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Shaming investment firms ‘is not something we do lightly,’ says Douglas Melville, Ombudsman for Banking Services and Investments.
Shaming investment firms ‘is not something we do lightly,’ says Douglas Melville, Ombudsman for Banking Services and Investments.

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Without compensation, trust is eroded in financial firms Add to ...

She was 62 years old. She knew close to nothing about investing. And this Scarborough homemaker, who had been widowed five years before, relied entirely on her financial adviser to supplement her $30,000 annual pension with the returns on her $550,000 of investments.

What happened is a sad – but not so uncommon – story. Her adviser at Octagon Capital Corp. bet most of her portfolio on risky investments. Short selling and investing on margin, he made hundreds of trades in the four years he managed her account, many without her knowledge. And he lost big.

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The Investment Industry Regulatory Organization of Canada (IIROC), the self-regulatory agency that oversees investment dealers, suspended the adviser for five years and fined him $125,000, among other unpleasantries. Yet Octagon is digging in its heels. The Ontario firm refuses to compensate the investor with a $181,339 cheque, an amount deemed appropriate by the Ombudsman for Banking Services and Investments. And this was OBSI’s most conservative evaluation of her losses.

Such a response is dumbfounding, as the Ontario firm knew OBSI was about to name it publicly – a dramatic measure it likens to a nuclear deterrent. But it is indicative of the wider financial industry’s challenge of the independent mediator that settles banking and investment disputes.

“This is not something we do lightly,” says Ombudsman Douglas Melville. In fact, OBSI has done it only once in its 16-year history, in 2007, to a small two-adviser firm.

And there is good reason. A financial firm’s value lies in the trust it inspires. Take that away, and there is nothing left. Even Octagon recognizes this on its website when it boasts its “unimpeachable references.”

That is why Royal Bank of Canada entered into a $17-million settlement with Earl Jones’s close to 180 victims, even if it considered itself to be a victim too. Though the bank denied being at fault, the settlement was an implicit admission that it had failed to adequately supervise the account in trust where the Montreal defrauder drew money as easily as if he was opening his fridge. Heartbreaking stories of Jones’s victims were hurting RBC’s public image in Quebec.

No one knows why Octagon didn’t compensate the Scarborough widow for an amount that would roughly equal the cost of three full-page ads in a national newspaper to restore its reputation. Its chairman and chief executive officer, John Palumbo, did not return phone calls.

But one can speculate. They probably thought they could play ostrich and the controversy would somehow blow away.

There are 12 other firms that stand where Octagon stood, on the verge of being exposed for their unresponsiveness to clients’ unwarranted losses. While some of them are small, others are big institutions, Mr. Melville says. And the ombudsman is anxiously awaiting to see whether the “shaming” of Octagon will make them more open to compensating those clients.

This situation is unprecedented. And it reveals the extent to which some in the financial industry now believe they can challenge the ombudsman’s authority – with the complicity of Finance Minister Jim Flaherty.

OBSI was created in 1996 under Jean Chrétien’s Liberal government at the insistence of the financial industry, which hoped to avoid a federally operated bank ombudsman. But its independent offspring may not have been as docile as the industry hoped. With its fines and hit parade of the most-complained-about banks, it made no friends on Bay Street.

RBC and Toronto-Dominion Bank have walked away, taking their banking complaints to a private firm. And instead of forcing them back into the fold, Mr. Flaherty recently allowed other banks to follow suit. However, banks and investor dealers are still required to submit their brokerage complaints to OBSI.

For consumers who feel they have been wronged, this is a mockery, as no service provider will bite the hand that feeds it. If speed and cost were really the problems, as the industry says, then removing impartiality is no solution.

Mr. Flaherty’s undermining of OBSI is uncharacteristic of the Conservatives, which have tried to bill themselves as a pro-consumer government. This political slant has trickled down in the CRTC’s recent decision, under the leadership of its new chairman, Jean-Pierre Blais. Canada’s telecom and broadcasting regulator killed BCE’s acquisition of Astral Media Inc. and intends to ban the obtuse language used in wireless contracts.

A weakened OBSI has now resorted to extreme measures. Will shaming unresponsive financial firms allow wronged consumers to obtain long-awaited compensation? Perhaps not. But as investors and bank clients vote with their feet, it may give Canadian consumers a certain sense of justice.

 

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