In this issue of our newsletter, we discuss Black History Month and the importance of diversity for investors. We also highlight the risks of investing in crypto assets and steps you can take to protect yourself. We provide an update on how well new rules, which were designed to put the investor’s interests first, are working in practice. And lastly, we’re excited to share the findings of our first Investor Survey Report, and to give you a heads up about our new Complaint Guide to help investors navigate Canada’s complex complaint-handling system.
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Board Diversity Matters for Investors |
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February is Black History Month. It is a time to reflect on the contributions and accomplishments of black individuals throughout history.
Sadly, it is also a time to reflect on the racism that continues to exist within our communities. The brutal murder of George Floyd in May 2020 sparked public outcry and worldwide protests against anti-Black racism and instigated important conversations about systemic racism. The recent violent killing of Tyre Nichols reignited calls for justice.
Each of us has a role to play in dealing with racism and other forms of discrimination. Business leaders can also help to tackle this issue by examining and addressing diversity within their companies.
Diversity Disclosure Requirements
Regulators and governments have come to recognize the value of board diversity in promoting more fair and efficient capital markets, as well as confidence in our markets. Companies listed on the Toronto Stock Exchange (TSX) are required to disclose each year the number and percentage of women on their boards and in executive positions. They must also disclose the number of women in these roles and their targets for them, or explain why they did not set targets.
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Among CBCA corporations, just under 10% of board positions
are held by directors who are Indigenous peoples,
persons with a disability, or visible minorities.
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The Canada Business Corporations Act (CBCA) goes further with these diversity measures. It requires companies to disclose information about women, Indigenous peoples, persons with disabilities and visible minorities in these positions. The Ontario Securities Commission’s (OSC) 2023-2025 Business Plan indicates that it is contemplating expanding diversity reporting along similar lines.
These measures are making a difference and companies increasingly see the value of diversity. But many companies are slow to change. Among TSX-listed companies, only 26% of board seats were held by women, up from 10% in 2015. The numbers are less encouraging for other aspects of diversity. Among CBCA corporations, just under 10% of board positions are held by directors who are Indigenous peoples, persons with a disability, or visible minorities.
Why does diversity matter? Not only is it the right thing to do, but it’s also a smart thing to do. Diversity matters because it can improve board performance and make for a better managed company, which ultimately benefits everyone, including investors.
For example, research by McKinsey and Company found that companies with greater gender or ethnic diversity on their executive teams are more likely to financially outperform less diverse companies. Companies with gender diverse boards also have fewer cases of fraud and corruption, more transparent disclosure of share price information, and fewer financial reporting errors. Studies also show that diverse teams are more likely to re-examine facts and remain objective, which can lead to better decision-making.
As an investor, you can vote with your money and look for those companies that have more diverse boards and leadership teams.
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Buyer Beware: Investing in Crypto Assets |
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Last year, the spectacular collapse of cryptocurrency exchange FTX underscored that investing in crypto assets is a risky endeavour.
The risks are heightened because many dealers that provide cryptos operate outside of existing regulations, and too many investors fall prey to the hype without fully understanding the risks.
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The risks are real. A detailed report from the Bank for International Settlements found most retail investors lost money on their investments in Bitcoin. The report analysed data on retail investors’ use of crypto exchange apps in 95 countries from 2015 to 2022. It found that a staggering 73% to 81% of retail investors lost money on their initial investments.
Despite these findings, an OSC study released in September 2022 found that 31% of Canadian investors still plan to invest in crypto assets over the next 12 months.
In an effort to protect investors, the Canadian Securities Administrators (CSA) announced new constraints for unregistered crypto trading platforms operating in Canada, while they pursue registration. These include prohibiting them from offering to lend money to clients who want to make an investment. This is intended to help protect investors, since borrowing to invest can magnify your investment losses, sometimes quite dramatically.
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According to a recent survey by the OSC, many Canadians lack
a basic understanding of crypto assets, so it’s critical
they educate themselves before investing.
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Be aware of the dangers of investing in crypto assets and take steps to protect yourself. If you plan to invest in crypto assets, here are some tips:
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Don’t invest money you can’t afford to lose: Crypto assets can fluctuate significantly in value. If people aren’t interested in buying a certain crypto asset anymore, the price could go down drastically, and you could lose a lot or even all of your investment.
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Check before you invest: Before investing in crypto assets, check the CSA’s National Registration Search database to ensure the platform is registered to do business in Canada.
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Conduct research: It’s important to take the time to carefully evaluate an investment and seek advice from a financial expert, particularly when it comes to less familiar investments like crypto assets. According to a recent survey by the OSC, many Canadians lack a basic understanding of crypto assets, so it’s essential to educate yourself before investing. You can gauge your knowledge of crypto assets by taking the OSC’s crypto quiz.
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Beware of opportunities offered through social media: Information about investments shared on social media may not be accurate, complete, or reliable. Fraudsters may use social media to entice investors into various scams. Make sure you understand how the investment works and watch out for any signs that it might be a scam. Read everything carefully and ask questions if you’re not sure about something.
Check out these informative resources on investing in crypto assets:
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Putting Clients First: Are the New Rules Working? |
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In 2022, regulators introduced new rules called the Client-Focused Reforms. They were established to address concerns that you may receive investment advice based on what puts more money in your advisor’s pocket, rather than what investment product is best for you.
The rules focus on the principle that your interests should come first and any advice should match your investment objectives and risk profile. A key requirement is that firms and investment advisors must address material conflicts of interest in a way that is best for you. They must also tell you about conflicts in a timely and understandable manner.
Last fall, the OSC released a report assessing how firms and advisors were meeting these obligations. It included a review of how dealers were complying with the conflict of interest requirements. The results were not good. For example, it found that some material conflicts had not been addressed in the client’s best interest, other conflicts (including reasonably foreseeable conflicts) were not properly identified, and some were simply not disclosed to the clients as required by the rules.
Other members of the CSA are also conducting their own sweeps to determine how well firms in their jurisdiction are complying with this important investor protection requirement.
If you are working with an investment advisor, be mindful that they may recommend you buy a product that pays them more. Be sure to ask them about any conflicts. It’s also a good practice, when you first start working with an advisor, to ask them how they get paid, and about their qualifications, investment philosophy and experience.
The following resources provide helpful information on working with an investment advisor.
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What’s New at FAIR Canada |
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Investor Survey Report
FAIR Canada recently released the results of its first investor survey, designed to better understand the perspectives and concerns of Canadian retail investors. The survey solicited feedback from 1,000 individual investors on a range of issues, such as the kinds of investments they buy and the type of advice and information they rely on.
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New! Complaint Guide
For people with complaints against a bank or an investment firm, the complaint system can be very complex. The process varies depending on who you are complaining about, how much money is involved, and even where you live.
To simplify and remove confusion, FAIR Canada will be publishing a comprehensive Complaint Guide this month on how to bring a complaint against a bank or investment firm. Written in plain language, the guide includes all the information you need to successfully navigate the system. Read our informative and resourceful Complaint Guide, which will be available soon on our Publications webpage.
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