The securities sector did a good thing when it set up its own dispute resolution service. But as criticism of the service grows, the sector may be in danger of squandering the goodwill earned by its creation.

It has been almost a decade since the Ombudsman for Banking Services and Invest-ments was launched. At the time, the securities sector was justifiably proud of its effort to come up with a simple, affordable mechanism to resolve disputes between firms and their clients. Recently, however, the sector has begun to voice some objections to OBSI’s work.

The sector charges that OBSI’s decisions aren’t transparent enough; it isn’t acting impartially; it is favouring clients over firms; and it isn’t putting enough of the responsibility on clients when they lose money in an unsuitable investment. There are also grumbles that OBSI ignores conventional rules of evidence, precedents and limitation periods when investigating client complaints.

Many of these grievances are spelled out in submissions to a consultation that OBSI initiated earlier this year. In late May, OBSI issued a paper to explain its approach to determining suitability (a common basis for client complaints against the investment sector), and its process for assessing investor losses that have occurred due to suitability failings.

In response to that paper, the sector is airing some of its growing list of gripes with OBSI. Some comments claim that OBSI staff often overreach in their efforts to determine, in hindsight, whether an investment should have been considered suitable or not when it was first made. Detractors also contend that OBSI is being too generous in awarding compensation by trying to restore clients to the position they would be in if they had purchased a suitable investment instead of an unsuitable one — an approach that may be more favourable to clients than merely making up their losses. And, these comments say, this has the effect of taking the risk out of investing for clients.

These objections have surfaced even though OBSI has no power to enforce its judgment beyond publishing the fact that a firm has rejected its recommendation.

Conversely, consumer and investor advocates are staunchly backing OBSI. The submission from the Ottawa-based Public Interest Advocacy Centre says that the PIAC views this public examination of OBSI’s practices as “unseemly and wholly unnecessary.

“We view the present exercise as only a thinly disguised effort at industry bullying of an otherwise highly effective consumer protection ombudsman in an area that sorely needs it,” the PIAC submission says. “If the substantive goal of these complaints from [the] industry about OBSI is abolition or crippling of OBSI, we hereby signal to that industry our determination to fight such a result with the minister of finance.”@page_break@Investor advocates would like to see OBSI further entrenched as an avenue for wronged investors to pursue restitution. The submission from the Toronto-based Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) recommends that OBSI consider expanding the list of non-financial losses for which it will recommend compensation to include pain and suffering.

And Toronto-based accounting and insurance firm Kenmar & Associates’ comment not only urges securities regulators to resist “any attempt to dismantle or weaken OBSI,” it also calls for regulatory reforms “to strengthen the accountability and independence of OBSI and to ensure that it retains its status as the single source for dispute resolution for banking and investment complaints in Canada.”

Although the starkly different positions of the sector and investor advocates are understandable, the spat itself seems unnecessary. For all of the grumbling from the sector, the service it’s picking such a nasty fight with is not only its own creation but the impact by OBSI on the sector is much more benign than the hyperbole would seem to indicate. Some of the criticism portrays OBSI as a powerful force that is enabling clients to take advantage of the sector, soaking it for unwarranted compensation, but the evidence suggests otherwise.

In fact, the securities sector still wins the majority of cases that come before OBSI. About two-thirds of the time, complaining clients are sent home empty-handed. In cases in which OBSI does rule in favour of the client, the amounts involved are simply tiny: for 2010, for example, OBSI recommended total compensation to investment-sector clients of less than $3.4 million. For the sector overall, that’s a rounding error.

Firms win before OBSI more than they lose; if they choose to follow its recommendations, the amounts they (or their insurers) must pay out are inconsequential.

Moreover, criticizing OBSI undermines the good the sector has done itself by setting up the service. The exercise wasn’t entirely voluntary — OBSI was created when the sector was under the threat of the federal government forming an industry ombudservice. Nevertheless, the creation of a fairly simple, cost-effective alternative to litigation was good for clients — and for firms.

As the PIAC points out, without OBSI, firms “could be facing much more substantial awards and a tidal wave of civil litigation,” adding that OBSI’s service benefits the sector by reducing costs while providing fair and efficient redress for investors.

Nevertheless, this consultation may yield changes to OBSI’s practices. Tyler Fleming, director of stakeholder relations and communications at OBSI, says the results of the consultation will be put before OBSI’s board for discussion in late September. IE