Ombudservice: Protecting investors

It appears that the tail now is wagging the dog for the Ombudsman for Banking Services and Investments (OBSI). As the ombudservice readies itself to meet new federal rules for banking complaints, OBSI is pulling in its horns on the investment side.

In April, the Department of Finance Canada unveiled the final rules that dispute-resolution services will have to meet in order to deal with banking complaints. Ombudservices can start applying to the Financial Consumer Agency of Canada (FCAC) on Sept. 2 for recognition that they meet the new federal standards. According to Tyler Fleming, director of stakeholder relations and communications with OBSI, that ombudservice intends to file its application as soon as possible.

Systemic issues

In the meantime, OBSI has been contemplating a series of changes to its terms of reference (TOR) that set out its mandate, which OBSI’s board will have to consider before OBSI applies to the FCAC for recognition.

The proposed changes, which were published for comment in mid-June, include a plan for OBSI to give up its ability to investigate so-called “systemic issues” on the investment side.

The new federal rules don’t allow dispute-resolution services to look into possible systemic issues at the banks, so OBSI decided to drop that capability from the investment side for the sake of consistency.

OBSI also is seeking to stipulate that it will not investigate any complaint involving segregated funds, but will refer such issues to the Ombudservice for Life and Health Insurance. OBSI also is proposing new conflict of interest policies and aims to formalize its process for “naming and shaming” firms that refuse to follow its recommendations (OBSI’s only real enforcement power).

The comment period for these proposals closed in mid-August, and the responses submitted regarding these proposals reveal that investor advocates are not pleased with the direction that OBSI appears to be taking.

Markham, Ont.-based Small Investor Protection Association Inc. doesn’t support the proposals, and its submission warns that “investor protection appears to us to be materially impaired.”

Regarding specific objections, the Canadian Foundation for Advancement of Investor Rights‘ (a.k.a. FAIR Canada) comment stresses that FAIR Canada does not agree with OBSI’s decision to give up its ability to investigate systemic complaints on the investment side. This comment also reiterates FAIR Canada’s position that OBSI should have the ability to make its decisions binding, not simply to “name and shame” firms that refuse to go along with its recommendations. This comment also says that seg fund complaints should remain within OBSI’s mandate.

On the industry side, various comments suggest that, among other things, firms should have more of a say in what’s publicly released when OBSI decides to name and shame a firm; that OBSI’s proposed six-year limitation period should be reduced to two years; and, that OBSI should establish an appeals process for its decisions.

Given the strong, disparate views on OBSI’s proposed changes, it’s difficult to imagine that the revised terms will be ready for making the application to the FCAC at the start of September. It’s yet to be determined whether OBSI’s board will approve the new terms of reference in time to apply to the FCAC, Fleming says, or if the proposals will face another round of consultation.

If the proposals aren’t ready, Fleming adds, OBSI would apply under its existing TOR, and would also submit whatever is proposed for further consultation.

In the meantime, the call for securities regulators to take a bigger hand in supporting OBSI grows louder.

FAIR Canada’s comment reiterates that organization’s call for the Canadian Securities Administrators (CSA) to recognize OBSI formally. Moreover, the comment suggests that if OBSI isn’t going to have the powers to uncover systemic issues or enforce its decisions, then securities regulators must take up the slack.

Violating the rules

FAIR Canada’s comment says OBSI should be obliged, at least, to report any suspected systemic issues to regulators, which will have to ensure that they investigate instead.

As well, FAIR Canada’s comment suggests that firms refusing to go along with OBSI recommendations without a legitimate reason are violating the securities rules – specifically, those firms’ obligation to participate in a dispute-resolution system in good faith. If that’s the case, the comment continues, regulators should be disciplining these firms.

Securities regulators have been conspicuously silent on many of the critical issues affecting OBSI over the past couple of years – from complaints by investment firms about the ombudservice’s capabilities to an independent report that recommended sweeping changes to shore up the service and the fact that OBSI has had to deploy its “name and shame” powers for the first time in a series of cases over the past year, when it couldn’t reach resolutions with firms that were rejecting its recommendations.

The CSA has voiced support for OBSI as an independent dispute-resolution provider and has proposed rules that would oblige all firms under its jurisdiction to use the service. (Currently, only investment dealers and mutual fund dealers are required to participate.) But the CSA hasn’t addressed many of the root issues facing OBSI over the past couple of years.

Instead, the new oversight requirements on the banking side mean the feds have a bigger role. This, despite the fact that investment complaints take up a much larger share of OBSI’s attention. There are more of them than banking complaints, and investment complaints both take longer to resolve and account for almost all of the monetary compensation that OBSI recommends.

Still, this hands-off approach by the securities regulators may yet change. The CSA revealed in its first-ever business plan, released in early July, that it plans to implement an oversight regime to monitor the effectiveness of OBSI.