OBSI an industry body trying to help the public?

[admin]

Wednesday, 22 February 2012
Judge Lays Out Limitations of OBSI
A judge would be considered by most an expert in justice and an impartial observer of the conditions that lead to justice. It is thus worth noting the recent comments of Judge Bryan Shaughnessy of the Ontario Superior Court regarding the Ombudsman for Banking Services and Investments (OBSI). Though his comments are made only in relation to whether the OBSI would be a suitable body for resolving a class action in the case before him, I think his list applies in general to OBSI as a means for investors to get justice.

Here are the defects and limitations Judge Shaughnessy lays out:
the OBSI invites participation by firms but cannot compel cooperation
the OBSI can make a recommendation but it cannot compel a firm to make the payment recommended
the only remedy for non cooperation by the firm and/or not following the recommendation is the "rather anaemic remedy" of publishing the name of the firm and details of the refusal
the enforcement procedure is not binding on the firm; this amounts to "... a denial of access to justice" for investors
the OBSI can only handle complaints for amounts up to $350,000 unless the parties agree
claims for punitive damages are not an explicit option under OBSI; I would guess this is what the Judge is thinking about when he says later that behaviour modification "... does not appear to be the objective or mandate of the OBSI process".
"The appearance of impartiality and independence of the OBSI is to some extent in play. ... [since] the ombudsman's recommendation is not binding on the Participating Firm or the Complainant. A truly impartial and independent body would have control over its process."
the OBSI dispute process is sparsely defined
there is no hearing process for complainants to introduce evidence or make submissions and there is little or no chance for investor participation
the OBSI is not bound by rules of evidence
the procedure by which recommendations are arrived at does not lead to a record of how the OBSI's recommendation is calculated
So there we have it, a checklist for reforming and strengthening OBSI.

Don't get me wrong. OBSI, even with its deficiencies, has been doing valuable work for investors. It does, however, need a counter to the industry offensive to shun it, no doubt spurred by too many cases where OBSI has taken the investor's side. As the saying goes, the best defense is a good offense. Let's reform OBSI and make it a body with sharp teeth and power. Go to it politicians.

Thanks to Ken Kivenko of [url]CanadianFundWatch.com[/url] for the heads-up on this court case (the details of which seem to show some odious, abusive practices involving mutual funds, financial "advisors" and inappropriate leveraging advice). Ken's website also has a very practical (and sobering) investor guide to dealing with the OBSI. The pdf judgment from which I extracted the Judge's ideas is linked to on this page of the website of Thomson Rogers, one of the law firms in the case.
http://canadianfinancialdiy.blogspot.co ... -obsi.html

[admin]

images.jpeg (13.95 KiB) Viewed 22889 times

I had a conversation with a person going through the OBSI process and I thought I should pass along the highlights, which were shared with me, in case they may be of benefit to other abused investors.

First the background.......an investment victim, a fraud victim, given an industry promise of "trusted professional financial advice", and then delivered the services of a commission sales agent, touting the highest paying (commission paying) products, with the highest fees, lowest performance and some borrowed money (leverage ) thrown in the maximize the payout to the salesperson.

Despite this background, despite the fraud, the misrepresentation, and some of the clearest thinking and presentation of of the facts that I have witnessed yet........the feedback from OBSI sounded like this:

"IIROC regulations are not sufficiently clear to allow us to ..........."

"unless we can "convince" the firm that they did wrong............."

I won't go on and on, except to say that I have very little direct experience with OBSI, but I do not have to be told very much to imagine them being impotent and self protective, rather than client protective To add further to their vulnerability, they are at this moment, being "fired" by some (TD and RBC) banks who do not like OBSI's brand of dispute resolution, and prefer to hire their "own".

OBSI is living up to the image of an agency with no teeth, no balls, and no desire to do investor protection, but a huge need to work on agency protection. Sorry OBSI if I am being overly harsh, but your PR has been as invisible as the BC Sasquatch.....

SO another of the 120 plus agencies, departments, offices, associations, regulators and self regulators, all apparently either captured, or in the process of being captured (or marginalized) by a financial industry "too big to prosecute".

Buyer beware my fellow Canadians, now more than ever before. buyer beware even if they give you promises of "trusted professionals."

Fraud pays in Canada.

[admin]

http://business.financialpost.com/2012/02/16/help-wanted-new-chair-for-obsi/

HELP WANTED: New chair for OBSI
Theresa Tedesco Feb 16, 2012 – 7:00 AM ET | Last Updated: Feb 15, 2012 5:10 PM ET

The embattled Ombudsman for Banking Services and Investments (OBSI) is looking for a new chairman as part of a “broad-based” reform of its governance structure.

The not-for-profit mediator of last resort, which has been under fire from Canada’s major banks and their investment dealers, is currently canvasing for an independent chair to replace Dr. Peggy-Anne Brown. A special governance committee of OBSI’s 11-member board of directors, which was created to oversee the overhaul, is in charge of the search.

The changes, which were among key recommendations made by an independent evaluator from Australia last November, are expected to be completed in time to replace several long-serving independent directors, including Dr. Brown, who will step down in September, at OBSI’s annual general meeting.

Created in 1996 to review complaints by small businesses against chartered banks, OBSI is the only national independent dispute resolution provider in the financial services industry. Its mandate expanded in the past decade to cover all unresolved grievances.
As arbitrator of last resort, OBSI resolves disputes between the 600 participating banks and investment firms and their customers if an agreement can’t be reached between them.

However, while the major banks and credit unions participate on a voluntary basis, the investment industry-brokerages, and mutual fund companies joined OBSI on a mandatory basis in 2002 as required by the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Funds Dealers Association of Canada (MFDA).



But there has been tension building between the industry and OBSI in recent years. Troubled by the growing number of consumer complaints filed against them, the length of time to resolve the disputes and the steadily increasing damages being awarded to clients, investment dealers are demanding changes to OBSI’s governance structure to make it more transparent and accountable.

Last year, RBC Capital Markets Ltd., TD Waterhouse and Manulife Financial Corp. filed an application with IIROC, the national self-regulator overseeing investment dealers and equity trading, for an exemption from the mandatory provision that requires them to resolve disputes through OBSI.

That application was denied by IIROC and the MFDA in May, 2011. Since then, securities regulators and the industry have been trying to resolve their differences over OBSI.
While that was happening, TD announced last November that it would cease using OBSI to mediate disputes with its bank customers.

The departure marked the second time a major Canadian bank has relocated its dispute resolution business away from OBSI in favour of a for-profit mediator. Royal Bank of Canada was the first when it quit using OBSI for its banking disputes more than three years ago.

As a result, numerous shareholder advoate groups and OBSI’s 11-member board of directors have asked Canadian financial services regulators to force the banks to support the not-for-profit mediator of last resort through “mandatory participation.” So far, Finance Minister Jim Flaherty has not indicated what, if anything, the government will do.

[admin]

All-public panels are a hit with investors, Finra says
Popularity of new program could quell calls to end mandatory arbitration

By Dan Jamieson
January 29, 2012 6:01 am ET
After nearly a full year, the Financial Industry Regulatory Authority Inc.'s program to let investor plaintiffs exclude industry arbitrators from hearing panels has proved more popular than expected.


So popular is the program, in fact, that it could ease concerns about industry bias and help quell calls to end mandatory arbitration.

From the start of the all-public program in February 2011 through Jan. 26, more than three-quarters (76%) of investors chose the all-public option, which allows them to strike industry arbitrators from proposed lists of panelists.

That figure was up from a 54% opt-in rate during a 27-month pilot program, according to Finra.

Normally, investor cases are heard by three-person panels that include an “industry” arbitrator who works in or is associated with the financial industry.

SURPRISING POPULARITY

The popularity of the all-public program is a “bit surprising, because the pilot numbers were lower,” said Linda Fienberg, head of Finra's arbitration program.

Observers said a growing familiarity with the all-public option by plaintiff's attorneys is driving its widespread use.

The pilot also was limited to customer cases against a select group of firms and applied only to those cases where an individual broker was not named. The permanent program includes all firms, as well as cases against brokers.

“The program has given everyone an option” to use in a larger number of cases, said Ryan Bakhtiari, a partner at Aidikoff Uhl & Bakhtiari, and president of the Public Investors Arbitration Bar Association, which represents plaintiff's attorneys.

The Securities Industry and Financial Markets Association also supports the program.

“We also think it's quite important that an industry panelist remains an option for investors,” Kevin Carroll, associate general counsel at the trade group, wrote in an e-mail.

SIFMA was smart to support all-public panels, said David Robbins, a plaintiff's lawyer and partner at Kaufmann Gildin Robbins & Oppenheim LLP.

The program has eased concerns about industry bias and helped counter the push by the plaintiff's bar and state regulators to end mandatory arbitration, he said.

“Finra had to respond this way because ... they were fearful they would be out of [the arbitration] business,” Mr. Robbins said.

Finra “wanted to assuage customer's attorneys [about the process] and it's worked,” he said.

