OSC to ban deferred sales charges on mutual funds next year

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TORONTO — The Ontario Securities Commission is moving to ban deferred sales charges on mutual funds — a move that will harmonize the watchdog’s policy on such fees with the rest of the country.

The securities regulator announced Friday that it is preparing to prohibit the payment of upfront sales commissions by fund organizations to dealers.

Deferred sales charges are paid by investors when they withdraw money from mutual funds before a set date.

Critics oppose such fees because advisers earn upfront commission higher than they would on other types of mutual funds, potentially incentivizing them to push DSC funds over ones with lower costs.

Though the Canadian Securities Administrators announced a ban on such charges last year and critics have long called for the OSC to follow suit, the regulator was unwilling to make a change until now.

The OSC attributed the decision to support for a harmonized DSC ban it recently received from industry stakeholders.

“In moving forward with the ban on DSCs, the OSC also considered the decline in the use of the DSC option in Ontario, as well as advances in industry innovation,” said a release from the regulator.

“Recent innovation in the industry has provided Ontario investors with access to affordable investment options, as well as access to investment products and advice with more affordable and transparent compensation models.”

It also heard concerns that the OSC’s proposed rule would create a two-tiered regulatory approach in Canada and would be burdensome for industry to implement and monitor.

But the regulator is moving forward anyway and expects its new policy to take effect next June.

The Portfolio Management Association of Canada, which represents more than 290 firms managing $2.8 trillion in assets, applauded the decision.

“It is a step toward greater transparency that will give Ontario investors more control of their investments with fewer surprises,” said PMAC President Katie Walmsley in a release.

Her organization long advocated for the elimination of DSC plans because CSA research showed fee structures associated with the plans are often confusing and investors don’t understand when they are charged with early redemption fees.

Clients who are locked into DSC plans may feel restricted from making changes to their investment portfolios or withdrawing funds when cash is required, PMAC said.

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