Individual Investors Need a Strong Ombudsman

OBSI. It looks like another boring acronym ... until your investment advisor screws up costing you money, refusing to reimburse or compensate you when you complain. Then the OBSI (Ombudsman for Banking Services and Investments) becomes a top of mind way to get redress.

It seems to have been doing too good a job, at least for investors, since the financial industry is now ganging up to undercut, criticise and opt out of OBSI being the one and only dispute resolution body (see various articles in the Financial Post over the last few months).

In fact, far from being watered down the OBSI needs to be protected and strengthened as a recent review commissioned by the OBSI Board suggests in the package of balanced recommendations that meets both consumer and justifiable industry interests. But the industry thinks the report is "delusional" according to a quoted reaction in a Financial Post article by Theresa Tedesco.

The financial industry needs to realize is that in-reality fair, and perceived-by-consumers to be fair, dispute resolution is good for it. One of the lasting psychological effects of the credit crunch is that bankers and investment dealers are a bunch of devious, avaricious crooks (witness the "Occupy" protests), lining their pockets and then letting taxpayers or investors take the fall. The industry's current campaign against OBSI reinforces the negative perception by showing unwillingness to fix errors or misdeeds . As both a shareholder in Canadian financial firms (directly and through ETFs) and an investor / consumer I want to see a fair, balanced system, not one that stacks all the advantages on one side (the FP Tedesco article cited above makes reference to the statistic that industry already wins 70% of cases adjudicated by OBSI - is it only 100% that is acceptable?).

It's not just perception either. When effective penalties are known to occur, firms will tend to improve their internal processes and controls so that problems don't arise in the first place. Industry calls this zero defects or six sigma. Consumers call this peace of mind.

What really needs to happen is for the federal minister of Finance Jim Flaherty to put the OBSI function on a stronger footing through permanent legislative authority on a national level, instead of its present voluntary, industry-funded status and to include insurance in its mandate.

Ontario Securities Commission Ignores Retail Investor Viewpoint

Tireless (judging by the quantity and depth of commentary he produces) investor advocate Ken Kivenko of CanadianFundWatch recently sent me the following news on recent machinations of our regulator the Ontario Securities Commission.

"OSC has selected for its new Investment Fund Products Advisory Committee: The IFPAC will advise OSC staff on emerging product developments and " innovations " occurring in the investment fund arena and will discuss the impact of these developments [ on investors?], as well as emerging issues. We put forward a candidate, albeit after the deadline We were not aware of the opportunity. Ref. http://www.osc.gov.on.ca/en/NewsEvents_nr_20110602_osc-members-ifpac.htm All members announced are industry participants – not a single investor or investor advocate. Another missed opportunity by the OSC Investment Funds Branch. However Manulife and RBC are in; they're part of the “gang of five” that are working to clip OBSI's wings or dismember it. It really doesn't matter since we've warned of leveraged ETF's ,SPAC's and CFD's in the past and all were unleashed on retail investors despite our stated concerns. News Release at http://www.newswire.ca/en/releases/archive/August2011/11/c3174.html"

There are many highly knowledgeable non-industry investors around to sit on such committees and provide the retail investor viewpoint but OSC seems to do little bring them into the process. As that famous song phrase goes, when will they ever learn?

Investor Protection in Canada: The Sisyphus Myth Backwards

In ancient Greek mythology, Sisyphus was an evil man condemned by the gods for his crimes to roll a boulder up a hill, only to have it roll back down on nearing the top and then have to start all over, repeating this forever.

Unfortunately, today in Canada, Sisyphus has been reversed - it is the investor protection advocates, those representing the victims of financial crime, who seem to be condemned to forever rolling the boulder of reform up the steep hill of governmental and bureaucratic indifference.

Having long been aware of such investor advocate stalwarts as Ken Kivenko at CanadianFundwatch.com. Peter Benedek of RetirementAction.com and Marc Ryan of IndependentInvestor.info, I've just come across Pamela Reeve (website here) and her current efforts to get the Investor Advisory Panel of the regulatory body the Ontario Securities Commission on an effective track. To no avail it seems ... after reading her thoughtful and detailed open letter to John Stevenson of the OSC about the IAP, I sent her an email asking about response and progress. A speedy reply the very day came from her (unlike, I might note, responses from the OSC at various times I have emailed them, which took from a few days to never). The essence of the result - a new IAP with no resources and no independence from the OSC (see the OSC page for the IAP here). She also copied me with a letter to the Ontario Minister responsible Dwight Duncan and his dismissive response months later.