DATA INCONCLUSIVE

“I do believe this [program] has removed the one issue [critics] could use to claim the [Finra arbitration] forum wasn't as fair as it might be,” Ms. Fienberg said.

Data from the pilot program are inconclusive as to whether investors did better when they opted into the program.

Of 49 pilot program awards issued by all-public panels, investors were awarded damages in 26 of 40 cases, or 65% of the time, according to Finra. Another 23 pilot program awards were issued by panels with one nonpublic arbitrator, and in these instances, investors got relief 13 times, for a 62% win rate.

In nonpilot cases, win rates were lower: In 2009, arbitrators awarded damages to investors in 49% of cases; in 2010, the win rate was 48%.

However, Finra said that the award data are insufficient to draw meaningful conclusions about whether all-public panels tend to favor investors — a conclusion that others share.

“Talk to me in a year” about win rate data, Ms. Fienberg said.

“We'll have a better idea then” whether customers do better with all-public panels, she said.

The growing use of the all-public option has worried some industry arbitrators, who insist that they can be as tough, if not tougher, on industry malefactors as public panelists.

“I've noticed inquiries for me [to sit on panels] have dried up,” said Neal Tourdo, national sales director at Mastrapasqua Asset Management Inc., who serves as an industry arbitrator.

Eliminating industry panelists “is a mistake,” he said.

“Finra doesn't do a good job of educating [public] arbitrators about investments,” Mr. Tourdo said.

For more technical products, such as derivatives, “the public arbitrators are generally unprepared,” said Joseph Stineman, a partner and chief compliance officer at Fogel Neale Partners LLC, who is also an industry arbitrator.

He added, however, that his own caseload of four potential customer cases is heavier than ever.

Of the 1,431 cases in the permanent program that have ranked panelists, investors have chosen to strike all the industry people in 66% of the cases, according to Finra.

Despite the success of the all-public option, the plaintiff's bar and state regulators still want an end to mandatory pre-dispute arbitration agreements.

“We think choice is working with the all-public program, and we think choice is the way to go in arbitration” overall, Mr. Bakhtiari said.

If arbitration were made optional, “I think [the industry] would improve the customer protection aspect of it,” such as providing for attorney's fees and written decisions, said John Cronin, Vermont's securities director and chairman of the North American Securities Administrators Association Inc.'s broker-dealer section.

The Dodd-Frank reform law gave the Securities and Exchange Commission authority to prohibit mandatory arbitration in brokerage contracts.

The commission hasn't yet acted on that authority.

CUSTOMERS WINNING

Mr. Robbins doesn't think that will happen, due in large part to the all-public option.

Customers “are winning” in Finra arbitrations, he said.

“Why kill a system where you can prevail?” Mr. Robbins said.

The SEC doesn't have a timetable for looking into the arbitration issue, Ms. Fienberg said.

“My best guess ... is, they are mightily working to do [other] things with a time requirement first,” she said.

Meanwhile, Republican control of the House and recent Supreme Court decisions make legislation prohibiting mandatory pre-dispute agreements less likely, Ms. Fienberg said.

[admin]

TD bank treated clients poorly : When TD Bank pulled out of OBSI at the end of November , a few TD complainants got caught with their complaint in mid stream. TD refused to pay for the continuance of the OBSI investigation. The hapless complainants had to start all over agian with TD's own "independent " Ombudsman ,ADR Chambers. These poor folks suffered as much from this abuse as the original cause of the complaint. To say they are bitter and angry is an understatemnt. Finance Minister Flaherty should mandate that all Canadian Charted Banks be participants in a legislated-enabled and reformed OBSI. OBSI's Board isn't clean either- it didn't have the foresight to anticipate what would happen to its clients if a bank decided to give it the finger. Once again, Main Streett gets the shaft due to complacency, negligence and blatant disregard.

Thanks to Ken at http://www.canadianfundwatch.com for this update

OBSI is the Ombudsman for Banking Services and Investments (OBSI) in Canada, which some banks are shunning so they can hire their own private "referee".
www.obsi.ca/

[admin]

As if it is not enough to be in a self regulating position in the country.............not enough to know that the criminal code rarely gets applied to ones industry indiscretions...........not enough to have near monopoly powers over ones marketplace..........not enough to earn billions in profits often at the expense of fair dealing at times. No, all that advantage is not enough for some.

See which Canadian banks have decided to "opt" themselves out of the official Canadian banking dispute resolution process and hire their "own" ombudsman to resolve complaints against them. http://www.bankingombuds.ca/participating_banks.html

Investor warning: If you are going to play in an arena with folks who insist on bringing their own referee to the game, keep in mind that some of the calls may not always be fair. Just sayin...........

[admin]

(advocate comments........while Canadian banks scheme behind closed doors to fire the Canadian Banking Ombudsman, and hire their "own" private guns to do this work to their own advantage.......other countries are getting it right. Part of the foundational reason why Canadian financial customers are mostly "fish food" for the big players.)

http://focustaiwan.tw/ShowNews/WebNews_ ... 1201020027

| CNA | Español | フォーカス台湾 |



2012/01/02 15:00
Home > Economy >
New body to mediate disputes between consumers, financial firms
2012/01/02 21:17:28
Taipei, Jan. 2 (CNA) A nonprofit agency that will arbitrate disputes between consumers and financial institutions was formally launched Monday, centralizing a process currently divided between several different organizations.

The body, called the Financial Ombudsman Institution, will hear disputes between consumers and financial services companies such as banks, brokerage houses, and insurance companies and decide on compensation.

"The institution will not only be a consumer protection body, but will serve as a bridge for communications between consumers and financial institutions and make just and professional rulings on disputes between the two parties," said Chen Yuh-chang, chairman of the Financial Supervisory Commission (FSC), which will finance the new body.

Lin Kuo-chuan, chairman of the new institution, said financial institutions must first sign an agreement to state that they are willing to accept the institution's arbitration before cases related to them can be heard.

To get financial institutions to sign the agreement, Lin said it will publish a list of the companies that are unwilling to cooperate.

"Through transparent information, we will let consumers understand which financial institutions are willing to accept arbitration so that they can feel better protected," Lin said.

Lin said that around 1,000 cases had already been transferred to the institution by groups currently involved in arbitration procedures, such as the Bankers Association of the Republic of China and the Taiwan Insurance Institute.

Most of the disputes involve the purchases of structured notes, Lin said.

He predicted that the institution will handle more disputes related to insurance products than to products sold by banks because of the more complicated nature of insurance policies and claims compensation.

According to the institution, it will follow a three-stage arbitration process, starting with face-to-face intermediation, followed by a written assessment, and concluding with the institution's ruling.

As long as the dispute involves compensation of under NT$1 million in an investment dispute and under NT$100,000 in a non-investment dispute, the financial institutions should "accept the result of arbitration" as final,

[admin]

Letter to Minister Flaherty: Mandate OBSI as the Single Provider of External Dispute Resolutions for All Financial Institutions

FAIR Canada recently wrote an open letter to Minister Flaherty, Canada's Minister of Finance, urging him to designate the Ombudsman for Banking Services and Investments (OBSI) as the approved, sole provider of external dispute resolution (EDR) for financial client complaints and to make the recommendations of OBSI binding. A single dispute resolution service provider is necessary in order to avoid fragmentation, inconsistencies, serious potential conflicts of interest, consumer confusion, and to enable the detection of systemic or widespread issues. It is not in the public interest to permit multiple EDR providers.

The letter to Minister Flaherty reads as follows:

Dear Minister:

Re: FAIR Canada Urges Mandatory Participation in OBSI by the Banking Industry

FAIR Canada supports OBSI as the single dispute resolution provider for clients both of the banking and investment industries. A single independent dispute resolution service provider is essential to ensure the protection of Canadian consumers. One single dispute resolution service provider is necessary in order to avoid fragmentation, inconsistencies, serious potential conflicts of interest, complainant (client) confusion and enable the detection of systemic or widespread issues.

FAIR Canada urges the Minister of Finance, pursuant to the Bank Act and its related regulations, to designate OBSI as the approved, sole body that all financial institutions must participate in in order to deal with client complaints that have not been resolved through internal complaint mechanisms and to make the recommendations of OBSI binding. OBSI remains an essential, simple, inexpensive service for consumers, even though it is a system in which member firms hold a great deal of power, expertise and knowledge. Permitting banks and other member firms to opt out and choose their own external dispute resolution ("EDR") provider, as both the Royal Bank of Canada and, more recently, TD Bank have done in electing to use the for-profit service, ADR Chambers, threatens the existence of OBSI and jeopardizes the fairness and independence enshrined in the current system. It is not in the public interest to permit multiple EDR providers, particularly where the financial institutions choose and compensate private, for-profit providers.

It is important to remember that OBSI is a creation of the banking industry, developed to pre-empt the imposition of a statutory ombudservice. The banking and investment industry is now attacking the entity it created and supported for the level of independence it has achieved and for not being subservient to the industry's interests. OBSI's approach to assessing complaints and its loss calculation methodology is competent, highly consistent and has even been found to be superior (more fair and more accurate) to similar financial ombudservices that are used in comparable jurisdictions.

