From: larry elford XXXX Sent: January-10-14 12:52 AM To: Consumer Code / Code consommateur Cc: larry elford Subject: Public comments on Banking to Director, Financial Institutions Division Financial Sector Policy Branch Department of Finance Canada January 9th, 2014 To: Jane Pearse Director, Financial Institutions Division Financial Sector Policy Branch Department of Finance Canada L'Esplanade Laurier 15th Floor, East Tower 140 O'Connor Street Ottawa, ON K1A 0G5 Facsimile: 613-943-1334 Re: Public comment on banking and investment dealing by banks and financial institutions in Canada! To whom it may concern: I now have slightly 30 years of experience in or around the Canadian investment industry. I feel privileged to have this dialogue about matters which are not typically allowed to be discussed in this industry. I will try and cut straight to the point that I feel most important to the welfare of Canadian investors. The investment industry is perversely incentivized to increase profits even at the expense of doing intentional harm to investors interests. The protective duty owed to the public interest by industry, and by regulatory and self regulatory agents, appears to have been lost, forgotten, or silenced. I have found this to be the case time after time. Despite all attempts to portray the industry as a professional body acting in positions of trust, this submission will attempt to show how far short the industry has come in living up to the promises. 1. Customers are being tricked into a relationship where the product or service they get is not what was promised to them, nor what they are led to expect. It is the foundation for intentional deceit of the public. This commentary hopes to open a dialogue on the abusive nature of our system. Misrepresentation of titles is one of the foundations for the abuse. The following article, published December, 2012 (www.sipa.ca), by Larry Elford, former industry participant, outlines some of the issues related to this industry bait and switch: THE DELIBERATE DECEPTION OF CONSUMERS - by Larry Elford One definition of fraud is "the deliberate deception of consumers". In this column I would like to open a conversation into a dark world of deception within some of the most "trusted" financial institutions in North America. Sadly, during the twenty years I worked inside the investment industry, this conversation was never allowed. In the United States there are more than 11,000 registered investment advisors according to the SEC. These are generally people who are licensed, trained and paid to act in the capacity of a professional advisor. In this capacity they are required to act in the best interests of the customer and they give this to you in writing. It falls under the Investment Advisor Act of 1940. There are also some 600,000 broker-dealers registered in the United States and they do not have to act in the best interests of clients. They are more likely the brokers and salespersons trying to earn a commission from selling a product such as a stock, bond, or mutual fund etc.. The problem for consumers begins when those 600,000 broker-sales-types identify themselves to customers by the title "advisor" even though they don't have the proper license or registration under the law. In my experience, this sleight of hand is done to allow salespersons to raise the level of trust in customers, while lowering their level of caution or suspicion. The comments about title misrepresentation by Quebec Superior Court Judge in Markarian V CIBC is along those lines as well. See "Misleading Titles" beginning at paragraph 262 here http://investorvoice.ca/Cases/Investor/Markarian/ Markarian_v_CIBCWorldMarketsInc.htm If you take this information to independent legal counsel you may also get comment on "phony titles and negligent misrepresentation". Here in Canada there are approximately 150 firms who are members at www.portfoliomanagement.org. These professional investment managers are legally registered as "adviser's" and they provide a written duty to place the interests of the customer first. Then there are the 150,000 registrants, who were legally licensed as "salespersons", until September of 2009, when the word "salesperson" was deleted from the Securities acts of 13 provinces and territories, and replaced with the words "dealing representative". Nearly 100% of these sale-types usually refer to themselves as "advisor's" in an effort to increase the "trust" they hope to earn with customers. Each one of those people may also be trying to represent that they are "advisors" and using the word advisor to imply that they will give advice that is in the best interest of the customer. This often forms a part of the deliberate deception that was spoken of at the outset of this article. An interesting side benefit of dealing with a registered adviser is that usually the investment management fees start out in the neighborhood of one to 1 1/4% and there are no sales commission people who may be motivated to increase those fees in ways that can harm the customer. So with a licensed and registered advisor, a customer gets a true professional with the fiduciary duty and an almost wholesale level of investment pricing if you are fortunate enough to deal with them. With a salesperson or broker, representing him or herself as an "advisor", there is less qualification, no advisor license, no duty to place the interests of the client first, and fees will usually begin at about 2% and go as high as more than 5% on some products sold. In defense of the sales side of the industry, some do have professional membership which requires them to pledge allegiance to ethics