Having worked for many years in corporate and government bureaucracies, at times even drafting responses such as the one she received from Minister Duncan, it is sadly evident to me that as yet, there is no will at the top government level to improve things for investors. Meantime, the OSC and other organizations who can and should do something, follow the "keep-them-talking-forever" strategy, paying lip-service only to investor protection. The new OSC IAP amounts to an exercise in co-opting some investor advocates. It's funny that the IAP should get a princely $50k when industry body IIROC is willing to put $3.75 million into FAIR http://faircanada.ca/about-us/background/. The new Canadian Securities regulator doesn't look like it will do any better either, as this article by Independent Investor's Marc Ryan says - http://independentinvestor.info/content/view/955/1/.

I have to admit that I have not devoted much blog space in the four years I have been writing this blog (yup, the 4th anniversary just passed) or personal time to the investor protection system (though I have been burned by the great con of LSIFs and a company called, ironically, Intelligent Detection Systems). I just assume that investor protection essentially does not exist right now in Canada and instead look for financial products and services that are likely legitimate. There are a few I believe and my aim as a blogger is to find and write about them!

Thanks to Pamela, Ken, Marc, Peter and others labouring mightily on our behalf. Hopefully, one day a tipping point will be reached and that rock will reach the top to roll down the other side of the hill and knock down a slew of bad guys hiding over there.

Proposed Federal Securities Regulator - Little Help for the Individual Investor

Worth reading: IndependentInvestor.info's Proposed Canadian Securities Act and investor protection: a failing grade. The thoughtful, detailed analysis and judgment of the proposed move by the federal government to create a national securities regulator shows how little improvement there really is likely to be for the individual investor in solving key problems: high fees for mutual funds, costly access to government of Canada securities, lack of fiduciary responsibility by the industry towards investors, inadequate civil court recourse against misbehaving financial firms, priority given to financial system protection over investor interests.

Blog author Marc Ryan concludes by quoting Minister Flaherty saying that the intent of the federal move is to enhance investor protection!

The article casts new perspective on provincial opposition to the move, which seems to be a federal-provincial blanket-pulling contest. Of course, the provinces could hardly cut to the gist of the matter and say that the federal solution is poor when their own laws and regulation don't do a very good job.

I've previously written in favour of having a national securities regulator but it just doesn't seem to be worth it as formulated, so I'm changing my mind as a result of this article. Do it right or don't bother. (As for my flip-flop I'll only doing as the great economist John Maynard Keynes, who said, "When the facts change, I change my mind. What do you do, sir?" from Wikiquotes which has a whole bunch of other wonderful Keynes quotes)

Canadian ABCP Explained, Health Warning

Bond expert Edward Devlin of PIMCO explained how ABCP works in Changing on the Fly: Canadian Credit Markets. Warning: reading and trying to understand how it works will hurt your brain! Only an expert could understand it. I doubt even 0.1% of average investors could, or 1% of investors not specialized in fixed income, even when it is explained clearly as in this example. Did regulators or ratings agencies like DBRS even understand what was going on?

PIMCO certainly knew what was going on and took advantage, though it seems not in a direct way, merely through exploiting the indirect effects; "Needless to say, PIMCO has not invested in the ABCP of any Canadian conduits, but we have found a way to capitalize on their market impact."

Favorite quote from this article, written in May 2007, a few months before ABCP blew up: " ... tick, tick, tick ..."

Moral of the story: don't invest in something you don't understand. That's why people like Warren Buffett say the average investor should stick to index funds, despite the fact that he, an expert, doesn't operate that way.

Reality check: if you think you understand something, ask yourself if you really do. The ultimate test of perfect understanding: could you explain to someone how to create the product in question?

Residence: a word with too many meanings for Expats

`When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `which is to be master -- that's all.'

Lewis Carroll, Through the Looking Glass

Perhaps Lewis Carroll anticipated the problems of expats and the use of the word "resident" when he wrote these immortal lines. It is easy to empathize with Alice as she struggles to make sense of Humpty D's arbitrary use of language and his haughty motive of controlling her.

The word resident is fraught with many meanings as it is used by bureaucracies and applied to us ordinary Alices. Imagine Alice's problem compounded by two (or more!) countries using the same word with different meanings that have real effect on things like taxation, health care, driving, social benefits, employment, immigration, marriage, children, estates, trusts and on and on. Arrgghh!

For the benefit of other expats like me, today's post addresses the issue with respect to one country - Canada, and one province within it - Ontario. Other provinces will have similar but, of course, not identical rules and interpretations.

Residence in everyday use means something like "live in a place", which is fine until governments mould the idea to fit who they want to include or exclude. We end up with details that are drastically different, almost turning the words inside out. Whereas in Humpty's mouth the motive of control seems harsh in its explicitness and brashness, in government hands the same justification becomes one of the "necessity to attain policy aims" or some such euphemism. The end result for common folk is unfairness and confusion.

