OBSI’s New Chief Must Transform the End Game

It’s been a rough few years for Canada’s Ombudsman for Banking Services and Investments (OBSI).

First, two of the country’s largest banks began boycotting OBSI’s dispute-resolution process. Then, some banks tried to pull their brokerage subsidiaries out, too.

In the confrontation that followed, OBSI’s mandate got trimmed back. It lost the authority to identify and investigate systemic problems. It also had to stop examining portions of complaints involving segregated funds.

Meanwhile, a small but increasing number of investment firms began refusing to comply with OBSI’s compensation recommendations. Some of those firms were broke but others were simply bellicose and didn’t even wait for the recommendation; they just declared upfront that they wouldn’t pay compensation, no matter what OBSI might conclude. “Naming and shaming” the firms did nothing. It just made OBSI look impotent.

In March, Doug Melville announced he was leaving as OBSI’s ombudsman and CEO before his term ended. Two senior staffers also departed.

Things looked pretty grim. Yet, to their great credit, OBSI’s directors persevered through all this muck and now they’ve succeeded in recruiting a high-powered new leader for the organization.

Sarah Bradley is a lawyer and law professor. She comes to OBSI directly from being the chairwoman and CEO of the Nova Scotia Securities Commission. She’s also served as vice chairwoman of the Canadian Securities Administrators (CSA), the umbrella group of provincial regulators that collectively sets OBSI’s terms of reference and oversees its activities.

Without doubt, Bradley’s competency in securities law and her knowledge of the players within the CSA will be valuable assets for OBSI. But to be truly effective, she also needs to establish quickly that she understands the real dynamics of client/advisor relationships and that she possesses keen insight into the realities facing OBSI.

One of those realities is the boycott. Although bank-owned brokerages are still “in” OBSI’s dispute-resolution system, they may only be there because the CSA ordered them to stay in. And no such support was forthcoming on pure banking matters. Instead, Ottawa sided with the dissatisfied banks, allowing them to walk out and use private dispute-resolution services in place of OBSI — a decision that’s bound to echo down the road. In time, as those alternate private services become increasingly experienced with OBSI-type matters, they’ll be ever more able and inclined to argue that the CSA’s edict should be overturned for investment firms.

OBSI’s other hard reality is the fact that “naming and shaming” no longer holds the deterrent power it once had. The first few shamings certainly attracted media attention. But as more and more firms have refused to settle, public tongue-lashings from OBSI have lost their novelty, and with it, their news value. Media coverage is bound to diminish in future. Naming and shaming will deliver less and less sting.

The result may be highly dysfunctional. As naming and shaming proves increasingly ineffective, dealers can claim credibly in negotiations that they have little to fear from it. This throws the door wide open to “lowballing” — i.e., threatening to pay nothing unless the claimant accepts significantly less than the amount of compensation OBSI recommended.

Lowballing already is a concern on OBSI’s radar, and it will be a sad irony if OBSI’s utilization of its own “naming and shaming” power makes the problem grow. Worse still, accountability will take a hit as statistics will still show a high percentage of claims being ” resolved successfully,” but confidentiality agreements will prevent outsiders from ever learning how many or how few of those settlements coincide with OBSI’s recommendations.

These dysfunctional consequences can be averted only by coming to grips with the need to reform the tail end of OBSI’s process. Specifically, when a dealer is disinclined to accept OBSI’s recommendation, the process can’t just keep shuddering to a halt with no resolution and claimants being left more vulnerable to unfair settlement pressure than they were before they turned to OBSI for help. Instead, some mechanism must be put in place to render a fair and binding decision.

But what mechanism? That’s not a simple question to answer. OBSI’s stakeholders will have significantly differing views on what constitutes a fair process, and who should pay for it. There’s also sure to be intense disagreement over whether binding decisions should be made by OBSI itself or by some other, completely separate agency or tribunal.

Still, all stakeholders will likely agree that it’s worth trying to find a solution — if only to avoid having one imposed upon them by regulatory fiat. As dealers learned when the CSA stopped them from pulling out of the OBSI system with their parent banks, the regulatory response can be surprising.

This gives Bradley an opening — if she wants it — to assemble OBSI’s stakeholders and to convince them they should at least try walking together down the path to reform. It won’t be an easy path. A workable solution will be difficult to hammer out. But that’s the mark of a good ombudsperson: getting opponents to see the practical benefits of a reasonable and fair resolution that lets them all move forward.

This article appears as an Inside Track op-ed in the online version of Investment Executive.

August 31, 2015