After almost a year of deliberation, the financial services industry’s homegrown dispute resolution system is making a few changes to its marching orders. The changes are designed to make the system more consumer-friendly, which should please consumer advocates. But there’s a new concern looming on the horizon.

After years in relative obscurity, the Ombudsman for Banking Services and Investmentscame to wider attention this time a year ago, when it proposed changes to its terms of reference that would beef up its ability to resolve consumer complaints. The plan to alter its mandate came in response to an Australian management consulting firm’s review the previous fall of the service and the “framework for co-operation” that was agreed upon among the ombudservices, the Joint Forum of Financial Market Regulators and the federal Department of Finance in August 2007.

Among other things, the changes OBSI proposed at that time would give it the power to investigate “systemic issues” that reveal themselves in the course of its work in resolving disputes between financial services firms and their clients and impose tighter deadlines on the process. Assorted other tweaks that would make OBSI’s processes more consumer-friendly were also proposed.

Those proposed changes sparked a backlash from certain parts of the industry, which worried that OBSI was straying into the regulatory realm, exceeding its mandate as a dispute-resolution service and possibly compromising its objectivity by favouring clients over firms.

To some, a tilt in favour of consumers is perfectly appropriate, given the vast disparity in legal and financial resources between firms and clients. Nevertheless, the industry and its advocates worried that OBSI was going too far, and they loudly opposed some of the planned changes to its mandate.

Now, OBSI is adopting some of those changes. In particular, it is adding a provision to allow it to identify systemic issues, and it is adopting new complaint-handling procedures that are consistent with those being adopted by self-regulatory organizations in the investment dealer and mutual fund dealer industries. The new terms of reference are expected to take effect in April 2009.

The industry’s complaints have not gone completely unheeded. The new mandate differs from the one proposed a year ago in its details, and the new mandate appears more restrictive than what was originally contemplated.

For example, the draft changes proposed that the ombudsman could consider a complaint 90 days after it is received by the firm. The new language says that OBSI can consider a complaint after 90 days, if it’s requested to do so by the client; OBSI can still decide that the firm hasn’t had long enough to deal with the issue, and can send the complaint back to the firm.

Under the initial draft, OBSI would have been able to recommend compensation for “loss or inconvenience” suffered by a client. The version that is to be adopted retains the original language — meaning that compensation can be recommended only where the ombudsman finds “loss, damage or harm.”

Perhaps most important, OBSI’s ability to investigate systemic issues is narrower than first conceived. In the original proposal, OBSI would have been able to investigate possible systemic issues, order compensation to all affected clients and require that the firm carry out remedial actions to prevent future problems.

“A FAIR RESOLUTION”
Under the new terms of reference, if OBSI suspects a systemic issue, it will ask the firm to investigate itself and report back. If a systemic issue is uncovered by the firm, the ombudsman is to work to reach a “fair resolution,” which may include the firm compensating all affected clients and carrying out remediation.

If, however, the firm doesn’t find a systemic issue and OBSI disagrees, or if the firm does find an issue but doesn’t agree to the remedies recommended by OBSI, OBSI can only refer the issue to the firm’s regulator and announce the incident in its annual report — without naming names.

In general, it appears that the industry has been somewhat successful in restraining the proposed expansion of OBSI’s mandate. But that’s not what has consumer advocates up in arms. They are more aggravated by the news that Royal Bank of Canada is dropping OBSI from handling complaints about its banking services, although RBC will still use OBSI to deal with disputes about investment services.

@page_break@RBC has hired Toronto-based ADR Chambers Inc. to deal with disputes that escalate beyond its internal processes. The bank announced the move a few days after OBSI unveiled its new terms of reference. RBC says that the reason for its decision is to get banking complaints resolved more quickly for clients.

“Our new independent customer resolution process is designed to respond more quickly and effectively to issues raised by RBC’s banking clients that cannot be resolved by RBC’s ombudsman,” the RBC announcement says, adding that ADR is “committed to providing clients a much quicker response.”

That said, the bank was a vocal critic of the proposed changes to OBSI’s mandate. It made its opposition clear in a comment letter submitted last February, in which it had “significant concerns about the proposed changes, which seem to suggest a regulatory function including, in particular, the power to investigate systemic issues.”

RBC also worried about a perceived “overall change in tone, which we feel is no longer neutral and tends to favour the complainant.

“It appears that OBSI is now an advocate for the complainant, not an impartial arbiter of the complaint itself,” the RBC letter said. It objected to any move into a regulatory role, or a consumer advocacy role, by the ombudsman.

Not surprising, consumer advocates are in favour of a more consumer-friendly ombudservice. Investor advocate Ken Kivenko calls RBC’s move “a giant step backward for complaint resolution in Canada.” He argues that the terms of reference adopted by RBC and ADR are weaker than OBSI’s, and he warns that it will make dispute resolution more difficult in cases in which there are issues that involve both banking and investment services.

Kivenko calls RBC’s decision to drop out of OBSI “a very serious move that will, in the end, undermine OBSI operations for other banks and, ultimately, for the investment side.” He suggests that perhaps the ombudsman should be a government agency rather than an industry-funded initiative.

A FASTER SERVICE

RBC maintains that the decision to opt out of OBSI for banking complaints but not investment complaints reflects its need for “a banking-specific complaints resolution solution, one that would more quickly and effectively address the needs of RBC clients.” But RBC also notes that the Investment Industry Regulatory Organization of Canada requires its members to be part of OBSI.

As RBC’s investment clients will continue to use OBSI as their third-party complaint-resolution service, RBC also notes that it will continue to work with OBSI through industry associations such as the Investment Industry Association of Canada and the Investment Funds Institute of Canada “to improve the existing framework” for those clients.

“My concern,” says David Agnew, OBSI’s ombudsman, “is for the integrity of the dispute resolution system that was set up by agreement among governments, industry and consumer groups. Starting in 1996 for banking complaints, and since 2002 for investment complaints, OBSI has been the acknowledged dispute resolution service for consumers with unresolved banking services and investment complaints.”

That said, Agnew indicates that he’s not aware of plans by any other bank to follow RBC’s lead and pull out of OBSI. At least two of the big five — TD Bank Financial Group and Bank of Nova Scotia — report that they have no plans to change their use of OBSI. (Bank of Montreal and CIBC hadn’t responded by press time).

The federal agency that exists to look out for consumers in their dealings with federally regulated financial institutions — the Ottawa-based Financial Consumer Agency of Canada — doesn’t appear to have any real concerns with RBC’s move, either. Sylviane Desparois, communications officer for the FCAC, says that the agency is aware of RBC’s decision and it “encourages RBC customers to continue to follow the complaint-handling process of their bank.” IE