In 2012, John Flynn was trying to get his family’s finances in order for retirement. After working for 38 years as an engineer in Alberta’s oil fields, most of the Flynns’ savings were tied up in oil and gas stocks. They needed a standard retirees’ portfolio – diversified, low-risk investments with enough income to live off. After meeting with their new financial adviser, who came highly recommended by a friend, the Flynns felt like they were in good hands.
It wasn’t long before they started to notice big losses in some of their new holdings, particularly in what they were told were safe corporate bonds. It turns out these were actually highly speculative debentures issued by junior energy companies that had a substantial risk of defaulting. Plus, they were illiquid, meaning investors couldn’t sell them at will.
Those and other investments would end up costing the Flynns nearly $500,000 from the nest egg that they’d spent decades building up. “It was very scary. Here I am in year one, year two of retirement, and a considerable stake was just gone,” Mr. Flynn said. “And let’s face it, it’s embarrassing. You trust someone … .”
Mr. Flynn’s determination to get his money back would plunge him headfirst into the Canadian securities industry’s complaint-handling system, which investor advocates have long criticized as tilted heavily against the everyday investor.
Aggrieved investors must escalate a complaint through multiple levels, starting with the adviser’s employer. From there, some firms and banks will divert a complainant to an internal “ombudsman.” If still unresolved, the Ombudsman for Banking Services and Investments (OBSI) can conduct an independent investigation and recommend compensation.
But OBSI is a toothless watchdog, relying on voluntary co-operation by dealer firms. It cannot force dealers to disclose documents and its decisions are non-binding. Sometimes, firms will simply refuse to compensate clients that OBSI concludes were harmed by unsuitable investments, discretionary trading and other dubious practices. Other times, investment firms will make an offer to settle for a fraction of their client’s losses.
Mr. Flynn jumped through all of those hoops only to have his complaint rejected at every stage. It would take nearly five years before the full picture would emerge of just how misaligned the family’s financial plan was for their stage of life. Their entire portfolio was allocated to high-risk investments, most of which were concentrated in energy sector holdings.
Only after getting a lawyer and initiating a lawsuit did the Flynns come to an undisclosed agreement with Richardson GMP, his adviser’s former employer, in May, 2020.
It shouldn’t be that hard, or take that long, for legitimate complaints to receive a fair hearing, said Harold Geller, an Ottawa lawyer who represents investors with claims against their advisers, including Mr. Flynn. “It’s a broken system, which relies heavily on the industry to abide by the basic principle of treating clients fairly, honestly and in good faith,” Mr. Geller said. “At times, I think they ignore that obligation.”
The lack of a binding dispute-resolution service for Canadian investors has long been flagged as a gap in the regulatory framework. An independent review of OBSI conducted in 2016 concluded that its inability to enforce decisions “tilts the playing field in favour of firms,” by permitting harmed investors to receive less than they are owed.
All registered investment dealers in Canada, outside of Quebec, are required to make OBSI available to their clients as a forum for disputes. And when OBSI finds a firm has acted unfairly or given bad advice, resulting in investor losses, it can recommend compensation of up to $350,000. (In Quebec, a dispute-resolution service is administered by the Autorité des marchés financiers.)
When there is a refusal to abide by a decision, OBSI’s only recourse is to “name and shame” the recalcitrant firm, publishing the details of the investigation on its website. There have been about 20 such refusals over the past 10 years.
One Saskatoon-based mutual fund dealer, Sentinel Financial Management, ignored four separate OBSI decisions over a two-year period in 2015 and 2016, refusing to reimburse investors for nearly $450,000 in losses. In those cases, OBSI found Sentinel responsible for the harm caused by its advisers selling unsuitably risky or “off-book” investments, sometimes to clients with minimal investment knowledge. Sentinel declined to comment when contacted by The Globe and Mail, citing confidentiality in its dealings with clients and regulators.
Other times, firms at the wrong end of OBSI rulings will make a lowball offer. By settling below the OBSI recommended amount, a firm can limit the damage while avoiding negative publicity. Essentially, it exploits a loophole – the distinction between an outright refusal to pay and paying less than the sanctioned amount. In the 2018 and 2019 fiscal years, 7 per cent of cases settled for less than what OBSI recommended, representing 17 per cent of the total dollar value of investor damages assessed by the organization. “This behaviour is disappointing and in part a consequence of the fact that OBSI is not able to compel firms to pay the amounts we recommended,” OBSI board chair Jim Emmerton wrote in the 2019 annual report.
Lowballing, however, is much more common than the numbers would indicate, said Ken Kivenko, a prominent advocate for investor rights who helps guide complainants through the process. Firms can make attempts to settle for pennies on the dollar throughout the many layers of the complaint-handling process. “Lowballing is chronic before it even gets to OBSI,” Mr. Kivenko said. “We’ve done this for 20 years, and it’s gotten worse and worse and worse.”
That’s what happened in one case study published by OBSI last year. A widow with two young children, a household income of $80,000 and limited investment knowledge was sold high-risk investments by her adviser. She lost $133,000 on those securities, while her adviser earned $43,000 in commissions on excessive trading. OBSI said she was entitled to both amounts, plus the $49,000 she would have earned had she been suitably invested. Hours before OBSI was set to name and shame the firm, it settled with their client for $40,000.
“People panic, even if they have a good case, because they know OBSI can’t give a binding recommendation,” Mr. Kivenko said. Following a complaint all the way through to an OBSI resolution requires patience and stamina, and lots of investors get worn out, he added. Others need the money and give in to the pressure to settle. A 2019 report showed that 38 per cent of OBSI complainants were older than 60 and more than half of these senior complainants had household incomes of less than $60,000.
