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Jim Flaherty is spinning his plan to overhaul the banking industry's dispute-settlement regime as "tough" and "pro-consumer."

The Finance Minister could also declare that the Earth is flat, but that wouldn't make it true.

The proposed new rules look suspiciously like a gift to the country's big banks, which have chafed under the current regime. Mr. Flaherty dropped the news on a sultry Friday afternoon in July.

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The upshot is that banks will be free to handle serious customer complaints using their own private ombudsmen, provided they follow some broad federal guidelines.

Mr. Flaherty insists the new system will settle disputes in a "more timely, impartial and transparent manner."

Put aside for a moment the potential for conflicts of interest when banks can hire and fire their own mediators.

The changes are a direct and significant challenge to Canada's existing national ombudsman – the Ombudsman for Banking Services and Investments (OBSI), headed by Douglas Melville. The minister's eight-paragraph press release doesn't even acknowledge the existence of OBSI, which has handled thousands of complaints and secured millions of dollars in compensation in the past decade.

OBSI was created in 2002 by the country's banks, under a threat from Ottawa to impose a federal arbitrator. But the banks have never fully embraced their offspring. It's seen as overly costly ($8-million budget in 2012, intrusive and often embarrassing. Among other things, Mr. Melville tracks which banks face the most complaints (a dubious honour that went to Toronto-Dominion Bank in 2011).

So it's hard to figure out how undermining OBSI could be cast as consumer-friendly.

Two banks have already bailed out of OBSI – Royal Bank of Canada in 2008 and TD last year. Both now use ADR Chambers, a private company that proudly promises on its website "fast and cheap" dispute resolution by retired judges and lawyers.

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Mr. Flaherty could have ordered RBC and TD back into the OBSI fold.

Earlier this year, outgoing OBSI chairwoman Peggy-Anne Brown begged Ottawa to stand up for an independent and impartial national dispute arbitrator.

Instead, Mr. Flaherty is inviting the remaining banks to go the fast-and-cheap route.

"Finance has opened the door, but we haven't heard that anyone is about to walk out," OBSI spokesman Tyler Fleming said.

OBSI won't disappear overnight. The bulk of its work centres on resolving disputes involving investment accounts, not banking services.

And, so far, the self-regulatory organizations for brokers (including bank-owned ones), mutual funds and insurers are standing behind OBSI.

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Investment disputes consume roughly two-thirds of the ombudsman's budget, and even more of its investigative efforts. To pay for that, OBSI charges fees to financial service companies, based on assets (for banks) or the number of licensed brokers (in the case of investment dealers). Fees are set annually to cover the relative cost of resolving disputes in the two industries.

But a continued exodus of the big banks would mean a much smaller, meeker and less-relevant OBSI.

And that may be exactly what the banking industry is hoping for.

OBSI already suffers from a relatively low profile among Canadians.

Creating a two-tiered system, in which for-profit arbitrators compete with OBSI, isn't likely to fix the ombudsman's identity problem.

Under Mr. Flaherty's new rules, private arbitrators conveniently won't have a mandate to study systemic problems in the delivery of banking services, as OBSI does now.

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An already weak system is being watered down even more. Anita Anand, an associate law professor at the University of Toronto, said the proposed changes are unlikely to be consumer-friendly.

"A single system that applies to all firms would be preferable because it provides certainty for consumers," Ms. Anand said.

The shift to multiple dispute resolution providers is also conceptually at odds with Mr. Flaherty's push for a single, strong national securities regulator, she suggested.

In a submission to the Finance Department, investor advocate and blogger Ken Kivenko said the private-sector system will add "opaqueness and secrecy," weaken consumer protection and undermine OBSI's ability to fund itself over the long-term.

This all may suit the banks.

Why the banks' agenda is now shared by Mr. Flaherty is harder to comprehend.

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