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Canada’s patchwork of regulators allows wrongdoers to handle clients’ finances years after they’ve been permanently banned from the securities industry.

An Advisor.ca investigation has identified nine cases between 2013 and 2015 where reps were permanently banned by their SRO but remained authorized to sell life insurance products for periods ranging from six months to years after. Of those nine, six are still authorized to sell today (June 14, 2016).

“Rule breakers should not be able to simply find employment in another area of financial services without potential clients and other regulators knowing what they’ve done,” wrote Doug Harris, vice-president and general counsel, IIROC, in response to our findings.

“We are aware of these situations,” wrote Ian Strulovitch, director of Public Affairs for the MFDA, when asked about banned advisors continuing to be authorized to sell life insurance. “Our goal is to work with provincial insurance regulators to ensure that individuals under the insurance regime are held to the same standards and subject to the same level of enforcement as securities registrants.”

Insurance regulators across the country declined to comment on specific cases, citing privacy concerns.

The Insurance Council of B.C. pointed out that insurance regulators cannot simply replicate other jurisdictions’ penalties against licensees. “All allegations against an insurance licensee must first be investigated and, if disciplinary action is warranted, the licensee is afforded the due process set out in the Financial Institutions Act before a decision is finalized and available to the public,” wrote ICBC executive director Gerald Matier. This sentiment was echoed across the country. (View full responses from all regulators.)

But how do insurers find out about wrongdoing? Regulators told us they rely on reporting by the licensee and/or the employer, consumer or company complaints, notifications from other regulators, and “monitoring” of offences, both civil and criminal. ICBC told us, for instance, that its licensees must report “any disciplinary action” within five business days, while the Insurance Councils of Saskatchewan require licensees to report the commencement of criminal, civil or regulatory proceedings within 30 days. But a system of self-reporting can be inadequate.

147

Number of MFDA-disciplined persons, 2013-2015.

Sources: 2013-2015 Enforcement Reports, based on hearings concluded each year. People disciplined twice in the period have been accounted for.

And while the SROs publish disciplinary actions publicly, formal collaboration with other regulators usually happens under a memorandum of understanding (MOU). Of the insurance regulators we investigated, the Financial Services Commission of Ontario (FSCO) has a MOU with both the MFDA and IIROC. The Insurance Councils of Saskatchewan have one with the MFDA. The rest do not have MOUs with IIROC or the MFDA. (Update: as of June 20, 2016, IIROC has a MOU with the Insurance Council of B.C.)

Once regulators learn about their licensees’ troubles, what happens? P.E.I.’s insurance regulator, its Department of Justice and Public Safety, told us that it considers whether to grant or renew a licence based, in part, on whether the applicant has been found to be “unsuitable to be licensed/registered” by other regulators. “If the applicant has been deemed not to be suitable, it is more likely that we would conclude in a similar manner.” This approach was broadly echoed by other regulators we spoke with. For instance, Warren Martinson of the Alberta Insurance Council told us that if a licensee’s offence in another regulatory jurisdiction involved “elements” of “breach of trust,” “untrustworthiness” or “fraud,” for instance, the licensee could, after formal proceedings, be deemed “unfit” to retain his or her insurance licence.

64

Number of MFDA-disciplined persons who were/are also insurance registered.

Sources: Provincial insurance regulatory databases. Insurance registration had to overlap with, or come after, the dates penalties were effective.

We asked Simon Romano, partner at Stikeman Elliott in Toronto, whether regulators in general tend to penalize similarly. He says it depends on whether it’s a fine or a ban.

Often when someone with multiple registrations commits an offence, “only your principal regulator will fine you, and the others will not fine you in addition,” he says. “But in terms of bans, they’re more protective of future investors. […] If you suspend for a period, I want that to be effective. I don’t want [a person] to move to Manitoba and start fresh. One would expect that suspensions and bans would be more similarly adopted by the regulators.”

National database incomplete

Setting aside the insurance issue, investors could still be misinformed about a securities registrant’s past behaviour even if they’ve searched the regulators’ newly upgraded National Registration Database (NRD).

In November 2015, the Canadian Securities Administrators (CSA) started including disciplinary information from the MFDA and IIROC in the NRD “to help retail investors more easily find and understand registration information,” according to an emailed response from CSA. CSA’s own website says that “verifying registration is the first step to take before investing.”

