Friday, April 29, 2016

Fine collection, IIROC and Best interests

Fine collection, IIROC and Best interests

In a recent paper released by the Small Investor Protection Association (SIPA) , it was determined that there is more than $899,216,448.32 in fines owing to Canadian regulators. A huge number by any standard.

The paper, “Unpaid fines: a national disgrace” was released by SPIA to raise awareness of the issue of unpaid fines for breaches of financial services regulation levied by regulators against individuals or firms.The report breaks down fines based on provincial commissions as well as Canada’s mutual fund and securities regulators.

Unpaid fines contribute to a breakdown of trust in the system and reduced investor protection,” writes Debra McFadden, who authored the report for SIPA. “Better collection of fines is needed but a legislated fiduciary standard for advice giving would reduce the number of complaints and lead to better financial outcomes for retail investors.”

While the biggest amount owing isn't related to The Investment Industry Regulatory Organization of Canada ( IIROC ) we want to emphasize IIROC as it is in effect Canada's national regulator for retail investors. The comments we make here apply also to the Mutual Fund Dealer Association (MFDA) . The IIROC figure is $27,941,793.00 and the MFDA total is $56,793,709.71 (includes costs imposed).To stay in the business, both firms and individuals are required to pay the fines that are levied.

The fines relate to a myriad of investor abuses , including misappropriating client funds; providing fictitious account documents to the client; forging signatures; unauthorized ptrading; outside business activities , off book transactions and engaging in personal financial dealings with a client . It is not known the extent to which employers compensated the clients for such activities.The large amount of fines whether collected or not are a sign of a far deeper issue with advice giving in Canada.

According to the SRO's, somewhere between 80 and 90 % of fines imposed on individuals are never collected.This is the main issue. Unpaid fines on such a scale make a mockery of the enforcement system and the general deterrence value of fines. This needs to be changed.The core issue is that dealers are not held accountable for the actions and inactions of their staff/ agents. If they were ,there would be a small collection problem.If a carpet cleaner ruins your rug , the firm , not the individual is held accountable. The financial services industry immunized themselves by having regulators chase the small fry who often can't pay or go bankrupt.This has zero deterrent value and reflects poorly on the industry and its regulation. Still, until the system is fixed, better fine collection is needed .

In two provinces, Alberta and Quebec, IIROC can pursue individuals after they leave the investment industry - a power it said it has used on occasions.In Alberta, the collection rate between 2008 and 2014 was 35.75%, compared to 17.6% nationwide.In Quebec, the collection rate for personal fines was 59% in 2014 (the first full year that the court enforcement power existed), compared to 17.3% nationwide. It wants Ontario regulators to have the same power. Andrew Kriegler, chief executive officer of the Investment Industry Regulatory Organization of Canada, asked the Ontario government’s standing committee on finance and economic affairs for legislative reform – stating the regulator’s unpaid fines in Ontario was largely due to the organization’s lack of power to enforce collection.We certainly agree with this as it will improve deterrence at least on the margin. We would expect to see that (a) any fines uncollected after one year will be to the account of the dealer and (b) the proceeds be used for investor education , outreach, research.,formation of an investor advisory Panel or restitution.

Over the years investor advocates have provided regulators with many ideas to imprive fine collection :

Improve supervisory controls over Reps -prevent problems
Require firms / staff to have appropriate insurance coverage
Link to insurance and banking regulators to deal with dual -licensed Reps
Incentivize collection staff with a bonus program
Use dedicated ,well trained specialist staff for collections
Use outside professional collection agencies whwn required

Prohibit use of personal corporations
Withhold x weeks pay as collateral
Make fine collection a defined annual executive compensation objective of each commission chairman and SRO president
Require dealers to automatically rebate profit they made as a result of the sanctioned activity in satisfaction of fine( unless they too are prosecuted)
Allow a certain percentage of collected fines to be go into an unrestricted fund
Increase dues/ fees for dealers with above average rate of rule breakers
Seize termination payouts and post employment benefits if and as applicable
Require all  securities commissions to publish detailed unpaid fines information
Check to see if EI , CPP et al  benefits can be seized;Use wage garnishment
Strengthen "advisor" recruitment screening processes and hiring criteria
Introduce an effective internal whistleblowing program at dealer level
Get more aggressive on fraud prosecutions - work with law enforcement
Notify professional Associations which the Rep is licensed with eg FPSC ( CFP designation)

SRO's often take too long to investigate and discipline, so by the time the fines are levied, years have passed and there is no money left. We therefore welcome IIROC's recent initiative to use mediation to help speed up the process.

