Sunday, July 30, 2017

What the Limitation Act means for retail investors


During the investing lifecycle, chances are you may have a complaint against your dealer/advisor. The complaint process has always been a painful experience. But in 2004, retail investors faced a new challenge to their ability to recoup undue investment losses caused by bad advice .The new challenge was reduced statute of limitation time periods.

In 2004, provincial governments started to standardize statute of limitation time periods. As a result, most provinces ended up reducing the limitation period. For example , effective Jan 1, 2004 the Ontario Government ( several other provinces have similar statutes known as Limitation Acts ) implemented legislation reducing limitation periods (the time within which plaintiffs must take the initiative or lose their right to take civil action) from six years to two years. The basic limitation period under the Act is two years from the date on which the claim is discovered, or ought to have been discovered whichever is earlier, by the person entitled to bring the claim. Nailing down these dates of course isn't always easy. Some special limitation periods that remained are nevertheless subject to some of the principles established by the Act concerning minors, incapable persons, dispute resolution and the 15 year Ultimate limitation period.

At least in Ontario, an agreement  ( called a  “tolling agreement” ) to let an independent third party mediate or arbitrate the dispute will suspend advancement of the limitation period for the duration of the arbitration or mediation process, but if that process fails to resolve the dispute, the limitation period countdown resumes where it left off. 

So, retail investors now have to act much more quickly if they feel they've been a victim of dealer/advisor wrongdoing. For unsophisticated investors, seniors, retirees, widows, recent immigrants and others the shortened Limitation presents a real challenge.

Most victims of industry wrongdoing, that results in significant loss of their life savings, can take a year or more to come to grips with this life-altering event, and to determine what action they must take. The stress of a life-altering event such as the loss of a hard earned retirement nest egg can be so debilitating that it can lead to depression and the inability to make a rational decision. In this mode, it’s unlikely an investor will have the emotional strength to file a claim or take civil action in a timely manner

Handling of complaints by industry participants, the OSC, SRO’s, and internal Ombudsmen services commonly cause delays 6 months or more. A complaint investigated by the Ombudsman for Banking Services and Investments (OBSI ) stops the limitations clock but OBSI will not consider restitution claims until they have progressed through lengthy time- consuming industry and industry- sponsored processes. Even after OBSI makes a recommendation for compensation, this recommendation is non-binding so the next step involves a decision to institute civil action.

The move by some provinces to reduce the limitation period for lawsuits from six to two years tips the playing field even more against investors and in favour of the bank-owned brokerage industry. In Canada, a complainant has two remedies: A lawsuit or a complaint to the OBSI. OBSI has a target of 180 days to resolve a complaint but some can take more than a year. Before an investor can benefit from this free "service" he or she must proceed through the bank-owned brokerage firm's manager, compliance officer and then , on a voluntary basis, the individual ombudsman of the bank involved. Unlike OBSI , a complaint to an internal bank “ ombudsman” does NOT stop the limitation time clock. For reasons we can only surmise, banks actively encourage the use of their own " ombudsman" ahead of the real Ombudsman, OBSI.

Once all that's finished, then the investor may take the case to OBSI. But OBSI won't accept a case if the investor has already sued. All of which amounts to a Catch-22 because jumping through all those bureaucratic hoops within two years is no mean feat .

Canadian investors will find they have no legal remedy if they go to regulators such as the Investment Industry regulatory Organization of Canada (IIROC) That’s because IIROC doesn’t fully investigate each complaint and those investigations it undertakes can take more than two years, by which time they will have lost the right to sue. ( the statute of limitations time clock does not stop with a complaint filed with IIROC)

So, by the end of this turbulent cycle of events, two or three years can pass leaving the investor with no recourse with the oppressive Limitations Act in place. The ability to seek compensation through the courts can be lost forever. This is why lawyers suggest their early involvement with a case to ensure all aspects of the case are considered.

Usually, the lawyer will require a period of time to investigate the material facts and to determine whether the investor is on a solid footing in filing the complaint and whether a cost/benefit analysis supports loss recovery actions. The time required will depend on the complexity of the claim. The lawyer will assess the investor’s right to sue and provide an opinion with respect to the practical merits of starting a court action or an alternative dispute resolution process. This takes time and the limitations clock keeps ticking.

To be sure, litigation is no panacea. The process is lengthy, stressful and expensive with no certainty of success. Expect to face some of the sharpest lawyers around. That's why investor advocates promote increased professional qualifications for advisors and the assumption of a fiduciary duty to clients. Prevention, rather than remediation, is a far better solution that will lead to superior outcomes for investors.

Until such time as the Limitation Act is amended, investors are encouraged to (a) ensure their KYC is up to date, (b) establish an Investment Policy Statement with their advisor, (c) carefully examine their client statements / trade confirmations upon receipt, (d) look at bottom-line account trends and most importantly (e) ask questions and complain promptly whenever something doesn't feel right.

If at any time you’re not sure of your rights or what to do, consider consulting a lawyer. This is certainly one area where professional advice can pay big dividends. Failure to do so in a timely manner could mean you get ZIP even if your restitution claim is rock solid.

Tuesday, July 25, 2017

This Court cases teaches investors many lessons

We urge investors to read this judicial decision . It has a number of lessons that can help ordinary Canadians prevent a lot of problems.

Here are a few:

  • Contact the applicable regulator to check on the background of your advisor
  • Understand that advisors are not required to act in your Best interests
  • Understand that many advisors are paid by sales commissions
  • When filling in forms, be modest about your investment knowledge , risk tolerance  investment experience and financial position. Never leave any block blank.
  • Retain a signed  and dated copy of your account application form ( KYC )
  • Place orders to buy and sell carefully and ensure trade confirmation slip matches your instructions. If not, contact the dealer immediately
  • If not happy with action /explanation, file a formal complaint without delay
  • Provide  KYC updates  to dealer when your personal situation changes
To review the case click here 

Sunday, July 23, 2017

Should I use the institution's internal “ombudsman “?

