it’s fair to say that Ermanno Pascutto, one of Canada’s most experienced securities lawyers and regulators, is plain-spoken. As founder and executive director of the Toronto-based Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), which opened its doors in June 2008, Pascutto doesn’t hold back.

Whether the debate concerns a new “best interests of the client” standard for financial advisors, competition in mutual fund fees or leveraged investing, Pascutto gets straight to the point. Referring to the “best interests” debate, he says financial advisors who already are acting in their clients’ best interests can rest easy. Those who don’t, however, would see some changes.

“The problem,” says Pascutto, “is people who are focusing on selling and maximizing their fees, and aren’t that concerned about the outcomes for their clients. Do these people serve any useful function? Or are they being paid lots of money for not providing useful services to their clients?”

After leading FAIR Canada through a period of almost unprecedented change in the Canadian financial services industry, Pascutto announced this past autumn that he is stepping down as its executive director. With 35 years working both in Canada and around the world as a securities regulator and advisor on securities law, Pascutto is ready to do something else.

Noting that he has rarely stayed in any job for more than five years, he wants to step out of the fray – at least, temporarily – and spend more time with his wife and two daughters at the family’s home in Costa Rica before he decides what to do next. He doubts, however, that will mean another job.

Pascutto has earned the respite. Many people credit FAIR Canada with having sharply raised the profile of investors’ rights in Canada. Among FAIR Canada’s initiatives are: calling for financial literacy to be taught in high schools; ramping up the fiduciary standards debate in Canada; calling for greater transparency between advisors and their clients on the issue of fees and commissions, especially at the point of sale; and, most recently, triggering a review of so-called “scholarship funds” in registered education savings plans.

But Pascutto makes it clear that FAIR Canada still has a lot on its to-do list. Regarding a higher standard of care, for instance, he says, the current suitability standard and the duty to act honestly, fairly and in good faith may sound reasonable – especially to consumers – but too often they fail to prevent the sale of unsuitable products with high fees.

As well, financial products and the financial services industry simply have become too complex for virtually everyone who is not immersed in the industry. There is, he says, no other feasible way to even up the stakes for investors who use advisors.

“There is no way a few financial literacy courses or going online is going to put [investors] on a level playing field,” says Pascutto, noting that more substantial investor protection is needed. “You can’t just give them a prospectus no one can read.”

@page_break@ Leveraged investing is another issue that needs even stricter rules – particularly, Pascutto says, borrowing to invest in mutual funds: “I simply cannot understand how the industry can recommend that clients use 100% [or] 200% leverage to buy mutual funds products. It is speculation; it is not investing. It’s like saying we are going to have 25% equities, 25% fixed-income and 50% Las Vegas. It makes no sense whatsoever.”

Pascutto cautions that the majority of such investors will lose money – and many could have their savings wiped out in the event of a significant market correction, which happens, on average, every five years.

Worse, clients frequently are rushed into such schemes with virtually no warning of the full risk picture. Pascutto suggests something along the following lines be included on client documentation – in boldface print: “If in 12 months’ time, we have a 30% market correction and you have leverage, you will lose 60% of your savings because of the losses on the loan. Plus, if you want to take your money out early, you lose another 10% in deferred sales charges. So, you lose 70%. Add interest, it’s 75%. And if it’s 200% leverage, you’re 100% wiped out.”

Pascutto believes the Ombudsman for Banking Services and Investments (OBSI) and other regulators should take much tougher stances on issues such as these. The recent debate over OBSI policy of “name and shame,” in which OBSI released the names of a few financial services firms that refused to settle client claims that OBSI had concluded were well founded, is an example. Although many firms decried that move by OBSI, Pascutto believes the response should have been tougher. Strict enforcement, he says, would send the message that “the duty to deal honestly, fairly and in good faith means something.”

Although Pascutto takes pride in FAIR Canada’s accomplishments – starting with a blank slate has been one of his more challenging jobs, he says – he has come to greatly value a receptive regulatory climate: “All I can do is make submissions to people and try to get them to listen and get them to act. We need the people we are submitting to to be committed to investor protection.”

Pascutto credits Howard Wetston, who was appointed chairman of the Ontario Securities Commission in October 2010 with being prepared to listen to FAIR Canada’s submissions – and act. Pascutto also credits the responses of the Investment Industry Regulatory Organization of Canada (IIROC): “I think [IIROC head] Susan Wolburgh Jenah, while she has a difficult balancing act, wants to run a high-quality self-regulatory organization that does its job properly.”

Pascutto is moving on, partly because it can be stressful to perpetually be the critic. But there are satisfactions. After decades in the field, finding ways to persuade market participants to play by the rules or face the consequences, Pascutto still enjoys- and places great value on – calling rule-breakers to account.

© 2013 Investment Executive. All rights reserved.