Canada’s investor protection framework has long had a reputation for being weak and not particularly well-enforced. Investors are still often paying excessively high fees and hidden charges on investment funds. Advisers are often under no legal obligation to act in their clients’ best interest. And even when an investor has been harmed by their investment dealer, there is no binding dispute resolution system to ensure their losses will be recovered. This is the latest explainer in an occasional series examining why the pace of progress in advancing investor rights in Canada has been so painfully slow, and what changes are needed to fill in the gaps. Do you have your own story about a failure of investor protection? E-mail us at shortchanged@globeandmail.com.
In 2017, the Ombudsman for Banking Services and Investments decided that a 37-year-old widow was owed compensation for financial losses she had suffered at the hands of her financial adviser.
Her investments, which were funded partly by a life insurance payout from the death of her husband, had taken a big hit in the years prior. OBSI, a not-for-profit organization that works to resolve disputes between consumers and their banks and investment firms, investigated and found that her adviser had taken inappropriate risks with her money. It also found that over-trading in her accounts had resulted in excessive commissions.
The financial watchdog said the investment firm she dealt with should have to repay her for roughly $225,000 in losses. But OBSI’s recommendations are not binding, so the adviser’s firm offered its client just $40,000. She “reluctantly accepted” the lower offer, believing she had “no realistic alternative” way of recouping her savings, OBSI said in a report on the matter.
As part of the settlement process, she had to pledge confidentiality. Because of this, the name of the firm and the identity of the adviser remained secret.
Nobody in Canada tracks how often these confidentiality measures, commonly known as NDAs, or non-disclosure agreements, are used. But lawyers who represent investors agree that they are widespread in financial dispute settlements. Complainants who choose to settle instead of going to court must often sign these agreements to receive compensation for their losses.
As a result, it is difficult for outside observers to know when financial services companies have faced allegations of misconduct, and firms can avoid negative publicity when clients settle for amounts far lower than OBSI has recommended. Now, against the backdrop of a wider legal debate about NDAs, advocacy groups and lawyers are calling for new rules against the muzzling of complainants in these types of cases.
“These agreements are designed to help shield financial institutions from access to justice by other victims of the same misconduct,” said Paul Bates, a civil litigation lawyer and former member of the Ontario Securities Commission’s Investor Advisory Panel. Often, he said, they are signed “without independent legal advice, or out of necessity, not desire or willingness.”
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NDAs in other areas of law are already under legal scrutiny. In February, the Canadian Bar Association voted 94 per cent in favour of a resolution to rein in the use of these agreements for silencing victims of abuse and harassment at workplaces, schools and other organizations. The resolution also called on the association to lobby the government about the misuse of NDAs. Prince Edward Island has already passed a bill to limit the use of NDAs in cases of discrimination and harassment, and four other provinces – Ontario, Manitoba, British Columbia and Nova Scotia – are proposing similar bills. A federal version is being proposed in the Senate.
But financial industry representatives deny that there are issues with the sector’s use of NDAs. They say the agreements benefit consumers and the court system by encouraging swift settlements.
“Maintaining confidentiality through a non-disclosure term in the settlement agreement is a standard part of the process in many industries,” said Mathieu Labrèche, a spokesperson for the Canadian Bankers Association.
Mr. Labrèche added that banks are highly regulated, and are required to report complaints to their market conduct regulator, the Financial Consumer Agency of Canada. For its part, the FCAC said in a statement that the use of NDAs was not identified as an issue during its most recent review of complaint handling for the retail banking services it oversees. Those services do not include investment services.
The Canadian Securities Administrators, a forum made up of provincial securities regulators, said in a statement that NDAs benefit clients by providing finality and faster resolution. But it said it is aware of instances of “lowballing,” when firms offer inappropriately small amounts of restitution to clients, and is working on a proposal to prevent this by giving OBSI the power to make binding orders.
Harold Geller, a lawyer who has been representing investors in complaints against financial advisers for more than two decades, said settlements can result from several types of negligence or wrongdoing. For instance, an adviser could make discretionary trades in a non-discretionary account without the permission of the client, charge fees that were not agreed to or use proprietary products when there are more suitable alternatives.
