Feds plan to increase predatory debt adviser fines twenty-fold, experts say it’s unlikely to work
The Canadian government’s plans to crack down on predatory debt advisers by hiking fines nearly twenty-fold are unlikely to solve the problem of identifying offenders and holding them and their enablers accountable, experts warn.
Debt advisers often promise to help ward off creditors and eliminate debt only to refer clients to insolvency trustees after bilking them hundreds or thousands of dollars. They often pose as licensed insolvency trustees, encouraging people to file consumer proposals, which are legal agreements to pay off debt, or for bankruptcy without outlining the repercussions.
They often duplicate services that licensed professionals provide for free and charge extra fees, sending clients into a cycle of debt.
With insolvencies up more than 23 per cent last year across Canada, the government’s fall economic statement last month promised to introduce civil remedies, such as damages and restitution, while boosting criminal fines for unlicensed advisers and those pushing bankruptcy filings under Canada’s Bankruptcy and Insolvency Act from $5,000 to $100,000 for individuals and $1-million for corporations.
“The addition of civil remedies provides an additional tool to allow the OSB to more effectively address misrepresentation and solicitation,” said superintendent of bankruptcy Elizabeth Lang in an e-mailed statement.
As things stand, the only options the Office of the Superintendent of Bankruptcy has for combatting predatory advisers are sending cease and desist letters, referring the issue to other regulators, or – if those fail – going through the challenge of seeking criminal charges.
It’s an offence for advisers to misrepresent themselves as licensed insolvency trustees or solicit clients to make a filing under the Bankruptcy and Insolvency Act.
Though the steep penalty hike signals a tougher stand, it doesn’t address enforcement, said Doug Hoyes, an insolvency trustee and host of the Debt Free in 30 podcast. “If you increase the fine for something no one’s ever been fined for, is it going to make any difference?” he said.
The challenge is that debt advisers are unlicensed and unregulated, although they can pretend to be licensed insolvency trustees. “Often, they’re not even in Canada. They kind of operate in the shadows,” Mr. Hoyes said.
Identifying offenders – and proving that an offence has been committed – is difficult. Since debt advisers often refer clients or sell leads to insolvency trustees, Mr. Hoyes calls for higher penalties and stricter accountability for trustees who collaborate with advisers or benefit from their services.
Debt advisers typically solicit clients through online ads, preying on those under severe stress and unaware of their options, said Kyle Harris, chief legal officer at Harris & Partners and an insolvency trustee.
“They’re dealing with people who are scared – they’ll scratch together $500 and give it to them,” Mr. Harris said. “The debt adviser charges them money just to refer them to an insolvency trustee. By the time the client realizes they’re being redirected, they’ve already lost their money.”
While Mr. Harris calls them “crooks” and Mr. Hoyes agrees they’re “scammers,” both say their actions don’t always meet the legal definition of fraud.
“I get you to e-transfer me $3,000 for my fee – if I get caught, I’ll say I was providing very useful advice. I told you to open a different bank account, showed you ways to save money, or helped you negotiate with your creditor,” Mr. Hoyes said. “These are all perfectly reasonable things. So even if I get caught, I don’t see how there’s any chance anyone ever gets convicted.”
Debt advisers fall outside the jurisdiction of the Office of the Superintendent of Bankruptcy, which regulates insolvency professionals. “There’s nothing that controls them – no one,” Mr. Harris said.
That’s why Mr. Hoyes suggests zeroing in on insolvency trustees who indirectly benefit from their work. In 2022, debt advisers provided financial advice on approximately 22 per cent of consumer proposals, which are filed through insolvency trustees, with some provinces seeing that number spike to 40 per cent.
Advisers can collect hundreds, sometimes thousands of dollars, from clients before passing them off to trustees. “It’s like needing an oil change. Instead of going to Jiffy Lube, you pay an ‘oil change consultant’ $3,000 to analyze your situation, only for them to refer you to Jiffy Lube,” Mr. Hoyes said.
Mr. Harris noted that it’s already against the rules for trustees to collaborate with debt advisers, and the superintendent is cracking down further. He said this can be frustrating for trustees because they want the superintendent to clamp down on advisers instead.
The OSB launched the Debt Advisory Relationship Review last year where trustees with apparent ties to debt advisers are targeted for review with compliance consequences.
There are 10 corporate insolvency trustee licences and 16 individual licences under professional conduct investigation, with a portion relating to involvement with debt advisers.
But steeper and clear-cut financial penalties could incentivize trustees to take more action against bad actors, Mr. Hoyes said. “If the government truly wants to stop this … they need to sanction trustees who enable this behaviour,” he said.
For now, he’s doubtful that the government will pass the law and the proposed fines will be implemented.
In the meantime, Francisco Remolino, a licensed insolvency trustee at Remolino & Associates, said Canadians can protect themselves by avoiding anyone promising to quickly “eliminate” all debt or bypass legal processes, and by steering clear of debt-relief professionals with large upfront fees.
Licensed insolvency trustees are federally regulated, with transparent fees standardized under the Bankruptcy and Insolvency Act, he said. Anyone can verify their credentials through the licensed insolvency trustee directory on the Superintendent of Bankruptcy’s website.
Licensed trustees typically offer free consultations and provide a full financial assessment, outlining all available debt-relief options without putting pressure on clients to act immediately.
This article was first reported by The Globe and Mail
