Gail Henderson (Queen's Law) and Jerry Buckland (University of Winnipeg) present Group RESPs: Using mixed-methodologies to study the experiences of low-income investors. Video recorded live in Room 201 at Queen's Law on February 8, 2019.
0:00:02 Gail Henderson: Sorry about the delay everybody.
0:00:05 Dean Flanagan: I'm delighted to welcome Jerry Buckland here to the law school. Jerry is a professor of the Menno Simons College at the University of Winnipeg. An economist with a long-standing interest in fringe financial products. I'm curious to hear more about fringe financial products. And he is working in close collaboration with our colleague at Gail Henderson with Law Foundation of Ontario grant, I believe that's on RESPs. I am delighted to welcome you, Jerry, to the law school. I look forward to hearing more about your research, your collaborative project. Thank you.
0:00:41 GH: Thanks very much Bill. Thanks everyone for coming. I just wanna take a moment to acknowledge the rest of the research team that was part of this project, including recent Queen's grad Simon Chung who assisted me with the regulatory review. Just to give a brief outline of the plan for the next 35 to 40 minutes, I'm gonna introduce the project, the impetus behind it and then a little bit of an introduction to what are group RESPs, then Jerry will talk about the mix methodology research approach that we took to this project. I'll talk briefly about the regulatory research and what I found in that portion. And then I'll hand it back to Jerry to talk about the field research methodology and findings. And then we'll conclude with some of our... Some of our overarching conclusions about group RESPs and the experiences of low-income investors with those products in particular.
0:01:39 GH: The impetus behind the project was that SEED Winnipeg, which is a community economic development non-profit. SEED and other similar organizations were seeing clients come in who had invested in group RESPs who had questions about them or maybe wanted out of those products. They wanted to switch. And the front line workers at SEED didn't really know how to answer those questions. And an initial literature review by SEED revealed very little prior research that was specifically focused on the experiences of low-income investors in group RESPs. So SEED was the lead among the other organizations on the slide, on a successful application to the Law Foundation of Ontario's Access To Justice Fund and we're grateful to the Law Foundation for allowing us to pursue this research project and fill this important gap in the literature. And we were also able to produce some public legal education materials for use by SEED and similar organizations.
0:02:41 GH: So RESPs generally are intended to encourage Canadians to put aside some private savings for the post-secondary education of the next generation. And it's similar to an RRSP in that the earnings on investment are tax sheltered. The difference is you can't deduct them from your income tax. And then when the child beneficiary attends University, the savings are there and are paid out each year to cover the annual costs of attending school. The concerns with the tax benefits of RESPs and the original matching grants offered by federal and some provincial governments was that these were disproportionately benefiting high-income families who likely would have saved for their children's education anyway. And so, in 2004, the federal government implemented two additional grants and the more important one is the Canada Learning Bond which is a non-matching grant for the lowest income families. There's no obligation to put any of your own money in, in order to collect the Canada Learning Bond, but you do have to open an RESP to get it.
0:03:51 GH: I think there's somewhat of a misperception that people living on low incomes are not investors, and it's likely that many of them are not, but the increased privatization of both retirement and education savings creates a market for investment products for individuals and families with average or below average incomes. And what has been found with respect to the Canada Learning Bond is that RESPs opened for the purpose of collecting that grant, those families also contributed their own money, 98% of them also put in money of their own. Low-income families are investing specifically in RESPs. And finally with respect to the type of RESP that we're talking about the group RESP, several reports and I think our own research confirms that these products... The promoters of these products tend to target low and middle-income investors.
0:04:49 GH: A bit about group RESPs in particular. One thing to notice that group savings plans actually pre-date the introduction of the RESP, the tax shelter for education savings, and they were originally conceived as an insurance product and that I think is still evident in the continued... The current structure. Group RESP providers have a unique business structure in that the group plans are sponsored by a non-profit corporation with names like Children's Educational Foundation of Canada and Canadian Scholarship Trust Foundation. That's the non-profit entity that actually holds the funds, but the funds are managed and the plans are sold by a for-profit company which employs the sales people who go out into families homes to sell this product. The distinction between a group plan and just opening an RESP with a bank is that if you open an RESP with the bank, you decide when you're gonna put money into it and how often, how that money gets invested. With a group plan when you enter into that contract you also commit to a contribution schedule upfront. And the problem with that is that if you're unable to maintain that contribution schedule say, especially if you sign up when your children are new born, right that's an 18 year commitment. If you're unable to keep up with that contribution schedule over the next 18 years, maybe because your income is too low or it's volatile, then you risk having your plan cancelled.
