Investor advocates would like the federal government to require or incentivize Canada’s big banks to offer third-party products, particularly mutual funds.Andrew Lahodynskyj/The Canadian Press
The federal Finance Department is studying whether large banks should be required to sell products and services from independent companies, a review that escalates the Ontario government’s concerns about competition in the financial services sector.
In September, 2021, Royal Bank of Canada RY-T, Canadian Imperial Bank of Commerce CM-T and Toronto-Dominion Bank TD-N, three of the country’s largest financial institutions, shrank their product shelves and stopped selling other companies’ investment funds to clients of their financial-planning divisions. These third-party funds, including mutual funds popular with small investors, were typically sold by financial advisers and planners working in bank branches. Employees at the three banks are now restricted to selling proprietary funds, which are run by the banks themselves and compete with the third-party products.
Shortly after the banks cut off access, Ontario Finance Minister Peter Bethlenfalvy publicly expressed concern and directed the Ontario Securities Commission to study the matter. The results of the OSC’s review, completed in 2022, have never been made public.
The federal government is now taking up the issue as part of its broad review of competition in the banking sector, which it launched on Dec. 21 – the same day it approved RBC’s takeover of HSBC Bank Canada.
As part of a call for public comment on the review, the government sought feedback on several competition-related concerns through a series of nine questions. One of those questions was about whether large banks should be “required or incentivized” to offer third-party products and services.
The public comment period ended in early March, and the responses the government received have not been posted publicly. But individual respondents have the right to publish their own commentary.
One group that chose to do so is investor advocate FAIR Canada, which wrote in its submission that the federal government should require or incentivize Canada’s big banks to offer third-party products, particularly mutual funds.
“Unfortunately, several banks have chosen to restrict their mutual fund product shelves to proprietary, limiting options for bank branch customers,” FAIR Canada’s chief executive officer, Jean-Paul Bureaud, said in the group’s response to the government. “... Disappointingly, the banks chose to prioritize their own interests over those of their clients.”
Mr. Bureaud said the banks’ decision has “reduced choice” for consumers and “entrenched” the banks’ dominant market share in mutual funds.
He added in an interview that federal involvement here is crucial. “These issues are complicated, and I don’t think provincial governments can dictate to the banks,” he said. “That’s why I think it’s going to require dialogue between different levels of government to address the fundamental problems here.”
Canadian investors held more than $2-trillion in mutual fund assets as of February, 2024, according to the Investment Funds Institute of Canada.
Fifteen years ago, independent fund companies accounted for 51 per cent of the net assets in the fund industry, while banks and credit unions made up only 38 per cent, according to research conducted by Investor Economics, a division of ISS Market Intelligence. As of March, 2023, the independents had dropped to 36.6 per cent, while the banks and credit unions had surged to 50.4 per cent.
When the three large banks restricted access to outside funds, they argued they were doing so in response to new regulatory rules, known as client-focused reforms. These rules require advisers to have deeper knowledge of the investment funds they recommend to clients. The banks claimed this meant financial planners could offer only proprietary products. (Currently, the banks’ full-service brokerage accounts for do-it-yourself investing clients do not have these restrictions.)
When Mr. Bethlenfalvy, the Ontario Finance Minister, called on the OSC to review the banks’ decision, he wrote in a letter to the commission that the banks’ actions appeared to “run counter” to the underlying intent of the client-focused reforms, which were designed to mitigate conflicts of interest and ensure that investors have access to the products that best meet their needs.
In February, 2022, the OSC completed its review and submitted its recommendations to Mr. Bethlenfalvy. Since then, both the OSC and the Ontario Ministry of Finance have not publicly disclosed the recommendations. In February, 2023, the OSC denied The Globe and Mail access to the report in response to a freedom of information request. At the time, the OSC said the recommendations were not being released publicly because they fall under an exemption for “advice to the government.”
In the OSC’s draft statement of priorities for this year and next, the regulator said it was concerned about what impact “predominantly proprietary products shelves” may have on client outcomes if independent products are not readily available for investors and their advisers to consider. The OSC cited higher fees and inferior performance as examples of potential consequences.
Finance Department spokesperson Caroline Thériault said the federal government is currently reviewing the public comment letters it has received.