So what else can be done? One possible approach to collection would be to work with FSCO ( and other provincial insurance regulators) in establishing a reciprocal agreement so that dual licensed salespersons were not immunized form paying fines. This would help in collections from dual licensed “advisors”. It appears that IIROC is taking steps in that direction after years of cajoling from SIPA and others . We welcome the new approach.

Given the large amount of unpaid fines, it is difficult to argue the current system is functioning. Given that working in the financial business is a privilege, a reasonable starting point would be to make it more difficult for people to enter the industry in the first place by requiring higher standards - academic, professional and ethics.

And once the individual is part of the system, make the advisors work to an even higher standard, namely fiduciary duty which means that they act solely in the client’s best interests. Although IIROC has not provided leadership in that area , the CSA /OSC appears to be ready to introduce such a standard. That should reduce the amount of abuse and by extension the need for sanctions and fines.

By making it harder to get into the business, by insisting that they the act to a higher standard, there’s a good chance that there will be better outcomes for investors.

Another way is for the regulators to insist employers are responsible for the behavior of the employees they take on — even if the employees regard themselves as independent contractors.In our opinion, such a change would result in an immediate improvement in dealer behaviour and supervisory practices. In the majority of cases cases it is the policies, practices, sales quotas , commission grids . compensation arrangements and other non-financial incentives of dealers that incent “advisors” to push the envelope of compliance. We have also encountered cases where supervision share in branch commissions earned!

Actually, fine collection is far less important to investors than recouping their money and that's what we'd like to see the IIROC really focus on. Fairer dealer complaint handling and an OBSI with binding decision powers are regulatory protections needed by retail investors .



Caveat Emptor !













Friday, April 22, 2016

Surviving a Complaint investigator interview

We have recently received a growing number of questions and complaints about the complaint resolution system itself. The investigator’s interview is a part of the analysis process. Interviews are voluntary but not participating could be harmful to your case. Readers increasingly report feeling uncomfortable with this stage of the process.

Before the interview takes place the claimant must confirm that the interview is without prejudice. Thereafter and before the interview, the claimant must send an e-mail confirming the date and time of the interview and once again recording, in writing now, that the interview is without prejudice. Written confirmation of the without prejudice aspect, is of vital importance.

Here are a few cautionary tips we’ve received from lawyers and professional dispute resolvers, should you have occasion to interact with the MFDA/IIROC, a firm’s complaint department/ombudsman or OBSI regarding an interview with an investigator:


  • Avoid  participating in an interview without being prepped

  • Make a list of everything you want to say and make sure you say it whether you are asked about it or not.

  • Ensure you have your key documents and files with you.

  • Ask for a list of questions the investigator intends to ask so you are properly prepared. If they refuse, ask why. If you have an Intervenor (someone who’s familiar with the complaint process and willing to provide support), consult with them before participating in an interview.

  • Have a friend participate with you to take notes and act as a witness. Ask if you can record the interview.

  • Don't allow the investigator to put words in your mouth.-ask if conversation is being taped. If so, ask for a copy of the tape.

  • Don't let them cross-examine you. Being a victim of financial assault is enough pain. After you have provided an honest response, it’s best to remain silent.

  • Don't think that they are your friend, and get lulled into a false sense of security –investor advocates have provided lots of evidence that the system is biased against you

  • Do not answer questions you do not believe are relevant to your case. Try to clarify why the question is being asked. Assume anything you say, can and will be used against you.

  • If you have provided documents or information to the investigator, ask if they have been provided to the firm. If they have, you may have the right of reciprocity- obtaining internal documents the firm has provided to the investigator.

  • You do not have to answer every question asked. If you don’t recall something, say so. If you want to check your files before responding, say you will get back to the investigator after you’ve checked the facts.

  • If inconvenient, impossible (e.g. hospitalized, infirm) or too expensive for you to travel (travel costs, lost time at work), ask for a conference call or a meeting location suitable to you. The SRO’s prefer that you visit their offices for the “friendly” chat but may accommodate you.

  • If you feel like your undergoing an interrogation, you feel your integrity is being challenged or the investigator is disrespectful, report this to senior management.

