This letter about investor abuse by financial professionals, and about IIROC etc is particularly good and worth sharing with all. (the system ain't broke at all, it is perfectly "Fixed")
Zoomer Magazine Letter to the Editor September 12th 2016
Peter Whitehouse -3359 Chokecherry Crescent, Mississauga, Ontario L5L 1B2
Tel: 905-607-5654
FAX: 905-607-4916 email:
PeterWhitehouse@bell.net September 12th 2016
Ms Suzanne Boyd Editor-in-Chief Zoomer Magazine 30 Jefferson Avenue Toronto Ontario M6K 1Y4
Dear Ms Boyd
Letter to the Editor re: Zoomer Magazine article, “Who’s Got Your Back”
It is appreciated that the objective for the “Who’s Got Your Back” article, in the September 2016 Zoomer magazine issue, is to help foster an increased awareness of the pitfalls facing unwary investors when they are trying to secure their lifetime savings for future comforts.
The article opened up by encapsulating three case examples to show the nature of costly investor experiences and then followed that up with a commentary of the questionable investor protection conditions faced by unwary investors. It would have been great to see an expanded narrative with the more intense details showing just how investor experiences have failed the “trust” expectation test that many, many unsuspecting investors have been subjected to.
There are three expectations of trust that are exposed to abuse when investors sign on to make investments.
Those three expectations of trust are,
1) There is the trust that the Investment/Financial “Advisor” will provide advice that investment recommendations made will be in the investor’s best interest and
2) There is the trust that the Investment Dealer employer of the “Advisor” will protect its integrity by adequately supervising the proper conduct of the “Advisor” employee.
3) Then, there is the third and most important expectation of trust. And that is the trust that the SROs, namely the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association (MFDA), whose job it is to oversee the conduct of the financial investment services industry, will recognize and acknowledge and take appropriate enforcement action when they are presented with a legitimate complaint of Investment/Financial “Advisor” regulatory wrong-doing. Also, the Ombudsman for Banking Services and Investments (OBSI) are trusted as being a part of the restitution enforcement process against Investment Dealer “Advisor” regulatory wrong-doing.
Without exaggeration, the records show there have been thousands of investors who have complained to the above mentioned three trust levels about unresolved unsatisfactory investing experiences. Not surprisingly, there is
one common observation that flows from those unsatisfactory experiences and that is the lack of respect by these three levels for the investor’s financial best interests that have violated the investor’s trust
.
Firstly, the investors place trust in the Investment Dealer “Advisor” employee to put forward the most suitable and appropriate investments and to act in the investor’s best interests. However, this investor expectation does not materialize when an “Advisor” violates that trust with actions that subordinates the best interests of the investor to those financial self-interests of the “Advisor”.
Secondly, when the investors have complained to the Investment Dealer employer of the Investment/Financial “Advisor”, the aggrieved investors have trusted the Dealer to respond and deal with a complaint also in the investor’s best interests, but that also does not happen. The fact is,
there are few if any disincentives that would encourage Investment Dealers to be forthright and concede to any wrong–doings of their “Advisor” employees, short of hard to deny obvious outright fraud.
That’s why there have been 12,355 investor complaints alone registered with IIROC over the last 7-year period. Who knows how many more thousands of investor complaints should have seen the light of day except for the vulnerable victims not having the fortitude, inclination and/or resources to press the details of their complaint with IIROC, the MFDA and the OBSI.
Thirdly, when all else fails, the
aggrieved investors expect and then trust the SRO regulatory overseers to objectively and proportionately enforce the securities regulations to protect the investors who have legitimate complaints. However, in far too many cases that has not happened.
The IIROC statistics enumerated below show Complaints Received versus the Case Assessment Files Open versus Complaints Investigated and Completed will substantiate this statement to be all too true. MFDA complaint statistics are not considered.
Here is a Summary of IIROC Enforcement Reports Statistics
The below statistics were extracted from IIROC published documents Source of Complaints Received by IIROC
NB. According to IIROC, the designation for the “Number of Investigations Conducted” and the “Number of Investigations Completed” have identical meaning. Therefore, regardless of the vernacular, what is important is that, for example,
there were only 124 “Investigations Completed” in 2015 even though IIROC received a total 1,341 investor complaints
. This means that, according to IIROC, only 9.25% of the complaints warranted investigation.
The larger issue here is what happened to the other 1217 (90.75%) complaints?
The public have a right to know how IIROC classified each of these 1217 investor complaints that were not investigated. Furthermore, in order to protect the unsuspecting vulnerable investing public,
they have a right to know who are the less reputable Investment Dealers who generated these 1,341 investor complaints. This is what the IIROC President defines as “transparency” !
