Fund investors to get full cost disclosure, eventually

CSA and CCIR finalize CRM3 rules, give industry until 2026 to adopt

A long-awaited effort to enhance cost disclosure to investors — covering both investment and segregated funds — has finally dropped, but it will be several years before investors actually get that information.

The Canadian Securities Administrators (CSA) are adopting new total cost reporting (TCR) requirements for investment funds (mutual funds, ETFs and scholarship plans), which expand on the disclosures introduced under phase two of the client relationship model (CRM2) reforms in 2016.

Initially dubbed CRM3, the new requirements will provide investors with annual disclosure of all the embedded costs of owning funds, including management expense ratios (MERs) and trading expense ratios (TERs) in both dollar and percentage terms.

The CRM2 reforms began the practice of demystifying these embedded costs for investors by requiring that they receive annual disclosure of trailer fees. The new requirements are intended to ensure that investors start to get ongoing disclosure of all the expenses that impact their returns. At the same time, insurance regulators are adopting similar requirements for segregated fund investors.

In a notice detailing the reforms, the CSA and the Canadian Council of Insurance Regulators (CCIR) said the changes represent their joint effort to improve disclosure to investors, and ultimately to enhance investor outcomes.

“One important concern which we aim to address is that there are currently no requirements for securities industry registrants or insurers to provide ongoing reporting to investors and policy holders on the amount of such costs after the initial sale of the investment product, in a form which is specific to the individual’s holdings and easily understandable,” the regulators said. They added that providing this sort of disclosure will enhance investor protection by better arming investors to monitor and manage the costs of their portfolios.

For seg fund owners, insurance regulators are also expecting the new requirements to improve investors’ “awareness of their rights to guarantees under their segregated fund contracts and how their actions might affect their guarantees,” the notice said.

However, it will be 2027 before investors begin getting these enhanced disclosures.

While the regulators have been working on these reforms for several years, in response to industry concerns about the cost and complexity of complying with the new requirements, the regulators are granting an extended transition period.

The new requirements won’t take effect until 2026, with the year ended Dec. 31, 2026, being the first period that firms will be required to provide reporting to clients.

In addition to the extended transition period, the final amendments are also intended to accommodate other industry implementation concerns by requiring annual reporting (rather than monthly or quarterly reporting on clients’ account statements, which had been considered), allowing flexibility in calculating the amounts reported to investors, and (at least initially) excluding certain products (prospectus-exempt funds and labour-sponsored funds) from the requirements, among other changes to the draft proposals.

As with the CRM2 reforms, it’s expected that the industry self-regulatory organization (SRO) will adopt its own rule changes to harmonize with the new CSA requirements.

The regulators also indicated that they intend to establish a joint implementation committee, including the SRO, to provide guidance and help industry firms adopt the requirements.

“Investors need to be aware of and understand the costs they pay to assess the value they receive and to make informed decisions,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission, in a release.

“These changes will bolster investors’ and policy holders’ awareness of the ongoing embedded costs of owning investment funds and individual segregated fund contracts, including management fees and trading expenses,” he said. “This additional transparency will help investors ask their dealing representatives and life insurance agents the right questions and make better-informed decisions, which should ultimately result in better investing outcomes.”

“The Canadian Council of Insurance Regulators supports consumers having full and complete information when making their financial decisions,” said Robert Bradley, chair of the CCIR. “With that in mind, we’ve worked collaboratively with other financial services regulators and industry to bring forward today the total cost reporting requirements for individual segregated fund contracts and investment funds. Insurance regulators continue to expect the insurance industry to bring to market the TCR insurance guidance in a time frame which is consistent with the investment sector.”

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