This month’s newsletter highlights an Ontario Securities Commission (OSC) proposal to help investors recover some of their money after certain enforcement proceedings. We also share tips on how do-it-yourself (DIY) investors can use trading simulators to test whether DIY investing is right for them without putting real money at risk. Lastly, we discuss an enforcement decision about the importance of spotting conflicts of interest and avoiding unethical practices that could harm you. Let’s explore these insightful discussions and more… | |
Getting Investors Their Money Back: A New OSC Proposal | |
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In July, the OSC introduced a plan to help compensate investors who lost money due to wrongdoing. The proposal will return money collected from disgorgement orders made by the OSC’s tribunal or a court.
The idea behind disgorgement is that wrongdoers shouldn’t profit from breaking the law.
When fully implemented, the proposal will give investors another way to recover some of their losses when they’ve been harmed by misconduct.
The proposal will enable the OSC to join several other jurisdictions that already provide this mechanism to help harmed investors, including the British Columbia Securities Commission (BCSC), which adopted a similar framework several years ago.
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The best and most effective way to help return money to harmed investors is to strengthen OBSI. Its free, efficient, and informal complaint-handling process suits individual complaints better than the OSC’s enforcement resources… | |
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The proposal is a good start, but it will only work if the OSC can collect the money owed. Unfortunately, the OSC’s collection rates are low.
For example, from 2015 to 2024, they ordered wrongdoers to disgorge about $266 million, but only managed to collect around $21 million—less than 8% of the total.
In our comment letter on the OSC’s proposal, we called on the Government of Ontario to give the OSC the legal tools to collect more money from wrongdoers. For example, the OSC should be able to withhold the person’s driver’s licence until they pay up.
While we support the OSC’s proposal, governments and regulators must go further. They need to act quickly to make recommendations issued by the Ombudsman for Banking Services and Investments (OBSI) binding on investment dealers. The best and most effective way to help return money to harmed investors is to strengthen OBSI. Its free, efficient, and informal complaint-handling process suits individual complaints better than the OSC’s enforcement resources, which are not designed to compensate harmed investors. Binding authority would significantly improve investor protection and make OBSI a better avenue for investors seeking financial compensation for their losses.
FAIR Canada and a growing coalition of consumer advocates look forward to further government and regulatory action on the critical issue of binding OBSI decisions.
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How to Buy and Sell Without the Financial Risk! | |
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If you’re considering DIY investing or want to improve your skills, trading simulators are one way to learn without risking real money. These programs let you buy and sell shares in a risk-free environment.
Also known as stock market simulators, the programs allow users to trade shares and other financial assets of actual companies using virtual money. Since they mimic the features and behaviours of financial markets, they are especially helpful for learning how markets work and testing out strategies without any real consequences.
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Be aware that trading simulators come with their own limitations.
Since you’re not using real money, your emotional responses
may differ from what you would do in real life.
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FAIR Canada’s research on DIY investors found that only 25% describe themselves as confident investors who understand the risks involved, and only 10% say they’re extremely confident. Trading simulators can also assist investors in better understanding their risk tolerance. They allow users to test trading strategies and understand their comfort with gains and losses—insight that’s crucial for determining their level of risk when making real-life decisions. | |
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Be aware that trading simulators come with limitations. Since you’re not using real money, your emotional responses may differ from what you would do in real life. There’s also a chance that trading simulators could lead to too much confidence, where an investor who performed well in a virtual setting may think they’ve mastered trading. Emotional and psychological factors such as FOMO (fear of missing out) are often more intense when real money is on the line.
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Ready to start DIY investing or sharpen your investing skills? | |
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Check out these resources:
(Recently launched to test how gamification techniques affect investor behaviour.)
- Your investment firm of choice may also offer practice trading accounts.
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Would You Know if Your Advisor Was Acting Improperly? | |
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As validated by FAIR Canada’s research, Canadian investors rely heavily on their financial advisors.
