The Ontario government is allowing the province’s securities regulator to join the rest of Canada in banning early withdrawal fees charged by mutual funds.
In 2019, most provincial and territorial securities regulators announced they approved a ban on what are known as deferred sales charges (DSCs), a controversial fee investors must pay when they pull money from certain mutual funds before a set date. But at the time, Ontario’s government did not support the ban and said it was going to place certain restrictions on the sale of the investments in the province.
Now, Ontario is changing its position. The province announced on Friday the Ontario Securities Commission will join the rest of the country’s ban on DSCs, which is set to take effect on June 1, 2022.
As of that date, consistent with all other provinces and territories, no new DSC sales will be permitted in Ontario, and DSC redemption schedules for sales made prior to June 1, 2022, will be allowed to run their course in Ontario.
In a notice released Friday, the OSC said after proposing several rule changes, which included a public comment period, 70 per cent of the commenters “overwhelmingly expressed support” for a complete ban on DSCs and urged the OSC to harmonize with the Canadian Securities Administrators, the umbrella group for provincial securities regulators, which ordered the ban in 2019.
“We also note that industry innovation over the past few years has opened significant new avenues for investors with smaller accounts at an affordable cost,” the OSC said.
Katie Walmsley, president of the Portfolio Management Association of Canada, which represents 290 asset management firms in the country, said in a statement that an Ontario-only regime would have created confusion and compliance complexities, and potentially raised costs for investors.
“It is a step toward greater transparency that will give Ontario investors more control of their investments with fewer surprises,” said Ms. Walmsley. “Ontario’s decision to align with the other provincial regulators will improve harmonization.”
Prior to today’s announcement, the OSC was in the midst of proposing several rule changes to tighten up investor protection parameters around DSCs to prevent any improper selling of the funds.
But industry feedback expressed concern that Ontario’s proposed rules would create a “two-tiered regulatory approach, which would create compliance issues, be costly and burdensome to implement and monitor, and cause market inefficiency.”
In addition, others felt there could still be negative investor outcomes – even with new restrictions in place.
DSCs force clients to pay as much as 6 per cent to cash out their mutual funds, a fee that tends to fall by one percentage point each year, down to zero after investing for five to seven years. Those fees are in addition to the annual management fees charged by the funds, which in Canada are often in the range of 2 per cent for funds sold by advisers.
Dan Hallett, vice-president and principal with HighView Financial Group, has advocated against the sale of DSC funds for decades and says he is pleased the OSC was not “swayed by fears of cutting off access to advice.”
In the past, it has been argued that DSCs offered a route for investors with fewer assets to access advice, since advisers receive higher upfront commissions. But over the years, the introduction of lower-cost investment funds, robo-advisers and exchange-traded funds now offer alternatives.
“Whether DSC commissions remained or were eliminated was never related to Canadians’ access to advice, as much of the industry claimed,” Mr. Hallett said. “Canadian investors with modest portfolios have long received little real ongoing advice, if any, unless they are linked to a more affluent family. New innovations have addressed that gap to some extent.”
Mutual funds with the DSC option have been in net redemptions since 2016 and had a total net outflow of $3.34-billion in Canada during 2020, according to the OSC. During the same time, there was a total net inflow of $23-billion into mutual funds with no-load options.
“With advances in industry innovation, Ontario investors have access to affordable investment options, including no-load funds and exchange-traded funds that are available to investors of all account sizes,” the OSC said in a notice. “Ontario investors also have access to investment products and investment advice with more affordable and more transparent compensation models.”
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Clare O’Hara