Special Feature

2013 Regulators’ Report Card

What do the compliance officers and company executives think about the regulators that oversee them? Applying discretion and OBSI are among the hot issues. From the April 2103 issue of Investment Executive newspaper.

The financial services industry has many concerns about giving OBSI more power and its campaign to "name and shame" firms

By James Langton | April 2013

The financial services industry certainly has been critical of the Ombudsman for Banking Services and Investments (OBSI) and doesn't back the regulators' proposal to declare OBSI the sole dispute-resolution mechanism for all firms. Yet, there also is broad support for giving OBSI tougher enforcement powers.

Investment Executive (IE) sought the industry's views on the current state of dispute resolution in two supplemental questions in our 2013 Regulators' Report Card and found that, by and large, what the industry truly wants is a more effective ombudservice.

After operating in the background for years, OBSI has come under increasing criticism from the industry over the past couple of years - and it's facing growing resistance to its recommendations. Late last year, amid mounting intransigence from the industry, OBSI felt compelled to deploy its only enforcement power - publicly naming firms and detailing their cases - against several firms in cases in which OBSI was unable to get those firms to accept its recommendations.

Around the same time, the Canadian Securities Administrators (CSA) proposed that all firms be required to use OBSI to resolve customer disputes. Currently, only firms that belong to the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) are obliged to use OBSI.

Although some other types of securities firms (such as exempt-market dealers and scholarship plan dealers) use OBSI's services, the CSA proposal would make it mandatory for all firms. The goals are to minimize confusion for clients and shore up OBSI's status.

Yet, those surveyed by IE were split over whether this is a good idea. When compliance officers (COs) and company executives were asked whether they are in favour of the CSA's proposal, 60% of those who answered said, "No." If those who declined to offer an opinion (almost 25% of those surveyed) are included, slightly less than half of survey respondents were against the CSA's proposal and about one-third supported it.

Among those who objected to the CSA's plan, the reasons most often cited included the belief that OBSI doesn't understand the industry well enough; the belief that OBSI is biased in favour of clients; and the preference that no organization be given a monopoly over this aspect of the business.

"I'm totally against this proposal," says a CO with an Ontario-based mutual fund dealer. "Banks are fighting to avoid it. And if they are finding reasons to get out, then imagine what it's like for small companies."

Indeed, OBSI suffered the withdrawal of a second big bank in late 2011 and saw the federal government refuse to mandate bank participation in OBSI's service last year in the finalized rules for bank-related dispute resolution.

However, opposition to the CSA proposal to mandate participation for all securities-related firms was far from unanimous; in fact, a healthy share of survey respondents supported the idea.

In particular, supporters cited the benefit of streamlining the dispute-resolution process and making it easy for clients to navigate. Some survey respondents also objected to the idea that firms should be able to choose, and pay, the organization that would serve as the judge in their disputes with clients - effectively, the approach that the federal government has endorsed for the banks.

"It's not fair to allow banks to hire their own dispute-resolution [service] because it's a conflict of interest," says an executive with an Ontario-based mutual fund dealer. "The CSA's proposal is one way to avoid that."

Although there was no unanimity on whether the CSA proposal makes sense, both sides of the issue apparently believe some reform at OBSI is needed.

For example, one respondent who objects to the CSA proposal and doesn't like the idea of OBSI being the last word on customer disputes suggested there needs to be an appeal process.

Another respondent who supports the CSA proposal added a caveat: "I've heard there is a lack of industry knowledge among [OBSI's] investigators, so that should be addressed."

Another major area in which the industry would like to see some changes is in OBSI's reliance on "name and shame" as its only recourse when a firm refuses one of OBSI's recommendations.

IE specifically asked survey respondents whether they believe that the recent spate of "name and shame" actions has been effective. Of those who answered the question, 77% said, "No." Overall, almost 30% declined to answer and just 17% said that it has worked.

"For a dispute to get to that point - that a firm absolutely refuses to comply - it's because [the firm] believes it's in the right," says a CO with an Ontario-based fund-management firm that also is an exempt-market dealer. "Then, all OBSI can do is threaten to tell on [the firm]. I don't think it's a workable model."

Indeed, the industry doesn't have much faith in the "name and shame" process. Some survey respondents said it's just not effective because clients aren't aware of it, while other respondents worried that it's a punishment that really can hurt only a small firm because a big dealer isn't going to feel the impact. And some respondents said that this practice taints the industry overall and doesn't stick to the firm in question.

Yet, despite this widespread skepticism about OBSI's role, there also was a strong sense that the ombudservice needs the ability to enforce its decisions.

"'Name and shame' is such an unprofessional way of resolving a complaint," says a CO in Ontario with a mutual fund dealer. "OBSI would be more effective if it had the power to enforce its rulings."

Of course, the industry doesn't simply want OBSI empowered to enforce decisions in its current state; it needs greater oversight.

"[OBSI] needs a way to enforce its decisions," says a dealer in the Maritimes. "But I have heard the concerns about its process, and I think that should be examined."

The industry may not be happy with OBSI, the regulators' plan to make the service mandatory or OBSI's "name and shame" power, but what industry players appear to want is an ombudservice that has both the power and the ability to resolve disputes.

© 2013 Investment Executive. All rights reserved.