Excited and proud as she prepared to send her daughter Alexis to university, Susan Tesluk called Heritage Education Funds in 2016 to make sure the money she had saved for the occasion was ready to go to work.

Instead, Heritage — the Registered Education Savings Plan (RESP) dealer that sold her the plan when Alexis was one month old — told her that the $8,300 she had given the company was gone. She had violated a contributions rule she had not been informed of when she signed up, Tesluk said.

“I was counting on that money to help pay for my daughter’s education,” said Tesluk, a single mother who lives in Timmins, Ont. “They stole my daughter’s education fund. I was not aware that this was a possibility. I trusted Heritage like a bank.”

Yu-Li Chang of Surrey, B.C., sued Heritage after discovering that the nearly $26,000 she and her husband had entrusted to Heritage was gone. She, too, was told she had violated the agreement. Chang, a stay-at-home mom whose first language is Mandarin, said in court documents the company never told her she could lose her money if she stopped making payments. She did not receive a prospectus until after she signed up, the court filings allege, and when she did, the document was “beyond an average person’s understanding.”

Tesluk, Chang and others lost their money and the benefits that flow from RESPs to a company securities regulators have repeatedly censured but continue to allow to do business.

An investigation by the Toronto Star found that since 2014, there have been close to 500 complaints to Heritage from customers who, like four of those interviewed for this story, lost all or some of their contributions.

Scores of customers have also complained to the Ombudsman for Banking Services and Investments (OBSI), which is overseen by Canada’s securities regulators and the Financial Consumer Agency of Canada and which mediates disputes between financial institutions and their customers. There have been 78 complaints about Heritage to the OBSI since 2009, the first year the organizaton released complaint numbers.

Under OBSI rules, customers must first attempt to resolve their complaint with the company before escalating the issue to the Ombudsman.

Of 18 complaints decided by the OBSI in 2017, half were resolved in the customers’ favour. The payout amounts — as well customer identities and complaint details — are not made public.

Heritage’s new owner, Knowledge First Financial, another national RESP dealer, told the Star consumers who complained to the OBSI are a tiny fraction of its customer base and that its mission is to “ensure Canadians maximize their education savings to help students realize life’s possibilities. As one of Canada’s largest RESP providers, we have strong governance and management.”

The company said that many of the OBSI complaints “involved customers who disagreed with the terms of the group plan contract enforced by Heritage.”

Heritage is one of several scholarship plan dealers registered with securities regulators to sell group RESPs, in which parents’ money is pooled and invested so that earnings can be shared among their children beneficiaries for post-secondary education. As in other RESP products, like those offered at banks, group plan customers are eligible for government grants and bonds. Unlike RESPs sold by Heritage, banks do not require up-front sales fees.

Customers who stay in the Heritage plan to maturity may get back an amount equivalent to some or all of the sales fees, a company document says.

Between 2000 and 2012, securities regulators in Ontario and B.C. conducted six compliance reviews of Heritage, and each time found deficiencies that included misleading marketing and targeting vulnerable investors who may not be able to keep up with contributions. Heritage was required to hire outside consultants to bring it into compliance with securities regulations.

Tesluk, Chang and two other customers in B.C. and Saskatchewan lost their savings for various reasons — a change in studies, a failure to respond to Heritage’s letters, or missed contributions. Heritage’s group plan requires regular contributions, and parents said no one warned them that they could lose some or all of their money if they didn’t meet those terms.

Knowledge First acquired Heritage in January 2018. Together, the companies hold 500,000 RESPs for children and have more than $6 billion in assets under management, the company says. More than 60,000 students attend post-secondary education each year with a Heritage or Knowledge First plan, the company says.

The company told the Star that in 2014 Heritage changed its rules so that customers whose plans were inactive and had maturity dates after July 31, 2014, can get their contributions back, minus sales fees.

Three of the five customers interviewed by the Star said Heritage would not return their money even though their plans matured after 2014, and only after they repeatedly complained did they get some money back. (Tesluk is the only one who took her complaint to the OBSI.) The company said these customers’ accounts were not only inactive but also considered “closed,” and the new 2014 rule did not apply to such accounts.

From 2014 to the end of 2017, the company says Heritage received about 450 complaints from customers who had lost their contributions but would not specify how many lost their money for violations before 2014. The company says that during this time only eight per cent of complaints were escalated to the OBSI. (Since Knowledge First acquired Heritage in 2018, the company says it has received 36 complaints from customers who lost their contributions.)

