The Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR) have jointly published proposals they say will enhance total cost reporting for both investment funds and for segregated funds.

The proposed changes were jointly developed by the CSA and CCIR, along with the Canadian Insurance Services Regulatory Organizations (CISRO), Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).

Developed in response to concerns about current cost disclosure and product performance reporting requirements, the proposals include requirements for periodic reporting to clients about the ongoing costs of owning segregated funds and investment funds. 

Cost and compensation reports are to be expanded 

Annual cost and compensation reports are to be expanded to include the total dollar cost of owning investment funds over the past year. For segregated funds this reporting would be included in a new annual report. The regulators say the proposed changes leverage existing requirements for account statements and annual compensation reports, rather than requiring additional documents to be sent to clients.

Specifically, the securities sector amendments proposed affect National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations and related guidance. IIROC and MFDA rules would be amended to be uniform in substance with final amendments to the instrument.

The insurance sector proposal calls for the use of an enhanced disclosure framework for segregated fund contracts. “The CCIR expects that each of its member jurisdictions will adopt the framework by local guidance or, in certain jurisdictions, (by) regulation,” the regulators state.

New requirements for seg funds 

The proposed enhanced cost disclosure reporting requirements for investment funds and the new cost and performance reporting requirements for individual variable insurance contracts (segregated fund contracts), require the disclosure of ongoing costs for each fund, and as an aggregate amount for all investment funds or investments in a segregated fund contract held during the year.

“The proposals are as consistent as possible between the securities and insurance sectors with respect to disclosure of the ongoing costs of owning segregated fund contracts and investment funds, taking into account the material differences among those products and in the way the two sectors and their regulatory regimes operate,” the joint notice and request for comment states. 

Insurers will be expected to provide information to clients at least once a year, including fund expense ratios stated as a percentage for each segregated fund held by the client within their contract during the statement period and the aggregate amount of fund expenses and the aggregate cost of insurance guarantees for the segregated fund contract as a whole. “The methodology for determining the information included in the statements would be prescribed in order to ensure comparability for investors,” they write.

The group’s project committee worked with the Ontario Securities Commission (OSC) Investor Research Office and Behavioural Insights Team, drawing on earlier research commissioned by the MFDA, to design and test disclosure documents. Seven prototype disclosure documents were created for the securities sector and four were developed for insurance to determine which ones would be most effective in maximizing investor and policyholder comprehension of cost information. Prototype statements are included in annexes to the consultation document.

A short transition period 

“We recognize that developing and implementing system enhancements to implement the proposals will require a significant investment of time and resources by industry stakeholders. However, we firmly believe that providing both investors and policyholders with essential information about the ongoing embedded costs of investment funds and segregated funds at the earliest possible date is a priority. We therefore intend to adopt a short transition period,” state the regulators.

Final amendments to the proposals are expected to come into effect at the same time in September 2024 if ministerial approvals are obtained in the second quarter of 2023. “This would represent a transition period of approximately 18 months. Registrants and insurers would be required to deliver statements and reports compliant with the proposals as of the first reporting periods that fall entirely after this date.” 

“We strongly encourage registrants and insurers to consider reviewing their systems and conduct advanced planning as soon as possible in order to have all of the necessary resources for implementation in place on time, following the final publication and subject to the required ministerial approvals,” says Louis Morisset, the CSA’s chair and president and CEO of the Autorité des marchés financiers. 

Stakeholders are invited to provide comments in writing on or before July 27, 2022.