Investors Scrutinizing the Regulators

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W-FIVE: Going for Broke

Updated Sat. Apr. 26 2008 7:17 PM ET
Kristen Yu, W-FIVE

 

Going for Broke, part I


Going for Broke, part II

It is quite possibly Canada's most expensive dirty little secret. And it's happening at some of the most respected financial institutions across the country.

From coast to coast, horror stories are emerging of investors losing their hard-earned savings due to questionable and improper practices within the financial services industry - and some experts estimate it is costing Canadians in excess of $20 billion a year.


It is a harsh reality that 58-year-old Donald Kennedy knows all too well. Several years ago, the Nova Scotia dairy farmer inherited $155,000 and decided to place it all in secure investments with RBC Dominion Securities.

At first, everything went according to plan. Kennedy's original investment even grew to an impressive $217,000 at its peak. But then his first broker went on maternity leave - and his account was taken over by another RBCDS broker, Hugh Bagnell.

Within a year, the account was worth only $134,000. Another ten months later, and it was down to just $1,800. "It just kept disappearing and disappearing," says Kennedy. "But being naive and him being a fairly high-paid professional, what do I hire him for if I don't take his advice?"

Stories like this come as no surprise to former broker Larry Elford. After spending twenty years working at major brokerage firms, Elford left the securities industry over what he saw as systemic unethical practices. "It's an eat-what-you-kill business for most people," he explains. He wants Canadians to understand that brokers may call themselves financial advisers - but they're really salespersons, and are registered as such.

Elford argues brokers and firms live off commissions and that often means taking every shortcut possible. "It's charging the client the maximum commission instead of the minimum," he says. "It's putting your interests ahead of the interests of a client."

And that's exactly what happened in Donald Kennedy's case. The farmer discovered that his losses were no accident. He says Hugh Bagnell was churning his account - buying and selling stocks to make huge commissions, while the investment rapidly bled dry. In fact, according to Kennedy's calculations, Bagnell made 126 trades in a 20-month period alone.

It seems Kennedy wasn't the only one to fall victim to Hugh Bagnell's trades. A number of other investors have since launched civil court cases and someone notified the Investment Dealers Association (IDA), the industry self-regulating organization. After looking into the case, the IDA fined Bagnell $50,000 and imposed a permanent ban on him. It also imposed a fine of $70,000 on Bagnell's former boss, Halifax RBCDS branch manager Frank Youden, for failing to supervise his employee.

Youden paid the fine and kept his job. But Bagnell walked away from the financial services industry, and his fine. Toronto-based investor advocate Robert Kyle says there's nothing that can be done is such a case. "The IDA cannot collect fines outside of the confines of a contract," he says. "They can push you out of the industry, but once they do, they've lost their ability to collect it from you."

Donald Kennedy, a 58-year-old dairy farmer, placed $155,000 in secure investments with RBC Dominion Securities. Less than two years later, the account was only worth $1,800.

 

Larry Elford spent 20 years working at major brokerage firms. He left the securities industry over what he saw as systemic unethical practices.

 

Hugh Bagnell was a RBCDS broker who took over Kennedy's account. Bagnell was allegedly buying and selling stocks to make huge commissions, while Kennedy's investment rapidly bled dry.

Kyle says this just isn't enough of a deterrent for brokers - and he points to an IDA database he stumbled upon to prove it. The association didn't want it published and even legally threatened Kyle when he went public. The document lists brokers with multiple complaints, investigations, court actions and even criminal charges against them.

 

W-FIVE discovered that Hugh Bagnell was on this list with 27 incidents, including complaints and civil claims. IDA Senior Vice-President Paul Bourque says that individuals such as Bagnell are identified and dealt with on a priority basis.

Bourque admits that the IDA can't compel payment once a broker leaves the industry, but he still feels that the system is working well. However, he also acknowledges that the Association usually won't get investors their money back - and that it has only ever ordered restitution once.

It is for reasons like this that Kyle feels investors aren't being properly protected. He criticizes the fact that regulators with legislative authority, like the provincial security commissions, are sending aggrieved investors to organizations that have little power like the IDA.

Kyle says that there is virtually no effective means for wronged investors to seek full recourse under the current system, short of legal action - which is often a costly and lengthy process. Even the Ombudsman for Banking Services and Investments (OBSI), he argues, is funded and created by the industry. He also points to the fact that OBSI can only make non-binding recommendations, with a limit to the amount of money it can suggest firms pay up. That's if your case is investigated at all, complains Kyle.

Last year, OBSI completed 169 investigations, 65 in banking services and 104 in investments. But it was contacted 11,000 times during that same time period. OBSI also refuses to disclose the average amount of compensation it recommends - as well as how many cents on the dollar investors normally receive.

Critics like Kyle have long called for the creation of an independent adjudicative body or tribunal - a sort of court system for investors. It's a view that is shared by federal Finance Minister Jim Flaherty, who strongly agrees it's time to overhaul the current system.

Flaherty describes the regulation of the securities business as "close to an embarrassment internationally." He says it's too complicated, too expensive, too bureaucratic, too inefficient and too ineffective.

The minister has long argued that Canada needs a national securities regulator at the very least - it's the only developed country without one. He says that changes won't happen overnight, but he does hope to have something accomplished by 2009.

And while this may come as welcome news to countless industry watchdogs, it won't be soon enough for victims like Donald Kennedy.

Despite eventually receiving some money back from RBC (we can't tell you how much because of a non-disclosure agreement he had to sign), the dairy farmer says he has lost all trust in the financial services industry. But at the end of the day, he feels it's useless to brood about the past - even as he faces an uncertain financial future.