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.

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