March 2024

In this month's newsletter, we delve into the issue of major banks restricting their clients from buying other firms’ mutual funds. We discuss the concerns raised by the Financial Services Regulatory Authority of Ontario (FSRA) regarding the adequacy of training provided to life insurance agents, and the potential harm if their clients’ needs are not being met. Lastly, we highlight Fraud Prevention Month in March by sounding the alarm on recovery scams. Read more…

Big Banks’ Decision to Limit Mutual Funds Raises Competition Concerns

In 2021, regulators introduced the Client-Focused Reforms (CFRs) to improve investor protection. The CFRs are meant to prioritize the interests of investors over those of banks and investment firms.

Sadly, in September 2021, RBC, TD Bank and CIBC opted to limit their clients’ choices in their bank branches by no longer selling mutual funds from other firms. This move was in response to the know-your-product rules in the CFRs. Rather than training their representatives to understand mutual funds from third parties, they simply decided to restrict their clients’ options.

This decision counters the intent of the CFRs and raises competition concerns.

Banks dominate the mutual fund market. In 2020, research by the Mutual Fund Dealers’ Association (now part of the Canadian Investment Regulatory Organization (CIRO)) found that Canadian investors held approximately $1.7 trillion in mutual funds. Deposit-taking firms controlled about 70% of the distribution of these funds and almost 60% of the management of the total mutual fund assets.

Research by the International Monetary Fund (IMF) and the Competition Bureau also shows strong concentration in Canada’s financial services market and a lack of competition. The IMF’s 2019 review found that the six largest banks and Québec’s major credit cooperative group accounted for about 90% of deposit-taking sector assets. A recent Competition Bureau study showed a decline in competitive intensity in Canada over the past two decades. This means businesses are less likely to lower prices or innovate, which is bad for consumers.

Consumer-driven banking (also known as open banking) would make it easier for consumers to move assets from one financial institution to another.

The banks’ decision further strengthens their dominant market position to the detriment of consumers. It could lead to extra costs for consumers who decide to switch banks, or to buy mutual funds at more than one bank to access a wider product selection.

We are pleased that the federal government is considering this issue. In a recent consultation on strengthening competition in the financial sector, the Department of Finance asked whether it should require or incentivize large banks to offer third-party products. To improve competition and better serve consumers, we believe it should.

The government should also explore other ways to strengthen competition and empower consumers. For example, consumer-driven banking (also known as open banking) would make it easier for consumers to move assets from one financial institution to another.

This issue is also on the radar of securities regulators. The Ontario Securities Commission plans to work with CIRO and the Canadian Securities Administrators to investigate how banks and other registrants approach their shelf composition. We hope to see a collaborative approach to this issue between governments and regulators that puts investors first. 

FSRA Needs More Powers to Protect Consumers From Bad Actors

FSRA has recently uncovered concerning issues in Ontario’s life insurance sector, particularly regarding:

• Tiered-recruitment business model managing general agencies (Tiered MGAs), and

• Sales of universal life insurance policies.

Tiered MGAs are managing general agencies that operate like a multi-level marketing scheme. Insurance agents with Tiered MGAs are compensated for their own insurance sales and for those of agents they recruit.

FSRA is concerned with Tiered MGAs because their business model may create incentives to recruit more agents, instead of focusing on whether new agents should hold a license or understand customers’ needs. Tiered MGA agents account for approximately 20% of licensed life insurance agents in Ontario.

Universal life insurance policies are complex products that combine flexible permanent life insurance with the ability of policyholders to invest extra contributions on their own terms. Agents must carefully manage universal life insurance policies; they are not suitable for all customers.

If unsuitable parties are licensed to sell insurance, or if life insurance agents sell unsuitable insurance, Ontarians may be at significant risk of financial harm.

FSRA’s recent examinations raise serious concerns about the training and supervision of life insurance agents with Tiered MGAs. It also raises questions about how fairly insurance customers are being treated. In an examination of 130 life insurance agents with Tiered MGAs, FSRA cited 50% of those agents with 184 contraventions of the Insurance Act (Ontario). In addition, more than half the insurance products those agents sold in 2020 and 2021 were universal life insurance policies.

