Investment Dealers Could Face Class Actions for Systemic Breaches of their Duty to Inform

Class Actions were created to be a more efficient and cheaper option for a number of people with common claims based on the same circumstances. However, class actions (obviously) cannot be used where an individual’s claim is unique to them, as is typically the case where a client sues a financial advisor or investment advisor for not adequately advising them. These cases usually turn on what was said by the parties as well as the plaintiff’s knowledge and circumstances. However, the Supreme Court of Canada’s decision in Desjardins Financial Services Firm Inc. v. Asselin, 2020 SCC 30 suggests that there may be a place for class actions in a claim against an investment dealer where that dealer has systemically misled their representatives about the risks of their products. The Majority wrote:

it would be highly imprudent for this Court to declare […] that any class action of this kind against a brokerage firm is impossible or that an action based on a representative’s alleged fault is necessarily an individual action.[1]

Even the dissenting judges, who did not authorize this claim, left the door open for this type of claim, writing:

The liability of financial advisers for a breach of the duty to inform and the duty to provide advice is not well suited to a class action because of the highly individual nature of the relationship between a client and an adviser in the context of a contract for investment services. […] This does not mean, however, that financial advisers are shielded from any class action for a breach of the duty to inform. If an applicant can show that the breach was systematic in nature, the common questions condition will not be an impediment to authorizing the action…[2]

This Class Action arises from investments managed by one company in the Desjardins Group (called the “Management” in the decision) and sold by representatives of another Desjardins Group company (called the “Firm” in the decision). The claims were different against the Firm and Management. The Claim against the Firm was concisely explained by the Supreme Court as:

Mr. Asselin alleges that Firm systematically breached its duty to inform by not adequately informing all of its representatives of the risks and characteristics of the investments (the “direct” fault). […] the representatives, having received false, misleading or incomplete information, then failed to provide adequate information to the group’s members (the “indirect” fault).[3]

The Claim against the Management was that it breached its duty of competence and caused damages by engaging in risky investments and transactions, which resulted in the investments being more volatile than their marketing suggested. Both the Majority and Dissenting opinion agreed to authorize this claim for compensatory damages. The issue that divided the Supreme Court was the claim against the investment dealer.

The lower court judge found that the Plaintiff had not shown that his action could succeed or that there were common questions between the class members. The Court of Appeal overturned this decision and their decision was largely upheld by a Majority of the Supreme Court of Canada.

After clarifying the test for authorization of a class action in Quebec, the Supreme Court concluded:

a person who provides financial services is indeed subject to a duty to inform, and failure to comply with that duty may give rise to civil liability, for which the principal or mandator of the financial adviser at fault must answer…[4]

According to the Supreme Court The “Duty to Inform” arises where “[1] knowledge of the information, whether actual or presumed, by the party which owes the obligation to inform; [2] the fact that the information in question is of decisive importance; [3] the fact that it is impossible for the party to whom the duty to inform is owed to inform itself, or that the creditor is legitimately relying on the debtor of the obligation”[5]

Applying this test to the allegations made by the Plaintiff, a Majority of the Court agreed that there was an arguable case that this duty applied to the dealer. The dealer knows or ought to know the details of its products. The details about the risks of investments are material to the decision to invest, and the claim alleges that the investors would have been unable to discover the precise way these investments were being carried out (including the associated risks) except from the dealer.  The Supreme Court of Canada concluded that, because this duty is broader and less specific to an individual than the duty to advise, it is more amenable for being resolved on a class action.

While the dissenting judges agreed that there were some cases where a class action would be appropriate for a claim against a dealer, they would not have authorized the class action here because the Plaintiff here had not plead or provided any basis for his claim that there was a systemic issue that could be attributed to the dealer. They also believed that the “duty to inform” required more individualized analysis than the Majority, writing:

I agree with my colleague that the duty to inform is more general than the duty to provide advice owed by Firm’s representatives. The duty to inform is, however, a variable obligation shaped by the circumstances of each case, such as the client’s characteristics and the nature of the client’s relationship with his or her adviser […] The obligation to inform in this case clearly arose in a broader context, namely the provision of a financial adviser’s services, which varies in accordance with several factors, including the length of the relationship, the client’s goals and the client’s level of expertise, to name a few.[6]

The test in Quebec for authorization differs from the tests for certification in the rest of Canada. For example, in Ontario part of the test for certification includes whether a class proceeding is preferable. The same facts might have had a different result if decided in another province.

However, the general approach taken by the Supreme Court of Canada to the duty to inform means it is possible for plaintiffs to start a class action against a dealer for a systemic issue that breaches the clients’ rights in a way that their individual circumstances are similar even if their backgrounds and advisors may differ. However, where the proposed class does not to plead supportable facts that could prove all of the class members were affected by the systemic issue or where the individual issues make a class action a less efficient option, dealers would have these additional grounds to contest certification .

[1] At para 115

[2] At para 239

[3] At para 45

[4] At para 58

[5] At para 63

[6] At para 242