Independent report supports OBSI

The Ombudsman for Banking Services and Investments has suffered a great deal of grief from the industry in recent months. Firms have launched a litany of complaints toward OBSI. Much of those boil down to a sense that OBSI is leaning too far in favour of clients over firms in its decisions. This despite the fact the industry wins more than two-thirds of the cases that go before the ombudsman; and, even when an industry firm loses, the amounts of compensation being recommended are fairly modest (totalling less than $3.4 million for investment complaints in OBSI’s fiscal 2010).

Still, industry members argue, among other things, that: OBSI isn’t acting impartially; it ignores the rules of evidence and legal precedents when it is investigating client complaints; clients aren’t required to shoulder their share of the blame when they lose money to unsuitable investments; and OBSI’s decisions aren’t transparent enough.

All this grumbling had led OBSI to publish a consultation paper earlier this year addressing one of the central areas of controversy: how it assesses suitability and determines losses in these sorts of cases. That paper drew a slew of critical comments from the industry, tempered by some largely supportive comments from the handful of consumer and investor advocates that also made submissions.

Now, an independent voice is wading into the controversy — and it is clearly lining up behind OBSI. Australia-based Navigator Co. has published the results of its latest review of OBSI — along with a separate, in-depth review of OBSI’s methodology for assessing investment complaints — which has found that the industry’s griping is largely unjustified. (Navigator had conducted its first independent review of OBSI in 2007.)

The report indicates that the review “found no substantive basis” for the level of criticism. Indeed, it concludes that OBSI compares favourably with similar dispute-resolution services in other countries. The review also found that OBSI has improved in some respects since the 2007 review.

For example, Navigator’s latest report says: OBSI’s transparency and accountability have improved over the past few years; it has made a variety of operational enhancements; and it has beefed up its capabilities, with the added authority to conduct systemic investigations. (The lack of that authority had been highlighted as a significant gap in OBSI’s scope in the 2007 report.)

In addition, the review found OBSI meets its guidelines in terms of: fairness, accountability and transparency; consumer accessibility; and the scope of services it provides. Moreover, the report notes, OBSI has managed this amid a significant surge in complaints, largely brought on by the financial crisis.

Regarding OBSI’s methodology for assessing investment complaints, the report says, there’s very little to criticize: OBSI’s procedure for calculating losses is actually better than what’s being used by similar services in most other jurisdictions, which results in fairer, more accurate loss measurements. If anything, the report notes, OBSI’s approach to investment complaints produces more decisions in favour of the industry than comparable services.

Navigator’s report concedes OBSI’s critics may be surprised by these findings, and it indicates that reviewers were surprised to find so little substance to such vehement criticism. However, says the report, “that is the unequivocal result of our investigation.”

Regarding OBSI’s methodology for assessing investment complaints, the report concludes: “It would be unfortunate if OBSI were forced to abandon its existing approach. We think it is a genuine attempt to be as accurate and as fair as possible, it is world-leading in its commercial sophistication and we think it is actually delivering fairer outcomes for industry as well as consumers.”

The report adds that other dispute-resolution services should be following OBSI’s methods, not the other way around.

As for the industry’s objections to OBSI, the report suggests they are rooted in a fundamental discomfort with the direction OBSI is taking. In an environment in which consumers have a limited voice and regulators aren’t engaged, it adds, “The debate over the methodology has been allowed to grow out of all proportion.” Most of the criticism, the review found, just isn’t supported by the facts.

Nevertheless, the Canadian industry’s protests aren’t likely to evaporate simply because an independent reviewer has found them to be largely baseless — and this sort of dispute-resolution service can function effectively only with industry support. Already, the report notes, industry compliance has degenerated, “with firms walking away, threatening to walk away, using more aggressive negotiating tactics and, in some cases, outright refusing to comply with recommendations.”

Ultimately, the Navigator report concludes, regulators must step in to shore up the service: “We do not believe that the current impasse between industry and OBSI can be resolved in any sustainable way with only minor refinements. The situation has moved beyond that. We argue that resolution of the current impasse will require the active intervention of the regulators and a multi-faceted package of reforms designed to act as a ‘circuit-breaker’.”

