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  4 | INVESTMENT EXECUTIVE NEWS June 2020 Both targeted testing and isolation could combat a second wave
Inc.’s latest forecast states that
the rating agency anticipates Canada’s GDP will contract by 7.1% this year — and gloomier forecasts warn of a double-digit drop in annual GDP.
These dire outlooks assume that a gradual reopening of the economy takes hold in the second half of 2020 as lockdowns ease and economic activity picks up. The nightmare scenario for the economy is that infection rates spike after restrictions on business activity are lifted and the country is plunged back into a shutdown, compounding the economic devastation already being wrought by the initial response to the pandemic.
Given that an effective, widely available vaccine is probably at least a year away, the potential for a second wave of Covid-19 infec- tions appears almost inevitable.
If and when that happens, governments hopefully will be prepared to take a more flexible approach to containing the virus rather than resort to economically devastating, comprehensive lock- downs once again.
CONTINUED FROM PAGE 1 Investments (OBSI), the indus-
try dispute-resolution service, jumped sharply once markets began to recover. Current mar- ket turmoil is likely to produce a similar increase.
Any time volatility rises and asset prices fall signifi- cantly, client complaints natur- ally climb. In some cases, this reflects a need to assign blame for significant market losses; in others, plunging markets expose failures of advice.
For example, clients who con- sidered their portfolio holdings to be “safe” may discover that their risk tolerance wasn’t prop- erly calibrated in the first place and that their overall portfolio wasn’t suitable.
Financial services firms aren’t responsible for clients’ market losses. Firms generally have to pay compensation only in cases in which the company fails to meet industry standards, provides bad advice to clients or engages in misconduct that results in client losses.
During the Covid-19 finan- cial crisis, securities regulators have provided the industry with emergency relief from certain requirements, such as relax- ing supervisory and audit trail expectations in light of the required shift to remote work- ing arrangements. However, this relief may open the door to abuses that could gener- ate investor complaints down the line.
At the same time, the move to remote working is exposing the industry, and its clients, to greater cyber-related risks because finan- cial advisors who work from home are using network setups that potentially are not as secure as their office networks.
“Placing the economy in a par- tial coma made sense during the first wave of the pandemic, but if there is a second wave, a second economywide shutdown should be avoided in favour of more targeted approaches,” stated a release from a working group con- vened by the C.D. Howe Institute.
That group — co-chaired by David Dodge (formerly governor of the Bank of Canada) and Mark Zelmer (formerly deputy super- intendent of the Office of the Superintendent of Financial Institutions) — argues that governments must take a more measured approach to combat- ing a resurgence in infections, given the economic damage inflicted by the initial outbreak and the threat to Canada’s already battered public finances.
Recent estimates from the Parliamentary Budget Officer of Canada in Ottawa indicate that the federal deficit for 2020–21 could be more than $250 bil- lion — a tenfold increase over pre-crisis projections and about 12.7% of GDP for the fiscal year that began April 1.
Not only are federal finances taking a beating, but the Bank of
Canada has tripled the liabilities on its balance sheet over the past couple of months with the launch of an array of emergency support measures, including programs to keep provincial and corporate bond markets functioning.
The provinces are suffering as well. A report from Montreal- based National Bank Financial Inc. estimates that provincial governments are facing a com- bined $100-billion deficit this year. That is on top of the mas- sive federal deficit.
While the initial shutdown due to the pandemic came at a mas- sive cost, new research indicates that more targeted intervention can lead to better results in terms of both health and the economy.
A recent paper from the Federal Reserve Bank of Minneapolis (FRBM) stated that a combin- ation of targeted testing for the coronavirus and isolation has the potential to provide a much better outcome by inflicting less damage on economic activity — while also doing a better job of saving lives.
According to the FRBM’s model, an economic shutdown that causes a short, severe recession is better than simply
permitting a pandemic to flour- ish unchecked. A shutdown, while damaging, generates a 0.6% permanent increase in con- sumption (due to reduced spread of the virus and fewer deaths) compared with doing nothing.
However, when testing and isolation tools are introduced, the result is a 3.0% gain, as this approach produces much less severe economic damage and does a better job of preventing deaths.
“Our findings also suggest that even if a pandemic is well underway, testing and isolation policies are very valuable,” the FRBM paper concluded.
Governments didn’t pre- fer indiscriminate lockdowns when the virus initially emerged. However, at the outset, there wasn’t much choice. Most gov- ernments simply weren’t capable of the sort of testing, tracing and isolating that could produce less destructive results than those of a wholesale lockdown.
