A fresh inrush of actions against advisors and firms by various self-regulators makes one thing perfectly clear: Canada’s system for resolving disputes between advisors and clients is badly broken.
So broken, in fact, that it should be replaced.
Industry observers have complained about naming and shaming efforts by OBSI, a function the ombudsman notes is outlined in its enacting legislation but which few expected it to actually use. While OBSI says the majority of complaints are successfully resolved, its press efforts tend to skew perception towards instances in which firms ordered to pay restitution refuse to cooperate.
While regulatory investigations by CSA, IIROC, MFDA and others, to reduce risk at securities firms do indirectly help investors, efforts aimed directly at resolving client disputes fall short.
In the current Canadian system, advisors who engage in wrongdoing can find ways to remain in the business, and investors who are wronged frequently have to take matters to court if they want to be made whole. Such legal actions clog dockets and rack up fees that bite into both the defending firms and any sums restituted to clients. OBSI’s services. of course, have the advantage of being free to users. IIROC, and the IDA before it, have offered arbitration services to resolve dispute for many years, though participants must bear some costs.
But there’s another way.
The U.S., and many other countries, long ago adopted arbitration programs to resolve disputes between advisors and clients who lose money.
There are many advantages. First, to become a client of the firm, an investor must sign a document agreeing to arbitrate any complaints about how his or her money is handled. By extension, the investor agrees not to litigate. This frees up courts to deal with other matters, and prevents securities loss actions from getting mired in the appellate process.
Second, while arbitrators serving on panels come from all walks of life, a certain percentage are chosen from a list of retired or former industry professionals who actually understand how securities transactions work.
This helps in two ways: it makes it easier to identify frivolous actions, and makes it harder for an advisor who has done wrong to claim ignorance (imagine saying you thought a 70-year-old widow was okay for a leveraged product with a former Morgan Stanley compliance officer sitting 10 feet away).
Keeping the adjudication system within the industry also means there’s a robust pool of expert witnesses that can be called upon to provide perspective on investment structure and potential suitability for the complaining clients.
Third, it’s faster. The arbitrators function as both a jury and a recommender of fine structures. And those recommendations go directly to the self-regulatory organizations which mete out punishments. Arbitrations typically last two or three days, not the weeks or months typical of court proceedings. Clients know if they’ll get money back quickly, and how much. And the panels have authority to recommend truly bad advisors be barred from the business.
Last, the system has teeth. The panels are operated directly by self-regulators (and backed by national regulators) that control the registration status of the advisors being judged, and the firms that employ them. So it’s easier to run in a broker that fails to supervise registered reps; and advisors who refuse to pay fines can kiss their careers goodbye.
While that may sound harsh, such actions generally are reserved for serious offenders.
And, it sure beats naming and shaming.