The Investor Advocate
Ken Kivenko’s column is all about investor protection. Ken fights for investors’ rights and exposes violations and malpractices. He also runs an advisory business, Portfolio Analytics, assisting investors obtain restitution due to sales or broker abuses.
OBSI in depth
By Ken Kivenko | Thursday, December 06, 2007
Things you should know about the Ombudsman for Banking Services and Investments.
Like every product or service, the investment industry has its share of unhappy clients. You might blissfully assume that robust mechanisms are in place to promptly and fairly deal with complaints. As John Reynold’s book the Naked Investor makes so abundantly clear, nothing could be further from the truth. The financial services industry’s approach— Deny, Delay, Defend is built into the system — internal and external ombudsmen, arbitration, civil litigation and complaints to regulators — are a microcosm of the convoluted nature of the system as a whole. First you have to figure out that something is wrong. Next, you have to convince yourself it’s the fault of your financial service provider, so that it’s even worth for you begin the long battle for restitution. Then you have to understand the nature and limits of the internal complaint process where your trusted expert adviser becomes your adversary — and the firm’s formidable resources are arrayed against you. They know the process and how to game the complaint proceedings that a retail investor is barely even aware of.
Once an investor concludes he can and should complain he must go through a long, extended and stressful process with the fund dealers and brokers. Some have referred to this complaint process as “a quagmire” as the investor struggles with how and to whom to address a complaint. Before it’s over an investor must deal with his advisor, a branch supervisor, a Vice President, a compliance officer and the firm’s ombudsman. During this complex process, documents are exchanged, there are many phone calls and meetings are held. Sometimes key documents go missing or the advisor has left the company. The brokerage firm may encourage delays, with long response times and obtuse replies begging for explanations that are not forthcoming. This phase alone can take many months, if not years. Meanwhile, the Limitation Act clock keeps ticking away
The financial services provider (FSP) knows the rules of the game and you don’t so you start out at a real disadvantage. The investment firm will drag you through the ringer before it gives you back a dime. It’s not a process you’ll enjoy. Most of the usual suspects, the provincial securities commissions, the IDA and the MFDA will remind you they’re not set up to provide restitution. Often you’ll be ricocheted from one organization to another. At some point, you should, if the FSP tells you, come across a non-profit entity named the Ombudsman for Banking Services and Investments (OBSI)
www.obsi.ca. OBSI investigate through what are called “inquisitorial” procedures, asking questions and reviewing material provided to us. It’s not adversarial but you can be sure the firm is an adversary. OBSI doesn’t conduct hearings involving lawyers or cross — examinations although it’s clear that the law department of the FSP is behind the scenes and crafting responses.
About OBSI
OBSI was formed in 2002 when the Government of Canada was planning to set up its own dispute resolution system for investment complaints. The financial services industry “graciously” jumped in and offered up OBSI for “free.” Today OBSI supports more than 600 participating firms across the banking services and investment sectors. As of Nov.1, 2007, dealers for registered education savings plans also come under the service. OBSI is the only national organization that offers a chance for retail investors to get some of their hard-earned money back in cases of financial assault or incompetence. You have up to 180 days after receiving a firm’s final response to get in touch with OBSI to submit your complaint. It’s therefore vital that you decide how you are going to proceed with your complaint without undue delay.
OBSI is industry-sponsored and industry-funded. It is not a government agency or regulator. OBSI is not subject to Freedom of Information legislation. It has a Board of Directors, the majority of which OBSI classifies as independent. The Terms of Reference provide the constraints under which the Ombudsman must function. OBSI’s Terms of Reference do not require it to conduct an analysis to warn other uneducated and unknowing pattern—advised and/or toxic product sold investors who may also have been abused. OBSI does however provide some interesting case studies on its website. Before OBSI may conduct an investigation, it will first have you sign and return a release letter. The release letter provides you with detailed information regarding their complaint process and outlines the terms and conditions under which OBSI will investigate. OBSI have disclosed that their ability to assess suitability is complicated by the continuing lack of industry-standard terminology in KYC forms, and the subjective nature of assessing the risk of certain securities. Recommendations are not always sent concurrently to the firm and complainant, a practice that invites cynicism.
OBSI are committed to the privacy principles of CSA-Q830 which are, in turn, embodied in federal legislation (PIPEDA). In particular, collection, use and disclosure of client data will only be done with your consent and only to the extent required to conduct the investigation.
