Canadian Financial Regulatory Framework An Overview of Prudential and Market Conduct Regulation Increasing Public Confidence and Enhancing Financial Inclusion - 5 Tsaghkadzor, Armenia, September 4 th and 5 th , 2014 Douglas Melville Ombudsman and Chief Executive Officer OBSI (Canada)
Agenda The Basic Regulatory Structure in Canada The Unique Aspects That Affect Dispute Resolution Canadian Federal-Provincial Jurisdiction Complexity Current Challenges in Financial Dispute Resolution Background on Canadian Financial Dispute Resolution The Value of Financial Dispute Resolution and Some Comments Re Accessibility
Canada: Twin Peaks Approach with Some “Extra Issues” to Manage Canada follows a “Twin Peaks” approach (separate prudential and market conduct) and uses principles-based regulation: Prudential regulation by the Office of the Superintendent of Financial Institutions (OSFI) Safety and soundness of system and individual institutions Risk management, systemic and institution-specific Capital and liquidity sufficiency, lead regulator for Basel III implementation Regulates bank, trust company, and insurance company powers and transactions
Canada: Twin Peaks Approach with Some “Extra Issues” to Manage (cont’d) Market conduct regulation by the Financial Consumer Agency of Canada (FCAC) Financial consumer protection, narrow definition Oversight of financial industry adherence to federal laws and regulations (including internal complaint-handling) Oversight of industry adherence to voluntary codes of conduct Oversight of External Complaint-Handling Bodies (ECBs) Consumer financial education and national strategy to improve financial literacy of Canadians
Canada: Twin Peaks Approach with Some “Extra Issues” to Manage (cont’d) Competition issues are handled by Canada’s Competition Bureau Only recent public involvement with banking sector involved review of proposed bank mergers in 1998-99 Tied selling is a constant concern and is watched carefully by other industry participants but no apparent prosecutions to date of banks No apparent problems of anti-competitive behavior Constant testing of the boundaries for selling insurance products and leveraging bank relationships to sell insurance products
Canada: Twin Peaks Approach with Some “Extra Issues” to Manage (cont’d) Deposit insurance provided by the Canada Deposit Insurance Corporation (CDIC) Insures deposits up to CAD 100,000 per person, per institution Also regulates risk to minimize insurance payouts; seen by some from industry as a duplication of OSFI regulator role Does not cover provincially-regulated deposit-takers like credit unions and trust companies (have their own schemes) Does not cover most investment products, only term deposits of up to five year term
Canada: Regulatory Changes Post-GFC Solvency considerations largely dealt with through Basel III implementation Risk management controls and board and executive skillsets/capabilities and oversight methodologies Tighter restrictions on leverage in mortgage and home equity loan market to increase consumer equity requirement and decrease household leverage/debt levels Market conduct changes largely focused on interest rate and repayment term disclosures, mortgage pre-payment penalty disclosures; banking code of conduct coming soon
Canada Has a Unique Legal and Regulatory Environment for Financial Services Less developed legal framework for consumer protection in financial services: No legal duty of care imposed on banks by Canadian law, different situation for investment issues Bankers not fiduciaries, no fiduciary duty for “pure” banking transactions Special (fiduciary?) duty may apply where financial advice is given, but not in most “lending” or transactional situations So where can an Ombudsman look to determine what is fair under the circumstances?
