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Royal Bank of Canada and Toronto-Dominion Bank have pulled out of the federal banking ombudsman's process and have hired ADR Chambers instead, a private service.

Ryan Remiorz/The Canadian Press/Ryan Remiorz/The Canadian Press

The firm chosen by Canada's two largest banks to adjudicate disputes with consumers is fighting back against what it sees as an attack on its credibility, amid a growing controversy over how Canadians are protected within the financial system.

ADR Chambers, which handles complaints raised by banking customers of Royal Bank of Canada and Toronto-Dominion Bank, told The Globe and Mail it is willing to submit to regular independent audits of its case files to prove that its arbitration methods are responsible and fair.

The promise comes after ADR's independence has been questioned by the federally appointed Ombudsman for Banking Services and Investments (OBSI). Since ADR was hand-picked by both RBC and TD to settle their consumer disputes, and is being paid directly by the two financial institutions, OBSI questions whether the service can represent consumers effectively.

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RBC and TD were formerly overseen by OBSI, but pulled out of the federal process to hire ADR instead, a private service. That has led to questions about the future of the federal ombudsman's office and whether it can survive.

"We don't see [the business relationship]as a conflict," said Allan Stitt, president of ADR Chambers, noting that his company would lose its reputation if it bent to the will of the banks that contract its service. "We see our job as to provide neutral work. And if we were ever to do something that was not neutral, where we would be at all perceived as favouring anybody, we would be out of business."

How the ombudsmen are paid is at the heart of the matter, since ADR Chambers is compensated directly by the two banks, while OBSI is funded collectively by the industry under a federally mandated system.

In an interview, OBSI head Douglas Melville likened ADR's compensation to the banks paying to hire their own referee, and questioned whether such an ombudsman could be truly independent in handling consumer files. "How can you be independent if you are beholden to the firm to get the business?" Mr. Melville said.

But Mr. Stitt argues his funding method is not materially different from OBSI's, since in both cases, the money for investigating and handling disputes ultimately comes from the banks.

OBSI was created by the banking industry in 1996, at the behest of the federal government, to handle arguments between banks and their customers that couldn't be resolved through an in-house process.

However, participation in OBSI was never made mandatory by Ottawa (only the investment arms of banks must submit to OBSI, not their consumer banking divisions). Unhappy with how the service was performing, TD decided to pull out of OBSI in October. RBC left about three years ago.

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When TD pulled out of OBSI, bank officials said they had concerns about the length of time the independent ombudsman was taking to resolve files. RBC raised similar issues when it departed. However, sources at other Canadian banks who did not want to be named say TD and RBC both had concerns about the cost structure that supports OBSI.

Each bank pays into OBSI according to its size. It is a similar method to how several regulators in Ottawa are funded, with industry collectively forced to foot the bill.

RBC is said to have been upset that it was paying the most as the largest bank, though it did not have the highest number of complaints. The bank has declined comment. TD meanwhile is said to have raised concerns about escalating costs at OBSI. In a previous interview, TD maintained its reason for leaving OBSI focused on delays in resolving cases.

ADR's Mr. Stitt said his organization will willingly submit to audits of its performance if the federal Finance Department wants, to prove it does not favour either side – banks or consumers. RBC and TD represent "less than 5 per cent" of the company's revenues, he said.

Ottawa is drawing up guidelines for bank ombudsman services to operate under, and currently requires audits of OBSI's performance every three years.

"We would absolutely welcome and be in favour of that requirement for both us and OBSI, to have someone independently look at the quality of the investigations and decisions that are being made," Mr. Stitt said.

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He added he would not be opposed to ADR being audited more regularly. "Nobody particularly likes going through audits, but if they said we had to do one every year, we'd do one every year," he said.

Of the five largest banks, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank of Montreal are still using OBSI to mediate disputes with customers.

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