The financial industry has no real basis for its complaints about OBSI and has refused to enter into a reasonable discussion in order to resolve the impasse. In fact, industry wins 70 percent of all complaints filed by consumers and total compensation paid to customers of some 600 banks and investment firms and mutual fund dealers amounted to only $3.78 million for 2010, with the average amount of compensation being $7,158 per complaint . The dollar amounts are completely insignificant to the banking and investment industries but they are significant for consumers of financial services.

The financial industry benefits from a fair EDR provider (particularly where customers perceive the process to be fair) that is independent of industry. The "Occupy" protests reflect a growing distrust of the current financial system and industry's campaign against OBSI reinforces the negative perception of the financial industry, to which the financial industry should be mindful.

While OBSI has the power to "name and shame" if the firm refuses to accept the complaint resolution recommended by OBSI, OBSI's ability to effectively use this power is reduced substantially when the financial industry bands together and decides to play hard ball. The problem of the "stuck" cases demonstrates the need to put OBSI on a stronger footing.
In a time when Canadians are shouldering more of the responsibility of saving for their own retirement, and during a period of economic uncertainty, it is essential that Canadians have access to a simple, inexpensive, neutral dispute resolution service to resolve their banking and investment complaints. The Expert Panel on Securities Regulation noted the inadequacy of complaint handling and redress mechanisms in Canada. The Chair of the Ontario Securities Commission, Howard Wetston, Q.C., speaking on behalf of the Canadian Securities Administrators (the "CSA") at the OSC Dialogue on November 1, 2011, publically endorsed a single system of external dispute resolution; "The CSA strongly supports the existence of a single system of informal dispute-resolution to which investors can have recourse as an alternative to litigation or binding arbitration."

As the Minister responsible for banking and the champion of a National Securities Regulator, we urge you to act now to prevent industry from retaining multiple providers of EDR services. Put OBSI on a stronger footing through permanent legislative authority on a national level. When a national securities regulator comes into being, a single EDR service should also be mandatory.
Even TD Bank, upon opting out of OBSI, agrees that a reformed OBSI is the answer: "We agree with the regulators that one single, independent dispute service is preferable and that should be OBSI" .

FAIR Canada thus urges you to act now to require mandatory bank participation in OBSI and work to implement the other changes necessary to ensure that OBSI has the ability and resources it needs to continue its work of finding resolutions that are fair and reasonable to both consumers and the financial institutions.

Sincerely,
Ermanno Pascutto
Canadian Foundation for Advancement of Investor Rights

[admin]

For Immediate Release Friday, October 28, 2011

Financial Consumers Need a Fair & Independent Complaint Resolution Process

“We should simplify the redress system for consumers, not allow more fragmentation.”

Toronto, ON—Today, the Board of Directors of the Ombudsman for Banking Services and Investments (OBSI) released the following statement:

“In the wake of TD Bank’s withdrawal from OBSI for banking complaints, the Board of Directors would like to strongly express our complete support of and confidence in OBSI management and staff. We are grateful to them for the tireless and often thankless work they do day in and day out to achieve fair outcomes for the most difficult financial consumer complaints.
Canadians are justly proud of our financial services sector. Over the past few years, it has been an example to the world in large measure due to prudent and balanced regulation of the sector, a key element of which is an effective consumer protection framework.

At the heart of that framework is trust; trust between the financial institution and the consumer. How the complaint handling system functions is essential to maintain that trust when the consumer feels he or she has been wronged or treated unfairly. For many individual consumers and small businesses navigating the bureaucratic maze of many large financial institutions can be a daunting prospect and baffling ordeal. When a consumer cannot satisfy his or her complaint with a firm, there must be a fair, impartial and efficient alternative to costly and lengthy legal action.

Canadian consumers and investors deserve an independent, accessible, and effective service that meets the needs of consumers and operates in the public interest. Government needs to know they have an effective partner in dispute resolution, one that independently and credibly deals with consumers and investors, and is transparent and accountable to regulators. For almost 16 years, OBSI has quietly and effectively performed this role.

OBSI’s Board of Directors believes that an effective consumer protection service that operates in the public interest cannot survive without the voluntary support of the banking sector, or in the absence of that voluntary support, mandatory participation through designation under the Bank Act or the approval process contemplated by the anticipated regulations pursuant to Bill C-47.
OBSI engages in extensive discussions and sharing of information with regulators and government. As part of its Framework for Collaboration with financial market regulators, OBSI must also submit to rigorous, independent third-party evaluations on a regular basis, judged against published guidelines on such things as fairness, transparency and accessibility.
NEWS RELEASE
OBSI’s Board of Directors believes we should simplify the redress system for consumers, not allow more fragmentation. We are committed to balancing the interests of all stakeholders, including consumers, industry, government and regulators, as we seek a way forward.”
OBSI is the 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: debit and credit cards; mortgages; stocks, mutual funds, income trusts, bonds and GICs; loans and credit; fraud; investment advice; unauthorized trading; 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.
-30- Note: Quotes may be attributed to Dr. Peggy-Anne Brown, Chair.
For more information, contact:
publicaffairs@obsi.ca
416-218-4244

[admin]

312673_2370322548056_1550261225_2551821_749935805_n.jpg (25.09 KiB) Viewed 25474 times

from http://canadianfinancialdiy.blogspot.com/

Tuesday, 11 October 2011
Individual Investors Need a Strong Ombudsman
OBSI. It looks like another boring acronym ... until your investment advisor screws up costing you money, refusing to reimburse or compensate you when you complain. Then the OBSI (Ombudsman for Banking Services and Investments) becomes a top of mind way to get redress.

It seems to have been doing too good a job, at least for investors, since the financial industry is now ganging up to undercut, criticise and opt out of OBSI being the one and only dispute resolution body (see various articles in the Financial Post over the last few months).

In fact, far from being watered down the OBSI needs to be protected and strengthened as a recent review commissioned by the OBSI Board suggests in the package of balanced recommendations that meets both consumer and justifiable industry interests. But the industry thinks the report is "delusional" according to a quoted reaction in a Financial Post article by Theresa Tedesco.

The financial industry needs to realize is that in-reality fair, and perceived-by-consumers to be fair, dispute resolution is good for it. One of the lasting psychological effects of the credit crunch is that bankers and investment dealers are a bunch of devious, avaricious crooks (witness the "Occupy" protests), lining their pockets and then letting taxpayers or investors take the fall. The industry's current campaign against OBSI reinforces the negative perception by showing unwillingness to fix errors or misdeeds . As both a shareholder in Canadian financial firms (directly and through ETFs) and an investor / consumer I want to see a fair, balanced system, not one that stacks all the advantages on one side (the FP Tedesco article cited above makes reference to the statistic that industry already wins 70% of cases adjudicated by OBSI - is it only 100% that is acceptable?).

It's not just perception either. When effective penalties are known to occur, firms will tend to improve their internal processes and controls so that problems don't arise in the first place. Industry calls this zero defects or six sigma. Consumers call this peace of mind.

What really needs to happen is for the federal minister of Finance Jim Flaherty to put the OBSI function on a stronger footing through permanent legislative authority on a national level, instead of its present voluntary, industry-funded status and to include insurance in its mandate.

[admin]

Financial Post

<http://www.financialpost.com/todays-paper/OBSI+report+widens+schism/5452270
/story.html> OBSI report widens schism

Theresa Tedesco, Financial Post * Sept. 24, 2011

If the Australian author of the report on the state of Canada's national
ombudsman for banking and investments thought his bluntly worded 94-page
review would silence the criticisms against the organization that hired him,
he's mistaken.

Phil Khoury's dismissal of the complaints levelled against the Ombudsman for
Banking Services and Investments (OBSI) by many of its largest members as
"somewhat baffling" has been met with derision.

"It's a complete delusional whitewash," said a source involved with the
complaints filed by some of Canada's largest brokerage and mutual fund
firms. "It's not going to have any resonance with the industry because it
has no credibility and no integrity."

In a report tabled Wednesday, Khoury, a director of consulting firm
Navigator Co. and a former Australian securities regulator, found there was
"no substantive basis" for the months of hyperventilating by TD Waterhouse,
RBC Capital Inc., Manulife Corp., Investors Group Inc. and others against
OBSI.

Khoury, who was hired by OBSI [ actually by the Board] to conduct the external review (mandated by
regulators), praises the mediator of last resort and repeatedly suggests
that while only minor tinkering is actually required to improve the
beleaguered agency, only a massive overhaul will slake the thirst of the
industry barbarians at the gate.

"We do not believe that the current impasse between industry and OBSI can be
resolved in any sustainable way with only minor refinements," he wrote. "The
situation has moved beyond that. We argue the resolution of the current
impasse will require the active intervention of the regulators and a
multifaceted package of reforms designed to act as a 'circuit breaker'. "

Khoury is right about the overhaul, but not necessarily for the reasons he
outlines.

The not-for-profit organization is the only consumer friendly
dispute-resolution service available in Canada to the customers of the 600
participating banks and investment firms. If folks don't agree with their
banks or brokers on how to resolve a problem, they usually wind up at OBSI.

