After more than a year of trying to hash out a solution, the Ombudsman for Banking Services and Investments (OBSI) has reluctantly begun “naming and shaming” firms that are refusing to comply with its compensation recommendations. It’s a step that may fundamentally determine the dispute-resolution service’s future.
The ability to call out publicly the firms that decline to follow OBSI’s recommendations is the ombudservice’s only real enforcement power, and yet it has rarely been used. (For more, see pages 27 and 30.)
Until now, the ombudservice has had its hand forced this way only once before. In 2007, a mutual fund dealer was outed for refusing to comply with OBSI’s recommendation.
But, in November, OBSI announced two more refusals and warned that there may be more to come. The decision to start “naming and shaming” firms comes almost a year after securities regulators called on OBSI to try to resolve 21 so-called “stuck” complaints, in which firms were refusing to comply with OBSI’s recommendations.
Since then, about a third of those complaints have been settled. Only one of the firms involved has taken OBSI up on its offer for an independent review of these cases in order to determine whether OBSI’s investigation or conclusions are flawed. The rest of those cases remain stuck.
And so, OBSI is resorting to naming the firms involved and publishing its investigation reports — a move that doesn’t get the clients their money back, but, OBSI hopes, may deter other firms from refusing its recommendations in the future.
“The publicity will hopefully play a role in settling some cases,” notes Tyler Fleming, director of stakeholder relations and communications with OBSI. “But there are others where discussions have resumed recently after we notified them we were moving to publish and informed the regulators.”
In the two cases so far in which OBSI has given up hope of settling, the ombudservice has announced: Toronto-based investment dealer Octagon Capital Corp. refused to follow OBSI’s recommendation that Octagon compensate an aggrieved inves-tor to the tune of $181,339; and Markham, Ont.-based mutual fund dealer W.H. Stuart and Associates (WHS) declined to comply with a $41,066 compensation recommendation.
Neither firm has commented on OBSI’s move. But, in both cases, the investigation reports published by OBSI indicate that the clients in question were victimized by rogue reps.
The rep involved in the Octagon case was sanctioned by the Investment Industry Regulatory Organization of Canada for making unsuitable recommendations and engaging in unauthorized trading. As for the WHS case, the rep was criminally convicted for theft involving a pyramid scheme that resulted in large losses to clients.
Nevertheless, in both cases, OBSI concluded that the clients were unsuitably invested, and that the firms are liable for their losses. But with the firms refusing to agree to OBSI’s recommendations, the ombudservice’s only option is to “name and shame” these firms.
This is a significant step for the clients, who now are unlikely to see any compensation, and the firms, which will suffer the bad publicity — but, perhaps most of all, for OBSI itself, as it will probably reveal whether this sanction has any significance at all.
In the wake of the first announcement, investor advocacy group the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) cautioned investors against dealing with firms that refuse OBSI’s recommendations: “Stakeholders in the financial markets [including consumers] need to consider ‘cold shouldering’ a firm that is named and shamed, meaning that they decline to do business with them. This is how ‘name and shame’ is given bite. [If that doesn’t happen,] the effectiveness of ‘name and shame’ is undermined.”
Indeed, an independent review of OBSI that was carried out last year by the Melbourne, Australia-based Navigator Co. Pty. Ltd., concluded that fundamental reforms are necessary for OBSI to retain its credibility and effectiveness. Among other things, it called for OBSI to have the power to enforce its decisions, not simply to “name and shame.”
A GREAT RISK
Phil Khoury, managing director of Navigator, who wrote that independent review of OBSI, says that OBSI’s decision to start naming and shaming firms, “absolutely illustrates the case for OBSI to have binding powers, which in turn would require some of the other accompanying ‘protective’ recommendations, such as an appeal mechanism, governance reforms, etc.
“‘Name and shame’ only works if there is enough shame,” he adds. “The great risk for any ‘name and shame’ regime is that the naming becomes too commonplace for the ‘shame’ to have any serious, lasting impact on firm reputations.”
If firms begin refusing OBSI’s recommendations routinely, Khoury adds, “[OBSI’s] credibility and ability to operate effectively will be seriously damaged.”
And the harm will not be felt by just clients whose compensation recommendations are refused.
Khoury warns that “consumers will inevitably start accepting low-ball settlement offers” rather than run the risk of a refusal. More firms will play hardball with OBSI, too, he suggests, “using delaying tactics, resisting requests, making low-ball offers.” Indeed, he warns, if “name and shame” proves ineffective, the whole system will suffer.
Yet, so far, Canadian regulators have yet to address most of the Navigator report’s recommendations — although, in mid-November, the Canadian Securities Administrators (CSA) published proposed amendments that would require all firms under its jurisdiction to use OBSI to deal with client complaints.
Currently, only investment dealers and mutual fund dealers are required to use OBSI; other firms do so voluntarily. The CSA’s proposed reforms would require exempt-market dealers, education scholarship plan dealers and portfolio managers to use it to resolve their client complaints, too.
To date, this is the only concrete measure the regulators have taken in the wake of the Navigator report. But this test of “name and shame” may now dictate whether they need to go further. IE