From the Regulators

Investment firm’s refusal of OBSI’s recommendation for compensation prompts OSC Investor Advisory Panel to demand more from regulators

By James Langton |

Another investment firm has refused a compensation recommendation from the Ombudsman for Banking Services and Investments (OBSI), and the Ontario Securities Commission's Investor Advisory Panel (IAP) has written to the commission demanding that regulators start enforcing OBSI's recommendations and warning that changes to its operations are "unacceptable".

OBSI announced today that Union Securities Ltd. is the latest firm refusing to follow a recommendation for investor compensation. It recommends that the firm compensate an investor $325,122 after he complained of unauthorized trading activity in his account.

The advisor that was the source of the complaint was sanctioned by the Investment Industry Regulatory Organization of Canada (IIROC), after it found that he failed in his suitability obligations to the investor and engaged in unauthorized trading in his account.

According to the investigation report published by OBSI, the firm was prepared to offer some compensation to the investor in this case. "In discussions with Union Securities in our attempt to resolve this matter, Union Securities acknowledged that some of the trades were questionable and offered to compensate [the investor] for 50% of the losses on those trades (approximately $40,000)," it says. "We agree that some of the trades are questionable. However, given our findings that the trades and the use of margin were unsuitable, we did not examine this issue further."

Instead, OBSI arrived at its compensation recommendation by calculating the difference between what the investor's account would have been worth had it been suitably invested, and the actual value when he closed his accounts at the firm, plus interest.

But, OBSI has no power to enforce its recommendation; and, publishes the details of the case instead, under its power to "name and shame" firms that refuse its recommendations.

When OBSI was first created the expectation was that it would almost never have to use this power, and that was the case until recently. Over the past year however, OBSI has attempted to "name and shame" several investment firms that have refused its recommendations. And, investor advocates are increasingly concerned that this is no longer enough.

In a letter to Eleanor Farrell, head of the Office of the Investor at the OSC, earlier this year the IAP called on regulators to "immediately address the Ombudsman for Banking and Investment Services' inability to enforce its recommendations for restitution to Canadian investors."

It notes that the ‘name and shame' power has lost its force, and that "the foundation of this voluntary investor restitution process is now under attack as more firms are emboldened to reject OBSI's recommendations." It suggests that regulators begin enforcing those recommendations itself.

An independent review of OBSI two years ago also concluded that a series of fundamental reforms were needed at the organization, including that it should have the power to enforce its recommendations, and that firms should have a mechanism to appeal its rulings.

Now, in a new letter to OSC chairman Howard Wetston, the IAP is also calling for more frequent independent reviews of OBSI, particularly as regulators are proposing to expand its membership to include exempt market dealers and portfolio managers.

The letter also indicates that the IAP is concerned about "OBSI's inability to meet its complaint cycle time standards", noting that the forthcoming Client Relationship Model reforms regarding disclosure and performance reporting (CRM 2) "may trigger more complaints", as will its expanded membership.

Additionally, the IAP objects to proposed reforms to OBSI's terms of reference, including its plan to stop systemic investigations of investment industry complaints; and excluding segregated funds when considering a complaint. It calls the proposed changes, "unacceptable and a major blow to investor protection."

"These changes will impair OBSI's ability to carry out its investor protection mandate. They will undermine OBSI's stature, scope and effectiveness as an independent, free and accessible ombudsman," it says.