When markets drop, a surge in investor complaints usually follows. Indeed, complaint volumes throughout the investment industry rose in 2020.
Last year’s turmoil wasn’t just a run-of-the-mill financial crisis; it was also a dramatic shift to remote work for the investment industry, relaxed regulatory requirements (often necessitated by remote work) and an increase in fraudsters and hackers seeking to take advantage of new vulnerabilities.
The economic disruption meant many households — and, by extension, retail investors — suffered mightily.
The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) stressed this reality in a recent submission to the Ontario Securities Commission (OSC).
“We cannot overstate the fact that while financial markets as a whole appear to be largely resilient in the face of the unprecedented economic situation caused by [the] pandemic, many Canadian households are continuing to experience significant hardship and financial jeopardy,” FAIR’s submission stated.
Throughout the investment business, signs of these strains were evident in 2020.
The OSC reported that the volume of investor complaints rose by 11% to 2,581 in 2020. While the top sources of complaints — alleged investment frauds, scams and unregistered trading, and complaints about service issues — rose, “what was unique in 2020 was the increase in complaints [about] market activity and performance, in particular at the beginning of the pandemic,” said Kate Ballotta, senior public affairs specialist at the OSC.
The Investment Industry Regulatory Organization of Canada (IIROC) reported an even more significant year-over-year jump: the number of client complaints recorded by its ComSet system in 2020 rose by 27.4% — there were 1,173 complaints recorded last year, up from 921 in 2019. IIROC blamed both market turmoil and industry disruption.
“IIROC saw an increase in public complaints at the beginning of the pandemic related to market declines. As market conditions improved, the corresponding number of complaints declined, although we continue to see an increase in service-type complaints throughout the pandemic,” said Andrea Zviedris, manager, media and public affairs with the SRO.
Similar trends were evident elsewhere. At the Mutual Fund Dealers Association of Canada (MFDA), complaints increased by about 24% year over year in 2020. The lion’s share came in the first half of the year, with the volume easing in the second half. For example, in the second quarter, the MFDA recorded 513 complaints, but that figure dropped to 320 in the third quarter.
The latest data from the Ombudsman for Banking Services and Investments (OBSI) also reveal a rise in complaint volumes, although OBSI’s spike occurred later. For OBSI’s second quarter (Feb. 1 to Apr. 30), the volume of investment complaints was down compared with the average over the previous eight quarters.
However, by OBSI’s third and fourth quarters, complaint volumes were well above historical averages. For its fourth quarter (Aug. 1 to Oct. 31), new investment cases were up by 41% from the average over the previous eight quarters.
Suitability remained investors’ top concern, but administrative dysfunction was a big source of frustration too.
OBSI reported that new cases involving suitability complaints in Q4 were up by 14% from the eight-quarter average, while cases involving complaints about service issues and transfer delays were double their recent averages. In fact, cases involving client service and transfer issues surpassed the volume of complaints about inaccurate product disclosure and fee disclosure in Q4.
While there is overlap between complaints to regulators and complaints to OBSI, the ombudservice focuses on resolving disputes between investors and the industry about the responsibility for investor losses, whereas regulators must also uphold industry standards, address misconduct and prevent future violations. Regulators also field complaints about unregistered firms and fraud.
As complaints rose at IIROC, so did the volume of new enforcement cases.
IIROC reported that the number of case assessment files it opened in 2020 increased by 18.2% from the previous year to 384. The number of investigations the SRO completed during the year rose by 14.4% from the previous year, despite the added challenge of carrying out investigations during lockdowns.
As for disciplinary hearings, IIROC completed 32 proceedings in 2020, a decline from each of the previous two years. The SRO said this reflected an increase in the number of contested hearings, which take longer to complete than cases that are resolved by settlement.
The decrease in disciplinary hearings came amid another consequence of the pandemic: a shift to electronic hearings at the end of March 2020. The SRO said the move hasn’t slowed the disciplinary adjudication process.
“In some instances, such as contested hearings, electronic hearings may be lengthier. However, generally, it has been IIROC’s experience that the electronic format has not affected timing of hearings,” Zviedris said. “In fact, the electronic format has improved scheduling and made it easier to find availability for participants.”
IIROC is seeing other benefits from the forced move to electronic proceedings.
“We anticipate that virtual hearings will increase transparency and access to justice because technology has the potential to open access to more people and to strengthen public confidence in the system,” said Zviedris, noting that the practice of holding electronic hearings is gaining acceptance.
Last year, IIROC sanctions weighed more heavily on firms than on individual reps. IIROC imposed $5.4 million in fines, costs and disgorgement against industry firms, compared with just $937,401 against reps. (Notably, the sanctions on firms included a $4-million fine levied in a single case.)
This represents a reversal from historical trends — ordinarily, the penalties faced by reps outweigh the sanctions on firms. For example, IIROC imposed almost $2 million in penalties against reps in 2019, and $1.8 million against firms. In 2018, reps were hit with $3.2 million in penalties, compared with just over $900,000 for firms.
With the second wave of Covid-19 now raging throughout much of the country, it’s possible the pandemic may have an impact on this year’s enforcement activity as well.