Wednesday, August 17, 2016

Bay Street , Investor Vulnerability and Canadian Society ( Why a Best interests Standard is needed)

Regulators portray retail investors as diligent, fairly sophisticated and logical. The academic literature, produced primarily by finance professors, finds that investors are generally uninformed and financially unsophisticated. Most investors are unaware of the basic characteristics of their investments, pay little attention to costs (especially ongoing costs), and chase past performance despite little evidence that high past returns predict future returns. The CSA's belief that retail investors can fend for themselves, once armed with adequate disclosure, fails to appreciate the extent of investors' limitations and vulnerabilities. Instead, the findings of the academic literature as summarized in this paper suggest that policymakers should rethink current securities regulatory policy. This paper provides detailed rationale why a fiduciary Best interests standard is required to protect Canadian investors, the vast majority of which are in fact vulnerable to mis-selling. While disclosure may be necessary, it is not enough to protect the typical retail investor. There is an urgent need to tackle investor vulnerability in the Canadian financial industry as a pressing socio-economic issue.







Monday, August 8, 2016

Call for Action Protection of Vulnerable Investors



Kenmar have been recommending changes in SRO rules that would protect seniors and vulnerable investors for the past 4 years. The vulnerability of seniors is a well documented  issue.. We have requested changes to the NAAF that would include a trusted contact person to be named .We also want a rule that would allow dealers and dealing representatives (" advisors ") to take immediate, short-term protective action for the benefit of vulnerable clients who may have diminished capacity to give coherent instructions due to Alzheimer's/dementia, or other causes, or who may be facing improper influence, including elder financial abuse. A model protocol for taking protective action has already been accepted by FINRA in the U.S. in 2015 ( see link below).  Currently in Canada, investment dealers and dealing  Reps do not have the legal authority to refuse or delay carrying out instructions from clients even when there is good and just reason to believe the client exhibit diminished capacity or is being  exploited financially by others.



There is a crying need to provide a legal safe harbour to protect dealers and dealing representatives who take protective action in good faith . Kenmar believe such an initiative is entirely congruent with acting in the Best interests of clients. We urge regulatory action without further delay. Kenmar continues to oppose any regulatory actions that would permit stockbrokers to act as executors or trustees except for immediate family.




On January 22, 2016, the North American Securities Administrators Association (“NASAA”) adopted a model act, entitled “An Act to Protect Vulnerable Adults from Financial Exploitation.” This act seeks to facilitate coordination among securities regulators, broker-dealers, and adult protective services agencies in dealing with the financial exploitation of seniors and other vulnerable adults. The model act reflects the collective views of the NASAA membership, which consists of 67 state, provincial, and territorial securities administrators from the 50 states, D.C., Puerto Rico, the U.S. Virgin Islands, Canada and Mexico; however, it has no legal authority and is only meant to serve as a guidepost to individual jurisdictions. The model act may be adopted by state legislatures or regulators (with or without modifications) and has both permissive and mandatory components. The full text of the model act, along with background information is available on the Policymakers section of NASAA’s new website, ServeOurSeniors.org, which launched in December 2015 and is designed to provide senior-focused resources to investors, caregivers, industry and policymakers.













Sunday, July 17, 2016

My advisor says all my investments are suuitable

Your investment advisor could be a straight shooter, scouring the financial world for the very best products, but it’s more likely than not they aren’t. They could just as easily push you into “in house” products that help them reap better commissions. The sad fact is, the latter situation is far from uncommon as advisors are typically not legally bound to find the “best” products for you, merely ones that are considered “suitable.” Most Canadians are not aware of this. In fact most financial advisors are registered as "dealing representatives", which according to our national regulators is a salesperson. Dealing representatives only have to fulfill the suitability obligation.

The National Smarter Investor Study, which was published on November 3, 2015 by the BCSC,examined client-registrant relationships in Canada. The study found that, among other things, 90% of respondents described their existing level of trust in their investment representative as strong or very strong. This trust led some clients to ask fewer questions about how their representatives were compensated and to place less importance on reading their account statements because they were confident that their representative was taking care of their money. That's because they wrongly believe their advisor has put their interests first ,not realizing the suitability regime is in play.

