Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House



September 2004
Consumers assail the system

"You get better consumer protection in Ontario if you're buying a used car"


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 investors.

With their testimony, investors and 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 protection.”

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 investor victims.”

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 claims.”

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 question. IE