Leveraging risks 'significant losses' for most | FP Street | News ...

The use of leverage, particularly for the purchase of high-fee products is simply a meritless strategy

Investors who can ill-afford the losses are being drawn into ?unsuitable? investments backed by loans, and regulators should make a co-ordinated effort to curtail the practice, advocacy group FAIR Canada urged Thursday.

?Leverage is a problem that needs to be addressed urgently,? the investor rights group said in a statement, pointing to an increasing number of cases coming to light where ?inappropriate? leveraging strategies have been recommended by investment firms or advisers.

FAIR said consumers are not being provided with sufficient information to properly understand the risks or the debt servicing obligations that go along with using leverage.

In addition, there have been two recent class actions which involve the recommending of leverage to consumers.

?There is simply no reasonable basis for an advisor to conclude that a highly leveraged sale of investment products is suitable for any but the most sophisticated investor with a high tolerance for risk,? FAIR said. ?In these times of low interest rates and potential volatility, the use of leverage, particularly for the purchase of high-fee products is simply a meritless strategy that will result in significant financial losses to the majority of consumers.?

The Investment Industry Regulatory Organization of Canada is in the process of reviewing its rules regarding borrowing for investment purposes. In July, IIROC issued draft rules that would step up requirements for investment dealers, forcing them to ensure proper monitoring and supervision of accounts even when the borrowing comes from a third party. Industry players were given until this month to respond.

FAIR Canada supports the proposals but says regulators must do more. The advocacy group calls on Canadian securities regulators including provincial commissions and self-regulatory organizations such as IIROC to implement a harmonized approach to protecting investors.

Beyond ensuring that there is adequate and proper analysis behind any suggestion that the leveraged purchase of high-fee investment products such as mutual funds or structured financial products is suitable, the investor advocacy group recommends that regulators review firms and advisers to determine the extent of leveraged investing.

Specifically, FAIR believes regulators should be aware of any ?contractual arrangements? between dealers, third-party financial firms that may be supplying some of the loans to investors and advisers. They should also look at marketing and advertising materials that encourage investors to borrow to invest to ensure they are ?fair, balanced and fully disclose the risks.?

Finally, FAIR calls on regulators to assess the degree of compliance by dealer member firms and advisors with their existing supervisory obligations.

But Canada?s investment dealers have pushed back on IIROC?s plans through their national association. The Investment Industry Association of Canada says parts of the regulator?s proposal are ?extremely prescriptive? while others, as IIROC itself acknowledges, ?can be very difficult to detect and/or supervise.?

Complying with the proposal to track all loans connected with investments would be costly, and ?flagging and capturing any non-margin leveraged arrangements will nonetheless be difficult,? a written submission from the investment dealers? association said. For example, it is unclear how an RRSP loan or a client using a personal line of credit could be ?captured? by the proposed regime.

Source: http://business.financialpost.com/2012/10/18/borrowing-to-invest-rules-under-scrutiny-in-canada/

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