Issued in April 2023 as an amendment to National Instrument (NI) 31-103, Canada’s Total Cost Reporting (TCR) seeks to improve the transparency of investor fees and costs relating to mutual fund, segregated fund and exchange-traded funds – and wealth and insurance firms now have just over 18 months to ensure they are ready.
Although the first annual report of 2026 charges and other compensation will not need to be submitted until early 2027, the collection and calculation of the data points must commence on January 1, 2026. To comply with TCR, firms will need to make sizable changes to their technology and processes, in addition to aligning with industry best practices when calculating and sharing data outside of their individual control.
As noted, Total Cost Reporting – also referred to as Client Relationship Model 3 (CRM3) – updates existing registration requirements, exemptions, and ongoing registrant obligations. Unlike CRM2, which is focused on the disclosure of trailer fees paid to the financial advisor, TCR goes a step further to disclose all embedded costs to the investor.
From an operational perspective, the major difference is that costs reported on client statements will need to be calculated daily to better reflect expense ratio fluctuations and clients’ shifting investment positions. These costs will now be part of the management expense ratio (MER) and trading expense ratio (TER), translated into dollar amounts on annual statement for investors, to show exactly where their money is going.
TCR’s scope is broad, spanning securities regulated funds, including mutual funds and exchange-traded funds (ETFs), and even extends into insurance-regulated funds such as segregated funds. For investors, this means greater clarity – empowering them to make informed decisions about where to invest their money.
Clearly, this is change will be no small matter for large Canadian wealth and insurance firms – TCR’s ripple effects touch every aspect of operations around the administration, manufacture, and distribution of fund products. And it is not limited to a firm’s own products, as they frequently leverage third-party products) including those of their competitors). As a result, data must be shared among firms, who must also adhere to a standardized exception handling process.
INTERNAL CONSIDERATIONS
As a baseline, fund manufacturers will need to calculate the fund expense ratio (MER plus TER) and send this ratio to distributors. The distributors will use the ratio provided to calculate every fund position that they hold for investor statements.
In practice, the intricacies of TCR become more complex given the diverse operations of fund manufacturers and distributors:
Automation will be key given this complexity, which will be exacerbated by the fact that calculations could involve hundreds of thousands of fund positions and tens of thousands of FERs.
EXTERNAL CONSIDERATIONS
Sharing data between unrelated third parties is ‘business as usual’ within the Canadian investment fund industry, with several data providers and Fundserv acting as conduits. The secure and timely delivery of the fund expense ratios can be added as part of the standard transmission of data given the maturity of these providers.
However, the nature of TCR requirements will see the generation of new data points coming to and from customers and systems – and these sources of data inputs and outputs may not yet be connected to those established industry providers.
EXCEPTION HANDLING
In the investment funds space, many attributes specific to individual funds are not applicable to other securities products. These attributes may be related to individual products, new data standardization and/or investor reporting. The new regulation allows for reasonable estimates and approximations. However, since the volumes are expected to be significant, any exception handling logic will have to be architected and build into the technical solution.
Additionally, solution compliance with TCR will require flexibility to allow for corrections. To ensure the fund manufacturer does not provide potentially misleading or incorrect information, data providers will need the ability to send adjusted ratios. This will require additional controls and monitoring of the FER calculation. Downstream, any changes will need to be transmitted and have standardized version control. If an error is detected, retroactive adjustments may need to be sent to the distributors who, in turn, will need to recalculate these fees for the investor.
These retroactive adjustments will need to consider materiality, reporting period, and timing of the adjustments. To further complicate matters, the data will be sent from unrelated third parties. The standardization of this in the industry will need to be agreed upon, which presents a unique challenge of building an automated solution without having the industry standards rules defined.
TCR presents a significant and complex regulatory challenge that will involve as yet undefined operational processes. Capco is here to support you through this journey, leveraging our extensive experience in wealth and asset management, insurance, regulatory compliance, and digital innovation. We’re ready to help you understand the necessary changes, develop digital tools and processes, explore growth opportunities, and apply industry best practices to ensure successful adoption of TCR.