Less power for OBSI?

In early July, the federal Department of Finance announced a new oversight regime for banking complaints that, as expected, doesn’t require banks to belong to OBSI. Banks remain free to hire their own external arbiters of customer complaints.

The new rules from Finance Canada do set some standards for firms that provide these dispute-resolution services, requiring that they be accessible, accountable, impartial and independent. These firms also must operate transparently, co-operatively and efficiently. The rules also require that the Financial Consumer Agency of Canada (FCAC) oversee compliance with those standards.

Yet, for investor advocates, it’s not enough. The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) says the federal proposals aren’t as consumer-friendly as they should be. FAIR Canada points out that the choice of a dispute-resolution service provider is the banks’; the consumer doesn’t get a choice.

FAIR Canada also notes there is no requirement that the external complaints body be truly independent; only that the individual handling a complaint be independent. And the investor advocacy group worries that opening up dispute resolution to multiple, for-profit firms may harm consumers by generating inconsistent decisions and increasing consumer confusion.

In a letter to Finance Canada that comments on the proposed rules, investor advocate Ken Kivenko echoes FAIR Canada’s criticisms about allowing competition in dispute resolution, warning that this will only weaken OBSI’s authority and financial strength.

Earlier this year, OBSI had suggested it might stop resolving banking complaints altogether if it didn’t receive the show of support it was seeking – namely, that the government require the banks to use its services.

For now, however, it appears that OBSI does intend to keep serving banks. Says Tyler Fleming, OBSI’s director of communications and stakeholder relations: “We have a strong relationship with our participating banks. And as long as they want to continue working with us – and we have no reason to believe they don’t – it’s business as usual at OBSI.”

Systemic issues

Fleming also notes that OBSI should have no trouble qualifying to continue doing its work under the proposed new federal rules: “Given that an international expert in financial ombudsmen found OBSI to be world-class in many respects, we have no doubts as to our ability to meet the regulations.”

In addition to worries about the conflicts inherent in allowing banks to choose their own complaints arbiter, investor advocates have other concerns. Kivenko’s letter highlights the importance of systemic issues. In 2010, OBSI gained the power to respond to systemic issues revealed by individual complaints, but the proposed rules would require only that the dispute-resolution provider alert the FCAC to any systemic issues it finds.

“Given all the systemic issues in the banking world today,” Kivenko’s comment says, “this deficiency seems particularly egregious.”

Things look a bit better for clients on the investment side, in which securities regulators have resisted firms’ efforts to pull out of OBSI. Indeed, the Canadian Securities Administrators (CSA) has continued to express support for OBSI and is said to be looking at requiring all firms under the CSA’s jurisdiction to use OBSI, not just investment dealers and mutual fund dealers.

However, it’s not all good news for these firms’ clients. Earlier this year, OBSI had proposed several changes to its processes for calculating losses in suitability-related cases. Most of these changes appear to represent victories for OBSI’s critics in the investment industry; this despite the fact that an independent review found that OBSI’s existing processes are just fine.

Among other things, OBSI plans to start using common indices as benchmarks to calculate losses instead of actual investments. In most cases, these calculations will factor in fees and trading costs. OBSI will assess interest charges only in cases in which it is recommending compensation, not when it has facilitated a settlement. And OBSI is adopting a six-year limitation period on complaints.

Capitulation

FAIR Canada also objects to several of these proposed changes, suggesting that they reflect capitulation to pressure from the investment sector. In particular, the investor advocacy group says, OBSI should not start using common indices as benchmarks when calculating losses. In a letter to OBSI, FAIR Canada says this change “would be a step backward, toward a ‘one size fits all’ approach.”

There is some resistance in the investment sector to the uses of indices. Comments on OBSI’s proposed changes from both the Investment Funds Institute of Canada and the Federation of Mutual Fund Dealers say using indices is problematic. They suggest that – in the mutual fund sector, at least – funds themselves are a better proxy of the actual investment performance an investor would have received. Using funds rather than indices, they note, also makes it easier to factor in fees and trading costs.

Other comments from industry players argue that instead of a six-year limitation period, the limitation periods in the client’s province should apply. (In Ontario and Alberta, for example, that would be just two years.)

In addition to these complaints about OBSI’s proposed changes, it appears that some firms continue to harbour deeper reservations about its work.

RBC Dominion Securities Inc.‘s comment expresses various concerns about OBSI’s practices and says that consulting on such changes is premature until OBSI’s oversight, governance and transparency issues are “meaningfully addressed.”

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