Despite the fact that retail investors are the primary reason securities regulations exist, it’s somewhat rare that these investors are heard by the system that’s looking out for their interests. Yet, investors got the opportunity to tell their tales when regulators hosted their second town-hall meeting on Oct. 24 — bringing some much-needed Main Street common sense to some of Bay Street’s more counterintuitive conventions.
The Ontario Securities Com-mission hosted its first town hall more than two years ago. Since then, not a lot has changed for investors. But that first meeting did alert regulators to retail investor issues that might otherwise have gone undetected. In response, various regulators have taken steps to make it easier for investors to navigate the intricacies of the regulatory system — for example, by explaining to whom retail investors should complain and how they can pursue restitution in cases in which they’ve lost money.
But it isn’t any easier today for retail investors to win restitution than it was two years ago, despite the fact that the Government of Ontario and the OSC have pledged to develop a better system. There are, however, indications that that may be changing.
At the second town hall, the self-regulatory organizations, the Investment Dealers Association of Canada and the Mutual Fund Dealers Association of Canada — which, along with the OSC and the Ombudsman for Banking Services and Investments, jointly hosted the October meeting — announced that they are adopting mandatory complaint-handling standards.
This will do a couple of things for investors who have grievances against firms that are IDA or MFDA members. The standards will impose a framework within which firms must deal with clients’ complaints, and they will set deadlines as to how quickly complaints must move through these steps.
The MFDA, which has issued its rule for comment, is proposing that firms be required to provide an initial response to complaints within five business days, and that they must deliver a detailed response within six months.
The IDA’s proposed rule has yet to be published, but the IDA board has approved it and has sent to the OSC for publication. The IDA contemplates a three-month deadline for substantive responses, which is in line with what the Canadian Securities Administrators proposed in its registration reform rule.
These deadlines are particularly important because the provincial government in Ontario has reduced the limitation period for civil actions to two years from six years — which is another ongoing, unresolved issue for investors. At the town hall, IDA president and CEO Susan Wolburgh Jenah indicated that the purpose of adopting complaint-handling rules is to ensure that clients/investors are treated consistently and that they are able to escalate their complaint to OBSI as soon as possible: “So they don’t get frustrated by having to deal for a long time within the firm.”
Wolburgh Jenah added that it’s important that firms not stall investors — or that investors find themselves in a system that appears stacked against them. “That’s the reason why we engaged in the effort to create consistent complaint-handling standards across the board that will be rigorous, that will create more efficiency in the system and certainty for inves-tors,” she told attendees.
Notwithstanding efforts to improve complaint handling, the shorter limitation period is just one among several harsh industry realities that continue to mystify retail investors. Others include seemingly common-sense ideas, such as the expectation that SROs should be able to collect the penalties that their disciplinary panels order. At present, for the most part, they can’t. The result is that miscreant advisors can easily avoid the sanctions by simply leaving the industry. The regulators have sought more power in this area for some time, only to be turned down by the government.
Investors also wonder why they can’t access advisors’ complaint histories, along with their disciplinary records, as a way of avoiding troublesome reps.
Although the SROs have begun collecting the complaints they receive more systematically, there is still some resistance to disclosing that information to clients. At the town hall, MFDA president and CEO Larry Waite said that he doesn’t believe it’s fair to disclose complaints, as so many of them are unsubstantiated. Only about 20% get past the case-assessment stage, and only about 20% of those that are investigated proceed to an actual hearing, which works out to about 4% of the initial complaints.
@page_break@Nevertheless, regulators are trying to respond to investors’ understandable demands for more information. At the meeting, Wolburgh Jenah announced that the IDA is working on “a fully automated electronic information service that will provide more detailed information about registrants’ qualifications and background.” She also indicated that the provincial securities commissions will be developing a central registry that would contain all of the decisions the securities commissions and SROs hand down.
These sound like good ideas for investors. However, it remains to be seen what actually materializes. Regulators have a history of overpromising and underdelivering — as they fall victim to a variety of stumbling blocks, from industry lobbying (for example, the failed effort to regulate financial planning titles) to a lack of unity among the provinces (the fair-dealing model, for instance) or problems in implementing technology (various CSA initiatives).
It makes sense that retail investors have access to the complete employment histories of their current and prospective advisors — as they do in the U.S. But regulators in Canada have been unable, or unwilling, to provide similar information to Canadian investors. Even though there is a central registration database, the general public doesn’t have access to it. The public is forced to seek information from the individual provincial commissions. And the depth of information and the ease of access varies widely across the country.
