By incorporating their firms, life and health insurance representatives can share the commissions they receive in a tax-efficient manner. When purchasing a block of business from another advisor, incorporation also allows life and health insurance representatives to pay the seller using the company’s income, rather than their own. 

For now, mutual fund representatives are not eligible to incorporate due to the discrepancy between the current legislation and Revenu Québec’s stance (see the heading Problems in Québec below).

Éric Jacob

Éric Jacob, Superintendent of Client Services and Distribution Oversight at the Autorité des marchés financiers (AMF), was asked about the status of this file at the Colloque des fonds d’investissement. This event, organized by the Conseil des fonds d’investissement du Québec (CFIQ, the Quebec voice of the Investment Funds Institute of Canada), took place virtually on May 10, 2022. 

Jacob explained that the subject of third-party commission arrangements is complex and that many elements must be considered. “A working group of relevant stakeholders at the Canadian Securities Administrators (CSA), in which the AMF participates, was recently created,” he said. 

Jacob adds that section 160.1.1 of the Securities Act authorizes dealers to share their commission, under the same terms as section 100 of the Act respecting the distribution of financial products and services (ADFS). More specifically, section 160.1.1 states that mutual fund dealers may share their commission with another dealer, an advisor governed by the Act, a firm, an independent representative or an independent partnership governed by the Act. The AMF has adapted its regulations accordingly. 

Legislative change required 

It will take more than a regulatory change to come up with a solution for mutual fund representatives, the Superintendent of Client Services and Distribution Oversight says. 

“It is not up to the AMF to determine the tax framework for brokers. I am not authorized to allow incorporation of representatives on a preliminary basis. A legislative change would be necessary to allow it. We have reached the limit of what we can do,” Éric Jacob explains. 

Problems in Quebec 

“Several stakeholders have advised us to allow mutual fund representatives to incorporate,” Jacob says, adding that by incorporating, these representatives would enjoy the same advantages as life and health insurance representatives do.

In a submission to the CSA’s consultation on the new regulatory framework for self-regulatory organizations (Position Paper 25-404) in 2021, the CFIQ highlighted problems experienced in Quebec due to the sharing of commissions with a third-party firm. 

“In 2020 and 2021, Revenu Québec (RQ) issued notices of assessment to several representatives who had shared commissions, on the grounds that it did not recognize the validity of this sharing. This position taken by RQ is contrary to the provisions of the Securities Act,” the CFIQ says. “These notices of assessment, sometimes for significant amounts, threaten the very continuation of the professional activities of these representatives, who have acted in good faith and within the parameters of the SA.” 

The case of MGAs 

A clarification meeting with Revenu Québec in June 2021 did not appease the CFIQ. “In their view, the sharing of commissions by a mutual fund representative with an insurance firm is invalid because it is not the firm that rendered the service,” reads the CFIQ’s brief. This position echoes the stance that Revenu Québec took when applying the harmonized sales tax to MGAs’ commission income.

At the end of the meeting, Revenu Québec verbally explained to the CFIQ that the firm can receive fees from the representative, but only after the representative has reported all commissions as personal income. “These fees paid to the firm would be identical in nature to fees paid for other services,” the CFIQ commented. 

Incorporation: The only avenue 

The CFIQ sees a conflict between Revenu Québec’s interpretation of the Taxation Act and the Securities Act. It claims that this interpretation nullifies the benefit of commission sharing, which the legislator wanted to grant mutual fund representatives by adopting Bill 141 in 2018.

“The only complete, effective, clear and predictable way to resolve this issue is to allow mutual fund representatives to incorporate their activities. The incorporation of representatives would have the great advantage of resolving, once and for all and in an unequivocal manner, the problematic situation we are experiencing with the tax interpretation of commission sharing in Quebec,” the CFIQ concluded.

New SRO: Rules or principles?  

The review initiated in December 2019 by the CSA will soon come to an end. On January 1, 2023 a new self-regulatory organization for mutual funds and securities will combine the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC).

At the same time, the Canadian Investor Protection Fund (CIPF) and the (MFDA’s) Investor Protection Corporation will consolidate to form the Investment Protection Fund (IPF). In the province of Quebec, brokerage firms won’t contribute to the IPF. Rather, they will continue to contribute to the Financial Services Compensation Fund. The AMF is responsible for managing the amounts making up the fund. On May 12, 2022, the CSA announced the names of the members who will form the boards of the new SRO and Investment Protection Fund. At the same time, the CSA launched several consultations on the recognition of the two entities, among other topics. 

