In this month’s newsletter, we highlight World Elder Abuse Day, including the most common form of elder abuse—financial abuse. We discuss the Canadian Investment Regulatory Organization’s proposed program to help investors recover some of their losses when CIRO members break the rules. Additionally, we highlight a new rule that, beginning in 2027, makes it mandatory to disclose the total amount of fees investors end up paying. Lastly, we provide an update on banning segregated funds with unfair fee structures.
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World Elder Abuse Day: How to Protect Yourself |
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June 15 marks World Elder Abuse Day, which aims to raise awareness about the mistreatment and neglect of older people.
Did you know? Financial abuse is the most common form of elder abuse and often involves victimizing seniors through financial fraud, theft, or coercion. It frequently goes unnoticed and typically does not get reported as much as it should.
To protect yourself or loved ones from financial abuse, here are some important steps you can take:
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Appoint a Trusted Contact Person (TCP): Speak to your financial advisor about designating one or more TCPs. A TCP can only be contacted by your advisor with your written consent, particularly in situations involving suspected financial exploitation, or diminished mental capacity to make financial decisions. Research suggests, however, that family members may be the most frequent abusers of elders. As such, it would be wise to appoint more than one TCP, including at least one person who is not a family member.
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Be aware of the trust trap: Just because you may know someone, it does not mean you should invest with them. Be cautious about who you trust and take time to check their background and find out whether they are registered with securities regulators. Also, be cautious of strangers pretending to be a distant relative or loved one urgently asking you to send them money through e-transfers or gift cards.
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Seek independent advice: If you’re being asked to invest in an opportunity that sounds too good to be true, seek independent advice from someone you know and trust. Don’t feel pressured to invest in something you’re not comfortable with. Scammers often try to make you feel rushed or under pressure as a tactic to convince you to go along with a scheme that you likely wouldn’t agree with if you had enough time to think about it.
If you suspect that you or someone you know is being financially exploited, it’s important to take appropriate action. It is always better to be cautious than sorry. Consider the following steps:
- Reach out to a family member, friend, or trusted advisor for support and guidance. Discuss your concerns and seek their perspective on the situation.
- Contact your financial institution and inform them about the situation. Speak with a representative who can provide guidance on how to safeguard your accounts and take necessary precautions.
- If you believe a crime has been committed, report the incident to police or to your provincial securities regulator.
For additional resources, please refer to the following:
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Show Me the Money: Compensating Investors for Their Losses |
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In February, the Canadian Investment Regulatory Organization (CIRO) proposed a program to help compensate investors who have suffered losses due to violations of securities rules. This is good news since getting their money back is what investors ultimately really care about.
The proposal would allow CIRO to use money obtained from disgorgement orders in an enforcement proceeding to compensate harmed investors. The idea behind disgorgement is that those who have done wrong should not benefit from their misconduct. It means that a person must return any profit, or losses avoided, resulting from their wrongful act.
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Unfortunately, collection rates for disgorgement orders are poor.
Between 2009 and 2022, CIRO collected only about 14%
of the total amount it ordered wrongdoers to disgorge.
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CIRO’s proposal draws on programs that exist in some, but not all, provinces that are designed to return funds to harmed investors. It shows that CIRO is taking steps to protect investors and strengthen public confidence in the regulatory system.
Assuming the program is developed as proposed, it will be important to manage public expectations about what it can achieve for investors. In some cases, the amounts to be disgorged might be too small to warrant using the program. In cases where using the program would make sense, investors would only be compensated if, and when, CIRO collects the money from the wrongdoer.
Unfortunately, collection rates for disgorgement orders are poor. Between 2009 and 2022, CIRO collected only about 14% of the total amount that it ordered wrongdoers to disgorge. Our comment letter to CIRO recommends improving the collections process, and using fines in certain situations to supplement the limited amount collected through disgorgement.
While we support CIRO’s proposal, governments and regulators need to do more to improve other ways for investors to be compensated. This includes making the decisions of the Ombudsman for Banking Services and Investments (OBSI) binding on investment dealers. OBSI provides free, efficient, informal dispute resolution services and is the preferred complaint-handling process for many retail investors. However, because OBSI’s recommendations are not binding, firms can refuse to comply with them or offer low-ball settlements to harmed investors.
FAIR Canada and other consumer advocates have been calling for concrete action on this front for many years. In our view, it would go a long way in addressing a fundamental consumer protection gap in our regulatory system. We look forward to the Canadian Securities Administrators’ consultation on this important matter, which we anticipate will be published later in 2023.
In the meantime, if you’re unhappy with an investment firm or bank and want to make a complaint, check out our Complaint Guide called Getting Your Money Back: An Investor’s Guide to Navigating Canada’s Complaint System. It’s packed with insightful information to assist you in handling the current process.
