The investment industry’s arbitration program has virtually slipped out of use in recent years. Admirably, regulators are trying to revive it. The trick is to carve out space between the very costly and time-consuming option of litigation and the comparatively cheap and simple industry-supervised alternative.

Critics of the investment industry have long complained about the lack of effective investor resti-tution mechanisms. Ideally, these critics would like to see the regulators ordering more restitution directly. In the meantime, however, the Investment Industry Regulatory Organization of Canada is trying to make its arbitration program more useful. The problem is that the service has fallen almost completely out of use in the past few years.

Investors with big, complicated claims against their dealers are more likely to take those cases to court; that option is so expensive and time-consuming that it makes sense only for large claims. Most investors with smaller claims are using the industry ombudservice, the Ombudsman for Banking Services and Investments, which handles claims worth up to $350,000; OBSI is seen as a big reason for the decline in the use of arbitration (which is currently limited to claims of up to $100,000).

When OBSI was formed in 2002, the investment dealers’ arbitration service had peaked in terms of usage, with 96 cases opened that year. According to IIROC statistics, there have been just five cases taken to arbitration so far this year. There were a total of eight cases in 2009 and nine the year before that — at a time when the onset of a financial crisis had naturally led to a rise in investor dissatisfaction and higher complaint totals. (Public complaints to IIROC jumped by about 20% year-over-year in 2008, and more or less held that elevated level in 2009.)

With OBSI presenting a free, simple dispute-resolution mechanism for smaller claims, it’s believed that many aggrieved investors have been using it instead of arbitration. And so, IIROC has been looking at ways to make its arbitration program useful and relevant again.

Last year, after reviewing the arbitration system, IIROC contemplated increasing the limit on awards that could be made under the system from $100,000 to $350,000, putting it on par with OBSI. Now, after considering comments on that idea, including numerous calls for even higher limits from both the industry and investor advocates, IIROC is proposing to move to a $500,000 award limit for the arbitration service.

IIROC is also proposing to allow investors to opt to eliminate the arbitrators’ discretion to award costs in a case, unless the arbitrator finds that one side acted in bad faith or needlessly dragged out the case. By allowing investors to choose arbitration without risking a large cost award if they lose, the hope is that fewer investors will shy away from the system if that risk is eliminated.

Still, the latest comment period on the proposed changes ended in early October, and it appears that some interested parties aren’t convinced that the proposed changes will be enough to make IIROC’s arbitration system that much more useful.

Some smaller dealers are worried that the regulator is going too far — and warn that a $500,000 arbitration judgment against them could be crippling. Others insist that it’s not going far enough.

The comment from the Canadian Foundation for Advancement of Investor Rights argues that the award limit should be even higher than what IIROC is proposing. The FAIR Canada comment says that capping arbitration awards at $500,000 means IIROC’s program is likely to attract only cases that fall between $350,000 and $500,000, allowing investors to avoid going to court in cases that fall into that range but leaving OBSI as the more likely choice of inves-tors with smaller claims.

Rather than limiting arbitration to such a narrow range of claims, the FAIR Canada comment says, a higher limit would make IIROC’s program an even more attractive alternative to civil litigation: “Given the complexity and cost of court proceedings, a greater increase in the limit, such as to $1 million, would make the program much more viable.”

This fear that a $500,000 limit will leave arbitration to deal with a relatively narrow selection of cases is echoed in the dealer community, too. In a comment, Toronto-based RBC Dominion Securities Inc. worries that the proposed reforms won’t do much to make the arbitration system more appealing to aggrieved investors, and says that IIROC’s proposed changes to the system “[do] not address the systemic issues that have led to underutilization of the program.”

Like FAIR Canada, DS also recommends that the limit on arbitration awards be raised to $1 million. And DS’s comment argues strenuously against what the dealer perceives is a lack of choice for investors in dispute-resolution mechanisms. The comment notes that while provincial securities rules require firms to provide dispute-resolution services to their clients, IIROC’s rules specify that the firms must participate in OBSI’s program.