The investment industry has fumed that the way OBSI calculates losses is
inconsistent and too one-sided in favour of dissatisfied clients.

But their main objection is about what they believe is a lack of integrity
in the process because OBSI is not accountable and has no oversight from
regulators.

Meanwhile, consumer-advocate groups that have expressed similar complaints
about OBSI's governance - and still do privately - have rallied around the
mediator, preferring to keep the devil they know rather than risking the
unknown.

FAIR Canada applauded Khoury's report as "tactfully worded." Ermanno
Pascutto, the advocacy group's executive director, says he didn't find
anything in Khoury's report to quibble about.

"From the outset, we've been absolutely perplexed by the hostile efforts to
weaken and ultimately destroy OBSI," he said. And Mr. Pascutto, who is a
member of OBSI's consumer advisory panel, says he's at a loss to explain why
the industry, which wins about 70% of the cases brought before OBSI, is
whining about having to pay out $3.8-million in awards in 2010 to
disgruntled customers.

Even the fact that three of Khoury's eight recommendations involve
overhauling OBSI's board of directors and improving the agency's overall
governance - issues at the heart of the industry's grievances - fails, at
least initially, to bridge the divide.

Worse, by demonizing the banks, brokerages and mutual-fund firms as fat cats
who refuse to pay aggrieved customers, Khoury has merely widened the chasm.

The report appears to have entrenched the Street's view that OBSI is out of
touch with reality, and inflexible to its concerns.

Consequently, expect more financial firms to dig in their heels by refusing
to act on OBSI's decisions and delaying the resolution process even further.
How is that good for consumers?

Perhaps now would be a good time for the self-regulatory bodies that oversee
the financial firms, and Canada's senior securities regulators, to step into
the bitter fray that, for the most part, they have avoided.

[admin]

IE's James Langton gives his take on dealer attacks on OBSI : http://www.investmentexecutive.com/clie ... ilNews.asp
id=59386&pg=2&IdSection=27&IdPub=215

"...Although the starkly different
positions of the sector and investor advocates are understandable, the spat itself seems unnecessary.
For all of the grumbling from the sector, the
[ ombudsman ]
service it’s picking such a nasty fight with
is not only its own creation but the impact by OBSI on the sector is much more benign than the
hyperbole would seem to indicate. Some of the criticism portrays OBSI as a powerful force that is
enabling clients to take advantage of the sector, soaking it for unwarranted compensation, but the
evidence suggests otherwise. In fact, the securities sector still wins the majority of cases that come
before OBSI. About two-thirds of the time, complaining clients are sent home empty-handed. In cases
in which OBSI does rule in favour of the client, the amounts involved are simply tiny: for 2010, for
example, OBSI recommended total compensation to investment-sector clients of less than $3.4 million.
For the sector overall, that’s a rounding error.
Firms win before OBSI more than they lose; if they choose to follow its recommendations, the amounts
they (or their insurers) must pay out are inconsequential. Moreover, criticizing OBSI undermines the
good the sector has done itself by setting up the service. The exercise wasn’t entirely voluntary — OBSI
was created when the sector was under the threat of the federal government forming an industry
ombudservice. Nevertheless, the creation of a fairly simple, cost-effective alternative to litigation was
good for clients — and for firms. As the PIAC points out, without OBSI, firms “could be facing much
more substantial awards and a tidal wave of civil litigation,” adding that OBSI’s service benefits the
sector by reducing costs while providing fair and efficient redress for investors. .."
http://www.investmentexecutive.com/clie ... ilNews.asp
id=59386&pg=2&IdSection=27&IdPub=215
SIPA have proposed that Canada enable OBSI via
legislation as is the case in the UK, Australia and NZ. We agree.

(advocate comments.......pathalogical banks appear to be fighting over principle and not money.......the money involved is tiny, but the principle of giving fair and honest settlements for financial violence done by the banks is a principle they will fight to the end to NOT HAVE to pay)

[admin]

Tuesday, August 9, 2011

NEWSFLASH OBSI In Critical Condition
Canada: Banks Stomp OBSI to Near Death


“In a shocking news development, we get word that a gang of extremely large, powerful and petulant banks have stomped the current Ombudsman for Investments to near death”!

In investigating the disturbing allegations we, like most Canadians, are confused as to why such large and powerful beasts would suddenly turn on such a small, frail, and youthful position.

For those requiring more background, the OBSI is the “ombudsman for banking services and investments”. This position was formed in the late 1990s when rumours were heard about a rampaging group of banks beating up small business owners and stealing their lunch money. No charges were laid as the surviving small business owners were hesitant to risk future lunch money. In 2002 the OBSI added the investment industry to its mandate; attempting to provide fair resolution to small retail investors who wondered how their current lunch money and future lunch reserves (RRSPs) had seemingly disappeared from their investment accounts. Of course many of these nest eggs were “prudently” invested by the gorillas in the Investment industry including of course the bank gang.

Many speculate that adding the investment bullies to the mandate of the ombudsman was short-sighted. Like a British police constable, the ombudsman carries no weapons when confronting these wild marauding gangs. Apparently the governments of the day felt that moral suasion and a proper upbringing would keep the gangs in line. Unfortunately, it would appear that power and greed have tilted the scale away from any fear of public condemnation. The large powerful bank investment firms appear to actually believe that whatever they do is always correct and any opposition is to be immediately crushed!

In fairness, it appears that the ombudsman did not even get his weapon (public disclosure) out of his holster before he was set upon. Despite clear warnings of the dangers, the ombudsman actually thought he was a respected friend of the gangs and appears to have walked into the back alley willingly and without back-up. One can only wonder at his surprise when the organized criticisms began raining down on his unprotected skull. Early word from investor advocates familiar with the case is that the ombudsman was guilty of having his own opinion on both the veracity of the banks documents and the claims made by the banks commissioned sales forces. Indeed, some have actually charged the ombudsman with talking to investors who lost their savings and in several radical cases, believing the word of a lowly common client over that of the banks commissioned sales person.

Medical staff tells us it will be some time before we know if the ombudsman will survive his injuries. While the powerless neighbourhood watch (investor advocates) keep a vigil at the hospital bedside of the ombudsman; the power, wealth and sheer overpowering influence of the gangs continues to threaten any recovery. Amid rumours that the gangs are looking at appointing their own “gang controlled” ombudsman to fill the void they are attempting to create; government and regulatory officials appear to be keeping a very low profile. Apparently the gang is so powerful even the government is leery of challenging their tantrum.

Back to you in the mainstream media for our next follow up on this troubling story......

soismike

Posted by Mike Macdonald at 2:53 PM

[admin]

(Banks are not interested in fair play and honest dealing with customer abuse complaints............read on)
OBSI under savage attack

On Thursday May 12th officials from RBC Capital Markets Ltd., TD Securities and Manulife Financial Corp. met with securities watchdogs and industry self-regulating agencies to argue for changes to the way brokerage firms are forced to resolve disputes with their aggrieved customers. The meeting has took place at the offices of the Ontario Securities Commission, , in the wake of an unsuccessful attempt by RBC, TD and Manulife to pull out of a mandatory provision that requires brokerage firms to mediate through the Ombudsman for Banking Services and Investments (OBSI).Investor groups were not invited to the meeting. Instead of telling the dealers to show cause and support their allegations,/arguments , for OBSI was pressured to establish a consultation and put its loss calculation methodology on trial. We have asked for a copy of the minutes via Freedom of Information.

The consultation period ended July 25th with a unusual number of investor submissions. Comment Letters from industry were hostile and raised serious issues about how fair dealers are treating complainants . We have analyzed the industry responses. A copy of our report is available from kenkiv@sympatico.ca So in the dark is the IIAC about the role of an Ombudsman they actually said: “One matter that the paper does not address is what happens when the firm and OBSI staff have a differing opinion on the outcome of an investigation. While the Terms of Reference indicate that if the firm does not comply with the compensation recommendation, the details of the dispute will be published, this is an extraordinary remedy that loses its effectiveness if used too often over time. We recommend creating other options, such as formal mediation, that would assist in reaching balanced outcomes. [ http://www.obsi.ca/images/document/IIAC ... 5_2011.pdf ]” In other words , after the dealer has rejected restitution, OBSI has recommended restitution , a mediator should be called in! Of course this would add still more time for the complainant waiting for an answer and would defeat the whole purpose of an Ombuds service.

IIAC also stated in their Comment Letter: “ We also seek clarification on the stated principle in the Consultation Paper that disclosure does not validate an unsuitable recommendation. It should be clear that,although such disclosure may not make the investment suitable, if full disclosure is followed by informed client consent and direction to make the investment, the client must bear responsibility for losses relating to that investment.” We won't even bother to remark on this absurdity.

