How Much Regulatory Protection do Investors Need from the Financial Sector?

So what kind of track record do the third party mediators have and how effective are Industry Self-Regulatory Organizations?

In April 2008 a W-FIVE investigation revealed some shocking cases that suggested the (then) Industry Dealer’s Association  existed for industry public relations purposes more than investor protection.   Most of us would be inclined to believe that we would be protected if we opted to invest with a reputable giant like RBC Dominion Securities, yet that is not necessarily true. It certainly wasn’t for (then) 58-year-old Nova Scotia farmer Donald Kennedy, who had inherited $155, 000 and placed it all in what he believed to be secure investments.  The unfortunate reality is that questionable, even predatory investment professionals can lurk in the most reputable places.  Mr. Kennedy’s original broker at RBCDS was fantastic. Under her stewardship, his investment was at one point worth $217, 000. When she went on maternity leave, Kennedy’s account was taken over by another RBCDS broker named Hugh Bagnell, and things started to go downhill.

Just under two years later, his account had dwindled to $1, 800.  Mr. Kennedy was concerned that his money kept disappearing but “being naive and him being a fairly high-paid professional, what do I hire him for if I don’t take his advice?” he said.  During this time, Mr. Bagnell was churning Donald Kennedy’s account (buying and selling stocks constantly while raking in the commissions and bleeding the account dry).  This spells out one of the conflicts of interest that exists in the investment industry: many (but not all) advisors are paid on commission and make money by selling their clients investment products. This can lead them to make trades that are not in the investor’s interest.  While most brokers do not abuse their clients’ principal the way Hugh Bagnell did, there is obviously a possibility that some retail investors are not earning as much as they could if their brokers were solely acting in the client’s interest.

It turns out that Donald Kennedy was not the first of Mr. Bagnells’ investment fraud victims. With the help of Toronto-based investor advocate Robert Kyle, W-FIVE uncovered a private IDA database that listed brokers who had multiple complaints, investigations, court actions and criminal charges leveled against them. It turned out that Hugh Bagnell was on this list and that he had been accused in no less than 27 incidents, including complaints and civil claims. In an interview with W-FIVE, IDA Senior Vice-President Paul Bourque said that individuals such as Bagnell are identified and dealt with on a “priority basis.”

Can it be understood that Hugh Bagnell was not a priority despite having been named in 27 incidents and complaints?  You decide. Maybe everyone should have access to that “private IDA database”!

After looking into the case, the IDA fined Bagnell $50,000 and imposed a permanent ban on him. It also imposed a fine of $70,000 on Bagnell’s former boss, Halifax RBCDS branch manager Frank Youden, for failing to supervise his employee.  The branch manager paid the fine and remained in his position but Bagnell walked away from the financial services industry, and his fine.

According to Robert Kyle, “The IDA cannot collect fines outside of the confines of a contract.  They can push you out of the industry, but once they do, they’ve lost their ability to collect it from you.”

The nail in the casket?  Paul Bourque openly acknowledged that the IDA did not get investors their money back and that it had only ever ordered restitution once.

What is a poor financial sector consumer/retail investor to do?  CARP has been calling on the Federal Government to create a National Securities Regulator- with an effective investor protection arm – and now will be calling for it within the provincial regulators. This would include:

  • A dedicated agency with specialist knowledge
    • to receive complaints
    • to investigate
    • to support prosecutions
  • A tribunal with authority
    • to order restitution
    • to undo [rescind] transactions
    • to order compliance
  • A compensation fund to pay the restitution
  • New criminal charges
    • presumably with new investigation capacity
  • Access for retail investors
    • to local offices
    • to mediation services
    • to an investor advisory panel

In the absence of such an organization, OBSI is one of the better Industry Regulators.  Let’s hope, for our own sake, that they stay afloat.