Securities regulators are seeking a long-awaited fix for the investment industry’s dispute-resolution system. The Canadian Securities Administrators (CSA) proposed a set of reforms that aim to give the Ombudsman for Banking Services and Investments (OBSI) the authority to make investor compensation recommendations that will bind industry firms — and sometimes investors.
The proposals, which have been issued for a 90-day comment period that runs until Feb. 28, 2024, are designed to address a longstanding criticism of the current system: OBSI’s inability to enforce its investor redress recommendations has sometimes resulted in firms refusing to compensate harmed investors or, more recently, has given way to a pattern of lowball settlements.
OSBI was created in 1996 as the Canadian Banking Ombudsman without any real enforcement powers. While the lack of binding authority has since been identified as a fundamental flaw, the system was designed to not be adversarial. OBSI was supposed to be a kinder, gentler way for investors and industry firms to resolve disputes without resorting to costly, time-consuming litigation.
OBSI’s job was to hear client complaints impartially and — in cases where it found those complaints to be valid — to make recommendations for firms to compensate harmed investors. OBSI’s only tool was the ability to “name and shame” firms that rejected those recommendations, in the hope that the risk of reputational damage would keep firms in line.
In 2007, a small mutual fund dealer was the first to reject an OBSI recommendation. That didn’t happen again until 2012, when the practice suddenly became more common. Between 2012 and 2015, investment firms rejected OBSI’s compensation recommendations in 18 cases.
Since then, with the exception of a pair of exempt-market dealers that refused OBSI’s recommendations in 2020, the practice has faded away. Instead, outright refusals have been replaced with lowball settlements.
According to the latest oversight review of OBSI by the CSA and the Canadian Investment Regulatory Organization, between fiscal 2018 and 2022 retail investors accepted settlements that resulted in approximately $1.6 million less than the compensation recommended by OBSI. While about 5% of OBSI’s recommendations resulted in lowball settlements, the CSA reported the prevalence of these deals rose along with the amount of money.
For recommendations less than $50,000 — the vast majority — firms generally agreed to pay the compensation. However, when OBSI recommended compensation between $50,000 and $100,000, investors settled for lower amounts in 46% of cases. For the largest cases, which involved compensation recommendations of between $200,000 and $350,000 (the limit for OBSI recommendations), the regulators found 67% of investors settled for less.
On average, investors who accepted lowball deals received about 60% of the recommended compensation. For cases above $50,000, investors received $59,373 less, on average.
Investors who experienced significant losses attributable to errors, misconduct or bad advice from their dealers and didn’t want to accept 60¢ on the dollar either risked getting nothing back (if the firm refused OBSI’s recommendation) or taking their case to court.
The CSA now seeks to give OBSI the authority to enforce its recommendations and give investors “more certainty that they would receive fair redress that reflects the harm suffered.”
The CSA also hopes a fair and effective dispute-resolution system will boost confidence in the industry.
“Low settlements and settlement refusals may erode retail client confidence in the fairness and effectiveness of OBSI’s dispute-resolution services, the CSA’s approach to independent dispute resolution generally, and in addition may contribute to reluctance to engage with firms or to invest in financial markets using the services of firms if there is no assurance of an effective dispute-resolution service,” the CSA stated in a notice outlining its proposals.
The CSA proposed preserving the core of OBSI’s non-adversarial approach. Investor complaints would continue to go through OBSI’s existing process to investigate a complaint impartially and make a recommendation.
At that point, the investor, the firm or both could object to that recommendation, triggering a review. That review would be carried out by senior OBSI personnel who weren’t involved with the first stage of the case.
The scope of these reviews would be limited to the specific objections to the initial recommendation and would be proportional to the complaint, the CSA said. OBSI wouldn’t attempt to facilitate settlements between the two sides, and could use both inquisitorial and adversarial processes during the review, if needed. However, the CSA said it anticipates the need for more adversarial methods will be relatively rare.
The decision resulting from the review would then be considered final and binding on the firm, and possibly on the investor. If only the firm triggered the review, the ruling would be enforceable as a court order against the firm, but the investor could still pursue redress through other means, such as litigation. However, if the investor objected to the initial recommendation (alongside the firm or alone), the final decision would be binding on the investor, too.
Having decisions be binding on investors would distinguish the CSA’s approach from other financial sector dispute-resolution services. The proposal is intended to “promote finality, efficiency and fairness to both parties,” the CSA said.
There would be no mechanism for appealing final decisions to the regulators, although either side could potentially seek a judicial review. The CSA said an appeal process risks reintroducing the power imbalance between investors and industry firms, given firms typically have more resources to pursue an appeal. Additionally, appeals “would increase expense, delay and complexity” for both sides, it said.
Moreover, the CSA said an appeal process could shift the dispute-resolution system toward an adversarial one.
The CSA is seeking specific feedback on many elements — including the stance on appeals, the plan to make decisions binding on investors, and the details of the regulators’ oversight of the new dispute-resolution system.
The reforms will need legislation in each province. So far, Saskatchewan has proposed legislative changes that would allow for binding dispute resolution in that jurisdiction.
But there are already diverging views. Quebec plans to stick with its existing system of investor redress and the British Columbia Securities Commission is not consulting on potential regulatory changes, instead indicating that the province is considering legislation that “may achieve the same outcomes.”