Investors Scrutinizing the Regulators

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Investors suffer from silence

In an ironic twist, IDA lectures brokers on secrecy


Derek DeCloet

Financial Post


May 25, 2001

Bay Street brokerage firms got a rather strange notice from Investment Dealers Association this week.

It's a dictate on dealing with unhappy customers. When they settle disputes, says the IDA, brokerage firms must not force clients to sign agreements that prohibit them from talking to the regulatory bodies, or from filing complaints. (Gagging clients by prohibiting them from talking to the press, however, is still considered entirely acceptable.)

What hypocrisy. If ever there was a group with no right to lecture others about secrecy, it's the IDA.

Let's start by looking at the IDA's role. In most cases, it's the first place an investor can turn if he believes his broker has violated the rules but the firm disagrees.

The IDA received 1,182 such complaints last year, a 234% increase from 1996. But the association won't release the really useful information: How many complaints have been received about each firm.

"I don't think that's necessary," says Joe Oliver, president and chief executive of the IDA. If there's a major problem at one brokerage house, he says, it will lead to a regulatory hearing, which would be public. Besides, the big dealers with hundreds of brokers will naturally generate more IDA files than the tiny ones run out of some guy's garage. So the number of complaints against each firm "can be misleading," says Mr. Oliver.

Admittedly, the number of complaints is a crude measure of the quality of an investment dealer. But it's one of few measures available -- or at least, that would be available if the IDA didn't keep the numbers locked in a filing cabinet. To be fair to bigger firms, you could simply divide the number of complaints by the number of brokers on staff. Call it the gripe ratio.

If the IDA disclosed such details, it would help the brokerage business, not harm it.

Every year, the Canadian banking ombudsman publishes a report on how many complaints he received from individual and small-business customers of the banks.

With all the bitching that goes on about service charges and loan rejections and lousy service, you'd think such information would be a public relations nightmare for the banks. But it's not. The ombudsman investigated exactly 14 complaints against Bank of Nova Scotia in fiscal 1999. He investigated 36 against Bank of Montreal.

That's not very many, given the millions of customers each institution serves. With no similar information on brokerages, we're left to wonder if every rogue-broker story is an isolated case, or proof of rotting ethics at a particular firm.

This is hardly the only example of the IDA's tight-fisted attitude to information. Last year, the IDA finally decided to start releasing statistics on margin debt -- but only after it was blasted in the financial press for keeping the data secret.

Then there's the IDA-sponsored arbitration process. Investors who have lost less than $100,000 and believe they were mistreated can take a brokerage firm to an arbitrator. It's cheaper and quicker than suing.

But the whole thing is conducted in a cloud of confidentiality agreements. Mr. Oliver argues that most individual investors would rather not air their disputes. "Public disclosure might discourage them from proceeding," he says.

That's a fair point. Maybe we don't need to know the minutiae of individual cases. But the results of arbitration, like the number of complaints, are an indicator of how hard a brokerage firm works to satisfy its customers. Which would you rather do business with: a brokerage firm that's lost a half-dozen arbitration cases in the past two years, or one that consistently solves complaints before they get to that stage?

Too bad you'll never find that stuff out from the IDA.