  • If the firm has been unable or unwilling provide you with personal documents [NOTE 1] ask the regulator or OBSI to assist you in obtaining them. These documents may be of great importance to you to help you make an informed decision as to whether to accept or reject any recommendation the firm may make to you, with regard to a possible settlement of your complaint. Without them, you could be placed in a disadvantageous position.

  • Resist paying any fees for these documents. If you are forced to pay, ask the investigator to include these expenses in any Decision so you can be reimbursed if your complaint is validated.

  • Watch out for trick questions. For example in one case, the investigator asked if the complainant had taken any courses in investing. She said “Yes”. This was used against her in a subsequent trial. It turns out the course was in fact a 2-hour seminar on RRIF’s, eight years earlier. In another case, the  investigator was able to extract information about the growth in assessed  value of a complainant’s home  over time, thus increasing his New Worth ; a figure that can be used ( or abused)  to demonstrate suitability.

NOTE 1:  These include but are not limited to your NAAF, KYC, transaction slips, client statements, copies of all KYC updates, any Investment Policy Statements, all agreements including margin, option and shorting Agreements, Powers of Attorney, discretionary and/or managed account Agreements, and annual renewals of discretionary accounts. Copies of all notes from the financial advisor or somebody else acting on his or her behalf, including entries in any diary or calendar relating to the claimants account in question. Recordings and/or notes of all telephone calls or conversations. Copies of all daily and monthly internal reviews carried out by the compliance department or other designated party relating to the financial advisors handling of the claimants account with particular emphasis to suitability and other issues, The dates and times when such internal reviews were carried out, and by whom. Records of any disciplinary action taken against the financial advisor, whilst at the current firm and whilst at any previous firms. Copies of any and all correspondence, e-mails between the compliance department and the financial advisor, or any other e-mails sent by anyone else in the firm with relation to the claimants account to anyone else. The investigator or the firm may refuse to provide requested documents- take note of the refusal and the reason provided for the refusal.

We are working with regulators and OBSI to make the interview process less intimidating and fairer and to accommodate the special needs of seniors.


Contact kenkiv@gmail.com for a copy of the Investors Guide to Effective Complaints. It may save you a lot of time, trouble and money. 

Tuesday, April 12, 2016

Kenmar review of “A Major Setback for Retirement Savings: Changing how Financial Advisers are Compensated could Hurt Less-Than-Wealthy Investors Most “

                                                                                                           April 12 , 2016

Kenmar review of “A Major Setback for Retirement Savings: Changing how Financial Advisers are Compensated could Hurt Less-Than-Wealthy Investors Most “
http://policyschool.ucalgary.ca/sites/default/files/research/financial-advice-lortie.pdf
Except for the title , a few unsubstantiated assertions and conclusion ,there's a lot to like about this paper. The University of Calgary school of Public Policy must've woken up one day and decided it's time to write about embedded commissions. A report of this depth must have cost it at least $100,000 to produce -the timing couldn't have been better – mostly for industry participants.

On page 1 we are presented with this paragraph “ We find that critics of current embedded compensation practices tend to base their policy prescriptions on a truncated analysis of the likely consequences that would unfold if implemented.3 These consequences are much broader and pervasive than investment outcomes. From a public-policy point of view, the “outcome” that truly matters is the impact of financial advice on households’ accumulation of financial wealth and, therefore, how it is affected under different remuneration models. We make the case that voluntary personal savings are unlikely to deliver adequate retirement income unless individual investors have access to expert advice from competent and well-regulated professional advisers and asset managers on terms that are reasonable and conform to their expressed preferences, regardless of whether advice is delivered using commission- or fee-based advice models.”

This essentially critiques the CSA research for undue emphasis on performance , arguably the main reason for investing in the first place. Even if “ outcomes” were defined as accumulation of financial wealth it's not obvious that advisors impact that much of that wealth accumulation ( eg home ownership ) for small investors. Of course for some , putting a child through university might be the goal rather than wealth accumulation. The other built in assumption is that today's mutual fund salespersons are in fact experts , competent and well regulated is an unsubstantiated assumption . A correspondence course and multiple choice exam is hardly proof of proficiency.In fact, investor advocates would argue that it is nothing more than industry hype , an illusion achieved via sharp marketing programs to mask the true nature of the role of the “advisor” as a saleperson .

