Indemnity Fund – the Coalition’s Highest Priority
The Coalition has devoted much time and effort to advancing the idea of an industry wide, inclusive indemnity fund. The following is a summary of the Coalition’s thoughts on an indemnity fund.
Why the Fund is Needed
The current system for compensating victims of investment fraud or negligence in Canada is underfunded, confusing and inadequate.
- It varies from province to province and is often decided on a case to case basis. In crucial issues like the Asset Backed Commercial Paper collapse, investors were left to fend for themselves, without support from the regulatory authorities.
- Ever-increasing numbers of more complex products are penetrating the consumer savings markets, often coming from insurance companies or virtually unregulated hedge funds.
- The Canadian Investor Protection Fund provides coverage (limited to $1 million per account) if a member dealer of the Investment Industry Regulatory Organization of Canada goes bankrupt. CIPF returns investor assets and has paid out $36 million since its founding in 1969. Recent scandals likes Portus, Norbourg and the Toronto $60 million Ponzi scheme were not covered by CIPF.
Fund Basics, and Areas for Future Study
- Mandatory, industry-wide participation. The Fund should cover all collective investment plans from pensions to mutual funds. All participants in the financial industry should be required to provide funding – including financial advisors, money managers, insurers, fund originators such as mutual funds companies and hedge funds, and investors.
- Independence. To succeed, this fund should be a public/private partnership. It should be run by a truly independent board with representatives from the regulators, fund managers, financial advisers, investor associations and trade unions. Potential conflicts of interest could undermine the Fund’s credibility were it to remain in the hands of regulators.
- Based in Montreal. A public consultation should be held with interested parties including the press. The Fund should be based in Montreal to cover Canada first and then open up to other regions in North America.
- Specific duties of the fund would include establishing the level of premiums; receiving the premiums and investing the assets; taking over any litigation from investors; and studying/implementing international best practices.
- Issues to be addressed include the nature of losses to be covered; possible caps on coverage amounts; differential costs based on varying risk levels; the use of insurance and re-insurance to reduce cash demands; and weighing the advantages and drawbacks of restricting the initial mandate to fraud rather than including negligence as well.