One of the supposed cornerstones of the financial services industry is the rule that stipulates the sanctity of the so-called “suitability” of the transaction, the product and the portfolio recommendation.

You would have thought that something as important as a recommendation suiting the client’s financial needs and risk preferences, as well as the current risks in the market place, would be well defined. You would have thought that suitability would be etched in statute, in the courts, in common law, in financial services rules and regulations, in compliance departments rule books, in corporate quality control procedures, in the minds of everyone in the industry.

In fact , it is not explicitly or specifically etched anywhere. There are no rules that say what is and what is not suitable, there are no principles that must be followed. The closest the Canadian financial services industry has got to putting principles of suitability into stone is the common garden “Know Your Client” (KYC) form. The KYC form cannot safeguard the suitability of a transaction because it cannot effectively relate the transaction to financial needs, existing investments, risk preferences or current risk/return relationships. All that really exists is the word itself amidst vaguely worded paragraphs on the subject. Indeed, because current thinking limits justification of suitability to the transaction there is in reality no substance to what is and is not “suitable”. More often, it really just boils down to not providing unsuitable recommendations. Indeed ,the weak suitability criteria induce bad advisor behaviours by contaminating the KYC process itself. KYC's are modified to fit what the advisor wants to sell. See The Know Your Client Process Needs an Overhaul

The so-called “suitability” regime does offer some legal protections for investors, but it’s certainly not the gold standard. Strangely, it doesn't include product cost, a key parameter in determining portfolio performance. If you want the gold standard you need to ensure that your investment advisor, or certified financial planner, is considered a fiduciary or at least works to a Best interests standard. What’s the difference, and why is it important?

First let’s start with what goes into the suitability regime. It is typically a regime that requires that whoever is handling your investments puts you in products that are “suitable” for your objectives, financial situation , risk tolerance/capacity and even age. Of course, this doesn’t always happen. The classic example is of a advisor who shuffles conservative clients into resource stocks. This would be considered an unsuitable investment . We've seen people in their eighties sold 6-year DSC mutual funds .Older people typically need more fixed income, and less in the way of speculative securities.
Much research exists that shows that incentives skew advisor recommendations. The out of sight trailing commissions in mutual funds for example have been shown to cause advisors to recommend funds that are more expensive and end up being performance laggards. Investor advocates attribute the relatively slow growth of low cost index funds and ETF's in Canada to the suitability regime and the conflicts it permits. The suitability regime is the soil in which conflicts-of-interests grow like weeds .

The suitability regime breeds a culture that causes advisors to cross the foggy suitability line. The self-regulatory and industry organization investor complaint experience shows there is consistent and ongoing non-compliance with many of the current key regulatory requirements, with the unsuitability of investment recommendations being the primary basis for complaints to OBSI for the past five years, case assessment files for IIROC for the past three years and allegations in MFDA enforcement cases for the past three years. A large number of unsuitable investments remain undetected or ignored by regulators leaving investors with sub par return performance or even huge losses. For some investors those losses can be life altering.

While suitability offers investors some sort of protection, it falls short in some important ways. For starters, it doesn’t require brokers to find the best products, only ones that are ostensibly suitable for you. If an underwhelming house brand security lines up with the vague outlines of what is considered suitable they can still push it, even if it costs more to own, or underperforms peer securities. It doesn't even require selecting the lowest cost product that will meet your needs. Suitability is focused on the product and transaction while Best interests is focused on you.

In other words, mere suitability alone falls short of what the Best interests or fiduciary standard brings to the table. When your financial advisor works to the Best interests standard they have the obligation to put you in only the very best products they can, and to act in your own best interest, not their own. Advising under a Best interests standard takes a lot more work than becoming your typical “advisor”. They have to fulfill a certification process that requires them to uphold prudent investment guidelines and practices as delineated by regulators. The majority of most mainstream “advisors” do not meet this higher standard.

