The financial services industry points to its free dispute-resolution service as the best place for angry customers to air their grievances, but investor advocates have long complained that it’s not good enough. Now, the ombudservice is looking to broaden its scope, and the industry is aghast at the notion that it may tilt the balance toward investors and leave firms facing yet another watchdog.

In December, the Ombudsman for Banking Services and Investments published proposed changes to its terms of reference that would expand its ability to investigate so-called “systemic issues,” impose certain timelines on the complaints process, ramp up the duties of firms and put OBSI in the position of helping customers with their complaints, among other things.

The proposed changes represent the most significant revisions to OBSI’s mission since it added coverage for firms in the retail investment and mutual fund industries to its brief back in 2002. The current changes are being driven by this past summer’s adoption of a “framework for co-operation” among the ombudservices and the various federal and provincial regulators (in the guise of the Joint Forum of Financial Regulators) and the federal Department of Finance, as well as an evaluation of its service that was commissioned by OBSI last year.

That latter report, produced by Australia-based management consulting firm Navigator Co. Pty. Ltd. and published this past fall, generally says that OBSI is fulfilling its function. But the report also makes 24 recommendations for improvement. Among the most pressing weaknesses it lists is the fact that OBSI lacks the ability to act on systemic issues that it uncovers. For example, if one of the complaints OBSI handled revealed a pattern of bad behaviour, it couldn’t seek out other victims or push the firm to investigate the situation more fully.

Another weakness the report lists is the lack of awareness of OBSI’s function among retail clients and a reticence on the part of some firms to inform their ticked-off customers about the service. Indeed, the report notes that many firms, as a matter of policy, don’t tell their clients about OBSI until their internal options have been used up.

“Although failure to notify clients about OBSI is explained away as well intentioned by the financial services provider, the practice is poor and the rationalization is threadbare,” the report states. “Keeping the consumer in the dark about further options in the complaints process is seen by the consumers we interviewed as untrustworthy and designed to keep the consumer at a great information and power disadvantage to the very last.”

Now, OBSI is aiming to redress some of that inherent imbalance of power through the various changes to its mandate. Not surprising, the financial services industry is not pleased with that plan. The comment period concerning the proposed revisions closed in January, and all of the comments from industry players — both firms and lobbyists — essentially support the status quo.

INDUSTRY NOT PLEASED

The securities industry trade association, the Investment Industry Association of Canada, says in its comment that it “fully supports OBSI’s current mandate.” The proposed changes, the IIAC warns, represent “a serious concern for the Canadian securities industry” adding it is “very concerned about the direction OBSI appears to be taking. It should be remembered that OBSI is a complaint resolution body, not a regulatory body. Its expertise and effectiveness is and should remain confined to this objective.”

The Investment Funds Institute of Canada also worries that the changes are effectively creating yet another addition to the already overpopulated field of industry regulators. Moreover, it argues in its submission, OBSI’s expanded marching orders would carry none of the oversight or procedural protections that existing regulators must follow.

“The success of OBSI’s role derives from its ability to provide an impartial, non-legalistic avenue for disputes between [firms] and their customers,” IFIC’s submission cautions. “The proposed revisions will have a significant and detrimental impact on this role.”

The industry’s specific worries are numerous. Various players fret that not only is OBSI drifting into the regulatory arena, but it is also adding a whistle-blower function, compromising its objectivity, seeking privileged information and imposing excessively rigid deadlines on the dispute-resolution process.

Although the industry may be up in arms about the potential changes afoot at OBSI, these ideas are not being pulled from thin air; they have been foreshadowed in both the Joint Forum’s framework and the consultant’s report.

@page_break@For example, both of those sources have recommended that the ombudservice should be able to investigate systemic issues. The Joint Forum report says that OBSI should have the authority to investigate widespread issues based on either complaints against a particular firm or its work in the sector generally.

Similarly, the Navigator report calls the inability to investigate systemic issues “a significant gap in Canada’s consumer protection framework.” It points out that this latitude exists in the various ombudservice schemes in Australia and Britain, and suggests that this current gap undermines OBSI’s reputation: “OBSI cannot risk being seen to be doing nothing when a clear flaw in the consumer protection framework exists. It is obligated to work to correct the problem.”

