Canadian investment and insurance regulators are proposing new rules that would require investment fund managers to disclose the total cost of owning investment funds and segregated funds as part of a client’s annual investment statement.
The Canadian Securities Administrators (CSA) – an umbrella group for all provincial securities regulators – and the Canadian Council of Insurance Regulators (CCIR) published proposals on Thursday to improve the way fund managers report the cost of investing to clients who own mutual funds, exchange-traded funds and segregated funds, which are funds that have an insurance component to them.
“We seek to enhance investor protection by improving investors’ and policyholders’ awareness of the ongoing embedded costs of owning investment funds and segregated funds, which include management fees and trading expenses,” CSA chair Louis Morisset, said in a statement.
The proposal follows years of industry debate around the transparency of fees and the cost of financial advice. In 2016, regulators approved a first set of rule changes to investment statements.
Since July, 2017, regulatory changes – known as the second phase of the client relationship model, or CRM2 – required all Canadian financial companies to provide annual statements that highlight how well investments have performed in dollar amounts, as well as the dollar figure an investor has paid for financial advice.
But regulators excluded one of the main costs an investor pays: the management expense ratio, also known as an MER.
CRM2 only focuses on the amount paid either directly or indirectly by an investor to an investment firm. This includes trailer fees – commissions paid out to investment advisers for the length of time an investor holds a fund. But for mutual funds, it does not include the amount paid to the investment manager – the MER. CRM2 also does not include trading expense ratios, known as TERs, which cover the costs of trades executed by manager overseeing the funds.
Now, the CSA and CCIR are proposing clients receive statements that will show the full cost of owning segregated funds and investment funds – including both the MER and TER. For securities investors, current account statements would be expanded to include the fund expense ratio as a percentage for each of the investment funds a client owns.
Additionally, annual cost and compensation reports – which are typically sent out to clients at year-end – would now include the total dollar cost of owning the investment funds over the past year.
For segregated funds – which currently do not send out annual reports – a new annual report would be created to report similar information.
Mr. Morriset said in a statement he “strongly encourages” investment companies and insurers to consider reviewing their systems and conduct advance planning “as soon as possible” to have everything ready to implement if provinces approve the proposal.
The proposal, which is out for public comment until July 27, 2022, is expected to be approved by the end of 2024.
“Consumers will better understand the cost of advice and asset management and be able to assess and compare the performance of segregated funds and investment funds,” CCIR chair Robert Bradley said in a statement.
The Investment Funds Institute of Canada (IFIC), which represents investment companies that manage funds, has been advocating for the inclusion of MERs in cost reporting since 2017, following the implementation of CRM2.
“We have been publicly in favour of extending disclosure requirements to encompass the full management expense ratio of investment funds – and have been for quite some time,” IFIC chief executive officer Paul Bourque said in an interview.
“Now, with this proposal on the table, we are looking forward to the next step of the process which would be to sit down with regulators and ensure we have a realistic timeline – with milestones – for implementation of a new reporting system.”
Dan Hallett, vice-president of research at HighView Financial Group, has been part of industry conversations around full cost disclosure since 1997. While he is happy to see the issue “finally get the attention” it needs from regulators, he is concerned that securities and insurance regulators won’t co-ordinate on the initiative, which could lead to big gaps in standards.
“It is striking to me that this is still being discussed 25 years later,” Mr. Hallett said in an interview. “More than the decision to disclose will be what the disclosure looks like. A failing of CRM2, for example, is that the presentations I’ve seen appear intended to fulfill a regulatory requirement – not to leave end clients more informed ... there needs to be an effort to make disclosure meaningful and informative.”
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Clare O’Hara