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.