Civil claims related to financial products have been on the rise in Canada in recent years and plaintiffs' counsel are showing surprising creativity in crafting new claims involving financial product design, product operation and product sales and compensation.
The proliferation of financial product claims appears to have been prompted by the expanded range of investment products available to retail investors. Many such products were previously only available to sophisticated and institutional investors. Additionally, retail investors are increasingly making investments in self-directed online accounts without the assistance of an adviser. This creates the potential for a knowledge gap between buyers and sellers of financial products.
Product Design
Improvident product design has been alleged or implied against, among others, a manager of a laboursponsored venture capital corporation fund and a provider of tax minimization strategies. When courts ultimately have occasion to confront such allegations directly, it is anticipated that plaintiffs will face difficulty extending product liability principles to financial products and fitting financial products into recognized categories of recovery for pure economic loss.
Patent and confidential information claims in respect of financial products in both Canada and the U.S. have included allegations that methods, strategies and techniques for calculation and information aggregation used in the design of financial products were misappropriated. The outcome of these actions will determine the level of protection that innovators of financial products can expect under intellectual property law.
Product Operation
The Ontario Court of Appeal has certified a class action for negligent misrepresentation against an insurance company on behalf of policyholders who had selected an investment feature. In this case, it is alleged that misrepresentations were made in written materials provided to investors. Courts have been reluctant to certify negligent misrepresentation claims because they often raise individual issues ill-suited to class proceedings, but this decision signals that courts are prepared to certify this type of claim where there is a single common misrepresentation.
Class actions have also commenced against multiple financial institutions for allegedly conspiring to fix foreign exchange rates, gold and silver prices, and bond rates through benchmark manipulation. Certain defendants have settled, but the actions continue against the remaining defendants. The benchmarks at issue in these cases serve as the foundation for a range of financial products.
Offerors of financial products are also susceptible to claims for share price performance related to financial products. In an older case, an insurance company's losses related to segregated funds were alleged to have depressed the company's share price, even though investors in the segregated funds did not sustain losses.
Product Sales and Compensation
The expected range of suitability claims against investment advisers continues, but new claims against the vendors of financial products have recently risen.
Class actions have been brought against mutual fund administrators and trustees in respect of commission fees paid to online brokerages. It is alleged that these payments, though disclosed, were improper because the investors received no advice in exchange for the commissions paid. Class actions have also been brought against mutual fund administrators alleging "closet indexing", in other words, that certain funds charged fees commensurate with active management, but provided only passive management.
Several class actions are outstanding in respect of syndicated mortgages, alleging that investors were misled as to the security of syndicated mortgages for real estate projects in Ontario and Alberta. As access channels for financial products become increasingly automated, it is anticipated that claims will proliferate further in respect of sales channels.
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