Has anything changed for investors?

February 2 2010 by Ellen Roseman

I’m doing a Sunday series in the Star on investor protection. And I’m asking whether Canadians will ever get stronger laws to save them from unscrupulous sellers of investments.

Choosing my words carefully here, I’m avoiding the word “adviser.” Investor advocates argue that industry participants are licensed to sell specific types of investments or investment services, but not to give advice.

Advice-giving is not regulated in Canada. And while Quebec regulates financial planning, the only province to do so, it couldn’t head off the Earl Jones scandal. (Jones, a Montreal money manager who ran a Ponzi scheme and ended up in jail, stayed aloof from all efforts to control him.)

Check out what the Quebec Institute of Financial Planning says here:

“We want a professional corporation to be created in order to better protect the public – the status quo is no longer satisfactory,” said Jocelyne Houle-LeSarge, the executive director of the Quebec Institute of Financial Planning (QIFP), the only organization in Quebec authorized to grant financial planning diplomas, and to establish rules concerning the ongoing professional development of professional financial planners.

Houle-LeSarge, who chaired the Quebec Order of Certified General Accountants in 1999-2000, says a professional corporation of financial planners would have limited the losses suffered by the alleged victims of Jones, even though he described himself as a financial advisor, and not a financial planner.

“Now anybody can describe themselves as a financial planner,” noted Houle-LeSarge. “But when there is a radar trap on the highway, everybody slows down. The same with a professional corporation. It wouldn’t be long before a professional corporation of financial planners would seek to prosecute individuals” who plied the trade “illegally.”

I agree 100 per cent with Houle-LeSarge’s later comment that the overall regulatory regime is “all over the place” and engenders a lot of confusion.

If you’re concerned about the advice you receive, you don’t know where to go with your complaints. Not only are there too many securities/financial regulators, self-regulatory bodies and ombudsman services in Canada, they tend to have close ties with the industries they govern or from which they derive their funding.

You may not get a serious settlement unless you hire a lawyer, an experienced litigator working with investor plaintiffs. And that means paying serious money up-front in retainer fees.

Do you think a national securities regulator will improve investor protection in Canada? Will the government pay heed to the expert panel on securities regulation, which called for improved complaint-handling and redress mechanisms and giving a stronger voice to investors?

Without a dedicated investor issues group, I doubt that regulation will ever get better. As the panel said:

Securities commissions in Canada provide fewer opportunities for investor advocacy and engagement than other key capital markets jurisdictions.

This is to the detriment of securities regulation in Canada and diminishes public confidence in regulatory accountability, integrity, and efficiency.

7 comments

  1. Small Investor Protection Association

    Feb 2 2010

    Feb. 2, 2010, Press Release:

    Under pressure from investors, the Canadian Securities Administrators (CSA) has quietly and without fanfare published a national alphabetical list of brokers, financial agents and investment advisers who have been disciplined:

    http://www.securities-administrators.ca/disciplinedpersons.aspx?id=74.

    These are people who have cheated their clients, stolen from them or were simply grossly incompetent in representing their best interests. The list is urgently needed, but is being criticized as “too little, too late”.

    Small investors need such a list to know who in the financial services industry to avoid. It is also a salutary tool for industry colleagues to know who the black sheep and incompetents in their industry are.

    The CSA list is similar in some ways to the Small Investor Protection Association’s (SIPA’s) “Brokers Hall of Shame” list published 10 years ago.

    But the CSA list does not include members of the self-regulatory organizations (SROs) recognized by the CSA: the Mutual Fund Dealers Association (MFDA), and the Investment Industry Regulatory Organization of Canada (IIROC). These two SROs provide search mechanisms for disciplined persons on their respective websites.

    This means that consumers investing in products sold by investment dealers or mutual fund dealers receive no benefit from this initiative by the CSA.

    In addition, consumers investing in products sold by life insurance companies or banks (which are federally regulated), such as segregated funds, will be unable to check on their representatives.

    Few of the provincial regulators are disclosing cases of discipline before 2004, whereas the British Columbia Securities Commission (BCSC) lists cases back to 1987 (an additional 17 years).

    This suggests the extreme and lamentable reluctance of most regulators – who should be protecting the consumer – to do anything concrete to help consumers if by so doing, they would upset some in the financial services industry.

    According to SIPA, this is just one more reason why a strong National Financial Services Regulator – provided it has a strict mandate to protect consumers – should be strongly supported by Canadian consumer-investors.

    Visit SIPA’s website at http://www.sipa.ca//regulation/csaRegulators.htm

  2. JLR

    Feb 2 2010

    It seems to me that an industry that promotes itself as investment experts, earning its profit by enabling investor clients to build their asset values, must accept some responsibility when this advice proves disastrous for clients.

    It’s a sticky field – no one dare suggest they know what next week, next month or next year may bring – so how can each case be determined re: responsibility?

    Perhaps the only solution is to fix rules on the claims that investment firms, brokers, etc. can make in promoting themselves.

    Not a perfect solution by any means, but one that may deserve some discussion.

  3. Robert Goldin

    Feb 2 2010

    For years, investors have always held their financial advisors solely responsible for their investment losses, caused by their financial advisor’s misconduct. WRONG!

    In most cases, their brokerage houses were equally, if not more responsible for their losses.

    This follows from a brokerage house’s regulatory duties and obligations to daily and monthly monitor and supervise the activities of their employees in order to detect any wrongful activities, and if so found, then to STOP them immediately, thus limiting investors’ losses to one day or one month at the most, and not the horrendous losses suffered by investors recently.

    These responsibilities are set out in Robert Goldin’s website: http://www.macgold.ca This information, which 99% of all investors don’t know about, will herald a new era in investment loss recoveries.

  4. Harold Geller, lawyer

    Feb 2 2010

    FYI, consider that the new Limitations Act bars claims two years after discoverability.

    That issue will be looming over investors and may easily start causing problems in the next few months and through this fall.

    For the last round of investors’ losses, the limitation period was six years. Right up until the six-year mark (and beyond), investors were still coming to the realization that they might want to take action in a court.

    There is a stark difference this time around, especially when faced with the “you haven’t lost anything until you sell” and the “value will out” advice — advice which puts off the reality of the need to claim it or lose it.

    There is little doubt in my mind, without any empirical proof, that dealers were delaying responding to complaints, partially to try to take advantage of the new short, limitation rule.

    FYI, we have a number of clients who started complaining to their advisors in around March of 2008. Arguably, their time is up in the next two months!

  5. second opinion mike

    Feb 5 2010

    Ellen, I am glad you are opening the debate on the right of the investor to understand who they deal with, how these people are licensed and how you know if they are under sanctions.

    As an investor consultant and advocate, these issues are at the forefront of discussions on how to change the industry.
    One of the biggest challenges is to determine if losses are caused by poor markets or poor advice.

    I see at least two potential solutions to assist investors: either we demand that sales people have a “fiduciary obligation” when providing advice; or (and this may be seen as self-serving) investors need to separate where they get advice and where they buy securities.

    The fiduciary obligation should raise the bar on advice and thus expose poor advice to legal action. On the second point, an advisor who does not sell does not have an incentive to distort advice.

    In the letter above, if the advice to stay in the market was independent of the fees to manage the portfolio, then you could argue the advice was good or bad, but you would know for certain there was no outside influence.

    It is a tough issue, so keep moving the discussion forward and let’s see what new ideas may come to light.