A Quebec class-action lawsuit against providers of group registered educations savings plans (group RESPs) could have ripple effects across Canada.
The lawsuit, which was authorized by the Superior Court of Quebec on March 31, targets six group RESP providers alleging that the sales charges or enrolment fees they have been charging in Quebec are unlawful and, in some cases, abusive. Authorization of a class-action lawsuit in Quebec is similar to a certification of a class-action lawsuit in other provinces.
Specifically, the lawsuit is targeting Canadians C.S.T. Consultants Inc. and Canadian Scholarship Trust Foundation; Kaleido Growth (previously Universitas Management) and Kaleido Foundation (Previously Universitas Foundation Of Canada); Knowledge First Financial (previously Heritage Education Funds Inc.) and Knowledge First Foundation; Heritage Education Funds and Heritage Educational Foundation; Children’s Education Funds Inc. and Children’s Educational Foundation Of Canada; and Global RESP Corporation along with Global Educational Trust Foundation.
Group RESP providers typically manage the scholarship plans through non-profit foundations or trusts but market and administer the plan through a so-called “distributor,” a for-profit corporation with close ties to the foundation.
Group RESPs are a type of group investment that pools funds from a number of individual accounts. Parents typically buy shares — called units — of the plan, which is usually based on the child’s birth date. Families make contributions on a set schedule and receive the funds — coming from contributions, government grants and investment returns — at maturity, usually when the children turn 18, if they attend a qualifying higher education institution.
All Quebec residents who, at any point since July 19, 2013, signed a contract with any of the group RESP providers named in the lawsuit and were charged fees above $200 per plan are included in the class, according to court documents. Of those Quebec residents, those who have cancelled their RESP plan after that date and claim they lost more than 20 per cent of their contributions due to enrolment, sales or membership fees are also included in a sub-class focused on the question of whether the charges were abusive.
While the scope of the lawsuit is limited to Quebec, it could invite similar lawsuits in other provinces, especially if successful, says Gail Henderson, a law professor at Queen’s University.
There is no trial date yet for the Quebec lawsuit, and class-action lawsuits can take years to work their way through the courts.
But Joey Zukran of Montreal-based LPC Avocat, who represents the lead plaintiff in the lawsuit, says he’s already at work with counsel in Ontario to bring a similar case forward that would cover the rest of Canada.
The lawsuit could also prompt provincial securities regulators across the country to revisit some of the rules around group RESP products, particularly those on enrolment fees, Henderson adds.
Speaking to Global News via email, all the defendants denied the allegations.
Lead plaintiff reportedly lost nearly $12K to fees
The lead plaintiff in the lawsuit, Montreal resident Qing Wang, lost $11,720 to enrolment fees charged by C.S.T. for two RESP plans he’d opened for his two children, the lawsuit alleges. The sum is equal to nearly 60 per cent of the roughly $20,000 Wang contributed to both plans over a period of about two years, according to the lawsuit.
Wang’s case is emblematic of how fees charged by the defendant group RESP providers violate Quebec laws and regulations in two respects, the lawsuit alleges. First, it is alleged that the fee schemes contravene a regulation of Quebec’s Securities Act that caps the fees at $200 per scholarship plan. Instead, the group RESP providers have been charging $200 per unit, according to the lawsuit.
Charging per plan vs. per unit can make a big difference. Usually, generating enough payments at maturity to fund a child’s higher education requires purchasing multiple units of a plan, Henderson says. With group RESP subscribers charged $200 per unit, “those are the fees (that) do add up,” she says.
Wang, for example, claims he had subscribed to 58.6 units for his two children, which resulted in a total of $11,720 in fees.
The Quebec regulation that says scholarship plan dealers should charge no more than $200 per plan is based on guidance that applies to all other provinces as well, according to Henderson. But that guidance “isn’t necessarily binding,” she adds.
The second issue the lawsuit raises is whether the way the fees are charged makes them abusive in some cases under Quebec’s civil code. Enrolment fees for group RESPs are front-loaded with 100 per cent of subscribers’ contributions going to fees until half of the fees are paid off. After that, 50 per cent of contributions go to fees until the fees are completely paid off.
This structure means that subscribers who cease to participate in the plan in the first few months of years may have to forfeit all or a significant part of their contributions because of the fees, which are non-refundable. The lawsuit argues in this case, the fees should be considered abusive under article 1437 of the Quebec Civil Code.
Henderson notes that subscribers may lose a majority of their contributions to fees not only if they withdraw early from the plan but also if the group RESP provider terminates their plan because of missing or late contributions.
Families, especially those on a limited income, may fall behind on payments because of financial hardship, she notes.
Wang, the lead plaintiff, lost 60 per cent of his contributions to fees when he decided to move both his children’s RESPs to individual RESPs at CIBC, according to the lawsuit.
RESPs help parents save for their children’s education after high school. Investments held inside an RESP grow tax-free, and the government pitches in extra money by topping up contributions (up to a certain limit). There is also additional funding for low-income families that doesn’t require contributions. But group RESPs are significantly different from individual or family RESPs that Canadians can open at financial institutions like banks, credit unions and mutual fund companies.
