CSA Staff Notice highlights concerns with Registered Firms' Complaint System
On December 7, 2017, the Canadian Securities Administrators (CSA) jurisdictions and staff of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) issued Joint CSA Staff Notice 31-351, which highlights concerns by the regulators arising from registered firms’ complaint handling systems and their participation in the Ombudsman for Banking Services and Investments’ (OBSI) services. The Staff Notice stopped short of recommending that OBSI’s compensation decisions be binding on firms or clients (a common criticism), but the regulators expressed strong views on the inferences that can be drawn where firms refuse to compensate clients consistent with OBSI recommendations, or repeatedly settle for lower amounts than recommended by OBSI. The Staff Notices refer to such actions as “risk-based indicators” of problems with a firm’s complaint handling practices, and caution registered firms that patterns involving these activities may lead to regulatory review.
When reviewing the complaint handling procedures of registered firms, the regulators noted that they will look at firms who are involved in refusal cases (i.e., where firms refuse to comply with an OBSI recommendation), or firms who exhibit a pattern of consistently and repeatedly settling for amounts lower than recommended by OBSI. The Staff Notice states that such behavior is a risk-based indication that these firms may not participating with OBSI in good faith, have not complied with the applicable standard of care, or have not implemented and maintained effective complaint handling procedures. In such cases, the regulators have indicated that they make take action to make enquiries of such firms, which could lead to further regulatory action, including discussions of concerns with firms or more formal compliance reviews. The regulators note that they may also make enquiries if a firm is involved in a disproportionate number of settlements, whether for the amount recommended by OBSI or otherwise. Staff have indicated that these reviews will not be automatically triggered when firms refuse to comply with OBSI recommendations or repeatedly compensate clients at lower amounts. However, the regulators noted that in their view, there is likely to be a heightened need for additional review in cases where a firm has shown a “pattern” of either refusing to compensate clients after OBSI recommendations or settling matters at discounts. Go forward, firms that fit this description would be wise to be on guard for increased regulatory scrutiny in the wake of this Staff Notice.
The Staff Notice also cautions firms against confusing clients when it comes to their own internal ombudsman services. Such services are not prohibited by securities regulations governing firms, but they are not an “alternative” to OBSI. The Staff Notice warns against any practices that mislead clients into thinking that they must first avail themselves of an internal ombudsman before they can access OBSI’s services, which would be inconsistent with securities regulations that require OBSI’s services be made available to clients no later than 90 days after having received a complaint. Ultimately, the regulators wish to avoid confusing investors, who may be worn down by extended internal processes leading them to ultimately abandon their claims before reaching OBSI. Firms are reminded that when they offer the option of using an internal ombudsman to their clients, they must treat clients fairly, and also make clear that OBSI’s services are available in a manner that gives at least equal prominence to OBSI in relation to any internal ombudsman.
The Staff Notice is a cautionary message to participating firms. While compliance with OBSI recommendations remains non-binding, this Staff Notice makes the position of securities regulators clear: non-compliance is not without consequences, and increased regulatory scrutiny may result where patterns of non-compliance emerge.