When you invest, the government wants to protect you from being taken advantage of. This is one reason why the sale of investments in Canada is a regulated industry. Regulation means that the government has rules for who can sell you investments and for how these people have to treat you. Your legal rights and the government’s rules are different for different types of investments. Deposit-type Investments are one type and include guaranteed investment certificates. Securities are the other type and include stocks and mutual funds. We will look at the regulation and then at the rights for each of these two main types of investments.
Regulation of Deposit-type Investments
Most investments which earn interest are known as deposit-type investments. You can buy guaranteed investment certificates (GICs), term deposits and other deposit-type investments from a bank or similar place. The rules for banks, trust companies, loan companies and insurance companies are made by the Government of Canada. This means the rules are the same whether you live in Nova Scotia or in any other province. The Government of Canada is known as our federal government so the companies that have to follow these rules are known as Federally Regulated Financial Institutions (FRFIs).
Rights for Deposit-type Investments
When you invest in deposit type investments, you have certain rights and responsibilities related to these types of investments. Your rights include what information you must be given and what happens at the end of the investment term. You must be told about the interest rate, beginning and end dates, cancellation rules, and other details about your investment.
This information comes from the Financial Consumer Agency of Canada (FCAC). It is a government agency that provides financial information for Canadians. This document from FCAC gives more details on your rights and responsibilities when you invest in deposit-type investments.
Regulation of Security-type Investments
Most other financial investments are called securities. These include stocks, bonds and mutual funds, but there are other security investments as well. We talked about these in the Investment Basics section of this guide. The regulation and your rights are more complicated for securities than for deposit-type investments. This is because security investments are more complicated.
The sale of securities in Nova Scotia is regulated by the Nova Scotia Securities Commission (NSSC). The NSSC helps to protect you when you invest in securities. It makes sure the people selling you securities are following the rules. Other Canadian provinces each have their own provincial regulators which are like the NSSC. Together, the regulators from the 10 provinces and 3 territories make up the Canadian Securities Administrators (CSA). The rules that come from this group are the same in all provinces. The rules that come from the NSSC are for Nova Scotia investors only. These can be different than the securities rules in other provinces.
Individuals who sell you security investments in Nova Scotia have to follow NSSC and CSA rules. Many of these rules protect your rights as an investor. You should know about the NSSC and the CSA and how their rules can help you.
One of the ways NSSC helps protect you as an investor is to make sure not just any company or any person can sell securities to you. The system for allowing companies (usually called firms) and individuals to sell securities is called “registration.” Not just anyone can be registered to sell securities. There are exams they must pass and other requirements. Individuals and firms who are allowed to sell securities to you are called “registrants.”
These videos introduce you to securities regulation in Nova Scotia. They tell you about the registration of the individuals and firms who are allowed to sell you securities.
NSSC calls the individuals registered to sell and advise on the sale of security investments in Nova Scotia “advisers.” These individuals often call themselves “advisors” when talking to you, or on their business cards. But the words “adviser” and “advisor” are also used by people who are not registered this way so this can be confusing. In this guide, we will say “advisor/registrant” to be clear about when we are talking about someone registered with NSSC.
Rights for Security-type Investments
Although NSSC is our regulator in Nova Scotia, the CSA has securities rules that are the same for all of the provinces. The Financial Consumer Agency of Canada (FCAC) says Canadian investors have these rights when they invest in securities:
- The right to know if your advisor has a conflict of interest
- The right to receive your advisor’s best recommendations based on your stated investment goals
- The right to timely and accurate information
This document explains these rights and the related responsibilities.
These rights seem straight forward but they are not. Investor rights groups believe that these rights are not protected well enough in Canada. Understanding these rights and the rules can help you protect yourself.
The Right to Know if your Advisor has a Conflict of Interest
Your advisor/registrant has a “conflict of interest” when what is best for them is different than what is best for you.
The idea of conflict of interest is hard to understand if you have little experience with investing or do not understand how advisors/registrants are paid. You may have bought a car before, so we can use buying a car to help explain this idea.
When you buy a car from a car dealership, the dealership pays the salesperson for selling it to you. The type of pay is called a “commission,” and it is a percentage of the sales price. So, if you buy a higher-priced the car, the salesperson makes more money. The salesperson may give you advice about which car to buy; but they want to sell you the highest-priced car they can. Since you want to keep your money, you would like to pay as little as possible for your car. There is a conflict of interest between what is good for you (buying a less costly car) and what is good for the salesperson (selling a more costly car).
If you know how the salesperson is paid, you may think about their advice more carefully because you know that what is best for you is different than what is best for the salesperson.
