EDITORIAL PAGE — Grading the securities industry

The Canadian securities industry has come under considerable scrutiny in recent years, and each review usually leads to a fresh batch of proposals to reform the regulatory system so that investors can be better protected.

The regulatory environment in British Columbia has attracted the most attention, the most criticism and by far the most studies. The latest, by the government-appointed Matkin Commission, calls for sweeping reform of the Vancouver Stock Exchange (VSE) and the B.C. Securities Commission (BCSC). Both institutions were given a poor grade for having failed to put a stop to the “shams, swindles and market manipulations” that overshadow the successes of legitimate VSE-listed companies (particularly those in the junior mining sector).

The Matkin Commission recommends restructuring BCSC and removing the VSE’s right to discipline brokers. Both institutions are resisting the proposals on the grounds that they would result in a more confusing, cumbersome and expensive regulatory system.

The issue is somewhat moot in that no matter what external tinkering is done, the fundamental problem remains that of enforcement. It does not matter what rules are in place if a few ethically dubious players know that they are free to break them. What regulators need is less debate and more power to throw out the few bad apples that threaten to spoil the barrel.

On a positive note, the Canadian securities industry, in general, appears to have the confidence of most of its retail clients. A survey of investors carried out by Goldfarb Consultants for the Canadian Securities Institute shows that 19 out of 20 clients are either very (62%) or somewhat (32%) satisfied with their primary broker-investment dealer.

The survey also found that clients with lower amounts of savings and investments are just as satisfied with their broker-investment dealers as are larger clients. Goldfarb interviewed 1,021 current clients, randomly selected from lists supplied by 12 brokerage firms and investment dealers. The survey also included 204 randomly selected former clients who have ceased doing business with investment-brokerage firms. Their responses were not mentioned in any detail (which is unfortunate, as we would expect some interesting comments from this group).

Also interviewed were 778 potential investors (again randomly selected) with household incomes exceeding $75,000 and no existing broker-investment dealer. This portion of the survey showed that a lack of information on brokerage-investment firms, and on the securities market in general, is the main impediment preventing potential investors from becoming clients. All respondents said the trustworthiness of the broker-investment dealer was the most important factor in their choosing a firm. Tied for the second most important factor were good investment results and aspects of service; the latter includes not pressuring to buy, providing good information and demonstrating an understanding of clients’ investment goals and needs. It is encouraging to know that the Canadian securities industry is doing some things right, including making efforts to improve areas of weakness. But, as is always the case, good news rarely strays from home whereas bad news travels fast, far and wide.