Fairness and balance in the complaint process where interests of the dealer and registered representative must be considered!

My first substantial post on financial services issues in Canada for some time:

I had been “lightly” reviewing the Canadian OBSI and IIROC complaint processes until I came across this section within IIROC’s complaint handling guidance:

“There must be a balanced approach to dealing with complaints that objectively considers the interests of the complainant, the Dealer Member, the registered representative, employee or agent of the Dealer Member, and/or any other relevant parties.”

The issue of semantics is an important one: how you word your guidance has an impact on the outcome of a given complaint process. Complaint processes, from the internal all the way to the Ombudsman, take note of regulatory guidance. But the issue is of course more nuanced and detailed than this…..

The UK Financial Services Ombudsman uses the following terminology: “The law requires us to decide each complaint on the basis of what we believe is fair and reasonable. In doing so, our rules require us to take account of the law, rules and good practice in the industry. This is the way in which parliament specifically intended us to operate.”

The Canadian OBSI states similarly that they “We are balanced and objective in our work…Our decisions are based on what’s fair to both the client and the firm. We take into account general principles of good financial services and business practices, the law, regulatory policies and guidance, and any applicable professional body standards, codes of practice or codes of conduct”.

What does balance actually mean, especially with respect to consideration of interests?

Conflicts of interests are known to skew investment recommendations in favour of firms and registered representatives, with negative financial consequences for the investor. These financial consequences are either with respect to increased costs, hence impaired risk/returns on products and securities, and/or excessively skewed allocations with respect to actual risk profiles and for want of a better word, risk capacity.

If regulation assumes a buyer beware, caveat emptor, transactional relationship where disclosure is intended to satisfy mitigation of a conflict of interest, and where simple information parameters are used to define suitability for transactions initiated by an investor, and where it is assumed that the collection and calibration of these parameters is conducted with integrity, then the balanced consideration of interests would tend to support the costs and the wide boundaries of outcomes irrespective. A product recommendation, within current regulation does not have to be in the client’s best interests; it merely has to conform to the parameters of the KYC.

I say irrespective because conflicts of interest also risk influencing the parameter selection that lead the client towards a selection of parameters that may reflect the interests of the distributor. The sales process and its conflicts therefore risk overly influencing the parameters upon which a complaint process assesses outcomes, especially if the presumption is of process integrity with respect to their collection – note that industry risk profiling in research conducted on behalf of the OSC’s Investor Advisory Panel found that most industry risk profiling was not fit for purpose.

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The Zone of Interest…I think Ellen has argued very forcefully for best interest standards!

The Zone of Interest is a book by Martin Amis that fictionalises the administrative zone of Auswchitz (and I highly recommend it).  An investment world without best interest standards, where the old, the infirm, the weak and vulnerable are maligned, abused and consumed, is too a Zone of Interest:

I was particularly drawn to a recent article by Ellen Bessner, a lawyer representing financial firms and “advisors”, entitled “Serving senior clients is becoming a more risky endeavour”.

The article is about the increasing prevalence of complaints made by elderly investors and highlights a generalised case of a senior who complains, with the help of a family member, about investment performance (i.e. losses) brought about by unsuitable investments for his or her age.

The article then goes on to flesh out 4 reasons as to why this is happening, none of which discusses the fact that “advisors” are rarely trained to professional standards; commissions drive advice and transactions drive commissions; suitability standards drive transactions and not portfolio and hence risk management structures; recommendations and rationale are not required to be in writing and little or no point of reference with respect to the risk/return/asset & asset allocation/liability profiles of the often mixed bag of investments are ever provided.  Moreover no disclosure of the true nature of the relationship is likewise provided, and this has not changed under the CRM.  The construct is designed to deceive, designed to place people in a place where they are least likely to be able to accept the risks of the transaction relationship they have been guiled into. 

And, according to Ellen, the reasons why there are more complaints:

Number 1

Perversely Ellen blames the fact that aging populations has led to a drive to educate investors about their rights in contractual relationships: this education and information she says has led seniors to take their advisors to court, to seek independent judgement on their advice via the financial services ombudsman (OBSI) or to take their complaints to the regulators.  Perhaps Ellen would like no education over contractual investment relationships or dare I say it human rights: ignorance does indeed breed a blissful transaction relationship.

Number 2

The second point is really point 1 again, but I will elucidate: it complains about the fact that there is no cost to taking a complaint to OBSI, that you can hire a lawyer for free (though she does not let this one hang) and that “lawyers” see dollar signs when they see an elderly client with a financial complaint…those damned lawyers!  Ellen tends to omit a great deal of the road that often leads people to the point where they have no other option but to seek help from OBSI, lawyers and regulators, as well as the road beyond, and she also omits to opine on those “advisors” who never pay their regulatory penalties or those firms named and shamed by OBSI who refuse to pay up.  The picture has not been fully painted, but one point is clear, investors have rights and this a problem.

Number 3

Point 3 is about investors buying the highest yielding investments available, the highest risk investments available, because they have not saved enough and they need the highest returns possible to meet their expenditure needs.  So we have here an admission that yes, investments were not suitable but that the “advisor” was not responsible.  Responsibility is an important issue and present “suitability standards” allow “advisors” to avoid this nicety, this responsibility to balance risk/return and financial needs through portfolio structure, advice and education.   Ask yourself this question?  Where is the record of the process whereby the “advisor” made recommendations over structure and content appropriate to financial needs and risk aversion, the client declined and wanted something much more risky?  Well, it ain’t there and that is the problem, or a good part of it.