In answering the ZOOMER Magazine article question, ”Who’s Got Your Back”, don’t look for IIROC to be a qualifier based on an analysis of the above statistics. Let’s also deal with the IIROC Complaint and Settlement Reporting (ComSet) comparison statistics which directly involves complaints to Investment Dealers.
The ComSet regulation requires Investment Dealers report all investor complaints they receive. This is vitally important because the world needs to know that there have been 9,363 ComSet investor complaints over a 7-year period against Investment Dealers. This averaging of 1,337 complaints per year indicates that over the past 7-years
IIROC have not put in place sufficient preemptive deterrents that would support the IIROC mantra that reads, “Protecting Investors and Fostering Fair and Efficient Markets across Canada”
During this 7-year time period, IIROC only saw fit to “open up” a total of 2,491 files (averaging 355 per year) of the 9,363 ComSet registered complaints.
That means that only 26% of the complaints registered from Investment Dealers received IIROC’s scrutiny.
What happened to the other 74% (6,902) of the ComSet complaint files that IIROC divulged were not “opened up” ? Just what did IIROC do with these complaints ?
Here is why we need IIROC’s answers as to where these investor complaints originate
It is interesting to note that when IIROC were asked how many of the Investment Dealer ComSet complaint reports came from the five largest Canadian banks and the IGM group, the
IIROC response was that they do not publish this "granular" information.
In other words
IIROC hides this most important defensive investor protection information which then perpetuates the exposure of unwary investors to the less reputable Investment Dealers
and their less reputable “Advisor” employees, regardless of whether they be bank-owned or independent Investment Dealers.
What level of public outcry will it take before IIROC realizes that they need to investigate and report the detrimental effects facing retail investors relative to complaints against the Bank-owned Investment Dealer concentration.
From recent 2014 information attributed to the Investment Funds Institute of Canada (IFIC), the big six Canadian banks and another major investment conglomerate now collectively control over 65% of the personal mutual fund assets of Canadians. This is an astonishing dominance considering that as of last February, Canadians have over 3-trillion dollars(1) in personal wealth of which over 1.2 trillion dollars are invested in mutual funds.
These six Canadian banks alone have been credited with increasing their share of mutual fund sales to Canadians from 25% in 2003 to 57% in 2013(2). This increasing domination has been made possible through the banks facility to steer its customers through the bank-owned investment services, as well as the banks buying up the independent Investment Dealers in order to continue to reduce non-bank competition.
Related to reduced competition - the Globe & Mail(3) reported that the Investment Industry Association of Canada (IIAC) stated that over the past 3 1/2 years, there has been a demise of more than 50 independent Investment Dealers and Brokers. Some have been swallowed up by larger competitors, such as the six Canadian banks, while others just gone out of business. (Refer to the Appendix for details of how the bank anti-competitive methods of operation have helped them accrue such a market dominance)
Even more stunning is the Globe and Mail article showing the six banks share of Canadian wealth management assets when compared with a couple of major independent Investment Dealers. In this comparison, by the year 2013, the six banks had accumulated relative control over 73% of Canadians investment wealth.
Here are Mutual Fund Assets under the Management of the banks, etc., for YE 2014
Page / 3
Royal Bank Assets Management - TD Asset Management - Scotia Global Asset Management - CIBC Asset Management - BMO Financial Group - National Bank Securities -
Investors Group
Mackenzie Financial Corporation -
Counsel Portfolio Services - 3.850 Billion
Total - $ 628.676 Billion
-
73.458 Billion 47.118 Billion
$124.456 Billion controlled by IGM Financial Inc which in turn
is controlled by the financial conglomerate Power Financial Corp
$ 166.165 Billion 94.872 Billion 86.392 Billion 78.049 Billion
59.410 Billion 19.632 Billion
By the time the $124.456 billion mutual fund assets invested through the IGM Financial Inc. group are added, the mutual fund assets of Canadian investors under management by this group of banks and non-bank operations, is closer to 80%. This does not include other forms of retirement plan products for Canadians that are under the control of an assurance group controlled the financial conglomerate, Power Financial Corp.
(1)Financial Post April 13th 2013 quoting MFDA (2) Globe & Mail July 26th 2013 (3) Globe & Mail Dec 1st 2015
The IIROC explanation for their refusal to divulge this critical information reporting on the number of ComSet complaints coming from each registered Investment Dealer is in order to protect the Dealers against frivolous complaints. IIROC said, their concerns regarding disclosure before the commencement of discipline proceedings relate, in part, to questions of fairness to firms and individuals being named in frivolous complaints, but also to possible confusion for investors who may not fully appreciate that allegations against a particular firm or individual have not been proven. This IIROC policy subordinates the investor’s best interests to the Dealer self-interests.