Investment dealers are required to respond to a complaint within 90 days. Offers for compensation are binding on the dealer.
After you receive a response to your complaint from the dealer ( or bank) you have a few choices. You can accept the decision, abandon the complaint altogether , use IIROC binding arbitration ( if an IIROC dealer), take legal action , refer the complaint to the Ombudsman for Banking Services and Investments (OBSI ) or the firm may “encourage” you to use their internal "ombudsman". The banks and insurers have created these entities to give the institution a second chance. We view the diversion from regulator-approved OBSI as an unnecessary step.
It is well known that the more steps in a complaint process, the greater chance the complainant will give up and drop the complaint. If the internal “ombudsman” confirms the dealer position, most complainants will not have the will or fortitude to start all over with OBSI .It is entirely possible a complainant with a very valid claim could be shortchanged.
An internal “ombudsman” is run quite differently than Ombudsman authorized by regulators. Such entities lack the transparency  real and perceived independence and disclosures as compared to true  institution - independent ombudsman services such as a OBSI.Recommendations by an internal " ombudsman" are not always binding on the parties involved.The use of an internal “ombudsman” is entirely voluntary but you may be nudged by the dealer to use it, rather than OBSI. Once you receive the final response from the dealer , you have 180 calendar days to bring your complaint to OBSI. Before consenting to use an internal “ombudsman” you should be informed. There are risks and pitfalls to consider. You need to ask some questions before giving consent.
The list of questions we provide is comprehensive. But don't worry about asking them all. After the first few questions , based on our experience, you will quickly become uncomfortable with the responses or worse, you will not get any responses. That's why Kenmar suggest going directly to the Ombudsman for Banking Services and Investments (OBSI) if you intend to pursue your complaint. At least that way you can avoid being rejected a second time by the same institution.
OBSI is a free, institution-independent ombudsman service endorsed by securities regulators and overseen by them. Unlike a bank or insurer internal " ombudsman", a complaint to OBSI stops the limitation time clock. Compensation can be recommended up to $350,000 .In 2016, nearly half ( 45% ; 150/323) of investment complaints ended with monetary compensation - average $ 15,552 . The latest OBSI satisfaction survey showed that 75% of respondents rated the quality of service as good / very good. Visit for more information
These are the questions an investor should be asking before voluntarily opting to use an internal bank ombudsman:
Performance statistics
> In what percentage of complaints do you recommend restitution greater than that offered by the dealer?
> What is the average and target time to investigate a complaint?
> What are your user satisfaction statistics?
> Have you ever been employed by the dealer/ bank before becoming ombudsman?
> Is any part of you or your staff compensation package tied to bank profitability?  
> To whom do you report?
> Do you receive company stock options? Shares?
> Who approves your annual operating budget?

          > Are your offices and locale physically separate from the dealer/bank ?
> Are you overseen by a regulator or other independent organization?
> Are you periodically audited by a third party and are the results made public?
> Do you assist Complainants in formulating their complaint?
> What is your loss calculation methodology?

> How does your investigation process work?
> Is there a dollar limit on your recommended compensation? 
          >What happens to my case file records after you provide me with a response?
> Do you deal with systemic issues ?

Tuesday, July 4, 2017

Transferring Accounts can be unpleasant

It should be no surprise there's an increase in the number of Canadians looking to transfer their accounts away from expensive, conflicted and abusive firms. Scandals like double dipping, expensive products, high fees, conflicted advice, risky Off book sales and even misappropriation of assets are key drivers. Investors are looking for trustworthy fee- only advice , fiduciary advisors, low cost robo -advisors and even discount brokers for those who want to control their own financial destiny. But transferring an account isn't that simple. There may be hefty account transfer fees and a lot of stalling before your account is transferred.

Virtually anyone who has ever transferred an account from one dealer to another is aggravated as to why the process takes so long. We would argue that it takes so long because there are no enforced regulatory requirements around maximum timelines and basic corporate behaviour is such that a dealer is slow to transfer out client money since that directly impacts firm revenue. To facilitate this, the MFDA, IIROC and the CSA should consider regulations regarding account transfers including maximum transfer times and apply fines for non-compliance.

Further,there is the potential for client harm resulting from delays in the transfer of accounts . And perhaps worst of all, restrictions of the type of securities that can be transferred.

In 2016 the MFDA asked all Members who sell proprietary investment products whether they permit clients to transfer those investments in-kind to other registered dealers or if instead clients are required to redeem the positions and transfer in-cash.  Several Members stated that some or all of their proprietary mutual funds or other investment products are exclusively distributed by the Member and therefore cannot be transferred in-kind. The MFDA has received complaints from investors who were unaware that certain mutual funds could not be transferred to another dealer.  In some cases, these investors incurred early redemption penalty fees to redeem their securities and convert to cash. There may also be tax consequences to a redemption and transfer in-cash versus a transfer-in-kind. Non-transferable assets deters mobility of consumers and therefore hinders competition for consumers business.

Kenmar feel that dealers that offer proprietary mutual funds or other investment products that cannot be transferred to other dealers, should, at a minimum, clearly disclose this to clients at account opening in their relationship disclosure document.  Where only certain specific funds or investment products cannot be transferred in-kind this should be specifically disclosed at the point of sale of the particular investment product.  In both instances, the disclosure should include a specific discussion of any potential fees or tax consequences that may result from a redemption and transfer in-cash. We’ve asked the MFDA an IIROC to issue Investor ALERT Bulletins on the issue.