Industry lobbyists feel that ombudsman favours investors

By James Langton | April 2016

The investment industry has grown increasingly unhappy with the Ombudsman for Banking Services and Investments (OBSI), the dispute resolution service, in recent years. The reason, according to industry lobbyists, is the sense that OBSI favours investors and tells investment firms to pay up, even if they haven't broken any rules.

The evidence of increased industry opposition to OBSI is obvious in the numerous refusals by investment firms to follow OBSI's compensation recommendations that have been publicly reported over the past few years. Still, apart from these individual cases, any underlying industry intransigence plays out largely behind the scenes.

Now, however, some of the industry's concerns are being aired amid consultations that are taking place as part of OBSI's latest independent review.

For individual firms to air these grievances themselves would be tricky, given that OBSI presides over disputes with their clients. And, indeed, none of these firms has made public submissions to the consultation.

But a couple of the industry lobby groups - the Investment Funds Institute of Canada (IFIC) and the Portfolio Management Association of Canada (PMAC) - are taking up the cause on their member firms' behalf.

According to IFIC's submission, one of the industry's primary complaints is the perception that OBSI either favours investors in its decisions or sees itself fulfilling a sort of regulatory role rather than doing the job of an independent adjudicator: "Despite OBSI's clear written mandate, the perception still exists among some in the industry that OBSI sees itself as a quasi-regulator or investor advocacy body."

The data do not appear to support the opinion that OBSI favours investors. Its latest annual report indicates that the industry still wins more than it loses in front of OBSI. In 2015, 65% of the cases OBSI ruled on were resolved in favour of industry firms.

The 219 cases that did go investors' way resulted in slightly less than $4.7 million in total recommended compensation.

Nevertheless, the idea that a firm can comply with securities industry rules, yet still be asked to compensate a harmed investor, appears to be stoking this sense of injustice.

According to IFIC's submission, the industry's suspicion of OBSI stems from a lack of clarity about how OBSI decides cases under the "fairness standard" that is applied when considering client/industry disputes: "Clarifying the fairness standard and how it differs from existing regulatory requirements would help OBSI to secure full buy-in from [the] industry."

To that end, IFIC's comment adds, OBSI - and the regulators - should provide additional guidance that spells out their respective roles more clearly.

In addition, the IFIC submission recommends that OBSI be more open with firms during the process of analyzing the facts of a dispute and coming to a decision.

According to that submission: "Our members report providing case materials to OBSI as requested, only to hear nothing from OBSI for months before they are suddenly presented with a compensation recommendation."

The IFIC comment also calls on OBSI to communicate with firms throughout the decision process, which, it states, will help speed resolutions.

From the investor side, there also is a sense that OBSI's role may have become muddied. But the concern expressed in the Ontario Securities Commission's Investor Advisory Panel (IAP) submission is that OBSI is increasingly playing the role of mediator to facilitate settlements between firms and clients rather than simply ruling on the merits of complaints and making compensation recommendations.

This view of OBSI as a mediator has arisen in the wake of the industry's increased willingness to ignore the ombudservice's compensation recommendations - which, when that happens, leaves aggrieved clients with nothing.

"Since OBSI's mandate is to act as an independent and impartial arbiter," the IAP comment states, "then, in our view, [OBSI] has clearly drifted off course and investors are paying the price, with industry choosing too often to ignore the OBSI recommendation and offering instead low-ball settlements.

The fix for this, investor advocates such as the IAP argue, is to make OBSI's recommendations binding on the firms.

"OBSI must be given the power to provide binding decisions," the IAP comment states, adding that such a move "would be a game-changer for OBSI."

This view is echoed in the comments submitted by various other investor advocates, including the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), which argues in its submission that there should be a single, national, statutory dispute-resolution service for clients of the financial services sector with the power to make binding decisions.

Investor advocates have repeatedly called for OBSI to be given the power to impose its decisions on firms; the previous independent review of OBSI (carried out in 2011) also made this recommendation. But the regulators have not followed that advice.

IFIC's comment warns that doing so would make the process more legalistic and expensive, eliminating many of the virtues of informal dispute resolution.

Another major issue for the industry is OBSI's fee model, which, the IFIC comment states, is not sufficiently transparent.

PMAC's comment echoes this criticism, arguing that the methodology for determining OBSI's fees for portfolio managers is unfair - particularly as they have generated very few complaints. (All investment firms were required to join OBSI as of August 2014.)

According to PMAC's submission, portfolio-management firms generated only 10 cases for OBSI in the 15 months after they were required to use the service. And, the comment continues, these firms are collectively paying an estimated $500,000 in annual fees.

"In our view," the PMAC submission states, "it is completely unjustified to subject each registered portfolio manager in Canada to pay OBSI an annual fee regardless of whether the service is ever used."

The PMAC comment argues that the fees levied on portfolio-management firms effectively are subsidizing the costs of serving other sorts of firms with more substantial complaint volumes.

Instead of the current model, PMAC's comment states, OBSI should charge fees directly to the firms that actually use the service. And, amid PMAC's concerns about the fee model, that submission argues that firms should have their choice of a dispute-resolution service rather than be obliged to use OBSI.

STABILITY IN COMPLAINT HANDLING

Despite the turmoil and angst surrounding the Ombudsman for Banking Services and Investments (OBSI) in the past couple of years, the actual business of resolving disputes in the financial services sector remains remarkably steady.

According to OBSI's latest annual report, released in March, the ombudservice recommended slightly less than $4.7 million in total compensation to financial services clients in 2015. This total was up a bit from 2014, but remains below the $4.9 million that OBSI called for in 2013.

The median compensation recommendation in 2015 rose to $21,275 from $16,921 in 2014. This reflects both a year-over-year increase in the total value of compensation that was recommended in 2015 and a decline in the number of cases that led to recommendations for client compensation. In 2015, 219 cases ended with compensation recommendations, down from 252 recommendations in 2014. Thus, these divergent trends resulted in an increase in the median compensation recommendation last year. But, again, the 2015 median was still below the median level in 2013, which was $24,667.

The bulk of the total compensation recommended by OBSI in 2015, almost $4.4 million worth, came from complaints involving firms on the investment side. Slightly more than $300,000 of the overall total stemmed from banking complaints. This dollar amount is fairly consistent with that of the previous year: in 2014, investment cases accounted for $4.1 million in total compensation recommended by OBSI. However, banking complaints generated slightly more than $150,000 in compensation that year.

Complaints regarding investment industry firms also continued to have a higher success rate than complaints about banks in 2015. In both cases, however, financial services firms continue to win more cases than they lose. Overall, 35% of client complaints were upheld in 2015, up slightly from 33% in 2014 and driven by an increase in successful client complaints on the banking side. The proportion of investment-related complaints that result in a compensation recommendation was more or less unchanged in 2015, at 43% (vs 42% in 2014). And, although just 22% of banking complaints proved successful, that figure rose only slightly from 14% in 2014.

Similarly, OBSI reports that overall complaint volumes in 2015 were more or less unchanged from the previous year. Beneath the headline numbers, however, there was a decline in investment complaints and an upswing in banking cases. OBSI reports that the number of investment complaints declined by 14% year-over-year in 2015, but the number of banking cases OBSI handled increased by 21% from the previous year. As a result of these opposing trends, the total number of banking and investment complaints that OBSI dealt with in 2015 was almost equal for the year: 298 on the investment side; 272 involving banks.

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