Mr. Geller said he has worked on between 300 and 400 settlement cases, some of which involved lawsuits with hundreds of complainants. The amounts of money at issue ranged from $10,000 to over $10-million. He said he has seen all of the Big Five banks – as well as investment firms, mutual fund dealers and insurers – require clients to sign NDAs in exchange for compensation.
The Globe and Mail contacted Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Bank of Nova Scotia BNS-T, Canadian Imperial Bank of Commerce CM-T, and Bank of Montreal BMO-T for comment. Each either declined or referred the request to the Canadian Bankers Association.
“They have the power, and they will not discuss negotiating,” Mr. Geller said. “I’d like NDAs to be presumptively banned, with limited exceptions enumerated.”
Ken Kivenko, a vocal investor advocate, has long called on regulators to ban NDAs in financial disputes entirely. He said complainants without legal representation may be severely disadvantaged in the lead-up to an NDA being signed, because they could have little or no opportunity to negotiate the terms of the proposed settlements.
As a result, he said, they are likely to take the settlements – and sign the required NDAs – even if they think they may be able to get more money through litigation.
“Usually, they’re older and financially unsophisticated. They’re lower income, and they need the money,” Mr. Kivenko said. “They’ll say, ‘To hell with it. It’s not worth the aggravation.’ ”
When an investor has a legitimate grievance, the legal path to recouping losses is a long one. Complaints against an adviser, for example, are typically first handled by the adviser’s employer. Many of the big banks and other firms have appeals offices for dealing with unresolved disputes.
Victims unhappy with a bank or financial firm’s offer can then appeal to OBSI, which can choose to investigate and recommend compensation.
But even before reaching the ombudsman’s office, the entire process can take several years, and disputes that make it all the way to OBSI are also subject to confidentiality restrictions.
All files and correspondence relating to an OBSI investigation and the complaint-handling process are protected from disclosure. There is good reason for that, according to Poonam Puri, a York University professor who conducted an independent review of OBSI that concluded last year. Confidentiality “allows firms and consumers to freely share information without fear that it will be used against them later,” she wrote in her review.
Complainants’ only alternative to seeking settlements is litigation, which can be lengthy, expensive and stressful, said Anthony Quinn, chief community officer for the Canadian Association of Retired Persons. The fact that so many opt for confidential settlements sweeps the issue under the rug, he said, “keeping the Canadian public unaware of the magnitude of this hidden problem.”
Investor advocates say NDAs make gathering information for lawsuits much more difficult. Mr. Bates, the former Ontario Securities Commission investor panel member, said these confidentiality agreements are “designed to block class actions,” making it harder for victims of financial malpractice to group together and share the costs of litigation.
OBSI spokesperson Mark Wright said in a statement that the organization is rarely involved in the NDA process and therefore does not track how many settlements use them. Even so, in February, OBSI urged the Autorité des Marchés Financiers – the provincial financial regulator for Quebec – to add guidance on the use of NDAs to proposed new regulations on dispute resolution. NDAs should be reasonable, not overly broad, and limited to the specific subject matter of the complaint being settled, Mr. Wright said.
While this is OBSI’s typical recommendation, he added, to date no province includes such a directive in its regulations.
No independent study has assessed how often the negligence of financial advisers results in settlements, or how often complainants are required to sign NDAs to receive compensation. As a result of this lack of data, some investor advocates say there is not yet enough information about NDA abuse in securities law for them to know whether regulatory change is needed.
“I’m not defending or opposed to NDAs per se. But we need to be careful to suggest they’re all bad,” said Jean-Paul Bureaud, executive director of the investor advocacy group FAIR Canada. “We don’t know how extensively they are used or whether there is widespread abuse. I realize it’s a bit of a catch-22, because by definition they’re not disclosed.”
Editor’s note: Ken Kivenko was incorrectly identified as a lawyer in an earlier version of this story. An earlier version of this article also incorrectly said investors who opt to complain to OBSI can be left waiting for several years. This version has been corrected.