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Jun 1, 2014

The Sorry State Of Financial Consumer Complaint Handling In Canada 2014 - Part Two

by Ken Kivenko

Ken Kivenko


(Editor's note: This is the second half of the article started in the May 2014 issue).



Let's continue our discussion of OBSI changes:

There were plenty of signs of trouble before the controversial changes were made. From our vantage point, investment dealer complaint handling is dismissive and non-responsive to the issues raised by complainants. Thanks to Canadian Securities Administrators (CSA) rule changes a few years ago, dealer complaint responses are now sent out within 90 days but unfortunately fairness is lacking in many cases. Per the 2013 OBSI Annual Report, complainant investors prevailed in 37% of cases (42 % in 2012, totaling $4.7 million), suggesting that nearly four in ten dealer investigations are deemed unfair after independent review. Firms also refused compensation in ten cases representing almost $1.4 million in recommended compensation. Responses should be based on honesty, fairness and good faith dealing. Dealers keep asserting that disclosure and investor concurrence get them off the hook; they refer to KYCs that appear out of nowhere and use pre-signed blank forms to justify actions.  Substantive responses are rare and dollar settlements are equally rare, usually a fraction of the actual loss, if at all.  The substantive response should be clear as to the cause of failure: service failure, process failure, staff failure, product failure and/or disclosure failure. Financial services firms are fighting complaints more aggressively. Disputes we have seen over the past year have been characterized by dealers taking entrenched positions and showing reluctance to accept what appeared to us to be clear evidence of miss-selling and bad advice. The evidence of businesses taking a more legalistic approach to investor complaints is impacting people's lives and causing a lack of trust in financial services. 

Another example: in May 2013, the MFDA issued a bulletin spelling out the common issues it found when reviewing fund dealers' complaint-handling documentation that must be provided to clients. MFDA rules require dealers to provide clients with a summary of their complaint handling procedures, and a copy of an approved client complaint information form (CCIF). In the bulletin, the MFDA reported that it reviewed firms' compliance with these requirements and found a variety of deficiencies.  For example, it said that some firms provided different versions of their summary to clients from the one available on their website. And, in some cases, the information included in these summaries differed significantly, typically with the online version being less thorough. Some firms didn't have the summaries available on their websites, or made them hard to find, it noted.

Also in December, regulators signed a Memorandum of Understanding (MOU) concerning oversight of OBSI among the participating members of the Canadian Securities Administrators and OBSI [ ].

The CSA is pledging to step up its oversight of OBSI, which has faced fierce, unceasing and generally unjustified attacks from industry participants in recent years. The MOU with OBSI establishes a joint CSA committee to facilitate this stepped-up oversight. The oversight framework aims to ensure that OBSI meets the CSA's standards in areas such as: governance; independence; standards of fairness; timeliness; fees and costs; resources; accessibility; systems and controls; methodologies for dispute resolution; transparency of material changes to OBSI's operations; and, information sharing with the CSA. The MOU replaces the investor-friendly oversight framework adopted by the CSA in August 2007.

A Joint Regulators Committee (JRC) is being established, which will include representatives of the CSA’s designates (the Alberta, British Columbia, and Ontario Securities Commissions), IIROC and the MFDA. OBSI will meet with the JRC on a regular basis to discuss governance and operational matters, as well as significant issues that could impact the effectiveness of the disputeresolution system.

The CSA now expects firms that are licensed to sell or distribute products that are not securities (such as insurance) to inform clients of the complaint mechanisms for each sector in which they do business and how to use them. This is an improvement.

Also on the positive side, OBSI will now be mandatory for portfolio managers, scholarship trusts and exempt market dealers (EMD). We expect the EMD inclusion could offer enhanced opportunities for fair investor restitution longer term. Exempt market dealers are a unique case as they have been lightly regulated in the past and records on complaints are dispersed and incomplete.  Recent reviews of their KYC-suitability disciplines are not encouraging. There is no SRO for EMDs so a set of conduct rules is not available. We believe the CSA will require extraordinary surveillance over EMDs as they now will have to deal with OBSI for external complaint handling. There is, however, plenty of opportunity for a system breakdown with the retail investor caught in the middle. Investors should be aware of the risks. The participation firm changes will more than double OBSI's membership to almost 1,600 firms.

So Now What?

