Low-interest investments may pose fraud risk

MONTREAL • The head of Quebec’s financial regulator says the current low-interest environment is causing an increase in fraud risk as investors search for higher margins.

“Ten years ago, scammers could attract people by promising 20 per cent interest, for example. In today’s world with a very low interest rate, you can be promised three per cent and it could be a scam,” said Authorité des marchés financier CEO Louis Morisset during an interview with the Financial Post on the sidelines of the International Economic Forum of the Americas in Montreal on Monday.

“The search for yield is there. People are looking for ways to invest and the risks are higher.”

Ten years ago, 9,200 Quebec investors lost what is now estimated at more than $100 million in the Norbourg Financial Group scandal.

Vincent Lacroix diverted money from a trust fund for personal interests in the biggest financial scandal the province has faced and one of the largest in Canadian history.

Morisset says that the AMF staff have tripled in size since then, growing from 47 employees in 2004 to over 150 today.

In 2010, the organization launched a cyber risk unit, a team that flags potential online fraud in Quebec.

Recently, the AMF put out a warning against trading in binary options after seeing suspicious activity emerging from the province, targeting investors looking for higher-yield investments.

However, Morisset says that with only five full-time staff handling daily cyber attacks, it’s mostly up to businesses themselves to protect against the risk.

“Frankly, there’s nothing we can do to prevent it,” he said.

“We can’t tell them what they have to do, but we have to ensure they are focusing on this risk and that they are investing on the technology and the detection.”

Morisset, 42, says technology is pushing the need for global cooperation between regulators, and the AMF is co-ordinating with the International Organization of Securities Commission on cyber risk and cyber resilience.

Unlike most other provinces, Quebec’s AMF oversees the entire financial sector, including business, insurance and banking regulations, as well as working with other authorities on criminal investigations.

“In Ontario, there are basically three organizations doing our job,” he said.

Last month, the AMF announced that Quebec and six other provinces will allow online equity crowdfunding for small businesses.

The measures include rules limiting the maximum individual investment to $1,500, and limiting the maximum amount a startup can collect at $500,000 a year.

“When you do this you have to balance the issues surrounding the raising of capital for small businesses and also the issue surrounding the protection of investors,” Morisset said.

He said crowdfunding is an opportunity to fill a “gap” between small startup financing and venture capital.

“When you start a business, obviously you ask for help from your family and friends. You get love money,” said Morisset.

“We thought it was important to help really small businesses to emerge.”

In fall 2015, the AMF will work with other provinces, including Ontario, to start a crowdfunding regulation system that will include publicly-traded companies.

People are looking for ways to invest and the risks are higher