The Report does contain some solid facts , statistics and excellent reference research materials in an attempt to support the argument that conflicted advice is better than no advice at all. If we didn't know better we might be swayed.

So where do we take issue with the report? First off , it refers to those providing advice as advisers as opposed to their actual registration as sales persons or dealing representatives. It also assumes that the advice is actually delivered but does admit that it could indeed be conflicted. Given the low qualification requirements for mutual fund “ advisors” even if advice is provided , it isn't based on a high standard of proficiency.

The Report doesn't deal with the issue that larger mutual fund investors are unknowingly, and likely unwillingly, subsidizing smaller investors. It also ignores the fact that funds sold by discount brokers collect embedded trailer commissions but don't provide a dime of advice.

As is well known , different advisors do different things (some more; some less) for their clients. In the real professions (law, accounting, etc.) those who do more charge more - and clients willingly pay it. Under the embedded commission model, there's a 'one compensation model fits all' approach - regardless of how much (or how little) the "advisor" does . This could mean that some investors are being overcharged under the embedded commission model.

The report labels investments in mutual funds as savings when in fact they are investments. They are naturally higher for advised accounts than for non-advised accounts. This is to be expected since the advisor is incentivized to sell more funds even if it may be better for the client to reduce ,say , 18% credit card debt or increase life insurance coverage. Without knowing the debt level it is meaningless to refer to account amounts as “savings “ and an advantage of an advised account. Focus should be on income adequacy in retirement rather than savings.

Too many advisors recommend leverage which in most cases is a wholly unsuitable investment strategy for the small investor. The cost impact of bad advice is not reflected in the report but for those who have ever experienced conflicted advice, it can be life altering.

It's easy to think that value of the service you’re getting is implicit, particularly when various pro-embedder Reports like this one routinely reference a 2012 report by the Centre for Interuniversity Research and Analysis on Organizations (CIRANO) which states that investors who have used a financial advisor for 15 years or longer had 2.73 times the level of assets as investors who don’t use an advisor. Sounds great, right? Well, not quite. If you dive a little deeper into the methodology of CIRANO’s research, you’ll find that someone who has fired their advisor—presumably for poor performance—is counted as a non-advised household (even if they used an advisor for more than 15 years!).

The report provides some rationale that a certain fraction of retail investors will refuse to pay for advice if charged separately. [ A study involving retail investors from eight European countries found that between 26 to 30 per cent of respondents were unwilling to pay upfront for advice.87 ] This means that 70-74 % would be willing to pay . In Canada , investors have been told for so long that advice ( such as it is) is free, that the figures will undoubtedly be higher. If a prohibition is applied, the industry, Regulators and governments will need strategies and programs to demonstrate the cost-effective value of professional advice and help make it affordable via productivity improvements , use of technology and creative tax and other strategies .

If the report had reported on studies about the integrity of advice they want ,they would have found that the overwhelming majority of investors want to be provided advice that is in their best interests. A U.S. Study by Financial Engines https://corp.financialengines.com/docs/Financial-Engines-Best-Interest-Report-040416.pdf found that over nine in ten (93 percent) said it is important that all financial advisors be legally required to put their clients’ best interest first when providing advice on retirement savings. We expect Canadian results would be similar especially since most Canadians assume , incorrectly, that this is the prevailing case.

There is no consideration of the pain and anguish caused each year by hundreds of these "advisors' through unsuitable investments, excessive leveraging, account churning , unduly expensive fund choices , early redemption charges and even fraud. These behaviors can be traced to the lack of a Best interests standard, a standard incompatible with embedded commissions.

The argument goes that if they refuse to pay for advice and go it alone they will suffer much worse than the estimated 2 1/2% annual penalty for investing with conflicted advisors. We don't understand why that would be the case .If a fee-based account was set up ,clients would still pay the 1% charged monthly but then would have a clear idea of cost/ services provided and the advisor would be free to recommend lower cost funds , inexpensive index fund's or tax-efficient ETFs. The net result would be increased retirement savings and improved retirement income security.

The report counters this by pointing to research that fee-based accounts are no panacea either. That is true where regulatory enforcement to counter reverse churning is absent which does appear to be the case in Canada. Regulators need to face up to that challenge.

