The Ontario Securities Commission has blocked two of the leading players in Canada's burgeoning education savings plan sector from taking on new business and put a host of restrictions on others in a crackdown on an industry it says is rife with problems.
Canadians have plunked $12.8-billion into registered savings plans to help finance the mounting cost of postsecondary education for their children. Growth in these plans has exploded from $2.5-billion in assets in 1998, when the federal government introduced the Canada Education Savings Grant. The grants add 20 per cent to the first $2,000 in contributions each year.
In Ontario alone, 14 firms are registered with securities regulators as scholarship plan dealers, including eight fund companies. The OSC announced Thursday that it has uncovered numerous problems involving the business, sales and disclosure practices of six firms. As a result, it has slapped conditions on the registrations of these firms for an indefinite period until the problems are corrected. Two of the firms are barred from hiring new sales staff and opening new branches.
The three largest players involved, Allianz Education Funds Inc., CST Consultants Inc. and USC Education Savings Plans Inc., account for nearly $5-billion in assets and more than 600,000 plans.
OSC officials said Canadians with plans at these firms have no reason to worry about the safety of their investment, because the problems mainly deal with how the companies operate their business.
“The issues that were raised don't relate to prudential issues or accounting. They relate to sales practices,” said OSC enforcement director Michael Watson.
Paul Renaud, an executive member of the RESP Dealers Association of Canada and a vice-president of USC, said the industry has been working with the OSC and other provincial securities regulators for the past year on the issues raised.
“Certainly the report, as it has been presented, can be read as somewhat of a concern,” Mr. Renaud said. “A lot of [the issues] have been addressed and satisfied and the remaining ones we are very confident that all of the members will be able to quickly and completely address them in very short order.”
The OSC, however, said the industry has been dragging its feet in dealing with the problems. The regulator said the Alberta Securities Commission prepared an industry report on common deficiencies with scholarship plan dealers in 2002. A year later, many of the deficiencies were still prevalent during a national compliance review done by several provincial regulators, the OSC said.
The commission says it plans to closely monitor scholarship plan dealers and is considering new rules to better regulate the industry. It said it has not ruled out enforcement action if compliance is not “swiftly and thoroughly” improved.
Kevin Connolly, president and chief executive officer of Toronto-based Allianz, said the industry welcomes the regulatory scrutiny.
“We've been trying to get their attention for years and all of a sudden now we have their attention,” he said. “We have work to do to move more toward the industry practices that they expect. This is normal evolution for our industry that we have to take seriously.”
The two companies that have been barred from taking on new business effective immediately are USC, which manages $1.6-billion in assets, and Global Educational Marketing Corp.
Three of the firms — Allianz, CST, and Children's Education Funds Inc. — are required to report monthly to the OSC.
H&R Block Canada Financial Services Inc., a relative newcomer to the industry, has been barred from having employees in sister company H&R Block Canada Inc. sell scholarship plans.
Todd McCallum, president of H&R Block Canada Financial Services, said the regulator wants the tax preparation business kept separate from the scholarship plan operation.
The OSC says in its report that it found numerous problems at the funds, including: inadequate and ineffective supervision of sales staff; significant weaknesses in reviewing whether investments are suitable for clients; no review of trades by branch managers; and inadequate disclosure of the fees associated with purchasing scholarship plans.
In some instances, fees to enroll in a fund were misrepresented, leading clients to believe that the potential for loss was nil, the report says. The report also says there were many instances of misleading marketing. These included: outdated information in pamphlets and brochures on the value of assets under management; products that were represented as “risk-free,” “fully protected” and over all as bearing no risk to clients; and saying the products had been endorsed by government agencies.
The OSC also found that many firms did not keep adequate books and records. Client statements of account were not sent out monthly and contained misleading information, it said. The statements also omitted relevant information such as investments made to date.
Another issue raised in the report was that CST and USC are private companies affiliated with non-profit foundations. This can lead to misleading marketing, the commission said.
Peter Lewis, a vice-president at CST Consultants, said the firm — the largest in the industry with nearly $2-billion in assets under management — is a for-profit company wholly owned by a non-profit entity. CST acts as a sales arm for the foundation, which receives all the profits, he said
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