A question arises: what happens when dealer rejects an OBSI compensation recommendation?  From what we've seen, not much, although we've been told action is in fact taken. If an OBSI recommendation is rejected, will there be an automatic investigation and corresponding compensation direction (if applicable) by the applicable regulator? (This is critical as OBSI has no power to make its decisions binding.) Are there legal/privacy constraints on the transfer of personal/ case file information from OBSI to regulators? Does the limitation time clock remain stopped as if the complaint were with OBSI? Will regulators be amending their terms of reference/by-laws to provide this ombudsman service? If so, will the investigation use the more informal fairness investigation rules employed by OBSI or something else?  What loss calculation methodology will be used? What timelines can be expected? Do firms have to ensure that complaints investigations take into account previous OBSI cases and/or guidance on similar matters? Will regulators publish the results of these follow-ups? Lots of questions, few answers.

Despite all the changes, regulators did not prohibit two-stage complaint handling, a sore point with investor advocates for over a decade. Canadian bank-owned investment dealers should be prohibited from using a two-stage resolution process. Investors are taken in by the “voluntary” protocol. It causes confusion, consumes valuable statute of limitation clock time (often without the victims’ knowledge) and deters many complainants from proceeding by exhausting their will and patience.  Internal Bank Ombudsmen are not overseen by any regulator. The bank-owned investment dealers’ existing two-stage complaints-handling process should be replaced by the requirement for firms to investigate complaints fully the first time and not passing responsibility back to the consumer to come back to firms if they are dissatisfied with an initial response. This is an abuse of process and should be abolished as UK regulators have already done.

According to the MOU, the OBSI Chair is to inform the CSA designates of issues that appear likely to have significant regulatory implications, including issues that appear to affect multiple clients of one or more firms.  Will regulators follow up and notify others adversely impacted by a systemic issue reported by OBSI? Other than common sense and decency, we can find no policy statement that obligates the commission/self-regulators to do so. Worse, we see no public disclosures that they have routinely done so except for in high-profile cases like the mutual fund market timing scandal and the nonbank ABCP fiasco. In cases of “mass detriment” caused to consumers, consideration needs to be given both to those who do complain and those who do not. Simply leaving the ombudsmen/regulators to handle hundreds of individual cases cannot be the right answer for investors, the financial services industry or OBSI.

By eliminating the OBSI' systemic issue investigation mandate, unknowing victims of financial abuse now have to depend on provincial regulators and Industry SROs for compensation. It is our understanding that securities regulators normally do not recover money for consumers. However, securities regulators in Manitoba, New Brunswick and Saskatchewan have the authority to order investor compensation up to prescribed limits. This requires a preliminary finding of a regulatory violation which may take years to investigate and adjudicate. In Québec, the Autorité des marchés financiers offers mediation services. The mediator does not have the authority to impose a resolution on the parties.

The OSC's Investor Advisory Panel is so concerned about the changes it has written a letter to Eleanor Farrell, the Office of the Investor, regarding OBSI: iap_20140212_letter-toefarrell-re-obsi.html. It asks many of the same questions.

While there is a need to address client dissatisfaction, financial firms need a culture change to actually welcome complaints and feedback, and to enable them to identify opportunities to improve customer experience/ loyalty and their own advice giving processes. Where clients have the opportunity to submit complaints, to put across their views on how they feel they are being treated and whether the firm is providing its products and services in accordance with their expectations, they are providing that dealer with an incredibly useful management tool to deliver a differentiated and competitive service.  (See Learning From Complaints Makes Complaints Worthwhile - Tim Kirk | BDO UK – BDO

The National Instrument NI31-103 rule amendments made by regulators may at first glance appear to be straightforward. However, layers of additional complexity are added when one considers the new and enhanced status of OBSI and its unique–and still undefined–position in Canada’s securities regulatory structure. Not only must dealers understand the CSA’s requirements and expectations, but it will also be necessary to become familiar with how OBSI will operate. There is much that is as of yet untested, including how the announced CSA monitoring of OBSI will work in practice, as well as the ability of OBSI to manage its significant increase in membership (EMDs and PMs) and the increased expectations and concerns of investors and investor advocates.

Bottom Line

Investors whose money has been compromised by error or wrongdoing on the part of market participants expect the system of complaint-handling and redress to be accessible, fair, responsive and responsible. The current system, however, requires significant knowledge, resources, and persistence to navigate properly. It all too often leaves investors frustrated and angry.

Given all the bear traps for complainants, it's best to prevent problems. Take a look at this useful guide It will save you a lot of pain, aggravation and money.

Recent changes have added to complexity, opaqueness, investor confusion and risk exposure. The complaint handling system is in tatters. It is unconscionable for any regulatory agency to permit the practice of suppressing information of dealer wrongdoing, thereby intentionally masking this information from those who may have been harmed, information they would need to seek redress. This is contrary to the most fundamental intent of investor protection. Much cleanup and clarification work is required by our regulators. In the meantime, it's CAVEAT EMPTOR.

Ken Kivenko, PEng, President ,

Kenmar Associates,

Etobicoke, ON (416) 244-5803,,