Tuesday, December 26, 2017

Kenmar Commentary ….IIROC How Do I Get Money Back Brochure

                                                                                       December, 2017

Kenmar Commentary ….IIROC How Do I Get Money Back Brochure

In the fall of 2017 we pointed out a number of deficiencies in the IIROC Complaint brochure. These included missing information, a need for better information on limitation periods, revealing the true nature of internal “ombudsman”, crystal clear text that after 90 days, investors have direct, unimpeded access to OBSI and the downplaying of the role of the Ombudsman for Banking Services and Investments (OBSI). Investment Industry Regulatory Organization of Canada (IIROC) have just issued a new brochure on how an investor can receive redress if they feel they have been treated unfairly or improperly by the IIROC registered firm. There is a separate brochure for making a complaint (see References) in addition to this one on seeking redress. You should read them both.

In this Guide we explain sections of the How Do I Get Money Back brochure and how they can be improved.

Background and Perspective

When an IIROC Member firm receives a complaint they must:

·         Assess every complaint fairly and promptly

·         Acknowledge the complaint promptly, usually within 5 business days. At this time, the firm may request additional information from you to assist them in resolving your complaint.

·         Unless your complaint can be resolved informally sooner, provide their decision to you within 90 calendar days, along with:

(a)         An outline of your complaint;

(b)         The results of their investigation and the reasons for their final decision;

(c)         Information about other options for seeking compensation, in case you are not satisfied with the firm’s response.

If your firm cannot provide a response within 90 days, they must inform you, explain the reason for the delay and provide you with the new expected response date. You do not have to accept this delay. You can take your complaint to OBSI after 90 days of filing your complaint.

The Ombudsman for Banking Services and Investments (OBSI) is the exclusive Ombudsman service for IIROC firms. OBSI is independent from the investment firms and has its own Board of Directors. It is overseen by the Joint Regulator Committee, a group consisting of several provincial securities commissions, the MFDA and IIROC OBSI works on fairness principles and is a non-legalistic, free dispute resolution service for clients of IIROC firms. Its decisions are non-binding- in 2015, 18% of its compensation recommendations were low-balled or rejected outright by investment firms.

IIROC is an Industry Self-regulating Organization that regulates its Member firms. It derives its authority via Recognition Orders from the constituent members of the Canadian Securities Administrators (CSA), a grouping of Canada’s provincial securities Commissions. IIROC is overseen by the CSA.

Comments on the new brochure

First off, we must say that OBSI has been given more prominence in the revised brochure. This is a real positive. We recommend inclusion of OBSI’s toll free Fax number [1-888 422-2865] for seniors and those who prefer to use FAX.

The brochure encourages complainants to act promptly due to statute of limitation periods. As such matters are completely new to the average retail investor, we suggest some additional helpful text viz..”  For further information regarding limitation periods in your province/territory, contact a lawyer or your provincial/territorial government”. In Ontario, the period is two years.

The brochure states” The first step in seeking compensation is to make a written complaint directly to your investment advisor [Emphasis added] and his/her firm. They must provide you with a substantive response to your claim within 90 days. But if you’ve tried that and haven’t heard back, you can go to OBSI or consider the other options outlined in this brochure”. Where it says "directly to your investment advisor and his/her firm we would like to see the word "AND" capitalized for emphasis.

IIROC Member firms are responsible to you, the investor, for monitoring the actions of their representatives to ensure that they are in compliance with the by-laws, rules and policies governing their activities.If you have a formal complaint, we do not recommend submitting it solely to your dealing representative (aka “salesperson” or “advisor”). Address the complaint to the Branch manager, compliance officer or other senior manager of the firm, perhaps with a cc to the salesperson.

The brochure should use plainer more prescriptive language as to when exactly you can file a complaint with OBSI. The law states that you may contact OBSI if the firm has not responded within 90 calendar days of the date you complained. In other words, if the firm has not responded to you within 90 calendar days, you can file a complaint directly with OBSI. You do not need to wait for a substantive response from the firm.

This new brochure has some significant improvements especially the text on the 180 day limit to file with OBSI.  It is important to know that if you choose to  use a firm’s internal ombudsman, you will have less than 180 days to complain to OBSI as the 180 time limit begins to apply after the firm’s written response to you (not after you receive  a letter from the internal ombudsman). “ This is much increased clarity over the previous version. Please note that all references in the brochure to days refer to calendar days. Note also that during the 180 day timeframe, the statute of limitation clock continues to run down, a point we think should be made in the brochure.