To say that “ .., although studies that investigate adviser behaviour have found surprisingly little evidence that advisers provide unsuitable advice as a matter of course and that other structures of remuneration lead advisers to adopt practices that are better aligned with their clients’ interests ” is plain wrong .The suitability standard along with conflicted advice has caused harm to Canadian retirement income security. The fiduciary/ Best interests structure has demonstrated far better performance and client satisfaction. As an aside , as this report was issued, the US Dept. of Labour decided to proceed with a Best interests duty for retirement accounts.

The report does not suggest imposing a cap on commissions or doing away with DSC funds ( the word deferred doesn't even appear in the report). In essence, the Report strongly recommends the status quo.

The report states “ The existence of a regulatory body that provides oversight to a profession is a signal to consumers that they need not spend resources on costly monitoring in order to reduce self-serving behaviour by the adviser and that there is a mechanism for redress if that behaviour were to occur. “ We totally disagree that mutual fund salespersons constitute a profession ,that CAVEAT EMPTOR is not required and that redress in Canada is robust. There is not a shred of evidence to support that statement.

We also disagree with “ A compelling body of empirical research demonstrates that regardless of their level of financial education and wealth, left to their own devices, individuals’ investment and savings decisions are, as a rule, sub-optimal compared to the results obtained by “advised” investors. “ In fact there are many studies that show quite the opposite. Given that Canada's fund fees are the highest in the world , it is not obvious that unadvised folks would do worse . In fact if they just bought a low cost balanced fund , a life cycle fund or used a robo advisor they could well be far better off. Since the average hold period for funds is about 5 years , it's not even evident that advisors are able to claim they are able to control investor behavioural biases.

Given the emphasis on the financial illiteracy of Canadians one would have thought the solution would involve a Best interests advice standard as investor protection . Of course that would make it hard to justify an embedded commission  model which is the apparent goal of the paper.

We do agree that trust in the financial advice industry would certainly be enhanced if there were more discipline and standardization on the use of titles, which, in addition, would facilitate compliance with proficiency requirements. Problem is regulators refuse to tackle the issue. In a 2015 OSC mystery shopping experiment ,a total of 48 different titles emerged. The Report does not actually say that it is necessary to support its conclusion.

We also agree that active consideration should also be given to the benefits that would accrue from the establishment of a professional designation for financial advisers, which, as for other professions, would entail formal training with an agreed curriculum and more extensive continuing education requirements than what presently exists. Again , industry lobbyists continue to fight such an initiative. It's not clear whether this is a firm recommendation or merely a nice to have with a conflicted advice regime.

The paper does make a case that the UK RDR initiative led to less Britains receiving conflicted advice or any advice. “ Testifying before the U.K. House of Commons work and pension committee, the chief executive of the FCA admitted that the “advice gap” and the number of people being orphaned by their advisers was a “concern.” Since then a separate report has been issued that provides many examples as to how to close the so-called “ advice gap: https://www.fca.org.uk/static/fca/documents/famr-final-report.pdf . It should be noted that the FCA has not reverted back to a commission oriented advice system or backed off on increased advisor proficiency standards. Conversely, the FCA Consumer Panel which represents the voice of investors says : “We have not seen any evidence to show the existence of a gap in the supply of professional advice, apart from in the provision of compulsory pension advice, e.g. on defined benefit to defined contribution transfers. Consumers do not always seek professional advice, even when they could benefit from it: some are not aware of what is available; they do not want to pay for advice because they do not understand the price or value of it; they cannot afford it; or they prefer to take decisions themselves. .” https://fs-cp.org.uk/sites/default/files/financial_services_consumer_panels_response_to_famr_24122015.pdf

Nevertheless, the potential for a "advice gap"  should be addressed by regulators as part of its implementation strategy and learnings from the UK experience ( which includes anticipating the countermeasures the industry may employ to undermine the initiative) applied to tactics.

We think the paper underestimates the positive impact robo advice will have . [ “Drawing on the experience of the discount brokerage industry, it is unlikely that automated digital wealth-management platforms will close the “advice gap” that would be created by a regulatory regime prohibiting the bundling of advice with financial products.” ] We believe technology- based advice at the competitive pricing levels and payment approaches being offered in Canada will be especially attractive to small investors, younger Canadians and millennial If the US is any guide, many Canadians will sign up thereby closing or greatly narrowing the postulated gap. The advice provided will be more client focused and should easily beat mutual fund based advice returns simply by using cheaper products and charging lower fees. The fees may also be tax deductible adding to their competitive advantage.

