CSA takes big step towards ban on embedded commissions

CSA moves forward on embedded commissions ban

CSA rejects waiting for major regulatory reforms


CSA has released a notice indicating that securities regulators are on course to ban embedded commissions.

“After thorough examination, the CSA finds that the prevailing practice of remunerating dealers and their representatives for mutual fund sales through commissions, including sales and trailing commissions, paid by investment fund managers (embedded commissions) raises a number of investor protection and market efficiency issues that suggest a need to consider change,” says the notice.

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A key argument against banning commissions is that CSA should wait until major regulatory reforms, such as CRM2, have had time to reshape the advisor-client relationship. The cumulative impact of these reforms, the argument goes, could make a commission ban at best unnecessary, at worst confusing and disruptive.

CSA’s notice appears to reject this argument. After referencing CRM2, Point of Sale and the recent batch of proposals focused on the best interest standard, the notice states that while these initiatives “may help address some” of the investor protection and market efficiency issues raised by embedded commissions, they’re probably not enough.

“This Notice communicates that, while the CSA continue to evaluate and monitor these initiatives, we have decided to consult on the further option of discontinuing embedded commissions and transitioning to direct pay arrangements.”

These direct pay arrangements, according to CSA, would:

  • directly engage investors in the dealer/representative compensation process,
  • deliver greater clarity on the services provided and their costs, and
  • better align the interests of fund industry participants and investors.

CSA acknowledges that discontinuing embedded commissions would be a major shift for the industry. So before releasing formal proposals, it will “consult on the impact such a change could have on Canadian investors and market participants and on the ways in which any negative impacts could be mitigated through the design and implementation of potential transition measures.”

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Keep an eye out for the consultation paper this fall.

This article was originally published on Advisor.ca