Sobering enforcement statistics

Sobering enforcement statistics

We've always felt that securities regulators were constrained in their regulatory activities, that they investigate too few cases and impose penalties that seem like a “wrist slaps” compared with the harm done. Most of the fines imposed are never even collected. A recent study by the Small Investor Protection Association www.sipa.ca revealed that nearly a billion dollars in fines remain uncollected.

Even participants in the securities industry have been surprised when they delved into enforcement statistics. For example, investment fund manager INVESCO, made the following observation when it responded to the Ontario Securities Commissions’ consultation on 2016-17 priorities. (http://www.osc.gov.on.ca/documents/en/Securities-Category1-Comments/com_20160509_11-774_adelsone.pdf 

“As noted at the beginning of this letter, we strongly support this goal. We do note a point of caution, however. In preparing this letter, we reviewed the annual enforcement reports for 2015 for each of the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association (MFDA) and the CSA, as well as for the Ombudsman for Banking Services and Investments (OBSI). Despite the intense regulatory focus on the retail wealth management sector, we were surprised by how little enforcement there really is.

To put this in context, the CSA in its report notes that financial wealth in Canada is approximately $3.6 trillion and there are 123,883 individual registrants. Given the focus on retail wealth management, one would expect to see a lot of cases, based on these numbers. Note that if 1% of registrants were “bad”, then we would expect a minimum of 1,238 cases, at 2% that figure is 2,477. Arguably, a 2% rate of problematic registrants is in the range of normal and does not infer a crisis. Based on the statistics, the 2% figure is not even reached.

IIROC received 1,341 complaints in 2015, a number that has been in decline over the past 5 years, it referred 98 cases to the CSA, and it engaged in 52 prosecutions against 68 individuals and 18 firms. We note that IIROC is the largest self-regulatory organization in the country. Total sanctions, including both at the firm level and the individual level, were a mere $4.6 million. It is hard to get excited about such a figure in a $3.6 trillion market. The top complaint received by IIROC related to unsuitable investments but that only totalled 33 complaints. [Kenmar note also that there were 124 investigations completed in 2015 but 41% never made it to prosecutions]

The MFDA record is not much better, with only 444 cases opened which led to 69 proceedings being commenced. The MFDA issued 85 warning letters and 86 cautionary letters, implying that those complaints did not merit much attention. The MFDA only concluded 65 hearings. While this might seem like a lot, in the context of the prevailing view of the wealth management industry we believe that this is a rather small number of hearings. We note that the MFDA issued $5.4 million in fines.

In summary, then, between the 2 SRO’s, there were about $10 million of fines issued in a $3.6 trillion market. There were approximately 1800 cases, well below 2% of all registrants, which implies that over 98% are compliant and/or do a good job. These statistics do not significantly improve when the CSA and OBSI statistics are included. The CSA commenced 108 proceedings involving 165 individuals and 101 companies and concluded 145 cases involving 233 individuals and 117 companies. The CSA statistics, of course, are not limited to retail wealth management and many of the issues raised in those cases are irrelevant for retail investor protection. But even with the 108 proceedings, the overall number is well short of 2% of registrants. The CSA did issue $138 million in fines, but $112 million was attributable to four cases.

OBSI only opened 298 cases, which still leaves us well short of the 2% mark noted above. They made awards of over $4.6 million.

Our concern is that this data suggests that the rate of non-compliance is overblown by the media and the regulatory community has done nothing to correct that (mis)perception. Alternatively, the data is so unimpressive due to a lack of enforcement. In our experience, most registrants are compliant and, as such, we tend to believe the former explanation; however, it is entirely possible that the latter is the correct explanation. The OSC should express an opinion on this prior to proceeding with new regulatory initiatives. If there is indeed a misperception, the OSC should step back and consider the impact of that on confidence in Canadian capital markets. If there is a lack of enforcement, we encourage you to consider the suggestions set forth earlier in this letter. “

We have to agree with Invesco that something doesn't add up. While we don't agree that a 2 % thresh-hold is an acceptable figure for an industry responsible for managing the retirement income security of millions of Canadians , we do agree that regulators should consider these numbers in their policy deliberations. A widow that is given bad advice will suffer a life-altering event ; a retiree could be left eating SPAM. Would you get on an airplane if you had a 98 or 99% chance of arriving safely? Like car or airplane safety , certain issues are driven by social factors and the public interest. Is financial health/ investor protection a public interest issue? What abuse percentage is “OK” for retail investor protection ?  How many Canadians must be abused before regulators will act?

We note parenthetically that the number of complaint cases opened is a fraction of the number of complaints received and the number of complaints received is a fraction of the actual abuses retail investors are exposed to. Canadians don't complain for a number of reasons. They don't know their rights, they blame themselves for the losses, they don't know how to file a complaint, they are embarrassed by their losses, they are “ Canadian”, they don't want to hurt the feelings of their “advisor”, they've heard that it's a waste of time, it’s too stressful  etc.

Satisfactory enforcement?- you decide.