We vehemently disagree that “ The evidence presented in this paper suggests that the operation of the Canadian market for financial advice has, heretofore, been successful in producing beneficial outcomes for households that obtain the service, and for society as a whole. “ . If it was so successful there wouldn't be a pension crisis, a record debt to income ratio for Canadians , thousands of investor complaints each year and pleas from investors/investor advocates for the introduction of a Best interests standard.

Furthermore , most investors have no idea how their account has performed. It was only due to the relentless efforts of investor advocates , against fierce industry opposition , that mandatory performance reporting will be required under CRM2. How advice was provided without knowing returns should have alerted the author of the Report that something ain't right.

Recent regulatory sweeps on DSC sold funds raised many issues. A OSC IAP supported research project on risk profiling found just 16.7% of questionnaires reviewed would be considered ‘fit for purpose’. A recent IIROC Bulletin noted that that its recent compliance reviews have found that most of the firms it reviewed "lacked a meaningful process to identify, deal with, monitor and supervise compensation-related conflicts." The 2015 MFDA Enforcement report listed blank unsigned forms as issue #1.This is a snapshot of what passes as advice , the type of advice that Canadians would lose if embedded sales commissions were prohibited .

The report raises a number of valid points while omitting others. Compared to some other reports , this one is more analytical and evidence based.Overall , despite its shortfalls, we believe this Report constructively adds to the debate on the impact of embedded sales commissions on retirement income security. We remain convinced that a Best interests standard is required for all financial advice givers and planners.





Sunday, March 27, 2016

Preventing investor abuse and fraud: a key role for regulators

March , 2016
Preventing fraud: a key role for regulators

Regulators have a huge role to play in preventing investor fraud and abuse . The Investment Industry Regulatory Organization of Canada ( "IIROC” ) asserts that : Protecting Investors and Fostering Fair and Efficient Capital Markets across Canada" is their role yet when victims complain they are too often met with a dismissive response :We have determined that the matter does not currently meet our threshold for initiating disciplinary action. IIROC does not provide a substantive report to any party involved in our review process."

Here's a prime example where prompt and firm regulatory action can help prevent or at least reduce investor abuse and fraud . The know-your-client (KYC) suitability obligation is among the most fundamental obligations owed by dealers to their clients and is a cornerstone of the investor protection regime. Yet far too often we hear complaints about the subversion of the KYC process .Examples:

1 Rep do not properly apply investor information in completing the KYC / NAAF forms.
2. Rep improperly apply risk tolerance as medium/high on instead of low on the KYC forms.
3 Reps misstate the client's investing experience elevating it beyond reality
4. Rep ask clients to sign blank forms or change them after they are signed
5 Reps downplay the KYC by saying it is just administrative paper from the investment firm.
6. Reps do not provide clients with a final signed and dated copy. to read
7. Reps mislead clients as to the meaning of terms on the NAAF and the importance of the form in determining suitability.

The inevitable result is the sale of unsuitable investments and losses for investors.

Complaints about the KYC process should give rise to a full investigation by IIROC. By summarily dismissing the complaint , the IIROC is in effect downplaying the value of KYC especially for an industry that now promotes itself as trusted wealth managers. It is no wonder that year after year we see the same complaints arise. The general deterrent value of inaction is zero. Instead ,we recommend IIROC adopt a "Broken windows " approach to regulatory enforcement. A zero tolerance approach would cut down on blank signed forms, signature forgery , “papered” KYC's and adulterated NAAF's. This approach would quickly grab the attention of dealers and lead to changed behaviours resulting in improved investor assessment , risk profiling practices and portfolio outcomes

Further ,the dismissive response to investor complaints is not neutral. There are several downsides to IIROC's prevailing practices that can actually harm retail investors . These include but are not limited to:

(a) It wastes victim's time in filing a complaint
(b)The IIROC response is used by IIROC member dealers to deny victim restitution claims
(c) It may affect OBSI's efforts to effect a facilitated settlement
(d) It unduly discourages investors from proceeding with the complaint
(e) It creates a false impression that the IIROC decision is robust and fair
(f) It sets a bad role model example for dealers in their handling of retail investor complaints
(g) It restrains the industry from moving from a low suitability framework to advice that is professional
It also reflects poorly on IIROC and the investment industry leading to investor cynicism .

