Fine collection, IIROC and Best interests

Fine collection, IIROC and Best interests

In a recent paper released by the Small Investor Protection Association (SIPA) , it was determined that there is more than $899,216,448.32 in fines owing to Canadian regulators. A huge number by any standard.

The paper, “Unpaid fines: a national disgrace” was released by SIPA to raise awareness of the issue of unpaid fines for breaches of financial services regulation levied by regulators against individuals or firms.The report breaks down fines based on provincial commissions as well as Canada’s mutual fund and securities regulators.

“Unpaid fines contribute to a breakdown of trust in the system and reduced investor protection,” writes Debra McFadden, who authored the report for SIPA. “Better collection of fines is needed but a legislated fiduciary standard for advice giving would reduce the number of complaints and lead to better financial outcomes for retail investors.”

While the biggest amount owing isn't related to The Investment Industry Regulatory Organization of Canada ( IIROC ) we want to emphasize IIROC as it is in effect Canada's national regulator for retail investors. The comments we make here apply also to the Mutual Fund Dealer Association (MFDA) . The IIROC figure is $27,941,793.00 and the MFDA total is $56,793,709.71 (includes costs imposed).To stay in the business, both firms and individuals are required to pay the fines that are levied.

The fines relate to a myriad of investor abuses , including misappropriating client funds; providing fictitious account documents to the client; forging signatures; unauthorized trading; outside business activities , off book transactions and engaging in personal financial dealings with a client . It is not known the extent to which employers compensated the clients for such activities.The large amount of fines whether collected or not are a sign of a far deeper issue with advice giving in Canada.

According to the SRO's, somewhere between 80 and 90 % of fines imposed on individuals are never collected.This is the main issue. Unpaid fines on such a scale make a mockery of the enforcement system and the general deterrence value of fines. This needs to be changed.The core issue is that dealers are not held accountable for the actions and inactions of their staff/ agents. If they were ,there would be a small collection problem.If a carpet cleaner ruins your rug , the firm , not the individual is held accountable. The financial services industry immunized themselves by having regulators chase the small fry who often can't pay or go bankrupt.This has zero deterrent value and reflects poorly on the industry and its regulation. Still, until the system is fixed, better fine collection is needed .

In two provinces, Alberta and Quebec, IIROC can pursue individuals after they leave the investment industry - a power it said it has used on occasions.In Alberta, the collection rate between 2008 and 2014 was 35.75%, compared to 17.6% nationwide.In Quebec, the collection rate for personal fines was 59% in 2014 (the first full year that the court enforcement power existed), compared to 17.3% nationwide. It wants Ontario regulators to have the same power. Andrew Kriegler, chief executive officer of the Investment Industry Regulatory Organization of Canada, asked the Ontario government’s standing committee on finance and economic affairs for legislative reform – stating the regulator’s unpaid fines in Ontario was largely due to the organization’s lack of power to enforce collection.We certainly agree with this as it will improve deterrence at least on the margin. We would expect to see that (a) any fines uncollected after one year will be to the account of the dealer and (b) the proceeds be used for investor education , outreach, research.,formation of an investor advisory Panel or restitution.

Over the years investor advocates have provided regulators with many ideas to imprive fine collection :

Improve supervisory controls over Reps -prevent problems

Require firms / staff to have appropriate insurance coverage
Link to insurance and banking regulators to deal with dual -licensed Reps
Incentivize collection staff with a bonus program
Use dedicated ,well trained specialist staff for collections
Use outside professional collection agencies whwn required

Prohibit use of personal corporations
Withhold x weeks pay as collateral
Make fine collection a defined annual executive compensation objective of each commission chairman and SRO president

Require dealers to automatically rebate profit they made as a result of the sanctioned activity in satisfaction of fine( unless they too are prosecuted)

Allow a certain percentage of collected fines to be go into an unrestricted fund

Increase dues/ fees for dealers with above average rate of rule breakers
Seize termination payouts and post employment benefits if and as applicable
Require all  securities commissions to publish detailed unpaid fines information
Check to see if EI , CPP et al  benefits can be seized;Use wage garnishment
Strengthen "advisor" recruitment screening processes and hiring criteria
Introduce an effective internal whistleblowing program at dealer level
Get more aggressive on fraud prosecutions - work with law enforcement
Notify professional Associations which the Rep is licensed with eg FPSC ( CFP designation)

SRO's often take too long to investigate and discipline, so by the time the fines are levied, years have passed and there is no money left. We therefore welcome IIROC's recent initiative to use mediation to help speed up the process.

So what else can be done? One possible approach to collection would be to work with FSCO ( and other provincial insurance regulators) in establishing a reciprocal agreement so that dual licensed salespersons were not immunized form paying fines. This would help in collections from dual licensed “advisors”. It appears that IIROC is taking steps in that direction after years of cajoling from SIPA and others . We welcome the new approach.

Given the large amount of unpaid fines, it is difficult to argue the current system is functioning. Given that working in the financial business is a privilege, a reasonable starting point would be to make it more difficult for people to enter the industry in the first place by requiring higher standards - academic, professional and ethics.

And once the individual is part of the system, make the advisors work to an even higher standard, namely fiduciary duty which means that they act solely in the client’s best interests. Although IIROC has not provided leadership in that area , the CSA /OSC appears to be ready to introduce such a standard. That should reduce the amount of abuse and by extension the need for sanctions and fines.

By making it harder to get into the business, by insisting that they the act to a higher standard, there’s a good chance that there will be better outcomes for investors.

Another way is for the regulators to insist employers are responsible for the behavior of the employees they take on — even if the employees regard themselves as independent contractors.In our opinion, such a change would result in an immediate improvement in dealer behaviour and supervisory practices. In the majority of cases cases it is the policies, practices, sales quotas , commission grids . compensation arrangements and other non-financial incentives of dealers that incent “advisors” to push the envelope of compliance. We have also encountered cases where supervision share in branch commissions earned!

Actually, fine collection is far less important to investors than recouping their money and that's what we'd like to see the IIROC really focus on. Fairer dealer complaint handling and an OBSI with binding decision powers are regulatory protections needed by retail investors .



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