Handling complaints internally could harm clients by diverting them from using OBSI or the courts

By James Langton | Mid-November 2017

Two investor advocacy groups are calling on regulators to put a stop to bank-owned investment dealers using so-called "internal ombudsmen" as part of their client complaint-handling process.

The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and the Public Interest Advocacy Centre (PIAC) both state that using internal ombudsmen could harm clients by diverting them from the opportunity to pursue their unresolved grievances with either independent dispute-resolution services, such as the independent Ombudsman for Banking Services and Investments (OBSI), or the courts.

According to a joint letter from FAIR Canada and the PIAC to OBSI's Joint Regulatory Committee (JRC), the group of regulators that oversee the ombudservice: "Investor complainants are not being given the clear option of seeking independent dispute resolution by OBSI. Rather, investors are being diverted to an 'internal ombudsman' while critical OBSI-related time periods and civil action limitation periods continue to run."

Ordinarily, firms have 90 days to respond to client complaints. At that point, they must provide the client with a written decision on the issue or information on escalating their complaint to OBSI. However, for investment dealers, the 90-day deadline, which is supposed to apply to all internal complaint-handling processes, doesn't include the use of an affiliate's internal ombudsman.

As the advocacy groups' letter points out, the rules applying to investment dealers expressly allow for this exception to the 90-day limit. Furthermore, the advocacy groups' joint letter argues, this practice harms investors and violates the complaint-handling requirements set down in securities rules by dragging out the internal complaint-handling process and diverting investors from pursuing redress with either an external, independent arbiter, or in court.

"The use of this [internal] procedure discourages investor complainants from continuing with their complaint due to lack of resources, attrition and fatigue," states the letter from FAIR Canada and the PIAC. "Fewer individuals, therefore, carry on to the legitimate ombudsman services of OBSI."

At the same time, the letter also argues that the title "internal ombudsman" is potentially misleading to clients. In truth, the letter states, these services are being delivered by employees of financial services firms that are affiliated with the dealer, who don't have the independence that's implied by the title of "ombudsman."

"These employees are not independent and they're in a clear conflict of interest position, which is inconsistent with the concept of an ombudsman," the letter states, adding that these roles would not meet the definition of "ombudsman" that's used in other major jurisdictions around the world, such as the U.K. and Australia.

Thus, the letter from FAIR Canada and the PIAC calls on the regulators that compose the JRC to require that OBSI's terms of reference and the rules of the self-regulatory organizations - the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada - be amended to prevent bank-owned dealers from using their internal ombudsman to drag out the dispute-resolution process.

If dealers are going to refer unhappy clients to an internal ombudsman for a second review of their complaints, this should happen within the time limit set in securities rules for dealing with complaints, the joint letter insists: "Within the 90 days, firms may choose to provide a second level of review. However, they should not be permitted to take more than 90 days to do so."

The letter also maintains that firms shouldn't be allowed to use the "ombudsman" title for these internal officials: "Registered firms should not be able to confuse consumers by calling any of their internal complaint-handling procedures 'ombudsman.' Such processes do not meet international criteria to be called an 'ombudsman' nor can [they] be said to be 'impartial' in accordance with international criteria."

The JRC acknowledges that it's considering the advocacy groups' submission, but has not yet stated if regulators are prepared to act.

"FAIR [Canada] and [the] PIAC have raised this with us and with our [Canadian Securities Administrators] colleagues on the Joint Regulators Committee, and we are looking into those concerns," says Lucy Becker, IIROC's vice president of public affairs and member education services.

Although a couple of regulatory sources indicate that the JRC is working on a response, which could be released in the next few months, the regulators would not confirm the status of the file. The Ontario Securities Commission - whose vice chairman, Grant Vingoe, chairs the JRC - declined to comment on whether the JRC will be acting on the issue.

This latest concern from investor advocates about the state of dispute resolution comes in the wake of an independent reviewer's report released in 2016 that calls for much more fundamental changes to the system.

Among the report's 19 recommendations is a suggestion that OBSI be given the power to issue binding rulings on client complaints and that some sort of limited appeal process be developed.

In response, the JRC issued a statement that pledges to continue discussing options for "strengthening [OBSI's] ability to secure redress for investors."

There has yet to be any decisive action on the key recommendation that OBSI be given binding powers.

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