"Although IIROC is not directly involved in the compensation process, all IIROC-regulated firms are required to participate in ombudsman [Emphasis added] and arbitration programs if the client chooses this option." This line may be confusing to investors regarding a firm offering their internal “ombudsman”; it may lead an investor to think he/she is required to use the  internal “ombudsman”.

The mention of a firm's internal ombudsman requires some further clarification from IIROC .We would add after "Some firms suggest you use their own internal ombudsman first" in brackets, "(internal ombudsman are non-independent employees of the firms’ or related affiliates)”.

We continue to ask IIROC to get rid of the internal “ombudsman “nomenclature. According to CSA Notice CSA Staff Notice 31-351, IIROC Notice 17-0229, MFDA Bulletin #0736-M Complying with requirements regarding the Ombudsman for Banking Services and Investments  when using an internal ombudsman, registered firms should clearly indicate (with at least equal prominence to information about the internal ombudsman), among other things that the internal ombudsman is not independent and is employed by the firm [ Emphasis added]. This is Never done to our knowledge; in fact these internal “ombudsman” boldly assert that they are independent of the firm which raises the question why OBSI accepts such non-binding response letters as letters from a regulated firm. For its part, IIROC must enforce this CSA requirement in order to retain the integrity of the complaint handling process.

The brochure makes it reasonably clear that the use of an internal “ombudsman” is voluntary. However, the document does not disclose that internal “ombudsman” findings are not binding on the firm, that the statute of limitation clock continues to tick for any time you spend with this entity, they do not disclose their loss calculation methodology or that these entities are not regulated by IIROC. Such information would help complainants make an informed decision before deciding to use an internal “ombudsman”.

Since internal “ombudsman” are related to the firm and OBSI is firm-independent, we recommend you focus your redress efforts on OBSI. Be aware that there may be nudging to divert you away from CSA-mandated OBSI in an attempt to keep control of the complaint within the firm and corporate family.

There is a major disconnect on the scope of a complaint. The brochure limits scope to financial losses [Emphasis added] but the OBSI deals with transaction errors, fee issues, investment advice, unauthorized trading, misrepresentation, fraud etc. as well as direct losses. We feel strongly that a complaint can be more than the direct financial loss incurred. For instance, a complaint can also include opportunity losses if unsuitable products were recommended. It can also involve excessive fees, breach of confidentiality, forgery, defective disclosure and other inappropriate financial dealings with clients. Ignore what the brochure says and follow the guidelines in the OBSI complaint brochure.

The brochure rightfully states that “OBSI is Canada’s free, independent service for resolving investment and banking disputes with participating firms. IIROC requires all the investment firms it regulates to take part in the OBSI process.OBSI provides an independent and impartial process for the investigation and resolution of complaints about the provision of financial services to clients. The OBSI process is confidential. Unlike a complaint filed with an internal “ombudsman”, a complaint to OBSI stops the statute of limitation time clock. This is a unique feature that should be considered before deciding to use an internal “ombudsman”. On next revision, the brochure should highlight these distinguishing characteristics of OBSI.

The sentence “Many firms will compensate the complainant but some choose not to.” is a pretty disparaging remark concerning OBSI, albeit technically not incorrect. OBSI does have the mandate to Name & Shame firms that refuse to accept its recommendations, a tool it has not effectively used. In view of the recent Joint Regulatory Notice on complaint handling, this remark seems odd coming from the regulator responsible for regulating these firms and who sits on the Joint Regulator Committee overseeing OBSI.IIROC have an obligation to act if they feel the firm has not handled the complaint fairly and in accordance with its rules. NOTE: IIROC gets to nominate a Director for a designated spot on the OBSI board. This current Director is from a IIROC-regulated firm that refused an OBSI recommendation and was Named and Shamed publicly!

In fact IIROC do claim to take note when a registered firm is involved in a refusal case or a pattern of repeatedly settling for amounts lower than OBSI recommendations (low-ball settlements). IIROC rightfully believe that this data can provide risk-based indications of potential problems with a firm's complaint handling practices, or raise questions about whether it is participating in OBSI's services in good faith or consistently with the applicable standard of care. IIROC have a variety of regulatory responses available if, after concluding an appropriate review, they come to the view that securities laws and rules have been breached. These may include, but are not limited to: recommending terms and conditions on the registration of the firm or registered individuals to mitigate risks in the area of concern; and initiating an enforcement investigation of the registered firm and/or registered individual relating to the issue. Unfortunately, we cannot find examples of where this sanction capability has actually been used.

