An investigation conducted by Scotiabank found that some of its employees had inappropriately processed clients’ requests to switch their mutual fund holdings.Deborah Baic/The Globe and Mail
Bank of Nova Scotia’s BNS-T securities arm will pay $1-million in fines over allegations that dozens of employees engaged in improper sales practices, revealing the bank terminated more than 30 employees for “egregious misconduct.”
The settlement deal with Canada’s mutual fund industry regulator, published on Wednesday, also requires Scotia Securities Inc. to return $10.8-million to clients. In Scotia’s agreement with the Mutual Fund Dealers Association, the investment dealer admits to not having adequate policies and procedures to prevent several incidents between 2017 and 2022 when employees padded their sales targets.
Scotiabank’s investigation found that some employees inappropriately processed clients’ requests to switch their mutual fund holdings. Instead of processing the trades as switches, which do not count toward employee sales targets, they recorded them as redemptions and purchases to receive credits toward their sales goals.
In 2019, the bank became aware of one employee that had been awarded with sales credits by avoiding switches. Through an investigation, Scotia found that 46 employees were involved in processing more than 750 transactions as redemptions and purchases instead of switches from November, 2017, to January, 2020. Two staff members were fired.
The bank also admitted that it failed to prevent employees from setting up preauthorized contribution plans – which count toward sales goals – without approval from clients. The plans were then cancelled before a contribution was withdrawn from the account.
In August, 2018, two clients submitted complaints to the bank that the preauthorized contribution plans had been set up without their knowledge, prompting Scotiabank to launch an investigation. From November, 2017, to October, 2020, more than 2,400 preauthorized contribution plans were set up and later cancelled. Clients had not approved the majority of those transactions and 19 of the people involved did so specifically to boost their sales targets. Of the 56 employees who were involved and disciplined, 14 were terminated.
It also found that more than 70 employees, including eight branch managers, were involved in manually adjusting sales results in the tracking system. The staff conducted more than 8,700 changes to their sales targets during a three-year period, but Scotiabank said that it was unable to determine how many of those were done for illegitimate reasons. Eighteen employees were terminated over the practice.
Typically, sales staff are awarded performance credits, such as pay raises and bonuses, for exceeding their sales targets. The investigation found that, in many of these cases, employees received benefits from the improper sales activities.
In all, 34 employees were terminated.
The bank also admitted to failing to send client redemption cheques in a timely manner during the months of the COVID-19 pandemic, as well as purchasing certain funds in non-registered accounts that were considered unsuitable for those types of investments, and delaying the processing of transaction requests that customers sent in by fax.
Scotiabank is “developing substantial widespread process and governance enhancements to prevent contraventions similar to those addressed in the Settlement Agreement from occurring in the future and to ensure sufficient training,” according to the settlement.
Scotiabank declined a request for comment and instead pointed to the settlement.