Insights & Articles

Should OBSI Have the Power to Make Binding Orders?

by Clarke Tedesco and Alexandra Grishanova, PCMA E-News Brief

Since May 1, 2014, the Canadian Securities Administrators (CSA) has required all exempt market dealers to maintain membership in, and rely on for resolving client complaints, the Ombudsman for Banking Services and Investments (OBSI).  Established in 1996, OBSI is a non-government organization mandated to provide independent dispute resolution services at no cost to consumers when they are unable to resolve their complaints with their banking services or investment firms.

Following a complaint from a consumer, OBSI conducts an investigation.  Typically, as part of that investigation, OBSI interviews the complainant and the securities dealer, reviews evidence and uses modelling techniques to assess any losses suffered by the complainant. Neither party has the ability to test the evidence given by the other and the parties have only limited ability to make arguments. 

If OBSI determines that a consumer has suffered loss, damage or harm as a result of an act or omission of the participating firm or its representative, it attempts to settle the dispute through a facilitated settlement between the consumer and the firm and, if a settlement cannot be reached, OBSI prepares a formal report with a recommendation. OBSI’s mandate allows it to recommend compensation up to a maximum of $350,000. If a firm refuses to comply and pay the recommended compensation, OBSI “names and shames” the firm by making the refusal public. Out of 3,078 banking and investment cases opened by OBSI between 2012 and 2016, 19 (or 0.6%) resulted in firms being publicly shamed for refusing to compensate their clients.  Given the extremely low rate of refusals to follow OBSI’s recommendations, it appears that the current process is extremely effective. 

While OBSI has sometimes been criticized for being unduly favourable to complainants by not bringing adequate rigour to the assessment of the complaint, OBSI dispute resolution is undoubtedly a useful process for securities dealers. It provides a low cost assessment of a complaint in lower-damages cases that would otherwise be difficult to economically take through the court process, and facilitates the settlement of those complaints at an early stage.  Dealers are well advised to take seriously even an unfavourable recommendation, as such recommendations provide an early, independent assessment of the complaint and may provide a glimpse into the possible results of an eventual trial.  Because of the $350,000 limit, settlement on the terms proposed by OBSI is usually less expensive than contesting a court proceeding. 

In 2016, OBSI underwent an independent review of its investment mandate.  Despite the extremely high settlement rate, the resulting report[1] asserted that ‘naming and shaming’ is actually ineffective because, while the number of firms refusing to follow OBSI recommendations is relatively small, the knowledge that OBSI lacks binding powers emboldens its members to negotiate down the compensation amounts recommended by OBSI. As a result, about 18% of consumers receive compensation that is, on average, $41,300 lower than the compensation recommended by OBSI.

The report recommended two potential avenues to enable OBSI to better secure redress for consumers:

1.   OBSI would have no binding authority. Instead, it would cancel membership of a non-compliant member and report it to regulators, who would then take action against a registrant, including preventing it from trading; or

2.   OBSI would have a binding authority based on the contract with its members.

In practice, the implementation of either of the above recommendations would result in OBSI recommendations having de facto binding authority, because the cancellation of a dealer’s OBSI membership would put that dealer in breach of securities regulations – an unacceptable option for any registrant. 

In our view, the implementation of either reform would not be in the interests of investors or investment firms.  It is the non-binding nature of the OBSI process that is its heart and soul, and the CSA ought to be wary of making changes that might have negative effects on the operation of that process. 

In particular, the primary attraction of OBSI is the quick, zero cost, nature of its process.  The parties tend to appear on their own behalf and lawyers are rarely involved.  Should the process become binding (and therefore represent the ‘last resort’ for such complaints), both complainants and dealers will be inclined to retain lawyers and demand additional procedural protections. 

Absence of coercion and the absence of binding orders are characteristic features of an ombudsman, who, as a result, is not subject to the same procedural and substantive fairness requirements that apply to courts and tribunal disputes.  By gaining the ability to make binding decisions and having its awards enforced in courts, OBSI would likely have to change its process to comply with the requirements of Ontario’s Statutory Powers Procedure Act[2] or the enhanced common law procedural fairness requirements. Those requirements could include the right to notice of the allegations, the right to be heard and call evidence, the right to disclosure, and the right to receive reasons for a decision.  The effect of adding those procedural protections would be to significantly increase the cost and reduce the efficiency of the OBSI process. The ‘ramping up’ of the OBSI process will make it less attractive to consumers if the cost and time for resolution increases. 

The differences between the procedural approaches taken by courts or tribunals and OBSI are obvious. OBSI acknowledges on its website that it is not “a court or a regulator”. Therefore, while it uses the law and industry regulations as guides to determining fair outcomes, it is not bound by specific case law. The compensation recommendations made by OBSI do not provide written analysis of what it considered to be wrong-doing or the rationale for its compensation calculations. Further, there are no internal review mechanisms or appeal rights available to the parties affected by OBSI’s decisions. All this is clearly in keeping with the ombudsman model that is a fast, informal, cheap and impartial procedure.  Such abbreviated procedures are not available to courts and tribunals, who possess the powers of coercion. Unfortunately, the report is vague in terms of addressing the increasing importance of procedural fairness that comes with binding authority.

The main question is, however, whether concerns about OBSI’s lack of coercive powers are even warranted. As aptly noted by Lorne Sossin and France Houle, the power of the ombudsman comes not from the binding nature of its decisions or recommendations, but from its “accuracy, non-partisanship and credibility”.[3] The non-compulsory nature of its decisions moderates its broad investigative powers and allows for a flexibility that courts and tribunals, which are bound by rules of procedural law, do not have.

In short, the ombudsman’s lack of power to issue binding decisions is in fact its strength.

OBSI’s current process allows it to come to a quick resolution while avoiding the legalities and technicalities of an adversarial dispute resolution process, with the ensuing delay and expense.  It is not uncommon for court actions to take years to come to resolution and to cost hundreds of thousands of dollars in fees.   OBSI’s power to publicise issues of non-compliance is, in fact, highly effective, as demonstrated by OBSI’s extremely high compliance rate.

Furthermore, the continuing ability of parties to negotiate provides incentive to OBSI investigators to make recommendations that are reasonable and likely to be accepted by the parties.  It acts as a moderating influence that adds to the fairness and effectiveness of the process.  That a percentage of recommendations are subject to further negotiation ought to be of no concern.  It is said that a good compromise leaves everybody unhappy, and it is unfair to place the risk of refusing to follow a recommendation entirely on the shoulders of OBSI members.

In any event, the CSA appears to be taking steps to address the perceived concerns by taking a role in ensuring that OBSI’s recommendations are taken seriously. In December 2017, staff of CSA jurisdictions and staff of IIROC and the MFDA published a joint notice[4] stating that refusals to compensate clients consistent with OBSI recommendations, repeatedly settling for lower amounts than those recommended by OBSI, or being involved in a disproportionate number of settlements can be risk-based indicators of problems with firms’ complaint handling mechanisms. Based on these indicators, the regulators may make enquiries with the firms as part of their risk-based reviews and take regulatory actions. These failures may result in the regulators ordering terms and conditions on a firm’s registration or initiating an enforcement investigation within the regulators’ existing regulatory framework.

While not perfect, the current OBSI process provides a mechanism for inexpensive and effective resolution of disputes relating to investments.  By gaining the power to make binding decisions, OBSI may lose the very thing that makes it effective.