It has now been a year and a half since OBSI started to make public a series of refusals by investment firms to compensate their clients where the facts warranted it. While there has been great interest in the details of the cases, we have also been frequently asked for our observations on the process of announcing the refusals (so-called “name and shame”) and what has led to some of these refusals in the first place.

We share some of these observations in this e-newsletter in the hope of increasing understanding of OBSI’s role as well as some of the dynamics at play in the resolution of complaints that we see.

Not a campaign

OBSI’s announcements of compensation refusals have occasionally been perceived as a “campaign” against individual firms or even the financial industry in general. Such beliefs are mistaken. It bears repeating that publicizing refusals to compensate represents an obligation placed on OBSI at the time of our office’s creation: under Section 27 of our Terms of Reference, we must publicize that refusal and the details of the complaint. It was the power that the financial industry and regulators gave us to incent cooperation, though most expected that it would never need to be used.

We have heard frustration from industry with this approach, and frustration from investors and investor advocates about OBSI’s inability to impose our conclusions. OBSI and the financial regulators who oversee us will continue to evaluate the impact of the compensation refusal announcements, both on firms and the complainants who come to OBSI. But for the foreseeable future, OBSI’s principal tool to incent cooperation will continue to be so-called “name and shame”.
Insufficient errors and omissions (E&O) insurance

Firms often have some form of professional liability insurance (commonly known as errors and omissions (E&O) insurance) for claims made against them. OBSI experience is that there is a wide variety of policies held by our participating firms, and that the nature of the policies often drives the behavior of firms when engaging with us.

Specifically, some E&O policies do not contemplate the type of voluntary settlements achieved by OBSI’s process, instead covering only decisions that are binding on the parties, such as decisions by the courts. It has been our experience that cases involving firms that lack E&O insurance covering OBSI settlements, or where there is some doubt as to whether they would be covered, tend to be more drawn out and/or more likely to end in a compensation refusal.

OBSI encourages all participating firms to review their E&O policies to make sure that voluntary payment of compensation recommended by OBSI is covered. Some have proposed an industry-wide approach to addressing this issue, which OBSI would be happy to participate in. We are also willing to speak with firms’ insurance providers directly to help them understand our role and process if that would be helpful, something we have done for some firms already.

Many older cases

Many of the refusal announcements concerned complaints made several years ago, thereby giving some an incorrect impression as to the “normal” rate of refusals.

Before OBSI began regularly announcing compensation refusals in late 2012, we undertook a series of extraordinary measures in an effort to resolve cases that were at an impasse. These included a wide-ranging consultation on our investment suitability and loss calculation methodology, undergoing a rigorous independent evaluation of our operations (which later found OBSI to be world-class in many respects), and establishing a limited external review process for the cases that were “stuck”. OBSI’s Board wanted the organization to first take these steps to see if refusals could be prevented, as at that time “name and shame” was a tool that most never expected would need to be used.

While these extraordinary efforts did help resolve many cases, there were others where they did not and we still had to announce compensation refusals in the end. The older complaints are among the refusals that the public has heard about, but it remains to be seen what the ongoing normal rate of refusals will be over a longer period of time.

Early involvement by firm senior management resolves cases
In cases that are headed towards publicly-announced refusals to compensate, OBSI instituted a process whereby the Ombudsman writes directly to the top executive of the firm. In this letter, the Ombudsman informs the executive that OBSI’s recommendation has been refused, which means we must soon announce this publicly. The firm is given a set period of time to reconsider its position before OBSI announces the refusal publicly.

OBSI has found that senior management at firms has sometimes not been involved, either deeply or at all, in complaints up to this point. Writing to firms’ top executives at this stage provides the opportunity for reconsideration by persons not closely connected to the complaint. We recommend as a best practice that complaint-handling staff at firms make their senior management aware of the details of a refused OBSI recommendation and the implications of this refusal at the earliest opportunity.

Smaller firms dominate refusals

It is no secret that recent years have been difficult for many of Canada’s small and mid-sized investment dealers. Followers of OBSI will also have noticed that many of the compensation refusals we have announced involved smaller investment firms.

While not all of the refusals can be linked to financial difficulties at the firms in question, we note that several of the firms involved were either in the process of deregistering or winding down operations, were suspended from their self-regulatory organization (SRO), or otherwise existed as a going entity in name only. OBSI’s Board of Directors and the financial regulators who oversee us will continue to monitor the implications of these circumstances for the effective functioning of OBSI’s mandate.<br><br>

Debate over long investigation reports vs. short investigation summaries

As previously announced, OBSI is experimenting with several changes to our process in order to speed up the average time it takes to resolve complaints. One of those experimental changes involves situations where a firm informs us it will not compensate its customer in the context of the specific complaint no matter what OBSI’s final conclusions are. In most such instances, OBSI will complete our investigation but announce our recommendation through a short summary that outlines the facts of the case, our conclusions, and a range of compensation that we determined was fair and reasonable (if an exact determination is not possible). We will not expend further time and resources to draft an exhaustive investigation report if a refusal to compensate is certain.

So far, we have announced refusals by two firms that met the criteria above. Interestingly, despite our having adopted this experimental change in the interests of timeliness and efficiency, we have since heard from several investment firms that we should continue to publish long-form reports in all instances, even with the associated resourcing implications.

We have no doubt that there are other firms who would object to such a move, but we do wish to note that there are various views amongst industry stakeholders as to what the best approach would be.

OBSI is Canada’s national independent dispute resolution service for consumers and small businesses with a complaint they can’t resolve with their banking services or investment firm. As a free alternative to the legal system, we work informally and confidentially to find fair outcomes to disputes about banking and investment products and services.

OBSI looks into complaints about most banking and investment matters including: mutual funds; bonds and GICs; stocks, exchange traded funds, income trusts and other securities; investment advice; unauthorized trading; fraud; debit and credit cards; mortgages; loans and credit; fees and rates; transaction errors; misrepresentation; and accounts sent to collections. Where a complaint has merit, OBSI may recommend compensation up to a maximum of $350,000.

OBSI has an excellent record of acceptance of recommendations from both firms and complainants: over 99% of the thousands of complaints brought to our office have been successfully resolved.

For more information, visit: www.obsi.ca