questions / Serdarbayraktar

This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

The Ombudsman for Banking Services and Investments (OBSI) is considering reforms to its governance model, but responses to a consultation suggest more radical surgery is required.

Over the past couple of years, dispute resolution in the financial services sector has been heavily scrutinized. A federal review of complaint handling in the banking industry resulted in a government promise to designate a single agency to serve as the industry’s sole external complaints body — a task currently carried out by both OBSI and the ADR Chambers Banking Ombuds Office (ADRBO).

OBSI’s latest independent reviews, which were headed by Osgoode Hall Law School professor Poonam Puri, produced 25 banking reform recommendations and 22 related to investment reform, including a call for a review of OBSI’s governance model.

In response, OBSI launched a public consultation in the fall on its governance arrangements and certain other recommendations in the Puri reports.

Among other things, Puri recommended that OBSI stop designating certain board seats to specific stakeholders; eliminate the requirement that industry directors be nominated by the Canadian Bankers Association, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada; and consider permanently disbanding its consumer and investor advisory council (CIAC).

She also recommended expanding OBSI’s diversity considerations, revising the list of skills it looks for in recruiting directors, and establishing new industry and consumer roundtables to garner feedback on industry issues.

But some submissions to the consultation argued that simply updating OBSI’s governance would be insufficient. Instead, they called for much deeper reform.

The submission from the Private Capital Markets Association of Canada (PCMA), an industry trade group for exempt market dealers (EMDs) and other players in the exempt markets, recommended OBSI be restructured into two divisions to reflect the service’s two major constituencies — the banking industry and the investment industry — each with its own board.

The PCMA argued the industries are fundamentally distinct — for example, they have different customer bases, product lineups, compensation models and regulatory frameworks.

“[H]aving one OBSI board serving two different constituencies is like having one board oversee both the National Hockey League and National Football League; both are sports leagues, but vastly different from one another,” the PCMA submission stated.

This issue will be aggravated if OBSI is given binding authority for its compensation recommendations on the investment side.

“This is a fundamental shift from being an ombudsman to adjudicator with binding decision-making powers like a court of law,” the PCMA submission stated. “This requires OBSI to change from a consumer advocate investigating and seeking to resolve complaints to an impartial arbitrator.”

While consumer advocates have long called for OBSI to be given the power to issue binding compensation recommendations (a position supported by both the independent reviewers and securities regulators), industry dissatisfaction with the service is longstanding too.

A segment of the investment industry has long complained that OBSI is biased in favour of consumers and thus produces unjust compensation recommendations (an accusation the independent reviewers rejected).

Unlike the banking side, where the ADRBO provides dispute-resolution services for four of the Big Six banks, securities regulators have mandated that investment firms use OBSI as their only external dispute-resolution service. Recently, this mandate was extended to all registered firms on the investment side, including portfolio managers, EMDs and scholarship plan dealers.

Meanwhile, complaints about OBSI’s inadequacy from the consumer and investor side have only grown louder and more frustrated.

For years, independent reviewers have recommended that OBSI be given greater authority to resolve client complaints and enforce its recommendations. While the regulators that oversee OBSI on the investment side have supported these suggestions publicly, they have yet to act on them — to the ongoing frustration of investor advocates.

(The Canadian Securities Administrators have once again indicated they intend to propose giving OBSI binding authority in the coming year.)

“Absent the articulation of a vision for OBSI that is broadly shared by all regulators and stakeholders, we consider the quest for an appropriate governance structure for OBSI akin to putting the cart before the horse,” stated investor advocacy group Kenmar Associates‘s submission.

It would be helpful to know what’s happening concerning binding authority on the investment side, the federal government’s pledge to establish a single dispute-resolution body for banking sector complaints, and any changes to OBSI’s capability to deal with systemic issues before overhauling the governance model, Kenmar stated.

More fundamentally, “OBSI and its regulators should decide once and for all to clarify its being,” suggested a joint submission to the governance review from Laurie Campbell, Harold Geller, Harvey Naglie and Andrew Teasdale. All are former members of the CIAC who resigned in June following the release of Puri’s reports. The CIAC’s activities have been suspended.

Their submission pointed out that various independent reviews of OBSI have concluded that it doesn’t perform the role of an ombudsman.

“[I]s it a designated external dispute-resolution body of its regulators or an independent system critical consumer ombudsman co-partnering, inter alia, with its stakeholders on matters of systemic importance?” the submission asked.