By James Langton
Listening to legislative hearings into
Ontario’s securities regulation, it’s hard to conclude anything other than
that the system of investor protection and redress isn’t working.
The hearings last month by Ontario’s
standing committee on finance and economic affairs were an odd mix of Bay
Street suits seeking technical reforms, financial industry establishment
figures pleading for more powers and aggrieved individual investors and
their advocates attacking industry authorities as structurally flawed,
unproductive or incompetent.
The committee is meeting ostensibly to
consider the recommendations of the five-year review committee report,
which was tabled about a year ago, but it is getting an earful from
investor advocates paint a picture of a system that delivers bad advice
that harms financial consumers and that fails to deal properly with client
complaints because its primary aim is to protect the industry rather than
the consumer. Investors charge that regulators are either unable or
unwilling to help them get their money back. The industry uses
non-disclosure clauses in settlements to cover up its misdeeds, they say.
And both the arbitration process and the court system are too expensive
and too time-consuming to offer effective redress.
“Frankly, you get better consumer
protection in Ontario if you’re buying a used car or a travel package than
when you get cheated by the securities industry,” Whipple Steinkraus,
vice president of the Consumer Council of Canada, told the
committee. She argues that investor protection is badly lacking, noting
that the Investment Dealers Association of Canada can impose fines,
but has no authority to collect those fines, “And that does little to help
the investor who may have lost their entire life savings.”
The IDA admits that its inability to
collect fines once brokers leave the industry hampers its credibility as a
regulator. It has badgered the securities commissions for this power for
the past couple of years, to no avail.
But the real problem for investors who
believe they’ve been wronged by the industry is that there is no easy way
for them to get their money back. For that they blame the regulators,
particularly the IDA and the Ontario Securities Commission.
“I am an Ontario investor who has lost
faith in our investment industry and its regulatory authorities, [as]
overseen by the Ontario Securities Commission,” said Gloria Hutton,
as she introduced herself to the committee.
Hutton told a tale of grief and
frustration as she fought first for the return of her life savings, which,
she says, was lost through broker misdeeds; and then for answers as to how
it happened. “No words can adequately describe the enormous trauma this
caused our family — the past four years have been hell,” she says, “made
no less easy by regulatory agencies supposedly committed to our
Her complaints were echoed in the
testimony of other investors and their advocates. They complain that there
are too many regulators who can’t or won’t do enough to protect investors
and that authorities don’t provide financial redress, don’t deal with
their complaints in a timely manner and have abandoned investors to the
courts — a slow and expensive option that simply isn’t cost-effective.
Ernest Wotton said his experience
fighting for redress has led him to conclude that investment firms won’t
vigorously investigate complaints against their own reps. Nor is the OSC
or the IDA able to help investors get their money back, he said, adding
that oversight of regulators is inadequate. “No investor should have to go
through the trouble and worry I went through to obtain relief,” the
elderly investor said of his eight-year battle.
Another aggrieved investor, Sandra
Gibson, also lamented the lack of viable options for redress. She says
that the OSC could orchestrate restitution, but it doesn’t. She complains
that the arbitration system deals only with smaller losses, which means
the courts are often the only option, but that this is prohibitively
expensive. She reports that law firms she contacted about her case warned
it would cost her $50,000 to settle a case out of court, and $125,000 to
$150,000 to carry through with a trial.
It’s not just the proverbial “little old
ladies” that are left feeling abandoned by the system. “Individual
investors are not all mothers and grandmothers; there are entrepreneurs,
such as myself,” says Diane Urquhart, who has fought a contentious
battle with the OSC over an alleged unpunished case of insider trading at
a company of which she was a director. Urquhart told the committee that
the securities enforcement and justice systems are “not working for
While it may be tempting to dismiss these
investors as fools or knaves with axes to grind, those who have worked in
the business corroborate their tales of woe. Retired broker Larry
Elford from Lethbridge, Alta., told the committee, by teleconference,
that his 20 years in the business taught him that “the money is too great,
and the entrance requirements too low” for many advisors truly to be
ethical toward their clients.
John Hollander, a lawyer who
represents investors against brokerage firms for Ottawa-based Doucet
McBride LLP, agrees with Elford. He says that while the various
industry associations and self-regulators all have codes of ethics, it
appears that they simply aren’t followed. He argues that the proficiency
bar is set far too low for financial advisors, and so firms should be held
accountable for losses due to bad advice, because it is the direct result
of the industry’s skimping on education and proficiency training. He’d
like to see much tougher educational requirements, noting he has never had
to pursue a case against someone with a CFA designation, for example.
Hollander also says that self-regulators
preach investor protection but really protect the industry: “When a
private investor contacts the IDA or the [Mutual Fund Dealers
Association of Canada] about losses from what they see to be
unsuitable trading advice, they assume both impartiality and expertise on
the part of the organization. Unfortunately, in my experience, both of
these assumptions are unfounded, and lead to the abandonment of valid
He recommends that when SROs respond to
client complaints, they should be required to tell investors that they
represent the industry, not the public, and they should encourage the
investor to seek independent legal advice. Otherwise, they are
discouraging people from seeking redress who have been genuinely wronged
by bad advice.
This lack of regulatory impartiality is
also a concern for Robert Kyle, formerly a trader and now an
investor advocate. Kyle is embroiled in a long-running legal battle with
the IDA over its attempts to discipline him. He alleges that
self-regulation has been a total failure. While the IDA claims to protect
investors and is empowered with delegated authority, it is really just a
private club run for the best interests of its members, he says.
Kyle implored the committee to, “fix the
system,” calling for an independent tribunal charged with an
investor-protection mandate, empowered by law and able to order redress.
This recommendation is echoed by Steinkraus from the Consumer Council; she
seeks stout protection for whistle-blowers.
Elford argues that self-regulation should
be abandoned entirely, that the OSC’s fair-dealing model should be adopted
to help protect investors and that a single regulator is required, as is
an independent association representing clients.
Duff Conacher, co-ordinator for
Ottawa’s Democracy Watch, has a plan for setting up such a consumer
association, modelled on citizen watchdog groups that police public
utilities on behalf of customers in several U.S. states. He says that the
regulatory system favours the industry because the industry is well
organized and investors aren’t. That imbalance could be corrected by
forming a consumer association that would give investors more market
power, thereby causing the industry to improve voluntarily its treatment
of clients; facilitate class-action suits; and, advocate for policy change
on behalf of investors. Conacher says that this group could be formed at
little cost by requiring dealer firms and public companies to include
brochures in investors’ mailings inviting them to join for a modest fee.
While this privately funded option may
appeal to the cost-sensitive government, author David Yudelman argues that
no consumer advocacy group has ever been very successful without public
funding. And, he suggests, governments should be improving investor
education and seeking a single regulator. “Consumers want solutions to
problems, not jurisdictional excuses,” he warns.
Some investors clearly aren’t satisfied
with the solutions the industry has produced to date. And their tales
certainly provoke sympathy from legislators. “The protection of investors,
and particularly individual investors, is a core priority for us,” claims
Deb Matthews, Liberal MPP. “The question is: how do we achieve that?” Good