A mutual fund dealer has refused a compensation recommendation from the Ombudsman for Banking Services and Investments (OBSI), the dispute resolution service announced Friday.

OBSI says that Waterloo, Ont. based fund dealer Armstrong & Quaile Associates Inc. has declined to compensate a retired couple that lost about $34,000 by following what OBSI says was an unsuitable leveraging strategy recommended by their advisor.

According to OBSI’s summary of the case, the firm maintains that the strategy was suitable based on the clients’ KYC documentation. OBSI also notes that the firm suggests that their new advisor should be able to recommend an investment strategy to recoup most of their losses.

The clients in question were retired and living on Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. They agreed to implement a leveraged investing strategy recommended by their advisor. OBSI says they adopted a “RRIF meltdown strategy” that involved borrowing $200,000, investing half in mutual funds and half in segregated funds, and using RRIF withdrawals to fund the interest payments on the loans.

OBSI reports that the strategy initially did well, but that the fund investments subsequently faltered, and the clients grew concerned they would not be able to afford the interest payments on the loans. Ultimately, they sold the funds to pay down the loans as much as possible. OBSI says that they still have outstanding loans and it calculates they have sustained in excess of $34,000 in losses to date on the part of the strategy involving mutual funds.

As OBSI has recently decided not to investigate complaints regarding segregated funds, in this case it restricted its investigation to the suitability of the recommendation to borrow to buy mutual funds. The part of the complaint involving segregated funds was referred to the Ombudservice for Life and Health Insurance (OLHI), it reports.

In terms of the mutual fund investments, OBSI found that the clients did not understand the risks associated with the leverage strategy. “While there was some risk disclosure on the loan applications [they] signed,” it notes that their advisor “did not provide them with a balanced presentation of the risks involved.” It says that the illustrations provided to them emphasized only positive results, and did not explain the potential downside and risks associated with borrowing to invest.

OBSI also says that the advisor acknowledged that he did not assess the affordability of the leverage strategy. “He said that was the responsibility of the loan provider,” it reports. “We do not agree. It is the responsibility of advisors to ensure their recommendations are suitable for their clients.”

It concluded that the strategy was not suitable, and recommended that the firm compensate the clients for their losses, but it says that the firm has refused to compensate them any amount.

This latest case follows OBSI’s new approach designed to speed up its process by only publishing summary reports in cases where firms indicate that they “will not compensate its customers no matter what OBSI’s final conclusions are.”