LATE LAST YEAR, THE OMBUDSMAN FOR BANKING SERVICES AND INVESTMENTS (OBSI) unleashed its so-called “nuclear option” by publicly singling out several financial services firms that were refusing to follow OBSI’s recommendations to compensate aggrieved investors. But investor advocates say those nukes clearly fizzled, and now it’s time for regulators to give OBSI more bite.
For most of OBSI’s life, the threat that it would “name and shame” firms that failed to follow its compensation recommendations was evidently all the enforcement power that the dispute-resolution service needed. Until late last year, OBSI hardly ever had to use that power.
However, faced with a series of “stuck” complaints – in which firms refused OBSI’s recommendations and efforts to break the stalemate had seemingly failed – the ombudservice went ahead and publicly named several firms that were refusing to heed OBSI’s rulings, publishing reports detailing its investigations in these cases.
It’s not clear how to measure whether this had the desired impact – or if it had any effect at all – but it is apparent that the results weren’t meaningful enough for investor advocates, who now are calling on regulators to step in to help make OBSI’s restitution decisions mean something.
In comments regarding a recent rule proposal from the Canadian Securities Administrators (CSA) concerning OBSI, both the Ontario Securities Commission‘s (OSC) investor advisory panel (IAP) and the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) are calling on the regulators to make OBSI’s decisions enforceable.
In addition, the IAP also has written to the OSC’s new Office of the Investor, calling on that office to help push for this sort of reform. In that letter, the IAP says that it believes that Canadian regulators “must immediately address” OBSI’s inability to enforce its recommendations for restitution.
The IAP’s letter suggests that the “name and shame” process is no longer effective and that “the foundation of this voluntary investor restitution process is now under attack as more firms are emboldened to reject OBSI’s recommendations.”
This view is echoed by FAIR Canada in its submission to the CSA, in which the investor advocate says the recent “name and shame” effort demonstrates that “reputational risk is an insufficient deterrent for many registrants and that OBSI needs to be placed on a stronger footing by having binding decision-making powers.”
FAIR Canada’s comment also notes that these recent cases reveal that the firms under review by OBSI don’t have “any credible factual basis” for refusing OBSI’s recommendations. Further, the comment says, “The consumer redress system will not work effectively and trust in the integrity of our system of securities regulation will be undermined if registrants are permitted to refuse OBSI’s recommendations and consumers are left without any compensation.”
Given that risk, the FAIR Canada comment recommends OBSI be given binding powers over the financial services firms that participate in its service. The comment also suggests that OBSI’s accountability to regulators should be improved through more formal recognition orders and that OBSI should become a statutory body. This, the FAIR Canada comment suggests, could improve transparency and OBSI’s adherence to the principles of justice, while also bolstering investor protection.
The IAP also is calling for greater regulatory oversight for the ombudservice. But rather than giving OBSI the power to enforce its decisions directly (a step that would then probably necessitate the creation of an appeal mechanism, among other complications), the IAP comment suggests that enforcement could be better handled as part of the new oversight arrangement that the IAP envisions for OBSI.
@page_break@ The IAP comment calls for the creation of an oversight panel comprising three provincial regulators and the two self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – which would oversee OBSI’s work, carry out audits and review any refusals to meet OBSI’s recommendations.
In situations in which firms are determined to walk away from OBSI’s restitution recommendations, the IAP comment suggests that the regulators (either a provincial securities commission or an SRO) should review these cases automatically and publish their own findings: “Although OBSI does not have the power to make its recommendations binding and to enforce its recommendations, the regulators do, can and should.”
This idea of subjecting contentious cases to a further, independent review as a way of resolving them isn’t entirely new to OBSI. Indeed, the regulators directed it to offer this sort of review to the firms involved with this recent crop of stuck complaints last year, in an effort to settle those cases.
Tyler Fleming, OBSI’s director of stakeholder relations and communications, reports that only one firm took OBSI up on the offer; as a result, he says, that case has been resolved.
In that instance, Fleming says, a former OSC commissioner reviewed the case and found that “OBSI’s conclusions and recommendation were logical, supportable, appropriate and fair.”
After hearing that verdict, Fleming continues, the firm agreed to pay the restitution that OBSI originally had ordered.
However, the resolution reached in that case is just a one- off. None of the other firms with stuck complaints took OBSI up on its offer of an independent review. And such a review is not something that has become a permanent feature of the service.
In the meantime, Fleming reports, OBSI still is dealing with a number of stuck cases. Although there has been some movement in some of those cases (including one that settled recently), he notes, OBSI also expects to be doing more “naming and shaming” of firms that are refusing its recommendations. Ultimately, that means there still will be wronged investors who won’t receive any restitution for their losses and more firms that supposedly have been shamed.
Yet, regulators have shown little inclination to step in to help this situation. The CSA proposed rule amendments late last year that aim to make OBSI the mandatory dispute-resolution service for all firms under its jurisdiction. But the regulators have yet to address some of the more fundamental issues that were identified in an independent review of OBSI that was published in the autumn of 2011 (and are now being raised by the investor advocates). Those issues include recommendations that OBSI have the power to enforce its decisions; that an appeal mechanism be established; and that OBSI’s oversight be enhanced.
Eleanor Farrell, director of the OSC’s Office of the Investor, says that her office strongly supports the CSA’s proposed rule that would make OBSI the provider of dispute-resolution services for all firms under its jurisdiction. However, the Office of the Investor is not yet sure whether OBSI needs a new arrangement to ensure enforcement of its recommendations.
“OBSI’s recommendations are followed in almost all of its cases,” Farrell notes. “And since the ‘name and shame’ [power] has only just been used, we feel more time and study of its impact needs to be done before an alternative can be considered.”
For now, then, OBSI is doing what it can within its current framework, says Fleming: “We’re focused on the mandate and existing powers [that the] industry and financial regulators set OBSI up with.”
But this isn’t good enough for the IAP. “The CSA needs to move quickly to support and strengthen OBSI,” it says in its comment to the CSA. “Too frequently, the CSA consultation process proceeds at what can charitably be described as a glacial pace.”
The IAP comment calls on regulators to move quickly “to ensure that OBSI can continue to provide free, independent, timely, informed and fair dispute-resolution services for Canadian investors and [financial services] industry.”
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