Courts Side With Banks, Reject Class Action Against Unearned Brokerage Fees

Ontario Superior Court Justice Edward Belobaba dismissed an application to certify a class-action lawsuit against seven Canadian discount brokerages. The suit alleges that investors were overcharged billions of dollars for services they did not receive.

According to the proposed class action suit, discount brokers have improperly collected approximately $5 billion in “trailing commissions,” which are fees for providing investors advice, which discount brokers are not legally permitted to provide.

The suit was charged against brokerage firms BMO InvestorLine Inc., Scotia Capital Inc., CIBC Investor Services Inc. and TD Waterhouse Canada Inc., as well as the trading divisions of HSBC Securities (Canada) Inc., Credential Qtrade Securities Inc. and Desjardins Securities Inc.

The central question before the courts was whether the collection of trailing commissions by discount brokerages prior to 2022–when a new rule prohibiting the practice was introduced–violated any applicable securities law.

During the motion for certification, Justice Belobaba stated that the plaintiffs failed to meet the legal standard requiring “some evidence of illegality,” and thus “there is no basis for a class proceeding.”

Trailing commissions are payments made to an investment dealer by a mutual fund company each year for selling its investment products. They are embedded in a fund’s management expense ratio and are intended to compensate financial advisers for providing ongoing advice to investors.

However, discount brokers are prohibited by regulatory rules from providing advice to do-it-yourself investors, which means they have collected billions in commissions without providing the intended service.

The Canadian Securities Administrators, an umbrella group for all provincial securities commissions, implemented a ban on all trailing commissions for DIY investing services on June 1, 2022. Despite the ban, several class-action lawsuits were filed on behalf of various groups of DIY investors who purchased mutual funds through trading platforms.

In his certification decision, Justice Belobaba stated that the plaintiffs failed to provide “a pre-2022 provision that clearly prohibited the impugned trailing commission practice and deemed it illegal or unlawful even absent the 2022 prohibition.”

“In sum, a significant amount of the evidence filed by the plaintiff strongly supports the defendants’ position that the practice of paying trailing commissions to discount brokers, although controversial and needing reform, was not illegal or unlawful until the law was changed effective June 1, 2022,” Justice Belobaba added.

Paul Bates, co-counsel for the plaintiff, a group of do-it-yourself investors who had trading accounts at the brokerages, announced on Tuesday that he intends to appeal.

“Plaintiffs’ counsel respectfully disagree with the decision of the court in this case and intend to ask the appeal court to overturn the decision on the basis that there is a good case that the discount brokers acted unfairly and illegally by receiving and retaining trailer payments,” he commented.

Information for this briefing was found via The Globe and Mail. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.