Be Careful of Predatory Financial Advice

Most financial advisors provide exactly the kind of service you would expect: they provide you options for investing your money and inform you of the risks and rewards involved with choosing an investment vehicle or personal financial restructuring. Those looking for financial advice to plan for their future, myself included, place trust in the advice we are receiving.

Rarely, as was the case in Connor Financial Services International Inc. v. Laughlin, financial advisors fail to keep their clients’ best interests in mind and, instead, seek to use their position to benefit themselves at their clients’ expense.

In Laughlin, the plaintiffs, the “Connor Group”, were suing the defendants, the Laughlins, for money allegedly owed further to a series of contracts the Laughlins had signed with the Connor Group.

By way of background, in 2000 when the Laughlins met with the Connor Group, they were unsophisticated in financial matters and had gotten into some financial difficulty by having overused their credit cards, racking up in excess of $22,000 in credit card debt. The Laughlins had a home with a mortgage and modest investments in RSPs. The Laughlins had seen an advertisement by the Connor Group concerning an RSP investment in what was described as a “Working Opportunity Fund”. The Laughlins were interested and met with the Connor Group’s principal, Gerry Connor.

The Laughlins believed the Connor Group would be providing them with financial advice on how to best consolidate and pay off their debt. The Connor Group presented them with a flurry of complex documents which the Laughlins signed despite not being equipped to understand the documents. The Laughlins were left with the general sense that they were borrowing money and buying mutual funds, but relied entirely on Mr. Connor for every step taken; they did not have any advice from third parties and relied on Mr. Connor’s suggestions that, by following his plan, the Laughlins would be debt free in three years.

In fact, the Court found that the documents signed contained a number of unscrupulous terms which led to, among other things:

  • the Laughlins authorizing the Connor Group to extend a $24,000.00 line of credit to the Laughlins to pay off their credit card debt which would be repayable on demand, incur interest at 13% compounded monthly and that the interest charged could be unilaterally amended by the Connor Group with 30 days’ notice without apparent restriction;
  • the Laughlins being charged higher interest rates by the Connor Group than they would have paid on their credit card debts;
  • the $14,000.00 held by the Laughlins in their low-risk RSPs being applied to high risk mutual funds which performed very badly;
  • the high risk mutual funds performed very badly and had decreased in value to $7,000.00. Despite having lost half of the Laughlins low-risk RSP investment, the Connor Group convinced the Laughlins to apply the remaining $7,000.00 towards the outstanding balance of the loan with the Connor Group;
  • despite the Laughlins making their monthly payments on their loan for four years, not a penny of the principal being paid off;
  • the Connor Group slipping in a clause that its legal costs of collecting on sums advanced would be paid by the Laughlins and would be treated as amounts lent by the Connor Group which, in turn, would make such costs subject to interest rates which could be unilaterally amended at any time; and
  • the Connor Group almost tripling the interest to 36% compounded monthly after it commenced its action against the Laughlins.

While these terms may be shocking when laid out in summary fashion, the Court found that the Laughlins were ill-equipped to fully appreciate the consequences of the documents they were executing with the Connor Group. The Laughlins mistakenly believed there were getting sophisticated guidance from the Connor Group, but instead found themselves being taken advantage of. As was pointed out by the Court and as a quick internet search will reveal, the Connor Group is no stranger to being the subject of a number of professional and regulatory sanctions and/or investigations for its unprofessional conduct.

Ultimately the Court found that the Connor Group’s attempt to recover $118,907 from the Laughlins – being the loan balance of $32,838 when the action was commenced, plus interest at 13% and 36% respectively, compounded monthly, for a total owing of $99,513, plus the actual legal costs of collecting on the debt. $118,907- as well as further amounts for the legal cost of trial was simply not an amount the Court would countenance. At para. 22, the Court found that the loan agreement in question was unconscionable; that is, there was an inequality in the position of the parties arising from the ignorance, need or distress of the Laughlins which left them in the power of the stronger, more informed Connor Group and, as a result that there was substantial unfairness in the bargain reached.

The Court ultimately found that the Laughlins were entitled to relief from the claim made against them by the Connor Group. The Court also went further and seemed to suggest that, had the Laughlins counterclaimed against the Connor Group, they may have succeeded.

The take away lesson is that, while the Court may relieve you from the obligations of a contract which is found to be unconscionable your best bet is to obtain proper, independent advice before you enter into any contract which may significantly affect your financial affairs. Depending on a whole host of factors, the Court may not be prepared to rescue you just because you entered into a bad bargain. The other lesson to be learned is that any party who does not allow you sufficient time and opportunities to have a contract reviewed by an independent legal or financial professional is one you should reconsider doing any business with.

If you are seeking to have a qualified legal professional review any contractual documents or business deals before you enter into them, please feel free to contact any of our many solicitors practicing in the area of business law. If you feel that you have been taken advantage of in entering into any contractual relationship or have become involved in a business dispute involving the interpretation of a contract, please feel free to contact any of our litigation lawyers.

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