We believe when it comes to advising retail investors and their life savings, the individuals advising them should be held to the highest standard. The standard that meets this is the fiduciary one. What separates professionals in this business from sales people is standard that puts client interests first.

The retail investor has to have a clear understanding between the difference of a financial Professional and a salesperson posing as an advisor .If the mutual fund and investment dealers want to be viewed as trusted advisors then they must be held to a Best interests/ fiduciary standard ,the same standard as other professions such as an accountant or a lawyer. These firms should not be able to use disclosure and made up titles to acquire your trust. “Suitable investments “ may be causing you real harm via account churning , unduly high fee products , excessive leveraging and other tricks and deceptions.

For example , say you want to buy an automobile. You want something that gets at least 25 mph and costs no more than $20,000. OK, there are likely many models from many manufacturers that will fit those two requirements and, as such, are “suitable” for you. However, most consumers would want to drill down beyond those two attributes.
Which model has the best safety record? What is the fuel consumption ? Which has the best maintenance/repair performance? How does it stack up on emissions? Which holds its value best after three years? Do you live near a qualified mechanic who can repair your car when necessary and are parts readily available? These questions go beyond whether something merely satisfies your wants or desires–they go beyond the mere suitability of the initial results to your broad query–these additional questions will likely begin to determine what’s the “best” model for you to buy.

Now, it’s possible that there may not be a clear-cut winner. Maybe three models are all great choices and no one emerges as better than the others. Nonetheless, there is a huge difference between narrowing down the choices to among the best vs. what merely is suitable.

Financial Advisors are typically only required to find stocks, bonds, funds, etc. for retail investors that are merely “suitable”; whereas other financial professionals are required to undertake more diligent searches to consider what’s “best” for you. They must assess how it fits into your portfolio ,consistent with your KYC parameters. They need to consider product cost , tax implications ,features like liquidity and your loss capacity.

The wide spectrum of “suitable “choices complicates disputes for investors. Shrewd dealers are able to deflect liability in all but the most obvious cases of unsuitable advice. That is why they fear the Best interests standard.

A key problem here for the average investor is -- Conflict-of-interest. If an advisor finds a dozen or so stocks or funds that are merely “suitable” for you, that registered person may feel pressured to push one of those products because he or she gets paid a higher commission or because their employer pressures them to move so-called “house” product or that of a favored third party. That’s the dirty little secret of Bay Street’s dealer community. Suitability enables conflicts to function under protective cover.

Does it make sense in this day and age that an individual can study for a few weeks and pass a registration examination that then effectively allows that person to provide advice to the public? Absolutely not.

In Canada. we have become entranced by the siren’s song of disclosure. It has been proven that disclosure ,while necessary ,is an ineffective retail investor protection.
It is important to understand regardless of whether an advisor is acting under Best interests or not it is impossible to remove all conflicts of interest, however the Best interests standard greatly increases the likelihood of reducing the abuse of these conflicts.

The Canadian Securities Administrators are currently looking into imposing a Best interests standard on advisors but it is years away and it faces stiff industry opposition. Until the issue is resolved it's CAVEAT EMPTOR.
Some videos to watch that will open your eyes are available at the Small Investor Protection Association website http://sipa.ca/contest/contestWinners.html https://www.youtube.com/watch?v=r0smCYvGVB8

If you want to learn how mutual fund trailer commissions work visit https://m.youtube.com/watch?list=PL6_kkUocOJXViw9ZM3Vpdh7TZnysmeIH-&v=T-uOKtiVa3M a FAIR Canada production.

Tuesday, July 5, 2016

The Best Interests Advice Standard

This post explains the Best interest standard , a standard investor advocates want to replace the prevailing suitability standard. Introduction of such a standard would increase investor protection and lead to better investment outcomes. Read the article here .

Wednesday, June 29, 2016

Saving Money vs. Investing Money


Bay Street often refers to money in investment accounts as savings. Industry funded research also refer to investments in mutual funds, stocks and bonds as savings. The reports state that those investors with advisors “ save” more than those without . This is not quite accurate as there are very important differences between savings and investments.

