World Bank Recommendations for a Banking and Investments Ombudsman

May 4, 2012 – Where would you go if you lost money because a bank, investment firm, or personal advisor gave you poor advice or hazardously disregarded your risk comfort? A financial sector ombudsman might help, but only if it has the required features and mandate to effectively mediate between institutions and individuals.

News from Canada’s banking and investment sector suggests that finding yourself on the wrong side of a financial dispute will become increasingly problematic. In December of 2011, the Supreme Court disallowed the federal government’s plans for a national securities regulator (NSR), which promised increased investor protection. More recently, the Ombudsman for Banking Services and Investments (OBSI), Canada’s banking ombudsman, is struggling for survival after two large participating banks withdrew from the third-party mediating service.

Canada is not alone on this front. The World Bank released a report that outlines the fundamentals for the creation of an independent and effective financial ombudsman. These fundamentals comprise some basic principles as well as a significant number of practical design issues.

The report outlines the key issues and features required in creating a financial ombudsman, or developing an existing one – including independence, funding, procedure, accessibility, transparency and accountability.

The World Bank Model for Financial Ombudsmen

A financial ombudsman provides an alternative to the courts; so the ombudsman should be (and also be seen to be) as independent and impartial as a judge – as well as having the necessary legal and technical expertise to resolve financial disputes authoritatively. In order to obtain the confidence of consumers the financial ombudsman should not be appointed by the industry, nor by a body with a majority of industry members. This is especially important for ombudsmen that have the mandate and power to order financial restitution.

Funding also speak to an ombudsman’s ability to mediate effectively between institutions and individuals. If an ombudsman is overly reliant on financial sector funding – especially if the funding is limited to a few powerful institutions – it could compromise impartiality. On the other hand, insufficient funding limits investigative capacity and the ability efficiently mediate a large number of cases.

Procedure, Accessibility, Transparency, and Accountability
Complainants need to have clear, timely and reasonable access to a resolution of their complaints so the processes need to be rational, efficient and transparent.

Ombudsmen expect consumers to take up their complaint with the financial business first, so that it has a reasonable opportunity to try and resolve the dispute to the consumer’s satisfaction. This means that financial businesses need effective complaints procedures. And the financial ombudsman itself should have a published procedure that is clear, fair, effective, prompt and economical. There should be a clear process (and time limit) for the handling of complaints by financial businesses. This is important so that as many disputes as possible can be resolved quickly; the number of disputes that have to be referred to the ombudsman is minimised; and it is clear when the consumer can refer the dispute to the ombudsman.

Of course, the procedural elements of an ombudsman are only effective if clients know where or that the services are offered. Consumers with a problem can only access the financial ombudsman if they know that the ombudsman exists, they know how to contact the ombudsman, and the means of contacting the ombudsman ensures that cost is not a barrier.

And, when the service is used, it is important that the process be transparent to avoid the perception of bias or unfair dealing. Transparency is key to earning the trust of all participants. The report states that the rules and procedures of the financial ombudsman should be published and easily accessible. They should include a clear statement of the types of dispute that the financial ombudsman can deal with, any costs that have to be paid, or which can be awarded at the end of the process, and the consequences of not complying with a decision.

Accountability does not involve any restriction on the independence of the financial ombudsman. It involves the ombudsman paying due regard to the overall public interest in the forward-planning and day-to-day running of the ombudsman scheme. An ombudsman must be accountable to all parties it represents and on whose behalf it works.

Canada Needs a Strong Investor Minded Financial Mediator

Canada may be famed for the prudence and caution of our banking and financial sector, but ordinary Canadians who find themselves on the wrong side of a financial dispute have little in the way of recourse. The NSR seems to be a lost hope, unless the provinces come together.  And, OBSI, our current banking ombudsman, is in jeopardy of losing financial sector support. The World Bank models shows just how important it is to build and support an effective financial sector ombudsman.  

CARP is advocating for a national initiative to protect retail investors and bank clients from fraud and financial crimes, with:

  • A dedicated agency with specialist knowledge to receive complaints, investigate financial crimes, and support prosecutions.
  • A tribunal with authority to order restitution, to undo and rescind transactions, and to order compliance.
  • A compensation fund to pay the restitution.
  • New criminal charges for financial crimes.
  • Access for retail investors, to local offices, to mediation services, and an investor advisory panel.

It’s time provincial and federal government’s act together to implement common regulations, oversight, enforcement and independent conflict resolution. In this uncertain economic climate, Canadians and their hard-earned money deserve the proper protections.

To read the full World Bank study, click here