The total amount of lost money returned to Canadian investors through OBSI investigations was about $5-million in the 2018 and 2019 fiscal years, combined. The average award is less than $15,000. These are modest sums by any measure of the industry’s size, Mr. Kivenko said. After all, Canadian investors have more than $2-trillion invested in mutual funds and exchange-traded funds alone.
“Let’s at least have one backstop that, if all else fails, and someone has a valid complaint, there’s one place they could go where it will be fairly settled,” Mr. Kivenko said. “And if they make a decision to award you an amount, you’ll get it.”
For years, the Canadian financial industry has quietly conveyed a sense of discontent with OBSI’s approach and has pushed back against an expansion of the watchdog’s mandate. In public consultations and reviews, industry representatives have characterized the complaint-handling process as inadequate and non-transparent.
While investor groups characterize the system as biased against the consumer, financial firms make their own claims to unfair treatment at the hands of OBSI investigators.
“Without question, there is a strongly held view and narrative that OBSI is not able to do the job,” said Walied Soliman, who chaired Ontario’s Capital Markets Modernization Taskforce, which recently recommended a set of sweeping changes, including an overhaul of Canada’s largest securities regulator.
When the task force first proposed giving OBSI binding authority, the industry resisted. “Giving OBSI the power to make binding decisions is inappropriate and does not strike the right balance between investor protection and fair and efficient capital markets,” the Private Capital Markets Association of Canada wrote in a submission letter.
“OBSI decisions are rejected for various reasons by registrants, including when a firm believes OBSI was not fair and reasonable in its investigation and its reasoning and analysis in its decision did not support its conclusions or the law,” the letter said.
Sarah Bradley has heard that kind of thing before. “It’s really important for us to fully understand the criticisms that are out there,” said Ms. Bradley, OBSI’s chief executive. “They’re often stated in vague and general ways that make it difficult to fully understand or respond to them.”
A number of independent reviews have tried to substantiate the industry’s claims about OBSI’s bias and lack of professionalism, but found little basis for them, Ms. Bradley said. The last one, conducted in 2016 by Deborah Battell, the former New Zealand banking ombudsman, concluded that OBSI performed well within its mandate, its decisions “fair and consistent,” and its loss-calculation methods “world leading.”
“We’ve been doing this job, and doing it effectively, for 25 years,” Ms. Bradley said.
The Battell report concluded that OBSI’s greatest shortcoming was its limited mandate. “It is difficult to confidently promote a service that is unable to assure and secure redress for consumers,” she wrote, adding to the litany of voices calling for a binding process. That list includes the acting chair of the Ontario Securities Commission, Grant Vingoe, and the International Monetary Fund.
“We shouldn’t have anything” that the IMF would consider a deficiency, Mr. Soliman said. The task force’s final report, which was completed in January, called on the Ontario government to implement a dispute-resolution service with teeth, and to increase the maximum award from $350,000 to $500,000.
Reaching a consensus for empowering OBSI will be a challenge in Canada’s fractured regulatory system. That’s why Mr. Soliman proposed a Plan B: a made-in-Ontario service to make binding decisions on investor disputes. “If we have to create one from scratch, we should do so.”
But adding another layer to the investor complaint-handling regime would just make the process more onerous, said Mr. Geller, the Ottawa lawyer who represents aggrieved investors. “It would mean that consumers will have to jump through even more hoops.”
Investors who feel their financial advisers have led them astray first need to know what to complain about. “They know there’s a problem,” Mr. Geller said. “They rarely know the nature of the problem.”
Back in 2015, Mr. Flynn wasn’t quite sure why his life savings were dwindling, but he knew something was gravely wrong. He was unaware that his adviser’s employer actually flagged the selling of unsuitable investments. Between August and September, 2012, Richardson GMP informed the adviser, Preston Smith, that the oil-and-gas debentures he mistakenly thought were safe, were actually high-risk securities. Mr. Smith then continued selling them to a number of clients, including the Flynns.
“Mr. Flynn wouldn’t have known to complain to OBSI about that. And if OBSI had the full file, they would have seen the documents that proved it,” Mr. Geller said. Dealers are not required to provide a client’s entire file to OBSI during investigations, they only have to respond to the complaint as it is received. Meanwhile, the investor submitting the complaint is not allowed to know which documents OBSI has received and is basing their recommendation off of. The entire process is shrouded in confidentiality. “The client is flying blind,” Mr. Geller said.
Brutal clarity would eventually come to Mr. Flynn in a series of regulatory decisions. Last July, Richardson GMP, which has since been renamed Richardson Wealth, agreed to pay a fine of $500,000 for its failure to supervise Mr. Smith and another adviser working out of the same Calgary office, in a settlement with the Investment Industry Regulatory Organization of Canada.
“Since 2015, we have taken the necessary actions to help ensure similar matters do not surface in the future,” Andrew Marsh, then-president of Richardson, said last year in a statement. The company declined to comment for this story.
IIROC also previously settled with Mr. Smith, finding he sold unsuitably risky securities to six groups of investors saving for their retirements, all of which suffered substantial portfolio losses, including Mr. Flynn. (Attempts by The Globe to reach Mr. Smith were unsuccessful.) Mr. Smith was suspended for 2½ years from acting in a registered capacity and fined $100,000.
According to IIROC, he has yet to pay the fine.
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