0:06:22 GH: And the consequences of cancelling the plan are they lose the money that goes to the high upfront fees, you lose the earnings on the contributions, which are re-distributed to those who stay in the plan to maturity, and then perhaps most importantly you lose the government-matching grants that were added to that RESP. So these are particularly risky investments for those with low or volatile incomes, again who may not be able to keep up with that payment schedule. So, this might seem like a niche investment product, and it is, but group, the assets of group RESPs represented 23% of the market for RESPs, so they're still a significant player in this particular space. So now I wanna turn it over to Jerry to talk about the mixed methodology approach we used for this project.
0:07:15 Jerry Buckland: Thank you very much, Gail. And so what I'd like to start with is explaining how I think the group RESP product, which as Gail has explained is quite a niche product, quite a special product, how it fits within a broader set of products. And a phenomenon called financialization that has, I think, very important ramifications to society and economy. And so the process of financialization is this idea that over time, the role of finances, the role of financial products is increasing, and increasingly we're influenced by financial motivations. And there's been a number of efforts to study the consequences of financialization on low-income people coming from a number of different angles. Some of those angles focus on the individual, the individual who's involved in that financial product. And so we see studies from economics and from behavioral studies, looking at how financial products affect different individuals. We also see studies happening more at the community level, trying to understand how different communities are affected by financialization. So whether the community is an inner city community or it's an indigenous community, we see studies looking at that community level. And finally we see studies looking more at the structural, the national, the global level.
0:08:39 JB: And so when I was looking around at the different literature, I found this particular theoretical framework quite helpful to understand the phenomenon of financialization, and how it affects the well-being of individuals, and it's this sort of typical nested paradigm where it sees at the very core the goal is to improve the financial well-being. Sometimes the focus is on financial capability or sometimes it's on financial inclusion, but this particular theoretical framework that was designed by a colleague of mine Rosalyn Russell from RMIT University, has the financial well-being as the core goal of this process, and then seeing that there's different layers in this nested paradigms that people are affected at first the individual, the household, the community, and finally the global level. What we see in the literature, or what I see in the literature on financialization are studies that often focus on the individual that are contrasted by studies that focus on structures. And the reason why I really like this financial ecosystem model is because it brings those both together. It's not to say that one is right, the other is wrong, but to say that both of these perspectives can add something to our understanding of financialization.
0:10:01 JB: So that's a little bit of a theoretical framework that I like to use when I think about products like group RESPs, because they're not one-offs, they are part of, like I said, this whole process of financialization. Then in terms of the research methodology that Gail, our other colleagues and I followed in this project was a mixed methodology, and the mixed methodology has gained I think more support, and has really grown as an important way to understand complex social problems in the last 10 to 15 years.
0:10:38 JB: And the mixed methodology is where we use different methods. Some are often quantitative methods like a questionnaire, a survey, and we combine those with qualitative methods, where we're doing more interview-style or focus groups. And the idea is that we both can triangulate the results from these different methods. By that I mean, well, what were the results from the interview? Do they support the results from the focus group? Or do they refute them? And the idea with this triangulation process is that you keep doing your research, until you find consistency across these methods, that you're coming up with consistent results, and I think Gail and I, we're actually quite surprised at the consistency coming from our quite different results. So, triangulation is a very important result.
0:11:29 JB: The other thing about mixed methodology is it enables a very textured insight. And John Creswell, one of the pioneers in mixed methodology has made this argument that really the most convincing sort of studies are ones that combine data and stories, that it's the combination of data and stories that we find. I think there's something that is intrinsically valuable about that. So data includes facts, and we've got facts and data about group RESPs in our research, and stories, and quotes lend to that texture that individual experience of group RESPs, and so I'm gonna be sharing some of those as we go on into the next sections.
0:12:20 JB: But I'm gonna now pass it over to Gail, and she's gonna talk about the results from one of those methods, and that's the regulatory review method.
0:12:30 GH: Thanks, Jerry. So the regulatory review for this project was done in two parts. And the first part pulled together all of the applicable securities regulations that apply to group RESPs or the terminology in the Securities Act's scholarship plans. I'm not gonna talk about this part, but I'm happy to answer any questions about what those rules are in the Q&A. The second part of the regulatory review reviewed all of the documents related to a number there've been... A number of past compliance reviews focused on this particular product and their providers and the enforcement actions that were taken against group plan providers for non-compliance. But I wanna focus here on the compliance review undertaken by the Ontario Securities Commission or OSC from June 2010 and October 2011. And as Jerry mentioned, we were surprised by how similar... What I found in the regulatory review and then what came up in the interviews and in the focus group.
