Ontario’s capital markets watchdog is proposing new protections for seniors through restrictions on the sale of mutual funds that carry large penalties if cashed in early, a fee structure that is being banned outright in all other jurisdictions across the country.
The new rules proposed by the Ontario Securities Commission would prohibit the sale of mutual funds with the deferred sales charge option to clients who are 60 and older, and anyone whose investment time horizon is shorter than the mutual fund hold period.
Under the proposal, the maximum term would be shortened to three years from the industry practice of up to seven years, and clients would be able to redeem 10 per cent of the value of their investment annually without redemption fees.
In addition, borrowed money could not be used to purchase such mutual funds, and there would be a $50,000 cap on account size. In financial hardship circumstances, such as involuntary loss of full-time employment, permanent disability and critical illness, clients would be able to redeem their investment without paying redemption fees.
The OSC was initially on board with an outright ban on deferred sales charges on mutual funds across Canada, but did not join the other regulators, which finalized their plans on Thursday, after a rare public disagreement with the Ontario government.
The OSC’s scaled-down restrictions are still subject to a public comment period, which runs until May 21.  If the new rules are accepted as proposed, they aren’t expected to be in force until mid-2022, by which time other provincial and territorial watchdogs will have implemented the complete ban.
On Thursday, Louis Morisset, chief executive of Quebec’s the Autorité des marchés financier, and chair of the Canadian Securities Administrators, an umbrella group for all Canadian securities regulators, said the full ban “was motivated by important investor protection concerns.”
Regulators spent months studying fund fee structures, including a deferred sales charge option in which mutual fund companies pay upfront commissions to dealers.
“This compensation bias incentivizes dealers to recommend a product that may not be in the best interest of investors and has led to suboptimal investor outcomes,” Morisset said.
He said regulators considered alternatives to the full ban, including regulating sales through a series of restrictions, but concluded that this would “only partially mitigated the investor harms we identified and none dealt with the conflicts of interest” inherent in the deferred sales charge option, or the “harmful lock-in feature imposed” on investors.
“With ample evidence of investor harm, especially for the most financially vulnerable investors, and no evidence of any benefits, we see no reason to preserve the DSC (deferred sales charge) option,” Morisset said.
Financial Post
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