Big Six bank subsidiary also to pay millions in remediation to impacted clients
The Mutual Fund Dealers Association of Canada (MFDA) has fined Scotia Securities $1,000,000 for widespread advisor training and control oversights, and service failures that impacted thousands of clients.
According to a settlement agreement dated December 19, an internal investigation by the Big Six bank subsidiary revealed that between November 2017 and January 2020, 46 of its advisors processed 757 transactions as redemptions and purchases rather than switches. That resulted in performance credits for the advisors, and losses for some clients.
In another investigation, the firm found that between November 2017 and October 2020, more than 120 of its approved persons set up and subsequently cancelled over 2,400 pre-authorized contribution plans (PAC) without adequate evidence that they were actually approved by clients to set up and cancel those plans. Those also counted towards the advisors’ performance numbers.
Over the same period, it discovered evidence that 73 of its approved persons manually adjusted their sales results on Scotia Securities’ sales tracking system to inflate their sales performance numbers.
Scotia also admitted to delays in issuing thousands of redemption cheques in or around the fall of 2020. After an investigation, it found that the delays were due to a business process set up in response to the COVID-19 pandemic-driven switch to remote work.
“As a temporary measure, the mailing of cheques was assigned to another operations department that continued to work onsite. This switch resulted in delays, which were not reported to the original department in a timely manner,” the agreement said. “The delivery of cheques by Canada Post during this period may have also contributed to the delay in clients receiving cheques.”
The firm also found that nearly 3,000 clients saw unsuitable purchases of certain index funds offered by Scotia in their non-registered accounts. The distributions of those funds were considered as income rather than capital gains, exposing them to higher tax rates when received outside of a registered account.
“[T]he Respondent admits that it failed to put in place adequate controls to ensure that the Funds were not purchased in non-registered accounts,” the MFDA said.
Scotia Securities also failed to process around 2,000 manual transfer requests in respect to about 1,700 clients between November 2021 and February 2022. An internal investigation revealed that a third party it had engaged to perform a software update on its computer fax servers failed to update one of the fax servers, causing the request to fall through the cracks.
The firm has taken steps to address the issues including disciplinary actions for advisors who engaged in the aforementioned misconduct, and updating its policies and procedures.
It is also paying $10.8 million in remediation to clients affected by the apparent abuses and service failures.