The brochure provides some other options for dealing with complaints in Quebec, New Brunswick, Saskatchewan and Manitoba. Most have restrictions and limits that make OBSI the best choice in the majority of cases. These securities commissions can order a person or company to pay compensation in appropriate cases.  This however requires a preliminary finding of a regulatory violation which may take years to investigate and adjudicate, a point the brochure should note.

The Guide also points out the availability of IIROC Arbitration. It has a $500,000 compensation cap. It is rarely used by retail investors because of the legal costs involved and the more consumer-friendly, no-cost nature of OBSI. Any choice to forgo the right to access the courts of justice ,should be well informed.

This paragraph is very helpful “As an investor you can complain to IIROC and we will review your complaint to determine whether or not your advisor and/or firm has broken our rules. If we find that our rules have been broken, we may take disciplinary action including fines, suspensions or permanent bans. However, IIROC cannot provide compensation to you or force an investment firm or individual advisor to reimburse you.” It makes clear that IIROC is not in the loss recovery chain. They do however include disgorgement in their Sanction guidelines but they retain the cash, it is not turned over to the investor. Disgorgement includes include any profits, commissions, fees, profits  or any other compensation or other benefit received by the dealing representative, directly or indirectly, as a result of misconduct.

On the chart page - under the column heading "Time Limit to Complain" we would like to see the actual time limit numbers put on the chart rather that the answers "yes" or "no". This should be complemented by a flow chart (or a link to a flow chart) that would visually present the complex, interacting sequence of events. Based on years of experience with complainants, we feel these changes would add greatly to the brochures’ impact and value.

We recommend that the following paragraph be integrated into the brochure or link-referenced:  If you live in Ontario: the Investor Protection Clinic at Osgoode Hall Law School provides free legal advice to people who believe their investments were mishandled and who cannot afford a lawyer. The clinic is staffed with Osgoode Hall Law School students that are paired with supervising lawyers from law firms in Ontario. If the Clinic is able to take you on as a client, you will be paired with a student-lawyer team that will provide you with legal assistance. The Clinic may be able to assist you by: (a) writing a complaint letter on your behalf to the company or the regulator; (b) giving you options on how to proceed with your issues; or (c) even representing you at a hearing.You can find more information on the clinic’s process and an online contact form at this link.”

Under Questions? We would expand to “You can contact IIROC if you have questions about making a complaint or to discuss alternatives at InvestorInquiries@iiroc.ca  or toll-free at 1-877-442-4322 for greater clarity.

It should be noted that IIROC registered firms must comply with IIROC complaint handling Rule 2500B which has been criticized by Investor advocates as being outdated, , creates an escape path ( acknowledges internal “ ombudsman”) that subverts the CSA 90 -Day rule and has weak provisions for dealing with systemic issues among other deficiencies. It also attempts to “balance interests” of all parties instead of using analytical root cause investigation analysis

If IIROC  place emphasis on a balance of interests, as opposed to a fair assessment of the overall balance of  objective information from both parties, then this clearly has implications for the complaints processes within IIROC’s Member firms, in particular the highly misleading internal “ombudsmen “ of the major banks. This is especially so under what still remains a largely product and transaction distribution focused industry. The complaint risks being set up to fail if we use a conflicted set of interests to set the basis upon which complaints are deemed to have merit.Kenmar have filed an Action request to the CSA asking them to require IIROC to make the necessary amendments to the Rule.


Overall, we believe IIROC has addressed some of the important issues we raised. That being said, there are still some significant aspects of the brochure that need revision. The ideas presented here should be useful to IIROC.

Kenmar have for years pleaded with IIROC to create a designated Board seat for a Retail Investor and establish a Investor Advisory Committee modelled after the OSC’s successful and effective Investor Advisory Panel. IIROC have been consistent in their rejection of such proposals which suggests to us they may be uncomfortable publicly confronting many Retail Investor issues, including complaint handling. We feel it would be WIN-WIN.

The complaint handling process is a cornerstone of investor protection yet it is inherently adversarial in nature. Retail investors lack a knowledge of the applicable rules, terminology and their rights. They are unaware of the many potholes and bear traps that they will face during their complaint journey. It falls upon Securities regulators to do their very best to level the playing field. Informative brochures are one tool that can help make the complaint experience a safer one.


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