Eliminating Step 3 (internal Ombudsman) in the investment dealer complaint process - the rationale and request for action
This past year has not been kind to retail investors. The CSA, defying both evidence and reason, has decided to retain embedded commissions and abandon an overarching Best interest standard. Even the welcome CSA proposal to ban the DSC option has been derailed by the Ontario government’s unilateral intervention. At the same time, the CSA has allowed risky alternative mutual funds to be sold to retail investors.
As of Nov. 1 , 2018 less than 30% of bank assets will be with OBSI -the recent departure by the Bank of Nova Scotia sent a clear message: The banks do not support an independent dispute resolution provider. As a result, retail investors are even more vulnerable to industry mis-selling and unfair complaint handling.
Bank-owned and insurance company owned dealers usually have a three step process. The first step is with the branch, the second step is at the dealer's Care center (or equivalent) with escalation to their internal "ombudsman “if the client remains unsatisfied as step 3. A 4th step would be to OBSI if the client still remain unsatisfied. Four steps can wear already stressed clients down to the point they lose their resolve to achieve a fair result. This should not be the outcome of a contemporary complaint resolution system in the wealth management industry.
The CSA has not yet acted on Kenmar recommendations or those of PIAC and FAIR Canada to fix obvious flaws in the complaint handling system. In Oct. 2017, PIAC and FAIR Canada sent a letter to the CSA
https://faircanada.ca/submissions/letter-obsi-joint-regulators-committee-re-use-internal-ombudsman-registered-firms-responding-investment-complaints/ identifying numerous complaint handling issues .The letter strongly recommended that OBSI’s Terms of Reference and the internal complaint handling rules (be they policies or rules) of IIROC and the MFDA be amended to conform with NI 31-103. OBSI’s Terms of Reference and the SRO complaint handling rules should be revised to require firms to provide a substantive response to a complaint within 90 days, whether they use a second review process (an “internal ombudsman”) or not. The letter stated that “Within the 90 days, firms may choose to provide a second level of review. However, they should not be permitted to take more than 90 days to do so.”.
The lack of CSA action on these recommendations has left complainants exposed to diversion. Investors are being channeled to “internal ombudsman” while critical OBSI-related time periods and civil action limitation periods continue to run to the prejudice of investor complainants. The use of “internal ombudsman” services is detrimental and prejudicial to investor complainants and is contrary to sections 13.16 (3) and (4) of NI 31-103.
It is emotionally and physically draining for a retail investor to file a complaint. It is also highly intimidating for most people. To have a complaint dismissed even once, let alone multiple times is a very debilitating experience. Many people give up as they feel they have no chance of prevailing against the big bank-owned dealers. Other consumers opt to not file complaints about their dealers because they are intimidated by the complaints process, do not understand their rights or how to navigate the process itself, are afraid of the possible negative consequences of complaining about their dealer and do not possess the written or oral skills to effectively advocate for themselves. This process can also impact physical, emotional health and family relationships. For many, sustaining undue losses is life-altering. One major reason that the current system isn’t working for investors is the banks insertion of an internal “ombudsman”.
An unsatisfactory response at the first step results in escalating the complaint further - this necessitates a complainant to redraft a cover letter and resubmit the complaint with supporting records as if nothing had occurred prior to this step having taken place. An appeal to the internal ombudsman also requires the signing of a Consent Agreement which may prejudice future proceedings. Among other items, the Agreement contains a confidentiality clause and in at least one case, gives the right of the ombudsman to access all of the complainant’s accounts with the bank.
Complainants can legitimately conclude that the dealers’ complaints process is designed to wear them out. Does this repeating of steps, as mandated by the process and placed on the shoulders of the complainants, contribute in any way to a fair and reasonable complaint resolution process? Does the internal ombudsman add value or risk? The CSA surely knows the answer. In 2011, the UK FCA eliminated the internal “ombudsman “step in order to streamline the complaints process. The CSA should do the same.
Securities regulators have tried to improve the process by requiring that dealers provide a substantive response within 90 days of filing a complaint. Prior to that, dealers would drag out complaints to the point where complaints just threw in the towel. This was followed up by a CSA/IIROC/MFDA Staff Notice in Dec., 2017 http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20171207_31-351_ombudsman-banking-services-investments.htm attempting to deal with several system failures.
That has not been effective as banks continue to deceive complainants. For example, the TD Bank website states “If you require further assistance after the decision of the TD Ombudsman, the following independent services may provide you with information and a further review of your complaint. These agencies may contact TD to facilitate their investigation and work toward a resolution”. The independent service referred to is the OBSI option.