This problem had been brewing for some time . At the Feb. 23rd OBSI board meeting , Ombudsman Doug Melville painted a grim picture :”Mr. Melville stated that, while he did not want to overstate the issue, OBSI is experiencing a concerning escalation of minor conflicts with investment firms around matters that previously were not a material concern and this affects OBSI’s front-end process. These include:
- refusal to sign consent agreements or requests for changes to longstanding consent agreement;
- pre-emptive challenges to OBSI’s mandate with respect to specific case files before OBSI staff have had an opportunity to review the case for mandate;
- refusal to sign the tolling agreement by firms not covered by the blanket tolling agreement covering most bank-owned financial groups;
- refusal to provide or very slow to provide requested file information upon OBSI request;
- increasing proportion of case files already under investigation or in the final stage of settlement are being escalated to OBSI senior management based on methodology used (particularly loss calculation and apportionment) and judgment with respect to application of fairness considerations to the facts of a specific case.”

During this period , at least 15 complainants have been denied restitution recommended by OBSI. because the dealers have rejected OBSI's recommendations. For whatever reasons, the OBSI board has decided not to make public the names or case details of the refuseniks. It was bad enough being financially assaulted but now the complaint process itself is taking a heavy toll amongst investors. There is no end in sight to this fiasco as cases no doubt are piling up.OBSI has been permantently mpaired and staff are demorized. Shame on the OBSI Board of Directors ,the CSA and Bay Street for putting complainants through financial and emotional distress.

Kenmar Associates

[admin]

