Bank ombudsman cites Octagon Capital in investment dispute

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Octagon Capital Corp. has been singled out by Canada's banking ombudsman for refusing to compensate an elderly client following a dispute over investments.

After warning this week that it would start "naming and shaming" financial institutions who were flouting its rulings, the Ombudsman for Banking Services and Investments (OBSI) said Toronto-based Octagon has refused to pay $181,339 to the client, after being found to have mismanaged her investments.

OBSI said the decision comes after an investigation determined that the client, a low risk-investor who relied on income from the investments, was exposed to unusual risk in her portfolio, often without knowing.

The adviser "traded frequently in her accounts, and often without her authorization," OBSI said in a statement accompanying the announcement. "The securities he purchased were too risky for her, as were the margin and short selling strategies he used... She was an unsophisticated investor who did not know her investments were unsuitable."

Octagon's chief executive officer John Palumbo could not be reached for comment. A person with the firm said Mr. Palumbo was out of town Friday and that Octagon would have no comment on the OBSI announcement.

Octagon is the first financial institution to be singled out publicly by OBSI under a new policy the ombudsman adopted this week to name investment firms the ombudsman believes are flouting its decisions. Following an increase in the number of firms who are not complying with OBSI's rulings on compensation, the ombudsman said Thursday it would begin "naming and shaming" those who refuse to co-operate.

Octagon "has chosen not to fulfill its responsibilities to [the client] by providing the compensation she is owed based on the facts of the case," OBSI said. "Octagon has not even interviewed [the person] to determine what occurred during her time as a client of the firm."

The adviser at the centre of the dispute has been probed by the Investment Industry Regulatory Organization of Canada (IIROC) concerning the same client's account. The regulator determined that the client had not been consulted about numerous high-risk trades and fined the adviser $125,0000, while also suspending his registration, OBSI said.

However, the client received no compensation from the IIROC decision. The ombudsman recommended the client be paid $181,339 in compensation, a figure that includes the losses in the account and interest on those funds from the date she first complained.

Before taking the steps of naming Octagon publicly, OBSI said it established an independent review, in which Octagon was given the chance to have a former commissioner of the Ontario Securities Commission provide an independent assessment of the file.

"If OBSI had unfairly considered the facts of the case or our investigation findings were objectively flawed, the reviewer would say so in their report on the matter," the ombudsman said. "Octagon chose not to take up this offer."

OBSI made a copy of its investigation available on its website Friday. The ombudsman has indicated it will be taking similar steps in the weeks and months ahead with other firms who have refused to co-operate with its rulings.

Created in 1996, OBSI handles complaints about banks and investment dealers that can't be resolved between the consumer and the firm. Though OBSI has always had the power to name firms that don't comply with its decisions, it has rarely used that lever before. Until recently, OBSI said it had only ever been refused once on a compensation ruling.

"Some have likened it to a nuclear deterrent," OBSI said this week of the new policy. "It is the principal tool that OBSI has to incent firm co-operation, but it was never meant to be used."

The push to start naming firms highlights the lack of power Canada's bank ombudsman has been able to wield over the financial sector in recent years. OBSI was created as a compromise to the banking sector, after Ottawa considered setting up a federal office to oversee banking complaints. Instead, OBSI was formed as an independent mediator funded by the industry. However, OBSI said it has seen an increase of cases where firms are refusing to comply with its compensation orders.

"We remain hopeful that the cases will yet resolve before we announce them as refusals to compensate," OBSI said in its statement this week. "Unfortunately the coming period will likely focus significant attention on those cases that could not be resolved."

Investment advocates worry about the effectiveness of the "name and shame" strategy if it is used too much. For it to work, it must be used sparingly so that the impact of being singled out isn't lost, said Ermanno Pascutto, executive director of Fair Canada, a non-profit organization that advocates for investor rights.

"If it's used again in the next week or two, that waters down its effectiveness," Mr. Pascutto said. He added that it's also up to the investment community to send its own message on business conduct.

"If the system is going to work, there have to be significant consequences for that – reputational consequences and business consequences," Mr. Pascutto said. "It's up to the people, the stakeholders in the market to send a signal to any firm that's named and shamed that it's unacceptable business conduct, because it undermines confidence and integrity of the system."