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In July, federal Finance Minister Jim Flaherty announced a controversial plan to overhaul the regime that lets consumers seek compensation from an outside arbitrator when they believe they’ve been wronged.CHRIS WATTIE/Reuters

Canada's banks want the federally mandated customer complaints ombudsman stripped of the power to track and investigate systemic problems in the way they do business.

In a submission to the federal Finance department, the Canadian Bankers Association argued that probing practices affecting multiple clients is too time-consuming and ambiguous.

"While we understand the government's desire to identify and deal with systemic issues within banks, we believe that existing measures … already accomplish that objective," the CBA said in the letter, filed in response to recent proposed federal changes to consumer complaints regulations.

The lobby group said it isn't sure what kinds of systemic issues the government has in mind, but that the financial institutions involved should determine if there's any need to report problems to federal officials.

But consumer advocates say there are plenty of practices that may be harming customers, including unwanted account charges, excessive mortgage prepayment fees or the unauthorized reopening of so-called "zombie accounts" when automated payments appear after an account is closed.

"These issues don't come to light if no one is identifying them. We're never going to know," explained Ermanno Pascutto, former head of the Ontario Securities Commission and now executive director of the Canadian Foundation for the Advancement of Investor Rights.

In July, federal Finance Minister Jim Flaherty announced a controversial plan to overhaul the regime that lets consumers seek compensation from an outside arbitrator when they believe they've been wronged. Among other things, Ottawa would enshrine the ability of individual banks to hire their own private dispute resolution company, bypassing the quasi-independent Ombudsman for Banking Services and Investments (OBSI) now used by most banks.

Under a threat from Ottawa to impose a federal arbitrator, OBSI was created in 2002 by the country's banks, providing consumers a cheaper alternative than going to court. But the industry has never fully embraced its creation, with many banks seeing it as costly, overly intrusive and potentially embarrassing. Among other things, OBSI tracks system issues as well as which banks face the most complaints.

Two banks have already bailed out of OBSI – Royal Bank of Canada in 2008 and Toronto-Dominion last year. Both now use ADR Chambers, a private arbitrator that promises "fast and cheap" dispute resolution on its website.

Consumer advocates said the CBA's latest submission marks a further attempt to weaken protection for Canadians.

Mr. Pascutto said it's unclear who would track systemic problems if they aren't flagged during the complaints process. The presumption is that it would fall to the Financial Consumer Agency of Canada, which has a mandate to make sure federally regulated financial institutions follow the law and promote financial literacy. But Mr. Pascutto said the federal organization is "not known for robust enforcement."

Abusive practices have a tendency to spread if they're not exposed, said John Lawford, a lawyer with the Ottawa-based Public Interest Advocacy Centre.

"If you don't give the Finance department or the banks the opportunity to change practices, they're going to repeat themselves forever, and consumers will pay the price," Mr. Lawford explained. "The whole idea of the ombudsman is like a perfect net for catching these systemic issues. It's an early warning system."

Ottawa's 30-day comment period of the dispute resolution regime ended last week.