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  6 | INVESTMENT EXECUTIVE NEWS January 2021 As markets rebounded, complaints tapered off
recent submission to the Ontario Securities Commission (OSC).
“We cannot overstate the fact that while financial markets as a whole appear to be largely resili- ent in the face of the unpreced- ented economic situation caused by [the] pandemic, many Canadian households are con- tinuing 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 vol- ume 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 per- formance, 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 com- plaints 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 begin- ning of the pandemic related to market declines. As market con- ditions improved, the corres- ponding number of complaints declined, although we continue to see an increase in service-type complaints throughout the pan- demic,” 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 quar- ter, the MFDA recorded 513 com- plaints, 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 com- plaint volumes, although OBSI’s spike occurred later. For OBSI’s second quarter (Feb. 1 to Apr. 30), the volume of investment com- plaints was down compared with the average over the previous eight quarters.
However, by OBSI’s third and
fourth quarters, complaint vol- umes were well above historical averages. For its fourth quarter (Aug. 1 to Oct. 31), new invest- ment cases were up by 41% from the average over the previous eight quarters.
Suitability remained invest- ors’ top concern, but administra- tive 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 involv- ing client service and transfer issues surpassed the volume of complaints about inaccurate product disclosure and fee dis- closure in Q4.
While there is overlap between complaints to regu- lators 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 unregis- tered firms and fraud.
As complaints rose at IIROC, so did the volume of new
enforcement cases.
IIROC reported that the num-
ber of case assessment files it opened in 2020 increased by 18.2% from the previous year to 384. The number of investiga- tions the SRO completed during the year rose by 14.4% from the previous year, despite the added challenge of carrying out investi- gations 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 hear- ings, which take longer to com- plete 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 disci- plinary adjudication process.
“In some instances, such as contested hearings, electronic hearings may be lengthier. However, generally, it has been IIROC’s experience that the elec- tronic format has not affected timing of hearings,” Zviedris said. “In fact, the electronic for- mat has improved scheduling and made it easier to find avail- ability for participants.”
IIROC is seeing other benefits
from the forced move to elec- tronic proceedings.
“We anticipate that virtual hearings will increase trans- parency 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 — ordin- arily, 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 through- out much of the country, it’s pos- sible the pandemic may have an impact on this year’s enforce- ment activity as well. IE
Having scrapped the trad- itional springtime consultation, the OSC instead issued its pro- posed priorities for fiscal 2022 in mid-November. The responses to those priorities reveal how the pandemic is shaping expecta- tions for the future of regulation.
Regulators’ quick, decisive response to the pandemic — granting the industry relief in the face of sudden pressures — is ramping up expectations for regulators to be just as nimble and effective once conditions return to normal.
For investor advocates — who have witnessed regulators’ efforts to enhance investor pro- tection drag on through years of consultations — one of the chief lessons from the pandemic is that regulators can move swiftly when they want to.
“We have seen lately clear evidence that the OSC can move very quickly and dynamically in response to industry needs and government directives,” stated the OSC’s Investor Advisory Panel (IAP) in a submission to the OSC. “Investors expect the same agility and attentive- ness from the OSC on issues and initiatives related to their protection.”
The IAP said it expects the speed of policymaking to accel- erate dramatically and also urged the OSC to give up on preserving deferred sales charge (DSC) fund structures.
“The facade of DSC necessity is gone,” the IAP said, adding that “efficiency, cost-saving, burden
reduction and consumer confi- dence would all be better served by the OSC abandoning develop- ment of a convoluted framework just to preserve DSCs.”
The seamless pivot to remote work during the pandemic has sparked hope that regulators will expedite the industry’s techno- logical transition. In a submis- sion to the OSC, Toronto-based fund industry giant Fidelity Investments Canada ULC argued for eliminating paper regulatory filings, allowing e-signatures and defaulting to electronic delivery for investor materials.
