As Canada’s equities markets enter correction territory once again, investment dealers and their financial advisors should be girding themselves for an increase in the number of nervous clients in the short term. In the long term, though, evidence suggests advisors and their firms can expect to face a greater volume of complaints and lawsuits.
Until the latest tailspin took hold, equities markets were enjoying an extended period of strong returns. In turn, there were fewer disgruntled clients. In fact, as a result of strong markets, investment dealers have seen a significant decline in the number of client complaints and regulatory enforcement activity thus far this year.
According to the latest data from the Investment Industry Regulatory Organization of Canada (IIROC), the number of client complaints were down significantly through the nine months ended Sept. 30, 2014, with slightly more than 800 complaints reported. In comparison, there were more than 1,300 complaints in 2013 as a whole. Extrapolating this year’s numbers, it looks as though complaints are on track to be down by about 20% from last year. And, in 2013, complaints dropped by about 15% from 2012.
Civil claims have declined even more dramatically. There have been fewer than 150 civil suits reported to IIROC through the first nine months of 2014, which puts the investment industry on track for fewer than 200 cases for the full year. This compares with the 333 suits reported in 2013, which means that if current trends hold up, civil suits will be down by about 40% from last year.
Enforcement also down
The reduction in client grievances is echoed by a decline in enforcement activity. IIROC opened slightly more than 340 case assessment files through the first nine months of this year vs 560 for the full year of 2013, 640 in 2012 and 843 in 2011.
As well, the cases that are reaching enforcement are more likely to be misdemeanors than felonies. Although the number of decisions that IIROC has handed down so far this year is more or less on track with previous years, the size of the penalties that are being assessed this year is notably lower.
For example, firms have been levied less than $170,000 in total fines, costs and disgorgement orders so far this year. This figure compares with more than $2.6 million for the full year in 2013. The penalties levied against individual advisors so far this year are down notably, too: less than $2 million in monetary penalties and disgorgement has been imposed on individuals in the first nine months of 2014 vs $5.3 million last year and more than $12 million in 2012.
IIROC isn’t the only organization hearing from fewer unhappy investors. The Ombudsman for Banking Services and Investments (OBSI) also is experiencing a decline in complaints this year, according to Tyler Fleming, director of stakeholder relations and communications with OBSI.
OBSI doesn’t publish interim complaint data; it reveals that data only in its annual report. However, Fleming says, the number of complaints received by the dispute-resolution service are down so far this year.
The apparent decline in client complaints follows a couple of years of frothy markets, and it appears that there’s a correlation between the number of complaints and market returns.
“It’s difficult to speculate as to the specific reasons for the change in numbers,” suggests Paul Riccardi, senior vice president, enforcement, member policy and registration, with IIROC. “But one contributing factor is probably the general strength of the equities markets.”
A notable exception
That said, not all industries in the financial services sector are enjoying the salutary effects of bull markets; the notable exception to this trend is the mutual fund dealer world. The Mutual Fund Dealers Association of Canada (MFDA) didn’t have its complaint and enforcement stats to the end of the third quarter available in time for Investment Executive’s press deadline. However, MFDA data to Aug. 31 indicate that the total number of events reported by firms is flat year-over-year.
There also has been no decline in the number of case assessment files opened by the MFDA through the first eight months of this year: 283 cases were opened this year as of Aug. 31, vs 295 in the corresponding period in 2013. However, the MFDA has seen a modest decline in the number of those initial cases that have turned into investigations: 65 cases were escalated to investigation through to Aug. 31 this year vs 87 cases last year.
A more meaningful change at the MFDA is in the number of investigations that make it into litigation. So far this year, just 27 cases have been advanced to the litigation stage, down from 50 in each of the previous two years.
Shaun Devlin, senior vice president of member regulation, enforcement, at the MFDA, says that he doesn’t necessarily see a trend in the current data. But, he notes, “It will be interesting to see if there is any change if the current downturn in markets continues [for the] longer term.”
Although a relationship between robust markets and decreasing volume of complaints isn’t a certainty, complaints do rise after markets drop and investors suffer losses. For example, Fleming reports, OBSI saw a tripling of its complaint volumes in the wake of the 2008-09 global financial crisis.
“We often find that there are generally more complaints during the two to four years after a major market correction,” Riccardi agrees, adding that this phenomenon “may cause these spikes and declines in the number of complaints we receive.”
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