Another customer, a father from Alberta, decided to close the accounts he set up for his three kids after learning most of his early contributions — nearly $10,000 — went to sales fees. He says no one told him the fees would be this much, nor that he would lose the fees paid if he closed his kids’ plans early.

Customers also said they felt pressured by sales reps who came to their homes, and they were not fully informed of the risks, fees and penalties, or walked through the voluminous prospectus and its fine-print.

During the reporting of this story, Knowledge First gave full refunds to all five customers interviewed by the Star, resolving those cases “in a different fashion than previously done by Heritage.” Knowledge First said it wants to lead its industry towards more flexible RESPs and that “no Heritage customer will ever have their plan result in a forfeiture of net contributions again.”

The Alberta father requested anonymity because he said his settlement did not allow him to disclose the details.

“Had I known about previous securities reviews (of Heritage) …I would have refused to invest with this company,” he said.

At tradeshows, malls and kitchen tables across the country, Heritage’s sales reps urge parents to buy into the plan. Their commissions are tied to how much the customer contributes when they sign up. The higher the initial investment, the more the commission.

First contributions go toward sales fees until half of those fees are paid. After that, 50 per cent of contributions go to pay down remaining fees, while the other half is invested. A scenario in the 2017 Heritage prospectus says that it will take an investor 33 months to fully pay the sales charges and that during this time 36.2 per cent of contributions will be invested.

The company says its fees are comparable to those charged over the lifetime of other RESP products.

Heritage’s group plans pool contributors’ money, which is matched in part by federal government grants and bonds. When children attend college or university, contributions are returned. Grants and earnings in the plan are also paid — provided Heritage’s guidelines are met.

Payouts are determined, in part, by how much a customer regularly contributes over the life of the plan and how many customers drop out before maturity, as earnings forfeited by dropouts are shared by others.

Earnings and government grants can be lost if students enroll in schools or programs that don’t meet Heritage’s qualifications, or if customers leave the plan before it matures, according to a 2017 Heritage “plan summary” document.

Bert Waslander, an economic consultant and an author of a study of RESPs done for Human Resources and Social Development Canada a decade ago, said customers “need to know that they are taking on extra risk, and that they do not need to do so to take advantage of the full range of government support for education savings.”

Waslander, who has read Heritage’s most recent prospectus, said RESPs provided by banks do not have large up-front fees and do not carry some of the risks inherent in group RESPs — such as the potential loss of earnings if customers don’t follow the contribution schedule they signed up for.

“Do people visited by the scholarship plan salespeople know about the alternative provided by the banks? Does the government make a big enough effort to advise people?” Waslander said.

The federal government pointed the Star to an online RESP brochure for consumers that does not outline the differences between RESP products.

The Alberta father said Heritage salespeople who, between 2011 and 2016, sold him RESPs for his three kids did not warn him that he would lose the fees paid if he pulled out early.

Earlier this year, he says he logged into his Heritage account and saw that his contributions were not getting a rate of return he expected, partly because of the up-front sales fees he was paying. He complained and withdrew his investments from the company.

“This is not what I signed up for,” said the customer. “We feel like we’ve been betrayed.”

In 2011, a group representing more than 17,000 Chartered Financial Analysts sent a letter to Ontario and Quebec securities regulators questioning “the fairness of an investment product where, if an investor discontinues paying his subscriptions, the net asset value of his investment is contractually reduced.”

“The advantages to the public of specific scholarship investment funds sold by commissioned sales representatives to retail investors do not appear obvious to us,” said the letter from the Canadian Advocacy Council for Canadian CFA Institute Societies. “Perhaps the time has come to phase them out.”

Marian Passmore, director of policy for FAIR Canada, an investor advocacy organization, said, “the people selling these plans don’t care if you stay in the plan or not. They just want the commissions as opposed to thinking about the needs and best interests of the investor.”

Heritage and Knowledge First are two of six firms named in a proposed class-action lawsuit that alleges customers were charged “unlawful” sales fees in Quebec, where regulations say fees must not exceed $200 per plan. The lawsuit alleges customers were charged “abusive” sales fees, ranging from several hundred to several thousands of dollars. The lawsuit still has to be certified by a judge.

Darrell Bartlett, Knowledge First’s chief compliance officer, said the allegations refer to agreements that have been “consistently disclosed in the company prospectuses each year” and that the documents “are filed with and reviewed by all Canadian securities regulators, including the Quebec regulator, who has not raised any concerns described in the allegations.”

The Quebec securities regulator refused to comment on issues before the courts.

