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This article appears in the Oct. 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

The idea that investment industry firms could be shamed into paying compensation to harmed clients has long been discredited. An independent review found that shame works in the banking business, but said the system should still be changed.

Late last year, Professor Poonam Puri from York University’s Osgoode Hall Law School was tapped to lead reviews of the Ombudsman for Banking Services and Investments (OBSI) and the ADR Chambers Banking Ombuds Office (ADRBO), the two organizations that serve as outside arbiters between banks and their retail clients.

In September, reports detailing the reviews’ results were released.

(Puri’s review of OBSI’s complaints handling in the investment industry was published in June).

The reports concluded that while both organizations are getting the job done, fundamental reforms still are
needed — most notably, binding authority for OBSI and the ADRBO to order compensation for harmed clients. (Currently, the organizations can only recommend compensation.)

The same shortcoming has long been evident in the investment business, where OBSI is the sole provider of independent dispute-resolution services. Previous reviews of OBSI’s work in those matters (including Puri’s latest report) called for OBSI to be given binding authority, but regulators have yet to do so.

In the investment business, that lack of binding authority has led to numerous firms refusing OBSI’s compensation decisions. Clients then accept low-ball settlement offers for fear they will get nothing otherwise.

Puri’s latest reviews concluded that the so-called “name and shame” approach has proven effective with the banks, however.

“The banks we spoke to indicated that they would never risk the public reporting of a refusal and the possible reputational damage that could cause,” Puri’s report on OBSI stated. “This is supported by the data on refusals, which appear to be all from cases under OBSI’s investments mandate.”

While outright compensation refusals haven’t occurred in the banking sector, the risk of low-ball settlements still exists, given the power imbalance between bank customers and banking institutions. A bank also could eventually decide to accept the reputational hit of walking away from a compensation recommendation.

“This undermines [the] ADRBO’s only enforcement mechanism and the fairness of the system as a whole,” Puri’s report on the ADRBO noted.

As a result, these latest reviews recommend OBSI and the ADRBO be given binding authority for the banking sector too, in part to ensure consistency between OBSI’s banking and investment arms, and also between OBSI and the ADRBO. The reports acknowledge that such a mechanism will introduce additional cost and complexity.

The reports also addressed concerns about the wisdom of allowing competition in the dispute-resolution business by giving banks a choice of referees rather than mandating a single service (the role OBSI has in the investment business).

“Given the concerns that consumer groups have about competition for member banks between OBSI and ADRBO, we believe it would be inappropriate to grant binding authority to just one without granting it to the other,” the ADRBO report said. “If, for example, OBSI were given binding authority in its banking mandate and ADRBO was not, then it could result in banks leaving OBSI for ADRBO. This would erode confidence in the [external complaint body (ECB)] system.”

That confidence has already been shaken. In 2020, a review by the Financial Consumer Agency of Canada (FCAC) concluded the multiple-provider model doesn’t meet international standards, adds complexity and reduces consumer trust in the system.

In the wake of the FCAC’s review, the federal government promised to scrap the current approach. In this year’s federal budget, the government announced its intention to introduce legislative reforms that would require the banking sector to use a single, non-profit dispute-resolution provider.

While the latest reviews’ mandates didn’t include exploring this issue, the reports echoed some of the FCAC’s concerns about the multiple provider model, saying, “We do not believe that a consumer should be prejudiced or have different rights depending on the ECB chosen by the bank.”

The reports also called for enhancements for both OBSI and the ADRBO, including in their identification and reporting of possible systemic issues, their standards for resolving complaints in a timely way and their approaches to recommending compensation for non-financial harm suffered by bank customers.

The reports also called for both organizations to work with the banks to address the issue of attrition — customers giving up on their complaints after being rejected by the banks’ internal processes. And the reports recommended that OBSI and the ADRBO use the threat of negative publicity — which seems effective in the banking
sector — to push banks to speed up cooperation with their investigations by giving them a two-week deadline to produce requested documents under the threat of public disclosure for non-compliance.

Not all of the reports’ recommendations applied to both organizations. The reports called for more fundamental improvements at the ADRBO, which was found to be only “substantially compliant” with federal regulatory standards, whereas OBSI “met and exceeded” its obligations.

As a result, ADRBO’s review also called for it to “strengthen its procedures for investigating and reporting complaints” and to bolster its approach to training and evaluating investigators on conflicts of interest and independence.

The ADRBO stated that it “agrees with and supports” the recommended improvements.

Similarly, Maureen Jensen, OBSI’s new chair, said OBSI will “consider the recommendations carefully and engage with all of our stakeholders to ensure that OBSI makes any changes needed to continue to fulfil its public interest mandate.”

The FCAC also promised to review the reports’ conclusions and consider the recommendations.

Regarding a possible end to the multiple ECB model in the banking sector, the ADRBO said it “looks forward to having a fair, transparent, objective and externally-reviewed process” for picking a single, dedicated ECB.