An outside recommendation to compel Canadian investment firms to abide by the compensation decisions of the Ombudsman for Banking Services and Investments (OBSI) has revived the debate over the effectiveness of binding authority powers and how it affects consumers.
In June, Deborah Battell, former New Zealand Banking Ombudsman, presented her independent evaluation of the operations and practices of the investment side of OBSI, in which she said that OBSI’s current mandate “prevents it from fulfilling the fundamental role of an ombudsman, [that of] securing redress for all consumers who have been wronged.”
The report noted that OBSI is unlike other comparable international financial sector ombudsmen in that it doesn’t have binding authority and so cannot compel firms to pay compensation when OBSI recommends it. As a result, some 18 per cent of consumers who came to OBSI in 2015 received less than OBSI recommended.
“I find this is a significant number – that’s one-fifth of our cases,” Sarah Bradley, OBSI’s ombudsman and chief executive officer said in an interview. OBSI’s 2015 annual report states that consumers received an average compensation of $26,258 on the investment side.
Working well for OLHI
But Holly Nicholson, executive director, ombudsman and general counsel for the OmbudService for Life & Health Insurance (OLHI), said the non-binding technique has worked very well for consumers and life insurance companies in her jurisdiction, none of whom have refused to pay the consumer.
In OBSI’s case, consumers who are unhappy with the recommended settlement can go through the court system to try to get higher compensation. However, speaking from her experience at OLHI and as a former litigator, Nicholson said having a binding decision even in a courtroom setting doesn’t necessarily mean the order can be enforced or collected quickly.
“A binding decision at a court is subject to appeal and then if you are ultimately successful in the final appeal you’ve got to collect that money and that can be a very arduous and long step [for the consumer],” said Nicholson. “The whole concept of an ombudservice or an alternative dispute resolution provider is to make it fair, fast and effective. The court process or any binding process, in order to have due process and fairness, will have to build in an appeal mechanism which, in and of itself, is going to delay things a lot.”
In her report, Battell said the current OBSI method of “naming and shaming” companies that refuse to pay is counterproductive in terms of both resolving the dispute and what it does to public confidence. In 2015, six investment firms refused to pay OBSI’s recommended amount even though OBSI has publicly named 18 investment firms since 2011.
Bradley said OBSI finds in favour of firms a slight majority of the time. As it currently stands, the non-binding method often ends up in a “negotiation” between the firm and the consumer and in the end, the consumer is the one who is most disadvantaged, getting less than the recommended amount, she said.
“The real mischief … is not that some consumers receive less, but that OBSI’s current mandate allows this to happen,” Battell said in her report. “It, in effect, tilts the playing field in favour of firms. The fact that this is happening in a complex industry that has a significant impact on people’s well-being and in which customer literacy is generally low, is of concern.”
The results of non-binding decisions also spills over to general public confidence, affecting more than just the person who has complained, said Neil Gross, executive director of FAIR Canada. Currently, all regulatory authorities in Canada support OBSI in that it should be the single portal dispute resolution service for the investment industry and the mechanism that is intended to safeguard investors by providing an avenue for redress.
“But if at the same time we have a defect in that process that systematically disadvantages investors in that process, then you have in effect, the Canadian marketplace having a systemic bias against investors and that can only erode investor confidence in the markets themselves,” said Gross, whose group was consulted for Battell’s report.
Gross said a binding decision from OBSI would automatically mean full enforcement by the investment firms if they wanted to remain licensed to carry out their business.
OLHI’s Nicholson said she could not comment on why the non-binding method does not seem to be working for OBSI.
“It works for OLHI because of our expertise in this area and the approach we take in listening to both sides. We are able to convince the insurers, in appropriate cases and where there is merit, to pay promptly,” said Nicholson. “All of our final non-binding recommendations have been accepted by insurers.”
The Battel report was part of a memorandum of understanding with the Canadian Securities Administrators (CSA) in which OBSI agreed to go through an expert evaluation every five years.
The Joint Regulators Committee (JRC), made up of CSA members from British Columbia, Alberta, Ontario and Quebec, as well as the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada, are scheduled to meet with the OBSI board of directors in September.
In the meantime, the JRC is looking at the findings and recommendations, along with stakeholder input in considering its next steps.