An Ontario Securities Commission advisory panel is seeking vast new investor-friendly powers for the financial services ombudsman, countering industry complaints that the agency is too tough on banks.
In a letter to OSC chairman Howard Wetston, the seven-member OSC Investor Advisory Panel called on regulators to make membership in the industry-funded regime mandatory and force two banks that quit – Royal Bank of Canada and Toronto-Dominion Bank – to return.
The panel also said the decisions of Douglas Melville, Canada’s Ombudsman for Banking Services and Investments, should be legally binding.
The ombudsman helps to secure compensation for investors who lose money owing to bad advice, mistakes or abuse at the hands of banks, brokers and mutual funds. But it operates largely by moral suasion and banks can opt out of the process entirely.
“A truly independent, objective, accessible and effective dispute resolution regime is … an integral component of investor protection,” the panel members said in a four-page letter to Mr. Wetston, obtained by The Globe and Mail.
The agency is facing industry accusations that it’s biased in favour of consumers, but the panel suggested the ombudsman isn’t friendly enough to investors.
“The existing system is confusing for Canadian financial consumers,” the panel wrote. “Many Canadians are unaware of OBSI’s services and powers.”
The OSC does not have the authority to force the banks to participate in the ombudsman regime. Ultimately, compelling banks to join OBSI would require action by the federal government, which regulates banks. Brokerage firms, including bank-owned ones, are already bound by law to be part of the system, but banks, which also offer mutual funds and other investments, are not.
The banks aren’t the only ones unhappy with OBSI. Throughout 2011, a group of investment dealers made repeated attempts to persuade various industry regulators to exempt them from the ombudsman regime, according to OBSI’s 2011 annual report.
Mr. Melville’s agency has been engulfed in controversy since TD dropped out of banking-related disputes in October and instead hired a private outside ombudsman – ADR Chambers. RBC, which quit in 2008, also sends its unresolved customer complaints to ADR Chambers. Both banks’ brokerage arms are still part of the regime, as required by law.
A common complaint from the financial services industry is that OBSI is biased in favour of investors, leading to rising claims, steep awards and lengthy resolution times.
But OBSI’s outgoing chairwoman Peggy-Anne Brown warned last week that TD’s abrupt exit jeopardizes the ombudsman’s ability to do its work. The departure of TD, the country’s second-largest bank, forced a cut in the agency’s 2012 budget.
“Make no mistake, this is a power struggle between the interests of consumers/investors and the interests of large and powerful financial firms,” Ms. Brown remarked in OBSI’s 2011 annual report. “A small non-profit organization cannot hope to survive in this struggle without strong support from industry, or in the absence of industry support, support from government and regulators.”
In its letter, the OSC panel also lamented the “fragmentation” of industry dispute resolution, urging the creation of a “truly national and universal” ombudsman.
Panel members pointed out that an independent audit of hundreds of the ombudsman’s rulings shows that the industry wins 69 per cent of decisions. And it paid out a total of $3.8-million in compensation in 2010.
“We do not think that OBSI membership imposes an unduly costly or onerous burden on the financial industry,” the panel said.
The panel suggested a better way to reduce disputes would be to impose a legal fiduciary duty on the entire financial advice industry, making it clear their first duty is to customers. A similar standard exists for accountants and lawyers.
The financial industry, on the other hand, is pushing to put OBSI on a much tighter leash, including seeking voting board seats.
“The ombudsman has to represent the interests of both parties,” said Joanne De Laurentiis, president and chief executive officer of the Investment Funds Institute of Canada, an OBSI member and voice of the mutual fund industry. “It has to have the trust of both sides.”
But Ms. De Laurentiis said the controversy is overblown. The problems at OBSI, she argued, could be addressed with “tweaking,” rather than wholesale changes.
TD spokesman Stephen Knight declined to comment.