have oversight of existing MFDA and IIROC members, portfolio man- agers, exempt market dealers and SPDs. Karen McGuinness, senior vice president of member regula- tion, compliance, with the MFDA, says having a single SRO that over- sees all investment dealers would “create a level playing field.”
But Brain questions whether SRO oversight of SPDs would in fact benefit investors: “If we still have virtually untrained people selling crappy products, [will that] actually make a difference?”
The CSA’s client-focused reforms (CFRs), which will be fully implemented by the end of 2021, could make a difference. An email to IE from the CSA states that the
CFRs will require SPDs to “put the client’s interest first when deter- mining the suitability of invest- ments and to address material conflicts of interest in the best interest of the client.”
As for how SPDs will ensure they’re in compliance with the CFRs, Renaud’s email states: “I know that senior compliance leaders from the various dealers are meeting to review the [CFRs] together to help ensure the reforms are applied consistently across the various firms.”
Brain says the key to pro- tecting investors in GSPs is beef- ing up sales reps’ qualifications.
“There are probably some phe- nomenal pooled RESP represent- atives out there, but I also think there are a bunch who aren’t,” Brain says. “If we can get those guys up to a professional stan- dard, that’s going to be a benefit to the average Canadian who wants to educate their kids.” IE
“Are people whose first language isn’t English or French going to understand a disclosure document?”
Regulatory overhaul?
MFDA proposes creation of new, comprehensive SRO for registered firms
BY JAMES LANGTON
as provincial regulators
prepare to launch a review of investment industry self- policing, they face calls to rebuild the self-regulatory organization (SRO) structure from the ground up rather than simply remodel the existing framework.
Late last year, the Canadian Securities Administrators (CSA) announced a plan to undertake an examination of self-regulation this year, with a consulta- tion paper to be published by mid-year.
In early February, the Mutual Fund Dealers Association of Canada (MFDA), an existing SRO, fired its initial shot in the forthcoming tussle over the future of self-regulation in a paper sketching out the MFDA’s vision.
Instead of simply merging the MFDA with the Investment Industry Regulatory Organization of Canada (IIROC) — an idea that has been broached several times — the MFDA proposes a more funda- mental restructuring that would create a new, comprehensive SRO for registered firms and return the task of market oversight to the provincial regulators.
The MFDA did not consult the CSA or IIROC in drafting the proposal.
“IIROC acknowledges the MFDA’s contribution to the CSA’s consultation,” states an email to Investment Executive from IIROC. “IIROC will continue to work with all stakeholders to develop solutions for the CSA to consider, as the CSA reviews the regulatory framework of IIROC and the MFDA.”
The MFDA’s paper proposes creating an SRO that covers fund dealers and investment dealers (which are under over- sight of the existing SROs) as well as firms currently super- vised directly by the provin- cial regulators — firms such as exempt market dealers, scholarship plan dealers and portfolio managers. Thus, the MFDA’s proposed SRO would take charge of both conduct and prudential regulation for all of these firms.
The MFDA paper also rec- ommends that the provincial authorities should handle mar- ket regulation — currently an IIROC responsibility — directly.
The MFDA’s paper sets out a proposed approach to govern- ance for the new SRO, which would include a board composed of industry representatives, independent/public directors and CSA nominees.
These recommendations would involve fundamen- tal change, but Mark Gordon, president and CEO of the MFDA, points out that the changes are achievable under existing secur- ities legislation.
At the heart of the MFDA proposal is the conviction that any SRO reform should begin from the ground up, with an eye to crafting the ideal model, rather than attempt to make marginal improvements to
what already exists.
The MFDA’s paper argues that
the CSA’s review should “not be limited by history or status quo regulatory structures, but should start with a blank slate and be driven by investor protection and regulatory concerns rather than dealer cost savings or competi- tive strategy.”
Gordon reiterates that vision: “The CSA needs to design a model starting with an investor- centric approach instead of just patching together existing struc- ture for the sake of perceived expediency.”
An investor-centric approach has support among investor advocates, such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and Kenmar Associates.
In response to the MFDA paper, Ermanno Pascutto, founder and executive director of FAIR Canada, says, “We agree that we need a wholesale review of self-regulation.”
Pascutto adds: “We need to ask why we have self-regulation rather than direct regulation. We have to ask whether [the current system] is working in the public interest [and] in the interests of investors.”
FAIR Canada recommends that the provincial regulators’ examination of self-regulation start fresh, with an eye to craft- ing “a new self-regulatory system that builds on the strengths and eliminates the weaknesses as much as possible.”
FAIR Canada’s stance is echoed by Kenmar, which pub- lished a paper arguing that the CSA’s review shouldn’t simply be an exercise in rubber-stamping an IIROC/MFDA merger. IE