The IDA’s vice president of public affairs, Connie Craddock, says that the proposed IDA service is essentially modelled on the one provided in the U.S. by the Financial Industry Regulatory Authority. FINRA’s BrokerCheck details a broker’s qualifications, employment history, disciplinary events and customer disputes.
The IDA system will disclose similar information about Canadian investment advisors. However, what the IDA system can reveal is subject to local privacy laws, Craddock notes. It also remains to be seen if client complaints will be disclosed.
The IDA’s new system will probably be launched once the long-planned merger of the IDA and Market Regulation Services Inc. is realized. A vote on the proposed combination of the IDA and RS is likely to occur in mid-December; an information circular is to be sent out in mid-November.
Assuming IDA members approve the merger, the deal still needs CSA approval — and that includes a public comment process. The best-case scenario is that the merger will take place by the end of the first quarter of 2008, with the new information service launched at the same time.
Although the regulators have pledged to do more to give inves-tors useful information about advisors, retail clients would also like to see the firms offering better information about their portfolios. Reporting individual returns on client account statements remains another disconnect between investors and the industry. To some at the town hall, it’s inconceivable that investment dealers and mutual fund dealers don’t report individual returns. But the firms have resisted this, saying that doing so would be very tricky — and expensive.
Wolburgh Jenah seems sympathetic to investors on this issue. “It sounds like such a common-sense thing and something to which investors should be entitled,” she admitted at the town hall, noting that some firms provide individual returns for their larger clients and that firms can produce individual returns on demand. The problem is making it universal.
She acknowledges the industry’s arguments against providing individual returns, but says that regulators want to move in that direction. And that one way to get there “is to signal an across-the-board belief that that’s where we ought to be.”
In that vein, she applauded an online petition from some fee-based financial planners calling for mandatory return reporting. “I think that kind of [market-driven] change and behavioural change is really what we’d like to see happen,” she said.
One way to get there, short of mandating it, she suggested, is to require firms to disclose whether or not they provide individual returns. That way, the market can decide whether individual returns are something it must have.
Another issue that intrigued investors at the town-hall meeting is the idea of requiring advisors to carry some form of professional liability insurance. The regulators indicated that the issue has been looked at in the past but rejected as too expensive or hard to acquire.
However, one attendee pointed out that it is required for advisors in the insurance industry, and that the concept does work in that sector: “The product is out there, it’s reasonably priced and I honestly don’t understand why [it] isn’t more seriously looked at. Because there’s a triage availability, the companies do pay out. Its time has come, and I think that will go a long way to protect Ontario consumers.”
While much of the town hall was devoted to investors’ grievances with the legitimate financial services industry, scams and frauds being perpetrated from outside the industry were also addressed. In a breakout session, Scott Boyle, assistant manager of investigations at the OSC and head of a new anti-scam unit set up earlier this year, reported that complaints about scams have risen tenfold over the past few years.
Correspondence coming into the OSC’s contact centre rose by about 35% over the past seven years, yet the number of scam-related complaints went to 2,000 from 200 in that period. “I do not know of any studies that indicate investment fraud is on the increase,” Boyle says, “but based simply on the numbers above, I suspect it is fairly safe to assume.” Earlier, a CSA study found that one in 20 Canadians have been victimized by investment fraud.
This proliferation of fraud may be explained, in part, by the changing tactics of scammers. “My team is finding a greater number of inves-tors are being defrauded of smaller amounts — $2,000 to $4,000 on the initial contact — and then later ‘re-victimized’ for additional investment,” Boyle notes. “Rather than try to persuade a few investors to invest large sums in phony deals, the boiler rooms are beginning to victimize more people with smaller amounts.” The OSC’s new unit is aiming to disrupt these frauds before people are victimized.
Back in the legitimate industry, there is plenty that could be done to improve investor protection, much of it common sense — giving investors more information about their advisors, providing a true picture of their portfolio performance, ensuring complaints are addressed swiftly and, ultimately, that avenues for fair restitution are available whether via arbitration or insurance.
Hopefully the industry is absorbing some of its clients’ simple wisdom. IE
Taking complaints seriously
SROs plan to introduce standards for handling client complaints
- By: James Langton
- November 12, 2007 November 12, 2007
- 10:35