Covid-19 also has proven trickier to contain than previ- ous pandemics, such as SARS, because a significant share of Covid-19 infections do not develop symptoms, allowing
carriers to spread the virus unknowingly. But, as testing cap- acity increases, the possibility of catching and isolating asymp- tomatic spreaders improves.
Moreover, as the body of research into the virus’ spread continues to grow, so does policy- makers’ understanding of the relative risk of various activities. While isolating with immediate family and limiting outside con- tact strictly is the safest approach, several key factors — indoor vs outdoor activity, prolonged vs short- duration exposure, small vs large groups of people — are critical in determining the level of risk of infection.
Armed with this sort of infor- mation, governments can make more nuanced decisions about the limits to set on economic activity. Large, prolonged indoor gatherings may have to remain off-limits, but lower-risk endeav- ours may not have to be treated similarly. Enhanced testing for the virus and tracing of infection paths also could enable more tar- geted curbs. Therefore, compre- hensive lockdowns may not be the only option if evidence of a
second wave emerges.
   Cyberattacks and scams could rise
Several regulators have reported an increase in phishing attacks since the pandemic took hold and lock- downs were imposed. The Investment Industry Regulatory Organization of Canada (IIROC) also warns that hackers are ramping up their efforts to pene- trate remote access networks in order to carry out cyberattacks.
Regulators and law enforce- ment agencies are seeing other types of fraud on the rise as scammers seek to take advan- tage of the unusual conditions created by the pandemic. These scams include pump-and-dump schemes involving companies that claim to have developed vac- cines or treatments for Covid-19 or that promise extravagant prof- its from the exploding demand for certain types of medical equipment.
At the same time, the unprecedented economic damage created by Covid-19 — particularly the spike in unemployment and the surge in lost income — creates an audi- ence more receptive to invest- ment frauds. Clients desperate to recoup losses may be more vul- nerable to dubious investment schemes.
Whether clients are victim- ized by cybercrime or more old-fashioned scams, greater incidences of fraud could be an additional source of complaints against firms if investment deal- ers and advisors don’t guard against these schemes on behalf of clients — or, even worse, if they get sucked into them too.
Just how significantly com- plaints volumes will rise in the months ahead is difficult to project, but past episodes of major market turmoil indicate that the increase is likely to be significant.
For example, the Mutual Fund Dealers Association of Canada reported that complaints vol- umes surged in both 2008 and 2009 (by almost 30% a year) before easing in 2010.
OBSI recorded an even sharper increase in complaint activity fol- lowing the global financial crisis. Investment complaints to OBSI surged by almost 60% in 2008 and jumped again by more than 70% the following year.
IIROC’s first full year of oper- ation was 2009. The regulator reported receiving more than 2,500 complaints that year — by far its highest annual total to date. Complaints activity slipped below 1,900 the fol- lowing year and has generally trended downward since. In 2019, IIROC fielded fewer than half the number of complaints (1,148) than it received in its first year.
Throughout the industry, complaints volumes have gener- ally been in decline in the years since the 2008–09 global finan- cial crisis as markets recovered and reached new highs.
Now, that trend appears set to reverse and industry firms’ capacity to handle rising com- plaints volumes may be limited, given the disruption to ordinary work arrangements following the imposition of physical dis- tancing requirements.
Nonetheless, regulators have warned industry firms to keep up with their complaint-handling responsibilities.
In a notice to the indus- try, the Autorité des marchés financiers is calling on firms to ensure that complaints are addressed expeditiously despite the challenges posed by the pandemic. The regula- tor also suggests firms consider whether aggrieved clients are
Client complaints trends
700 600 500
400 300 200 100
2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 2019
3,000 2,500
2,000 1,500 1,000 500 0
 Any time volatility rises and asset prices fall significantly, client complaints naturally climb
 facing financial stresses due to the crisis, with an eye to miti- gating the effects on vulnerable customers.
Complaints that firms can’t resolve on their own often end up with OBSI, which recently received a vote of confidence from the Canadian Securities Administrators (CSA). In May, the CSA stated it “is renewing its focus on strengthening OBSI as an independent dispute- resolution service.”
Whether that results in the CSA finally providing OBSI with some sort of binding authority — which investor advocates have long sought, and as an independ- ent review of OBSI recommended
— remains to be seen.
In the meantime, the antici-
pated rise in complaints vol- ume will inevitably increase the compensation that firms pay to clients.
The proportion of invest- ment complaints to OBSI that are resolved in favour of clients has hovered around the 40% mark, regardless of client complaints volume (although the percent- age did jump to a high of 47% in 2019).
Assuming that client success rates remain historically con- sistent in the months ahead, the number of compensation rec- ommendations is likely to rise proportionally. IE
IIROC complaints
MFDA/OBSI complaints

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