The Many Meanings of Residence in Ontario Canada
The charts below show what I have found out to be the different rules and tests for what constitutes "residence", used loosely where various types of government and some private organisations apply the concept of living somewhere. Note that some of these could be wrong despite my best efforts and showing of original sources. I'm not a lawyer and these things are so darn complex, you should double check before taking any action.


Most of the definitions sort of overlap but the details are devilish and each definition has its nuances. There seems to be a significant divide between those relying on physical presence (of varying amounts of time) as the main criteria, and the tax people who rely on ties to the country.

It is amusing to read that Elections Canada claims that a person can have only one ordinary residence at a time. In the tax world and amongst different countries that's not true. Don't know if English law is similar enough to Canadian law but this UK reference says "it is well established that it is possible to be ordinarily resident in more than one country at the same time." (PM North and JJ Fawcett, Private International Law, 13th edition, 1999, page 170 and footnotes a dozen cases as proof).

The result of the divergent rules, for instance, is that it is easy to end up paying all federal and provincial taxes, including Ontario's health premiums, on worldwide income, some of which may not even have been earned in Canada, and yet be ineligible for Ontario health care. Who knows if you will be eligible in the foreign country or if it even offers health care. Is that fair?

Legal scholars North and Fawcett (page 139) make another statement: "Problems in relation to residence would disappear if this concept were to be replaced by the simpler concept of presence." But apparently this has been rejected in the UK and in every other country too. Instead, governments and courts have, over decades of law-making, regulation-making and jurisprudence, on the principle of taking into account the social and economic requirements of a situation, created a sophist's delight that requires 1000 page books (that's how long their book is) to explain the simplified version of reality, leaving the ordinary person in a confusingly impossible state.

It would be completely understandable if many were not so kind-hearted as Alice, who realized Humpty D's precarious sitting spot and worried that he might fall off his perch.

Why a Bureaucratic Bunfight on Securities Regulation Matters

I've previously expressed my support for having a single national securities regulator in Canada so I'm glad that the just-released Hockin report also supports this long-overdue idea.

Why should individual investors care about a matter that might seem only to be a power struggle between the federal government and the provinces, especially Alberta and Québec?

Gail Bebee, author of No Hype Investing, has an even better answer than I could come up with, so here it is, with her permission.

"

Promising proposals could deliver a fairer system for small investors

Toronto, January 13 – Help may be at hand for Canadian investors long served poorly by a mishmash of provincial securities regulations, if the government acts on a new report from The Expert Panel on Securities Regulation in Canada. Independent investor and personal finance author Gail P. Bebee believes that the report’s recommendations, which include a national securities regulator, investor panel and investor compensation fund could benefit small investors in several ways:

· Increase the choice of investing products, especially in smaller provinces

· Improve the process for handling complaints about financial products and services

· Provide better compensation to victims of financial industry misconduct

· Improve government oversight and enforcement and reduce financial industry fraud

· Give investors a voice in regulatory policy making

· Facilitate more timely government policy decisions on securities industry issues.

· Lower industry administrative costs which will hopefully be passed on to retail investors.

Bebee offers a word of caution: “I am hopeful that Minister Flaherty’s commitment to changing the securities regulatory system will prevail. However, a national securities regulator has been under consideration for years without action. This report could end up on the heap of great ideas that were never adopted.”

For more information or to arrange an interview, please contact:

Gail Bebee

Personal finance speaker and author of No Hype - The Straight Goods on Investing Your Money

All the investing basics for Canadians from a savvy financial industry outsider

Tel: 416-733-0221

gbebee@nohypeinvesting.com

www.nohypeinvesting.com

Tell the Ontario Securities Commission What You Want Them To Do

The investing world doesn't seem to know it but the securities regulator in Ontario, the Ontario Securities Commission is collecting public input about retail investor issues. The OSC set up a body at the end of August 2008 called the Joint Standing Committee on Retail Investor Issues. Its terms of reference (only two pages!) are here. The JSC's first initiative was to conduct a survey on product suitability - see the questions on this page.

They need your help because they don't seem too skilled at getting out there and finding the run-of-the-mill retail investor. I had stumbled across their web page in September and sent them my two cents worth. They subsequently organized a teleconference to which I was invited along with, I presume, those other folks who had responded. There was a vast crowd on the call, all of twelve people (!) giving their views. Half or more were insiders or industry professionals. Somewhat sad and inadequate participation for such an important subject, I dare say. No one had really been informed that they were expected to give their views so it was quite off-the-cuff. As a result, there was a lot of rambling in the two hours. Sigh...

