Investors more vulnerable amid COVID environment

Investor Protection Clinic's latest annual report outlines concerning trends for vulnerable Canadians

Investors more vulnerable amid COVID environment

Over the course of the pandemic, fraudsters and other malicious actors have had the opportunity to exploit the desperation of vulnerable investors for their own financial gain. And it’s not just online investment scams, as the latest annual report from the Investor Protection Clinic (IPC) of the Osgoode Hall Law School at York University indicates.

In its 2021 Annual Report, the IPC said that the demographic makeup of clients it was worked with over the 2020-2021 period were consistent with its overall client profile during its four years of operation.

For the most recent period, the clinic worked with a near-equal split of male (50.9%) and female (49.1%) clients. Half of the clients (50.9%) were between 50 and 70 years old; just over a third (35.1%) were younger than 50; and the rest (14%) were older than 70.

In terms of investment knowledge, almost four fifths (78.9%) were said to have low investment knowledge, or none at all. A 17.5% minority reportedly had medium investment knowledge, and 3.5% had high investment knowledge.

“Despite the pandemic, the IPC is operating at full capacity and remains open,” the report said. “The Clinic’s caseworkers are working remotely and diligently to advance our clients’ interests.”

While judicial proceedings have continued through online and virtual channels, the report said the pandemic has severely hampered the capacity of courts and other adjudicative agencies and organizations to address investor complaints and actions, impacting some of the IPC’s clients. But even as the proceedings go slowly, the clinic said many investors who don’t bring forth their claims urgently can be barred from recourse or compensation because of the expiry of a limitation period.

“The limitation period for civil claims in court is generally two years after the date on which the claim was, or ought to have been, discovered,” the report said. “The limitation period for IIROC arbitrations and OBSI mediations is six (6) years.”

The low interest-rate environment has been beneficial for investors looking to take advantage of low borrowing rates, the IPC said it has observed a rise in unsuitable leveraged investments, with some advisors recommending to clients that they fund their investments with loans to capitalize on the low borrowing costs – even if it leaves the investor naked to risks from rising rates or lower-than-expected investment returns.

“Some of the Clinic’s clients have even had their advisor complete their loan application with material misstatements in income and assets in order to get the loan approved,” the report said, noting most investors who approached the clinic were already facing legal action from lending institutions seeking to collect the principal and interest on loans they had already defaulted on.

The clinic also reported observing increases in cases of affinity fraud, where fraudsters target groups or individuals that they can garner trust from on the basis of affiliation. An overwhelming number of such schemes, the report said, target various immigrant groups with whom the fraudster shares an ethnic or cultural background, language, or religion.

“Investors should be made aware of the importance of verifying the registration of the firms and/or the individuals that they are investing with to mitigate the possibility of fraud,” the report said, while acknowledging the difficulty of providing protective information so that it can reach vulnerable communities. “It may be difficult for those with a language barrier to differentiate between fraudulent investments and legitimate prospectus-exempt investments; in particular, investors should be wary of investments under the friends and family exemption.”