This article appears in the April 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The courts are a notoriously slow and expensive way for investors to prosecute complaints against investment firms, and securities regulators have so far failed to follow through on promises to reform the industry’s low-cost option, the Ombudsman for Banking Services and Investments (OBSI). Now, there’s hope that a largely overlooked arbitration program can be transformed to help wronged investors.
Late last year, after an internal review, the Investment Industry Regulatory Organization of Canada (IIROC; now part of the new self-regulatory organization) launched a consultation on reviving its arbitration program. The service attracts only a handful of cases each year, compared with the hundreds OBSI handles annually.
The review recommended testing a new tiered structure for cases, increasing the maximum award under the arbitration program to $5 million from $500,000 and publishing arbitration rulings, among other, more modest changes designed to raise the program’s profile and make it more useful for harmed investors.
The attempt to rejuvenate the arbitration program is generally welcomed by both investor advocates and the investment industry.
“Investors deserve viable options for the proper resolution of disputes beyond OBSI,” said the Investment Industry Association of Canada’s (IIAC) submission to the consultation.
To that end, the IIAC endorsed several of the working group’s recommendations for overhauling the old IIROC arbitration program and indicated that features of other models — such as Quebec’s use of mediation and the U.S. industry’s mandatory arbitration structure — also should be considered.
The IIAC also supported the idea of expanding a renewed arbitration program to include complaints involving mutual fund dealers under the new SRO.
Investor advocates also hope the IIROC arbitration program can be made useful, but some say it needs a dramatic overhaul.
The IIROC arbitration program was last reviewed in 2010, resulting in only modest changes. Maximum awards were increased to $500,000 from $100,000 and the ability to obtain costs was introduced. These tweaks did little to increase the program’s use.
“This has clearly not made the system more accessible,” said the Ontario Securities Commission’s Investor Advisory Panel (IAP) in its submission to this year’s consultation. “For the last decade, there have been five or fewer cases each year.”
The IAP suggested the reforms proposed in the latest review may not go far enough “to truly transform the arbitration process in order to achieve greater accessibility for retail investors.”
Instead, the IAP recommended including free legal and advisory services for investors with smaller claims, extending the limitation period for claims to six years, and defaulting to virtual hearings to keep costs down, among other changes.
The Investor Protection Clinic (IPC) at Osgoode Hall Law School, which provides free legal advice to harmed investors, echoed the IAP’s concerns. The IPC called on the new SRO “to seize this opportunity to overhaul the arbitration program and adopt transformational changes as opposed to the incremental changes that were adopted by IIROC following the last consultation in 2010.”
However, rejuvenating arbitration could sow further confusion.
“For clients who do not retain expertise or legal representation, there are significant headwinds in both understanding all available options (whether internal dispute resolution, the OBSI, or the arbitration program) and in selecting the most appropriate option given the substance and size of their potential claim,” the Canadian Advocacy Council of CFA Societies Canada (CAC) stated in its submission.
To address that issue, the CAC recommended developing an early-stage triage mechanism to help an investor determine the most suitable venue for their case.
OBSI expressed concern that a revived arbitration program could do more harm than good absent a triage mechanism.
“There are significant economies of scale and scope in dispute resolution services,” OBSI’s submission stated. Providing multiple options for the same sorts of investor complaints would raise costs for the whole dispute resolution system and, ultimately, investors, it said.
OBSI’s mandate involves cases with amounts up to $350,000.
“The expansion of the arbitration program to lower-value, unrepresented complainants would increase the complexity of the dispute resolution system and increase investor confusion,” OBSI cautioned. The submission also suggested that such complaints are better suited to ombudservices because they are less legalistic, “faster, less costly and less procedurally complex than arbitration.”
Some submissions recommended the arbitration program explicitly avoid taking complaints under OBSI’s $350,000 threshold to prevent overlap.
However, this view wasn’t unanimous. FAIR Canada argued investors should determine where to have their complaint heard, whether that’s OBSI, arbitration or in court.
“Fundamentally, we believe it is important to preserve investor choice and ensure each option remains available and delivers fair outcomes for investors,” said FAIR Canada’s submission. “The objective should be to ensure the arbitration program is as efficient and effective as it can be when it is a complainant’s preferred option to handle their dispute.”
This effort to revive arbitration comes against the backdrop of persistent hopes that OBSI will undergo its own reforms.
While OBSI has become the primary venue for resolving investors’ complaints, long-standing criticism of its service has yet to be addressed. The industry has alleged OBSI’s process unfairly favours investors. Meanwhile, investor advocates have long complained about OBSI’s lack of binding authority, which can undermine rulings and drive investors to accept “low-ball” settlement offers.
The Canadian Securities Administrators have long promised to act on recommendations from independent reviews to grant OBSI the authority to make binding investor compensation decisions, along with other possible reforms. And OBSI just wrapped its own public consultation on its governance structure.
At the same time, the 2023 federal budget reiterated the government’s intention to reform the dispute resolution system for banking complaints by designating a single, non-profit provider to deal with all bank customer grievances — a job consumer advocates have campaigned for OBSI to have.