Ad­vo­cacy groups call for an end to in­ter­nal om­buds­men.

Investment Executive - - FRONT PAGE - BY JAMES L ANGTON

two in­vestor ad­vo­cacy groups are call­ing on reg­u­la­tors to put a stop to bank-owned in­vest­ment deal­ers us­ing so-called “in­ter­nal om­buds­men” as part of their client com­plaint-han­dling process.

The Cana­dian Foun­da­tion for Ad­vance­ment of In­vestor Rights (a.k.a. FAIR Canada) and the Pub­lic In­ter­est Ad­vo­cacy Cen­tre (PIAC) both state that us­ing in­ter­nal om­buds­men could harm clients by di­vert­ing them from the op­por­tu­nity to pur­sue their un­re­solved griev­ances with either in­de­pen­dent dis­pute-res­o­lu­tion ser­vices, such as the in­de­pen­dent Om­buds­man for Bank­ing Ser vices and In­vest­ments (OBSI), or the courts.

Ac­cord­ing to a joint let­ter from FAIR Canada and the PIAC to OBSI’s Joint Reg­u­la­tory Com­mit­tee (JRC), the group of reg­u­la­tors that over­see the om­bud­ser­vice: “In­vestor com­plainants are not be­ing given the clear op­tion of seek­ing in­de­pen­dent dis­pute res­o­lu­tion by OBSI. Rather, in­vestors are be­ing di­verted to an ‘in­ter­nal om­buds­man’ while crit­i­cal OBSI-re­lated time pe­ri­ods and civil ac­tion lim­i­ta­tion pe­ri­ods con­tinue to run.”

Or­di­nar­ily, firms have 90 days to re­spond to client com­plaints. At that point, they must pro­vide the client with a writ­ten de­ci­sion on the is­sue or in­for­ma­tion on es­ca­lat­ing their com­plaint to OBSI. How­ever, for in­vest­ment deal­ers, the 90-day dead­line, which is sup­posed to ap­ply to all in­ter­nal com­plaint-han­dling pro­cesses, doesn’t in­clude the use of an af­fil­i­ate’s in­ter­nal om­buds­man.

As the ad­vo­cacy groups’ let­ter points out, the rules ap­ply­ing to in­vest­ment deal­ers ex­pressly al­low for this ex­cep­tion to the 90-day limit. Fur­ther­more, the ad­vo­cacy groups’ joint let­ter ar­gues, this prac­tice harms in­vestors and vi­o­lates the com­plaint-han­dling re­quire­ments set down in se­cu­ri­ties rules by drag­ging out the in­ter­nal com­plaint-han­dling process and di­vert­ing in­vestors from pur­su­ing re­dress with either an ex­ter­nal, in­de­pen­dent ar­biter, or in court.

“The use of this [in­ter­nal] pro­ce­dure dis­cour­ages in­vestor com­plainants from con­tin­u­ing with their com­plaint due to lack of re­sources, at­tri­tion and fa­tigue,” states the let­ter from FAIR Canada and the PIAC. “Fewer in­di­vid­u­als, there­fore, carry on to the le­git­i­mate om­buds­man ser­vices of OBSI.”

At the same time, the let­ter also ar­gues that the ti­tle “in­ter­nal om­buds­man” is po­ten­tially mis­lead­ing to clients. In truth, the let­ter states, th­ese ser­vices are be­ing de­liv­ered by em­ploy­ees of fi­nan­cial ser­vices firms that are af­fil­i­ated with the dealer, who don’t have the in­de­pen­dence that’s im­plied by the ti­tle of “om­buds­man.”

“Th­ese em­ploy­ees are not in­de­pen­dent and they’re in a clear con­flict of in­ter­est po­si­tion, which is in­con­sis­tent with the con­cept of an om­buds­man,” the let­ter states, adding that th­ese roles would not meet the def­i­ni­tion of “om­buds­man” that’s used in other ma­jor ju­ris­dic­tions around the world, such as the U.K. and Aus­tralia.

Thus, the let­ter from FAIR Canada and the PIAC calls on the reg­u­la­tors that com­pose the JRC to re­quire that OBSI’s terms of ref­er­ence and the rules of the sel­f­reg­u­la­tory or­ga­ni­za­tions — the In­vest­ment In­dus­try Reg­u­la­tory Or­ga­ni­za­tion of Canada (IIROC) and the Mu­tual Fund Deal­ers As­so­ci­a­tion of Canada — be amended to pre­vent bank-owned deal­ers from us­ing their in­ter­nal om­buds­man to drag out the dis­pute-res­o­lu­tion process.

If deal­ers are go­ing to re­fer un­happy clients to an in­ter­nal om­buds­man for a sec­ond re­view of their com­plaints, this should hap­pen within the time limit set in se­cu­ri­ties rules for deal­ing with com­plaints, the joint let­ter in­sists: “Within the 90 days, firms may choose to pro­vide a sec­ond level of re­view. How­ever, they should not be per­mit­ted to take more than 90 days to do so.”

The let­ter also main­tains that firms shouldn’t be al­lowed to use the “om­buds­man” ti­tle for th­ese in­ter­nal of­fi­cials: “Reg­is­tered firms should not be able to con­fuse con­sumers by call­ing any of their in­ter­nal com­plaint-han­dling pro­ce­dures ‘om­buds­man.’ Such pro­cesses do not meet in­ter­na­tional cri­te­ria to be called an ‘om­buds­man’ nor can [they] be said to be ‘im­par­tial’ in ac­cor­dance with in­ter­na­tional cri­te­ria.”

The JRC ac­knowl­edges that it’s con­sid­er­ing the ad­vo­cacy groups’ sub­mis­sion, but has not yet stated if reg­u­la­tors are pre­pared to act.

“FAIR [Canada] and [the] PIAC have raised this with us and with our [Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors] col­leagues on the Joint Reg­u­la­tors Com­mit­tee, and we are look­ing into those con­cerns,” says Lucy Becker, IIROC’s vice pres­i­dent of pub­lic affairs and mem­ber ed­u­ca­tion ser­vices.

Al­though a cou­ple of reg­u­la­tory sources in­di­cate that the JRC is work­ing on a re­sponse, which could be re­leased in the next few months, the reg­u­la­tors would not con­firm the sta­tus of the file. The On­tario Se­cu­ri­ties Com­mis­sion — whose vice chair­man, Grant Vin­goe, chairs the JRC — de­clined to com­ment on whether the JRC will be act­ing on the is­sue.

This lat­est con­cern from in­vestor ad­vo­cates about the state of dis­pute res­o­lu­tion comes in the wake of an in­de­pen­dent re­viewer’s re­port re­leased in 2016 that calls for much more fun­da­men­tal changes to the sys­tem.

Among the re­port’s 19 rec­om­men­da­tions is a sug­ges­tion that OBSI be given the power to is­sue bind­ing rul­ings on client com­plaints and that some sort of lim­ited ap­peal process be de­vel­oped.

In re­sponse, the JRC is­sued a state­ment that pledges to con­tinue dis­cussing op­tions for “strength­en­ing [OBSI’s] abil­ity to se­cure re­dress for in­vestors.”

There has yet to be any de­ci­sive ac­tion on the key rec­om­men­da­tion that OBSI be given bind­ing pow­ers.

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