Report calls out 'harmful' settlements that cause undue financial loss and stress for seniors and other vulnerable investors
Despite years of calls from advocacy groups around Canada, the Ombudsman for Banking Services and Investments (OBSI) still lacks the ability to issue binding decisions in favour of investors with valid complaints. And as a new report argues, that absence of authority enables an unfair environment for investors seeking reparations.
“The lack of a binding OBSI decision mandate shifts the playing field in favour of dealers and promotes lowballing at earlier stages of the complaint,” said investor protection group Kenmar Associates.
In a paper titled Lowball Settlements and Investor Protection, the group cited figures from 2016, the most recent available, finding that complainants received an average of $41,927 less than OBSI ruled they should be given in compensation. It also suggested that victims of financial assault tend to be financially unsophisticated investors of modest means, with elderly individuals, widows, new Canadians, and other vulnerable individuals being disproportionately targeted.
Payments below the amounts ordered by OBSI, the report argued, can directly impact people’s ability to recover lost financial resources that they vitally need, as well as the quality of their life in retirement. Their mental state, sense of well-being, and ability to deal with physical health issues can also be negatively affected.
Less-than-fair settlement offers, the report added, may come even before OBSI gets involved. Many victims get exhausted, financially and emotionally, by the complaints process; when they get a low offer from a firm in earlier stages, they are often discouraged by the lack of certainty that an OBSI order to pay a higher amount would even be followed.
“Dealers are secure in the knowledge that few retail investors will be either willing or able to challenge the offer,” the report said. “In terms of both quantity and value this type of lowballing is far more pervasive and harmful.”
It went on to argue that the complaint process is adversarial, citing comments from substantive response letters from dealers that appear to place the blame on investors. Complainants may be told that they were adequately informed through fund facts, quarterly account statements, and discussions on the nature of certain risky funds during the time they were sold. Some letters may also point to documents showing that the investor has a high-enough degree of risk tolerance, a sufficient degree of investing knowledge, or a willingness to accept dangers associated with leveraging.
“Investment dealers are well aware of the asymmetry faced by investors with respect to knowledge, resources and sophistication and the barrier to fairness faced by investors given the high cost of civil litigation for investors of modest means,” the report contended.
Kenmar Associates also spoke out against the practice of requiring lowballed complainants to sign a non-disclosure agreement before they can receive any compensation, arguing that they are used by to manipulate investors into keeping certain information under wraps when it actually shouldn’t be kept secret.
“It’s important to note that not all non-disclosure agreements are nefarious,” the report said. “Lowballed Complainants may or may not be signing NDAs with informed consent but they are definitely signing them under duress. People need to know their rights when they sign an NDA.”
Kenmar called on the CSA to set standards for NDAs, such as plain-language text, assurance that individuals can share information with their family, and verbiage to clarify what they can and can’t reveal specifically, especially if they wish to approach law enforcement, regulators, or human rights commissions.