OBSI provides guidance on making a complaint
http://www.obsi.ca/UI/ComplaintProcess/Step1.aspx If you have a question, or want more information, you can call OBSI toll-free at 1-888-451-4519 or email them at
ombudsman@obsi.ca You might also want to read OBSI’s Procedures Guide
https://www.obsi.ca/images/document/up- ... _Guide.pdf If you’re a mutual fund owner be sure to read How to Make a Complaint to the MFDA
http://www.mfda.ca/enforcement/forms/HowToComplain.pdf
OBSI doesn’t automatically take on a case just because a client complains. Section 9(d) of their Terms of Reference gives them the right to refer the case to someone else if they judge that someone else to be more appropriate. There is no appeal [
http://www.obsi.ca/UI/AboutUs/TermsofReference.aspx ]
Governance
OBSI is a non-profit entity claiming it is independent from its industry sponsors and financiers. Governance is crucial as is the transparency of the governance. One measure of independence is the process for selecting the independent board directors and the CEO/Ombudsman. We are told that the majority of board members are “independent” but no definition is provided. OBSI’s disclosed governance process does not seem to include a nominating committee, an oversight committee, details on compensation policy/decisions or annual board self-assessment Looking at the independent members we would have expected to see some background in investor issues, modern complaint systems, dispute resolution processes — instead we see a group of folks, though talented and accomplished in their fields, representing merely diversity of occupations and geographic coverage across Canada. Some have been members’ since way back in 1996 when the service only provided banking dispute resolution services.
Many other aspects of contemporary governance are not revealed in public documents. e.g. By-laws, disclosure controls, board education, position description for Chair, board member duties, annual independent audits [financials and effectiveness], annual no conflict of interest certification, succession planning (current Chair has been in place since 1996) etc. Finally, the fact that there is no appeal to the Board or anyone else, nor can the Board influence the decisions of the Ombudsman, dramatically limits their governance potential and accountability. OBSI affects the lives of all Canadians exposed to it and more transparency of governance practices is required for a national dispute resolution service. Transparency would allow an assessment of OBSI’s operations; the opaqueness breeds distrust.
The rules of engagement
OBSI’s financiers, the financial services industry, have designed the rules under which OBSI will operate. Some of the more important ground rules include, but are not limited to:
OBSI does not deal with service complaints
the investor must first have made an effort to resolve the case with the firm, a long convoluted frustrating process [there is no defined time period wherein OBSI will automatically take on a case; as long as the firm insists it’s still working the case, they maintain control and the statute of limitation clock ticks on]
recommendations are non-binding on either party—OBSI has no power to force payment, set deadlines or impose a sliding scale of fees to encourage early settlement—the way government-imposed arbitration services do in other countries
the restitution limit is $350,000—it hasn’t changed in four years [Where the amount claimed by you in respect of a complaint exceeds $350,000, the Ombudsman will not investigate the complaint unless you and the FSP in writing acknowledge the Ombudsman’s recommendation limit and you agree to release the FSP from liability for any amount greater than the amount of any recommendation made by the Ombudsman and accepted by both the Complainant and the FSP].
if you’ve launched civil litigation, OBSI won’t take your case
only out-of-pocket losses are covered, not pain and suffering
there is no direct charge for the dispute resolution service
In most cases, OBSI will conduct their investigation concurrently with a regulator’s if you’ve filed a complaint with them. However, in some cases OBSI may choose to delay until the regulatory investigation is completed. Dangerous, unless the limitation clock is stopped.
If you meet with or are called by an OBSI case investigator you may be asked questions that try to reveal your financial literacy, personal situation, level of education, investing experience, financial objectives, employment, annual income, net worth, age and other factors that will determine the success or failure of your claim. Be very careful what you say and how you express it. If you don’t understand a question, ask for clarification. Your answers could come back to bite you. This is no time for ego.
You might think that these restrictions are not too bad. Let’s add a little more detail. In 2006, only 51% of cases ruled upon resulted in any restitution. If you reject the recommendations, you cannot go on to file a civil action. The firm will require you to sign a confidentiality agreement aka a gag order if you agree to settle. OBSI may resist taking on a case that includes segregated funds, a life insurance product, but with a little persuasion they will do it especially if the issues are a blend of segregated funds and other securities. Ensure in your statement of complaint that you clearly articulate your investment profiles and attach relevant documentation such as a signed and dated NAAF.
Wait, there’s more .All provinces have what are called statutes of limitations which are time frames during which you must file a civil claim or lose your right to a claim. In Ontario, that period is a short two years, thanks to our politicians. In the case of Ontario, and only in the case of Ontario, OBSI explicitly state that the “limitation clock” is stopped while they deal with the case. Outside of Ontario, you’ll be told to find out on your own whether or not the clock is halted while they take six months or even two years to make a recommendation—their stated target for resolution is 80% within six months. The number of cases that go beyond that is not disclosed in any public documents. When the clock actually started is a judgmental issue depending on differing and legally untested provincial criteria—a real mess.
In 2006, the number of investment cases examined was a shockingly low number given that Canada’s investing population probably numbers well over 10 million. OBSI does note in its Annual report that even of the people who did use their services, fully 40% had to find out on their own that OBSI exists. OBSI is in fact not well known by the average retail investor, a situation we hope this article will correct.