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Total Cost Reporting: A Win for Investors…Coming in 2027 |
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Did you know? Your annual fee statement about your investments does not include all the fees and charges you pay. That’s because your advisor is only required to disclose what they receive directly from you (such as trading fees) or receive indirectly from others for providing you advice (such as trailing commissions). But these are not all the fees that have an impact on you.
On April 20, 2023, Canada’s securities regulators announced they intend to adopt a new total cost reporting (TCR) rule. Once in force, the new rule will require your advisor to show all the fees they receive from you, as well as the other charges embedded in the products you may have bought. These include the costs of managing an investment fund (the management expense ratio) and the fund’s annual transaction costs (the trading expense ratio) of that fund.
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Since embedded fees can have a significant impact on how much your investment grows over time, it is important for you to be aware of them. |
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These embedded fees are not paid to your advisor. Rather, they come out of the investment fund and are used to pay the fees charged by the manager of that fund. Given that they are taken directly out of the fund each year, many investors may not be aware they are paying them.
TCR will provide investors like you with clearer and more complete cost information and help you make more informed decisions about the investment products you buy. We view this as a win for consumers. Since embedded fees can have a significant impact on how much your investment grows over time, it is important for you to be aware of them.
The problem with the new rule, however, is there is a long transition period before investors will see their first reports with the total costs—investors will only begin seeing the new total cost reports in 2027 (about 3.5 years from now).
Yes, we are disappointed it will take so long. However, dealers need time to change (and in some cases build) their data systems to be able to do the following:
- Receive fee information from different fund managers,
- Identify each client that is invested in each different fund,
- Break the fund’s fee data down for each client,
- Allocate the correct portion of that fund’s fee to each client account, and
- Ensure they can do it reliably and accurately for potentially thousands of different accounts each year.
Overall, we think regulators struck a reasonable balance to ensure investors get reliable and accurate information about the total costs of their investments. They also set a firm deadline for when dealers must make all the needed changes to their systems, and made it clear that no extensions will be granted.
What can you do today to figure out your total costs?
Until the TCR rule comes into effect, you should proactively discuss the fees and charges you pay with your advisor. Be sure to ask them how the management and trading fees charged by the fund manager affected your mutual fund investments this year, and how they may be affected over the next five or 10 years.
You should also learn more about the types of investment fees you may be paying, as well as better understand the fee information you currently receive. Here are a couple of other resources that may help you understand the investment fees and charges you pay:
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Ban on Deferred Sales Charges in Segregated Fund Products |
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Effective June 1, 2023, a new rule approved by Ontario Finance Minister Peter Bethlenfalvy banned the use of deferred sales charges (DSCs) on new segregated fund products. Other provinces are in the process of announcing similar bans on DSCs.
DSCs are fees investors pay when they sell their segregated fund within a specified period, typically about five years. These fees are paid to the firm that manages the fund. DSCs are problematic because they put pressure on investors to stay invested in a fund to avoid paying the fee, even if the fund is performing poorly. This is unfair and harmful to investors.
DSCs were a big problem for investors who needed to withdraw their funds in the event of an emergency or financial hardship. Additionally, DSCs discouraged investors from switching to better performing investment products.
Considering these problems and concerns, DSCs were banned from mutual fund products last year. Extending this ban to segregated funds will ensure harmonized regulations across different investment products, further enhancing consumer protection measures.
For more information, read FAIR Canada’s submission to FSRA’s consultation on the proposed amendments to the rule regarding DSCs.
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FAIR Canada’s Expanding its Team! |
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We are pleased to welcome Bruce McPherson to our team. Bruce will be working as our new Policy Counsel, where he’ll be contributing on important regulatory and policy issues that have an impact on investor rights.
Prior to joining FAIR Canada, Bruce worked in-house as a lawyer at a publicly traded company listed on the Toronto Stock Exchange. We look forward to the valuable insights and fresh perspectives he will bring to our team.
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Prosper Canada’s Financial Literacy for Facilitators Course |
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FAIR Canada is glad to support organizations such as Prosper Canada, which focus on ensuring vulnerable Canadians have access to financial literacy and other programs they need to build their financial well-being. Prosper Canada developed a self-directed, online financial course to help front-line practitioners gain the skills and knowledge required to successfully deliver financial literacy education in their communities. The financial literacy for facilitators training offers a series of nine modules on financial topics, as well as a module on facilitation.
The course qualifies for 15 CE Credits in the Financial Planning category. If you’re interested, you can receive a $10 discount off the registration fee by entering code: fl-offer-fair. Check out the course here!
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To learn more about our advocacy for investors, visit FAIRCanada.ca
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If you have any questions, contact us.
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