Kenmar Associates Investor protection and education
Bay Street vs OBSI
OBSI's hands are tied
“I think we've got a lot of work to do on the culture of complaint handling and dispute resolution in financial services,There are some firms that have worked hard at it, but we also see some behaviour that really suggests to me they don't get it. It's the tactics of delay, it's the automatic no, it's the attitude of, ‘Get this into the hands of legal and start the formal letters.'“ - former Ombudsman for Banking Services and Investments, David Agnew on his departure in 2009 . [ see June , 2009 Research Paper by Dr. P. Reeve FLAWED PROCESS, FAULTY PRODUCT for a discussion of industry complaint handling rules and process weaknesses at http://www.pjreeve.com/pjr/blog/Entries ... ULATION.ht ml ]
August 9, 2011
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Kenmar Associates Investor protection and education
Introduction
Per Wikipedia, “ The modern use of the term [ ombudsman] began in Sweden, with the Swedish Parliamentary Ombudsman instituted by the Instrument of Government of 1809, to safeguard the rights of citizens by establishing a supervisory agency independent of the executive branch. ”. Today, an Ombudsman, such as OBSI, is used to provide fair, unbiased resolutions of financial consumer complaints . By design,their services are non-legalistic and participation does not require legal representation. Findings are not admissible in any subsequent litigation or arbitration. There is no charge to complainants for the use of OBSI's dispute resolution services. OBSI can also serve as a bulwark of financial consumer democracy in troubled times, protecting citizens and helping industry, regulators and government to improve in the face of a tough economy and fiscal constraint. But it is under attack by a group of investment dealers.
Major Investment dealers are rejecting 15 OBSI recommendations for compensation This has only happened once before in OBSI's history, with a small mutual fund firm. Problems with industry participants have been brewing for some time- see Feb. 23, 2011 OBSI Board meeting minutes. http://www.obsi.ca/images/document/High ... D_s_Mtg_EN
.pdf In this paper we offer the retail investor's perspective on this unnecessary fiasco .
Background
Per the OBSI 2010 Annual Report ,the average and median compensation for in- vestment cases were modest - $19,121 and $8,205 respectively. OBSI recom- mended compensation in 78 banking case files and in 177 investment case files, with 100 % of recommendations being accepted by the firms involved. Complain- ants received compensation from their financial institution in just 20% of banking cases and 38% (177 of 468) of investment cases, representing a total of only $3,788,896 for all of Canada ( of this amount $3,346,138 was related to invest- ment cases) . Thus , almost two thirds of investment case complainants received NIL compensation. Just five cases were settled for an amount greater than $100,000 . Per the chart on pg 49 there appears to be one case that paid out $200,000 , the highest amount of the year. Frankly, we are surprised at how low these numbers are and puzzled why so much static has been generated on the is- sue of loss calculations.
Of the major investment issues in 2010 ,Investment suitability was cited in 227 cases (48 %) , the most frequent cause of investment complaints out of a total of 468.Misrepresentation, fees, transaction errors , unauthorized trading and fraud make up the difference and are not affected by the issues raised by dealers.
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Kenmar Associates Investor protection and education
National Instrument 31-103 , a regulation investor advocates feel was an organized industry attempt to hijack the OSC's Fair Dealing Model, is the statutory basis on which suitability is founded. Section 13.3 of NI 31-103 provides that:
Suitability (1) A registrant must take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a client to buy or sell a security, or makes a purchase or sale of a security for a client’s managed account, the purchase or sale is suitable for the client. (2) If a client instructs a registrant to buy, sell or hold a security and in the registrant’s reasonable opinion following the instruction would not be suitable for the client, the registrant must inform the client of the registrant’s opinion and must not buy or sell the security unless the client instructs the registrant to proceed nonetheless. NI 31-103 also states that the “registered representative is responsible for the advice given. In providing this advice, the registered representative must meet an appropriate standard of care, provide suitable investment recommendations and provide unbiased investment advice”.
From this Instrument we see that each recommendation (transaction) must be suitable for the account . This is important because it is establishes a principle upon which OBSI bases its loss calculations and restitution recommendations.
The OBSI Consultation http://www.obsi.ca/UI/Resources/WhatsNew.aspx? csid1=77 resulted from complaints from a several investment dealers. They assert OBSI is being unfair in their investigation methodology and loss calculations . Specifically they assert:
1. As regards suitability ,OBSI should take at face value documents relevant to the case. These include but are not limited to NAAF, KYC , transaction slips, loan agreements, account statements and the like. It is felt that OBSI should not exercise discretion and judgment in weighing issues of credibility but instead should rely on legal and regulatory principles.
2. OBSI should assess suitability in the context of a portfolio, not as a stand- alone investment ; additionally, that OBSI is not consistent in its approach
3. OBSI client interviews may unduly influence the results especially as regards risk tolerance.
4. The adviser makes recommendations but the final investment decision is that of the investor who receives regular disclosure and account statements
5. OBSI should not award compensation greater than actual losses incurred on the basis that opportunity losses are akin to a performance guarantee
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put forward ; #24 stated “
That OBSI continue with and expand its one-to-one
liaison activity with participating firms, with a view to continuously improving
cooperation and complaint handling between the two parties.”
] In our opinion ,
all of the key recommendations have been satisfactorily resolved The next report
is due out next month. No doubt, it will be closely read and analyzed.
Kenmar Associates Investor protection and education
6. OBSI should not use benchmarks for notional portfolios on the basis that Index funds are rarely the basis for a complaint and Index funds are not generally held for long terms
The 78 page September 2007 Report of the Independent Reviewer concluded “ In the course of our review, we looked closely at OBSI’s written complaints handling procedures and how they are implemented in practice. Our conclusions were that the OBSI does provide a fair and balanced opportunity for both the participating firm and the consumer to provide documents and other information in support of their positions and that OBSI achieves the right balance as between the participating firm and the consumer”. http://obsi.ca/images/document/up- 7Independent_Review_of_OBSI.pdf [ 24 recommendations for improvement were
In our view, OBSI staff conduct an independent fact-based assessment of suitability, the risk of investments and the sophistication and responsibility of the investor. This assessment is done with the benefit of information provided by the dealer and also from the complainant. Compensation recommendations based on such research are not now being accepted by some firms . The resulting impasse has led to undue delays for complainants in receiving compensation has created a growing backlog of long standing cases. Restitution is being with-held while this very public battle rages with no end date in sight.
The financial and emotional pain of these delays on complainants has been severe and impaired the reputation of the dealers and OBSI . Investor confidence in the complaint handling system, which was intended to be a fair alternative to the longer and expensive litigation process is now in peril. OBSI has been unduly patient and not exercised its right to publicize the names and details of complaint cases where dealers have rejected OBSI's recommendations. Industry suggestions that this one power that OBSI has should be replaced with mediation makes a farce of the very concept of an Ombudsman. Industry participants assert that this is all about principles. We think it's more about a demonstration of power and influence. As Mammy Yokum says “ Sometimes you have to rise above principles” .
[Ironically ,while this nonsense is going on in Canada, the UK's securities regulator, the Financial services Authority , fined 2 British Banks in January millions of pounds Sterling for deficient complaint handling systems. http://www.fsa.gov.uk/pages/Library/Com ... /003.shtml This included unduly lengthy processing times, unresponsive replies to complainants ,
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Kenmar Associates Investor protection and education
poorly trained complaint assessors , deficient analysis and use of available information and failure to disclose Ombudsman referral rights. Perhaps Canadian regulators should do a sweep of a few dealers to confirm that retail investors are being treated fairly?]
In addition , there is the correct observation that NI31-103 permits dealers to select their own ombudsman as long as the entity is independent. Notwithstanding NI31-103, IIROC/MFDA member rules require investment and mutual fund dealers to utilize OBSI for all complaint investigations. Banking regulations and the Bank Act unfortunately do not. A Bank can leave OBSI as a participant at any time and pick their a dispute resolution service that better suits their needs. In fact, RBC Banking has done exactly that.
Let us discuss each of the six points
1. Use of NAAF / KYC as foundation documents
The essence of the argument is that regulators provide a framework from which to ascertain suitability. Chief among these is the NAAF and the KYC .This, according to the industry participants , should be the basis that OBSI should use to determine suitability. It is argued that this structure provides a protection for investors within which licensed representatives mus operate. Industry participants argue that the OBSI proceeds on the erroneous premise that it can establish through its suitability and assessment process, the "actual KYC facts" that will be relevant to OBSI's assessment of whether advice was suitable, without being limited to the KYC information that the dealer actually collected or should have collected.
We note parenthetically that Loss Capacity, income tax issues and liquidity are especially important suitability issues for seniors but not adequately dealt with on NAAF's. Loss Capacity is the ability to with-stand and recover from a bear market. It is primarily determined by age,health, income/expenses, time horizon and level of savings/net worth. It is not the same as Risk tolerance. Leveraging adds risk to a portfolio and undue risk , if it is unnecessary or excessive ,should also be a factor in OBSI's suitability determination(s).Our view is that neither OBSI nor industry participants deal with loss capacity adequately.
Investor advocates state that the prevailing KYC system is dysfunctional and Canadian suitability standards are weak and ill-defined. Investment Policy Statements and Engagement Letters would help but they are not required by regulators and hence , infrequently used. This lack of regulatory engagement makes the OBSI complaint handling process much more difficult than it should be. Further, there is no requirement currently to provide personal rates of return
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Kenmar Associates Investor protection and education
on client statements and client statements are generally very poor at communicating essential information.
The Dec. 2003 OSC Regulatory Burden Task Force Report recommended that there should be a mandated KYC form with definitions that are more
understandable. Additionally, they stated:
1. Registrants should be required to follow mandated procedures regarding their use of the form with investors.
2. The form should require signature by the investor in all cases (with a copy retained by the investor) and all changes in the investor information contained in the form should require initialing by the customer.
3. The form should also contain clear bold-faced instructions to the investor as to how to best use the form to protect themselves and how to pursue a complaint regarding their account, with the registrant and its internal ombudsman and, if necessary, with the OBSI [Ombudsman for Banking Services and Investments].
4. The Commission and the IDA [now IIROC] should consider requiring registrants to send clients copies of their KYC form annually together with a request to advise the registrant if the information in the form should be amended.
Source:http://hdl.handle.net/1873/608 2 None of these recommendations have yet been implemented. Investor advocates continue to press for these unaddressed improvements but progress has been very slow.
The January, 2004 OSC Fair Dealing Model Concept Paper stated “ We continue to regulate most registrants on the basis of the products they sell, even though investors, firms and the courts consider the relationships formed and the advice given to be far more important than the actual sales transactions. The regulations allow an unacceptable lack of clarity which contributes to many of the problems in relationships between investors and advisers. Most retail financial services, including investment advice, are delivered by firms registered as dealers and their individual representatives. But the OSC‘s regulations only focus on advice as a business activity for a limited number of portfolio managers, investment counsellors, and newsletter publishers. For the majority of financial services providers, Ontario‘s existing product-based regulatory model has become
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Kenmar Associates Investor protection and education
outdated, yet we continue to tack new regulations onto it. ” Source: http://faircanada.ca/wp-content/uploads/2010/10/FDM.pdf Perhaps the current confrontation between dealers and OBSI will have a positive impact if it triggers a constructive review of the regulatory model from the retail investor perspective.
New Account Application Forms (NAAF) try to assess a client's risk tolerance through checking off a few blocks on the form. The form contains only barebones and generalities. Too often it's like putting a square peg into a round hole. The client might have goals to save for a house or an education, but the forms only allow advisors to check off Objectives like "growth" or "income" or "safety of principal". They come without definitions of the terminology used ( e.g. “safe” apparently means “not guaranteed “) . Nevertheless, this is often the core basis used by “advisors “ in deciding on suitable investments. SRO's have also identified problems with KYC's.