and fair treatment of clients, however I have yet to see enforcement of those pledges within the industry. In two most recent cases of financial misconduct I have found investments with multiple layers of fees, piled one on top of another, on top of another. Fees in excess of 5% annually are the kind of things that turns a broker-salesperson, into a "vice president" or a "million dollar producer". Unfortunately none of that serves the customer. I spoke about one specific example (of fee-layering abuse) at the launch of the THIEVES OF BAY STREET book and it's on my YouTube channel here http://youtu.be/diEjitz-4So along with a dozen video presentations on this and related topics. So customers who end up dealing with a salesperson-broker in Canada or the United States, most often get a person who is (a) pretending that they are an investment advisor , who (b) is not a licensed and registered professional in the category claimed on their business cards, and (c) does not owe customers a duty of care to place customers interests ahead of the seller. I believe that salesman-brokers who call who call themselves "advisers" are one of the greatest systemic bait and switch operations in the world. I encourage victims of this misconduct to seek legal opinion from far outside of the financial industry in order to gain objective access to the law. If you ask a securities lawyer or regulator, you are very likely to get an answer as independent as the advice you get from a non-licensed "advisor". (see comments regarding this in the SEC petition in following paragraph) During my research for this story I ran across this well informed agency in the United States, and a written petition they made to the SEC. It is among the most candid and enlightening articles I have seen, to honestly discuss a matter which is cheating and shortchanging North Americans of billions of dollars, and putting those billions into the pockets of industry members who are acting with misconduct. It is found here at the SEC: http://ftp.sec.gov/ rules/petitions/2012/petn4-648.pdf Two simple solutions. First Proposed Solution: 1. If persons selling investments refer to themselves as "salespersons" then there is no fiduciary responsibility. 2. If persons selling investments refer to themselves as "advisor" or any similar term, they must accept a fiduciary responsibility for those they claim to advise. This is a matter of simple common sense and perhaps common law. This simplicity meets the standard of fair, honest and good faith dealing which is promised by the industry. It also meets the "true, plain and clear" standards often referred to. Terms like 'registered representative' are industry insider "jargon" and should not be used to address the public. Jargon is currently allowed to confuse the public, and assist those who would mislead and misdirect them for commission or fee purposes. Any industry claiming to deal in trust and honesty, must demonstrate the maturity to move beyond such sleights of hand. Simplicity like this is either in place or in discussion in other developed countries. Canada needs to professionally "grow up", if they are to reverse the destruction of the reputation of the financial industry. Failure to act in a professional manner, is putting billions into the hands of current market participants, but like the CEO of Lehman in the US, it is not mature to destroy the reputation (or company, or industry) simply to earn a personal salary or bonus. Many of today's Canadian market participants appear willing to take the short term view, rather than the longer term approach, and this must be prevented even if it means a new regulatory system must be put into place. Codes, rules, promises, laws, etc., often violated by "trusted" investment professionals. Some examples of the resulting "tricks of the trade" which are then used to harm Canadian's financial well being. From the high-moral-ground of self regulation, along with some high-six-figure salaries paid to provincial government regulators by the industry, anything, literally anything appears possible. Up to and including gaining exemptive relief to our very laws, often at tremendous harm (and semi-secrecy) to the investing public. ($35 billion was the cost (to Canada) of just the recent sub prime ABCP collapse) When combined with the ability to self regulate, an industry of highly profit-driven people who misrepresent themselves as licensed and professional "advisors", the customer is bound to be hurt. In this industry the customer is nearly each and every Canadian with an objective of saving, investing, or living off their investments in retirement. We are thus allowing the abuse of elderly Canadians, for the benefit of the investment industry. The cost to the country is not being tracked officially, but well into hundreds of billions over time. The profits to the industry are obvious. Some of those profits to the industry, which come at harm to the customer include the following types of public harms: 1. Double dipping, a form of extra billing (adding "advisory" fees on top of commissions already paid). 2. Fees layered on top of other fees. See presentation at http://youtu.be/diEjitz-4So to view nine or ten ways todays "advisor" can cut their customer's retirement by half or more in an attempt to increase their own revenues. 