Sovereign against AMF, was the Supreme Court right or wrong?

I wrote recently of the dangers of doing business in Quebec by falling under the laws of this province.  The recent Supreme Court judgment regarding Sovereign’s infractions demonstrates this danger. However since this is a judgment from the highest court in Canada, it is quite evident that it will also have an impact on other common law provinces. This is why this judgment is important to all advisors.

As a result, I will share my point of view on this judgment. It is the point of view of a sales and marketing guy. I am not a lawyer and tend to stay away from them because my encounters with this breed of professionals rarely provide me with any form of enrichment.

The Case

Sovereign is an insurance company from Alberta operating in all provinces across Canada. As a result, it is registered with the AMF to operate in Quebec.  Sovereign uses a certain number of advisors to distribute its products. Flanders Insurance Management and Administrative Services Ltd. is an agency based out of Winnipeg and an agent of Sovereign. Flanders however was not registered to offer insurance products in Quebec.

In 2004, Flanders negotiated and delivered on behalf of Sovereign a policy for GE Financial to all of its Canadian retailers to insure all of the goods which are financed by GE Financial. Out of all the retailers in Canada, 56 of them were in Quebec.  Flanders therefore delivered on the basis of this national program, an insurance certificate to the Quebec retailers with GE being the insured and the retailer as the holder of the certificate. A competitor of Flanders made a complaint to the AMF. The AMF then started an investigation on April 2005. On June 2005, Sovereign answered the AMF questions by stating that the policy was negotiated in Ontario and that the premiums were paid by GE and not the Quebec retailers. In case of a payment of an indemnity, it was paid directly to GE. Sovereign mentioned this was done across Canada and no other provinces had any problems with this situation.

On August 2005, Flanders solicited the retailers including the Quebec retailers to renew their insurance. On January 2006, the AMF deposited 56 counts of infractions against Sovereign for the actions of Flanders in renewing the policies in 2005.

AMF: Sneaky Bastards

Yes sorry for the choice of words but the AMF are sneaky bastards. But being sneaky bastards does not prevent you from winning in Supreme Court. What is sneaky about this? Well the infractions are based on the renewal of the policy. As we know the AMF knew of the situation in April 2005 and could have advised Sovereign that contrary to the other provinces it was illegal to insure these retailers in Quebec through an agent not registered with the AMF. But the AMF said nothing because the AMF was uncertain of how to interpret the law and did not notify Sovereign of this. Therefore Sovereign thought that its interpretation of the law was correct.

The fact is in Quebec if a company or an individual seek to determine if a commercial practice is legal or not, the AMF will not make a decision on the matter. For example, let’s take this example. Mr. Cuggia is an expert on group insurance who is not licensed anymore as he does not want to sell group insurance. However he wants to make his expertise available to companies who are renewing their group insurance by helping these companies in the structuring of their existing group insurance. By not being licensed and by not receiving a commission and therefore by not acting as an agent of the insurer, he believes he can save these companies a lot of money which he has proven many times. In fact, he is paid on the savings he generates for these companies and is remunerated directly by these companies.  However he does not want to start this company to find out later that his commercial activities are infractions to the law and that he cannot provide such advice without a license. Sadly the law is not clear as to what is considered an activity that requires a license. Mr. Cuggia therefore asked the AMF to indicate its position and to clarify the law. Instead the AMF refused referring him to the law asking him to make his own interpretation.  Forced to do this he consulted his lawyers and they told him that analyzing existing insurance plan through a report including recommendations is not a selling activity and therefore he did not need a license. He proceeded with his business and a few months later the AMF suddenly regained its ability to interpret the law and started an investigation against him.

De : Information []

Envoyé : 3 octobre 2011 13:35
À :
Objet : TR: Questions -300902

Monsieur Cuggia,

En réponse à votre demande du 30 septembre, nous vous référons à l’article 4 de la loi sur la distribution des produits et des services financiers qui définit  le représentant en assurance collective personnes .

Si vous avez d’autres questions, n’hésitez pas à communiquer avec le Centre d’information aux numéros ci-dessous ou à consulter notre site Web.

Recevez, Monsieur Cuggia, nos salutations distinguées.

