When it comes to finding liability, the key question for an arbitrator is whether a reasonable person still would have chosen the investment had there been proper disclosure
Experts say the latest round of regulatory reforms, including the new point-of-sale rules for mutual funds as well as Phase 2 of the client relationship model (CRM2), will probably result in more complaints to regulators. Most notably, this is likely to mean more activity at the Toronto-based Ombudsman for Banking Services and Investments (OBSI).
“In the short term, [CRM2] will lead to a higher uptick in terms of potential complaints to the OBSI or other regulators,” says Chris Wirth, litigator with Keel Cottrelle LLP in Toronto who defends financial advisors in regulatory and civil lawsuits.
“Change is always difficult,” he says, adding that it will take advisors some time to get used to the new regulatory regime.
More complaints are something OBSI is bracing for, says Robert Paddick, deputy ombudsman, investments, with the ombudservice. “We anticipate an increase in complaints as a result of new CRM2 requirements – in particular, the cost reporting requirements. These are significant changes.” The new reporting requirements will lead to many investors hearing about how much they pay for investment advice, in dollars and cents, for the first time, Paddick says. “The changes will lead to questions from investors and, in some cases, complaints that the fees weren’t previously disclosed.”
Paddick is part of the senior management team steering OBSI since the departure this past spring of former ombudsman Douglas Melville, who left to become the CEO of the Channel Islands Financial Ombudsman.
OBSI hears disputes between banks or investment management firms and their clients and can recommend non-binding awards of up to $350,000.
Under the tough-talking Melville’s watch, OBSI drew the wrath of the management of many Bay Street firms, who were upset at being on the short end of an OBSI decision. That caused a backlash among some firms, which refused to pay the penalties that were levied against them.
As a result, OBSI began a so-called “name and shame” campaign and now uses its website to name those firms that refuse to implement OBSI’s recommendations. Investor advocates have since called on the government to grant OBSI greater powers to order firms to pay up.
OBSI announced in early August that Sarah Bradley, chairwoman and CEO of the Nova Scotia Securities Commission, will succeed Melville. It’s not clear what direction OBSI will take under her watch.
Under Melville, Wirth says, there had been a “forceful tone.” Change at the top is always a “wild card,” Wirth adds: “In that type of organization, the one at the top can have a significant impact on the direction. It’s hard to know if [OBSI] will stay the course or have a different approach.”
Nevertheless, Wirth says, he expects that regulators, whether it’s the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association of Canada, and OBSI will take a measured, but appropriate response to CRM2’s new measures.
For his part, Paddick says the key for financial advisors is communication with clients. “It’s important that advisors speak with their clients and fully explain [investing] costs and performance to their clients,” he says, “and be prepared to answer questions.”
It’s that question portion that has lawyer Greg Temelini concerned. Temelini, who practises at Wright Temelini LLP in Toronto, says advisors will be asked by clients to give detailed answers to questions, such as how much those clients will pay for deferred sales charges (DSC) or how trailing commissions work. Some of the answers require estimates and calculations based on future projections.
Disputes, he says, will become very fact-driven and be what he calls a “he said/she said” scenario.
In finding liability against an advisor, the key question that an arbitrator or judge will have to consider is whether a reasonable person still would have chosen the investment in question had information properly been disclosed.
“It’s a matter of degree,” says Temelini. “If you’re off by thousands of dollars on a small transaction, it’s going to be much more magnified than if you are off by a few dollars on a large transaction. The real question is likely to be: ‘Would the client have changed their mind about the transaction’?”
Paddick acknowledges that some of the discussions around fees, such as DSC, involves information that can’t be reduced to dollars and cents amounts, but must be estimated. He says it will be a case of the OBSI “looking at particular facts and circumstances of the case to determine what discussions were had and what disclosure was made.”
From Wirth’s perspective, the changes are an “opportunity for [the investment] industry to show its value to its customer base.” Adds Wirth: “I think, at the end of the day, it is always good to be reviewing and enhancing your practices because that only protects you.
“If you have effective procedures in place and you implement and follow them,” he adds, “it should, in the long run, both enhance customer satisfaction and enhance the protection for the industry.”
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