While the word Ombudsman might conjure up an image of a friendly group that will hold your hand when facing the powerful, well resourced investment industry, this is not exactly the case. The address for OBSI is a Post Office Box, their office itself is not particularly inviting and the website could be a lot more investor-friendly. OBSI makes it clear it is not an advocate for investors. The shackles on OBSI limit it to examining your case and making a recommendation. You will be told they offer no legal advice, actually no advice. You won’t even be told what the limitation period is for your province of residence. Except for Ontario, you could be flying blind as the precious limitation clock days and months tick away.
Complaints about OBSI center on their complaint acknowledgement process, the infrequent case status updates, a perceived bias towards believing FSP evidence and of course the recommendation outcomes both in percentage successful and restitution amount.
The Ombudsman is not bound by the rules of evidence. OBSI itself may be stonewalled by the FSP — it has little clout to demand documents or records. There is no appeal process for OBSI recommendations. Trying to contact the Chair or any of the directors is fruitless, even if you could find out their mailing or email addresses. Once they’ve opined, you should understand that none of the documents can be used in court and OBSI cannot be asked to testify in any subsequent legal or other proceedings.
In recent large cases, like the Portus and Norshied fund fiascos where investors lost tens of millions of dollars, OBSI takes the position that since bankruptcy proceedings or class actions are in process, they will not take on the case or even log it in to restrain the limitation clock.
Strangely, the OBSI web site refers to IFIC, the mutual fund industry’s official lobbyist but does not mention the Small Investor Protection Association
www.sipa.ca. There is no periodic disclosure of patterns or systemic investment abuses. Details of settlement amounts are not provided nor are there any figures outlining OBSI’s operating budget. OBSI claims that in 2007 it encountered the first ever rejection of its recommendations by a firm. Critics believe the amounts are negotiated and then “accepted” so a perfect record can be publicized. In any event, investors have, over the years, turned down the recommended offers. Some went on to win satisfying awards after initiating civil action.
Even those who accept the recommendations may not be satisfied. Desperate for cash or worn out by the exhausting process, they take what they can and try to move on with their lives. The sad fact is that the culture is one in which small investors are conditioned to expect little — they are often not disappointed
Summary and conclusion
When recommending compensation, OBSI aim to “make you whole” by putting you in the financial position you should have been in if there hadn’t been a problem. They do not look at compensation for damages such as pain and suffering or medical conditions
For consumers, clients, customers or small investors, especially if they are older, the entire process can be exhausting and time-consuming. The stress of a life — altering traumatic event such as the loss of a hard-earned retirement nest egg can be so debilitating in itself that it can lead to depression and the inability to make a rational decision. In this mode, an investor may not have the emotional strength to file a claim, the energy to deal with all the interrogatories or the sometimes nasty remarks made by FSP’s. And if they do, the redress process only compounds their stress.
On the matter of decision-making criteria, their website indicates that the decisions reached by the Ombudsman take into account “fairness in the circumstances”. They look at g ood financial services and business practices, Standards established by regulators, professional associations or the firm and Laws and regulation. This is simply not good enough. As a self-governing organization representing virtually all of Canada’s banks and major investment dealers, OBSI should seek to raise the standards for services and business practices for ALL of its financial institutions by using ‘Best practices’ as the basis for determination of the resolution of a complaint.
While far from perfect, OBSI represents one of the few routes to dispute resolution without cash outlays for investigation or legal fees. Should OBSI adopt ISO 10003,Guidelines for dispute resolution external to organizations and an independent compliance assessment, many critics would feel a lot better [ a recent third— party assessment of OBSI is available at
http://www.obsi.ca//images/document/up- ... ort_EN.pdf ]. Previous to this, the only observations on OBSI have come periodic critiques by investor advocates, the media, SIPA, CARP individual investors and some lawyers.
The report of findings they provide can be harvested for useful facts in pursuing the case further. Several critical OBSI observers however caution that the recommendations may not be unbiased. One key settlement criteria used is that dollar settlements, if any are reduced because the hapless investor failed to mitigate the loss at an early enough stage. Another ploy used attempts to offset the losses from unsuitable investments with the gains from suitable investments. Investor advocates warn that OBSI’s legal position on rejections may not always be on solid footing. SIPA does not recommend OBSI to its members based on limitation period uncertainties and other issues.
Regrettably, for too many Canadians, OBSI represents their only hope for restitution. The losses may be too small to justify hefty legal expenses or age or ill health may be working against the investor. If you reject the proposed settlement it is removed from the table and you’re back at square one. It’s even possible OBSI’s recommendation could be lower than one you nay have rejected from the FSP. The bottom line: Look towards OBSI for a resolution recommendation but with constructive criticality, a cast iron stomach and a lot of determination.
thanks to ken at
www.canadianfundwatch.com for this article