Investments are volatile and may not be available when you need the money most. Market losses , early redemption charges and general illiquidity can reduce the amount of cash available. Obviously you must not put a large amount of money in a long-term investment for your down payment on a house that is closing in a few months. When the lawyer asks for the house money you can’t say: “Wait!.. the stock market is down 50%, you will have to wait until it recovers..”

There are two primary types of savings programs you should include in your life. They are:

1. As a general rule, your savings should be sufficient to cover all of your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least six months. That way, if you lose your job, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from lliving pay cheque to pay cheque .This is referred to as an emergency fund. According to a 2015 CPA study , slightly more than half of Canadian working households said they did not save on a regular basis and only half of those surveyed said they maintain a special reserve fund for unexpected financial emergencies. The almost one fifth of respondents who indicate having an emergency fund said that their fund would not cover regular household expenses beyond four weeks.

2. Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven. The stock market in the short-run can be extremely volatile, losing more than 50% of its value in a single year. Paying. down a home mortgage is a great example of saving- it will cut the balance owing while cutting monthly mortgage payments. Interest paid on mortgages is not tax deductible .

Financial advisors that cannot distinguish between short-term savings and long-term investments or are more interested in putting you into a high commission investment or ignore your 18% credit card debt are dangerous - in such a case you need to find another advisor!

Only when these things are in place, and you have adequate property, life and health insurance, should you begin investing .The only possible exception is putting money into a pension plan at work if your company matches your contributions. That’s because not only will you get a substantial tax break for putting money into your retirement account, but the matching funds basically represent free cash that is being handed to you on a silver tray and there may be material bankruptcy protections in place for assets held within such an account should you be wiped out entirely. A RESP is another good example because of the Government Education Grants.

Remember, it's your money.





Wednesday, June 15, 2016

Conflicts-of-interest and your " Advisor"

In their day-to-day business, it is not uncommon for financial advisors to face decisions about whether a particular action or circumstance constitutes a conflict-of -interest. A conflict- of- interest exists when a advisor's. business, property and/or personal interests, relationships or circumstances may impair his/her ability to provider objective advice, recommendations or services .

Current securities regulations do not require that advisors act in the best interests of their clients as registered investment advisers, as fiduciaries must. It only requires that they sell investments that are suitable—not necessarily optimal—for their clients. In fact , advisors are actually registered as dealing representatives or salespersons. The title “advisor” is a made up one.

Conflicts-of-interest are never in the client's best interests.

One conflict for advisors is that they make their money on transactions. The more transactions they execute, particularly involving investment products with high commission rates, the more they earn. This can lead to churning of your account – the high level of trading has more to do with generating brokerage commissions than growing your nest egg.

In the case of mutual funds , the advisor continues to receive what is known as a trailing commission for as long as you own the fund. The more they sell you, the greater their ongoing commissions. Due to a conflict of interests they may not encourage you to pay down high interest credit card debt. This is also why some less than ethical advisors may encourage you to borrow to invest- the more you own in mutual funds, the greater their income. Such advisors rarely recommend lower cost products like ETF's because they do not pay trailer commissions. This borrowing may be in addition to your other household debt so your risk profile is greatly magnified.
Equity mutual funds typically pay a 1% trailer commission while bond funds pay 0.50 % thus incentivizing advisors to create higher risk portfolios. If a conflict-of-interest arises ,this may unduly increase portfolio risk.

Advisors selling proprietary products may earn a higher commission than comparable third party products .

Advisors charging flat fees have an incentive to add more clients and potentially do less work for each one. You need to assess whether you are receiving value for money.
Fee-based accounts are often mis-represented “I charge 1.5% of assets I manage, so I only make more money if you do” is an enticing but misleading sales pitch. Most people don’t do the math, and don’t realize that 1.5% of $1 million amounts to $15,000 a year — a fee they likely would resist paying if it were transparently stated as a dollar amount rather than as a percentage. Moreover, in such accounts, fees are deducted directly from a client’s account, and so tend to be forgotten.