While regulators have taken steps in this direction — and research indicates that most investors prefer to communi- cate electronically — Fidelity said the industry still faces paper requirements, which have forced firms to keep workers coming into offices.
“The pandemic has shown us not only that we can adapt very quickly to an electronic model that services the needs of the industry and investors in a practical way, but that an elec- tronic model more [effectively] addresses the OSC’s goals of reducing regulatory burden and improving the retail investor experience,” Fidelity stated in its submission.
Fidelity also called for other measures to curb compliance costs, such as eliminating the requirement to send investors annual reminders, abolishing interim reports and stream- lining Fund Facts requirements to allow companies to prepare a
single document for each fund, instead of requiring one docu- ment for each series of a fund.
Fidelity estimated that doing away with interim reports would save the firm $3 million per year, and about $50 million for the industry as a whole. Streamlining Fund Facts requirements would save Fidelity about $1 million annually by reducing the num- ber of Fund Facts from almost 3,400 to 542.
“The real beneficiaries of this change would be the investor, the financial advisor and the dealer,” Fidelity sug- gested, arguing that stream- lined requirements would make it easier for investors to com- pare funds.
Markham, Ont.-based
Broadridge Investor Communi­ cations Corp. echoed the call for regulators to modernize the investor experience in its sub- mission to the OSC, noting that the participation in shareholder meetings increased when regu- lators allowed those meetings to be held virtually.
Industry trade group the
Private Capital Markets Association of Canada (PCMA) said the OSC should prioritize capital formation by expanding the availability of exemptions and reducing some of the regu- latory demands on exempt offer- ings and exempt market dealers.
The PCMA also proposed that the OSC grant another long-standing advisor wish: enabling all reps — not just mutual fund reps — to flow their commissions through a personal corporation to save taxes.
There are, however, con- cerns that accommodat- ing industry needs that arose during the Covid crisis could become a habit for regulators. For instance, bowing to indus- try demands, the Canadian Securities Administrators (CSA) delayed implementation of cer- tain aspects of the client-focused reforms (CFRs), now slated to take effect at the end of this year.
The IAP is demanding the OSC stick to the revised imple- mentation deadlines for the CFRs and not delay their adop- tion further.
The IAP also recommended that the OSC spearhead compre- hensive, co-ordinated enforce- ment of investor protection rules throughout the finan- cial industry — among statu- tory regulators, self-regulatory organizations (SROs) and across the securities and insurance sectors.
“This is not just a desirable outcome. It is essential if Ontario and Canada are to maintain the integrity, credibility and attractiveness of our capital markets,” the group stated in its submission.
The IAP also argued that regulators should do more to ensure that ill-gotten gains are returned to harmed investors by requiring investor compen- sation as part of enforcement settlements and considering a compensation fund for victims of investment fraud.
Several commenters called for improved investor restitu- tion, including advisor trade group the Independent Financial
Brokers of Canada (IFB).
In its submission, the IFB suggested the OSC should have the ability to direct sanctions collected from firms and advis- ors to harmed investors. The group also said the OSC should resolve the divergent approach to DSCs in Ontario and the rest of Canada, and recommended that the OSC improve its engagement
with advisors.
“Securities firms, dealers,
and investment manufacturers do not speak for advisors,” the IFB said.
These ideas for a post-pan- demic world come amid major reform initiatives that continued last year despite the pandemic: the CSA’s effort to overhaul the self-regulatory structure, and a sweeping review of Ontario securities law by a provincial government task force.
Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés finan- ciers, said the CSA’s SRO review “is currently on track.”
As for the task force, its final recommendations were delivered to Ontario’s then- finance minister, Rod Phillips, in mid-December, but have yet to be released publicly.
The task force signalled it would recommend sweep- ing changes to both regula- tory policy and the OSC itself. However, it remains to be seen how much traction these ideas gain with the new finance min- ister, Peter Bethlenfalvy, as the Ontario government grapples with the pandemic’s swelling second wave. IE
Industry calls on regulators to prioritize digitization

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