To Finance Ministers and Investment Regulators

Margin investing accounts are sold to investors on the basis of being more convenient and enabling more sophisticated investment strategies such as leverage based on borrowed money.  This adds to the general level of indebtedness that many government have expressed concern about.  What is not told to would-be investors is that margin allows institutions to surreptitiously borrow their shares for the purpose of abetting short sales, which has the unfortunate effect of destroying stock prices and with it, people's savings.  We saw this operating on a large scale in 2008 when the Dow 30 was sold 95% short.  Such speculative activity turns the stock market from a stable vehicle of growth into a wild and counterproductive casino.

Cash accounts enable ordinary people to invest sensibly (without margin borrowing) but are discouraged (in favour of margin accounts) by institutional salespeople for the following self serving reasons: 
1. seeking more commissions on leveraged trading and shorting activity,
2. seeking to borrow shares from unwitting shareholders non-transparently,
3. seeking increased rents (revenue) on margin loans.
The government is allowing the financial industry to jack its revenues at the expense of stability and reasonable ratios in Canadian stock and money markets.

We the undersigned, believe the government should encourage investors to stay away from margin accounts and the borrowing of money and/or shares.  One way to incentivise investors is to remove 'suitability rules' for direct investing cash accounts that require investors to divulge net worth and income information that is really not needed or used.  Such invasion of privacy may be justified in margin accounts, where lenders must asses borrowers, and possibly even in mutual funds where innocent grannies should be kept out of inappropriate investments such as hedge funds.  Given the increasing incidence of loss and abuse of data, and the fact that there is no mechanism to use such data in direct investing accounts (ie to stop a trade), it is inappropriate to force account holders to divulge such sensitive personal information, even in the face of new terrorism requirements from the US.  As is the case in gun control, criminals will just give false data anyway.  We believe the government should not dismiss this remedy on grounds it is protecting people.  As noted, this does not work in practice for this sector but there are better ways to ensure people protect themselves such as stipulating people set up multiple accounts so eggs are not all in one basket, which is very much contrary to normal competitive financial industry strategy. 

In addition, government should force financial institutions to expressly warn investors that their shares will be borrowed from margin accounts.  At present, this information is buried way down in lengthy client agreements.  The government should counter the self serving interests of banks by educating investors and students in general about the perils of margin and shorting in Canada's educational facilities and in publications. The government should also facilitate and encourage people to convert their accounts from margin accounts to cash accounts by easing the above regulatory data requirements and it should force institutions to not block or discourage such conversions as is sometimes the case. 

The government should also investigate other possible disincentives to margin borrowing and excessive speculation such as taxes, fees, waiting periods, etc.

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