Investor protection should be the highest priority for financial advisors and securities regulators as the industry works to regain the trust of the public, according to Margaret Franklin, chair of the Board of Governors of CFA Institute and president and CEO of Kinsale Private Wealth.

Speaking to members of the Canadian Club and the CFA Institute in Toronto on Thursday, Franklin said investors are clearly still shaken by the financial crisis and the numerous cases of fraud that surfaced in the past few years. She pointed out that billions of dollars continue to sit on the sidelines in cash, as investors remain reluctant to put their money in the hands of the industry.

Rebuilding trust is critical, Franklin said.

“Without trust, we don’t have a business,” she explained. “It is a business whose basic thread is that of trust that we will do the very best for our clients, we are qualified to do the services that we say we can provide and that we will put our clients’ interests first and ahead of our own.”

Advisors have a critical role to play in rebuilding trust by proving that they’re acting ethically and responsibly, according to Franklin.

“Investors count on their advisors to look out for their interests. Investor protection is therefore a high priority for advisors. It should be the highest priority,” she said. “There must be a commitment to professional excellence and ethical standards that goes beyond lip service.”

In addition to holding financial advisors to a strict code of ethics, Franklin said it’s critical for investment practitioners – and particularly young professionals – to be well educated on how to deal with ethical dilemmas.

Another critical component of rebuilding public trust is to better enforce the rules.

“Sadly, when it comes to the issue of enforcement, the Canadian experience is exceptionally poor,” Franklin said.

She argued that the system fails to prevent fraud, and when fraud does occur, fails to punish wrongdoers.

For example, Franklin noted that enforcement penalties frequently go uncollected. She said the Mutual Fund Dealers Association collects only 38% of penalties, while the Investment Industry Regulatory Organization of Canada collects just 20%, because people can leave the industry – at least temporarily – to avoid paying the fines.

“I continue to be shocked that industry participants aren’t outraged and demanding stronger enforcement because this is about our business, which is about trust,” Franklin said.

Four problems with enforcement

She outlined four main problems with securities enforcement in Canada. First, she said there are too many regulatory players on the field, with 13 provincial and territorial securities administrators and two self-regulatory organizations.

To address this problem, she calls for a single, national regulator that will help streamline detection, investigation, and disciplinary proceedings. Franklin applauded Finance Minister Jim Flaherty’s efforts to make this happen.

A second problem is too few investigators who are sufficiently qualified and experienced to find and convict wrongdoers.

“When we look at enforcement investigators employed by provincial administrators, it is striking how many have limited experience with the industry or many of its practices,” Franklin said.

Obtaining the Canadian Securities Course should be a minimum requirement for this type of position, she said. She also calls for the provincial securities administrators to have more senior-level securities lawyers who have industry experience.

Franklin also called for changes to the Integrated Market Enforcement Teams. Over seven years, she pointed out, IMET has charged 26 individuals with capital markets fraud, resulting in just five convictions, at a cost of more than $100 million.

“This agency needs to be revamped from top to bottom,” she said.

Lastly, Franklin called for Investment Industry Regulator Organization of Canada and the Mutual Fund Dealers Association to be granted the statutory ability to collect fines, so that wrongdoers cannot avoid penalty.

IE