Group RESPs can only be offered by scholarship plan dealers. The amount of money each child stands to receive for their post-secondary studies depends on how many units the family purchased, how much money is in the pooled account, and how many children attend post-secondary school that year. If families withdraw early, have their plans terminated because they can’t keep up with payments, or if their children don’t end up attending an eligible secondary institution, the money earned on their contributions is often redistributed among the other participants who remain in the plan until maturity and whose children continue their studies as expected.
“A group RESP is for people who are fairly certain that the child will attend post-secondary school and who can make regular payments for many years,” according to group RESP education materials provided by the non-profit SEED Winnipeg. “For people who may not be able to make regular payments or whose children may not attend post-secondary school, there are other types of RESPs which may be more suitable.”
And group RESPs generally come with high fees and strict rules about maintaining eligibility, although consumers are entitled to receiving their money back if they withdraw from the plan within 60 days.
The defendants maintain the fees they charge are fully compliant with applicable national and provincial regulations.
“Our organization adheres to the highest regulatory and ethical standards supported by strong corporate governance and financial oversight. In compliance with regulatory requirements, we undergo rigorous approvals, both at the provincial and federal level, with every investment product we introduce,” Peter Lewis, chief revenue officer at C.S.T. Consultants told Global News via email.
“For a typical investor, our total fees combined would represent the equivalent of about a 1 – 1.5 per cent annual management fee when averaged over 18 years. Our upfront fee model results in lower fees over time, compared to other structures where fees are taken as a percentage of the total assets under management,” he wrote.
“Most importantly,” he also said, “our company refunds 50 per cent of the sales fees when a student attends post-secondary school, boosting the overall amount available for their education.”
The lawsuit, he noted, “disputes an industry-wide, accepted fee structure that has been in place — at least — since 1979 and approved by regulators.”
Several of the defendants noted their fee amounts and structures are clearly disclosed, including in prospectuses that subscribers receive upon or before signing in accordance with applicable laws and regulations.
“As with all others in our sector, fees are collected in order to cover the costs of the management of accounts, associated investments and administration costs, for what is normally an 18-25 year commitment,” Global Education Trust Foundation said in a statement via email. “Moreover, some plans may qualify for a full reimbursement of fees on maturity,” it said.
Global RESP Corporation, surrendered its registration as a scholarship plan dealer in March 2020 as part of a settlement agreement with the Ontario Securities Commission after what regulators called “continued non-compliance with Ontario securities law” by both the corporation and its related investment fund manager Global Growth Assets Inc. (GGAI).
“By their very nature, RESPs are a long-term savings vehicle that are designed to deliver the best outcomes for subscribers and beneficiaries over their 18+ year lifetime,” Knowledge First Financial’s chief compliance officer, Darrell Bartlett, wrote via email.
He also said that since 2012 the group RESP provider has “gradually transitioned” from group scholarship plans and ceased to sell those types of plans entirely in 2020.
“In 2022, all remaining group RESP plans managed by the company and its subsidiaries will be transferred to individual RESP plans, which were specifically created to better meet the evolving needs of the market, providing greater flexibility, ownership, and ease of use to subscribers and beneficiaries,” Bartlett wrote via email.
Knowledge First Financial acquired Heritage Education in 2018.
Is disclosing the fees enough?
While regulators across Canada tightened rules around disclosure requirements for group RESP providers in 2013, the lawsuit may prompt provincial securities commissions “to go back and take a look at the rules relating to the enrollment fees specifically,” Henderson says.
Among the information scholarship plan providers have to provide subscribers is a so-called “plan summary,” a document of a few pages that is supposed to describe in plain language how the group plans work, what fees are involved and the risks involved, Henderson says.
Mandatory disclosures also include setting out how the fees will be charged.
But group plans are “often aggressively sold, including to vulnerable investors who have little investing experience or who may not be fluent in English or French, the languages in which they are generally sold here in Canada,” the Ontario Securities Commission (OSC) has previously told Global News.
Wang signed up for the group RESPs for his two children just days after immigrating from China, according to the lawsuit. Upon his arrival, Wang and his family stayed in a property owned by a C.S.T. agent “who immediately introduced and sold the RESP plans to Mr. Wang,” the documents read.
Wang does not speak English well, according to Zukran.
Another issue is that families often learn about group plans from a salesperson working for the group plan provider.
“That person is paid probably solely based on sales commissions, which is what the enrollment fees are there to cover. So they have an incentive to sell you as many units as possible in this particular plan,” Henderson says. Nor do group plan salespeople have to make subscribers aware of the option of opening an individual or family RESP at a financial institution, she adds.
As well, a 2018 research report on group RESPs co-authored by Henderson for SEED Winnipeg found that compliance reviews of group RESPs revealed “breaches of securities regulations related to selling plans to low-income investors for whom they were not suitable.”
Low-income subscribers may be more likely to exit the plans before maturity, the report noted.
“The question is whether disclosure really does sufficiently protect these investors,” Henderson says.
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