Canadians mistreated by financial firms routinely accept less compensation than independent mediators say they deserve, according to a coalition of investor and consumer advocates.
The new analysis, detailed in a comment letter submitted Wednesday to securities regulators across the country, represents the latest salvo in a decade-long battle to establish a binding regime for investment-related disputes. Currently, the non-profit Ombudsman for Banking Services and Investments can only recommend compensation up to $350,000, which firms can simply refuse to pay.
In late 2023, the Canadian Securities Administrators – a national umbrella group of provincial and territorial market watchdogs – proposed a new framework that would force banks and investment firms to comply with OBSI decisions. The proposal has faced strong resistance from industry groups, which argue a binding regime would drive up the cost of liability insurance. But proponents claim a binding regime is the only effective way to level the playing field between large financial entities and individual investors.
From 2015 through 2020, an analysis contained in the comment letter found investment firms paid out nearly $3-million less than the aggregate amount OBSI recommended. Another analysis in the letter found payments made between 2018 and 2022 totalled roughly $1.6-million less than OBSI’s recommendations.
On average, the letter cited CSA data in stating that “consumers who accepted lowball offers settled for 60 per cent of OBSI’s recommended compensation amount.”
“Binding decision-making will put an end to this harmful practice and should, instead, encourage firms to work harder to resolve client complaints fairly and honestly when they are first brought to their attention,” the letter said. The 11-member coalition that submitted the letter includes FAIR Canada, the Public Interest Advocacy Centre, the Consumers Council of Canada and the Canadian Association of Retired Persons.
There have been 22 instances since 2007 in which financial firms have refused to abide by an OBSI recommendation. In those cases, OBSI publishes the name of the offending organization on its website, though such a “name and shame” system has been repeatedly criticized as ineffective.
“OBSI’s inability to universally secure redress for consumers through the name and shame system continues to limit its effectiveness, as it provides an economic incentive for both parties to settle for amounts below OBSI’s recommendation,” Poonam Puri, a professor at York University’s Osgoode Hall Law School, said in an independent evaluation of OBSI’s mandate published in 2022.
Her report came to many of the same conclusions as a 2016 evaluation by Deborah Battell, who was previously the banking ombudsman for New Zealand. Ms. Battell’s analysis found 18 per cent of complainants in 2015 who OBSI considered should receive compensation ended up receiving, on average, $41,927 less than OBSI recommended.
“The real mischief, however, is not that some consumers receive less, but that OBSI’s current mandate allows this to happen,” Ms. Battell said. “It, in effect, tilts the playing field in favour of firms.”
OBSI records confirm the vast majority of its decisions are in favour of the company responding to a complaint. According to its 2022 annual report (the 2023 report has not yet been released), only 33 per cent of investment-related complaints and 21 per cent of banking-related complaints ended with a recommendation for compensation.
Still, several of Canada’s largest banks have opted out of OBSI amid disagreements over resolution timelines and the size of settlement recommendations. Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia pulled out of OBSI for consumer banking complaints in 2008, 2012 and 2018 respectively, moving instead to for-profit arbitration firm ADR Chambers.
In 2012, after the departures of RBC and TD, OBSI contemplated shutting down its operations entirely. Its 2011 evaluation also recommended binding authority, calling the present system “unworkable if participating firms can simply reject an Ombudsman decision.”
The CSA proposal, however, also seeks to expand the definition of “complaint” to include “any expression of dissatisfaction,” which according to the Private Capital Markets Association of Canada runs the risk of dramatically increasing the number of complaints that could potentially be made against its members.
The PCMA, which represents roughly 400 exempt market dealers (meaning they can sell securities that do not require a prospectus, such as private placements), portfolio managers and investment advisers, launched a website detailing the various reasons why it opposes granting OBSI any binding authority. In an interview, PCMA chair David Gilkes said the proposal was “unfair by design” and that, if implemented, it could become impossible for some firms to access a common form of liability insurance known as errors and omissions – or E&O – insurance.
“The insurance industry is telling us, the underwriters and brokers that we have spoken to, have said you might have trouble underwriting E&O insurance in the investment industry in the future if this is the type of settlements that will be given out with binding authority,” Mr. Gilkes said.
Proponents counter that binding recommendations are the norm internationally, with Canada being an outlier among peers such as Britain, Australia, New Zealand, Ireland, the Netherlands, the Czech Republic, South Africa, Singapore and Taiwan. However, Mr. Gilkes said none of those countries have the power to make binding recommendations for payments as high as the OBSI limit of $350,000, with most being limited to a fraction of that amount.
Support for granting OBSI more authority has been growing in recent months. Referring specifically to OBSI, Ontario Securities Commission chief executive officer Grant Vingoe said in a Feb. 5 interview that legislation creating “a stronger framework for investor compensation in cases of wrongdoing could be very valuable.”
In the meantime, federal Finance Minister Chrystia Freeland selected OBSI in October, 2023, as the sole ombudsman for banking complaints in Canada. That means RBC, TD and Scotia must leave ADR Chambers and rejoin OBSI before the end of this year.
Jameson Berkow