Another idea that some in the industry are objecting to is the proposal that would see OBSI take a more active role in helping clients with their complaints rather than simply sitting in judgment. As Royal Bank of Canada says in its comment: “Also of concern is the overall change in tone, which we feel is no longer neutral and tends to favour the complainant. While we agree that consumer protection is a primary accountability of the OBSI, it appears that the OBSI is now an advocate for the complainant, not an impartial arbiter of the complaint itself.”

That same concern is also noted in the Navigator report, which found that some firms feel that OBSI is tilting toward favouring the consumer. The report concludes that although OBSI does account for clients’ lack of expertise and resources, its decision-making remains neutral.

However, regulators feel a formal tilt toward the customers’ direction is warranted. The Joint Forum’s framework notes that the ombudservice should help consumers register and, “where necessary, articulate their complaint” or guide them to other alternatives.

Industry firms may view this shift as the emergence of a bias toward the consumer, but the playing field is already so deeply tilted toward the firms (in terms of the huge edge in legal, financial and intellectual resources that they hold) that a little helping hand for aggrieved clients can hardly be viewed as a decisive swing against the firms.

NO CONSENSUS

Additionally, the Navigator report argues that the robustness of an industry’s ombudservice should be determined in relation to the legal and regulatory context in which it operates. In other words, if it’s cheap and easy to take firms to court and regulators are tough, then the ombudservice doesn’t have to play as big a role in consumer protection. But in an environment in which it is otherwise difficult for consumers to get redress, an industry-sponsored dispute-resolution system has to be more useful.

When in doubt, the report suggests, erring on the side of a more active service is recommended, but adds that there is no consensus on how aggressive an ombudservice should be: “Some interpret the idea of neutrality to mean that the ombudsman service should act as a kind of inert postbox, dealing only with what comes through the door, taking the narrowest interpretation of the facts and turning a blind eye to all else. Others would have the industry ombudsman take up arms on behalf of the consumer, waging a righteous crusade against evil-doing in the financial industry. Of course, neither position is correct.”

That said, the report states: “We come down on the side of greater proactivity.”

An industry ombudservice is a valuable resource that should not be wasted.

Compared with other jurisdictions, Canada’s financial services sector has “noticeably lower levels of formal consumer protection,” the report says. It also points out that, unlike services available in other countries, OBSI doesn’t have binding authority over the firms for which it handles complaints, nor does it have formal regulatory or statutory support. It also states that services in other countries have sliding fee scales that encourage firms to settle early in the process.

The regulatory environment in Canada is becoming more supportive of dispute-resolution services. The self-regulatory organizations are adopting complaint-handling standards, which has helped drive ombudservice volumes in other countries, the Navigator report notes. Moreover, the registration reform that was proposed last year by the Canadian Securities Administrators (and is awaiting republication) would require all registered firms to be part of some sort of dispute-resolution mechanism.

However, access to affordable, effective restitution remains a shortcoming of the Canadian system. Ontario’s standing committee on finance and economic affairs has recommended the government and the Ontario Securities Commission work together to develop a more accessible mechanism. So far, nothing has been done.

The weaknesses of the regulatory system and the inaccessibility of the courts in Canada are well documented. The Navigator report points out that consumer advocacy is weak in this country. All of these things would appear to argue for a much more consumer-friendly ombudservice.

The few consumer advocates that exist appear to be generally supportive of the proposed changes to OBSI’s mandate. In a letter, Pamela Reeve, an original member of the OSC’s investor advisory committee, indicates support for the notion of OBSI investigating systemic issues. She also calls on it to refer instances in which a firm is found to have unfairly decided against a client, or in which firms aren’t co-operative with the regulators.

There’s no question that access to and the effectiveness of dispute resolution in Canada needs to be improved. What remains to be seen is whether the financial services industry will allow its own ombudservice to take on that role, or if the regulators will finally have to step into the breach. IE