Embedded commissions, deferred sales charges, a best interest standard, transparency – all of these issues and more have enveloped the mutual fund industry around the world in the last few years. And if regulators are right, there will probably be more issues to come.
“It’s opened our eyes on how interconnected we all are,” said Jean-Paul Bureaud, director with the office of domestic and international affairs at the Ontario Securities Commission (OSC) in a conversation with regulators from the United States and the United Kingdom.
Bureaud told the September annual meeting of The Investment Funds Institute of Canada (IFIC) that regulatory interests in the recent past have focused on calming the financial system in different parts of the world. Taking the lead on that has been the Financial Stability Board (FSB), whose mandate primarily covers the G20 countries.
In the meantime, in addition to strict regulatory risk, the International Organization of Securities Commissions (IOSCO) now wants regulators around the world to do more and emphasize market conduct, he said.
International tax rules and legislation from different parts of the world can potentially have major effects on other countries around the globe, agreed Jonathan Lipkin, director of policy, strategy and research at the Investment Association, IFIC’s British counterpart.
One example is the Markets in Financial Instruments Directive (MiFID), that increases transparency across the European Union’s financial markets, standardizing regulatory disclosures required for particular markets, he said.
These pressures are on top of each country’s internal issues, such as the Retail Distribution Review, which came into effect in the UK in December 2012, bringing with it the end of embedded commissions, higher qualifications for financial advisors and greater transparency for investors. The upheaval for clients at first was quick and strong as many advisors stopped providing financial advice to clients of only modest means.
“There’s been a relentless period of change over the past five to 10 years in the UK,” said Lipkin.
Now add on the increased use of technology, including fintech and robo-advisors, and there will be even more challenging times ahead for the industry, said Tim Cameron, head and managing director of the asset management group with the U.S. Securities Industry and Financial Markets Association (SIFMA).
Canadian regulators echoed those issues, adding to the list topics such as electronic signatures and cyber security, as well as aging demographics and referral arrangement practices.
Compensation and incentives
Meanwhile, over the past year, the Mutual Fund Dealers Association (MFDA) centred some of its concerns on compensation and incentives. The MFDA issued a report in December following a mandatory request for advisors to submit information and generally found many different practices that vary in the potential to incent advisors, Karen McGuinness, senior vice president, member regulation – compliance, told the conference.
They included: compensation practices that incent trading in funds with deferred sales charges; compensation generated from referral arrangements and compensation arrangements that favour the sale of proprietary mutual funds.
The report stated that the MFDA will take action against those who do not comply with requirements and will watch how their members control conflicts on incentive programs.
The British Columbia Securities Commission is focusing on certain rules like CRM2, said Janice Leung, manager, advisor/investment fund manager compliance with the BCSC.
The BCSC recently issued the results of a longitudinal study on the impact of CRM2 on investors’ knowledge of mutual fund fees. The results indicate that just over half of investors who had less confidence and investment knowledge at the beginning of the study increased their knowledge of mutual fund fees after receiving their CRM2 reports.