But knowing about cars also helps you. If you know about car prices and what features you need, you won’t need as much advice. You may also know when you are getting bad advice.
The name “salesperson” or “sales associate” also helps. This “sales” title reminds you that the car salesperson is working for the dealership to sell you a car. They might be giving you advice but they are not working for you. If car salespeople were called “advisors,” and you didn’t know how they were paid, you might think they were paid to give you good advice. And if you also knew very little about cars you might rely on that advice.
So, let’s get back to investments.
If you don’t know much about investments and someone called an advisor is helping you, you might trust any advice they give you. You may not know that your advisor/registrant is being paid for selling investments or that they make different amounts of money for selling different investments. You probably would not be thinking about a conflict of interest.
If you don’t know much about investments or how advisors/registrants are paid, you might just take the advice they give you. You might not think to ask questions and might not know what to ask. You might not feel like someone is selling you an investment. You might feel like your advisor/registrant is just giving you advice to help you. The word “sale” or “salesperson” probably will not even come up.
But in many cases your advisor/registrant has a conflict of interest, just like the car salesperson.
The investment they recommend might be one that pays them more for selling it than another one that might be better for you.
The Financial Consumer Agency of Canada says that when this, or other conflict of interest situations happen, your advisor/registrant must tell you it is happening. But this is complicated and you may not always be told or understand.
The Right to Receive your Advisor’s Best Recommendations
This sounds simple but it is not. What “level” of advice investors have the right to get is a big issue that investor rights groups and the investment industry disagree about.
In Nova Scotia, all advisors/registrants have to follow a “suitability” rule when helping you decide what investments to buy. This video explains this suitability rule.
Investor rights groups believe the suitability rule does not do enough to protect your right to get your advisor/registrant’s best recommendations. They make the point that “suitable” and “best” are not the same thing.
We can use the car buying example to explain. Let’s say a car salesperson shows you two similar cars, Car A and Car B. Both have the features you asked for. The cars cost the same and you can afford to pay the price. The salesperson will get a higher percentage commission for selling Car A than Car B. The only other difference is that Car A uses much more gas than Car B. Either car would be suitable for you based on your stated goals. The car salesperson recommends Car A and gives you information about it. This information includes the gas usage estimate. You buy car A.
You did not ask about the gas usage of Car B. But it would be better for you to spend less on gas. Car B would be better for you than car A even though both cars are suitable.
The same thing can happen with investments. An advisor/registrant can recommend a suitable investment to you and not recommend, or even tell you about, a similar one that would cost you less in fees. This advisor/registrant has not broken the suitability rule. But you may not agree that your right to your advisor/registrant’s best recommendation has been protected.
The Right to Timely and Accurate Information
You need information before you buy securities. You should understand the relationship you will have with the advisor/registrant and their firm. You should know details about the investments. You should know the risks and the costs of buying and selling. In 2017, the CSA changed the rules about what information you must be given. These two videos explain the information you get before you set up an account and before you buy a security investment.
How much money your security investments are worth changes over time. Dividends are reinvested, fees are deducted and the market value can go up or down. You might invest more money or take money out. Getting timely information helps you keep track of these changes and make decisions about your investments.
Regulators make sure you get information about what is happening in your investment account. They do this through rules about the reports you get. These reports are called “investment account statements.” The firm where you bought the investments holds the investments in your account or accounts. This firm sends you a statement for each account. If you had investments in an RESP account and investments in an RRSP account, you would get two statements.
The NSSC and CSA rules say what information must be in the statements and how often they must be sent to you. You must be sent a statement at the end of each three-month period. This is called a quarterly statement. These statements show any changes that happened in the three months. You can choose to get monthly statements instead of a quarterly if you want to see changes every month. You must be sent a statement at the end of each year for the twelve-month period. This is called an annual statement. It includes special reports that are not in the other statements. Your annual statement tells you how much your investments went up or down in value. This is called the “performance” report. Your annual statement also tells you how much money the firm made from your account and how much it charged to your account in fees. This is called the “charges and compensation” report. These videos explain these reports.
When you get an investment account statement, you should always look at it closely right away. This checklist from the FCAC helps you know what to look for.
Some information you can only get in your annual statement. However, technology has made it easier to get most information about your investments any time. You can sign up to look at your investment account online from your computer or cell phone to see:
- transactions (what investments you bought and sold, what dividends you earned),
- market values (what your investments were worth that day) and
- other information.
You will still get investment account statements quarterly (or monthly) and yearly. And you can get them by mail as paper statements or by email.