Friday, April 6, 2018

More issues with IIROC client complaint handling rules

IIROC Rule 2500B Client Complaint Handling has been subject to much criticism from the time it was released in early 2010. Experience has shown that investor advocate concerns were on the money. In this blog we relate new concerns that have arisen regarding this controversial Rule.

The Substantive Response Letter

One of the most problematic aspects of the current version of Rule 2500B from an investor protection standpoint relates to the extremely minimal and demonstrably inadequate standards in the “substantive response” of IIROC Member firms to client complaints. This issue needs to be considered from a comprehensive perspective, which includes taking into account the regulatory outcome(s) that the rule is supposed to achieve, together with the ‘framing’ of the conduct at the firm level, which is supposed to achieve these outcomes. One then may consider whether the regulatory framing of this conduct—which specifies what is to be done, when it is to be done, and how it is to be done—is sufficient to achieve the desired regulatory outcome(s) . In the present case, there is an evident deficiency in the way the “substantive response” is specified relative to the achievement of the claimed regulatory outcome, which is to ensure the fair handling of client complaints. 

The Rule does not introduce provisions that arguably will “ensure” that clients are made aware of the complaint process and that their complaints will be handled in a fair manner. The provisions relating to fair dealing in the current version are seriously deficient relative to the presumed regulatory outcome of ensuring the fair handling of complaints. The mere requirement that firms should provide a letter with a “summary” of the complaint, the “results of the Dealer Member’s investigation” and the “final decision, including an explanation” is completely inadequate to “ensure” fair dealing. On the contrary, it is our view that fair dealing will not be “ensured” by the current version and it would be seriously misleading to suggest this. To many retail clients, the responses would have appeared reasonable and authoritative, often to their detriment.

Investor advocates consider transparency and disclosure issues, as well as conflict- of-interest, while also taking into account retail client vulnerabilities. The Rule overlooks these vulnerabilities, which are clearly evident in a process in which there is, very often, a significant imbalance in power and an asymmetry in knowledge between the complainant and the firm. It is disappointing to find that these elements, which are essential in any consideration of investor protection, have not been adequately taken into account in the formulation of Rule 2500B.

Consider the original IIROC Staff response to the issue of conflict-of-interest and disclosure raised previously in a SIPA submission. The response acknowledged that the “submission of a complaint by a client usually results in the creation of opposing interests” and that “the proposed complaint handling rule will not eliminate this situation.” IIROC has not undertaken to provide a regulation that would serve to ‘manage’ this conflict-of-interest, especially where a client has a meritorious complaint that the firm might be inclined to deny, favouring its own financial interests and avoiding an offer of fair recompense. 

Moreover, the effectiveness of the Rule in achieving the public interest objectives is entirely questionable from a further perspective. These objectives are typically the promotion of “just and equitable principles of trade, the duty to act fairly, honestly, and in good faith”, the fostering of “fair, equitable and ethical business standards and practices” and the promotion of “investor protection”. If these objectives were being “promoted” or “fostered” by means of the present Rule, this would entail, for one, that clients with meritorious complaints who have suffered financial loss should be offered fair compensation by IIROC Member firms. Our own detection of errors, omissions, bias and fallacies in the firm’s responses is confirmed based on years of assisting clients resolve their complaints and published OBSI data. Complainants have also been exposed to made up KYC forms, defective risk profiling and selective non- disclosure of important documents. 

The IIROC rule contains no framing of Member conduct that “promotes” or “fosters” precisely the kind of conduct and outcome, that most people in our society would consider to be “just”, “equitable”, “ethical” and to reflect “fair dealing” in such circumstances. The mere provision that the Member firm should provide a summary of the complaint, the results of its investigation, and a final decision with an explanation is clearly inadequate to achieve these objectives.

An investor-centric substantive response letter should include a statement of facts; reference to the applicable rules , principles and standards on which the decision is based; identification of the files documents and records used in the analysis; and the methodology used for calculating restitution, if offered. This information is essential if the client is going to be able to make an informed decision whether or not to accept the firm’s decision. How is a retail client going to be able to know one way or the other whether the firm’s offer is fair if little information is provided regarding the methodology used to formulate/calculate the offer? The requirement that the firms’ decision should be “fair, clear and not misleading “does not suffice to ensure firms will treat complainants fairly.

Indirect regulation and obtuse language

We have noted that certain qualifications regarding how complaints are to be handled by dealers have been incorporated into the IIROC rule in a curious way that reflects indirect regulation. That is, certain provisions similar to those in the U.K. Financial Conduct Authority (FCA) policy have been incorporated into a requirement that member firms should develop policies and procedures having certain features. Hence , while the  FCA rule directly mandates certain conduct e.g. that firms must investigate complaints “competently ,diligently and impartially “,the IIROC  rule specifies  only that member firms must have in place policies and procedures that address  “the fair and thorough investigation of the complaint”. Or again, while the FCA  rule directly mandates that firms must assess complaints “fairly ,consistently and promptly”, the IIROC  rules specifies only that firms must have policies and procedures that address “the process by which an assessment is made regarding the merit of the complaint”.

Further concerns arise from the fact that the policy and procedures of SRO member firms are subject only to review and approval by private self-regulatory bodies and are inaccessible to those representing investor interests. This is a significant concern given the evidence of inadequacies in the policy development process used by IIROC to this point.

Compare to UK FCA Rule

Systemic Issues

Internal reporting procedures to management in the event of the occurrence of frequent or repetitive complaints is less specific then the U.K. FCA policy which is superior. Moreover, the policy contains no guidance regarding a firms consideration of the interests of other clients when it identifies some systemic problems or compliance failures. In other words, there is no indication that IIROC member firms should consider the interests of clients who have not complained but may have suffered detriment or have been disadvantaged by identified compliance problems. This is a serious deficiency, which raises the question as to why Canadian retail investors merit a lesser degree of protection than those in the UK.

Access to alternative dispute resolution sources

The IIROC 2500B Complaint Handling Rule states:

"Dealer Members must respond to client complaints as soon as possible and no later than ninety (90) calendar days from the date of receipt by the firm. The ninety (90) days’ timeline must include all internal processes (with the exception of any internal ombudsman processes offered by an affiliate of the firm) of the Dealer Member that are made available to the client. The client must be advised if he / she is not to receive a final response within the ninety (90) days time frame, including the reasons for the delay and the new estimated time of completion. "
One concern comes into play, where the client must be advised if he/she is not to receive a final response within the ninety (90) days time frame accompanied by reasons for the delay and the new estimated time of completion .The content of this communication with the client needs further specification. The firm should be required at this point to reiterate the 90-day timeline and indicate that the client now has the right to proceed directly to OBSI. As it stands, the way this communication is specified (above) in the current rule is inadequate. Clients need to be informed of their right to proceed to alternative dispute resolution once the allowable timeframe for a substantive response has been reached and not just be given reasons for further delay and a new estimated completion date. Furthermore, the Rule should make it clear that the timeframe is measured in calendar days.

Rule 2500B needs a complete rewrite if fair complaint handling in Canada is to take place.