Tesluk is one of the scores who complained to the Ombudsman.

She signed with Heritage in June 1999. The sales rep, whose business card Tesluk still has, made an “impressive” sales pitch at the couple’s kitchen table.

He said that for 17 annual deposits of $1,200, combined with “scholarships” of $48,636.50 to be paid by Heritage while Tesluk’s daughter Alexis was in university, she could receive a total payout of $69,036.50. The sales rep’s worksheet, which Tesluk kept, contains a disclaimer that the calculation was “an illustration, not a contract.”

The company said that this illustration “projects out the potential funds within the plan based on factors that are in place at the time of the illustration.” These factors include contribution amounts, government grants and compound growth within the plan, it said.

When Tesluk and her husband separated in 2005, Tesluk could no longer afford the Heritage payments but says Heritage advised her she would not lose her contributions if she stopped paying.

“It’s the hidden small print that is not explained. It seems the intent is to misguide the client,” Tesluk said. “I believe what happened to us should be illegal.”

When she phoned in 2016 to check on her investment, Heritage told her it had sent warning letters 10 years earlier and received no response. Tesluk says the letters were sent to her old address and an address for her ex-husband that does not exist, according to Ontario property records. The company said the incorrect address “highlighted a miscommunication and/or operational gap in the process.”

After the Star asked about Tesluk’s case, Knowledge First gave her a full refund, including sales charges, plus an amount equivalent to government grants and earnings that Alexis would have otherwise received.

In 2015, Heritage settled with the Ontario Securities Commission and received a reprimand following a 2012 review that found more than two dozen deficiencies, many repeat problems from previous reviews (the OSC has done three compliance reviews of Heritage since 2000).

Among the findings were that Heritage representatives were trained to engage in “high-pressure sales tactics” and that the company transferred “unclaimed” payments to those remaining in the plan without attempting to contact the original contributors.

Between 2000 and 2008, the B.C. Securities Commission conducted three reviews of the company and found several deficiencies, including failing to provide records to commission staff and not adequately supervising employees to ensure compliance. In 2010, the commission reprimanded Heritage, ordered it to pay $50,000, saying the company “acted contrary to the public interest.” It also ordered Heritage to hire an independent monitor to perform annual reviews for two years.

The OSC’s 2012 compliance review of Heritage was part of a broader sweep of group RESP dealers, including Knowledge First. The regulator’s sampling of enrolment applications found Heritage targeted mostly low- to middle-income families.

Debra Foubert, Director of the OSC’s Compliance and Registrant Regulation Branch, said in an interview that her organization focused on group plans because they are “complex, they have a long investment time horizon, which is typically 18 years, and they’re also aggressively sold to vulnerable investors who probably have little understanding of investments.”

In the case of Knowledge First, the OSC found, among other things, that the company employed sales reps who did not have a sufficient understanding of the structure and risks of the plans.

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Both companies were reprimanded and ordered to hire independent consultants and monitors to assist in strengthening their compliance systems. Knowledge First settled with the OSC in March 2014.

“There is a question for the regulator whether the approach taken to enforcement in dealing with these plans has been enough,” said Gail Henderson, a law professor at Queen’s University and an author of a report released in June on the experiences of low-income investors in group RESP plans.

The report, part of a research project led by SEED Winnipeg, a non-profit anti-poverty agency, found there is a “significant” number of low-income subscribers in group plans and that they may be more likely to exit these plans prior to maturity.

It’s time for the federal government to take a look at these dealers, especially given that the government’s billions of dollars in matching grants are taxpayer funded, said Bill Knight, who was Canada’s first Commissioner of the Financial Consumer Agency of Canada, a national watchdog that oversees financial institutions to make sure they comply with federal consumer protection measures.

“There is a legitimate right of the government to review where their money is going,” said Knight, who was one of the authors of the 2008 Human Resources and Social Development Canada study on RESPs. “What is needed here is absolute transparency so people have clarity of choice, whether they should just go to their bank or credit union or use these companies.”

As of 2016, the federal government had paid a combined $11.4 billion in grants and bonds into RESPs.

If group RESP dealers don’t make their promotional materials more understandable for ordinary consumers, Knight says, the government “should start asking itself why (group RESP dealers) should be distributing products the government subsidizes.”

These Canadians signed up for Heritage’s plans at different times during the last 22 years. When they checked their accounts, they learned their money was gone. Each contacted Heritage to complain and ask for their money back.

Jill Yahn, North Battleford, Sask.