Charging clients on total assets basis often presents more serious conflicts-of-interests than those faced by brokers because the conflicts may involve much more money than the value of a trade. Here are some typical situations where asset-based fee compensation poses conflicts for advisors:

•When advising a client to roll over a RRSP for the adviser to manage, even when the client has equivalent and less costly options if they leave their funds with the employer’s fund manager.
•When advising a client not to pay off a mortgage (thus diminishing assets), even when the mortgage carries a high interest rate.
•When advising against making a large charitable contribution to get a tax deduction (but decrease assets under management).
•When advising not to give large gifts to children to avoid estate taxes.
•When advising not to buy a larger home.
•When advising not to buy an annuity or set up a charitable annuity.
•When advising a client not to invest in real estate.

On top of these issues there are advisor compensation practices that are designed to accelerate greed . Sales quotas, cross selling incentives and compensation grids that pay increasingly higher commission rates as higher sales levels are achieved.

Complicating matters still further is the increasing number of advisors who wear two hats. Dually registered advisors are registered under securities legislation but also operate as insurance agents covered by insurance regulation ( and a different regulator). They may recommend that you redeem your mutual funds and buy segregated funds, an insurance product that is more expensive than mutual funds. Not only do they receive higher commissions but the insurance industry is less regulated than the securities industry.

In all the cases mentioned above there may be good and impartial reasons for an advisor’s recommendation, but in all these cases and many others the temptation to protect or enhance the advisor’s own compensation is omnipresent.

Fee-only financial advisers have long held themselves out as being more ethical than commissioned stockbrokers. Fee-only advisors claim to adhere to a fiduciary standard which requires them to act in the best interest of their clients, meaning they must set aside their personal interest and fully disclose all of their fees and any conflicts of interest.
Advisors have every right to earn a fair fee for the advice they provide but investors have every right to expect that the advice they receive should be in their best interests. Your retirement income security depends on it.Be AWARE . It's your money.

Enjoy John Oliver explaining retirement savings plans, fees and fiduciary duty












Tuesday, June 14, 2016

How banned IIROC and MFDA advisors can still sell insurance | Advisor.ca


Canada’s patchwork of regulators allows wrongdoers to handle clients’ finances years after they’ve been permanently banned from the securities industry.An Advisor.ca investigation has identified nine cases between 2013 and 2015 where reps were permanently banned by their SRO but remained authorized to sell life insurance products for periods ranging from six months to years after. Of those nine, six are still authorized to sell today (June 14). Read the full report at
http://www.advisor.ca/news/industry-news/hidden-in-plain-sight-how-banned-iiroc-and-mfda-advisors-can-still-sell-insurance-207496

A recent SIPA report showed how ineffective regulators were in collecting the fines they impose. And OBSI's independent assessor has just concluded that major changes are required at OBSI including the need for it to have binding decision powers.


All in all, one has to wonder just how robust investor protection is in Canada.

Monday, May 16, 2016

Sobering enforcement statistics

Sobering enforcement statistics

We've always felt that securities regulators were constrained in their regulatory activities, that they investigate too few cases and impose penalties that seem like a “wrist slaps” compared with the harm done. Most of the fines imposed are never even collected. A recent study by the Small Investor Protection Association www.sipa.ca revealed that nearly a billion dollars in fines remain uncollected.
Even participants in the securities industry have been surprised when they delved into enforcement statistics. For example, investment fund manager INVESCO, made the following observation when it responded to the Ontario Securities Commissions’ consultation on 2016-17 priorities. (http://www.osc.gov.on.ca/documents/en/Securities-Category1-Comments/com_20160509_11-774_adelsone.pdf 

“As noted at the beginning of this letter, we strongly support this goal. We do note a point of caution, however. In preparing this letter, we reviewed the annual enforcement reports for 2015 for each of the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association (MFDA) and the CSA, as well as for the Ombudsman for Banking Services and Investments (OBSI). Despite the intense regulatory focus on the retail wealth management sector, we were surprised by how little enforcement there really is.

