In 2002, in the desire to provide retail investors with a risk- and cost-free methodology to seek compensation for investment losses, the Ombudsman for Banking Services and Investments was effectively given jurisdiction over stock brokerages and mutual fund dealers across Canada to resolve investor complaints on a confidential basis.
The concept is that OBSI acts as an independent, neutral evaluation service, investigating retail investors\u2019 complaints and making recommendations about compensation for investment losses up to $350,000. Unlike a court of law or a regulatory hearing panel, OBSI is not an adjudicative body and cannot make binding determinations that contain findings of fact and law as to fault, liability or damages, nor can it issue an order or judgment containing a result (dismissing the complaint or ordering compensation).
That\u2019s the theory. And, in practice, OBSI\u2019s conclusions are not binding on investors, who are truly free to decline OBSI\u2019s \u201crecommendations\u201d and pursue other means of redress, such as commencing legal proceedings.
For investment dealers, however, theory and practice are fundamentally at odds. In order to ensure that dealers are not free to reject its recommendations, OBSI has built into its process a provision that every parent can relate to \u2014 the \u201cor else\u201d threat that accompanies what otherwise seems to be a request to do something. In this case, the threat is adverse publicity for the dealer, by making public the name of the dealer and \u201cthe recommendation and the circumstances of the case in a manner considered appropriate by the Ombudsman\u201d (quoting from OBSI\u2019s terms of reference).
There is no right of appeal for either the investor or the dealer; nor would one expect such an appeal mechanism, in which the outcome of the process is only a recommendation and the complainant has other recourse available to him or her.
However, the threat of adverse publicity consequent on a dealer\u2019s rejection of an OBSI recommendation has been a stick the OBSI has not been shy to wield, whether to compel a dealer to accept an otherwise unacceptable recommendation or to withdraw an objection to an OBSI investigator\u2019s position or demand on a particular issue.
Dealers involved in providing investment advice and services to the investing public are particularly vulnerable to reputational damage caused by adverse publicity. Enforcement regulators have long been aware and have taken advantage of this weakness to achieve settlements of regulatory issues.
A quiet reign of tyranny has existed over the past five years, with dealers wary of being the first to run the gauntlet should they not accept an otherwise objectionable OBSI recommendation. Anecdotally, the threat has been made on numerous occasions to get dealers to overcome their objections, principled or otherwise, to OBSI recommendations.
However, on May 10, OBSI issued a press release stating that one small mutual fund dealer had, in its words, \u201crefused to honour a recommendation for compensation\u201d resulting from OBSI\u2019s investigation of a client\u2019s complaint about the handling of her account and consequent investment losses. While OBSI\u2019s announcement paints a vivid picture of dealer misconduct, the dealer subsequently has defended itself in the media \u2014 both substantively and by alleging misconduct on the part of OBSI itself.
And confidentiality concerns were nowhere in evidence in this extremely public exchange.
OBSI clearly operates on the assumption \u2014 one that is commonly held in the industry \u2014 that although an investor has a choice to accept or reject an OBSI recommendation, a dealer has no such choice. The merits of this particular case and the basis for the recommendation are not the point; neither are issues of investigative competence, personnel turnover at OBSI or in disregard of industry practices and regulatory policies.
The point is the lack of due process in OBSI\u2019s dispute resolution mechanism has resulted in a fundamentally flawed system. If a recommendation is really a judgment that must be satisfied or honoured, the system should then be changed to build into it an appeal or a review mechanism prior to the execution of the dealer through an incendiarily worded press release designed to provoke maximum public outrage toward the dealer.
There is a difference between a consensus-driven dispute resolution mechanism and an adjudicative one. OBSI\u2019s dispute resolution mechanism purports to be the former while acting as the latter, but without the protections arising from our history and experience of civil actions and arbitrations.
@page_break@Whether or not the result, being the \u201crecommendation,\u201d is correct, the process itself is unfair. Justice is neither done nor seen to be done.
It is time for change. \tIE<\/b>
Joel Wiesenfeld is a partner at Torys LLP in Toronto. <\/i>
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