Canada lacks proper indemnity fund for investors

Canada hasn’t yet formed an industry-wide indemnity system to protect harmed investors, and that’s a major problem.

So said expert panels yesterday at an investor recovery conference hosted by Osgoode Hall Law School and the Canadian Foundation for Advancement of Investor Rights (FAIR). The event included regulatory specialists from across the country, as well as experts from the U.S., U.K. and Australia.

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To date, Quebec covers its investors through a Financial Services Compensation Fund, and IIROC offers protection, in the case of firms going insolvent, through the Canadian Investor Protection Fund (that fund is paid for by IIROC member firms based on their risk models and overall share of assets under management).

Meanwhile, the MFDA operates a separate not-for-profit protection fund, which is called Investor Protection Corporation.

But we need an indemnity fund and system that protects more investors, says Robert Pouliot, director for FAIR. The challenge, he adds, is to determine which group of wronged investors should be focused on, given that “fraud isn’t the main source of investor harm. Negligence of financial professionals and firms is far more prevalent.”

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For more on this issue, and on how indemnity funds work around the world, see our collection of live tweets below.

Also, follow @advisorca for more news and events coverage.

Live tweets from Investor Recovery Conference

Robert Pouliot of FAIR says we need an indemnity fund in Canada, but need to determine which wronged investors that fund would benefit @FAIRCanada

Louise Gauthier of the AMF says Quebec’s indemnity fund is called the Financial Services Compensation Fund. The government and the AMF run it. Since its creation, the Quebec fund has awarded about $52M to investors, the bulk of that from one 2005 fraud case @FAIRCanada

In the U.K., the country’s indemnity fund seeks to protect consumers from more than “Madoff-style” fraud, because that’s rare, says Mark Neale, CEO of U.K.’s Financial Services Compensation Scheme @FAIRCanada

Often, adds Neale, U.K. investors are paid back for the mis-selling of products. Many of the costs of covering investors are covered by the industry and by advisors. The fund’s biggest case involved a payout of CA$600M, so this leads to questions of the sustainability of the indemnity fund model, says Neale @FAIRCanada

In fact, the U.K. fund is supported by levies on firms, says Neale. Currently, the risk models of firms aren’t taken into account, just firms’ market shares based on AUM

But, it can be difficult to quantify how much to pay investors back, especially if their claims involve illiquid assets that they still own, says Neale @FAIRCanada

Finally, Neale says the U.K. has two compensation bodies: one that steps in when insolvency is involved, and another that deals with claims against solvent firms and funds #ppse15

If Canada creates an indemnity fund, we need to find balance between which types of investors are reimbursed, says Shayne Kukulowicz, lawyer at Cassels, Brock and Blackwell. “It would be expensive to have the QC system across all Canada, so who do you really want to protect?” he asks, adding the most egregious claims are key #ppse15

Gauthier says an AMF study from 20111 on indemnity funds showed there is no consensus on how such funds should work #ppse15 @FAIRCanada

The final panel of the day is on recovery for investors through Ombudservices #ppse15 @FAIRCanada. The panel includes experts such as Sarah Bradley from OBSI, Mercer Bullard, professor from the University of Mississippi, and Shane Tregillis, Chief Ombudsman of the Financial Ombudsman Service (Australia)

OBSI has no binding authority, reminds Bradley, so mainly about naming and shaming. That has positive and negative effects #ppse15 And, the other problem with no binding authority is firms have range to negotiate with OBSI. So this needs to change #ppse15 @FAIRCanada

When OBSI recognizes systemic risk, it must report to regulators. And it doesn’t deal with segregated funds because the insurance ombudsman does that. However, that’s tricky because many products are hybrid products #ppse15 (For more on OBSI, read: OBSI defies common sense)

Tregillis is talking about FOS in Australia. It recieves 30,000 complaints per year and deals with 20,000. Australia OBSI does have binding authority, but only 10% of cases impacted by this. Most cases are settled, and there are other tools #ppse15

Australia’s OBSI (the FOS) doesn’t publish the names of those charged, but does have problem with small firms not paying fines, says Tregillis #ppse15