This article appears in the May 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Getting a better handle on investor complaints is at the heart of regulatory proposals that are rattling investor advocates and industry alike.
In January, the Investment Industry Regulatory Organization of Canada (IIROC) proposed reforming its complaint-handling rules and regulatory reporting requirements. Under the proposals, IIROC would introduce a new principles-based approach to the self-regulatory organization’s reporting system, known as ComSet, which is intended to address the SRO’s concern that industry firms aren’t consistently reporting or investigating serious issues.
The proposed approach calls for a focus on “serious misconduct”— which IIROC defines as issues that could do meaningful harm to clients or the capital markets — as well as violations of securities rules or laws.
The proposals also would expand certain reporting obligations beyond financial advisors and other registered personnel. Firms would be obliged to investigate allegations of serious misconduct among all of their employees, and to report any client complaints involving allegations of misconduct by their workers. Cases in which firms pay “substantial” compensation to harmed clients also would have to be reported to ComSet under the proposals.
In addition, the SRO is proposing to scrap the requirement that firms balance the interests of clients with the dealer, rep and/or employee when addressing client complaints. Instead, firms would be expected to put clients’ interests first when dealing with complaints, as they are when dealing with clients generally under the client-focused reforms that took effect last year.
Investor advocates welcome the proposed changes for the most part, but some would like IIROC to go further.
The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) stated in its response to the consultation that IIROC’s proposals would address “several well-known shortcomings” with the existing rules. For example, firms would be prohibited from allowing the subject of complaints to also be responsible for addressing those complaints.
Yet, the investor advocacy group suggested beefing up the proposals to meet best practices. For example, FAIR Canada’s submission recommended that IIROC impose tougher deadlines on firms for resolving complaints, and that the SRO push firms to take “concrete action” in the face of systemic issues.
Specifically, FAIR Canada suggested IIROC set a 60-day deadline for addressing client complaints, down from the current proposal of 180 days (which includes 90 days for the firm to resolve a complaint and another 90 days for any internal dispute-resolution process to run its course).
“In our view, the entire process for resolving a complaint should be as streamlined as possible,” the group’s submission said, arguing that longer timelines increase the risk that clients will accept low-ball settlement offers or abandon their complaints altogether.
Imposing a single 60-day deadline would “promot[e] fair outcomes” and match similar efforts to improve the complaints process used by both the Autorité des marchés financiers (AMF) and the federal government, which is adopting a 56-day limit for banks as of June 30. Jurisdictions such as the U.K. and Australia already require quicker resolutions (56 and 30 days, respectively), FAIR Canada’s submission noted.
“We believe IIROC can and should strive for best-in-class solutions that promote better outcomes for investors. In our view, if a dealer or adviser registered in Quebec can resolve a complaint within 60 days or less, there is no reason why their counterparts across Canada cannot do the same,” FAIR Canada stated.
The recommendation that IIROC adopt the same standards as the new bank requirements was echoed by the Financial Consumer Agency of Canada (FCAC). The FCAC said its review of complaint handling in the banking sector found that the longer consumers’ issues go unresolved, the more negative the effect on confidence in the financial services industry and its regulators.
“A more consistent approach to complaints handling across the banking and securities sectors would serve both the industry and financial consumers,” the FCAC said. “Financial consumers would be able to rely on the same approach irrespective of the type of product and where it was purchased. Financial institutions selling products from more than one sector would benefit from harmonized requirements.”
Timelines aren’t the only area in which the proposed IIROC rules could be improved. FAIR Canada’s submission suggested IIROC follow the AMF when determining which complaints need to be reported.
Instead of the SRO’s proposed approach of allowing firms to determine whether an issue is “material” or not, FAIR Canada recommended adopting the AMF’s policy of distinguishing between minor and more serious complaints based on how quickly the firm can resolve them.
Issues that can be addressed in fewer than 10 days would be treated less stringently than issues that take longer to resolve.
“The advantage of the AMF approach is that it removes reliance on each [dealer’s] subjective determination of what is material misconduct,” FAIR Canada said, adding that firms also would have an incentive to resolve issues quickly.
The financial services industry also expressed concerns about an approach that requires firms to report complaints involving “serious misconduct.” The submission from the Investment Industry Association of Canada (IIAC) argued that “serious” is defined too broadly and could conceivably capture just about any incident.
Moreover, the IIAC stated, non-registered employees don’t fall under IIROC’s jurisdiction, and it’s “not clear on what basis IIROC will govern these employees and what sanctions IIROC will be imposing on employees if they are required to report to IIROC.”
In addition, the IIAC argued that dealers shouldn’t have to report unproven allegations such as the filing of criminal charges or investigations by other regulatory bodies.
But the bigger issue for many in the industry is the timing of the policy consultation, which comes ahead of a planned merger between IIROC and the Mutual Fund Dealers Association of Canada to create a new, single SRO.
The IIAC’s submission stated that the consultation is “out of step” with the effort to launch the new SRO by the end of the year, and that asking firms to provide input on IIROC rules at this point “is not appropriate and is an inefficient use of time and resources.”
The IIAC submission also suggested that omitting feedback from mutual fund dealers on the subject “would be a significant oversight.”
Still, FAIR Canada said it supports IIROC’s efforts to tackle the problem before the new SRO is up and running, stating that “fixing the process should be a priority.”