A group of investors has filed an appeal after a judge dismissed their class-action lawsuit against a mutual fund division of Royal Bank of Canada that offered its advisers higher commissions for selling RBC funds than it did for selling competing funds.
Earlier this year, two Ontario-based law firms, Investigation Counsel P.C. and Bates Barristers P.C., filed a class action suit against Royal Mutual Funds Inc., an investment arm of Royal Bank of Canada, claiming investors were not aware of the adviser compensation arrangements and, therefore, did not receive unbiased investment advice when they bought the company’s mutual funds.
In 2018, Royal Mutual Funds paid more than $1.1-million in fines after investment regulators found the company was offering in-house investment advisers commissions that were 10 basis points higher than those for other funds when they sold certain RBC funds. ( A basis point is a one-hundredth of a percentage point.) The enhanced compensation paid out to RBC advisers by Royal Mutual totalled more than $24.5-million.
In a decision on Tuesday, the Supreme Court of British Columbia refused to certify the class action, stating the investors had failed to meet the requirements of a class proceeding.
“Ultimately, I cannot find that a class proceeding in this case would be fair, efficient or manageable,” Justice Amy Francis wrote in her decision. “The heart of the plaintiffs’ case is the allegation that the defendant harmed their financial interests by acting in a conflict of interest when selling RBC funds ... this is a highly individualized claim that is simply not amenable to class determination.”
Justice Francis dismissed the certification after determining the class action was not a preferable procedure for resolving investors’ claims, and that finding the defendant liable would require detailed inquiries into each class member’s financial records.
Paul Bates, co-counsel for the plaintiff, said he was disappointed and “respectfully disagreed” with the court’s decision. As a result, Mr. Bates and his co-counsel, John Archibald, filed an appeal on behalf of class plaintiffs William and Diane Sharp, a retired couple from British Columbia.
“We believe everyone has the right to access justice when they have been wronged by an investment dealer through conduct that breaches securities regulation,” Mr. Bates said in an interview. “Investors should be able to access the courts through class action procedure. They should not be forced to bear all of the cost, risk and delay of access to justice by individual action.”
Justice Francis also weighed “behaviour modification” in her ruling, noting that RBC had already ended the higher compensation for advisers and had been fined by the Ontario Securities Commission.
“I must weigh these factors against the increased access to justice inherent in a class proceeding where each plaintiff’s claim is for a relatively small sum,” she said.
Many people in the investment community – including RBC clients – have criticized the OSC for not using a heavier hand against RBC, saying the $1-million fine was disproportionately small compared with the $24.5-million in compensation paid out to RBC advisers.
“The big mistake was with the OSC not sanctioning the senior [Royal Mutual] executive who authorized the extra 10-basis-point payment to salespeople,” investor advocate Ken Kivenko said. “Given the modest fine levied on RBC by the OSC , the deterrent value is nil as it would be cost-effective for RBC to repeat the offence given the extra sales volume achieved.”
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