It's easy to find horror stories of average investors bilked, gouged and abused by unscrupulous brokers in Canada, as well as examples of the failures of the industry's regulators to protect those who feed their money into the system. Such stories make headlines and often spark outrage, if little action.
But more rampant -- and less reported -- are tales of investors being taken advantage of in little ways. Hidden fees, dodgy trades and double dipping by brokers: These aren't necessarily illegal, but hurt far more investors than the occasional outright fraud.
That's why many investor advocates condemn the overseers of this country's financial services industry and espouse wholesale regulatory transformation, from the need for a single securities regulator to the need for a fee-based model for brokers to help ensure they are looking after their client's interests, not just their own.
Critics even include federal Finance Minister Jim Flaherty, who has called the regulatory framework in Canada -- the only country in the G20 without a national securities regulator -- an "embarrassment." As other economies create more sophisticated systems to protect investments, Canada has fallen well behind and its international credibility has suffered, Flaherty has said.
Canada falls short on many fronts. The country is viewed by many as a haven for insider trading. Its mutual fund fees have been identified as among the highest in the world. Investor rights advocate FAIR Canada says the Toronto Stock Exchange falls below international standards in managing conflicts of interest. And a report by Transparency International, a German group dedicated to fighting corruption, ranks Canada at the bottom when it comes to preventing foreign bribery, having little or no enforcement. "We don't need to be the worst in the world," says Ken Kivenko, a consumer advocate and president of Toronto-based Kenmar Associates. "That's not a good objective."
There have certainly been many well-intentioned plans promising to impose stringent regimes of regulation and enforcement on Canadian capital markets. But they have been shelved by a lack of consensus and an industry intent on maintaining as much self-governance as possible. For instance, regulators have deliberated since the 1990s on how best to mandate disclosure documents for mutual funds that spell out the possible risks for prospective investors. In 2002, after years of examining ways to impose fiduciary standards on the industry, the Ontario Securities Commission (OSC) came up with the Fair Dealing Model to improve disclosure and remove embedded compensation for brokers. "It was really good thinking," Kivenko says. "We were ahead. We were way ahead. And it's what everybody else is doing now." But the OSC's proposal was subsequently watered down by the industry, and absorbed by the provincial regulator into a different framework that reformers say fails to address the conflict of interest issue for investment dealers.
The federal government, meanwhile, has come up with a plan to replace the country's 13 provincial and territorial regulators with a single national entity. "We need to rebuild the ship while it's still sailing," said Doug Hyndman, chair of the government's transition team, in July. The notion of a unified regulator is hailed by the industry's most fervent critics, but they're skeptical Ottawa can do it, particularly since it's two years away at best. "Is it even going to happen?" Kivenko asks. "What happens if the government loses an election? It doesn't seem like the Liberals want it very much." The plan also faces virulent opposition from Alberta and Quebec, which dismiss it as a federalist power grab. The Conservatives, however, have vowed to bring a national regulator into existence. "It is progress," says Larry Elford, a former financial adviser from Lethbridge, Alta. "It will be progress to simply say to 13 corrupted securities commissions: 'You are fired.'"
Elford was a broker for 20 years, but left disillusioned with what he views as systematic misrepresentation and conflicts of interest. He was dismayed by brokers who willingly ignored the interests of their clients in pursuit of higher commissions and fought against the expectation for him to do the same. The tricks of the trade range from double dipping -- charging commissions from new issues in addition to the annual fee applied to client accounts -- to brokers pushing a firm's proprietary products rather than providing options from the whole menu.
The key disincentive splitting brokers from the interests of their clients is a commission-based model that is pervasive in Canada, but increasingly being replaced worldwide by fee-based systems that essentially impose a fiduciary duty on brokers. Without that duty, brokers and salespeople can pursue deals that maximize commissions regardless of the impact on a client's portfolio. Until Canada embraces fiduciary standards, those selling investments should only be called salespeople, Elford says. Yet, they all refer to themselves as advisers, "even if they have less professional training in their craft than a hairdresser," he says. "There are methods that the industry uses to obtain the greatest amount of commission from the client, usually done in an invisible manner, usually done without disclosure and usually done without the interests of the client."