Number 4

Point 4 is a different matter and I am not sure why it has been slid into this argument, but it has its uses and I will aside here: in a best interests standard regime, advice and recommendations would focus on the needs and disposition of the investor of interest and manipulations of the sort described would find it very hard to survive. 

I think Ellen has argued very forcefully for best interest standards!

Naming and shaming and business titles

Two recent additions to arguments I have been following: the first from a CFA Institute blog and the second from FAIR Canada.

“Naming and Shaming”: Canada’s Move to Call out Bad Actors Sets Investment Industry Example

Our profession could do with quite a bit more of this practice, whereby we don’t shrug and wait for regulators or the media to call out the bad actors and bad practices in our midst

IIROC Guidance re Business Titles and Designations

“..the overarching problem with titles and designations is that Approved Persons at IIROC are allowed to hold themselves out as “advisors” when there is no statutory obligation to act in the client’s best interest and this is inherently misleading to consumers. “

The definition of suitability is being warped by an insane distribution culture.

OBSI is fighting a losing war against leverage, and with its latest name and shame the mark is on the current point in time.  

While all the recent leverage name and shame cases are to do with the last market downturn, the refusals to pay are all to do with the next.   If companies were to pay these cases now, they would put a line in the sand about the suitability of leverage and set a precedent that would cut them off at the knees in the next downturn. 

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OBSI Name and Shame

I would like to refer readers to the recent OBSI name and shame press release.  It concerns Richardson GMP, a firm that has been accorded a Fiduciary Certification on its discretionary mandates.

The OBSI reports are sparse and it is difficult to discern just what the securities at issue are, but I would hazard a guess that they are in the asset backed/collateralised loan/mortgage backed area given that the problems arose during 2007 and 2008 and looked to relate to once highly rated paper.

I can see why many firms would not want to reimburse investors for normal market losses, and in most instances, where a portfolio is properly structured, I would agree with them.  But it looks as if structure and transparency over structure were found lacking and I do wonder why Richardson took the risk to their good faith message in this particular instance.  I fear perhaps the lawyer’s hand and not pragmatic business logic.   But then again there is too little information here to really go on.  

However, what concerns me in the “power of ten realm” is that we are at heady market valuations and who knows how many shaky foundations are set to be levelled in the months and years ahead.

Ethics in the quantitative concerns itself with a surreptitious exchange of value without informed consent…

The boundaries of manufactured suitability are so wide that even an egregious deviation could appear to lie in the shadow of the rules.

I am a capitalist at heart and my belief in ethics has nothing to do with “social” policy per se, but the ethics of imperfect outcomes.  So when I read Barbara Shecter’s recent article, ‘Shocking’ crackdown on advisors threatens smaller players: Tony De Thomasis”, my ethics sense started to ring loudly.  It has been ringing a lot recently.

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Fuzzy Lines and ample leg room…

The point is this, if you set the rules too low and the decision parameters too wide, the lines as to what can and cannot pass become fuzzy and the leg room for inappropriate transactions becomes much too large.

I am in the midst of writing up a blog that refers to the De Thomas OBSI name and shame decision, but was drawn towards a CBC News article that also commented on the case:

““De Thomasis said his firm did everything by the book:”It’s like you have a big hammer over your head, and you don’t know what to do,” he said. “You follow all the rules, all the regulations, and now what?””

Now the majority of investors are not aware of the niceties of retail financial services regulation.  Indeed, the rules regarding what can and cannot pass between the narrowly defined parameters of the know your client form allows in my opinion the unspeakable to pass, at times, between them.

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Gravitational collapse and retrograde movements…is the Canadian regulatory system imploding?

OBSI, the ombudsman for securities and investments is looking to hand over the review of investment complaints involving segregated funds to the Insurance Ombudsman.

OBSI will refer the investigation and analysis of segregated funds to the Ombudservice for Life and Health Insurance (OLHI) even if they form a part of a larger portfolio that is the subject of a complaint to OBSI.

It is also looking to give up its mandate to investigate systematic issues, although the reasoning here is not exactly clear – something to the effect that because banking systematic issues need to be referred to the FCAC, in the interests of fairness investment related systematic issues should no longer be investigated.  This is an incredibly fudged and fobbed explanation.  Dealing with systematic issues was a major recommendation of an earlier Navigator report.

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Fairness for the Street!

Fairness for the Street – in this Investment Executive special, Ellen Bessner blames sophisticated, clever and cunning investors for the awful transaction recommendations their advisors “were forced at gun point” to recommend to them. 

Monty Python could not have put it so well.   

If they were so cunning and clever, why would they have let themselves be put in this position in the first place?  And, what possible vendetta could they have against their “advisors” to so injuriously risk their financial security? 

Is a free day in court really worth all this hassle?   Spurious arguments smack of desperation.

Blood Money: beware those with stable income and a “long time horizon” who could be described as “knowledgeable“.

I was passed along a link to web page that provided an advertisement to “advisors” to consider the use of leverage, which actually led to a number of other links that provided more insight and documentation on the leverage implementation process in Canada.   The communication I am talking about said the following:

Studies show that for the right investor borrowing to invest can be a sound strategy. It certainly isn’t for everyone, but for knowledgeable investors in good financial health with long time horizons, taking on investment debt may be advantageous for a number of reasons. Recognizing this, and to make borrowing as convenient as possible, xxxxxx now offers investment and RRSP loans for xxxxx funds at preferred rates from xxxx Bank.

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