FAIR Canada
FAIR Canada Newsflash 
November 2012

OBSI "Name and Shame" of Octagon

On November 9, 2012 OBSI announced that Octagon Capital Corporation has refused to compensate an elderly and widowed client of Octagon as recommended by OBSI in the amount of $181,339. OBSI found that the investor, Mrs. B, was primarily a low-risk investor who needed income from her investments to last her lifetime. According to OBSI's investigation report, the Octagon representative frequently traded in her accounts without authorization, purchased securities that were too risky, and employed leverage and complex strategies that were unsuitable. Overall, OBSI found that Mrs. B was an unsophisticated investor and that her accounts were unsuitably invested.
 
Octagon Representative Suspended by IIROC
 
The Octagon representative at the centre of Mrs. B's complaint (Randall William Harding) was also the subject of an Investment Industry Regulatory Organization of Canada (IIROC) hearing concerning unsuitable investments and unauthorized trading in her account. The IIROC Panel concluded that Mrs. B had limited investment knowledge, was a low-risk income investor, was recommended unsuitable investments by her advisor, was not consulted about trades, and that her representative traded excessively in her accounts. IIROC imposed the following penalties on Mr. Harding: (a) A fine of $125,000; (b) Disgorgement of commissions in the amount of $17,861; (c) A suspension of registration approval for a period of five years; and (d) Costs in the amount of $25,000. Mr. Harding is no longer a registrant with an IIROC member firm.
 
After OBSI's recommendation was provided to the parties and was not accepted by Octagon, Octagon was offered the option of having a credible and experienced former commissioner of the Ontario Securities Commission (OSC) provide an independent assessment of the recommendation based on standards consistent with OBSI's Terms of Reference. Such an offer is outside of OBSI's normal procedures. The OSC had encouraged OBSI to adopt this special "appeal" procedure as a one-time effort to resolve complaints that were "stuck". Octagon chose not to take up this offer, which, in FAIR Canada's opinion, demonstrates a lack of a credible factual basis upon which to reject OBSI's recommendation.

FAIR Canada supports OBSI's decision to exercise its "name-and-shame" power after taking extraordinary steps to attempt to reach an agreement with Octagon. It is unfortunate that this case has necessitated the use of this power. Mrs. B will not receive compensation through OBSI's process, and the refusal of Octagon to accept the recommendation demonstrates Octagon's unacceptable lack of respect for the external dispute resolution system in place in Canada for complaints against investment firms and an absence of good faith in resolving disputes with its customers. 
 
Name and Shame and "Cold Shoulder"
 
"Name and shame" in securities regulation is a concept that comes from the UK City of London system of self-regulation of markets where regulatory requirements were non-statutory and there was no statutory backing for decisions. A non-statutory self-regulatory system only works if members of the self-regulatory system are willing to comply with the decisions reached. The City's system worked because non-compliance meant that a firm would be "cold shouldered" by the other firms in the industry for failure to follow standards expected in the City.

OBSI was originally set up by the banks as a form of self-regulation. Its decisions have no statutory backing and are not binding. The resort to "name and shame" for firms that refuse to comply with an OBSI recommendation essentially requires securities regulators and the financial industry to take note of the firm's "unacceptable conduct". Stakeholders in the financial markets (including consumers) need to consider "cold shouldering" a firm that is named and shamed, meaning that they decline to do business with them. This is how "name and shame" is given bite. If stakeholders do not "cold shoulder" a firm that is unwilling to comply with an OBSI recommendation, the effectiveness of "name and shame" is undermined.
 
Caution to Retail Investors
 
FAIR Canada cautions consumers from obtaining financial services from firms who refuse to enter into external dispute resolution processes in good faith. In our view, this reflects poorly on an investment firm's commitment to dealing fairly with its clients and a lack of integrity in resolving legitimate client complaints.

We hope that other OBSI participating firms recognize the poor public perception associated with a refusal to accept OBSI's recommendations and work to maintain and improve upon the existing non-statutory ombudsman system so that complaints are resolved in a manner that is fair and reasonable.

 

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