At a Glance: Earlier this month, the Ontario Divisional Court decision in Boal v. International Capital Management Inc. provided some clarity on the scope and nature of the duty owed by financial advisors to their clients, and their obligations under the client focused reforms (CFRs), introduced by the Canadian Securities Administrators (CSA) in 2019 (and subsequently integrated into the rules and policies of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada) (IIROC and MFDA, respectively). Specifically, the court re-affirmed that a fiduciary duty between financial advisors and their clients is ad hoc, established on an individual, case-by-case basis, and is dependent on a multi-factorial analysis as required by common law. As such, a fiduciary duty does not arise solely due to regulatory standards and professional rules which require advisors to act in the “best interest” of the client.
Background: The plaintiff, a former client of the defendant, a registered member of the MFDA, commenced a class action against the investment advisor claiming breach of fiduciary duty, knowing receipt and knowing assistance, stemming from losses sustained from an investment in promissory notes. The certification judge denied the motion, holding that the Statement of Claim did not establish the material facts necessary to support a finding of a fiduciary relationship between the class members and the financial advisor. Further, it would not be possible to establish an ad hoc fiduciary relationship with the class, unless it could be shown on an individual, case-by-case examination that each individual of the class evidenced the traditional common law hallmarks of a fiduciary relationship. The plaintiff then appealed the decision to the Divisional Court.
Issue: On appeal, the primary issue was whether an ad hoc fiduciary relationship could be established between the class members and the defendant based on the “best interest” regulatory standard enshrined in the rules, regulations and by-laws of the MFDA and the FP Canada Standards Council Code of Ethics (professional standards).
Decision: In a 2 to 1 decision, the majority of the Divisional Court held that because ad hoc fiduciary relationships arise based on the specific circumstances of a given relationship, a fiduciary duty between a financial advisor and a client will only be found where the multi-factor test stated in the Ontario Court of Appeal decision of Hunt v. TD Securities Inc. (taken from the Supreme Court of Canada test in Hodgkinson v. Simms) is satisfied, on an individual basis. The Hunt test considered five factors: a) the client’s degree of vulnerability; b) the degree of trust between the client and advisor; c) the history of reliance and any representations of special skills and knowledge by the advisor to the client; d) the extent of the advisor’s discretion over the client’s account; e) and any professional rules or codes of conduct which inform the duty owed by the advisor and the standard of care. As such, the majority found that a fiduciary duty could not be established on a class wide basis as strictly the result of standards imposed by regulatory rules and regulations which require advisors to act in the “best interest” of the client.
The key distinction between the dissent and majority opinions centered around the weight afforded to the fifth factor (professional rules or codes of conduct). Sachs J. in dissent, placed a strong emphasis on a self-regulating body to set the standard for their profession, relying on the remark in Hodgkinson, that “It would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself.” While in the majority’s view, the dissent had reduced the five-factor analysis to a “’one-size-fits-all’ duty that would apply to every investor, regardless of discretionary authority over the account, or sophistication of the client.” The majority also took the view that imposing a fiduciary duty in the absence of the other four indicia would negatively impact both investors and capital markets.
Additional points and takeaways: It is important to note that the dissent of Sachs J. opens the door for the plaintiff to appeal the Divisional Court’s decision to the Ontario Court of Appeal. Even so, parties should keep in mind, as the majority notes, that even if the “best interest” regulatory standard does not impart a fiduciary relationship between financial advisors and their clients, “duties of good faith, care, confidentiality and disclosure apply to a variety of non-fiduciaries as well.”
-  Hunt v. TD Securities Inc. (2003), 66 OR (3d) 481 (CA), at para 40.
-  Hodgkinson v. Simms,  3 SCR 377 at 425.
-  Boal v. International Capital Management Inc., 2022 ONSC 1280 at para 68.
-  Ibid at para 70.
March 31, 2022