Kenmar have also provided a detailed report to IIROC that its dealer complaint handling rules are inadequate to protect retail investors. For example , dealers continued use of so-called " internal ombudsman" have had the adverse effect of reducing client claims and subverting OBSI .Action to date: NIL.

There is clear and convincing evidence that IIROC 's idea of investor protection is far from that expected and needed by investors .We urge IIROC to review its policies and practices with a view to making its claim to protecting investors credible by diligently preventing and reducing investor abuse and fraud.

With its Recognition Order as a Self-Regulating Organization , the CSA has given IIROC not only the right but the obligation to protect investors. In effect, IIROC has been given the privilege and honour to be the national regulator for Retail investors. We do not believe this obligation is being adequately fulfilled starting from governance and investor engagement right through to enforcement and complaint investigation.Reforms are urgently required.

In the interim , it's
CAVEAT EMPTOR for retail investors .




Kenmar Associates

Friday, January 15, 2016

The NAAF and Know Your Client

Despite its innocent sounding name ,The New Account Application Form is a very important document. It forms the foundation of the investment recommendations made to you. Alas, things are not so simple. It can also be used against you in the event of a complaint. This article covers the intricacies in detail and how it can save you a lot of grief.

Monday, January 11, 2016

Gag orders: Purchased Silence

Gag orders: Purchased Silence                                                     January , 2016


Behind closed doors, abused investors whose accounts imploded are receiving settlements from Canadian financial institutions including all the big fund dealers and banks. After a prolonged and aggravating process with customer service, compliance officers and ombudsman, frustrated investors finally attract attention by threatening litigation. Legal action and the threat of a public airing of their grievances seems to motivate financial institutions to settle, at least some times. The cost of legal action or even arbitration is not insignificant and the outcome is far from certain. Firms are well aware of this and take this into account when negotiating settlements. Rarely do these investors recoup their losses. Most are lucky to get 20-50 cents on the dollar . The vast majority decide to write it off as a learning experience.

Settlements can save both sides the money and time [ and investor stress] of dragging litigation through the courts. But you won't hear about them in the media because one of the stipulations made is to adhere to the terms of so-called Confidentiality clauses, Non-Disclosure Agreements or as investor advocates call them "Gag orders." As they pay their hush money, dealers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though that’s the real reason they’re settling. In return for financial restitution, these investors are unfairly put in a position where they would violate legal contracts if they disclose specifics of their deal and become subject to legal intimidation.

Often, such settlement agreements provide that the parties will not make any negative or defamatory statements about one another, and require the customer to keep the terms of the settlement confidential. Sometimes the investor is so embarrassed at his situation he might actually welcome silence.

Some “creative ”agreements may require settling investors to withdraw or alter claims that have been filed with regulators. Such provisions are obstructive and frustrate the ability of regulators to enforce prevailing regulations. They also interfere with the ability of other law enforcement agencies to take appropriate action. According to regulators, such practices are not permitted.

"The industry covers up this huge problem of investors losing due to industry wrongdoing." - Stan
Buell, President, Small Investor Protection Association www.sipa.ca

Investors who settle disputes with their brokers or mutual fund dealers are routinely asked to sign such detailed settlement agreements, usually prepared by sharp, battle-tested lawyers. The investor, who is happy to be recouping at least some – typically a fraction- of his or her losses, is eager to sign on the dotted line and move on with his/her life. Consequently, he or she is unlikely to voice a vigorous objection to the so-called “boilerplate provisions ” of the Confidentiality provisions of the agreement. From the investor’s point of view, the dispute is over.

A fund dealer or brokerage firm may have sound business reasons for inserting the “boilerplate provisions. Confidentiality can make sense – at least from the broker’s point of view. Investment dealers do not want to encourage other similarly affected clients to file claims, or signal a predisposition to fair settlements.

Per Mutual Fund Dealers Association Policy 03 Handling Client Complaints dated Feb. 1, 2010 http://www.mfda.ca/regulation/policies/policy03.pdfNo Member or Approved Person of such Member may impose confidentiality restrictions on clients or a requirement to withdraw a complaint with respect to the MFDA or a securities commission, regulatory authority, law enforcement agency, SRO, stock exchange or other trading market as part of a resolution of a dispute or otherwise.” Similarly ,the Investment Industry Regulatory Organization of Canada ( IIROC www.iiroc.ca ) rules prohibit confidentiality conditions that are intended to prevent a client from initiating or continuing a complaint with a regulator or enforcement agency. Neither of these organizations are geared up to provide investor restitution so most victims “lose interest” in pursuing a regulatory complaint once they have been compensated.

