Canada’s investment industry needs a single, broadly defined contingency fund to cover investors’ losses due to industry malfeasance, including financial advisor negligence, said Robert Pouliot, a lecturer in governance and fiduciary risk and a director with the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), at the organization’s conference in Toronto on Monday.
Specifically, Pouliot argued during a panel discussion that industry negligence is far more costly than outright fraud, but that it has a much lower profile: “Negligence is high frequency, but low noise. You don’t hear about it much, but it happens every day, every minute, every hour.”
The fund that Pouliot envisions already exists in the U.K., which was detailed at the conference by Mark Neale, CEO of the U.K.’s Financial Services Compensation Scheme, who participated in the session via video link. Neale explained that the U.K. fund applies to all financial services firms and covers investors for mis-selling, or negligence, not just fraud.
Typically, the fund pays out between £150 million and £200 million a year, Neale said, with these costs funded by levies on the industry on a pay-as-you-go basis.
However, the funding issue is currently up for debate, he noted, with firms concerned about fairness. So, he suggested that there is an issue of whether the funding should factor in the risk of firms rather than simply sharing the costs equally, as is currently the case.
Shayne Kukulowicz, bankruptcy lawyer and partner with Cassels Brock & Blackwell LLP in Toronto, agreed that there should be a comprehensive compensation fund for investors — although he wasn’t sure it should extend all the way to negligence.
“What I’ve learned from my experience is that we do need a compensation fund that does respond to fraud and other misconduct. I don’t know that I’m going to go all the way down to negligence, but I’m certainly going to include misconduct in there,” said Kukulowicz, who acted on behalf of investors in the case against Portus Alternative Asset Management Inc. and is currently representing investors in First Leaside Securities Inc.’s bankruptcy.
However, Kukulowicz also said the trigger for coverage needs to be insolvency. In cases in which the firm is not insolvent, there are already regulatory and civil procedures for investor recovery, he noted; but in the case of insolvency, you need such a compensation fund, he said.
Although existing contingency funds, such as the Canadian Investor Protection Fund (CIPF), cover investors in certain circumstances, Kukulowicz argued that the CIPF interprets its coverage too narrowly.
“If you’re actually trying to instill confidence in the industry,” he said, “there needs to be a fund that deals with fraud and other misconduct, and it needs to have a trigger of insolvency.”
In the meantime, in the case of First Leaside for example, Kukulowicz reported that the results are “heartbreaking.” He said most of the investors in that case are at, or near, retirement, and most of them have invested their life savings with the firm. So far, their recovery has been about 7¢ on the dollar, he reported, “for people that were relying on this money to retire on.”
In the current system, there’s little recourse for these investors, he noted: “Seven cents on the dollar, there was no [director and officer] insurance, you can sue the principals till the cows come home, but here’s nothing there, or nothing you can get at — so, what do you do?”
As a result, he said that for cases of this nature, there should be an industry fund to cover the victims.