A small investor exclaims and asks “why are regulators not collecting fines for serious violations of securities regulations?”!

This is a brief post on a very important and highly complex issue that cannot be done justice in the space provided.  There are many issues today, in Canada’s financial services industry, where funding for independent research of issues impacting consumers would be of tremendous value to the continuing debate over standards and regulation

Canada’s Small Investor Protection Association (a small non profit organisation that serves as a voice and resource for Canadian investors who have been subjected to financial abuse and/or bad advice by the financial services industry) recently released a report by one of its members on unpaid fines levied by regulators on industry participants but which have not yet been collected.  The report has been discussed in numerous articles, the most detailed of which is found in a piece written by Yvonne Colbert of CBC news.

The report is both an exclamation and a question from an investor who has gone through the long restitution process herself and come out of it the other side only to find that even the most egregious of offences and their advisors appear to be let off.  The some $1bn of unpaid fines is not just a mountain of unpaid fines but the other side of scale that holds numerous infractions of advice and conduct many of which have been made against the individual consumer.   The consumer and other entities have long since paid and unfairly so, but the fines, the advisors and the firms behind them have instead been granted a get out of jail free card. 

So just why are regulators not enforcing their decisions and with respect to personal financial advice providers, why ultimately are firms that employ these advisors not responsible?   If you read through the enforcement decisions and notices (MFDA, IIROC) you will see a wide range of offences, some of which are quite shocking.   Do big fines deter those intent on taking advantage of investors? Well, it is a good point since the lesson appears to be that you can make hay while the sun shines and then leave when you are finally found out.  Many of the breaches of regulation and conduct have happened over fairly lengthy periods of time that you have to wonder just where was the supervision.   You cannot escape the responsibility of culture!

From “The Good, the Bad, and the Misguided: How Managers Inadvertently Encourage Deviant Behaviors” by Barrie E. Litzky, Kimberly A. Eddleston, and Deborah L. Kidder:

Research has uncovered numerous examples of the connection between commissions and/or gratuities and workplace deviance. Studies of individuals in sales positions in a variety of industries (e.g., automobiles, real estate, insurance, and financial services), whose income was 80 to 100 percent based on commission, found evidence of workplace deviance….

It is also important to note that a great many investor complaints are not addressed by their regulators as these are deemed, in a regulatory environment where the investor and not the advisor is considered responsible for the transaction, the client’s fault.  Some of these cases have shown up further down the line in Ombudsman for Financial Services decisions against the firms, and most notably some of the naming and shaming decisions.  Issues abound with respect to enforcement of decisions against advisors and firms and these are highlighted in comments made by Phil Khoury (who conducted the two prior independent reviews of the ombudsman) in a 2012 Investment Executive article.

The great risk for any ‘name and shame’ regime is that the naming becomes too commonplace for the ‘shame’ to have any serious, lasting impact on firm reputations.”  If firms begin refusing OBSI’s recommendations routinely, Khoury adds, “[OBSI's] credibility and ability to operate effectively will be seriously damaged.” And the harm will not be felt by just clients whose compensation recommendations are refused. Khoury warns that “consumers will inevitably start accepting low-ball settlement offers” rather than run the risk of a refusal. More firms will play hardball with OBSI, too, he suggests, “using delaying tactics, resisting requests, making low-ball offers.” Indeed, he warns, if “name and shame” proves ineffective, the whole system will suffer.

Regulators’ failure and inability to collect on fines is part of a wider problem in Canada’s financial services industry that has impacted complaints/avenues of redress as well as the delivery of advice which even today, for the most part (advisory services), does not require that it be given in an investor’s best interests.

For more information on issues that impact the small investor I would visit SIPA, FAIR Canada, the OSC/CSA consultations on best interest standards and mutual fund fees and the Canadian Advocacy Council for CFA Societies in Canada where you can find submissions on a number of relevant issues.  

The mountain of unpaid fees is part of a much wider landscape of issues  many of which are impacting the integrity of financial advice giving in Canada.

I must also note that I do from time to time provide input to the Small Investor Protection Association and had encouraged, along with others, the preparation of this SIPA document.

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