Canada has been “tinkering around the edges” of fiduciary standards for financial advisers while the rest of the English-speaking world has leapt headlong into the debate in the wake of the worldwide financial crisis, says a prominent business law professor.
Ed Waitzer, the former chairman of Stikeman Elliott LLP, made the comments at a conference co-hosted by the Hennick Centre for Business and Law, which he directs, and the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada). He said he hoped the conference would help fill the silence on the regulatory front in Canada.
“We thought it would be helpful to bring elements of that debate, which is somewhat absent in Canada, to the policy-making exercise here,” he said.
Waitzer said huge investor losses in the last two years, combined with high-profile scandals, such as the Bernard Madoff and Earl Jones affairs, have severely “impaired the trust and confidence necessary to make any market work reasonably efficiently,” spurring introspection in the financial industry around the world.
American lawmakers are attempting to set a uniform fiduciary duty across all financial advisers. Regulators in the United Kingdom have attempted to tackle the conflict of interest that arises when brokers are incentivized to sell certain financial products, by eliminating commissions.
Lawyers at the event clashed over whether Canada needs to impose a statutory fiduciary standard for financial advisers.
Laura Paglia, a partner at Torys LLP specializing in securities litigation, said the core principles being debated in the U.S., which revolve around disclosure of conflicts of interest and putting the client’s interest first, were already generally accepted in Canada under the duty of care owed by all financial advisers to their clients.
“We have extensive case law enforcing that duty of care and if you breach that standard of care, an investor goes to court and can win in simple negligence. And they get restituted without ever making out a breach of fiduciary duty,” she said.
“We don’t need [the fiduciary standard] in Canadian law, because we never had the debate. It’s always been there through the case law, through regulation, and through industry standards.”
While investors do sue for a breach of fiduciary duty, Paglia said a tiny proportion of cases go to trial and even fewer make the claim stick, because the term implies a much higher standard of care than in other jurisdictions.
“It’s not bad, because it doesn’t mean they weren’t restituted. It means they were otherwise restituted without needing to go to the fiduciary standard,” she said.
But Allan Hutchinson, a professor at Osgoode Hall Law School, said Paglia’s attitude showed “complacency” and called for a general shift towards a fiduciary relationship, rather than case-by-case common law rulings.
“The main thing is the onus would be on the financial adviser to explain what did and didn’t happen, as opposed to a duty of care,” he said, explaining that the current situation disadvantaged investors without the knowledge to challenge their adviser.
Janis Sarra, who teaches securities law at the University of British Columbia, agreed that the common law, because of its incremental nature, causes problems that would be solved be a statutory definition. With the vast majority of cases settling outside court, benchmarks are difficult to set around acceptable and unacceptable behaviour.
“A statutory fiduciary obligation would clearly set out what that standard would be. It would give more certainty to the profession and it would give more certainty to retail investors. It’s in everyone’s interests to know what expectations are of conduct,” she said.
She also said the changing face of the investment market would require action in the coming years. The stakes are much higher for today’s investors compared to their counterparts 20 years ago, who had much more security, through defined-benefit pension plans.
“That trend is only going to continue, so the standard of professionalism and standard of care that need to be given are much more significant,” she said.
From an enforcement point of view, Kelley McKinnon said a new rule would have no effect. The former chief litigation counsel for the Ontario Securities Commission is now a partner at Gowling Lafleur Henderson LLP.
“If the question is, will we catch more people breaking the law, will we catch more people who have harmed investors and get more money back for those investors if we have a fiduciary standard, in my experience I would say no,” she said.
Joseph Groia, a securities litigator, fears a fiduciary standard would miss the worst offenders in adviser-client relationships.
“All the major securities cases that we’re worried about are cases that exist outside a regulated financial adviser relationship,” he said, pointing to Jones in Montreal and Weizhen Tang from Toronto, who called himself the Chinese Warren Buffett.
He suggested mandatory investor education in high schools would help make consumers less vulnerable to unscrupulous dealers.
“If somebody guarantees them 25-per-cent return a year with no risk, somebody with a minimum investor knowledge ought to be able to understand that maybe there’s something wrong with that proposal,” Groia said.