IFIC slams

(February 2, 2004) The head of IFIC is calling on the Canada Deposit Insurance Corporation (CDIC) to stop its ad campaign, which he calls critical of the mutual funds industry.

“We request that CDIC stop the targeting of mutual funds in its advertising,” read a letter to the CDIC from Tom Hockin, IFIC president and CEO. “We have received reports of clients and investors calling their financial advisors because of fears created by these ads. Surely this is not a responsible approach by an agency of our federal government.”

The ads, which have been appearing on TV and in print, remind Canadians that deposits in GICs, savings and chequing accounts are insured for up to $60,000. The ad also points out that CDIC coverage does not extend to investments such as mutual funds.

“The impression the ad gives is that mutual funds are a bad investment,” Hockin says. “They’ve done this before and I’ve written to the chair of the board before, but this is the biggest campaign that they’ve launched.”

“My response is surprise,” says J. P. Sabourin, president and CEO of CDIC. “I haven’t seen his letter, although he says he sent it last week — we have not received his letter. His press release this morning was a surprise to us. Our public campaign is focused on getting Canadians the information they need before making an investment decision.”

Sabourin says a recent CDIC survey showed 34% of Canadians thought mutual funds were covered by the insurance, while 40% said they did not know — leaving 74% in the dark over the issue.

“When 74% of the population is not well-informed about the insurability of mutual funds, we felt we had an obligation as a federal Crown corporation, to fulfill our mandate and inform the public about what is and what is not insured by our system.”

The insurance is in place primarily to protect the depositor should the deposit-taking institution fail. But Hockin says such a failure in the mutual fund industry would not threaten an investor’s holdings.

“When you buy mutual funds they’re sent to a custodial trustee and held on your behalf,” Hockin said in an interview. “If the institution that sold it to you went bankrupt, it would in no way affect your ownership. That’s why you don’t need CDIC-style protection.”

Sabourin says such risk to investors is not the focus of the ad campaign, admitting that the trustee structure does afford protection. The real issue is that the Canadian public still seems to be under-informed about CDIC, he explains.

“[Hockin’s] release says he has received reports of investors calling their financial advisors. Well, I’m pleased to see that,” Sabourin says. “Obviously these people thought they were insured, or they didn’t know, and they should find out about it.”

The CDIC says it has protected investors from the fallout of 43 failed institutions since 1967 and paid out $24 billion to depositors. Hockin points out there has never been a mutual fund company failure over the same period.

“We did inform IFIC of the results of our survey and we suggested we work closely together since we think we all have an obligation to ensure the public has at its disposal a number of avenues to correct information, so Canadians make appropriate financial decisions,” says Sabourin. “IFIC has not taken up our offer or responded to our invitation to work together.”

“If they want to clarify what’s covered or not covered, they should be doing it on point-of-sale materials,” said Hockin. “I’m sure they’ve got something in there, but it must be so obscure that people don’t understand what products are covered and what aren’t.”

He says this is the approach of the fund industry, which is compelled to explain to the investor what risks they are assuming when they purchase a fund.

“The fund industry is the most heavily regulated industry in Canada, outside of the nuclear industry I’d argue,” Hockin says. “If you read the prospectuses, all of these things are made clear. This is a security and you’re participating in the market.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(02/02/04)

Steven Lamb