On the regulatory side, groups such as Investment Industry Regulatory Organization of Canada (IIROC) and the Ombudsman for Banking Services and Investments (OBSI) are funded by the industry, creating inherent conflicts of interest. And the various securities commissions, to varying degrees, are simply impotent and inactive, critics charge. In a report this past March by the Standing Committee on Government Agency, the OSC was given a reminder of its general mandate to protect the public interest. "Almost every submission we received commented on the lack of enforcement in the area of securities fraud," the report stated, noting the requirement of police to pursue criminal activity in capital markets.
The committee also criticized the Ontario regulator's response to the asset-backed commercial paper (ABCP) crisis. It cited a National Post story in which Jim Turner, vice-chairman of the OSC, was quoted as saying, "We didn't feel we had to jump in to protect investors." Retail investor Brian Hunter was acutely aware of the absence of any OSC leadership when $650,000 of ABCP paper he bought from Canaccord was wiped out. Hunter subsequently waged a public campaign to organize victims and eventually got his money back in a deal negotiated between a group of investors and Canaccord. "We were the lucky ones," he says, noting that without publicity, he would not have stood a chance. "Otherwise, you're a lost voice yelling into the night."
Considering the baby-boom generation is entering retirement age and requires competent management of their nest eggs, a regulatory regime with teeth is needed more than ever, Kivenko says. "White-collar crime is like financial assault. It can kill you as much as a knife. You can get distressed, get ill. Life is never the same again when you lose 50% of your money at 65."
Of course, there are less sophisticated investors who lack the confidence to challenge brokers and advisers. The elderly are particularly vulnerable to slippery practices that can shrink a retirement fund. Take Harold Blanes. His son, Alan, says his father was 90 years old, and his mother, Gladys, was terminally ill when the couple's broker began to push them into increasingly riskier assets. "They were only interested in preserving their principle and that's it," says Blanes. "But they were getting steered into higher risk against their wishes. And they didn't have the strength to fight back."
After examining the client file, Blanes found it included a number of unsolicited trades, something his father wouldn't have done, particularly since he was preoccupied tending to his ailing wife. "He had no interest at all in moving money around in his portfolio," he says, suggesting the broker was churning the account to make commission fees on each transaction. In July 2006, his father was convinced to buy a "low-risk" equity that promptly lost almost $10,000 in two weeks. "My mother's spirits were totally destroyed by this. She felt the world was just too corrupt for her to live in and she just gradually shut down," he says. She died in 2007. The broker later claimed his client agreed to purchase a $160,000 yield deposit note with a seven-year term.
"People in their 90s don't normally put their money into a seven-year lock-in," Blanes says. Although he says his father lost $50,000 due to what he believes are dishonest practices, complaints to the OBSI and IIROC have gone nowhere.
When Financial Planners Make Bad Moves, Clients Have To Sometimes Take Matters Into Their Own Hands
Seeing his financial planner's picture in a newspaper confirmed Sylvio Gagnon's fears. Really, he already knew, but didn't want to believe it. Months earlier, the man he entrusted his finances to for 15 years, convinced him and his wife to sink about $70,000 into second mortgages. The retiree agreed and his money went into the mortgage on a home in Hawkesbury, Ont., between Ottawa and Montreal. Soon after, the property owner declared bankruptcy, the house was foreclosed on and Gagnon's money vanished. Still, his planner told him everything would be resolved and the home would be refinanced. But news reports earlier this year of similar deals involving his planner extinguished those hopes.
Gagnon tried to invoke protection from the industry's watchdogs. He met with officials from the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada, the Ombudsman for Banking Services and Investments (OBSI) and Quebec's Autorite des marches financiers. None were willing to pursue the matter.
Now Gagnon is a member of a group of 150 investors seeking certification to bring a $10-million class-action suit against the advisers. Some investors claim they had homes purchased in their names without their knowledge, at prices well above market value. Others thought their money was going into real-estate assets, but never received ownership of anything. None of the allegations have been tested in court. But for Gagnon, who retired from his job as an auditor with the federal government in 1993, the class-action lawsuit is the final hope.
"I don't give a damn about the money now. We've given up on that," he says. "But we want justice. I want people to realize how serious this is, that the small investor has no protection."