Commissions encourage "suboptimal behavior"

By Andrew Rickard | January 11 2017 01:30PM

The Canadian Securities Administrators (CSA) have begun their consultation on whether or not to ban embedded commissions. While they say they have not made a final decision to prohibit this form of compensation, they do believe it encourages "suboptimal behavior".

The CSA published their consultation paper on discontinuing embedded commissions yesterday. Based on the evidence they have gathered, the securities regulators argue that “a change to a different compensation model must be considered”, namely to one that better aligns the interests of investors with those of fund managers, dealers, and advisors.

While the CSA emphasize that they have not already made up their minds to put an end to embedded commissions, they want to "consult and contemplate" about appropriate regulatory action. The regulators wish to hear proposals from the financial services industry about what can be done to address their concerns.

Britain and Australia prohibited commissions

Groups such as Advocis and the Investment Funds Institute of Canada have warned that when Britain and Australia prohibited commissions, many advisors left the business and those who remained focused on wealthier clients; this left smaller investors on their own. The regulators, however, do not seem very keen to hear any more about what happened in those countries. Instead, they say they want to receive comments that were not raised in prior consultations and are "evidence-based, data-centric and Canadian-focused".

"The fund industry has also pointed to the consequences of relevant regulatory reforms in other jurisdictions (such as the U.K. and Australia) as potential evidence of the likely impact of the discontinuation of embedded commissions in Canada,” reads the paper. “While observations about the impacts of relevant reforms in other jurisdictions are informative and insightful, we consider that the potential impacts from similar reforms in Canada might not be the same."

Potential effects of discontinuing embedded commissions

The CSA says the objective of their consultation is to identify the potential effects of discontinuing embedded commissions in Canada specifically, "based on what we know of our fund market and its participants, including our investment fund managers, our dealers, and the investors they currently serve."

The 169-page consultation paper may be downloaded from the Ontario Securities Commission website. Comments should be submitted in writing on or before June 9, 2017.

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