Ottawa to set new rules for bank mediators

The federal government has finally confirmed it will not force the country’s banks to resolve client disputes through the Ombudsman for Banking Services and Investments (OBSI) and is set to unveil new rules and regulations that will allow financial institutions to hire their own mediators to sort out disputes with clients.

This article was published by The Financial Post on April 30th 2012.  To see this article and other related articles on The Financial Post website, please click here

Finance Minister Jim Flaherty told the Financial Post that Ottawa will not make OBSI mandatory for the federally chartered banks even though investment dealers, including those owned by the banks, are still required to use the not-for-profit mediator of last resort.

During a meeting with the newspaper’s editorial board Friday, when Mr. Flaherty was asked whether Ottawa would order banks to employ OBSI, he replied, “No.”

The Finance Minister said that the federal government believes that while “there must be effective dispute-resolution for bank customers that needs to be subject to certain rules and processes and procedural fairness,” that can be achieved “through a public body or it can be done through the private sector.”

He said Ottawa’s role is to set out the rules, “and if the banks want to use the services available in the private sector, as long as the private sector obeys the rules, that’s okay.”

Mr. Flaherty said new rules and regulations to create a multi-platform system that will allow banks to hire private-sector mediators are imminent.

“I’ve seen the draft rules. I want to spend a little more time on it,” he said.

For more than a year, OBSI has been under fire from a handful of the 600 member banks, investment dealers and mutual fund companies that fund it. Publicly, the complaints range from the methodology used to calculate reimbursements to aggrieved customers, the time it takes OBSI staff to investigate and close a file, and OBSI’s governance structure. Privately, the banking industry complains that OBSI has overstepped the boundaries of its mandate and has emerged as a quasi-regulator, even though its decisions favour the banks in more than 70% of cases.

Founded in 1996 by the big banks, Canada’s independent financial ombudsman was the voluntary compromise offered by the banking sector at a time when it was concerned that Ottawa would impose a government mediator on them. OBSI was originally intended to review complaints by small business against the chartered banks, and all banks were expected to participate.

As the mediator’s authority was later expanded to cover all consumer complaints, tensions began to emerge. Banks had previously handled customer oversight and preferred to resolve client matters privately.

In 2002, in the aftermath of the technology bust, brokers, credit unions, mutual funds and other financial firms were forced by their self-regulatory bodies to join OBSI. However, participation for the banks remained voluntary.

Royal Bank of Canada, the country’s largest, cut ties with OBSI in 2008 at the height of the economic meltdown and has since been using its own private mediation services. In November, 2011, Toronto-Dominion Bank, Canada’s second-largest, also withdrew from OBSI. Industry observers expect other banks to follow.

Last year, a group of large investment dealers, led by RBC Capital Markets Ltd., TD Waterhouse and Manulife Financial Corp., filed an application with the Investment Industry Regulatory Organization of Canada, the national self-regulator overseeing investment dealers and equity trading, and the Mutual Fund Dealers Association of Canada for an exemption from the mandatory provision that requires them to resolve disputes through OBSI.

That request was denied and since then, the brokerages, mutual fund groups and OBSI have been working to sort out their differences.

Meanwhile, there is growing concern among consumer advocate groups and regulators that if banks are allowed to hire their own mediators to resolve disputes with their clients, the independence of the decisions will be compromised. They have been imploring Mr. Flaherty to force the major banks to stay with OBSI. The same concerns were expressed by OBSI chief executive Douglas Melville when he appeared before the House of Commons standing committee on finance in March.

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