Here's a smattering of comments I heard (I make no attempt to be representative or comprehensive):

• products need to have full disclosure of risks and costs before sale
• advisors lack training and need a far higher level of education, practical training and experience
  
• advisors are more motivated by sales commissions and fees than the client's best interests e.g. many advisors won't recommend ETFs
• advisors may mislead by themselves not understanding the products they sell
  
• some advisors put client money into investments that are highly inappropriate, both from the view of risk and client understanding, i.e. they ignore their fiduciary duty
• the ABCP fiasco is an example of the failure of regulatory bodies to prevent the offer of a bad product and subsequent mis-selling by the industry
  
• this OSC committee itself is in danger of bias and influence by part of the very industry it seeks to improve, e.g. through the fact that Mutual Funds Dealers Association is a member

While one can complain about poor regulation and a bad consultative process, just sitting back and bitching under one's breath does not and will not solve problems. It was written almost 400 years ago and is still true today: "If the mountain will not come to Mahomet, Mahomet must go to the mountain". Let them know what you want or think needs to be corrected. Send an email to jsc@osc.gov.on.ca by their deadline of Friday, October 31st.

A good place to start might be the new disclosure requirements for mutual funds, which blogger Michael James finds to be less than perfect. Btw, thanks to Preet Banerjee over at WhereDoesAllMyMoneyGo for bringing this subject to my attention.

I'm preparing my own comments for an email and will post them on this blog.

Book Review: Canadians Resident Abroad (4th ed) by Garry R. Duncan and Elizabeth Peck

About half of this book is pure gold and half is more or less junk. Fortunately, it is easy to distinguish the two.

The good stuff is:

• chapters 1 to 6 and 10 to 12 cover the Canadian tax implications for Canadian residents, emigrants, non-residents, immigrants and other permutations from many angles - income, property, investments, pensions, tax plans (RRSP, RRIF, LIRA etc); there is much detailed explanation and numerous mini examples of how things work, which is tremendously helpful because this is very complex and arcane stuff; adding to the value is the commentary of the expert tax practitioner Garry Duncan telling how the Canada Revenue Agency interprets and applies its own too-often ambiguous rules. For instance, on page six, there is a lengthy list of secondary factors that CRA uses to determine whether you are a Canadian resident for tax purposes or not, which tautologically includes whether or not you have filed a Canadian tax return. There is a certain black humour value from explanations of how twisted and bizarre the effects of tax laws can be. I especially enjoyed on page 56 where he explains how "Under certain circumstances, you may be required to pay tax to Canada even though are a non-resident earning income in another country." Yikes! Any one of these many situations, if they apply to you, would justify the price of the book many times over by avoiding huge amounts of aggravation and perhaps unanticipated large tax consequences, or on the other side of the ledger, finding ways to intelligently and legally reduce your taxes. The book should really be titled Taxes and Canadians Resident Abroad.
  

The junk is:

• chapter 7 - purportedly about health coverage, but consisting mostly of pages of contact information for provincial health ministries, private health care providers and clinics; it isn't to me worth writing on page 121 "... since residency regulations vary widely across Canada (and, by the way, are totally unrelated to the residency rates for income tax purposes), you should never assume that your coverage is continuing ..." Well, thanks a lot, but I bought the book to find out the details not to be told to phone the bureaucracy. This is especially annoying since,
• pages 157 to 335 consist of appendices, most of which are complete copies of tax forms and circulars, though there is one bizarre table of foreign currency exchange rates as of 2001 and another with world time zones. In this Internet age (and it had started by the 2002 publishing date of this edition) web addresses and links to find current versions of these documents would save a lot of pages that no one will read.
  
• chapter 8 on Canadian drivers' licenses includes a similar vague mention of varying provincial rules and pages of contact addresses
  
• chapter 9 on the no-longer-in-existence GST rebate program (cancelled as of April 1, 2007 and replaced by a somewhat similar Foreign Convention and Tour Incentive Program) shows the age of the 2002 edition - it's time for an update and revamp.

In short, half this book deserves five stars out of five but the other half only deserves one star, which comes out to an average of three stars out of five.

Still, if you are coming to, or going from, Canada, permanently or temporarily, buy this book. It is available from the publisher Carswell , where you can see the table of contents, or possibly from Chapters or Amazon., where it is currently unavailable.

Insider Trading and Securities Regulation in Canada

The posts by Larry MacDonald on a number of studies which found highly suspicious statistical evidence that insider trading is rampant in Canada are sickening (the insider trading, not the posts!) to say the least. A big thank you to Larry for bringing this up. A few years ago I sent a complaint to the Ontario Securities Commission about what seemed to me to be very suspicious price changes shortly before surprising and important news on a small company called CSI Wireless. I only ever got an acknowledgement back, months later, from the OSC that they would "look into it" and never saw or heard anything more. Maybe there was or there was not information leakage and insider trading but without confidence in the fairness of trading in that stock, it's one reason I eventually sold out and will not consider buying again.

The lack of control over insider trading is another confirmation that a properly funded national securities regulator is badly needed in Canada; I'm with Canadian Money Blogs Reviewer on this one.