The grouping within a new SRO raises several questions in the industry, some of which were debated with the AMF at the recent symposium. Brokers and representatives are wondering which way the new framework will lean: Toward a principles-based model like that of the CSA, or a more prescriptive model like the MFDA’s? 

“The members will jointly define the rules that will be applied. Part of it will be done by the organization that will be created. It is reasonable to think that this work will take several months,” replied Eric Jacob, Superintendent of Client Services and Distribution Oversight at the AMF. 

Supervision and duplication 

To avoid duplication, “the AMF will work with the new SRO and the Chambre de la sécurité financière to coordinate the implementation efforts,” Jacob said. He pointed out that the AMF already minimizes duplication with the Chambre in its supervision, inspection and regulation enforcement activities.

As for cooperation with the new SRO, Jacob said that the AMF will continue to carry out inspections and investigations of the activities of mutual fund dealers in Québec during the transition period. The AMF will evaluate the possibility of conducting inspections in collaboration with the new SRO in certain cases. He explains that once it becomes permanent, the new SRO will inspect mutual fund dealers and representatives according to its rules, without assistance from the AMF. 

In addition, the Superintendent of Distribution confirmed that there will be no changes to the registration of mutual fund dealers and representatives during the transitional phase. To ease the transition, “dealers registered in Quebec will be presumed to meet the obligation for joining the new SRO as of January 1, 2023,” he added. 

Costs commensurate with services 

Hugo Lacroix

Asked to comment on the fees that the new SRO will charge, Hugo Lacroix said that the fee structure has not yet been defined. This will happen once the organization begins operations, said the Superintendent of Securities Markets at the AMF.

The CSA would like to see fees pegged to the operating costs of the new SRO. Lacroix says the fee structure will have to allow for a fair and proportionate distribution of costs, based on members’ activities. “Not all members have the same business model. The principle is that the fee amounts should not be an unreasonable barrier to access.” 

Lacroix notes that there will be “a transition period of approximately one year from January 1, 2023, until the final rules are adopted.”

The fees will be commensurate with the services that the new SRO provides to Quebec brokers and representatives, under Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations, he adds.

Under consultation until June 27, 2022, the Regulation to amend Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations - Amendments relating to the transition for Québec mutual fund dealers to the New SRO will come into force on January 1, 2023. These amendments pertain to Quebec brokers’ transition to the new SRO. Lacroix mentioned that there will be a moratorium on fee increases during this transition period. 

Economies of scale and compliance 

He did not put a figure on how much the new framework will save. “We have been told across the country that the harmonization of the rules and the brokerage framework will create opportunities,” he said. In Quebec, there is an even greater business opportunity to expand, for dealers to extend their activities across Canada, Hugo Lacroix continues. 

He points out that the new SRO will allow integrated groups (financial institutions with both a mutual fund dealer and a securities dealer) to achieve “significant economies of scale.” “They will be able to combine these two sales forces into one legal entity and administer a single compliance program,” Lacroix explains. 

Fewer obstacles for independent brokers 

What do independent brokers have to gain? Hugo Lacroix says he anticipates benefits for independent brokers who are not members of a financial group, and cannot combine two sales forces.

“We’ve been told that de-harmonization of frameworks creates operational pitfalls,” he said. These pitfalls “hinder the efforts of brokers who want to modernize their service offering, and their back office.” He gave the example of brokers who want to offer exchange-traded funds. 

He adds that Quebec is somewhat isolated because it operates differently than the rest of Canada. Brokers in the province have a harder time accessing solutions because they represent a pool that is less attractive to technology developers. 

Disclosure of total fees 

Asked to comment on the ongoing consultation on the reporting of total costs by segregated funds, Eric Jacob described this CSA and Canadian Council of Insurance Regulators (CCIR) initiative, in which the MFDA and IIROC are collaborating, as a major project. The consultation is scheduled to end on July 27, 2022. 

“Final publication is expected in the first half of 2023. We have proposed a transition period of approximately 18 months after final publication,” he says. This timeline applies to both the insurance and securities industries. “We strongly recommend that you ensure that you have the capabilities and resources you will need to put in place when we announce the final versions.” 

Jacob says the proposed changes are designed to improve fee transparency and investor protection by better informing investors about the management and transaction fees embedded in their funds. The end result will also be to harmonize the disclosure rules for segregated funds with those applicable to mutual funds.