For example ,according to MFDA MR-0069 Suitability Guidelines :
1. Where ranges are used, at times they are too broad. For example, long term time horizons defined as greater than 3 years and the top category for net worth is greater than $100,000;
2. The NAAF does not collect sufficient information to assess suitability of particular products or investment strategies of the Member. For example, if selling exempt securities under the accredited investor exemption, the NAAF should include income and net worth information specific enough to demonstrate compliance with the exemption conditions. Another example, where a minimum time horizon has been established as a guideline for recommending leveraging, the time horizon on the NAAF should be able to support that this criteria has been met. MFDA Staff has also observed Members that define long term time horizon as greater than 3 years, which would not be adequate to determine whether the sale of a mutual fund with a deferred sales charge is suitable;
3. KYC choices on the NAAF are ambiguous. For example, time horizon of “none” was interpreted differently by staff at a Member to mean either extremely long term or very short term;
4. For joint accounts, Members have collected KYC information for each account holder rather than for the account itself. In some cases, the KYC information collected for each account holder conflicts and it is not clear what KYC information relates to the account;
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Kenmar Associates Investor protection and education
5.
6.
7. 8.
KYC information that is inconsistent. For example, a client with a speculative investment objective and a low risk tolerance. A Member should either have controls to prevent such inconsistencies or have detective controls to identify and follow-up where inconsistencies are identified;
Use of calculators or other formula that focus on ability to withstand losses rather than the lesser of the client’s willingness and ability to accept risk;
Little or no explanation of terms used on the NAAF, including risk tolerance, investment objectives and time horizon;
Where the model portfolio approach is used, little or no disclosure to the client regarding the composition of the portfolio, how the portfolio was selected and no statistical analysis to support its reasonableness; .....
We could easily add a few more issues. IIROC requires one KYC for multiple accounts even though those accounts may have widely varying objectives and risk metrics. The MFDA is reviewing outsourced backoffice systems with respect to KYC and other issues. Dealers have voiced concern about the fact that an outsourced service provider is unable to make necessary changes within a reasonable time or without incurring significant costs. In some instances, third party back-office service providers have not made necessary changes to their core systems to meet new regulatory requirements or, alternatively, have made system changes that have resulted in non-compliance with MFDA requirements. Source: http://www.mfda.ca/regulation/bulletins ... 0484-P.pdf . This results in a deficient recommendation and a defective KYC post trade analysis.
A detailed commentary on the shortcomings of KYC because of the industry transaction-based mindset can be found in the TAMRIS Special Report by respected portfolio consultant Andrew Teasdale Suitability, Minimum Standards & Fiduciary Duty in the Canadian Financial Services Industry available at http://www.moneymanagedproperly.com/New ... hnical.htm The document argues that the prevailing “Know Your Client” form cannot safeguard the suitability of a transaction because it cannot effectively relate the transaction to financial needs, existing investments, risk preferences or current risk/return relationships. It also reminds us that Canadian regulators need to deal with the client/adviser fiduciary relationship (sales commissions platform vs. unbiased professional advice), a movement rapidly gathering steam in the U.K. , U.S. and elsewhere.
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Kenmar Associates Investor protection and education
The Suitability Rules themselves are not understood by investors and investors are unable to assess a Dealer Member's compliance without further guidance as to the precise nature of the Rules and how they are to be applied in particular cases . Retail investors do not appreciate that the inappropriately labeled “NAAF” is in effect a contract and thus are not sensitive to how important each block ticked off may impact them in a future dispute./ complaint Additionally, investors do not possess the tools they need to knowledgeably assess whether a Dealer Member has effectively followed the Suitability Rules. Most retail clients of investment Dealers will have little knowledge of, or sophistication about suitability rules .
The industry suggestion that where the legitimacy of the objectives and risk tolerance agreed to in writing is challenged, the complainant should be held to a very high standard of proof before it is accepted that, despite the fact that they may have signed the form, they did not agree with the stated objectives or that the risk tolerance was not appropriate in the circumstances must surely be disingenuous. These forms are not designed to amplify clarity- they are so imprecise that in most cases they amount to signing a blank cheque. Sometimes quite literally, the form is filled in by the Rep and signed by the client on the basis of trust in the Rep and his/her implied professionalism.
The Canadian suitability standard is thus a weak standard and even it is not implemented well . There are numerous cases where account supervision was weak , the infamous Ian Thow case being an excellent example. We've seen KYC's that are not signed by investors and only find out about them when a complaint arises. There have also been documented cases of NAAF's being adulterated by advisers or client signatures forged . As a direct result of a weak KYC system , unsuitable investments have routinely risen to the top of the reasons for complaint list.
Given all these known deficiencies it appears entirely appropriate , if not mandatory, that OBSI validate the KYC information. It would be irresponsible not to do so.
2. The Portfolio Context
A professional financial planner would readily acknowledge that balancing of risks is an accepted part of investment advice, and "high risk" investments should be considered in the context of the client's overall portfolio holdings, rather than in isolation. If for example the equity portion of the client's holdings is conservative, an investment of a small portion of the total in an aggressive fund that might be unsuitable as a stand alone investment, could be suitable in the context of the
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Kenmar Associates Investor protection and education
client's overall holdings. This argument makes sense if the suitability regime were not transaction based and “high risk” investments really added to the portfolio stability.
If some investments are uncorrelated with other investments in the portfolio, an otherwise unsuitable investment as a stand-alone security may indeed be suitable in a portfolio context . For example hedging US dollar securities with a gold fund may be perfectly acceptable. However this does not mean that “high risk” or speculative securities such as a Bre-X or Sino-Forest have a place in a portfolio. Registered dealer representatives should be prepared to rationalize and document their recommendations that use “risky “ securities during the complaint investigation and OBSI should take this into consideration when assessing suitability .
“Manipulation of KYC and NAAF :There is a wide range of investment objectives in many New Account Application forms[ NAAF's], with the less risk averse and more aggressive options often allowing for aggressive trading and very high risk investments. Investors risk being pushed into more aggressive allocation profiles without being fully aware of what the profiles actually mean in terms of long term transaction costs, risk and return, and asset allocation.
NAAFs and KYCs do not actually provide risk/return profiles relevant to the stated investment objective -What is the risk profile of the security or strategy that an advisor would consider appropriate for that actual profile and how would it affect the overall risk and return profile of the client’s assets? Indeed, once you study the NAAF and KYC, you find them incomplete with respect to the transparency of what the advisor is actually going to do for you. Combine this with little or no feedback on the relative risk and return and relative performance of accounts, and you find that the advisory segment of the industry is open to abuse and manipulation at a most fundamental level: -regulate the transaction, and ignore the wider service and representations made. The narrow frame of the current regulatory system is open to abuse and the average investor is not sophisticated enough to negotiate representations made and regulation of the transaction -based industry. “ Source: Andrew Teasdale , Point of Sale disclosure and regulatory failure in Canadian retail financial services , September 2010
So, while we agree with a Portfolio approach, that is not how the Advice business actually works in most cases.
3. Client Interviews
There is an implied assertion that OBSI invites or welcomes complainants to
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challenge the KYC information collection process undertaken by the dealer and the advisor on the basis that the KYC information was not accurately recorded, that they did not understand the KYC forms they signed, that their advisor did not review the KYC forms or explain their significance or that disclosure was not understandable. This approach , it is argued, is akin to asking the complainant leading questions about the dealer's KYC process, that is likely to elicit responses concerning the dealer's KYC process that are self-serving and coloured by the client's dissatisfaction.
We are not aware of any cases where OBSI investigators have unduly cast doubt on the KYC . In our experience they act as fact gatherers .Only when the investigator assesses that the complainant's version of facts is materially different than the documented KYC information do OBSI collect and consider additional evidence by interviewing the parties and conduct research to determine if the KYC forms reflect the investor's actual KYC information .To ignore a major conflict of information would be irresponsible. The result all too often is that the KYC information is in fact incorrect, inconsistent,stale or incomplete
We are however aware of a few cases where the OBSI investigator seemed to imply that the complainant was financially literate when they were not, that the complainant understood the risks involved when they did not and that the complainant was simply greedy and unhappy with the result. These however are rare. By and large , investigators stick to a ordered line of fact finding that is logical and is congruent with high standards of ombudsmanship. https://www.obsi.ca/images/document/up- ... ndards.pdf OBSI use internationally recognized service standards to build their Code of Practice in areas such as timeliness, accessibility, consistency and confidentiality. We note parenthetically, that dealer complaint systems do not make this declaration . And for good reason, they do not meet these higher standards. In addition , OBSI must comply with the Framework with the Regulators https://www.obsi.ca/images/document/up- 2Framework_with_the_Regulators_EN.pdf which includes a Fairness principle.
We've observed KYC forms with investment objectives that are too broad or vague to relate to any specific trade or investment but that relate more to the overall objectives of the account (such as “retirement savings” or “tax planning”). In such cases OBSI must probe further. According to reports , MFDA Staff has observed the use of foggy terms including “capital preservation” and “speculative”. Where these terms are used, they must be appropriately defined in a manner to allow the client to understand what types of investments they relate to. It is left to OBSI unfortunately to compensate for a defective KYC regime.
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There is of course a risk that the the ombudsmanship standards may not always be met .We therefore would not disagree that interviews be monitored/recorded to ensure the fairness standard and independent objectivity is maintained.
4. The Investor as decision maker
In one of the industry submissions investors are portrayed as informed decision makers, framing their decisions based on research, adviser communications and a knowledge of the risk/reward balance. They compare investing to the purchase of a home where a buyer does extensive due diligence. Another industry commenter stated “ .It should be clear that,although such disclosure may not make the investment suitable, if full disclosure is followed by informed client consent and direction to make the investment, the client must bear responsibility for losses relating to that investment.” Actually ,the suitability requirement is complementary to the fundamental obligation under securities legislation for dealers and their representatives to deal fairly, honestly and in good faith with retail investors. So, according to this commenter, it's OK to stick it to an investor , relying on an adviser for robust advice , with losses resulting from an unsuitable investment because some form of disclosure was made. Dealer Reps may feel morally licensed to offer biased advice once they've disclosed all the issues and conflicts-of-interest. Thus, disclosure can lead advisors to give even more biased advice to retail investors once they have disclosed their conflicts- of- interest and product risks.The OBSI argument that disclosure does not make an investment or strategy suitable if it’s otherwise mismatched with the investor’s objectives , personal situation, risk tolerance and loss capacity is just common sense.
Deficient Risk disclosure is often at the heart of most complaints. A scan of IIROC complaint files shows that risk disclosure is weak or outright wrong. Two recent examples are the sale of non-bank ABCP unjustifiably described as safe and leveraged and inverse ETF's that were totally mis-sold to small investors.
Investor advocates argue that most Canadian retail investors lack financial literacy. Indeed, that is why they are willing to pay for professional advice.“ In the case of mutual funds , the OSC research found that investors had a Grade 5 reading level and as a result ,insist on plain language disclosure for mutual fund investors. Canada’s Task Force on Financial Literacy has made public its report to the federal Minister of Finance, recommending urgent action on a national strategy to strengthen Canadians’ financial literacy.
Complex investment products, especially complex income tax-reducing investment structures,complex leveraging arrangements and an increasing appetite for global exposure among investors, have made it increasingly difficult