Pierre Cantin
Centre d’information
Autorité des marchés financiers
Téléphone : 418 525-0337   514 395-0337
Sans frais : 1 877 525-0337

As a result I was very interested by what the judges of the Supreme Court would say about this type of situation. I agree with judge Abella who stated that the AMF is responsible to regulate the financial services which are very complex and they must be the source of information in this regard. Abella stated that the AMF has a duty to fulfill this role and provide this information with diligence. The jurisprudence quoted by Abella stated that if the AMF did not fulfill its role and did not act by informing someone that he had interpreted the law erroneously, then the AMF had to share the responsibility for these infractions. Sadly Abella’s view was the view of the minority. The majority of the judges decided that it was the responsibility of those who are regulated to interpret the law and if you interpret it wrongly, well then you are damned. Please note here the unconstitutional and discriminatory basis of this assumption because it means that people with money and connections who can afford to pay lots of legal fees can get the law interpreted for them by big legal firms and can therefore engage in any commercial activities. The single person who wants to start a business and must do it alone is facing quite a bit of risk.

The Infraction Multipliers

The other question tackled by the Supreme Court was whether Sovereign by allowing its agent to renew the 56 policies in Quebec had committed one infraction or 56 infractions. This issue represents quite a bit of money since the minimum fine for each infraction is $10,000. If Sovereign had committed one infraction the total fine would be $10,000 or $560,000 for 56 infractions. This time it was not only Abella who thought there was only one infraction but judge Fish and Bel who also believed one infraction was committed.  Sadly the majority believed the contrary and we are still faced with the problem of the infraction multipliers which does not prevent fraud or protect the public. In fact multiplying infractions only make good stories for the newspapers by amplifying the gravity on an infraction committed and by casting the regulator as having done a great job. However based on my experience, those who are subjected to the infraction multipliers are usually honest people who have just made a mistake such as Sovereign.

I will not discuss the legality behind the infraction multipliers since this was done by judge Wagner and you can read his arguments in his decision. I will discuss it based on real life example. Let’s take the example of an advisor named Alan Murphy licensed in mutual funds and who was suspended by the AMF. Murphy was then told by his dealer that his suspension had been revoked. Murphy then proceeded to help his existing clients in making deposits in their existing RRSP. Before he learned that his dealer was wrong and that he was still suspended he had helped his clients make about $10,000 in deposits. It is important to note that Murphy did not open new plans. These were just additional contributions to existing mutual funds he had sold while being licensed and where a KYC was still valid. No clients lost money and Murphy only made about $600 of commission. However he was charged for 29 counts of infractions for a total of $145,000 because each deposit of $1000 went into in different funds and each deposit to a fund even if it was for $1 counted as a transaction and therefore as an infraction.

Compared this to the same person who sold $1 million of illegal investment into one investment and where clients lost their money; this will count as 1 transaction and therefore 1 infraction and the fine will be $10,000. In this case, the person would probably have made about $50,000+ in commission.

Is this justice?

Judge Wagner representing the majority for the Supreme Court understood there was a problem wishing that the AMF look at the context of a situation by using its discretion before making multiple counts of an infraction. Therefore for Wagner he hopes that power would be tempered by reason. But when has this ever been the case? Power will only always serve power and this is why we have check and balances because we know reason can always be corrupted.


The final element of this judgment which was important to me was the question of intention. Before you get to be found guilty of having helped someone in committing an offense, is there a need to prove that you had the intention of doing this?

To decide on this the Supreme Court compared the wording of the article 21 of the criminal code versus the different articles of law found in the financial services (482 of LDPSF). The difference was simple. In the criminal code the wording included « en vue de » which means « with a view to ». These words did not exist in the LDPSF. As a result under the criminal code to be criminally charged of helping someone doing a crime, the prosecutor must prove intention. This is not the case under the penal code in regards to infractions in the financial services. The majority of the judges justify this form of justice stating that to protect the public we must be willing to sacrifice the rights of an individual. It is the only way to achieve efficiency in a domain like the financial services which is extremely complex.

Well it is easily said until you are the one whose rights are sacrificed. It is very hypocritical. How many times I see an advisor stating this does not bother him until he is the one accused of an infraction. Suddenly this advisor is not silent anymore and certain the notion of sacrifice takes an entirely new perspective. It was fine when it was someone else.

Also if efficiency is so important why not remove the notion of intention in other commercial sectors such as the legal or medical profession? Why not apply this in politics? We could therefore impeach Prime Minister Harper without having to prove that it was his intention to help Senator Duffy hide that he had defrauded the Canadian taxpayer by claiming fraudulent expenses. Would not this make the government more efficient?

So does the need of the many outweigh the need of the few or does the need of the few outweigh the need of the many? I think the issue is more about who ask the question. If our world was populated by a lot of Spocks  and Kirks I would believe there is a balance that can be reached through reason. But since this is not the case, I would prefer a lot of checks to be in place to give reason a chance.


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