In response to public concerns brought forward in 2004 and 2005, the Investment Industry Regulatory Association of Canada and the Mutual Fund Dealers Association of Canada have introduced amendments to their complaint-handling policies, effective Feb. 1.

The policy amendments are intended to ensure the fair and prompt handling of client complaints by the self-regulatory organizations’ member firms. Before commenting on the content of the new policies, the long, convoluted, policy-development process merits attention. How much time should it take for the regulators to amend a policy once they become aware of problems? Clearly, delayed intervention can compromise investor protection.

In the case of investment complaints, the regulators have been aware for many years of the difficulties facing investors in achieving fair and timely redress. Investor advocates have long spoken out about this issue. Heated testimony was given on the issue of client protection at the hearings of Ontario’s standing committee on finance and economic affairs in August 2004. James Langton reported on the event in the September 2004 issue of Investment Executive.

At the time, there was a high volume of complaints moving through the system from the previous market meltdown. Langton reported that the standing committee heard from “a series of aggrieved investors [who] came to tell politicians … of their Kafkaesque experiences with the regulatory bureaucracy in Canada.” Among other things, “They complain that when members of the securities industry harm retail clients with bad advice, the system fails to deal with their complaints fairly.” More frustrations with the current complaint process were voiced the following spring, at the Ontario Security Commission’s Investor Town Hall.

In November 2005, the OSC announced an investor advisory committee, of which I was a member, to provide the OSC with input and advice on retail investor issues. Complaint-handling and restitution were major items on the committee’s agenda. A committee report, promised in November 2006, was never released but was later obtained through a Freedom of Information request. The report notes that complaint-process issues were a consistent topic of discussion throughout 2006 and that senior management from the SROs heard directly from the committee on this issue.

In July 2006, the OSC published a Town Hall progress report, stating that the SROs had agreed to introduce revisions to their complaint-handling policies that would “set standards and time frames” and “ensure clarity of communications by firms with inves-tors/complainants.” The need for change was clearly recognized, but the promised policy revisions are being implemented only now — too late for many investors who came forward with complaints following the most recent market meltdown.

There have been, however, notable im-prove-ments in both SROs’ policies regarding complaint-process time frames. IIROC members will now have 90 days to provide clients with a “substantive” response to complaints. After that, the investor may proceed to the Ombudsman for Banking Services and Investments, whether or not the firm has provided a response. The MFDA policy contains similar but more loosely formulated provisions.

Regarding IIROC, the use of a member firm’s internal ombudsman is now voluntary; previously, a two-stage complaint process was required before a client could proceed to OBSI. An important reason for tightening the time frame is the 2004 reduction in the limitation period for initiating civil action in Ontario from six years to two. Hence, the need to reduce the time it takes for investors to proceed through the complaint process.

There are now provisions that ensure clients are properly informed about available options for redress if they are not satisfied with the firm’s response to their complaint. There are some specifics about the content of the “substantive” response, which must include a summary of the complaint, the results of the investigation and the firm’s final decision with an explanation.

Nevertheless, fundamental issues relating to the fairness and transparency of the dealers’ complaint processes remain a concern. In my submissions over the years, I have consistently pointed out that there is a significant imbalance in knowledge and power in favour of the firm in this process. How is an investor to know whether a firm’s assessment of their complaint is reliable?

This question is especially pressing if the complaint involves a complex matter, such as suitability. How is the investor to know whether the firm’s decision and offer is fair? There are risks associated with making decisions in this context that are not being disclosed to investors.

@page_break@Steps have been taken by the SROs to improve the complaint process. Nevertheless, the public interest has not been well served by such a protracted policy-revision process. The amendments have had to go through multiple levels of approval by SRO boards, recognizing regulators and then “harmonization” between the SROs.

This Kafkaesque process obstructs timely intervention by the regulators in addressing acknowledged problems affecting retail investors’ interests. IE



Pamela Reeve is a professor at the University of Toronto and writes on investor protection.