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Who Benefits and Who Loses from Keeping OBSI Toothless?

Some might say it doesn’t really matter much that Canada’s Ombudsman for Banking Services and Investments (OBSI) can’t force banks and brokerage firms to compensate the clients they’ve harmed.

Their argument goes something like this: More than 95% of cases that OBSI has handled are resolved successfully; only a few end up with the ombudsman’s recommendations being ignored. So, just a tiny handful of deserving complainants are being prejudiced. Why get all fussed about that? The system’s working for the vast majority of consumers as well as for industry and regulatory stakeholders.

Superficially, that’s how it may seem. But let’s look a little closer, as an independent review of OBSI’s operations has just done. New Zealand’s former banking ombudsman, Deborah Battell, found that OBSI’s inability to make binding compensation orders undermines its effectiveness by forcing it to spend most of its time and resources getting disputes settled. Those resources, she says, could be freed up for more productive things — such as helping stakeholders use lessons from past disputes to avoid future ones — if OBSI just had the power to bring claims to an efficient conclusion by issuing binding orders.

The independent review also found that OBSI’s ability to “name and shame” firms that don’t comply with its recommendations is counterproductive. Although the practice of “naming and shaming” has been used 18 times thus far, it has done nothing to bring recalcitrant firms to heel. Instead, it’s merely exposed OBSI’s toothlessness and, Battell’s report says, that’s given firms the effective balance of power, allowing them to negotiate down the recommended amount of compensation.

Currently, firms are refusing to pay 3.5% of the time, but according to Battell, there’s strong evidence that in a further 18% of cases, firms have managed to induce settlements below the amounts OBSI recommended. In other words, in more than one in five instances OBSI’s recommendations are either being disregarded entirely or circumvented in part.

The independent review’s most noteworthy finding, therefore, is that this result is a systemic problem as it tilts the playing field in a way that places consumers at a disadvantage and in a weaker position.

This doesn’t happen in isolation. It occurs against a backdrop of securities commissions and self-regulatory organizations rarely collecting fines they levy against individual registrants. Combining that problem with the OBSI systemic problem, the resulting image is one of the investment industry — or large portions of it — running roughshod over the entire regulatory apparatus.

That’s an image everyone should be concerned about because it doesn’t just conjure up the plight of harmed investors being denied a measure of justice. It also opens a path to a damaging loss of public confidence in regulators’ competency or determination, or both. Furthermore, it raises the prospect of real harm to the public perception of the industry as a whole, including all those investment firms that do comply with OBSI recommendations.

But most troubling, all this threatens to erode the public’s confidence in the integrity of Canada’s capital markets because investors can’t truly trust a market that systematically impedes its own mechanism for fairly and fully compensating investors if they wind up being harmed by the market’s gatekeepers.

Looked at it this way, OBSI’s lack of binding decision-making power isn’t something that harms just a tiny number of people. It’s actually the reverse: benefiting only a minority intent on evading their obligations while potentially harming everyone else.

Nothing validly stands in the way of fixing this. The independent review notes that gripes by some industry groups about OBSI’s impartiality and loss calculation methodology are all based on “myths” and have no foundation. There’s no reason for concern that OBSI would abuse the power to make binding decisions. In fact, says Battell, OBSI has demonstrated it can exercise such power judiciously and should be entrusted to do so — just like virtually every other country’s financial ombudservice.

Thus, the time has come for Canada to reform its ombudservice system. For years, OBSI’s ability to deliver a full measure of fairness has been needlessly impaired — and further delay in rectifying this serves no sensible purpose.

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

June 13, 2016