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Bank of Nova Scotia will no longer resolve banking disputes with customers through the country’s non-profit banking ombudsman, making it the third major financial institution to choose a for-profit alternative.

Starting on Nov. 1, Canada's third-largest lender will no longer use the Ombudsman for Banking Services and Investments (OBSI) to settle its clients' banking complaints, although the organization will still oversee complaints about investments, OBSI confirmed on Monday.

Scotiabank's decision, which was first reported by the Canadian Broadcasting Corp., further fragments a divided system for solving disputes between banks and their customers, and is drawing criticism from consumer advocates. Multiple groups are rallying behind OBSI, pressing the federal government to consolidate dispute resolution under a single, independent body. The country's two largest banks, Royal Bank of Canada and Toronto-Dominion Bank, opted out of OBSI's banking services in the past decade, turning to the private, for-profit ADR Chambers Banking Ombuds Office (ADRBO) to mediate customer complaints.

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The continued splintering of the ombudsman function for banking weakens OBSI's authority, and leaves Bank of Montreal and Canadian Imperial Bank of Commerce as the only two of Canada's Big Five lenders still using the independent, industry-funded body to resolve those complaints. And that has raised questions about whether the use of for-profit firms could tilt the process in banks' favour.

"This is a real problem for consumer protection in the banking sector, and we do believe that the federal government needs to step in," Sarah Bradley, ombudsman and chief executive for OBSI, said in an interview. "It's not fair for Canadian consumers, and it's not in their interests."

Scotiabank said on Monday that it will use ADRBO to resolve banking disputes with its customers, including those from its Tangerine subsidiary.

“We are consistently looking for ways to improve the Scotiabank customer experience,” spokesperson Brynne Moore said in an e-mailed statement. “While this decision was not made lightly, we believe that our customers will benefit from a more streamlined resolution process, including faster response times.”

Established in 1996, OBSI has settled disputes between about 1,400 banking and investment firms and their customers that could not be solved between the parties involved. Most of the banking-related complaints OBSI adjudicates are over issues such as credit-card fraud, banking fees, penalties on mortgages or poor service. In 2017, banking-related complaints rose 28 per cent, and customers who won their cases received more than $165,000 in total compensation for the year – or an average of $2,089.

Among banks overseen by OBSI, none had more banking-related complaints lodged against it in 2017 than Scotiabank, which had 128 cases opened, 23 of which were decided in the customers' favour.

Under current laws, all banks must use an external ombudsman, but have the option to choose another accredited firm. So far, ADRBO is the lone alternative for Canadian banks, and OBSI has received "no indication" that any other bank plans to leave, Ms. Bradley said. Spokespersons for CIBC and BMO declined to comment.

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Scotiabank’s withdrawal from OBSI will also have a noticeable financial impact. Although the ombudsman is an independent non-profit organization, it is supported by membership fees from banks and investment firms, and Scotiabank paid $433,148 in the last fiscal year, accounting for nearly 5 per cent of OBSI’s $9-million in revenue

OBSI and consumer groups argue that having firms compete to provide ombudsman services to banks could compromise their judgment. "[Banks] can choose who's going to investigate and decide on people's complaints, and that creates an inherent conflict of interest," Ms. Bradley said.

The federal government promised to strengthen consumer protection in its latest budget, and has been considering new measures. That may provide an opportunity for OBSI to argue its case. The Public Interest Advocacy Centre (PIAC), the shareholder rights group FAIR Canada, and CARP, a national non-profit that advocates for older Canadians, have urged federal officials to make OBSI the sole, binding mediator of customer complaints with banks.

A statement from FAIR on Monday called on the government "to end the ability of banks to choose their own umpire as this results in unfairness to consumers and prevents there from being an adequate consumer protection framework."

"Everyone's at the end of their rope," John Lawford, PIAC's executive director, said in an interview. He called Scotiabank's decision to leave OBSI "a real poke in the eye."

A spokesperson for the Department of Finance said in a statement that the government “takes the protection of financial consumers very seriously and intends to ensure that all Canadians benefit from strong consumer protection standards.”

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