under the microscope
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The financial services industry’s beleaguered mechanism for resolving industry/client disputes is facing its next independent examination, even as past calls for fundamental reform largely went unheeded.

Concurrent reviews for the investment and banking divisions of the Ombudsman for Banking Services and Investments (OBSI) began in early November with a pair of short consultation papers.

The reviews, which are being carried out by Osgoode Hall Law School professor Poonam Puri, are scheduled to be completed by late January (for the investment side) and late February (on the banking side). However, those deadlines may slide, as investor advocates are pleading for an extension to the Dec. 2 deadline to submit feedback.

These latest evaluations come as the pandemic has driven a rise in complaint volume. OBSI’s latest data indicates that for its fiscal third quarter (to July 31), complaint volume was up by 20% from the average over the previous eight quarters. (Investment complaints rose by 11% and banking complaints rose by 34%.) Complaint volume has been above average since Q3 2020, after the pandemic first took hold.

The reviews also follow repeated criticism of the financial industry’s mechanisms for resolving consumer complaints. On the banking side, investor advocates condemn the existence of competition in complaint resolution — some banks use OBSI and others opt for the ADR Chambers Banking Ombuds Office (ADRBO) — as undermining the fairness and credibility of the system.

Meanwhile, a key critique levelled against the investment side of OBSI’s service has long been the lack of binding authority to impose compensation decisions on financial industry firms.

In fact, the previous independent review of OBSI’s investment mandate — carried out by Deborah Battell, New Zealand’s former banking ombudsman, in 2016 — concluded that OBSI didn’t meet the definition of a true ombudservice. OBSI’s structure effectively “tilts the playing field in favour of firms,” she wrote, as its lack of binding authority has resulted in some harmed investors receiving no compensation and others accepting “low ball” settlements for fear of getting nothing.

From fiscal 2018 to 2020, low ball settlements were reached in about 7% of the cases in which OBSI recommended compensation, costing harmed investors about $1.3 million, according to the 2020 annual report from the Joint Regulators Committee, which oversees OBSI.

The 2016 independent review also found that OBSI’s putative enforcement power — the ability to “name and shame” firms that defy its compensation recommendations — is counterproductive, as it exposes OBSI’s limitations and undermines confidence in both the complaint system and the retail investment business.

At the time, the review recommended that OBSI be given the power to compel firms to pay compensation. This conclusion was reiterated in Ontario’s Capital Markets Modernization Taskforce’s final report earlier this year: “A binding, reputable and efficient [dispute resolution service] framework in Ontario would be a significant improvement to the retail investor protection framework.”

To that end, the task force recommended that the Ontario Securities Commission (OSC) be given the statutory authority to designate a dispute resolution service with binding powers and that the regulator either create a made-in-Ontario solution with the power to order compensation or provide OBSI with binding authority (and make governance and procedural changes to reflect the added powers).

There has been little action on the issue. Ontario’s government proposed a new package of securities legislation, the Capital Markets Act, which doesn’t include specific statutory authority for the OSC in dispute resolution. And regulators’ repeated promises to enhance OBSI have produced little tangible change.

That said, OBSI’s Joint Regulators Committee observed in its 2020 annual report that the Canadian Securities Administrators (CSA) had “renewed its focus on strengthening OBSI as an independent dispute resolution service.”

And, as part of the CSA’s self-regulatory reform project, a joint CSA/OBSI working group is pursuing a project to make OBSI’s decisions binding and examine the need for an appeal mechanism. The regulators have yet to make any concrete proposals on the issue.

In the meantime, the latest review of OBSI’s investment mandate will, among other things, assess any progress since 2016.

Concurrently, OBSI’s banking division and the ADRBO are undergoing their first reviews since being designated external complaint handling bodies (ECBs) by the federal government. The examination of OBSI’s banking division will look at its progress since the division’s last review in 2011 and also will examine how well OBSI and ADRBO are working together. (The ECBs are expected to co-ordinate complaint handling and ensure customers are dealing with the right body.)

These reviews come in the wake of a consultation the federal government launched in the summer to examine the ECB framework. That consultation followed a 2020 report from the Financial Consumer Agency of Canada that found Canada’s approach to dispute resolution falls short of international standards and adds complexity and inefficiency to the system for consumers, negatively impacting their confidence in the fairness of the complaint handling process.

The re-elected Liberal government also campaigned on establishing “a single, independent ombudsperson” with binding arbitration power to handle consumer complaints involving banks.

“We firmly believe that the absence of binding decisions creates unacceptable risks for all consumers, has failed to bring real closure in many cases, and has been eroding public confidence for too long,” stated the submission from Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) to the federal Department of Finance’s consultation.

Unlike in the investment industry, there has never been a case of a bank refusing an OBSI compensation recommendation. Nonetheless, FAIR Canada called on the government to provide ECBs with binding authority.

“Without it, the consumer is exposed to a potentially ineffective process and unfair outcome, whereas the financial institution is not,” FAIR Canada’s submission stated. “All this calls into question the system’s effectiveness, as well as whether there is any real accountability within the financial system more broadly.”