Customers lose and banks win, under new banking conflict resolution rules

August 24, 2012 – The federal government, under the leadership of Finance Minister Jim Flaherty, is set to allow banks to mediate their own conflicts with customers.  If you find yourself on the wrong side of a financial dispute with a bank, you may no longer have access to an impartial third-party mediator.

The Ombudsman for Banking Services and Investments (OBSI), Canada’s banking ombudsman, has most recently played the role of mediator, but with banks now allowed to mediate conflicts in house, OBSI is struggling for relevance.

Government gave the banks what they wanted

Minister Flaherty has alternately called the new regime of conflict resolution “tough” and “pro-consumer”, but neither is the case. The best description of the upcoming rule change is “conflict of interest.”

According to Flaherty, the “sweeping new rules will give more power to consumers looking to resolve a dispute with their bank by creating a stronger, more independent consumer complaint system. This will happen by putting in place, for the first time ever, a new framework that sets pro-consumer standards all banks and authorized foreign banks must meet and will ensure federal government supervision of the external complaints body’s compliance with the new regulations.”

There will be guidelines that impose time limits for conflict resolution and standards for transparency and effectiveness, but it’s hard to see how any of this will be the case. Instead of exposing customers to the real possibility of being on the wrong side of a conflict of interest, the Federal Government could have given OBSI, or some other independent third-party organization, the power to mediate independently and effectively.

In theory, OBSI can still operate, but without the participation of the big banks and the funding that comes with it, Canada’s banking ombudsman may not survive for long. And while OBSI’s role as an effective mediator has also been questioned, customers are now left with no real choice but to let bank hired arbitrators resolve conflicts with the very bank that hired them – and the banks that can fire them.  The federal government can try to sell this as greater protections for customers, but the real winners are the banks.

Independence is crucial to conflict resolution

Canadians have an implicit sense of fairness, and nothing about the new rules suggests that clients in conflict with their bank will receive the impartial resolution they deserve. The independence of the dispute resolution process – both the appearance of and the actual independence – is important to the trust relationship and this can be compromised if banks are permitted to choose their own mediation process. Indeed, this will certainly matter to CARP members since 75% of people who complain to OBSI now are 50 or older — 53% of those are seniors, who may find it more difficult to pursue and receive resolution and compensation when they are unhappy with their dealings with banks.

CARP has called for comprehensive investor protection. But, with the demise of third-party resolution, Canadians may now be less protected and have less recourse for their complaints against banks.

CARP strongly endorses a national initiative to protect retail investors and bank clients from fraud and financial crimes. 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.

Read the backgrounder on the new rule changes

Read CARP’s earlier coverage of this issue