There has been a lot of media discussion over the the recent OBSI naming and shaming of WH Stuart Mutuals Ltd/And Associates for their failure a) to supervise and assess the suitability of certain transactions and b) to pay restitution for the couple at the heart of the issue.
Clearly, this is a case with a hell of a lot more angles than that discussed in the OBSI report. But, what the large number of angles confirms, yet again, is that regulation and supervision of “investment advisors”, under the current transaction distribution business model, remains impaired with consequence.
A best interests model would require “advisors” to act in their clients’ best interests, as far as the transaction was concerned, which would also place greater responsibility at the feet of those firms who currently “loosely” employ them.
Quite why WH Stuart have failed to pay the restitution is unclear, but this is a poster child of a case for higher transaction standards, at the very least, and should rebut any industry arguments for maintaining the status quo.
Firms should ultimately be responsible for the actions of their employees, something which would force better monitoring of advisors and better definition of services and service processes. But this would also change the model from one overly bent on the transaction and limited accountability, to one of greater accountability and less emphasis on the transaction.
A reduced ability to transact will reduce returns, and a narrower margin of suitable products and rationales for transaction the same. It will also change the relationship between advisors and the firms and force firms to better manage the risks of rogue “advisors” and conflicts of interests.
But, if firms are not liable for the transgressions of their employees, then someone needs to be, and the current impasse has to be a failure of regulation to implement a credible organisation of the restitution process.
This case is yet more conclusive proof, if more proof were needed, that current regulation of the transaction and the standards governing the regulation of the transaction are not effective in protecting investors. If I were the industry, I would be pressurising WHS to pay up!
I append commentary on this from Ken Kivenko from his recent monthly missive:
Mutual fund dealer refuses to accept OBSI’s restitution recommendation
The Ombudsman for Banking Services and Investments has announced another refusal of a dealer (W.H. Stuart & Associates http://www.whstuart.com/about.html ) to compensate its customers in the amount of $41,066 as recommended by OBSI.W.H. Stuart Mutuals Ltd..(“WHSML”) is an independent mutual fund dealer ( and MFDA member) [there is also a separate insurance agency entity] based in Markham,Ontario. A retired elderly couple, Mr. and Mrs. Irons, brought their complaint to OBSI after unsuccessfully trying to resolve their complaint with the Company directly.
The dealer is responsible for the Rep’s ( “ Ms W.”) unsuitable recommendations that led to Mr. and Mrs. Iron’s unsuitable investment portfolio at the firm. Per OBSI, if W.H. Stuart had assessed the suitability of the initial shares of Saga Marine they purchased and warned them of the risks, the complainants could have sold the shares without a loss and avoided purchasing additional shares on which they also incurred losses.
http://www.obsi.ca/en/news-a-publications/e-news-archive/267 See a copy of OBSI’s investigation report regarding this case . Mr. and Mrs. Irons are each currently 82 years old and Mr. Irons is not in good health. Some good news- we are told that the MFDA reviews the adequacy of a Member’s complaint handling system under MFDA Rule 2.11 in any situation where the Member has declined to follow an OBSI recommendation. If there is a fine, hopefully the proceeds will be turned over to the desperate couple.
CBC’s The National covered the story of Ken and Shirley Irons and their dreadful experience with W.H. Stuart. It’s a grim story but you need to watch for learning purposes Text story at http://www.cbc.ca/news/business/story/2012/11/22/obsi-banking-compensation.html According to OBSI , Ken and Shirley were were low- to medium-risk investors with limited investment knowledge, limited income and net worth, and no investment experience in individual stocks or private shares. We hope W.H. Stuart clients press them to pay the Irons. We’ve also encouraged bloggers to carry the story and for FSCO to check to see if similar issues exist on the insurance side. All Fund OBSERVER
readers will be informed as well. This blatant case of elder abuse deserves lots of publicity.
This dealer has had some run-ins with regulators in the past. In 2000, the Alberta Securities Commission fined W. H. Stuart $150,000 for the sale of limited partnerships in Montebello Egyptian Bloodstock to Alberta nine investors without a registration or a prospectus. In March, 2001 , W.H. Stuart Mutuals Ltd. agreed to pay the British Columbia Securities Commission a $25,000 administrative penalty including investigative costs for its failure to supervise the activities of its sales staff or keep proper records. As part of the settlement, W.H. Stuart also agreed to appoint an independent auditor to review compliance procedures at each of its B.C. offices. In April 2001 WHSML terminated the Rep’s (“Ms. W”) employment and mutual fund registration for cause. Ms. W was criminally charged in 2002 and was convicted for “theft over $5,000” in 2005 for a pyramid
scheme that resulted in large losses to clients of WHS. In a January 2012 MFDA Settlement Agreement the firm admitted that prior to February 28, 2009, it failed to establish, implement, maintain and adhere to adequate policies and procedures to ensure that branch managers and head office compliance staff maintained adequate records of trade supervision that was conducted including records of inquiries made, responses received and resolutions achieved and as a result, the Respondent was not able to
demonstrate the suitability of all trades and leveraging strategies that were processed on behalf of its clients. W.H. Stuart agreed to pay $45,000 in fines and $2500 in costs.