0:13:33 GH: The 2010 compliance review among many other findings found that group RESPs sales persons were frequently selling these plans to investors whose incomes were either too low or too volatile or both, to make them suitable to those investors based on those risks inherent in group RESPs that I discussed earlier. And I wanna emphasize that selling an investment product to an investor to whom it is not suitable to their financial circumstances and investment goals, is illegal under securities laws. The compliance review also made a number of troubling findings regarding the sales tactics employed by group plan promoters. One appeal of group RESPs is that a sales rep often will agree... Offer to come to your home. I think, particularly with a new parent, this is a real convenience. But the OSC found the training materials of group RESP promoters were instructing their sales reps to close the sale in one visit. And this means that investors don't have time to review the information about this investment product that the law requires them to provide. And I just have a few quotes from... That the OSC compliance field review report pulled from the training materials. And I wanna emphasize these were the printed training materials of these group plans that were instructing their sales people this is what they should say.
0:15:03 GH: So things like, "It would really help me if there were any way you could make a decision tonight. If we had to call on every family twice we could never get our job done." So that's the high pressure tactic to agree to sign up in the first visit. Also really preying on parents wishes for their children to pursue post-secondary education and put pressure on them. They were instructed if someone said, "I'm worried I can't afford this much per month." The response would be, "There's always something to spend money on or it is seldom money that stands in the way of people who really want to do something." These were aggressive sales tactics identified by the OSC as being non-compliant with securities laws. And I wanna add that a 2018 OSC report notes that the use of misleading or inaccurate marketing materials is still a problem with respect to group RESPs.
0:15:56 GH: And something else that came up was exaggerating the future cost of tuition. One particular promoter had a chart that tried... Purporting to show that tuition would increase 4% every year until 2031 with no evidence that... No factual basis for that increase and also that they would exaggerate the fees charged by mutual funds which they saw as their competitors. Those were some of the misleading and aggressive sales tactics. And then finally there was an issue with sales representatives of these products not fully understanding the terms and associated risks of the product themselves. And if you, as a sales person don't understand the risks of product, you're probably not gonna be able to explain those risks to a potential investor. Those were some of the highlights from the regulatory review. There were a number of other issues of non-compliance as well, but those are the ones I want to focus on today. And I'll now hand it back to Jerry to go through the field research and the results from that portion of the project.
0:17:07 JB: Thanks, Gail. I'm going to talk about the results from three of the different methods. I'm not gonna talk about the key informant method simply for time reasons, but it was also interesting. To start off with, I'd like to talk about our focus group with service providers. Now, by service providers we mean people who are in the field providing different kinds of services, financial literacy services, asset building services to low income people. We had a focus group with them to try to understand the dynamics of this market and some of the things that they said included the fact that subscribers recruitment is done through referrals of family and friends. And that these referrals act as a really important means of building trust early on. That in getting a referral from a friend or family member means that the prospective subscriber believes that this organization legitimate, has some legitimacy. There's a trust that puts maybe some pressure on that individual to join and subscribe the product.
0:18:20 JB: The other thing that these subscribes... These service providers shared with us is that the fact that the federal government provides support through the group RESP products gives them another kind of legitimacy. This is another thing that we heard from them. Also, we heard that the... Because of trust and because of the government funding many people are not inclined to look as carefully at the product, rules and how it works. They're more likely to maybe skim over that and to join right away. They're more likely to feel that pressure from the sales person. And the final thing that the subscriber... The service providers shared was that people who are brought into the group RESP project... Product this way, sometimes are unlikely to complain because in complaining they might get a member or their friend or family network in trouble. This is another, I think, a problem that we saw.
0:19:30 JB: So those are some of the results from the service provider focus group. Next, we talked with 11 subscribers in two focus groups, so these are folks who actually subscribed to the Group RESP product, and they're from both Winnipeg and Calgary. So some of the things that we learned are summarized here and I'm gonna go through these different points separately, so that's just the summary. Although the first point was something that they all emphasized that they felt that education was very critical, post-secondary education was very critical and we thought this was a really important piece of this story that people believe strongly in post-secondary education. And so, therefore, they are seeing some kind of savings towards that as being critical. However, they also in the focus group talked about the lack of... Or misleading nature of information about Group RESP before or after too little information, too complicated information or inaccurate. So a number of different concerns about how that information was shared.