To put this in context, the CSA in its report notes that financial wealth in Canada is approximately $3.6 trillion and there are 123,883 individual registrants. Given the focus on retail wealth management, one would expect to see a lot of cases, based on these numbers. Note that if 1% of registrants were “bad”, then we would expect a minimum of 1,238 cases, at 2% that figure is 2,477. Arguably, a 2% rate of problematic registrants is in the range of normal and does not infer a crisis. Based on the statistics, the 2% figure is not even reached.

IIROC received 1,341 complaints in 2015, a number that has been in decline over the past 5 years, it referred 98 cases to the CSA, and it engaged in 52 prosecutions against 68 individuals and 18 firms. We note that IIROC is the largest self-regulatory organization in the country. Total sanctions, including both at the firm level and the individual level, were a mere $4.6 million. It is hard to get excited about such a figure in a $3.6 trillion market. The top complaint received by IIROC related to unsuitable investments but that only totalled 33 complaints. [Kenmar note also that there were 124 investigations completed in 2015 but 41% never made it to prosecutions]

The MFDA record is not much better, with only 444 cases opened which led to 69 proceedings being commenced. The MFDA issued 85 warning letters and 86 cautionary letters, implying that those complaints did not merit much attention. The MFDA only concluded 65 hearings. While this might seem like a lot, in the context of the prevailing view of the wealth management industry we believe that this is a rather small number of hearings. We note that the MFDA issued $5.4 million in fines.

In summary, then, between the 2 SRO’s, there were about $10 million of fines issued in a $3.6 trillion market. There were approximately 1800 cases, well below 2% of all registrants, which implies that over 98% are compliant and/or do a good job. These statistics do not significantly improve when the CSA and OBSI statistics are included. The CSA commenced 108 proceedings involving 165 individuals and 101 companies and concluded 145 cases involving 233 individuals and 117 companies. The CSA statistics, of course, are not limited to retail wealth management and many of the issues raised in those cases are irrelevant for retail investor protection. But even with the 108 proceedings, the overall number is well short of 2% of registrants. The CSA did issue $138 million in fines, but $112 million was attributable to four cases.

OBSI only opened 298 cases, which still leaves us well short of the 2% mark noted above. They made awards of over $4.6 million.

Our concern is that this data suggests that the rate of non-compliance is overblown by the media and the regulatory community has done nothing to correct that (mis)perception. Alternatively, the data is so unimpressive due to a lack of enforcement. In our experience, most registrants are compliant and, as such, we tend to believe the former explanation; however, it is entirely possible that the latter is the correct explanation. The OSC should express an opinion on this prior to proceeding with new regulatory initiatives. If there is indeed a misperception, the OSC should step back and consider the impact of that on confidence in Canadian capital markets. If there is a lack of enforcement, we encourage you to consider the suggestions set forth earlier in this letter. “

We have to agree with Invesco that something doesn't add up. While we don't agree that a 2 % thresh-hold is an acceptable figure for an industry responsible for managing the retirement income security of millions of Canadians , we do agree that regulators should consider these numbers in their policy deliberations. A widow that is given bad advice will suffer a life-altering event ; a retiree could be left eating SPAM. Would you get on an airplane if you had a 98 or 99% chance of arriving safely? Like car or airplane safety , certain issues are driven by social factors and the public interest. Is financial health/ investor protection a public interest issue? What abuse percentage is “OK” for retail investor protection ?  How many Canadians must be abused before regulators will act?

We note parenthetically that the number of complaint cases opened is a fraction of the number of complaints received and the number of complaints received is a fraction of the actual abuses retail investors are exposed to. Canadians don't complain for a number of reasons. They don't know their rights, they blame themselves for the losses, they don't know how to file a complaint, they are embarrassed by their losses, they are “ Canadian”, they don't want to hurt the feelings of their “advisor”, they've heard that it's a waste of time, it’s too stressful  etc.

Satisfactory enforcement?- you decide.




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 SIPA 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 trading; 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.