Section 13.16 of NI31-103 specifies that a firm must make available the services of OBSI at the earlier of when the firm informs the client of its decision with regard to the complaint or 90 days after receiving the complaint. Companion Policy 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations concerning compliance with the requirements under section 13.16, provides that a registered firm should not make an alternative independent dispute resolution or mediation service available to a client at the same time as it makes OBSI available.
But Section 13.16 of NI 31-103 does not prohibit the use of an internal “ombudsman”. As a result, for investment dealers, the 90-day timeline, which is supposed to apply to all internal complaint-handling processes, doesn’t include the use of an affiliate’s internal ombudsman. These dealers are able to divert hundreds of complaints each year from OBSI to their own “ombudsman” without fear of sanctions.
Bank-owned dealers have cleverly subverted CSA intentions by offering the optional (sometimes not) third step choice- their own internal “ombudsman”. Complainants sidetracked there are entering a no man’s land with an entity that is neither an ombudsman nor independent of the dealer, nor under CSA/IIROC/MFDA jurisdiction. Trusting and gullible complainants, to their detriment, assume that this entity is a real ombudsman and voluntarily agree to subject themselves to this entity instead of the regulated, independent ombudsman service-OBSI. It should be noted that proposed Federal Bill C-86 would not permit these internal ombudsman to assert they are independent or use the misleading nomenclature “ombudsman”. This is a clear recognition by lawmakers that these internal “ombudsman” are merely an artifice to mislead clients and add a completely unnecessary step in resolving complaints.
How can an investigator from the bank’s ombudsman’s office be impartial given that he/she is an employee of the bank, may have existing relationships with parties being complained about and is ultimately accountable to the legal team of the bank? The use of the descriptor “Ombudsman” is not being made in good faith by the banks as the banks know that the ombudsman’s true purpose is to protect the bank at the expense of the consumer (in some countries such misrepresentation is illegal). In contrast to its true purpose, the bank internal ombudsman is marketed to the consumer as that of a fair, impartial and independent investigator. Most clients do not realize they are in an adversarial relationship. The inclusion of an internal ombudsman in the dispute resolution process is solely for the benefit of the dealer/banks and most definitely not in the complainant’s best interests.
Kenmar have therefore concluded that, while some dealers may use the three-step complaint process appropriately, it is inherently prone to misuse and abuse, in particular because it gives investment dealers an incentive to reject complaints at the first two steps on the basis that only a relatively small number of complainants will persevere and the dealer then has a third chance to rectify any shortcomings or, more likely, again provide an unsatisfactory offer.
Unlike OBSI, internal Ombudsman are not transparent - their loss-calculation methodology is not publicly disclosed. Kenmar argue that any interaction with the internal ombudsman helps the Dealer as part of its risk reduction and defence-building processes. Complainants are not cognizant of the fact that any information provided can later be used by the Dealer to defend itself if an external complaint process is commenced. In other words, complainants are in harm’s way.
The reason OBSI was purposefully created was to deal fairly and expeditiously with cases where clients are not satisfied with the dealer's substantive response letter delivered within 90 calendar days. There is no need for a third step involving a non-independent, unregulated internal "ombudsman". It unduly increases the complaint cycle time beyond 90 days, eats into precious statute of limitation time , exposes complainants to conflict-of-interests and legal risks and adds to complainant stress and disillusionment.
We have found that if a complainant is rejected 3 times, it is highly unlikely he/she will proceed further. This may explain the relatively small number of investor complaints that reach OBSI. Therefore, we recommend that the CSA abolish the three-step process. The new rules would mean that the firm’s step 2 response would be its definitive ‘Final response’.
Complainants would then be given a crystal clear message that they can escalate their complaint to OBSI (where the limitation time clock is stopped), must do so within 180 calendar days or pursue litigation/IIROC arbitration. We believe that this will lead to investment dealers focusing their attention on providing robust responses to complaints at the first two points of contact. This should lead to fairer, higher quality complaint decisions. It would put an end to consumers having to restate their complaints twice or more, something that stops many people taking their cases further. This would also reduce the complexity of the process for retail investors therefore reducing the abandonment rate of valid complaints.
Kenmar believe this is a major socio-economic issue, aggravated by an increase in complaints by seniors/ vulnerable investors, a rapidly growing demographic.
A fair and effective independent dispute resolution service is important for investor protection in Canada and is vital to the integrity and confidence of the capital markets OBSI is the last line of defence in a Caveat Emptor investing environment. Accordingly, we are of the firm conviction that an elimination of step 3 (internal ombudsman) is in the Public interest. Kenmar urge the CSA to act given the overwhelming evidence of investor harm we have provided.
Ken Kivenko, President