“We are disappointed that IIROC has not addressed our concerns,” DS’s comment says, “regarding the lack of choice for investors when selecting a cost-effective dispute-resolution mechanism and that IIROC continues to position [OBSI] as the only viable solution for resolving a dispute.”@page_break@This call for a bigger role for arbitration, and a lesser one for OBSI, is also championed by the Investment Industry Association of Canada, which is calling for a more fundamental reshuffling of the dispute-resolution options and recommending that OBSI be made the dispute-resolution service for claims worth less than $100,000, leaving the arbitration service available for larger claims.

Moreover, the IIAC would like to see the arbitration system’s procedures become even more rigorous as the limit on possible claims is increased. The IIAC comment says that the much higher award limit necessitates added procedural safeguards to ensure “due process” for potentially larger claims.

For one thing, the IIAC is calling for the introduction of pleas, so that both sides in a case will be aware of the claims being made and the intended defences. The IIAC also recommends that the system include an option for claims worth more than $250,000 to be heard by a three-member panel rather than a lone arbitrator.

In addition, assuming the reforms will invite greater use of the arbitration system and larger claims, the IIAC recommends that IIROC consider several other changes, including improving the transparency of the system.

More cases will generate more confidential decisions, “which does not promote transparency,” the IIAC comment says, adding that this undermines consistency in decision-making by firms and the arbitrators. As a result, the IIAC recommends that some anonymous reporting of arbitration decisions should be considered.

This call for more transparency is another area in which the industry and investor advocates can agree. Comments from both FAIR Canada and the Small Investor Protection Association say that IIROC should try to be more transparent about the decisions that are handed down.

FAIR Canada calls for IIROC to begin improving transparency by publishing more detailed statistics about arbitration decisions and, ultimately, when the program is being used more widely, possibly publishing the decisions too.

Although these various comments are still up for consideration, it seems unlikely that many of them will resonate that loudly with the regulator. In its notice announcing the planned changes to the program, IIROC already addresses many of these issues.

For example, in response to concerns that the higher claim limit may warrant new, more formal procedures and greater reporting of decisions, the IIROC notice says that the arbitration process already has rules in place to ensure the fairness of the proceedings, which are presided over by a retired judge or a lawyer who is agreed-upon by both sides.

“IIROC believes that a $500,000 award limit is appropriate,” the notice says, “and reflects a balance between providing greater access to recourse that is expeditious and cost-effective, and ensuring adherence to principles of natural justice and legal process.”

And IIROC doesn’t want to start requiring the publication of arbitration decisions, noting that this could increase costs and prolong the process. The IIROC notice says that one of the hallmarks of arbitration is confidentiality, and that this should be preserved.

Moreover, IIROC doesn’t believe that arbitration decisions should be used to create precedents for future cases.

On broader issues, such as the suggestion that IIROC scale back OBSI’s role to apply only to cases below the $100,000 threshold, the regulator stresses that it is not in a position to alter OBSI’s limit unilaterally, which also serves to resolve banking-sector and mutual fund dealer complaints. Nor is IIROC prepared to alter its rules so that OBSI is not a mandatory dispute-resolution service.

One area in which IIROC may entertain the possibility of changes is in creating a simplified procedure for smaller claims. IIROC’s notice notes that both sides now can agree to a hearing based solely on written pleas, which simplifies things. However, in the future, IIROC may consider mandating specific rules for simplified proceedings.

Another area in which there could be some room for movement is investor education. Comments from both FAIR Canada and SIPA say that investors need more help navigating the system. The IIROC notice points out that the regulator has done a number of things to improve investors’ understanding of their dispute-resolution alternatives, but suggests that IIROC is open to other opportunities to provide guidance for investors.

The regulator may also want to consider FAIR Canada’s recommendation that IIROC make its proposed new provision on costs the default position. In that case, the complaining inves-tor would have to choose the possibility of a cost award; otherwise, the default setting will be no costs.

FAIR Canada’s comment says that requiring investors to choose the possibility of a cost award “would encourage inves-tors to consider seriously the implications of cost awards before electing to accept the risk and provide the arbitrator with that discretion.”

Whether or not IIROC adopts some of these suggestions in its final reforms, any effort to ensure that another viable option for investor redress exists can only be considered a good thing. IE