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