These disclosure obligations do not extend to the media. which, regrettably, has under-reported the dark practice of gagging. The only exceptions are for disclosures made to lawyers, financial planners or accountants for income tax purposes.

For investors who have legitimate complaints against their dealers/brokers, the gagging can be emotionally stressful.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got." Source: Jonathan Chevreau, “Grievances never see the light of day: Banks, brokerages use confidentiality pacts to great effect “, Financial Post, June 26, 2004

Thus by keeping settlements secret, other investors with the firm are in the dark even though the malfeasance and the resultant settlement may also be applicable to them and may still be occurring.

The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being” –Investor advocate Joe Killoran Source: Jonathan Chevreau, “Grievances never see the light of day: Banks, brokerages use confidentiality pacts to great effect “, Financial Post, June 26, 2004

Financial services firms aren’t the only one wanting to keep information confidential. A complaint to the Ombudsman for Banking Services and Investments ( OBSI www.obsi.ca) also places restrictions on disclosure. By signing their engagement letter, you agree that OBSI’s correspondence and discussions with you as part of the complaint process, and OBSI’s files, are confidential. You must also agree that in the event of any subsequent legal or other proceedings you will not use that correspondence or information. In addition, OBSI require you to agree that you will not seek to compel OBSI to produce its files and records, or seek to compel the Ombudsman or any other OBSI staff member or advisor to give evidence or testify in any such proceeding. This wouldn't be so bad if OBSI had retained their mandate to investigate systemic issues. If the firm rejects the OBSI compensation recommendation and you settle for something lower , OBSI will not implement their “ Name and Shame” protocol which means their “ Name and Shame” statistics understate the true situation.

Another threat to investors are provincial Limitations Acts which require investors to file for legal action within a certain period of discovery. In Ontario this is two years. This actually encourages financial services firms to drag out the complaint process and make low -ball offers with gag order attached. Investment dealers must respond to you in 90 days after which you can file a complaint with OBSI. Unlike OBSI , if you agree to send your complaint to the Bank's internal “ Ombudsman”, the limitation time clock keeps running. If this drags on beyond the statute of limitations period you will lose your right to civil litigation.

Gag orders perpetuate asymmetric information, with ordinary Canadians at the bottom of the food chain. Surely, allowing the cover-up of incompetence, fraud and criminality is not in the spirit and intent of the Securities Act. Although some of our regulatory leaders say they believe in transparency, nothing is being done about the industry practice of covering up widespread wrongdoing and then settling with complainants by making “ low ball”offers and covering up with gag orders.
As the late U.S. Supreme Curt Justice Louis Brandeis said: Sunlight is the best disinfectant. The financial services industry and its regulators needs to Walk the Talk. It’s time to implement real investor protection.



Thursday, January 7, 2016

IIROC complaint handling rule needs an update

It's been quite a while since IIROC's rules on complaint handling have been updated . Our research identifies a number of critical areas that need to be amended in order to keep up with modern client complaint handling processes . See our Report here.

Friday, January 1, 2016

Investing landscape in Canada like a minefield

A very informative article aptly entitled SCREWED summarizes the situation Canadian investors face when investing for their retirement , It is a real eye opener - reading it may help you prevent some grief. It is available here .

Monday, November 30, 2015

WHITE Paper : The "Advice gap"?

This paper discusses the postulated " advice gap" from an investor's viewpoint. Read the paper here

Tuesday, November 24, 2015

The Advice Chasm


Industry participants have predicted an " Advice gap" for small investors if needed regulatory reforms regarding the advice process are introduced. Investor advocates have argued that unless the prevailing " Advice chasm" is resolved millions of Canadians face challenges in retirement . This chasm is the huge gap between what Canadians need in the way of trusted advice and what they are actually receiving. There is no question that the conversion from a sales based advice system to a professional system will be disruptive but the end result will benefit Canadians Other jurisdictions have decided reforms are necessary and are dealing with the bumps in the road. The status quo is no longer a viable alternative. Read the article .