130

Number of IIROC-disciplined persons, 2013-2015

Sources: 2013-2015 Enforcement Reports, based on hearings concluded each year. People disciplined twice in the period have been accounted for.

If a rep has faced disciplinary action by the MFDA, IIROC and/or one of the provincial securities commissions, it will appear in a separate, conspicuous section of the rep’s NRD profile. That section will include key details on the penalties (dates, fines and the nature of the offence) and link out to documents that provide the full picture of the disciplinary process and outcome.

But there are major holes in the database’s records. As of May 26, 2016, the NRD is missing penalty information for at least 51 people disciplined by IIROC and the MFDA between January 1, 2013 and December 31, 2015—including permanent bans. That’s 18% of all reps who faced discipline during that period.

IIROC and MFDA both told us they transmit data to CSA’s database after taking enforcement actions, with IIROC adding that the information “is available for immediate review.” CSA said “the information is available as at the time the regulator entered the information.”

Regardless of who’s at fault, the stark reality remains: an investor could look up someone on the NRD who’d been permanently banned and conclude that person had no disciplinary history. [tweet this]

25

Number of IIROC-disciplined persons who were/are also insurance registered.

Sources: Provincial insurance regulatory databases. Insurance registration had to overlap with or come after the dates penalties were effective.

Regulators already warned

We’re not the first to sound the alarm.

A 2014 Ontario auditor general report slammed FSCO for inadequate “procedures and information-sharing arrangements” and for failing to “routinely initiate any proactive examination of disciplined life insurance agents when it was aware of them.”

A spokesperson from the auditor general’s office says the office is currently assessing FSCO and will release a follow-up report by the end of 2016. However, if the office is dissatisfied with progress, the spokesperson said that “there are no formal or legal consequences.”

For its part, FSCO told us by email that it “actively monitors disciplinary action taken by other regulators or jurisdictions as part of determining the suitability of new applicants and existing licensees.” It adds, “FSCO welcomed the Auditor General’s observations […and] is undertaking a full review and update of licensing systems [to] support complete data gathering, better internal controls, improved risk assessment and better compliance.”

Our investigation showed, however, that the nine people still authorized to sell for at least six months after their permanent SRO bans were or are licensed by FSCO.

2

Number of people disciplined twice by IIROC, 2013-2015.

Sources: 2013-2015 Enforcement Reports, based on hearings concluded each year.

And when FSCO does discipline licensees in general, that disciplinary history doesn’t always appear within their licensing profiles, which are accessible through a tool called Licensing Link.

“Licensing Link provides the current status of […] any licensed individual or business, and this is the most relevant information that a consumer requires,” responded a spokesperson. “All of our enforcement actions are posted on FSCO’s public website” — but separate from Licensing Link. We found similar deficiencies in other provinces.

When asked why discipline and licensing status were not more obviously associated, FSCO said, “Your comment about linking past disciplinary history with the current FSCO listing for licensees will be taken into consideration.”

Here are the details for Ontario and other provinces.


Cases of concern

After combing through more than 250 cases of wrongdoing across three years, we wanted to highlight two that were particularly egregious: one was disciplined by IIROC; the other by the MFDA. In both cases, the person disciplined is still currently authorized to sell insurance products.

Licensee A
timeline

Misconduct* occurs

February 2013 to April 2014

Renews FSCO licence

September 2014

IIROC registration ends

January 2015

IIROC hearing panel imposes fine and permanent ban

August 2015

Online resume posted; licensee touts CPA and holds self out as “Senior Investment Advisor”

November 2015

Continues to hold valid CPA

May 2016**

Earliest renewal date for FSCO insurance licence

July 2016

Expiry of FSCO insurance licence

September 2016

*Deemed as such by IIROC.
**as of May 18, 2016.

Sources: IIROC settlement agreement;
FSCO database

Licensee B
timeline

Misconduct* occurs

September 2005 to 2008

MFDA investigation begins

2009

MFDA releases decision imposing fine and permanent ban effective June 2013

June 2014

Renews FSCO insurance licence

September 2015

Earliest renewal date for FSCO insurance licence

July 2017

Expiry of FSCO insurance licence

September 2017

*Deemed as such by MFDA.

Sources: MFDA enforcement database;
FSCO database


What can be done about this? Read our recommendations.

Originally published in Advisor's Edge Report

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