3. Selling the highest-compensating-choice of an investment product about 80% of the time (deferred sales charge funds for one example) 4. Selling the highest profit margin product (over 90% of mutual funds sold in 2007 were WRAP funds) (source Investment Funds Institute of Canada) 5. Wrap funds include "funds made up of other funds" (and fees on top of other fees) as well as proprietary funds (house-brand funds) which increase profit margins to the seller by up to 26 times. (according to the OSC Fair Dealing Model Appendix F, page 10, titled "Compensation Bias's) 6. Exemptions to the law (including exemptions to firms like Assante and Berkshire so that the house branded funds mentioned above could be easily foisted upon clients of these firms) 7. Exemptions to the law to allow banks to "unload" poor selling investment underwritings into the mutual fund portfolios of their trusting and unsuspecting customers. 8. Exempt market products. (approximately $2 billion of which are currently failing in Alberta alone) Too many other examples to list herein, show how "the harm done to customers is the increased profit for the salesperson on a commission, or the industry". Candid media quotes about violations of the public by so-called-professionals. The quotes following, are from respected experts and refer to industry misrepresentation, deceit, false pretense or outright fraud: 1. ".........financial advisors, wealth managers, senior financial planners, financial analysts, and investment managers are just a short list of titles that salespeople like to adopt, in an effort to steer clear of the "salesperson" stigma........" From "Understanding Misleading Financial Advisor Titles – Your Right to Know" Bryon C. Binkholder 2. "Anything else is fraud, because the seller is delivering a service different from what the consumer thinks he or she is buying. " Edward Waitzer article, Financial Post · Tuesday, Feb. 15, 2011) (Mr. Waitzer is a Bay Street Lawyer and former Securities Commission chair, and this quote ( by another person) appeared in his article. http://www.investoradvocates.ca/viewtopic.php? f=1&t=173&p=3438&hilit=waitzer&sid=315213c6fd740f3160d45ff7965fd5de#p3438 3. "The greatest risk the average investor runs is the risk of being misled into thinking that the broker is acting in the best interest of the client, as opposed to acting in the firm's interest," Professor Laby said. New York Times (Arthur Laby, a professor at Rutgers School of Law-Camden, and a former assistant general counsel at the S.E.C.) http://www.nytimes.com/2012/07/07/your- ... html?_r=1& 4. This misrepresentation allows persons with a "phony title" to financially violate trusting and vulnerable Canadian investors (and similar across the USA)...............here is one comment from Quebec Superior Court Justice The Honorable Jean-Pierre Senécal, J.S.C., Quebec Superior Court , District of Montreal The Honorable Jean-Pierre Senécal, J.S.C. 263 The defendant attributed to Migirdic fake titles, i.e. "vice-president" and "vice-president and director", in addition to letting him use the title "specialist in retirement investments". Those titles were false representations that misled the plaintiffs, hid reality from them, disinformed them, comforted them in their confidence in Migirdic, reduced their distrust, and contributed to Migirdic's fraud. The defendant committed a fault in terms of its obligation to inform and advise, in addition to misleading the plaintiffs. Further and link to full court documents here: http://www.investoradvocates.ca/viewtopic.php? f=1&t=10&p=3454&hilit=markarian#p3454 5. The self regulatory nature of the industry then gets to "handle" each complaint "within" , essentially employing "investigators, judge and jury", from persons employed (or paid) by the industry itself. This then forms a secondary form of abuse, which is the withholding of justice, and access to the courts for victims. They are dealt with in a manner resembling a Kangaroo court where bias is towards protection of the industry. Many victims tell that it is like being traumatized a second time by the system itself. An American advocacy organization submitted a very well written petition to the SEC, describing this problem in better words than my own. It is found here http://ftp.sec.gov/rules/petitions/2012/petn4-648.pdf Conclusion and Summary page In conclusion: Your investment "advisor" can give you advice which harms you. Your investment "advisor" does not have to have an advisor license. Your "advisor's" conflicts and incentives mean that harming your interests delivers improved profit to the industry. Fraud, misrepresentation, false pretenses may be used to harm you. The law may not be applied to help you if you are harmed in these or other improper ways. The law may even be "exempted" so your investment firm can more easily profit, despite harm to you. Self regulation allows persons paid by the investment industry to act as if they are paid to protect the public, which does not often appear to be the true. Canadians lose billions of dollars of rightful investment earnings, while the strongest financial institutions in the world gain billions. To repeat for clarity, I am not concerned with charging a "fair, honest and good faith" price for investment services. That is not the question under discussion. The question under discussion is whether Canadians should be harmed by billions of dollars, using deceit, false pretenses, misrepresentation, from persons posing as financial professionals?. Should the investment industry be allowed to get away with such behavior, and does the regulatory system in Canada that appears to be willfully blind to these and other abuses, need to be replaced or enhanced, with one solely dedicated to the protection of investors? The best thinking in Canada has given us a system where financial abuse of Canadians is not only tolerated when done by our giant financial institutions, but it appears to be "built in" to the