Bad brokers: a $1-billion problem for investors

By Dan Leger
The Chronicle-Herald, Nova Scotia
Oct 17, 2005

CANADA’S billion-dollar rip-off is a problem so widespread and so pervasive that it swamps regulators and law enforcement agencies from coast to coast. And it’s going on in some of the most respected financial institutions in the country.

Every day, Canadians are losing their hard-earned savings to malfeasance, incompetence and flat-out fraud by their trusted stockbrokers and financial advisers. No one knows for sure how much is being stolen or frittered away, but it could be as high as $1 billion a year, based on information available from public sources. In many cases, the victims are elderly. Little is being done about it.

Some home-grown examples: A Nova Scotia businessman sells the company he built over a lifetime and invests the proceeds as his retirement nest egg. His advisers work for one of Canada’s biggest bank brokerages. Two years later, he is out $750,000.

A farmer from Hants County invests $150,000 with a major bank brokerage. Two years later, there’s $15,000 in his account. When he finally complains, the broker hands over a letter of resignation and walks away, never to return.

In the Canadian system, brokers who are caught and quit can float away from any enforcement or responsibility to their former clients. There’s no law or regulation that will ever make them pay restitution or so much as lift a finger to get their client’s money back.

Each year, the Investment Dealers Association of Canada handles more than 1,000 complaints from investors, mainly over unauthorized trading, unsuitable investments or conflicts of interest by financial advisers. Very few of those complaints are ever resolved. So far this year, 995 complaints have been registered by the IDA; 30 have been resolved. For all of 2004, 1,250 complaints were made; only 70 were resolved.

And there’s a darn good reason for this. The IDA is both a lobbyist for stockbrokers and investment advisers, and the “self-regulating organization” that handles discipline and enforcement issues among its members.

You don’t have to be a Supreme Court judge to see the appalling conflict represented by this dual role.

The same goes for the Mutual Fund Dealers Association of Canada. It was created by the same people who run the IDA and it, too, has a dual mission: to represent and lobby for the mutual fund industry, and to act as its regulatory body and enforcement court.

By now, you are saying: “Surely the government doesn’t allow this to go on?” Sorry. Don’t expect government to sort out your broker problems.

Right now, securities regulation in Canada is a crazy quilt of overlapping and conflicting jurisdictions. Each province has its own little securities commission minding the local store. But they are sadly under-resourced and in some cases, little more than cash cows for provincial treasuries.

Here at home, the Nova Scotia Securities Commission takes in $14 million a year in fees, but spends less than half that on running the commission and only a fraction goes to enforcement.

What’s needed is an independent, national securities regulator with teeth, one that can put thieves and fraud artists in jail and order restitution to their victims. But our squabbling provinces aren’t ready to hand over their convenient little cash machines to any other jurisdiction.

Meanwhile, the brokers and mutual fund salespeople still argue they should be left to regulate themselves.

The saddest part is that the individual investor hardly ever gets his or her money back after it’s been stolen or squandered by a financial adviser. Occasionally, brokerage houses will offer some compensation, but only if the losses indisputably result from their failures. Almost always, compensation comes with a gag order preventing the victim from ever revealing what happened.

The IDA knows it has a massive problem. It claims to have imposed millions of dollars in fines on its miscreant members. But dig a little deeper, as I did, and you find out that the fines are hardly ever collected. Few, if any, have ever been paid.

That’s because most brokers caught in fraud or misdeeds simply leave the industry and its problems behind them. Once they quit the business, the IDA or the MFDA no longer has any jurisdiction over them. The poor investor is left holding the bag, and little else.

Dan Leger is assistant managing editor of The Chronicle Herald.