FAIR Canada’s 2013 Wish List

With 2012 drawing to a close and a new year imminent, FAIR Canada has drafted a wish list of investor protection improvements it would like to see implemented in the coming year:

1. Implement a best interests standard

There is a distinct expectations gap between what is required of “advisors” and what is expected by consumers. Consumers are led to believe that advisors make recommendations in their best interest, but no such standard is actually in place. Often, consumers are unaware that the financial services providers that they receive “advice” from are simply salespeople pushing high-cost financial products. When things go awry, advisors’ defense is that the investments were “suitable”, which is a much lower standard. FAIR Canada wishes that “advisors” were required to provide advice that is in the consumer’s best interest, in line with consumer expectations.

2. Ban all forms of third-party embedded commissions (particularly trailing commissions) and encourage real price competition between mutual funds

Trailing commissions carry serious potential for conflicts of interest and present high, opaque costs to consumers. Mutual funds are marketed by manufacturers to “advisors” on the basis of how much advisors will earn in commissions – a perverse form of price competition where there are  incentives to create more expensive products in order to increase compensation to incentivize advisors to sell their products. FAIR Canada wishes that securities regulators would seriously consider banning trailing commissions.

At an absolute minimum, investors should be told of any costs or fees (including specifics about trailing commissions) clearly and in plain language both before they invest (in Fund Facts) and after (in annual cost reports). The investment fund industry’s continued opposition to the disclosure of trailing commissions is an indication that the industry worries that if investors were aware of these costs they would question what services they received for the money they paid and would seek lower-cost alternatives.

3. Protect consumers from leveraged speculation in investment products

FAIR Canada is concerned about systemic risks presented by leverage in retail customers’ investment accounts. We are concerned that some financial institutions irresponsibly promote borrowing to invest as an investment strategy despite the fact that in the vast majority of cases it is not appropriate for the consumer and despite the fact that Canadians are already heavily indebted. We have raised with securities regulators the issue of inappropriate practices and relationships between banks who provide investment loans (including related institutions) and registrants, where consumers may be encouraged to take out loans while they are still in their advisor’s office. In particular, we recommend that regulators undertake targeted compliance reviews and canvass dealer member firms to determine the extent of this problem.

FAIR Canada wishes that regulators would address the issue of inappropriate recommendations of leveraged investing to retail consumers in order to provide an adequate level of protection. Leverage sale of mutual funds, segregated funds and other high-fee financial products is not investment, it is speculation and clearly not suitable for the great majority of consumers.

4. Fair resolution of consumer complaints

FAIR Canada supports mandatory participation of all registrants in the Ombudsman for Banking Services and Investments (“OBSI”) and would like to see OBSI or a single, statutory ombudsman empowered to issue binding decisions. FAIR Canada wishes that financial industry participants would participate in OBSI in good faith in order to maintain and improve upon the existing non-statutory ombudsman system so that complaints are resolved in a manner that is fair and reasonable.

FAIR Canada is concerned about the lack of commitment to fair consumer dispute resolution by some banks and investment firms, specifically their strong opposition to participating in the OBSI.

We would also like to see regulators take action should participants fail to comply with OBSI recommendations. Any “name and shame” should trigger an inquiry into whether the firm complied with its supervisory obligations and whether it had acted fairly, honestly and in good faith in resolving the client’s complaint (as required by law) and whether they participated in the OBSI process in good faith.

5. National comprehensive consumer-friendly registration check

Securities regulators tell investors to check the registration of anyone selling investments and to only deal with registered representatives. However, we do not think that regulators appreciate the difficulty consumers encounter in conducting a proper registration check. Regulators need to provide a single, national comprehensive background check that Canadians can easily use to check the background, registration status, proficiency and disciplinary history of registrants. The system should also include self-regulatory organization membership information. The current system is very complicated and necessitates the search of several databases. It also requires the consumer to know the registered name of the firm, although this may not be the business name the consumer knows. FAIR Canada wishes for a simplified, comprehensive, national one-stop source for registration and disciplinary information for consumers.

6. Crowdfunding: A dumb idea whose time has come!

FAIR Canada believes that permitting equity crowdfunding would pose great harm to investors. SEC Commissioner Luis Aguilar has stated that this initiative “would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult.” FAIR Canada wishes that Canadian governments and securities regulators would make it clear that crowdfunding is too risky and will not be permitted in Canada.

7. Informed regulatory reform of exempt market

FAIR Canada is concerned about investor abuses in the exempt market. There is a dearth of meaningful information available to the public about how investors invest in the exempt market (and who such investors are) and the extent of fraud in the exempt market. Current regulatory statistics lump retail investors in with institutional and professional investors such as banks and pension funds. FAIR Canada questions the ability of regulators to oversee such markets or to undertake informed regulatory reform in the absence of such information.

The consumer “accredited investor” exemption is conceptually unsound. There is large-scale non-compliance, a lack of regulatory oversight, and it is a source of significant fraud. Let’s fix the accredited investor exemption in 2013. The Northwestern Exemption orders, in particular, pose an even greater threat to investor protection in the Western provinces. FAIR Canada wishes that the “accredited investor” exemption be reformed, that the Northwestern Exemption orders would be revoked in order to protect investors in these jurisdictions, and that regulators would obtain and provide to the public meaningful detailed data on exempt market activity.

8. Better enforcement

Regulators should prosecute all frauds and unregistered sales of securities where consumers have lost money as a result of the illegal conduct and not simply take administrative proceedings where fraudsters receive a slap on the wrist. More prosecutions would further deter fraud and misconduct.

FAIR Canada believes a simple fix for 2013 would be to provide the self-regulatory organizations (“SROs”) (that is, IIROC and the MFDA) with the power to collect fines when an individual ceases to work for an SRO-regulated firm. This would serve as a better deterrent against misconduct. Additionally, we believe that requiring the firm to pay the fine if the registrant does not would encourage improved compliance at firms.

FAIR Canada wishes that SROs had the power to collect fines, that firms were liable for their registrant’s unpaid fines, and that prosecutions of illegal distributions and fraud be increased in order to better protect investors.

We have many other wishes for 2013, but we will limit our list to 8 items given that we are entering the holiday season. FAIR Canada is thankful for the input it has received over the past year from our newsletter subscribers and others about issues of importance to you. We thank you for reading and encourage you to write to us about other wish list items you would add to the list for 2013.

December 19, 2012