It would be better if regulators and, in particular, OBSI could treat both the industry and clients fairly and with respect

By Ellen Bessner | December 2012

In the past several months, investment and mutual fund dealers have received investigation reports from the Ombudsman for Banking Services and Investments (OBSI) in which recommendations were made that payment be made to satisfy client complaints.

Many of those recommendations have been rejected by the dealers and, according to OBSI's terms of reference, OBSI is compelled to publicize the names of the dealers and the circumstances of each refusal. But, OBSI has not been releasing those names as it is required to do, in contravention of its own terms of reference. With several matters not having been publicized, OBSI had to determine what and how it would proceed with the release of its list, given the several dealers which rejected OBSI's recommendations.

Recently, OBSI notified dealers by telephone to advise them that, notwithstanding that they had been advised several months before of OBSI's recommendations, OBSI was now intending to go public. However, the threat of going public did not make the manner of investigation, analysis and conclusion more accurate or acceptable to many dealers.

Thus, several dealers continued to reject the recommendations, waiting in anticipation to see what OBSI would do next. Before the names of two firms were released last month, I wondered, "Will the OBSI be fair and release all the names at once, or will it release one at a time and hope the others cave after observing the reaction?" Then, I wondered, "If OBSI releases names one at a time, how would it pick the first one?" We now know.

I understand the perception that there is a power imbalance between individual clients on the one hand and advisors and dealers on the other. But not all advisors and dealers can be painted with the same brush, and neither can all clients.
While there may be a perceived imbalance of power, when you consider the impact that one client complaint, legitimate or not, can have on an advisor's career and dealer's reputation, I disagree that the imbalance of power is necessarily one in which the client has less.

From my vantage point, as a lawyer who defends advisors and dealers in litigation and regulatory proceedings, it seems to be quite the opposite. This needs to be explored, not having been the subject of any press due to the unpopularity and risk associated with making such an argument.

Not all clients who hire investment or mutual fund advisors are unsophisticated and lacking in knowledge. In fact, many clients are very sophisticated, knowledgeable and cunning. Clients have nothing to lose by bending the truth to appear to be completely unable, unaware and ignorant; they don't have any licence to lose or reputation to worry about. The worst thing that could happen to clients who are less than truthful is that they are caught lying and they do not get a decision in their favour — in court or before regulators.
Further, there is no cost to clients associated with issuing a regulatory complaint and, with many plaintiff lawyers working on a contingency basis, there are court battles against advisors and dealers at no cost to clients. (Lawyers will obtain a fee only if the client succeeds against the advisor or dealer.) Is this a level playing field?

In contrast to clients getting free representation and the sympathy of the regulatory panels and judges, advisors and dealers have serious problems. Advisors and dealers are only permitted to work in this industry if they have a licence. A licence is a "privilege," not a "right," and, therefore, they are subject to regulatory scrutiny and approval. Even if a licence is not revoked or suspended, a penalty rendered by any of the regulators can be career-ending because all regulatory hearings and trials are public. The decisions, available and circulated on the Internet, can wreak havoc on an advisor's and the dealer's reputation, even if the advisor or dealer services thousands of clients and is subject to one client complaint.

With the steps taken by OBSI to shame the dealer and advisor by releasing one matter at a time to the public, even though there are several in the queue, the goal seems to be to muscle the dealers into settling with clients, even if the dealer disagrees with the analysis and conclusion arrived at, particularly since client-support organizations direct clients not to hire other advisors at those dealers even if the advisor in question has left the industry.

While protecting the investing public is a good thing, smearing the reputation of an entire dealer is not.
Such unfairness will not increase the confidence of the investing public. Instead, it will make the public even more weary of the market and those who can properly and professionally advise them.

Therefore, I submit that being unfair to advisors and dealers is not the answer. It would be better if regulators and, in particular, OBSI could treat both sides fairly and respectfully, which I believe would favourably impact investors' confidence in the markets. IE

Ellen Bessner is a senior litigation partner at Cassels Brock & Blackwell LLP.