Failure to Disclose Fees on Investment Accounts can be a Breach of Fiduciary Duty
On February 28, 2020, a judge of the Ontario Superior Court granted judgment in a class action and awarded an accounting of the profits realized by three Bank of Montreal subsidiaries on approximately $102.9 million in undisclosed foreign currency conversion fees. The fees were charged over the course of ten years to clients holding RRSP and other registered investment accounts.
In MacDonald et al v. BMO Trust Company et al, 2020 ONSC 93 (“MacDonald”), the plaintiffs had eight years earlier certified as a class action a proceeding that alleged that BMO Trust Company, investment dealer BMO Nesbitt Burns and discount brokerage BMO Investorline had breached their fiduciary duties to clients by failing to disclose the amount of the currency exchange fees they were charging in RRSP, RESP, LIRA and other registered accounts between 2001 and 2011.
In the process of opening their accounts, each of the class members had signed a trust agreement that said, among other things, that: “Planholder acknowledges that the Agent (or an affiliate) may charge fees, commissions and expenses to the Fund in its capacity as the investment advisory firm for the Planholder. ” In the action, the representative plaintiffs had argued that the various BMO entities, as trustees of their accounts, owed them a fiduciary duty to disclose the quantum of the fees for currency conversions in their accounts. They argued that, because the fees were higher than those charged by other comparable companies, had the account holders been made aware of the fees, they might have chosen to move their accounts.
For their part, the defendants argued that the RRSP and other registered funds were held as bare trustees and therefore, no fiduciary duty was owed to class members. Regardless, they argued that the clients were all aware that they would be charged fees for currency conversions (as set out in their trust agreements) and the defendants would have disclosed the quantum of those fees to account holders if any of them had asked.
The class action was decided on a summary judgment motion without the need for a trial, and Justice Belobaba ultimately agreed with the plaintiffs and granted judgment. He determined that the three BMO companies were trustees and fiduciaries of the registered account holders – because the investments were held in trust accounts and held pursuant to trust agreements. He determined that, based on the wording of the agreements, these trust relationships created a fiduciary duty. In particular, Justice Belobaba reviewed the trust agreement and relied on the provision that said the Defendants would provide “reasonable prior written notice to the Planholder of a change in the amount of such fees”. Despite this wording, which requires a “change in the amount of such fees” Justice Belobaba did not make any finding that there was a change in the amount of the fees between the time the accounts were opened and the time these fees were discovered in 2011. Rather, he reasoned that it is a basic principle of trusts and the duty of trustees that information on fees must be disclosed.
Justice Belobaba wrote that, even if he agreed with BMO companies that the relationship with class members was just a bare trust, a bare trust still required them to advise the beneficiaries before removing any funds in order to pay their undisclosed currency conversion fees.
Justice Belobaba’s decision throughout placed a stringent duty on trust companies, saying:
“It is fundamental to the viability of trust law in general, and banking and investment relationships in particular, that trust and fiduciary duties be taken seriously – especially when they are explicitly set out in a standard-form trust instrument that was drafted by the fiduciaries. And even more so, when they involve a duty on the part of the trustees and fiduciaries to disclose the amount of any fee that will be taken out of the beneficiaries’ trust accounts by these same trustees and fiduciaries for self-payment.”
In other words, when a trust company enters into an agreement it drafted with an account holder and when it is given the right to remove its fees from those accounts, the company owes a duty to the account holder to be clear about what those fees are.
Given the nature of a fiduciary duty breach in this case, Justice Belobaba granted an equitable remedy that the three BMO entities be ordered to disgorge the profits they earned on the $102.9 million in undisclosed currency conversion fees – the quantum of which is to be calculated on a further reference to the court.
Any company that operates investment accounts for investors or holds funds in trust for clients should take note of this decision. This decision places a fiduciary duty on these companies in relation to any disbursement of those funds to ensure that clients know exactly what is being charged before any fees are deducted. A fiduciary duty is not a small thing. It requires the entity owing the duty to prioritize the interests of the person to whom it owes the duty. At a minimum, to meet this duty, investment dealers, trust companies and banks should ensure that they are making the terms that govern their trust accounts – and the amounts to be charged – clear to account holders in advance and advise them every time the terms or the charges change. It is not enough to make this information available on request.