But how much trust and authority should you place in your advisor? A decision by Ontario’s Capital Markets Tribunal (Tribunal) provides a cautionary tale. In June 2022, a mutual fund sales representative (the advisor) was found to have acted “unfairly, dishonestly, and in bad faith” by:
- Being named as the elderly client’s power of attorney.
- Being appointed as an alternate executor of the client’s estate.
- Failing to report that he had been named as the sole beneficiary of the client’s estate.
These are very serious conflicts of interest, and the advisor failed to report them.
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The Tribunal emphasized the seriousness of these breaches, particularly because the client was vulnerable due to age, poor health, lack of financial understanding, and her personal relationship with the advisor. | |
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The advisor also managed almost all the client’s financial assets, representing one-third of the advisor’s business. The advisor was also deeply involved in preparing and executing his client’s estate documents.
The Tribunal ultimately imposed significant sanctions on the advisor, including a permanent ban from the industry, a $500,000 fine, and $85,000 in costs. However, they did not order the disgorgement of the $1.8 million inheritance under the client’s estate.
Unfortunately, the Tribunal’s decision focused on the advisor’s failure to disclose these severe conflicts of interest, not on the legitimacy of the inheritance itself. This is partly because it lacked evidence to conclude that the failure to disclose the conflict led to the advisor being named a beneficiary. It also could not establish that the advisor obtained his inheritance because of a breach of Ontario securities law. Accordingly, they found they could not order him to disgorge the inheritance.
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What Should You Avoid Doing With an Investment Advisor? | |
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The Canadian Investment Regulatory Organization (CIRO) highlights three key actions to avoid with your advisor:
- Never lend your investment advisor money.
- Never name your investment advisor as a power of attorney or executor.
- Never sign a blank or incomplete form.
For a more detailed explanation of the risks of doing the above, see CIRO’s full list here.
We would add to CIRO’s list:
- Never name your investment advisor as a beneficiary under your will or a life insurance policy.
If your investment advisor asks you to agree to any of the above, it’s wise to think twice and be very skeptical. Investment advisors are supposed to act fairly, honestly, and in good faith toward their clients.
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Good News for Bank Consumers: An Easier Complaints Process! | |
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Starting November 1, 2024, banking customers will only need to deal with one external complaints body to handle their complaints—OBSI. Previously, when managing complaints, banks could choose between OBSI or ADR Chambers, a system often seen as unfair and complicated for consumers. This change is a significant win for banking consumers, simplifying the process and making it more affordable to resolve complaints.
While this is a welcome change, governments must act to give OBSI authority to make binding decisions. Without it, firms will continue to victimize investors by walking away from the process, or pressuring their clients to accept low-ball settlements. Read our commentary for more insights on this issue.
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Getting Your Money Back! To help Canadian investors navigate the complaint system to get their money back, FAIR Canada recently updated its Complaints Guide. Inside, you’ll find comprehensive information with simple steps on how to file a complaint with your bank or investment firm. It also includes essential resources and contact information for reaching securities regulators in your province. Explore the Guide:
Getting Your Money Back: An Investor’s Guide to Navigating Canada’s Complaint System
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Beware of Recovery Scams Targeting Investors | |
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There’s been a rise in recovery scams targeting investors who’ve already lost their money to fraud. These fraudsters promise to help victims recover their lost funds for a fee. Unfortunately, no money is returned in many cases, and victims may lose even more. Some fraudsters also impersonate regulators, such as CIRO. Note that CIRO representatives will never ask investors to pay.
To protect yourself, here are some helpful tips:
- Always verify who you’re dealing with
- Take steps to confirm the accuracy of information found online
- Be cautious of unsolicited offers
- Check your advisor’s credentials
You can start by viewing these free resources to help with the verification process:
CIRO Advisor Report
National Registrant Search
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Throughout the year, FAIR Canada submits many comment letters on various important policy and regulatory matters that have an impact on investors. Read more about our investor advocacy work. | |
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Do you have feedback on our newsletter or suggestions for topics you’d like us to write about? Your input is valuable and will help us improve our newsletter content for loyal subscribers like you. Please email us at info@faircanada.ca with your comments and/or suggestions.
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