Indeed, the report calls for a series of fundamental reforms, recommending, among other things, that regulators make membership in OBSI compulsory and give OBSI binding powers over industry firms. The report calls on regulators to endorse — and for the industry to accept — OBSI’s basic framework for investment-loss calculation. As well, the report suggests establishing an appeal mechanism for OBSI decisions.

The report also recommends: the creation of an independently chaired advisory panel (drawn from both industry and regulators) to deal with technical aspects of complaints-handling; restructuring OBSI’s board to include the consumer voice and to involve industry-appointed directors in all decisions; and establishing annual regulatory oversight of funding/budget decisions.

The recommendations should be adopted as a package; just cherry-picking one or two in the hope of fixing the problem with some modest tweaks won’t work and may, in fact, make the situation worse. The recommended reforms, says the report, “are designed to restore OBSI’s external support mechanisms (industry, regulators and consumers) to a state of reasonable balance. Selectively implementing these recommendations risks exacerbating the current state of ‘imbalance’.”

The problem, then, really falls to regulators, as it’s not something that OBSI can fix on its own. Bill Rice, chairman of the Canadian Securities Administrators and chairman and CEO of the Alberta Securities Commission, says the CSA hasn’t had time to consider fully Navigator’s report and its recommendations, or to develop the CSA’s response. But, he adds, greater regulatory involvement is likely: “The CSA wants OBSI to work; and we are hearing from various sources — including the report — that if it is to work in the future, regulators will need to become more involved.”

However, determining just how involved regulators need to be “will take some considerable deliberation,” Rice says. “But we would like to see improvement in the environment in the relatively short term.”

The immediate problem regulators want to solve is the accumulation of threats by firms to walk away. Beyond that, it remains to be seen whether regulators are prepared to step in and fundamentally overhaul OBSI, or if they hope to get by with patching over the current crisis.

Traditionally, regulators have not had much of a role in resolving client complaints; apart from a couple of notable enforcement cases, they haven’t had much of a hand in ensuring investor restitution, either. Now, it appears as though the regulators will have to get much more involved for OBSI to be effective in continuing to carry out those tasks.

The Ontario Securities Com-mission has been leading the way, Rice says, with the rest of the CSA expected to get up to speed at a meeting of the securities commissions’ chairmen in St. John’s in early October.

Mary Condon, vice chairwoman of the OSC, indicates that the OSC is reviewing the Navigator report’s recommendations and plans to work with both OBSI and the CSA to deal with the issues raised in the report. “It’s extremely important,” she says, “that we have an effective complaint-handling system for investors.”

Without regulatory intervention, the Navigator report warns, OBSI will be sent on a path of capitulation to industry demands: “Absent a clear regulatory signal to the contrary, industry’s continued criticism and pressure may ultimately leave OBSI with nowhere to go but to make a series of backward-stepping compromises.”

Although neutering OBSI could appease the dealers, both inves-tors and advisors may ultimately suffer as a result. Indeed, Harold Geller, a lawyer with Doucet McBride LLP in Ottawa, suggests advisors are better served by a strong ombudservice.

Dealers may prefer litigation to an ombudservice, as they clearly have the advantage over the average investor in a courtroom. The time and cost of pursuing a lawsuit presents a huge barrier to most investors, even those with solid cases; many investors who would use a free dispute-resolution service would never go to court.

For those cases that do go to court, dealers have a good chance of success, as their far superior resources give them the upper hand, not only in fighting a case on its merits but in dragging it out beyond the will (or means) of the investor to pursue it.

Advisors, Geller argues, are better served by a dispute-resolution mechanism that dispenses with claims relatively quickly and allows them to move on. Although the low barrier to making a claim may mean advisors face more unsupportable claims than they would in court, advisors are often better off resolving a legitimate claim at OBSI than in the courts.

“The alternative of litigation bears a much higher emotional and lost-work cost,” says Geller, noting it carries a higher reputational cost as well. Moreover, OBSI awards are typically lower than court awards, he says, adding that advisors should be supporting the proposed reforms to strengthen OBSI.  IE