Will new OBSI review lead to reforms?

If investor advocates such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and the Ontario Securities Commission’s Investor Advisory Panel (IAP) get their way, those recommendations will feature some fundamental reforms to OBSI. Both FAIR Canada and the IAP have called on the regulators in the past few years to shore up OBSI amid rising resistance from the investment industry.

Specifically, FAIR Canada has proposed that OBSI be redesigned to give it the power to compel firms to comply with its compensation recommendations. FAIR Canada has also suggested that regulators bring enforcement action against firms that resist OBSI’s processes in the meantime.

Binding decisions needed

Neil Gross, executive director of FAIR Canada, believes the independent review will come to the same conclusion: “I expect it will be apparent to an outside observer again that some form of binding decision-making is needed.”

The concerns of investor advocates stem from the raft of challenges that OBSI has faced in the past few years, which has resulted in a weakening of its role. Those challenges came to light when Australia-based The Navigator Co. conducted an independent review of OBSI in 2011 and found an environment of increasing industry resistance to the dispute-resolution service’s compensation recommendations. The report characterized that resistance as “baffling” and unwarranted based on its assessment of OBSI’s complaint-handling processes and performance.

This erosion of industry support for the process led Navigator to conclude that OBSI was not meeting all of the international standards for dispute-resolution services. In response, the firm’s report recommended a series of fundamental reforms, including that OBSI be given the power to make its compensation decisions binding on the industry, and that this be accompanied by an appeals mechanism – along with other proposed changes to its structure and governance.

Up to that point in its history, OBSI, which was established in 1996, had only ever had one firm refuse a compensation recommendation. OBSI’s sole power to enforce its recommendations is moral suasion and the threat of public scorn for firms that refuse to follow its decisions.

Specifically, OBSI publicly names firms that won’t pay the recommended compensation to clients, but it can’t force them to pay. Yet, as the Navigator report noted, this so-called “name and shame” power is only useful in an environment of industry goodwill, where there is a significant reputational cost to defying the ombudservice publicly.

Rise in unresolved cases

Historically, that was the case in the Canada. With the exception of one small mutual fund dealer in 2007, firms always paid up when OBSI recommended investor compensation. However, as industry intransigence grew, OBSI faced a growing number of unresolved cases, announcing three refusals in 2012, five in 2013, six in 2014 and four more in 2015.

All of these refusals came after the Navigator report, which characterized the “name and shame” process as critically undermined and recommended major reforms. Yet, regulators have proven reluctant to follow that report’s recommendations and give OBSI greater enforcement powers. Instead, they have pledged support for the organization, helped shore up its membership by mandating that all registered firms participate, and established more robust oversight arrangements.

OBSI has also undergone its own reforms, including a series of operational changes designed to help clear up a backlog of cases that accumulated in the wake of the global financial crisis, which has now been eliminated. OBSI has also adopted changes to its mandate, giving up the power to investigate possible systemic issues and the ability to deal with complaints that involve segregated funds, among other changes.

At the same time, the 18 refusals that have occurred since OBSI’s last independent review all represent clients that have lost money due to industry misconduct and didn’t receive any compensation. Although those clients suffer directly due to such an outcome, it has indirect negative consequences. OBSI warned in its latest annual report that it is seeing a troubling increase in clients accepting “low ball” settlement offers from firms.

This new review will likely bring all of these issues to the fore once again, but Gross hopes that the industry will be moved to act on its own to shore up OBSI before more recommendations are made.

“The industry’s best leaders understand that a dysfunctional complaint-resolution system is bad for business and is likely to provoke a heavy-handed response ultimately from regulators,” he says. “The industry would be better served by helping to shape a more functional system.”

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