The question raised is, how does IIROC separate what they say are "frivolous complaints" against Dealer resolved complaints, as well as against those legitimate substantiated complaints that have not been resolved by the Investment Dealer ? After all, what's the point in having Investment Dealers report the number of complaints if most are only used as a bare statistic to glamorize the IIROC Enforcement Report with no COMPLETE consequential purpose ?
It would seem reasonable and part of the IIROC review process that their job is to classify the legitimate complaints versus what they classify as frivolous complaints and then publish names of the offending Dealers responsible for the cause of the legitimate complaints. This is not happening.
Can the IIROC top management not see and
understand the hypocrisy of IIROC publishing statistics in the IIROC Annual "Enforcement Report", with the title "Protecting Investors and Fostering, Efficient and Competitive Capital Markets across Canada", when investors are denied the names of the less reputable Investment Dealers whose ComSet reports are the source of 9,363 complaints over the 7-year period.
This IIROC policy is nothing short of protecting the powerful investment dealer questionable reputations against the powerless unsuspecting small investors. And the damage continues.
Another way of looking at it, compare these figures with average number of investigations that were completed over the past 5-years to show the ineffectiveness of IIROC claim of protecting investors. Over the past 5-years, out of 7960 complaints received, IIROC say they have opened up 2,924 case assessment files and they have completed 967 investigations. What happened to the other 5,036 (64%) investor complaints that did not get as far as assessment files, let alone being investigated.? There needs some IIROC answers here !
Considering the pathos of all this information,
one has to wonder how much impartiality is present when the SROs, IIROC and MFDA are being financed by the very Investment Dealers whom the SROs are regulating.
Until the potential for bias against investor interests is removed from this equation, there can be no perception of impartiality. The perception of impartiality cannot be claimed just on the merits of a few IIROC prosecutions for serious breaches of the law such as fraud, etc.
The IIROC statistics illustrate that the problem with the present investor regulatory protection process being focused on the threat of post-mortem penalties, only after the damage is done, is not in the investor’s best interests. The problem is there is not sufficient IIROC emphasis on preemptive deterrents to remind all Investment Dealers that their names will be exposed relative to the number of legitimate complaints that are brought forward by investors.
The enumerated IIROC complaint statistics shows that,
if a potential investor has been fortunate enough to have accumulated a financial nest egg from years of labour and believes that all Financial “Advisors”, the Investment Dealers and the SROs overseeing the investing process can be trusted as guardians of the investor’s best interests, the investors are sadly mistaken.
There are too many incentives for disproportionate amounts of the investor’s money to be inappropriately transferred to the “Advisor” and Investment Dealer pockets relative to the services provided.
There are no compelling preemptive disincentives for Investment Dealer wrongful conduct, other than penalties after the damage has been done to the investor’s best interests. These are called post mortem penalties.
The IIROC March 31st 2016 Press Release puts a spin on the enforcement situation that is enough to cause serious indigestion. Here is the link to the press release –
http://www.iiroc.ca/Documents/2016/40e3 ... eb3_en.pdfThis IIROC Press Release title reads, "Report highlights IIROC's focus on strengthening enforcement tools and deterring wrongdoers"
The choice operative words "deterring wrongdoers" in this IIROC declaration are hardly supported when you consider the continuing number of 9,363 investor ComSet complaints registered over the past 7-years as shown in the previous table of investor complaints. Added to this figure are the 3,000 investor complaints from other sources. Publishing the names of Investment Dealers who employ the Investment "Advisors" attracting investor complaints would certainly contribute to reducing these above complaint statistics. The more concerned Investment Dealers would then be quick to discipline any wrongful conduct of their Investment "Advisor" employees, instead of condoning it.
What is more important, protecting the wellbeing of future investors or Investment Dealers with bad reputations ?
In the Zoomer magazine article, Mr Wade Poziomka, CARP’s Director of Policy and Litigation, only lightly touched on the publically available IIROC statistics. The IIROC statistics that I have presented, along with the commentary shows a greater dimension of the staggering complaint abuse that investors are being subjected to.
The details of the IIROC Complaint Statistics reporting that I have brought to your attention indicate a very serious situation concerning IIROC's first and foremost responsibility, which is to protect the powerless investor before they invest. This is every bit as important as IIROC employing many legal and paralegal staff engaged in post mortem investigations after the damage has been done to the finances of unsuspecting investors by some self-serving Investment "Advisors" and Investment Dealer employers.
As it is now, there are conflicts of interest and incentives for investment Dealers to condone the self-interests of their Investment "Advisor" employees because the Dealer can also financially profit from overlooking those "Advisor" self-interests conduct.
There is something terribly wrong with the way IIROC is reporting investor complaint facts. Don't think for one moment that Investment Dealers are unaware of these statistics I have enumerated. The IIROC batting average that I have detailed certainly encourages the Dealers to push the limits of ignoring the Regulatory Laws, Rules and Guidelines that are supposed to protect investors.
