Death Knell for the National Banking Ombudsman?

The federal government has announced proposed regulations that will allow banks to opt out of a national customer ombudsman service in favour of private ADR services that they will choose and pay for.

This seems like a bad idea.

If banks can simply shop around for another ADR service provider whenever they are unhappy with the decisions of the current provider, how can consumers and small businesses have any confidence in the integrity and impartiality of decisions?

The Ombudsman for Banking Services and Investments (OBSI) currently has more than 600 participating firms including banks, credit unions, trust and loan companies, investment funds and dealers. It handles consumer and small business complaints about banking and investment products and services.

The Canadian chartered banks created the OBSI in 1996 and participation has always been voluntary. The investment industry signed on in 2002 and participation by its members is mandatory.

The OBSI investigates customer complaints and attempts to facilitate a resolution between the customer and the financial institution. The process is private and confidential. If there is no resolution, the OBSI has the can recommend compensation up to $350,000 in individual cases, but cannot impose a resolution on either party. Nor can it impose fines or penalties in the case of wrongdoing by a financial institution. It can only publicize the failure of a financial institution to follow a recommendation.

But all has not been well with the OBSI since the financial crisis of 2008, when the number of complaints against financial institutions predictably began to soar.

Parties on both sides have complained about how long it takes OBSI to investigate and resolve complaints. The OBSI says it tries to complete the process in 180 days, but many cases take longer than that. Financial institutions have also complained about how much it costs.

Predictably, neither consumers nor financial institutions are satisfied with the results in many cases.

Participating firms fund the OBSI based on their size or volume of business. Two of the biggest banks – TD and RBC – have withdrawn from the OBSI and engaged a private ADR firm to mediate and arbitrate complaints from their customers because they were not happy with the OBSI.

In the 2010 budget, federal Finance Minister Jim Flaherty announced that banks would be required to have an “approved” third-party ombudsman, but did not say it would be the OBSI. The banks interpreted this as an invitation to use private services.

In March 2012, an article in the Globe and Mail  warned that the OBSI might be forced to shut down due to the defections by RBC in 2008 and TD in 2011, and the threat of further erosion of participants.

In 2011, RBC Capital Markets, TD Securities and Manulife Financial asked the Investment Industry Regulatory Organization of Canada, the national self-regulator for investment dealers and equity trading, for an exemption from the rules that require them to use the OBSI to resolve disputes. The application was denied, but put greater pressure on the OBSI.

Now, Mr. Flaherty has released proposed “Approved External Complaints Bodies (Banks and Authorized Foreign Banks) Regulations” that will, for the first time, require the banks to participate in an external complaints process as part of “an effective and efficient complaint handling system.” But apparently the trade-off is that the banks will be allowed to choose their own ADR service provider. The banks will be able to pick from a list of approved dispute-resolution firms. The government said it will ensure each ombudsman is impartial and independent and it will monitor them.

The proposed Regulations require an external complaints body to resolve complaints within 120 days, compared to the current OBSI target of 180 days. Although it is expected that most complaints will be resolved more quickly, some complaints may still extend beyond the 120-day time limit. Performance would be monitored by the Financial Consumer Agency of Canada (FCAC).

ADR service providers will have to be approved by FCAC. But the regulations don’t say what standards must be met to receive approval, other than a vague statement that it “must have a reputation for being operated in a manner that is consistent with the standards of good character and integrity.” (s. 3.1)

Each approved service provider must be willing to make the services available across Canada, in both English and French, free of charge to anyone who makes a complaint. It must also be willing to make the services available to any bank that wants to sign up.

Approved service providers must submit to a performance evaluation every five years. It is not clear what will happen, if there are complaints about the quality of the services in the meantime.

There is also no indication of how the new private dispute resolutions will be funded.

The provincially-regulated investment industry participants in the OBSI can be expected to continue to lobby for the same freedom to choose ADR service providers as the banks will have under the new regulations. If provinces introduce inconsistent regulations, this will further undermine the OBSI’s ability to provide dispute resolution services to the industry. The result is likely to be a national patchwork of regulations and service providers.

I have no doubt that ADR Chambers, the private service currently used by RBC and TD, is independent and impartial and that its neutrals are very well qualified.

But I am equally sure that once the new regulations are in place and more service providers are competing for this work, it will be hard for the service providers to resist pressure to keep fees as low as possible and that means spending less time on each complaint.

If there have been problems with OBSI’s ability to provide timely, cost-effective services over the past few years, or issues with the quality of decisions it renders, the answer is to address them through better funding, increased resources and improved quality control, rather than by dismantling the system that has successfully served the financial industry and consumers for more than 15 years.