In 2000, Yahn was a 24-year-old student when a Heritage sales rep came to her home and convinced her to open a plan for her son, Landon. Yahn, who ran a part-time home daycare, and her now ex-husband, who was unemployed, were already contributing to a Heritage plan for Landon’s older sister.

The Heritage contract asked, “How would you describe your investment knowledge?” Yahn checked “Low.”

After the couple separated in 2003, Yahn was unable to make the monthly contributions and phoned Heritage. She says the company told her it could set up accounts that didn’t require regular payments.

Last summer, as Landon graduated from high school, Yahn says she phoned Heritage and was told the money was gone. The company told her that in 2006 it had sent her documents that required the signatures of both parents within 30 days.

“They didn’t want to give me anything at all,” recalled Yahn, who says Heritage told her that because it had never heard from her and she stopped making payments, it gave her savings to other plan members.

After more than a dozen phone calls, Heritage offered Yahn a partial “good will gesture” refund. She refused.

When she threatened to hire a lawyer, she says the company offered to return all her savings, less fees. She accepted. After the Star asked about Yahn’s case, Knowledge First refunded all fees, lost interest and the amount she would have been entitled to in government grants.

Sandy Hirtz, Mission, B.C.

Hirtz’s son received about $12,000 in contributions from a Heritage account when he started at the University of Victoria in the general arts program. After his first year, he took two years off and transferred to Thompson Rivers University to study environmental science. He was one credit short of a full year of studies but was planning a full course load. When Hirtz called to confirm the account balance, she says she was told her son was no longer entitled to the earnings and grants because of the missing credit.

She complained for months, she says, before the company agreed to pay her investment income and grants totalling another $12,000.

“You don’t penalize a child for failing a course if they pick up and keep going,” Hirtz said.

After the Star’s inquiries, Knowledge First gave Hirtz a “goodwill payment” of contributions that had not yet been returned, plus an amount her son would have received had he stayed in the group plan, and interest, for a total of $2,500.

In 2014, the company says it changed its rules to eliminate the need for students to pass all courses or carry a full course load.

Yu-Li Chang, Surrey, B.C.

Chang filed suit against Heritage in 2014 to get her money back. Her suit claimed that she phoned Heritage several times in 2008 and 2009 to stop her contributions due to financial problems, and was told she “could resume her contributions whenever she decided.”

Chang alleges she was not given the company prospectus when she opened accounts for her two children in 2003 under the sales rep’s “high-pressure sales tactics.” When she did receive the document, Chang, whose first language is Mandarin, contended that it was “beyond the average person’s understanding.”

“As my English is not good, it feels like I fell into a trap,” Chang told the Star.

Chang settled with Heritage in 2015 for $20,000, about $6,000 less than what she contributed, because her daughter was heading to university and needed the money.

RESP Basics

RESPs were introduced by the federal government in 1974 to encourage families to save for post-secondary education.

In 1998, the government introduced the Canada Education Savings Grant, which at its basic level matches 20 per cent of annual contributions to a maximum of $500. Each beneficiary has a lifetime grant limit of $7,200. RESPs carry a lifetime contribution limit of $50,000 per child.

Investments grow tax free. When the child beneficiary goes to college or university, the money is taxed at the student’s income tax rate, usually resulting in little or no tax owing.

Group RESPs are different from RESPs offered at banks or credit unions in that they are sold and administered by “scholarship plan dealers.” In group plans, contributions from individual investors are pooled according to the birth year of the beneficiary.

When a plan reaches maturity, beneficiaries receive their contributions plus “educational assistance payments” — income earned plus any government grants and Canada Learning Bonds. How much is received depends on several factors, including how much a customer contributed over the life of the plan and how many plan members drop out before maturity.

Group plans charge up-front sales fees which are deducted from initial contributions. Customers have up to 60 days to withdraw from their plan and get all their money back.

Customers who cancel their plans after 60 days will get back their contributions, less sales fees, but may lose any earnings on their investment, as well as government grants. These forfeited earnings are distributed to customers remaining in the plan at maturity. Analysts have likened group RESPs to “tontines,” life insurance plans invented in Europe during the 17th century in which investors pay into funds, and those who survive the longest share the pool of money.

Customers who join group RESPs commit to making regularly scheduled contributions. If contributions are missed or not made on time, customers risk going into default, which may result in termination, in which case investment income and government grants could be lost.

Sources: Employment and Social Development Canada and Ontario Securities Commission’s website GetSmarterAboutMoney.ca