system. Doing financial harm to investment customers is now legally allowed, having removed the "customer interests must come first" provisions of a few years ago, and replaced them with a much lower standard of "suitability", without informing the public about the change. "Suitable" is measured by the provider of the investment and is not only subject to his or her definition, in the case of "intangible" things such as investments, it can become nearly impossible to nail down accurately. They can thus sell almost anything and call it "suitable". The abusive of customers despite promises of professionalism, client first promises, etc, allows a bullying treatment of elderly victims, first financially abusive, followed by corporate bullying for those customers (or employees) who refuse to be silent to financial abuse, and finally, many years of legal bullying by the financial industry for those with the strength to demand "fairness, honesty and good faith" from the worlds strongest financial institutions. Legal concerns Further to violations of the public. Some definitions which may be applicable to protect Canadians. ---Misleading Advertising Provisions of the Competition Act of Canada --The false or misleading representations and deceptive marketing practices provisions of the Competition Act contain a general prohibition against materially false or misleading representations. --Bait and switch selling.....the marketing of professional "advisory" investment services, with the implication of a licensed, trained, and properly compensated professional with a duty to give advice that is in the best interest of the customer.....and then the delivery of a commission salesperson with no such license. Against the spirit and the intent of the Competition Act of Canada. Section 74.04 of the Competition Act is a civil provision. Section 74.04 was drafted in contemplation of situations where the person who advertises the product would be the same as the one who supplies it. http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/00522.html#bait ***** Section 380 Criminal Code of Canada --Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, carless whether it be true or false. ***** --Competition Act of Canada Marginal note: Misrepresentations to public PART VII.1 DECEPTIVE MARKETING PRACTICES Reviewable Matters 1 74.01 (1) A person engages in reviewable conduct who, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, 1 (a) makes a representation to the public that is false or misleading in a material respect; 2 http://laws-lois.justice.gc.ca/eng/acts/C-34/page-41.html?term=misrepresentations#s-74.01 ***** --What is a false pretence under the Criminal Code? Under Section 361., (1), a false pretence is a representation of a matter of fact either present or past, made by words or otherwise, that is known by the person who makes it to be false and that is made with a fraudulent intent to induce the person to whom it is made to act on it. Subsection (2) states that exaggerated commendation or depreciation of the quality of anything is not a false pretence unless it is carried to such an extent that it amounts to a fraudulent misrepresentation of fact. For the purposes of subsection (2), it is a question of fact whether commendation or depreciation amounts to a fraudulent misrepresentation of fact. Under the Criminal Code, every one who commits an offence under paragraph (1)(a) (a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding ten years, ****** On quiet industry settlements: Customers who make it through the five to ten years of financial abuse and trauma, to perhaps see a return of some money, are asked to sign confidentiality agreements, which then allow the harms done by financial firms to be kept secret, thus allowing them to continue those harms, for any other Canadian, one at a time. It is the perfect process to launder billions of dollars from the hands of the public, into the hands of the strongest financial institutions in the world and never be held accountable. ****** IIROC Rules and Standards: (Investment Industry Regulatory Organization of Canada) source IRROC 29.7A8 Link to source: http://iiroc.knotia.ca/Knowledge/View/Document.cfm? Ktype=445&linkType=toc&dbID=281205341&tocID=398#para_46 800.15. The purpose of these Rules is to spell out as far as practical what can be done under these Rules without breaking the letter or the spirit of them. It is common knowledge that there are innumerable ways of circumventing the purposes of the Rules, but any such method so adopted can only be considered a direct contravention of the letter and spirit of these Rules and contrary to fair business practice. source IIROC Source Link: http://iiroc.knotia.ca/Knowledge/View/Document.cfm? Ktype=445&linkType=toc&dbID=281205341&tocID=559 ****** From the BCSC Securities Act (link 1) comes this; Persons who must be registered 34 A person must not (a) trade in a security or exchange contract, (b) act as an adviser, (c) act as an investment fund manager, or (8) Misleading Trade Name No Dealer Member or Approved Person shall use any business or trade or style name that is deceptive, misleading or likely to deceive or mislead the public. (d) act as an underwriter, unless the person is registered in accordance with the regulations and in the category prescribed for the purpose of the activity. If we are being honest, the two promises in the CSA (Canadian Securities Administrators) image above, Protecting Investors" and "Maintaining confidence in Canada's markets" are not met. I argue that the exact opposite is what Canada's regulatory regime and investment industry is accomplishing. Time will tell.