Regulators have introduced new disclosure requirements for scholarship plans, in an effort to address inadequacies that are hurting some especially vulnerable investors. Of special concern are the often complex designs that differ from the more widely sold individual and family RESPs. These often leave unwitting subscribers with obligations and risks for which they are unprepared.
The revamped guidelines, released by the Canadian Securities Administrators (CSA) on Jan. 10 and scheduled to come into effect on May 31, will require scholarship plans to provide a four-page summary document. The goal is to present information about risks and costs in standard format that's easier for potential investors to understand.
"Many of these investors have little to no financial literacy. In some instances, they may not speak or understand English or French as a first language, making the information in the prospectus even more difficult for them to access," said the CSA in its notice for implementation of the new disclosure form. The CSA is made up of provincial and territorial regulators across Canada.
Anecdotal evidence points specifically to early-stage fees and strict contribution schedules as especially problematic. Toronto Star columnist and consumer advocate Ellen Roseman recently recounted the tale of a family who bought into to a scholarship trust, only to find the bulk of the more than $2,000 they contributed was earmarked for marketing and administrative fees when the beneficiary, their daughter died at the age of two.
Regulators reviewed prospectuses, conducted compliance reviews and went further in developing the new guidelines, says Rhonda Goldberg, director, investment funds with the Ontario Securities Commission. "This disclosure document was subject to two comment periods as well as a lot more informal consultations with all stakeholders, including industry and investor advocates," says Goldberg.
Also helping to inform the new requirements was an extensive report on group RESPs prepared for Human Resources and Skills Development Canada (HRSDC) and published in 2008. Among the key highlights of the study are enrolment fees and annual fees, and the potential for subscribers who do not meet contribution commitments to lose out.
"At its core, the group scholarship plan is a scheme that concentrates gains on plans that survive through the contribution period and meet various restrictions," wrote HRSDC reviewers. "Beneficiaries receiving scholarships receive not only the investment income earned on their own contributions, but also a share of investment income earned in plans that do not result in a claim on the pooled investment income, or in only a partial claim."
Cancellation rates, who gets paid what from the plan, and the number of months it will take an investor to pay off the sales charge based on monthly contributions are examples of required information under the new rules. In addition, there is prescribed language for presenting these details. The title of one section, for example, is: What can I expect to receive from the plan?
"We are able to highlight the information in four pages in plain language, and focus on the key risks as well as the costs for investing in a scholarship trust plan," says Goldberg. She believes the question-and-answer format for presenting this information makes the information more accessible to investors.
Personal experience has shown that scholarship-trust subscribers tend to have few investment assets and limited access to financial advice, says Jason Heath, an independent financial planner in Toronto. But certain related issues are equally concerning, according to Heath.
"I think one of the biggest challenges with these scholarship trusts is the marketing pitch," says Heath, who charges for the services he provides, rather than being paid commissions on the products he sells. He says promoters of scholarship trusts often lead subscribers to believe that they can obtain the government grants only by signing up for these plans. In reality, the same benefits are available through the RESPs sold by banks, investment dealers and mutual-fund companies.
Another consideration for investors is that scholarship plans have a much more restricted investment universe. For example, they aren't allowed to invest in equity securities. "Arguably, if someone has a 20-year time frame, they should have a little bit of exposure to equities," says Heath. "Just the fact that you're forced to invest in very low-risk investments is really punitive."
Disclosure is just one of the issues facing scholarship plan sellers currently. Coinciding with the CSA's announcement of new disclosure requirements, the OSC issued a statement of allegations, including unauthorized investments and poor compliance, against Global Educational Trust Foundation, its investment fund manager, distributor and two principals of the company.
Furthermore, four of the five scholarship trust plans in Ontario are currently under temporary orders from the OSC. Following compliance reviews by the OSC, orders were issued in 2012 for Global, Heritage Education Fund Inc., Knowledge First Financial Inc., and Children's Education Fund Inc.
Amid these legal proceedings, the new disclosure rules are being welcomed by some industry participants. "What this has done is increased comparability across the industry by mandating a specified form and headings, and the nature of the content within that," says Peter Lewis, chief executive officer of the RESP Dealers Association of Canada.
Despite the move toward a simpler, shorter document, Lewis, who is vice president of regulatory and corporate affairs with the distributor of Canadian Scholarship Trust Plans, believes disclosure could still be better. "As it stands now we have to deliver the [four-page] plan summary document in addition to the much longer parts B, C and D of the long-form prospectus," says Lewis. "So you still have a fair amount of paper." Lewis, who has worked with CST for more than 20 years, says his company, which dates back to 1961, was the first to offer an RESP to Canadians and is currently the largest scholarship-plan provider in the country.
Lewis sees potential challenges in the CSA's move to strictly mandate the language for certain parts of the document. "Part of our concern is the high level of prescription in the language which doesn't always leave room for accuracy," he says. "It's going to be an interesting balance because we have to ensure our prospectus is accurate."
More about RESPs
- The growth of registered education savings plans in Canada can be traced to the introduction of the Canada Education Savings Grant (CESG) by the federal government in 1998, when many mainstream financial institutions began offering individual and family plans.
- Canadians held a total of $9.1 billion in RESPs at the end of 2011. Scholarship trust plans, also commonly called group RESPs, accounted for nearly 29% of those assets.
- An incentive to save for post-secondary education, the CESG pays up to $7,200 over the lifetime of an eligible plan. There are also top-ups to the CESG that depend on family income. In 2004, another subsidy for modest-income families was introduced in the form of the Canada Learning Bond. An initial CLB amount of $500 is followed by annual payments of $100 a year until the child turns 16. The lifetime limit of the CLB is $2,000.
- Until the late 1990s, RESPs were sold primarily as group plans sponsored by scholarship trust companies. Currently, scholarship trust plans fall under general securities regulations and are recognized by Canada Revenue Agency as a particular type of RESP investment vehicle. They are eligible for the same federal grants as individual and family RESPs. They are also like individual and family plans in that contributions are not tax-deductible and investment income is not taxed while in the plan.
- As highlighted by the current initiative to standardize and simplify disclosure, the mechanics of group scholarship plans are not dictated by set rules and may differ by provider. Details such as enrolment fees, annual fees and transaction fees, as well as contribution schedules and transfer options can be complex and confusing to investors.
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