Investors Scrutinizing the Regulators

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‘Duped' retail investors want Ottawa to step in


April 10, 2008 at 2:12 PM EDT

OTTAWA — Retail investors who feel they were “duped” into losing their life savings by investing in non-bank asset backed commercial paper want the federal government to get involved in recoup their losses.

At a hearing before the House of Commons Finance Committee, investor activists gave harsh accounts about how their financial advisers had stashed their savings in non-bank ABCP, telling their clients it was as safe as Guaranteed Investment Securities or treasury bills.

“Everything has turned horribly wrong,” said Murray Candlish, a semi-retired farmer who put his inheritance and much of his life savings in non-bank ABCP — the same commercial paper that has been frozen since last August.

“Please help the individual get back what is rightfully ours,” he asked the committee. “If individual investors are guilty of anything, they are guilty of trusting the Canadian banking system.”

Retail investors, including Larry Elford, are testifying about the way their ABCP holdings are being treated before the Standing Committee on Finance in Ottawa

Since investment brokers and financial advisers are self-regulating and prone to convoluting their investment advice, Canadian clients are vulnerable, and end up trusting their advisers blindly, with little recourse if something goes wrong, said Larry Elford, a former financial adviser from Lethbridge, Alta.

“They give Canadians a false sense of security,” he said. “We are sitting ducks, financially.”

Retail investor Wynne Miles, a self-employed Victoria resident, said her savings were invested in non-bank ABCP without her knowledge or consent, since her adviser believed she was merely putting Ms. Miles' money in a safe place.

The future of their savings is caught up in the high-stakes plan to fix Canada's frozen $32-billion commercial paper market. About 1,800 individuals have money tied up in that market, but they collectively own just about 1 per cent of the frozen paper.

The plan to fix the market is scheduled for a vote on April 25, and each investor gets one vote, regardless of the quantity of frozen paper they hold.

Many of the panel members appearing before Commons committee on Thursday suggested they would vote against the plan, however, because they would have to give up their right to sue, and because they would still sustain substantial financial losses.

However, Vancouver-based brokerage Canaccord Capital Inc. announced on Wednesday a relief plan for 1,400 of its customers who collectively hold $269-million of the frozen paper.

The package is contingent on the April 25th restructuring vote passing, and so some analysts believe the Canaccord proposal will ensure success of the vote.

The House of Commons hearings were billed as a “briefing” and committee chairman Rob Merrifield warned the panel that MPs would not get drawn into a private-sector dispute in the days before a crucial vote.

But most of the investors and activists before the panels had advice for Ottawa anyway, ranging from recommendations to increase the power of federal banking regulators to crack down on foreign financial institutions active in Canada, to recommendations for a bail-out fund to compensate retail investors.

The Conservative MPs on the committee tried to steer the focus of the discussion to the perceived need for a national securities regulator.

Finance Minister Jim Flaherty has frequently placed the blame of the commercial paper caper on provincial securities regulators and hints the whole issue could have been avoided with streamlined oversight.

“Most of the businesses involved that sold this product are provincially regulated, were supposed to be provincially regulated in our current system by provincial securities commissions. And, as you know, we are advocating and I am a strong advocate of a national securities regulator in Canada,” Mr. Flaherty said on Wednesday.

Still, the committee agreed to pursue its hearings into the causes of the ABCP collapse, placing the issue near the top of their list of priorities to handle before the summer.

The investors told the MPs that the issue has prompted many retail investors to lose confidence in Canada's capital markets and regulation of the banking system in Canada.

One man, the treasurer of an affordable housing co-operative in Waterloo, Ont., described how the residents would have to forego new furnaces. Another panel member recounted how an acquaintance, an 83-year-old veteran of the Armed Forces, was having blood pressure problems because his retirement savings were now frozen and unlikely to be full restored.

“Most of us just want our money back,” said Ms. Miles. “If someone would buy our notes, then the big boys can [do what they please.]”

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