IIROC fines on individuals- Are they a deterrent?

IIROC fines on individuals- Are they a deterrent?

The Investment Industry Regulatory Organization of Canada (IIROC) has argued that their inability to collect fines from individuals reduces their credibility as a regulator. Their position: “If you break the rules and abuse the trust your clients have placed in you, you must pay the penalty and be seen to pay it." In Alberta , Quebec and PEI, IIROC can apply to courts to certify its decisions and fines, which gives the organization court approval to enforce fines .As a result, they seek authority from other provinces and Ontario is next to provide that authority .

Loss of registration and public shaming can be effective deterrents for individuals .We don’t think better collection of fines from individuals will enhance deterrence or improve investor protection at all. Even provincial Securities Commissions with the necessary authority aren’t very good collectors. For example, the British Columbia Securities Commission has collected less than 5% of monetary sanctions imposed since its incorporation in 1995. Individuals tend to declare bankruptcy, have few assets to seize or relocate to another province. In 2016, IIROC collected just 8.3% of fines against individuals.

IIROC would collect the fines if it made the dealer responsible for the fines of its individual reps. This would lead to the dealer caring about its individual reps receiving any fines and would therefore improve compliance and deterrence of wrongdoing in the first place.

The hard facts of the matter are that the vast majority of root causes for rule breaches can be traced back to the dealer: these include poor advisor recruitment and training, advice - skewing incentives/inducements for advisors, deficient KYC / risk profiling tools, weak supervision, ineffective administrative controls, poor compliance processes all in a culture of greed. In some cases, branch managers and supervision are compensated for branch sales putting their supervisory roles in a conflict-of interest. The result is that the person at the bottom of the pyramid takes the fall, the individual advisor.

Let's take a closer look at exactly how IIROC operates. First off is its board is decidedly stacked with industry oriented Directors. The Small Investor Protection Association has issued a report on IIROC governance and found that industry participation on the board is strong while investor representation is weak. It does not have an Investor Advisory committee and its engagement with retail investors is not considered strong. The vast majority of the fines it levies are against individuals rather than its fee-paying Member dealers. IIROC rarely obtains restitution for victims of financial assault by its Member firms. Fines collected go into a restricted fund - they cannot be used for investor restitution but can be used to subsidize certain IIROC operations including Hearing Panels and market participant/investor education. When IIROC collects money from disgorgement it retains the cash instead of returning it to harmed investors.

Are the fines a deterrent? We think not since fines are generally a fraction of what the investor lost .On a statistical basis the number of complaint cases in the industry seems to be stable perhaps even increasing. Suitability continues to be the major issue year after year.

Not only is effectiveness and deterrence value questionable there is actually a potential downside. Giving IIROC collection authority will divert scarce human resources from investigating dealers to fighting court battles. It will also require added legal expenses. Although IIROC will cherry pick its cases there is still the chance it will lose a case and that could have a negative impact on the SRO.

We'd rather see IIROC focus its limited resources on preventing investor abuse by  1.(a) changing its rules for suitability, dealing rep compensation and complaint handling; (b) establishing more cooperative agreements with insurance and banking regulators and most importantly (c) step up its enforcement of dealers and 2. Holding dealers accountable when they reject an OBSI restitution recommendation. That would put money in the pockets of the investor rather than the SRO. 

The financial services industry will not reform because the current deflection strategy works well. Instead of assuming responsibility, the industry is able to deflect all attention to the miscreant dealing reps. Periodically, to appease the protests of the public and media, a rep is hung in full public view to "demonstrate" the "concerns" of the industry but these instances are nothing more than show trials. This situation will only change when the buck stops at the dealer. Only when the dealers are held liable for the transgressions of their employees/representatives will the situation change and not a second before.

Phase 2 of the Banking Upselling Scandal

                                                                                                       April 4, 2017

By now we've all read about the scandal involving upselling by Canadian banks especially TD Bank. It is truly disturbing that such a horrible client- abusing culture has been allowed to develop in front of the eyes of Federal regulator, the Financial Consumer Agency of Canada (FCAC)

Back in Oct. 2016 FCAC told us that for the most part, financial services institutions are behaving themselves in how they treat their clients, according to its 2015-16 Annual report. The FCAC's report indicated that the agency has observed, "strong market conduct" among federally regulated financial services firms, such as banks and insurers. Specifically, the FCAC's uncovered "no major or systemic concerns."  During that fiscal year, the FCAC investigated 708 potential breaches of federal legislation, regulations, voluntary codes of conduct and public commitments, the report states, noting that any compliance issues that were uncovered, "were addressed in a timely and effective manner." In 2015-2016 no fines were imposed . Well, here we are a few months later with a huge banking misconduct scandal on our hands.

