Double charging/dipping on fee based transaction accounts in Canadian Retail Financial Services

Double dipping is where “advisors” and/or their firms charge investors, with fee based transaction accounts, a fee on their accounts at the same time as taking commissions and other transaction returns on the underlying investments.  Since these accounts are meant to swap payment of transaction remuneration on securities held within the accounts for a simple annual fee that favours those with high levels of transactions, knowingly taking commissions and other transaction returns on investments held within these accounts would be a fraudulent act.

Double dipping appears to be a systemic issue in Canada with TD, CIBC, HSBC and Scotia all having been found wanting in this respect.   Canada’s regulators have, for some reason, decided to treat these breaches of firms’ and registrant obligations and regulations as uncontested settlements with no admission or denial of the charges, and have to date seemingly relied on self reporting of issues.

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A quick comment on disclosure…..what is its objective and market function?

There has been much work into the impact of disclosure on investor decision making: it does not work on the whole.  

One of the key issues with most disclosure is that regulators have deemed that disclosure is a communication to all investors, so that they can understand the risks, the details and functions of a given asset/security. 

Perhaps we have got the purpose of disclosure all wrong.  What if disclosure has a higher level market vetting purpose, in the sense that all the relevant information about a security or product has to be market vetted by “experts”?  In this context the very existence of a disclosure document, in the sense that it has passed a market expert validation test, is an endorsement or validation of the durability and integrity of the product/asset for the individual investor.

Dumbing down disclosure makes it useless for all, for the individual investor and for the impartial, independent market expert.  Disclosure needs to be fully transparent to pass muster and regulation must assess the integrity of both the disclosure document and the validation process that passes as fit for purpose the disclosure itself.  Not only the standard of disclosure needs to rise (i.e. the integrity of information) but also the complexity and detail of that information needs to rise to all for more effective market validation.

A recent FAIR Canada post, “Why is Deficient Issuer Disclosure Allowed to Persist?” raises the issue of expert/regulatory validation of disclosure communication.  The purpose of disclosure should not be to leave the ordinary investor in a buyer beware situation, but this is precisely what appears to be happening.  While the FAIR Canada post relates to more complex corporate issuer disclosure I feel that the relevance of the point has ramifications for the client relationship and product point of sale disclosure that applies to the retail financial services market place.

Other references

Does the disclosure received by retail investors help them to make optimal investment decisions?”

I was happy to attend the Capital Markets Institute’s discussion on disclosure at Toronto’s Rotman School of Management.  But some 3 and a 1/2 hours after the start, the panellists had still not answered the headline topic of discussion: “Does disclosure help investors make optimal investment decisions?”

Outside of the academic presentations by Sunita Sah and an interesting but jocular presentation on behavioural issues affecting choice, focus seemed to be almost entirely on documentation underpinning investment details, costs and performance, i.e. the disclosure of detail. 

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Are they advisors or salespersons and do we have a transaction or an advice based service process?


I was thinking of submitting a few arguments to round 3 of the point of sale framework, but flogging a dead horse gets kind of tiresome after a while and also raises questions over one’s own intelligence.  

Needless to say I have not been surprised by many of the industry or “industry funded” comments.   I would like nevertheless to draw attention to some points made in the Fasken Martineau submission.

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My submission to the CSA re Risk Classification disclosure

Re: CSA Notice 81-324 and Request for Comment – Proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts

The part must relate to the whole and the whole to the part and the both must know of it:

The CSA in their consultation paper fail to explain how the risk classification methodology proposed for use in the point of sale documents is to be used by investors to make informed decisions, and how advisors are to use the same to determine suitability.

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Euphemism: regulators still clinging to the past, still unwilling to face the fundamental problem?

Quite frankly I am gobsmacked, but at the same time eternally grateful to the many gifts this communication will provide the public debate on best interest standards.  I of course refer again to the Keynote Address by Bill Rice, Chair Alberta Securities Commission, on December 3, 2013 to the IIROC – CLS Compliance Conference 2013.

In this address he made a number of points that I think are worth pointing out and rebutting:

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Russian Roulette: leverage and seeing through the marketing message…

How on earth are investors meant to be able to assess the risks and returns on borrowing to invest strategies when they are not provided with the hard data on which to assess the risks of their decision and when everything they read suggests only the unsophisticated are unable to appreciate the incredible benefits of leverage?

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Why are benchmarks important in mutual fund point of sale documents?

In response to a recent blog on benchmarks and behavioural economics I have been asked to comment on the importance of benchmarks in point of sale documents.  The following is the detail supporting that response, and (at the end of the post) a set of answers to a number of questions:

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Regulators + Behavioural Economics = social engineering & the “mutual fund bliss point”

You gotta keep them focussed on the transaction, otherwise they wander and cannot make up their minds..sometimes they just need to be nudged in our direction and not away from it..”, you can almost imagine someone quipping at a recent OSC dialogue.

Sometimes, and at times more times than you would wish, you have to wonder if the cards are being deliberately stacked against the consumer in plain view.

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Oh, and by the way, they shot the token benchmark!

While best interests standards are the way to go, in my opinion, it should be clear that we are still only regulating 50% of the lamentably lax, non best interests standards, transaction service process. 

June 13 saw publication of the CSA’s implementation of stage 2 of point of sale disclosure for mutual funds.  And by the way, they shot the token benchmark!

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At this rate, propaganda may be the OSC’s only effective plan….

Investor beware, in the absence of concrete regulatory change, the OSC may have to rely on gradually introducing an idea of investor confidence into your mind.

The OSC has just published its 2013/2014 statement of priorities.  It is bland, uninspiring and fails to make a firm commitment, either way, on the key issues of our day.  The OSC, once again, is preferring the warm fuzziness of further discussion and consultation to the realities of conflict and commitment.

Blithely ignorant of the increasing body of research that raises considerable doubt over the efficacy of disclosure, the OSC continues to rely heavily on this out dated remedy. 

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The Burden of Disclosure…

Canadian regulators seem to be hooked on disclosure (CRM, Point of Sale, etc) at a time when many international regulators acknowledge it is insufficient on its own to bridge the natural asymmetry of information in the market place or to direct advisor/adviser behaviour in the investor’s best interests. But disclosure is relatively inexpensive and as Sunita Sah and other academics point out, it is less disruptive to the status quo.  I can see why the industry would favour it, but not necessarily why a regulator should be so enamoured of it.

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