In a separate examination of 24 customer files of Tiered MGA life agents, 80% of the files did not have an analysis showing the universal life insurance policy was appropriate for the customer. FSRA also found substantial problems with retirement advice and with unrealistic or misleading assumptions.

If unsuitable parties are licensed to sell insurance, or if life insurance agents sell unsuitable insurance, Ontarians may be at significant risk of financial harm.

We were pleased to see FSRA proposed guidance about how it will decide if individuals, corporations, or partnerships are suitable to hold a life insurance license. We support FSRA clarifying how the following matters will affect whether FSRA will consider an agent suitable to hold a life insurance license:

• Criminal charges and convictions.

• Breaches of laws, regulations, or rules.

• Bankruptcy or insolvency.

• Not following FSRA Guidance (including guidance about fair treatment of customers).

• False statements, material omissions, or other dishonesty.

• Failure to diligently perform any activity that an agent agrees to perform on behalf of an insurer or another agent.

While FSRA’s proposed guidance is a welcome addition to its toolkit to hold the insurance sector accountable, we strongly recommend the government give FSRA more powers (including rule-making powers). This will help to ensure that FSRA can protect Ontarians from bad actors in the insurance sector.

You can read our recent comment letter about this here.

Fraud Hurts: Highlighting the Recovery Scam

Fraud Prevention Month has arrived, and it is crucial for Canadians to inform themselves about the evolving landscape of financial fraud.

Canadian Anti Fraud Centre (CAFC) data shows that reported fraud losses skyrocketed to a staggering $554 million in 2023.

This month, we are highlighting a scam that has become more prevalent as fraud moves online: the recovery scam. These scams target people who have already fallen victim to fraud, offering false hope of reclaiming lost funds. These cunning scams take advantage of those who are already in vulnerable situations.

After an individual has lost money to fraud, scammers may contact them by phone or email posing as lawyers, government officials, regulators, or even financial advisors. These fraudsters claim they can recover lost funds—for a fee, of course.

Once the fraudster has a victim on the hook, they will trick that person into paying money or divulging personal information, such as bank account details. Then the scammers disappear with the money or personal information.

Spotting a recovery scam requires skepticism and vigilance. Here are five red flags to watch for:

Unsolicited Contact: Be cautious with unexpected calls, emails, or messages from individuals claiming to help recover lost funds. Legitimate recovery efforts usually do not involve unsolicited outreach.

Pressure Tactics: Scammers often use high-pressure tactics, insisting on immediate action or claiming there is a limited window for recovery.

Upfront Payments: Legitimate recovery services do not demand upfront fees. Be wary if asked for payment or personal financial information, especially if someone is guaranteeing a return.

Check Registration: Verify the credentials of anyone offering recovery services. Remember, Canadian regulators do not directly recover funds for investors.

Trust Your Gut: If something feels too good to be true, it probably is. 

The best defence against fraud is to educate yourself about how fraudsters operate. This Fraud Prevention Month, arm yourself with resources from the CAFC and FAIR Canada’s A Guide to Protect Yourself Against Investment Fraud.

What’s New

Choosing an investing app that is right for you – Nova Scotia Securities Commission

For self-directed investors, the online landscape is overflowing with investment platforms boasting downloadable apps. However, the trick is finding the right app for your needs and understanding how to use it to your advantage. The Nova Scotia Securities Commission lays out key considerations in their article Are all investing apps the same? Choosing an investing app that’s right for you:

• Is the investing app registered? Ensure your selected investing app is registered with securities regulators by checking the CSA National Registration Search.

• Avoid red flags of fraudulent investment apps. Stay clear of suspicious offers to download investment apps, including unsolicited email and social media messages.

• Fees and features. Fees and features can vary between different investing apps, so ensure you know the costs involved.

Read the article to learn more about which app might be right for you. 

Throughout the year, FAIR Canada submits many comment letters on various important policy and regulatory matters that have an impact on investors. Read more about our investor advocacy work.

We’d Love to Hear From You!

Do you have feedback on our newsletter or suggestions for topics you’d like us to write about? Your input is valuable and will help us improve our newsletter content for loyal subscribers like you. Please email us at info@faircanada.ca with your comments and/or suggestions.

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To learn more about our advocacy for investors, visit FAIRCanada.ca