0:20:37 JB: So a couple of quotes, "The group RESP representative who came to the house, only half explained. They are doing a sale and thinking about a commission." Another quote, "Annual statements don't make sense. If you call the group plan promoter for clarification, it takes two hours to talk with someone." So some frustration about information. And more frustration, another quote, "They work with families living under $25,000 a year, they target newcomers. Someone from your community approaches you, they, the person selling the product think it's a good product, you trust them, one family was saving $278 a month." So that's a very high amount of savings for a family just earning $25,000. So these are some of the quotes that we drew out from the results. A third point that came out was the trust that investors had at least initially with the salespeople in the company at a critical moment. And that critical moment, Gail has made reference to, the moment of signing. So there is a trust that's built up and that puts pressure to sign.
0:21:49 JB: So the quote is, "But the person who linked me to the group promoter as part of my ethnocultural community. He is a friend of a friend who made an appointment with the salesperson who came to my home, the community member was there at the appointment. I felt the salesperson was someone I could feel comfortable with." So that's the importance of trust. Then more on the trust piece, in some cases, participants were concerned that complaining about the product might harm their community members. So we've heard this from the service provider focus group and here the quote is, "That's what a lot of people think when you work with someone from the community, you're more reluctant to get them in trouble. You don't want to talk badly about them in your community." And also the key informant, I'm not talking about that today, but key informant interview also, I heard about that particular problem.
0:22:46 JB: Okay, then number four, dissatisfaction with group RESPs, a majority of participants in the focus group were dissatisfied with the product. So, some quotes, "What's the difference between what these companies are doing to families compared to other scammers running off with people's money?" Another quote, "It's counter-intuitive that government programs help families to stay with vultures like this," so pretty strong language from some of our focus group participants. They also had some advice for others, "Double check the information." Now the quote is, "Sleep on it, try to not sign up that day when the salesperson comes." In addition, we asked our focus group participants, "Are there ways that you could imagine the product being improved?" And they have lots of ideas. So things like provide clear information to the prospective investor, provide clear and timely information about fees and product rules. And Gail and I haven't really talked about how these products work, the various rules and the complex things that go on, but this is one of the problems that the information about fees and product rules are not clear.
0:24:01 JB: Thirdly, simplify language of product documents. Product documents are very complicated, even the summaries that the providers create can be very complicated and our folks who are participants said that. They also said to others to compare the group plan with individual RESPs, like do your homework, buyer beware, check the alternatives and finally, they call for a better regulation of group plans. So that was the focus groups with the subscribers. Now, I want to turn to... We did interviews with 48 subscribers. So this is the last method I wanna share about and you'll see some similarities, but a couple of differences as well with the results from this method.
0:24:49 JB: So here we found that 27 of the 40 responded signed up on the first sales visit. So that's this point that there's pressure to sign right away. Seventeen respondents felt it was insufficient time. So we have a quote here, "I wish I had more time to do research first, but I was fooled, think about your children. There was a lot of pressure to follow through with the purchase." Then in terms of understanding about the product, 20 of 39 respondents were satisfied in the way the product was explained to them at the time of purchase. So there's some satisfaction. However, 25 of 39 were unsatisfied about certain aspects of the product. For instance, the front-loaded nature of the fees, we haven't really talked about that, but the fees can be front-loaded and if you pull out of the product, those fees are already taken off.
0:25:45 JB: And finally, some respondents felt they did not even know what questions to ask. It was so complex, they didn't really know what to ask. And it seems like this is a really important point for improved public information.
0:26:00 JB: Then in terms of awareness about product restrictions, 23 of 46 respondents were not aware of restricted use of savings for particular programs. Responses to question, what would happen if their child did not attend post-secondary education. All knew that they would not receive the government grant. They knew that, but they weren't sure, there were various views of what would happen to the fees and savings that they had collected.
0:26:30 JB: And then in terms of hardships and consequences, 20 of the 40 respondents faced a problem that caused them to miss one or more payments and this caused NSF fees and sometimes follow up from the company. And I think Gail found some very interesting results from the regulatory review where some group RESP companies were collecting a lot of money in NSF fees. Okay, then we did ask our inter... Our respondents about what about strengths and weaknesses of the product. And it wasn't unilaterally, these are bad products. It was more mixed and some people took a more critical view, some people took a more positive view.
