In recent years, billions of dollars have been pumped into market-linked guaranteed investment certificates. Though they have gone largely undetected by regulators radar until now, that situation could change with the planned review of the federal financial services legislation in 2006.
Although they are becoming more complicated, market-linked guaranteed investment certificates (GICs) remain loosely regulated compared to other financial products. Though the Financial Consumer Agency of Canada (FCAC) does track sales to ensure full divulgation about return rates, it does not, nor does any other regulator, exercise control over divulgation of risks or strategies put forward by managers.
Bruno Levesque, team leader for consumer education at FCAC, thinks index-linked products have become harder to understand, with some GIC returns now linked to hedge fund or other alternative strategy returns.
GIC products can be bought with fixed or variable returns or a mix of the two. Returns can be capped, management fees can vary. Returns can depend on a single portfolio manager or on several. Some returns depend on stock markets, some on bond markets, and some on a mix of the two.
That is why Mr. Levesque believes that index-linked GICs will be one of the items to be examined at a five-year review of financial services by the Ministry of Finance.
That said, in its three year existence, FCAC has fielded 299 complaints about GICs in general, but only eight of those were related to index-linked GICs. In those cases, the principal issues were about a need for more information or about the way the interest rates were divulged.
National Bank of Canada vice-president for credit and investment solutions, Jean Blouin, recognizes that the difference between the current regulations applying to mutual and hedge fund sales, and those applying to market-linked GICs, is an advantage for the institutions selling the GICs. Since those investments are protected deposits, he says, there are less legal formalities to run through in selling them.
National Bank’s Active Management GIC, for example, links the entirety of its potential return to the results of active management. If the underlying markets decline, the investor would not make any money.
The term of the National Bank product is five-and-a-half years, and the Canadian Deposit Insurance Corporation (CDIC) does not protect it.
That’s one of the things that should probably be explained more clearly, allows Mr. Blouin. He notes that this particular product is identical to an equivalent five-year product that is covered by the CDIC, and thereby may be less contentious.
A federal official with the Ministry of Finance noted that regulations made in 2002 already deal with index-linked GICs. The Index-linked Deposits Interest Disclosure Regulations specify how and when deposit interest must be divulged. The official said for the moment the Ministry is satisfied to monitor the situation.