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for investors themselves (as well as Dealer Reps) to determine whether certain products are suitable. To argue that a client must bear responsibility for losses relating to that investment if full disclosure is made and accepted by the client is tantamount to saying that investment advice has limited value and no accountability. The limitations of disclosure in the retail investment marketplace are well researched - see for example Mutual Fund Investors: Sharp Enough? http://www.canadianfundwatch.com/files/sharp-enough.pdf
In respect of the suitability of specific products, we can appreciate the statement on page 7 of the OBSi consultation paper , which indicates that OBSI may disregard the investment objectives, strategies and risk ratings published in a mutual fund company’s simplified prospectus. These are often merely broad boilerplate recitations and the risk ratings and disclosure in Fund Facts have been discredited by FAIR, SIPA, Morningstar , PIAC , industry participants and ourselves. It is perfectly appropriate for OBSI staff to exercise its own judgment to confirm these ratings, particularly when the ratings are known to be misleading.
In our experience ,most retail investors do not do independent due diligence of investment recommendations. In the vast majority of cases, investors place a high level of trust in their “advisors”. This is confirmed by a number of studies including those conducted by IFIC www.ific.ca .Lofty marketing slogans strive to induce trust in the industry [ Invest with Advice , Freedom 55, “You're Richer than you think”, Buy, Hold...Prosper , Advice you can Bank On]. Too often,investors are lured into a relationship that is unfriendly , if not hostile, to them. They , especially seniors and retirees , are defenseless in this scenario. All this hype essentially puts the retail investors nesteggs in the hands of the dealers and their salespersons whom they trust, often unconditionally. So when unsuitable investments are recommended , the idea of an informed decision being made appears ill-founded. In reality , most Advisors” are transaction oriented, have no fiduciary duty, have not prepared meaningful financial plans for clients,do not utilize IPS's and rarely, if ever, provide personal rates of return vs. benchmarks
5. Awards should be capped at actual losses incurred
Industry participants clearly are against compensating for “ opportunity costs ” - they feel compensation should be limited to losses actually incurred because the use of such a loss calculation mechanism could be considered an implied per-
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formance guarantee .An argument is made that OBSI's loss calculation methodo- logy is silly since no one would posit that an investor should refund excess profits if the unsuitable investments provided a superior return to the suitable in- vestors.
The advocacy community believes a compensation calculation that makes people whole from an industry that holds itself out as a trusted source of advice must include opportunity costs in certain circumstances. Some abuses we see are truly disturbing . The investment industry too frequently uses false and misleading representations as to the roles and titles of those they employ as "advisors". Further information regarding the misleading marketing practices that are considered standard operating procedure by the industry can be found at http://www.investorvoice.ca with particular attention to the MARKARIAN vs CIBC WORLD MARKETS discussion of false and misleading sales practices and title inflation by a Quebec Superior Court Judge. http://investorvoice.ca/Cases/Investor/ ... _index.htm
In certain cases restitution should not be limited to the loss incurred - for a senior or retiree especially, that would mean several critical years of potential earnings would be lost forever. It would mean that RRSP's/RRIF's could not be repaired. It would also mean that dealer Rep misconduct, misrepresentation , incompetency,negligence or fraud would not carry much financial risk for industry participants . Respected dispute resolver Robert Goldin lists 156 ways that a broker can be culpable http://www.macgold.ca/advisorfault
Conceptually ,unsuitable investment recommendations are similar to unauthorized trades and therefore the loss calculation should include opportunity costs in certain circumstances. It is simply a matter of fairness. [OBSI is not a regulator -it cannot fine wrongdoers , order disgorgement or assign punitive damages. so opportunity costs are the only available route for fair compensation for demonstrably defective advice . The UK Financial Ombudsman Service uses notional portfolios [ portfolios chosen to mimic the likely suitable portfolio] to assess restitution. The Service has a Guide to Redress calculations at http://www.financial-ombudsman.org.uk/p ... es/QG5.pdf We believe OBSI should make publicly available its Practices and Procedures Manual- this would support transparency and increase understanding.
We therefore support the OBSI position on opportunity costs applicability in select cases but OBSI should better define the boundaries for those cases ( as should industry dispute resolvers) . See http://www.financial- ombudsman.org.uk/publications/ombudsman-news/37/calculating-redress.htm
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for some case examples of the UK Ombudsman's approach to calculating redress for “ loss of investment opportunity”.
6. Use of Indexes/benchmarks
Industry participants argue against the use of indexes . They state that securities that were suitable for a client might not be available within the index utilized, and the securities within that index may not be suitable for the client at the time the investment choice was made, or at any time during the time frame applicable to their investment. This results, in part, due to the fact that a benchmark is not adjusted to reflect the asset allocation that is suitable for the given client. It is also argued that the use of indices as benchmarks presents the issue of selection bias, confuses suitability with performance, fails to account for fees that would otherwise be applicable to a client (particularly where considered over a period of a number of years), and assumes consistency on the part of the client that may not reflect actual investing history.
It makes perfect sense that working out the loss involves comparing the complainant's current position with the position they would now be in, if they had not been sold the unsuitable investment(s). We can therefore understand the use of indices as performance benchmarks under certain conditions. After all , industry marketing materials always use them to illustrate risk and performance. They also use indexes in preparing model portfolios or as benchmarks for portfolios. This may not be perfect but it is a practical , generally accepted solution to a tricky problem. As long as informed judgment is employed , there is full transparency for dealers and investors , and appropriate rebalancing is applied this should not be a material problem. We do agree that since indices are costless (and frictionless ) that performance should be reduced by fees for the comparable Index fund or ETF.
Another alternative would be to use the average target return after fees contained in the financial plan ( if there is one).
In cases where a suitable investment may originally have been discussed as an alternative to the unsuitable investment, it may be appropriate to award restitution based on that investment.
In some cases there may be no conclusive evidence as to what suitable investment would have been decided upon , if the client had not taken out the unsuitable investment. In these cases, unless the circumstances indicate otherwise, we recommend compensation on a notional capital return, equivalent to Bank of Canada base rates during the relevant period + 1%.
There is also a seventh major point to consider that was barely touched on by the Industry submission's to OBSI's request for consultation. That is mitigation . It can be a bigger factor
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than the choice of Index in determining the amount of redress. A big issue is the loss timeline with most dealers and OBSI using the legal principle ,that once a unsuitable investment is identified by an investor, they should take steps to mitigate further losses. Defining this point in time requires considerable judgment . It's difficult to apply for retail investors for a variety of reasons. In many cases, sales Rep's counsel to buy-and-hold , so investors don't sell even if the investment is unsuitable and losing money. Investor advocates argue that a sales Rep's duty includes sell recommendations , not just buy recommendations. Of course , other factors may delay mitigation such as hefty early redemption charges or the inability to sell the security prior to maturity. Investors may not even know , thanks to crappy account statements, that they've lost money until a sizable fraction of their portfolio has been depleted. Seniors may be ill/hospitalized, out of town for the winter or suffer from dementia.
Further, behavioural finance researchers have found that contrary to expected utility theory, people place different weights on gains and losses and on different ranges of probability. They found that individuals are much more distressed by prospective losses than they are happy by equivalent gains. Some economists have concluded that investors typically consider the loss of $1 dollar twice as painful as the pleasure received from a $1 gain. OBSI should factor this human behaviour into its decision as to when mitigation should have occurred and publicly reveal its approach. Recommendation letters sent to complainants should clearly articulate how the mitigation date was determined.
Summation
Most of the industry commentary appears to be nothing more than a thinly disguised attempt to clip OBSI's wings. or dismember it. It appears too much fairness is a threat to some on Bay street The Canadian financial services industry either lacks an understanding of the role of a contemporary Ombudsman or is feigning this lack of knowledge. The ploy has been very “successful”. OBSI's reputation has been permanently impaired, OBSI staff appear intimidated/demoralized and core loss calculation methodologies based on fairness have been placed on trial.
Shame on regulators for letting things deteriorate to this level. Regulators should focus on examining industry practices to see if they comply with recently passed complaint handling rules and if those rules are achieving their intended investor protection objectives. Based on the thinking displayed in the Comment letters it appears there's a lot more work to be done and as noted in the remarks by former Ombudsman David Agnew on the front cover of this report.
The industry comments raise a number of investor protection issues. As a result,
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regulators should ask the financial services industry to explain why the number of unsuitability complaints is so high . They should be asked to publicly reveal their loss calculation methods and justify them. They should be asked to justify why they do not compensate for “ opportunity losses”. They should be asked to correct glaring deficiencies in their investor protection protocols including , in particular , the Know-Your-Client regime.
We fully concur that the overall objective of OBSI’s approach should be to determine a fair estimate of the financial position the investor would be in had the unsuitable investment advice not been given and acted upon. Investors pay for advice and when bad advice is given, clients deserve compensation. We don't disagree that an OBSI recommendation should be well supported but so should the dealer's original rejection of an investor complaint.
Overall, we find the OBSI approach to be non-intimidating, logical , disciplined and fair to investors and dealers. OBSI appears to follow International Standard ISO 10003 Guidelines for dispute resolution external to organizations standards quite closely. From our experience , OBSI is well ahead of the more legalistic complaint handling processes and disclosure practices used by most investment and mutual fund dealers.
The Joint Standing Committee on Retail Investor Issues needs to be reactivated. to deal with this critical issue. After an initial bold declaration by the OSC, MFDA, IIROC and OBSI in the Spring of 2008, little has been heard from this Committee. The original idea to create a permanent forum in which the four organizations could discuss the problems that afflict retail investors- and to work together on possible solutions- is even more critical today than it was 6 years ago. In the end , it may be necessary to enable OBSI via Federal legislation so investors are not dependent on an industry sponsored entity. Bringing the insurance industry into the fold would also make a lot of sense.The Minister of Finance needs to also ensure all Canadian Chartered banks use OBSI.( RBC Banking broke away from OBSI in 2008).
We strongly recommend that the Canadian Securities Administrators should simultaneously revisit , update and tighten the FRAMEWORK to bring it in line with the 21st century . They should also start providing oversight for OBSI governance since OBSI is an integral part of the investor protection system in Canada . Some priorities would include governance, examination of forms used ,how the vast OBSI database can be used to improve investor protection in Canada and a detailed Guide on the criteria they must meet to be considered an independent Ombudsman service ( See the Australian Securities and Investments Commission document PS139 .Approval of external complaints resolution schemes )
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Perhaps it's time for another Investor Town Hall. The 2005 OSC Town Hall proved to be quite an eye-opener for regulators- unfortunately, it has not been repeated since. The Town Hall brought out dissatisfied investors in droves . At the end of the prescribed time, there was still a long line of participants waiting to get to a microphone.
Scene from May, 2005 OSC Investor Town Hall
At the meeting, investors made it clear that they want regulators to address the following concerns: • the challenges they face when trying to navigate the complaints process • the desire for timely , fair and accessible redress
• the need for the OSC to consult more with investors See A Report on the Ontario Securities Commission's Investor Town Hall for what regulators say they heard . We couldn't find it on the OSC website but it can be downloaded from http://investisseurautonome.info/compon ... ,CSA-ACVM- CVMQ-OSC-SEC-ETC%7Cdoc.342-OSC+Town+Hall+29+06+2005.pdf/
Instead of public bitching about OBSI, dealers should embrace OBSI as an invaluable investor feedback tool. Investment dealers should take account of OBSI decisions and guidance in assessing a complaint. We believe that the guidance will help firms operate fairer complaint processes by applying relevant
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learning from ombudsman recommendations/investor dissatisfaction. This will be a WIN-WIN proposition for all concerned.
Kenmar Associates staff
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