An important aspect of securities regulation is the protection of investors.23 We believe that there are a number of areas where investors could be better served.
Investors whose money has been compromised by error or wrongdoing on the part of market participants expect the system of complaint-handling and redress to be accessible and responsive. The current system, however, requires significant knowledge, resources, and persistence to navigate properly. It all too often leaves investors frustrated and angry.
Our consultation process revealed that investors are not always adequately engaged and consulted in the development of securities regulatory policy. Securities commissions in Canada provide fewer opportunities for investor advocacy and engagement than other key capital markets jurisdictions. This is to the detriment of securities regulation in Canada and diminishes public confidence in regulatory accountability, integrity, and efficiency.
The complaint-handling and redress mechanisms in Canada are complex. Resolving an issue can involve securities commissions, SROs, arbitrators, and the courts. The redresses available to investors vary across Canada.
An investor may seek two types of redress.24 The first involves a situation where an investor believes that a firm has failed to comply with securities law and is seeking a review of its conduct. In such circumstances, while the investor has the option to contact the SRO or the securities commission directly, where the complaint is against a member of a SRO (either IIROC or the MFDA), the recommended course of action in most provinces is to first exhaust all complaint processes internal to the firm in question. This would involve raising the issue with management and, if one is available, the firm’s ombudsperson. If the issue remains unsatisfactorily resolved, the investor can then file a complaint with the appropriate SRO. Complaints against firms that are not members of SROs, or complaints that remain unsettled after the SRO review, can be made directly to the securities commission. Investigation by a securities commission can result in sanctions, including reprimands, fines, and suspensions.
The second type of redress involves a situation where an investor seeks financial compensation for a contravention of securities laws. As with the first type of redress, the investor is first expected to seek financial redress under the internal complaint process of the firm. If this is unsuccessful, the investor could then seek binding arbitration through IIROC or non-binding arbitration with the Ombudsman for Banking Services and Investments (OBSI). IIROC’s arbitrator can order compensation of up to $100,000, while OBSI can recommend compensation of up to $350,000. These services, however, are only available if the firm in question is a member of these organizations.25 Additionally, the investor might be able to seek financial redress through the securities commission in some provinces. Saskatchewan, Manitoba, and New Brunswick can order compensation of up to $100,000. To collect, the order must be registered in court. Quebec can immediately compensate investors, in an amount of up to $200,000. Finally, the investor can seek financial redress in the courts, by pursuing a civil action. Small claims court may also be an option if modest financial redress is sought.
“The journey to a successful complaint conclusion can be aggravating, time consuming, and add stress to an already stressful situation. Restitution claims require diligence, persistence, determination, and thick skin.”
During our consultations, we heard accounts from investors who were compelled to navigate through the system to recoup funds lost as a result of error or wrongdoing. These accounts vividly described many of the shortcomings of the complaint-handling and redress mechanisms in Canada. We believe investors are not particularly well-served by the system. Although many mechanisms have been put in place to provide investors with simpler, more cost-effective alternatives to the courts, the numerous organizations, the multi-step processes, and the lack of uniformity across Canada pose challenges for investors to properly understand and achieve a proper conclusion in an expeditious manner. Based on some of the personal accounts, it appears that investors are often not provided with the information required to understand the full range of options available to seek redress.
We recommend the establishment of a dedicated service to address the lack of information, guidance, and support for investors in the domain of complaint-handling and redress. We envision that this service would disseminate comprehensive information about complaint-handling and redress in Canada. The service could be provided by a securities regulator or another existing regulatory entity.
We are concerned with the degree of variation in financial redress provided by securities commissions across Canada. The fact that some provinces provide financial redress that is binding while others do not is not comforting to investors who find themselves subject to wrongdoing in a province with weaker redress mechanisms. Seeking redress in the court system is an option, but it might not be a viable one, as the cost of engaging the court might exceed the compensation being sought. The lack of uniform financial redress in Canada is troubling and a direct result of Canada’s fragmented securities regulatory structure.
We find that the process of financial redress established by the AMF in Quebec is a best practice in Canada. An investor, after receiving a ruling in his or her favour by Quebec’s independent adjudicative tribunal, can submit a claim for compensation to the AMF for up to $200,000. The amounts paid in compensation are drawn from the financial services compensation fund, Fonds d’indemnisation des services financiers. Fees levied on regulated entities in Quebec are used to fund it. The AMF will, as required, undertake action to recoup the payment of compensation from those responsible. The benefit of this approach is that settlements are binding and investors are compensated expeditiously without having to wait for a court to enforce the ruling and collect compensation.
We recommend the following to improve investor complaint-handling and redress mechanisms:
We are concerned that in some provinces firms can avoid disciplinary action by a SRO or an exchange by simply leaving the securities industry. This allows wrongdoers to get away unpunished. We have suggested appropriate language in the draft Securities Act to ensure that the SROs and exchanges continue to exercise jurisdiction over former members.
We believe that securities commissions across Canada could do more to engage and advance the interests of investors. This point became clear to us during our consultation process. We heard from concerned investors. We also learned of the practices used by regulators in other countries that have made investor engagement a priority.
In the United States, the Securities and Exchange Commission (SEC) has an office mandated to ensure that the SEC is truly the “Investor’s Advocate.” The Office is responsible for reviewing all actions taken by the SEC from the perspective of the investor. It plays a leading role in the SEC’s efforts to make disclosure documents more readable and understandable to investors. It consults with investors to develop investor education programs, conducting focus groups and investor surveys. Finally, the office acts as a single point of contact for the intake of tips, complaints, and suggestions.
In the United Kingdom, the FSA has established a consumer section that is situated within the organization so that it has influence across all regulatory policy groups.26 The group is known as a cross-sector leader. The objective is to put consumer interests at the core of regulatory policymaking at the FSA. To properly inform the regulatory process, the group works with consumers, organizations, think-tanks, and others that represent consumers. It identifies risks that could potentially disadvantage current, or potential, consumers. It stewards the FSA’s overall approach to consumers, ensuring that it is coherent and being properly implemented.
“England has given investors considerably more clout by creating a core funded Financial Services Consumer Panel with resources to do research and the authority to review key decisions in the industry.”
The Consumers Council of Canada
The FSA also has an independent financial services consumer panel, which is statutorily mandated. The panel provides advice to the FSA on the interests and concerns of consumers, and it assesses the FSA’s effectiveness in meeting its statutory objectives that pertain to consumers. The FSA consults the panel on its policy proposals and the panel raises its own concerns and initiates its own research. It is prescribed in statute that the FSA must consider any representation made by the panel. If the FSA disagrees with a view expressed or proposal made in a representation, it must give the panel a statement in writing of its reasons for disagreeing. The panel currently has 11 members (including the chair), with diverse backgrounds. The panel is funded by the FSA and is supported by a dedicated secretariat.
We understand that the vast majority of the provincial securities regulators do not have an advisory panel on investor issues. We also understand that they generally do not have a group exclusively devoted to advocating the interests of investors in securities regulation.
We recommend the establishment of an independent investor panel. We also recommend that securities regulators establish a dedicated investor issues group.
23 As noted previously, we have prescribed in the draft Securities Act that a core objective of securities regulation is to protect investors from unfair, improper, or fraudulent practices (see Table 1 in the section “Objectives of Securities Regulation”).
26 As an integrated financial sector regulator, the FSA regulates areas that affect investors as well as non-investors (e.g., depositors). The FSA uses the term “consumer” to capture both investors and non-investors.