CSA Proposed Amendments to NI 31-103 and to 31-103CP and Proposed CCIR Individual Variable Insurance Contract Ongoing Disclosure Guidance Total Cost Reporting for Investment Funds and Segregated Funds
The amendments for securities relate to enhanced cost disclosure reporting requirements, the purpose of which is to enhance investor protection by improving awareness of ongoing embedded fees for investment funds such as MERs and trading expense ratios. Currently, there is no requirement to provide ongoing reporting of such costs after the initial sale in a form that is specific to an individual investor’s holdings. In the securities sphere, the amendments would impact the account reporting requirements for registered dealers and advisers and would place obligations on registered investment fund managers to provide dealers and advisers with the required information. The proposed insurance guidance would apply to all insurers offering segregated fund contracts and is intended to add new cost and performance reporting requirements for individual variable insurance contracts. The changes to the insurance guidance also seeks to improve awareness of the rights of policyholders to guarantees and how their actions might affect their guarantees. The changes to NI 31-103 would require those providing account statements to include information on embedded fees as a percentage (i.e. the newly-coined ‘fund expense ratio’) for each fund held on the monthly/quarterly account statement. In addition, information would be required to be included on the annual cost and compensation report which shows the aggregate dollar amount of fund expenses for all investment funds and the aggregate dollar amount of any direct investment fund charges (e.g. redemption fees or short term trading fees) held in the account during the year. The disclosure would apply in respect of all investment funds, including foreign funds and prospectus exempt funds. Existing exemptions for non-individual permitted clients would continue to apply. IFMs could rely on publicly available information in fund facts, prospectuses, or MRFPs to provide information for those reports, unless that information is outdated. If advisors or dealers did not believe the information received is reliable, there would be an obligation to make reasonable efforts to obtain the information by other means. It is proposed that final amendments would comeinto effect in Sept 2024, meaning the new first quarterly account statements would be required for the period ending Dec 2024, and the new annual reports for the period ending Dec 2025.
Overview of the Council’s Comments:
We support the CCIR’s efforts to enhance cost disclosure in the insurance sector. We also believe that total cost reporting in the securities sector is long overdue. But we had expected the CSA to do more to ensure the disclosures retail investors would receive under the Proposals are easy to understand and act on.
Our comments note several missed opportunities for the CSA to foster comparability across disclosures and product types. For example, they could have used this opportunity to undertake a much-needed review of point-of-sale disclosures and ensure comparability across point-of-sale and ongoing disclosures such as cost and performance reports.
We do not support the proposal to present management-related expenses and trading expenses as a single, combined metric. It obscures the differences between these costs, denies investors full disclosure about their costs of investing, leaves investors without the tools to engage in meaningful value-for-money analysis, and impairs comparability across different investment funds, and their managers and strategies.
We expected that the CSA would draw a far clearer connection between available evidence and the design of the cost reporting templates included in the Proposals:
- The UK and EU adopted total cost reporting over four years ago, but the Proposals disclose no efforts by the CSA to learn from the experience of these jurisdictions.
- The Proposals do not explain how the templates incorporate findings from previously-published behavioral insights research.
- We are not prepared to give weight to the unpublished OSC research cited in the Proposals as being reflected in the templates, as OSC staff have refused to share this research with stakeholders. If the OSC and CSA have enough confidence in this research for it to form a basis for proposed rules, they should have enough confidence to share it with stakeholders.
Given the importance of total cost reporting for investor protection, and the resulting need to move swiftly with adoption and implementation, we hope the CSA corrects course sooner rather than later.