 

The reaction of the FCAC to the scandal has demonstrated no sense of urgency to investigate and protect financial consumers. Asked to comment on the CBC’s GoPublic reporting, the FCAC’s deputy commissioner Brigitte Goulard appeared on TV to say that the agency had been interested in looking at these sales practices “for a while” but had decided it was going to launch a special investigation in April. A report can be expected by the end of the year, but how deep will it go? 

Asked by Radio Canada what would happen if a bank is found guilty of illegal actions in its sales practices, Goulard warned that her agency could impose a fine of up to $500,000. In 2015-16, Toronto-Dominion Bank CEO Bharat Masrani was paid $9.38 million in his first year as top executive so a fine of $500K would equal only a few weeks compensation or a minute fraction of TD’s quarterly profit. Not exactly a huge deterrent for a bank like TD. And she added, “If it’s a serious violation, we could name the institution.”. This is neither the transparency Canadians deserve nor the financial consumer protection they need.

In a statement, FCAC commissioner Lucie Tedesco expressed concern with recent allegations related to the sale of products and services by financial institutions to consumers without properly obtaining their prior express consent. “The law requires that, in order to provide consumers with new or expanded products or increase their credit limits, financial institutions obtain their customers’ prior consent and disclose key information about the costs and charges of the products they are purchasing,” she said. The real issue is not consent /cost disclosure but rather an unbridled sales culture where client needs are subordinated to sales quotas placed on employees under threat of termination. Clients provide personal and confidential information that is harvested to upsell them based on quotas rather than need. That is exactly the opposite of the type of trust relationship that should exist between a bank and its clients.

Contrast this with the U.S. Consumer Financial Protection Bureau https://www.consumerfinance.gov/ .Its motto We’re on your side is right there on the first page of their website. ”We are the Consumer Financial Protection Bureau, a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.”  The site makes it easy to submit complaints, includes a searchable database of public complaints against companies and invites whistleblowers from within the industry to spill the beans.

In  September 2016 , the Bureau announced that Wells Fargo had been slapped with fines totalling US$185-million after an investigation found that bank staff had opened more than two million fake chequing, credit card and other accounts for unknowing customers as part of a company-wide effort to meet sales targets. The announcement set off a series of investigations into Wells Fargo, including a congressional hearing .The bank’s CEO, John Strumpf was forced out a short time later. In January, 2017, it ordered subsidiaries of Citibank to pay US$28.8-million for failing to provide borrowers with adequate options and giving them a bureaucratic runaround as they attempted to avoid foreclosure on their homes. These actions send a strong message to the banks.

Phase 2 of the scandal will unfold when abused clients file their complaints with the bank. They will likely end up with the bank’s “ombudsman” which in reality is neither independent nor a true Ombudsman. You likely won't be warned that, unlike OBSI, your complaint will not stop the statute of limitations time clock. If you don't accept their response , you'll be referred to their own fully paid for " independent' for -profit firm ,ADR Chambers banking  ombudsman ( ADRBO) which clearly is not independent of the bank ( applies only to TD and RBC) and is not a true Ombudsman. See this report from the Consumers Council of Canada of what they think of this type of conflicted dispute resolution service. Canada's banking dispute resolution system http://www.consumerscouncil.com/site/consumers_council_of_canada/assets/pdf/cccbankingdisputeresolution.pdf

Will the FCAC come down hard on the banks involved? Will abused clients obtain restitution or have improper contracts unwound? Or will employees who behaved badly or broke the law under intense pressure be turned into scapegoats for management actions?

With an increasing number of vulnerable consumers and more complex banking products/services, the need has never been greater for robust consumer protection. A Financial Consumer Code is required. Kenmar support such a code and a strong enforcement agency (FCAC) to make it real. OBSI should be the sole Ombudsman for ALL banks and internal bank “ombudsman " abolished as has occurred in the UK. For- profit Ombudsman services should be prohibited .

We call on the Government of Canada to use this scandal as an opportunity to introduce a robust Financial Consumer Code, give the FCAC the mandate and resources to act as a consumer's advocate for Canadian financial consumers and make OBSI the sole Ombuds service for all Canadian banks under Federal jurisdiction. Such actions are well past due.