The Ontario Securities Commission cracks down on RESP sector
Friday, Jul 16, 2004
By KAREN HOWLETT AND PAUL LDIE
The Ontario Securities Commission
1)禁止2家公司銷售, USC and Global Educational Marketing Corp.
2)要求3 家公司每月回報. Allianz, CST, and Children's Education Funds Inc
USC Education Savings Plans Inc. and Global Educational Marketing Corp. cannot hire new sales staff or open new branches under conditions placed on their registration by the Ontario Securities Commission. They have not been barred from doing new business. USC is a wholly-owned subsidiary of the not-for-profit International Scholarship Foundation.
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.
[color=red:ebf18324f9]Another issue raised in the report was that CST and USC are private companies affiliated with non-profit foundations. [/color:ebf18324f9]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.
Take matters into your own hands with your RESPs
Last Updated: 2/15/2005
Article ID: 489
Financial adviser Mike Morrow has noticed a difference in the way people invest for themselves and for their children through registered education savings plans.
"They say, I don't mind losing my money, but I don't want to lose my kid's money," says the proprietor of Morrow Financial in Thunder Bay.
Backing up this insight is the more than $5-billion invested in RESP scholarship trusts, which are the savings vehicle recently targeted by the Ontario Securities Commission because of their sales practices.
Scholarship trusts are a relatively safe, conservative way to invest for your child's university education. And yet, most people would be better off with a simple self-directed plan available from financial advisers, brokers and do-it-yourself on-line brokers.
The problem with scholarship trusts is partly the sales practices mentioned by the OSC, which include inadequate disclosure or misrepresentation of fees, lack of supervision of sales staff and exaggerated claims about zero risk.
Worse still are the many fees, rules and conditions that scholarship trusts impose on their investors. "I don't want to beat up on scholarship trusts, but I just think they're too confusing," Mr. Morrow said.
Scholarship trusts have been around for more than 40 years and now claim a little more than one-third of the total assets invested in RESPs. The sales pitch is folksy -- lots of pictures of shining-faced graduates and babies wearing mortarboards, plus scary numbers showing how expensive a university education is becoming.
These trusts differ somewhat from product to product, but generally they consist of a pool of investor money that is invested in safe securities such as government bonds, Treasury bills, guaranteed investment certificates and insured first mortgages. Annual returns in recent years have been in the 5-per-cent range, which isn't bad in the current low-rate environment.
As an investment, Mr. Morrow likened scholarship trusts to a bond fund. But you'd have to work hard to find a bond fund with the same level of fees and complex rules as scholarship trusts.
The fees are so onerous that even scholarship trust salespeople don't like to talk about them. The OSC listened to these sellers in action and too often found that salient details about fees were missing.
For this practice, and for others that included inadequate supervision of sales staff, the OSC imposed terms and conditions on five scholarship trusts, including the three largest players -- Allianz Education Funds Inc., CST Consultants Inc. and USC Education Savings Plans Inc.
The OSC said the issue of fee disclosure mainly concerns enrolment costs that people must pay when they join a scholarship trust. One trust has an example in its prospectus where someone invests $95 a month and pays $1,070 in enrolment fees during the first year, or almost 94 per cent of the total invested.
An example of the lack of fee disclosure found by the OSC: In some cases, people weren't told that if they withdrew early from a trust, they were in a position to lose some of their contributions because they had not yet covered all their enrolment fees.
Mr. Morrow is acquainted with scholarship trusts because he invested in one almost 10 years ago for one of his children. He's in a position to recoup his enrolment fees when money is withdrawn from the plan to pay for his son's postsecondary education (without interest), but he said there might be other trusts where you don't get the enrolment fee back.
If the fees don't put you off scholarship trusts, then check out the rules. Bowing out or making changes in your contributions can't be done without triggering all kinds of consequences, some of them potentially costly.
It's no wonder that scholarship trusts have seen their share of the money invested in RESPs drop to 36 per cent as of mid-2003 from 53 per cent in 1998, which is the year that Ottawa announced that it would match RESP contributions of up to $2,000 a year with a grant of 20 per cent.
Banks and brokers appear to be picking up market share at the expense of scholarship trusts, and that's just fine. Bank-sold funds and GICs can be a decent foundation for an RESP, especially when you consider that there are no fees other than maybe an annual administration fee of roughly $50 or less (fund management fees apply, of course).
The best approach is a self-directed plan held with a bank, broker or financial adviser that allows you to mix funds, stocks and bonds. Want to invest conservatively? With a self-directed account, you could buy a ladder of strip bonds and a dividend fund and then sit back.
Annual administration fees are usually charged on smaller-sized self-directed RESPs, but that's a fair a price to pay for the sort of freedom you'll never have in a scholarship trust.[/url]
a) for annual contribution, one cst unit only requires 17 contributions and one heritage unit requires 18 contributions;
b) cst plan is more flexible such that a students can choose four independent programs. (min. full time study 3 weeks and 10 hr per week) heritage plan requires 2-yr min. in order for a student to select a "scholarship option" which pays by "units"
c) both plan refund the principal back the parents in yr 1 at maturity, but cst starts to pay 1/4 of the profits (usually interest + government grant) to the students starting from yr 1 while heritage plan start to pay the profit starting from yr 2.
d) cst refunds the enrolment fee at 25% each yr for 4 years. heritages MAY refund 25% or 50% or 100% starting from the 2nd yr depending on the scholarship option selected.
heritage scholarship options are:
i) prinicipal refund in yr one + 1 scholarship payout
this option MAY refund 25% membership fee;
ii) prinicipal refund in yr one + 2 scholarship payout
this option MAY refund 50% membership fee;
iii) prinicipal refund in yr one + 3 scholarship payout
this option MAY refund 100% membership fee;
* pls note that three options pay different $ per unit. therefore, if you select option i), you will get a lot less $ than option iii); unlike someone suggests that if you choose i) you will get "all" your money back w/ 2 yr of study;
e) cst has a special "enrolment fee refund" fund set aside for future enrolment fee refund. heritage doesn't have this fund available. in heritage's prospectus, it says that heritage "may" refund % membership fee depending on the scholarship option selected;
f) in terms of total assets, total scholarship payout pay out per yr, plan history, etc. etc. cstplan is more solid than heritage plan.
however, both plans are group RESP and therefore both plan invests according to the National Policy #15 - whichs says that both plan should only be investing in gic, t.bill, goverment bonds - safe and secure investments.
for those of you who think that a mutual fund will charge you less fees, try this mutual fund fee calculator. every single mutual charges fees: sales chg: front load OR rear load + MER. many sales will say there's no fee. most mutual fund express their fee in % not in $ amt. it will shock you when you convert that % into $ amt:
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