Mr. Chairman, I'm from the Small Investor Protection Association. I'll keep my comments short because I have made a submission to your committee.
In August 2008 the Small Investor Protection Association made a submission entitled “Investor Protection Illusion” to this committee. The asset-backed commercial paper fiasco and the subsequent financial market meltdown are revealing financial fraud and wrongdoing at a scale that is hard to believe. The industry created structured investment vehicles to enhance the industry's take, and executive compensations spiralled ever higher while regulators failed to react.
The regulators claimed to provide preventative investor protection, but failed to prevent financial fiascos or systemic fraud and wrongdoing, the direct cause of small investors losing their savings. The Canadian public is being misled by the financial services industry and the regulators, who would have us believe that the investment industry is well regulated and that investors can place their trust in the industry. Reliance upon the industry to self-regulate and protect investors is an inherent conflict of interest and does not protect investors.
The industry creates innovative structured products to circumvent regulations, which cannot keep up with the fertile minds developing new products. Regulators allow these practices and at times provide exemptive relief from regulations supposedly meant to protect investors.
The Canadian Securities Administrators' 2008 enforcement report states that In 2008 about $200,000 was ordered in Saskatchewan and Manitoba in restitution, about $570,000 was paid out in Quebec and Manitoba in compensation, and about $15,800,000 was ordered in B.C. and Ontario in disgorgement against respondents.
In plain terms, the regulators ordered or paid out a total of about $770,000 to aggrieved investors in 2008, which is slightly more than David Wilson, chair of the OSC, receives in annual salary, but about $15,800,000 was paid to the regulators.
Canadians who lose their savings to investment fraud and wrongdoing need time to realize they have been victimized and then to find their way through the maze of regulators, who do not help. Victims will be condemned to finish their declining years without the fruits of their life's labour. Their lifestyle will be compromised, and in many cases so will their health. Still worse, many lose faith and hope, and contemplate suicide.
We recently received an e-mail, and I'll read the contents. It's quite short: “My parents, ages 81 and 76.... All of the money invested is lost. This was most of my parents' life savings.... My father became depressed from losing all of his money. Coupled with the cancer that he had, this caused him to take his own life.”
Widespread practice of fraud and wrongdoing costs Canadians $20 billion per year. Forged signatures and false documents are not unusual. Selling unsuitable products and use of inappropriate leverage are accepted practices. Creation of structured products to circumvent regulations, lack of disclosure, and use of creative accounting to mislead investors are rampant.
Industry tries to create an illusion that the industry is well regulated. The illusion is supported by regulators levying headline-grabbing fines, but the fines may never be collected. Our submission quotes extensively from the Markarian decision, because it illustrates reality. Judge Jean-Pierre Senecal wrote, “In this case, the defendant's conduct was highly reprehensible”. We've included longer quotes in our submission.
Registered representatives are given titles such as investment adviser, financial consultant, or vice-president. This conveys a message to investors that suggests these salespeople are qualified to act as advisers. However, they may simply be salespeople of mutual or segregated funds who are seeking to generate commissions.
Also, industry creates innovative products with names that tend to deceive investors. A prime example is the principal-protected note, or PPN, for which guarantees apply only at maturity and returns may be cut or suspended.
The Ontario Bar Association says that the justice system is not designed to provide justice, but to resolve disputes. The Laflamme decision shows victims take 10 years to obtain justice, but most seniors cannot survive the ordeal. Laflamme died a few years after gaining a Supreme Court decision.
The recent Longstaff case in British Columbia was dismissed because the judge found that an uneducated labourer who lost his savings did so because his adviser followed an accepted practice of a “leverage plan”.
Other issues impacting Canadians' retirement security include excessive executive compensation, and Nortel illustrates this issue by the current Nortel executives' grab for bonuses while the employees have concerns about their pensions; exemption from regulations and the law, whereby many faulty products had exemptive relief and the ABCP solution exempted perpetrators from the law; lack of whistle-blower legislation to protect all Canadians; lack of special courts and judiciary to deal with white collar crime; underfunded workplace pension plans and the possibility of taxpayers without pension plans paying for a bailout.
I believe the majority of Canadians are just and upright, with a sound sense of morality and ethics. However, regulatory failure has allowed fraud and wrongdoing to become rampant. The investment industry has exploited this situation by providing incentives to create fundamentally flawed products and strategies that are sold to unsuspecting investors.
The investment industry is guilty of fostering an ideology that they are capable of self-regulation. Events have proven they are not. There were alerts raised that the investment system was faulty, yet regulators failed to react. There is lack of oversight, and there is no authority with a sole mandate to protect investors. Investors are left in the hands of the perpetrators of the various schemes developed to devour the savings of Canadians. We can only hope that the financial meltdown has sufficiently raised awareness to create public outrage that will precipitate government action to rein in an investment industry by revising legislation and regulation. It is time for government to act.
Thank you.