The calm before the enforcement storm?

Complaints have surged over the past couple of years, but disciplinary action against firms and individual reps declined in fiscal 2021, according to the Investment Industry Regulatory Organization of Canada’s (IIROC) latest enforcement report.

The report, which covers the 2021 fiscal year (ended March 31), showed a decline in certain measures of disciplinary activity.

For instance, while the total number of investigations completed during the year was essentially flat at 113, the proportion of investigations that resulted in referrals to enforcement dropped to just 25%, down from 35% the previous year. By comparison, over the previous four years, an average of 40.5% of investigations were referred for prosecution.

Sanctions against firms and individuals also declined in fiscal 2021.

IIROC handed out 21 decisions against individuals during the year, down from 27 the previous year, and well below the average of 38 for the previous four years.

The self-regulatory organization (SRO) imposed a total of $976,851 in monetary sanctions (including fines, costs and disgorgement), down from the $1.1 million levied in 2020 and well below the average of $2.9 million imposed over the previous four years.

The collection rate on those individual sanctions also dropped to 31% in 2021 from 77% the previous year — although the 2020 collection rate represented a big jump from the 39% collection rate recorded in 2019.

Typically, regulators have struggled to collect from individuals who can evade sanctions by leaving the industry. However, IIROC and the provincial authorities’ ability to collect sanctions has been enhanced in recent years.

Collecting fines from firms that want to remain in the industry is usually much easier — and, on that count, IIROC reported that it collected 100% of the sanctions imposed on firms in 2021.

In total, the SRO imposed $1.2 million in fines and costs against industry firms during the year (there was no disgorgement ordered in fiscal 2021).

While that amount was down sharply from the $5.9 million ordered the previous year, fiscal 2020 was an outlier. In the three years prior, sanctions against firms averaged just over $782,000.

Alongside the monetary penalties, IIROC suspended 13 individuals in 2021 (unchanged from the previous year), permanently banned two others and imposed registration conditions on 12 people.

The top issue for individual reps that were sanctioned involved suitability/due diligence, while firms were most often disciplined for supervisory lapses.

Notwithstanding the apparent dip in disciplinary activity in fiscal 2021, a leading indicator of possible future enforcement action — industry complaints — is on the rise.

IIROC reported that complaints rose by about 9% year over year in fiscal 2021 to 1,396. The previous year, complaints rose even faster, increasing by 15.7% from fiscal 2019.

The increase in complaints comes amid a recent surge in retail investor activity, particularly self-directed investors entering the market for the first time.

Anecdotally, this has resulted in rising complaints about service outages and has prompted discussion about when service problems rise to the level of disciplinary issues. Whether this drives an increase in enforcement activity in the years ahead remains to be seen.

In the meantime, one of the more lasting effects of the pandemic may prove to be the shift to carrying out investigations and hearings online, which IIROC expects will continue even after the need to work remotely subsides.

“We plan to integrate remote interviews and hearings into our investigations and proceedings even after the pandemic is over and travel restrictions are eased,” Charles Corlett, IIROC’s vice-president, enforcement, said in a release.