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Douglas Walker is deputy director of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada)

Too many Canadians continue to be victims of misleading sales practices and advice to make investments that are unsuitable for them. Investors who are victimized by these practices often suffer devastating losses. Those setbacks have serious impacts, including the loss of retirement savings or the inability to pay for a child’s postsecondary education. Ontario’s current Capital Markets Modernization Taskforce review of the province’s securities laws presents an opportunity for change that is long overdue.

Concerns about the effectiveness of regulatory enforcement are aggravated by the challenges victims often face in trying to recover their losses. All these worries impair Canadians’ confidence in the integrity and fairness of regulation of the securities industry and capital markets.

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The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) has recently urged the task force to focus on meaningful access to justice for aggrieved investors. It recommended the Ontario Securities Commission (OSC) have a clear mandate and stronger powers to order financial compensation for harmed investors.

The OSC’s mandate is to protect investors and bolster confidence in Ontario’s capital markets. Compensating investors for losses should be a major priority of the commission’s enforcement program.

Currently, the OSC can apply to a court for a compensation order in favour of victims of financial loss. The OSC itself does not have the power to order restitution for investors. The OSC’s investigations and enforcement actions focus on imposing penalties on investment advisers and their firms. While this is important, investors who suffer losses rarely receive compensation for them. Occasionally, some compensation is specified in settlement agreements, but usually victims are left to seek compensation on their own.

The task force proposes that amounts collected by the OSC through disgorgement orders against advisers and firms be distributed to harmed investors. While this would be progress, it has limitations. Disgorgement only requires wrongdoers to pay back the income they obtained from their misconduct, such as fees and commissions. Investment losses suffered by victims are not addressed.

In Canada, investors have limited practical options to recover losses from adviser misconduct. The options that do exist can be costly, time consuming and frustrating.

To help address these challenges, FAIR Canada recommended to the task force that the Ombudsman for Banking and Investment Services (OBSI), a national organization, have the power to make binding compensation awards. Currently, investors with concerns about their securities investments are able to seek dispute resolution through OBSI for claims up to $350,000.

Giving OBSI that binding authority and increasing the limit on its decisions to $500,000 would make the process far fairer and more effective for investors. Acting OSC chair Grant Vingoe’s public support for giving OBSI binding authority is also welcome.

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Under the current non-binding OBSI regime, if an investment firm rejects a compensation recommendation, the firm can be publicly “named and shamed.” However, some firms typically offer much less to an investor than OBSI’s recommendation, accompanied by a threat to not pay anything if the investor rejects the offer. If the investor accepts, the firm then requires signature of a non-disclosure agreement that forbids any public mention of OBSI’s recommendation or that the firm bargained hard for the agreement. The firm saves money and keeps its name out of the media.

Allowing firms to use this approach is unfair and stacks the deck in favour of the investment industry. Total compensation awarded by OBSI in 2019 for client complaints against banks and investment firms was just $2.67-million, and the average award for investment complaints was just $14,291.

The OSC’s 2019 annual report discloses that $10.9-million was to be returned to investors through commission enforcement proceedings. In the United States, tools to protect investors are more powerful. Between 2002 and 2015, the U.S. Securities and Exchange Commission returned US$14.5-billion to investors – an average of US$1.3-billion a year.

Also, the U.S. Financial Industry Regulatory Authority (FINRA), a self-regulatory organization, mandates that its adjudicative tribunals and staff put their highest priority on compensating investors for any harm caused by investment firms. The equivalent investment industry SROs in Canada, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), have not addressed as a priority the issue of investor compensation for misconduct by the dealers they regulate.

Recently, IIROC announced that in 2021 it will explore ways to return to investors disgorged funds collected from advisers or firms the organization disciplines. SROs in Canada should address investor compensation of client losses, not just disgorgement of an adviser’s ill-gotten gains from misconduct.

For years, FAIR Canada has urged regulators to fix the problems facing Canadian investors who suffer losses owing to misconduct in the securities industry. Why do Canadian regulators not place the same priority on compensation to investors for losses that other regulators do? Change to ensure more effective protection of investors here is long overdue.

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