0:27:11 JB: In terms of strengths, 11 of the 48 respondents identified the government grants as the main strength. Of course, you get the government grant through individual RESPs as well, but nevertheless, they said that. Secondly, some identified the automatic monthly withdrawal as a strength. And we know that from behavioral studies that some people are willing to pay for an automated process that nudges them to save.
0:27:37 JB: Thirdly the security of the investment is with the company that's going to watch after that investment. And then finally, pooling of the investment, the idea that through the pooling of the investment they could earn higher interest rates. Others identified weaknesses of the product. Some of the things we've already heard, product is poorly explained to them, the signing was rushed, the incomprehensible product documentation, the fees, the unreasonable nature of the fees front-loaded, lack of flexibility which in a sense is the other sense of... Other side of the coin from automatic monthly withdrawals but lack of flexibility was identified. And also lack of control over money. And I remember one participant saying she had a concern with her RESP, phoned the company and the operator said, "Well it's not your money, it's ours." And that really heightened her concern.
0:28:41 JB: In the end, the overall assessment from the subscribers 12 were positive, 12 were negative and 19 advised caution. So one quote, "Do it 100%." Clearly, someone who found this was working for them. Another quote, "Do your research and explore all options including banks. I feel like group RESPs is predatory. I don't see the value. Find out what fees really are." So those are the results from... Some of the results from the methods I was involved in and I'm gonna pass it to Gail to talk about the results and discussion.
0:29:19 GH: Yeah, so just a few concluding points. First off group plan, RESPs are a complex financial product. I spoke earlier about what happens if the plan is cancelled, the risks inherent in that. But as Jerry mentioned there's a number of other rules. As someone who has read the detailed prospectuses for all of these products, they're not simple to understand, even for someone who teaches securities regulation.
0:29:51 GH: Secondly, group plans might help some investors save more than they would have otherwise. And Jerry gave an example of an investor who said, "I liked the contribution schedule. It forced some discipline." But they're not suitable for many of the investors that are targeted by group plan promoters because other things are gonna get in the way of being able to maintain that contribution schedule and the consequences of having to cancel the plan are too great. In terms of losing the earnings on the investment and also the government grants. And there's a concern that for those who do have their plan, it's detrimental to their financial well-being also because they're less likely to start another RESP with someone else. If you've been burned once you are probably not gonna do it again. And those beneficiaries miss out on those private savings altogether.
0:30:46 GH: And there continues to be a significant representation of low-income subscribers in group RESPs versus other types. I think that's diminishing over time, but it's still too high. Because it seems likely that investors with lower volatile incomes are more likely to drop out or have their plans cancelled, these investors, it seems like they will end up subsidizing those who are better off and so are better able to stay in the plan until maturity because the earnings on the investment of the first group are then redistributed to the second group. And the returns on investment that are included in materials from group RESP promoters, they include this attrition that's built into the product itself. And so without that attrition, they can't guarantee or provide those returns on investment.
0:31:42 GH: And also in addition to having to exit the plan early, there also is some evidence that a number of group plan investors, if the beneficiary doesn't pursue a full four-year university degree, they don't access the full complement of the education system payments at the back end. Even if you maintain your payments to maturity, you might miss out on some of the returns that you should be getting under the plan. So that's an additional concern.
0:32:14 GH: With respect to the regulatory compliance issue, three of the five group plan promoters promote in Canada... Most of them across Canada one in just Quebec and Brunswick. The three out of these five have a history of substantial and repeated non-compliance with securities laws. I talked earlier about the aggressive sales tactics, selling to people who they're not suitable for and then also the sales people not having the correct proficiency and knowing the product in order to meet standards under this Securities Act. And again there's been a number of compliance reviews and each time these particular group plan promoters fall short of the standard.
0:32:57 GH: And finally, we found in both regulatory review and the interviews with focus groups that some investors do focus on the non-profit nature of the trust that holds the funds. And I think that came up in some of the stuff that Jerry mentioned but that trust is engaged both by the connection with the salesperson themselves, but also this idea that the funds are held by a non-profit entity. And that's seen as favorable compared to say a bank. And so that... The structure of the group plan promoters themselves is an issue, and in past compliance reviews, the regulator found that salespeople were told to play out the connection to the non-profit and downplay their connection to the for-profit provider. That's all we wanted to say in terms of... There's a lot more to the study but in the interest of time I will leave it there but we'll have... We're very happy to hear your ideas, comments, and questions. Thank you very much.
[Question & Answer session follows]