It is the
unbridled practices of some “Advisor” individuals and Investment Dealer companies who perpetrate a variety of Regulatory violations that are allowed to unfairly bleed unwary investors of hundreds of millions of dollars from their life's savings.
The extent of this deleterious condition will continue as long as IIROC declines to put forth sufficient disincentive speed-spike strips to get the attention of the offending parties, especially as these are the same parties who are financing the very existence of IIROC.
As a side note, if IIROC were truly protecting investors, discount brokers would not be allowed to transact orders for A class mutual funds since they are not permitted to provide advice, the cost of which is embedded in the fund fee. And IIROC dealers wouldn't be allowed to reject OBSI compensation recommendations with impunity. In addition, IIROC has allowed deceiving advisor titles to proliferate to the point that investors are utterly confused as to who they are dealing with. As for deterrents, only a tiny fraction of the fines imposed on advisors are ever collected – therefore, the IIROC announcement of fines imposed is just an IIROC PR exercise.
I will be happy to supply any other information you may need to support action on the issues I have brought forward in this missive.
Respectfully
Peter Whitehouse
PS. Let me know if you would like a Windows WORD version so that you can extract quotations for you to use.
Appendix
How did the bank-owned captive retail Investment Dealer channels achieve such market dominance ?
On the surface of it, the six big Banks and one other major non-bank financial organization appear to compete with their Investment Dealer subsidiaries for the retail investor business. However, the Bank customers regular day-to-day banking relations at their Bank, effectively becomes a means of corralling and steering customer needs for investing savings into the Bank-owned retail investment channels. The real issue here is the innocent looking freedom that is enjoyed by the banks for them to steer their customer needs to save and invest through the banks own captive conduits. This includes the Banks own in-branch investment services as well as the facility to also feed Bank customers to the Bank-owned retail Investment Dealer subsidiaries.
Thirty years ago, the Canadian banks came to the realization that they were missing out on additional profits from their customers' need for long term savings investments services. To capitalize on this opportunity, the banks had a choice of investing and building their own retail Investment Dealer operating structures for these investment services or, to save time and effort and the reduced risk, buying up all the largest Canadian retail Investment Dealers.
It would not have escaped the banks' reasoning that, if they had invested to build their own retail Investment Dealer structures, they would still have been faced with the competition from all the other well established non-bank Investment Dealers. These investment Dealers would also be competitively selling investments such as mutual funds. It therefore follows that
by buying up all the major Investment Dealers, the banks also
removed what could be future major competition.
All it took was for one Bank to buy up a major Investment Dealer and the rest of the Banks followed.
Now, we the
consumer-investors are paying the price for this market dominance by the concentration of the Canadian banking system and one non-bank conglomerate financial operation, who collectively control well over 65% of the Canadians personal wealth.
With so much concentration of financial power from the mutual funds savings of Canadian investors controlled by so few companies, is there any wonder where the power to influence and resist Government policy and Regulatory change initiatives can originate.
The Federal Government has allowed the banks to continue to purchase and merge all of the significant Canadian investment dealers into their operations. All the largest investment dealers who were independent 30-years ago are now owned by the Canadian Chartered Banks.
What were the conditions in the merger approvals by the Federal Government to ensure that true competition was maintained in order to protect consumer best interests ?
It is now up to the Competition Bureau to intervene and dissolve the unjust anti-competitive power of this bank-owned retail Investment Dealer concentration.
Here is a list of the most significant Canadian Bank and Investment Dealer mergers -
1. BMO & Nesbitt Thompson, 2. TD Bank & Canada Trust, 3. Royal Bank & Dominion Securities, 4. Scotiabank & McLeod Young Weir plus Dundee Securities, etc., 5. CIBC & Wood Gundy,
6. National Bank & Levesque Beaubien Geffrion.
In addition, the Power Corporation (PC), who controls IGM Financial Inc., has also acquired other retail Investment Dealers. The PC group is a major player in the Canadian mutual fund sales business with over $124 billion under their asset management.
IGM must be doing OK as they are a publically traded company currently paying about a 5% dividend after paying sales commissions and all their operating expenses. Investors would do better by investing their RRSPs in IGM Financial Inc shares than in many of the mutual funds that IGM Financial are selling. But then, that would not work, because IGM Financial would not have the profits from the sale of mutual funds in order to pay dividends!
If there was more true competition, the bank-owned investment channels would have likely been more pro-active by showing an initiative to protect the investor-client interests, in order to earn their continued loyalty.
Zoomer Magazine article which prompted this letter to the Magazine:
http://www.everythingzoomer.com/small-investors-pushing-greater-protection/2/