see-saw with king chess piece and pawns

The Canadian Securities Administrators’ (CSA) proposal to introduce binding dispute resolution to the investment business is the subject of a bitter fight between investor advocates and industry voices.

In November, the CSA proposed overhauling the process for resolving client complaints handled by the independent, non-profit Ombudsman for Banking Services and Investments (OBSI).

At the core of the proposal is replacing OBSI’s reliance on “name and shame” powers with the authority to issue binding decisions.

Investor advocates have long criticized OBSI’s inability to enforce its rulings, which has resulted in several firms ignoring investor-compensation recommendations. The status quo also has contributed to investors accepting lowball settlements.

This criticism has been supported by several independent reviews of OBSI, which also have called for binding authority.

The CSA is finally heeding those calls. “Making OBSI recommendations binding could improve investor protection and promote increased fairness for retail clients,” the CSA’s proposal stated, adding that firms would benefit from a more conclusive and therefore efficient dispute-resolution process.

The investment industry is pushing back hard.

The Investment Industry Association of Canada (IIAC) said in its submission to the CSA’s consultation, which ended Feb. 28, that it supports fair, accessible, cost-effective dispute resolution. However, the IIAC believes the CSA’s proposal misses the mark.

The CSA used the history of firms refusing OBSI’s recommendations and investors accepting lowball settlements to justify introducing binding authority, but “there has been insufficient meaningful consultation, analysis and research to understand the root causes of these minimal refusals,” the IIAC’s submission said.

The IIAC also argued the number of investors settling disputes for lesser amounts than OBSI recommends is “similarly low and isolated,” and questioned whether refusals and lowball settlements had actually eroded investor confidence in OBSI or discouraged investors from pursuing complaints.

The industry trade group acknowledged the existing dispute-resolution system needs reform but called for increased choices for resolving investor complaints.

“Investors should be able to avail themselves of the many other high-quality mediation services that are broadly available,” the IIAC said, suggesting firms should be able to offer mediation rather than being mandated to use OBSI, and that OBSI should be required to offer mediation.

The IIAC also suggested that if a process for reaching binding compensation decisions is adopted, the process should not use OBSI but rather the Canadian Investment Regulatory Organization’s (CIRO) arbitration system if the dispute involves a CIRO firm, or a CSA tribunal for non-CIRO firms.

The Private Capital Markets Association of Canada (PCMA), the industry trade group for exempt-market dealers, also is strongly opposed to the CSA’s proposal, going so far as to set up a website documenting its concerns and providing members with a form letter to submit to the CSA’s consultation.

The letter highlights the potential added costs of binding authority and lack of “procedural fairness” with the proposed process.

Independent reviews of OBSI’s services have repeatedly dismissed claims that its process is unfair to the industry, but that hasn’t quieted the long-standing critique.

Nor has the fact that OBSI regularly dismisses most investors’ complaints (only 29.6% of investment cases closed with compensation recommended in fiscal 2023), most of its compensation recommendations are modest (in 2023, the average recommendation for investment complaints was $10,199, and the median was $2,115), and total compensation paid due to OBSI rulings each year is a fraction of industry revenue.

Nevertheless, the fact that the CSA’s proposed model excludes an appeal mechanism has raised concerns about fairness — even among firms that otherwise support reform.

For example, fund giant Fidelity Investments Canada ULC favours giving OBSI binding authority.

“Investors will be better served if it is granted authority to make decisions that are enforceable against firms that have harmed retail investors,” Fidelity’s submission said. “We view this change as a significant improvement in the ability for harmed investors to obtain redress.”

Yet, Fidelity said an appeal mechanism is “a central part of procedural fairness that should be present in a binding regime” and would add an important safeguard and help inspire confidence in the system. The firm recommended the framework include the right to appeal OBSI’s decisions to the regulators’ tribunals.

However, proponents of binding authority believe an appeal mechanism would unduly favour firms with far more financial and human resources to pursue appeals than the ordinary retail investor.

“An appeal mechanism is undesirable because it would reintroduce a power imbalance between complainants and firms that would defeat the basic purpose of the proposed framework,” the CSA’s independent Investor Advisory Panel said in its submission.

Other submissions proposed alternatives to binding authority. Worldsource Financial Management Inc. suggested that instead of abandoning the “name and shame” approach, the CSA should double down.

Worldsource suggested the “name and shame” power should be expanded to calling out firms that lowball investors — and that shame could be amplified through wider publicity.

“The increased reputational risk associated with failing to follow OBSI recommendations” would increase compliance, Worldsource suggested.

Furthermore, the CSA should consider taking regulatory action only against firms that repeatedly fail to follow OBSI’s recommendations, Worldsource said.

To investor advocates, however, binding authority for OBSI is long overdue.

“We cannot overstate the importance of this proposal,” a coalition of consumer and investor advocates, led by FAIR Canada, said in a joint submission. “Independent experts on complaint-handling systems have repeatedly told us that the lack of binding recommendations is harming Canadians and falls short compared to other countries with strong investor protection regimes.”

Binding authority will not only eliminate refusals and deter lowball settlements, but also will encourage firms to resolve complaints fairly before they reach OBSI, the coalition suggested.

“However, if this does not prove to be the case, binding authority will still ensure a more level playing field for investors who can count on a fair process and for the firms involved to respect OBSI’s decisions,” the coalition said.

The coalition also opposes the idea of including an appeal mechanism as part of the proposed reforms, echoing concerns that this would revive industry firms’ inherent advantages in disputes with retail clients.

This article appears in the March issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.