Canada’s Unique Environment for a Financial Sector Ombudsman Canada’s federal -provincial sharing of powers that apply to our work: Banking is federal; trust companies can be federal or provincial Credit unions are provincial, but that system is currently evolving Non-bank consumer credit is provincial Securities regulation (except investment leverage loans from banks) is provincial (for now) Consumer protection issues are mostly provincial Former Criminal Code provision that restricted interest rates to 60% was federal – now being replaced by provincial/territorial rules
Current Challenges in Financial Dispute Resolution Unstable Environment Competition in banking dispute resolution and banks seeking cost and scope reductions in banking dispute resolution Not consistent with OECD best practices Uneven regulator attention and support across sectors and jurisdictions – many gaps in coverage System is under-resourced for complaint volumes post-global financial crisis Lack of regulatory clarity re expectations and systemic (mass) issues
Who We Are at OBSI An independent national dispute resolution service established as a not-for-profit corporation (an NGO) An alternative to the legal system for banking services and investment firms’ customers with an unresolved complaint Started in 1996 covering all banks; in 2002 became the Ombudsman for Banking Services and Investments (OBSI) when the mandate expanded to all members of the: Investment fund companies (mutual funds) Investment dealers (brokerages) Mutual fund dealers
Who We Are at OBSI (cont’d) Until recently, had over 600 participating firms; on August 1, 2014, added over 1,000 more investment firms at request of investment regulators Banks, federally-regulated trust companies, investment dealers, mutual fund dealers, and mutual fund companies; Some credit unions have joined voluntarily Recently added portfolio managers, exempt market dealers and scholarship plan dealers as part of national reform of investment firm registration
What We Do at OBSI Informal, confidential and independent review of complaints not resolved to the satisfaction of consumer We look primarily at cases of direct financial loss as a result of error, misleading information or bad advice Review industry standards, firm policies, regulations, laws … and decide what would be “fair under the circumstances” Goal is to make the client “whole” where maladministration is found to have occurred
What We Do at OBSI (cont’d) We make recommendations to the firm; not binding on either party Clients do not lose their legal rights; may reject our recommendation and start legal proceedings “The Olive Branch” - Gives participating firms an impartial service to which they can refer their unresolved complaints “The Stick” - We will make public any firm’s refusal of a recommendation, had only happened once since OBSI’s creation in 1996 – That has recently changed, about 20 in the last 18 months, all investment-related
How We Work at OBSI Member firms must: Have an internal complaint-handling system Inform their clients about their internal complaint handling system Inform their clients about OBSI and refer after completion or after 90 days Co-operate in OBSI investigations Pay their share of OBSI’s operating costs
How We Work at OBSI (cont’d) Firm has the first responsibility to resolve a complaint OBSI is an informal service, not bound by judicial rules We are not a regulator; we do not fine or punish firms Usually investigate; sometimes mediate Objective is to determine "Fairness in the circumstances" and recommend compensation
Systemic Cases (Dealing with “Mass Cases”) Controversial power introduced by senior regulators in 2008; in force starting 2010 Strongly opposed by industry and some regulators who saw it as a matter of regulatory jurisdiction Conducted 10 “systemic investigations” in 2010 -11, 3 resulted in recommendations; refused by firm – reported to regulator Voluntarily withdrawn by OBSI Board in June of 2012 under pressure from industry and regulators Re-introduced in recent banking regulations and investment regulator rules as a whistleblower requirement (no investigation)
Governance of OBSI Independent Board of Directors Chair of the Board is a non-industry (community) Director Community Directors must not be associated with either industry or government for two years prior Community Directors are the majority of the Board (7 of 10) and a majority of them are required to approve OBSI’s budget and control hiring and firing of Ombudsman Directors not involved in investigations, decisions or appeals
OBSI Opened Inquiries by Sector Inquiries By Sector 4000 3793 3500 3087 3000 2776 Number of Inquiries Total 2500 2767 Banking 2095 2000 Other 1952 1643 1870 1577 1536 1528 1486 1392 All Investments 1372 1500 1361 1558 1526 1551 1460 1455 1395 1375 1278 1000 500 0 Q1-2009 Q2-2009 Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Q3-2013 Q4-2013 Q1-2014 Q2-2014 Q3-2014
OBSI Case Files Opened by Sector Number of New Case Files Opened in Quarter 100 150 200 250 300 350 50 0 Q1-2009 154 262 Q2-2009 Q3-2009 251 Q4-2009 217 Q1-2010 312 239 Q2-2010 213 Q3-2010 260 Q4-2010 Q1-2011 237 Case Files Opened Q2-2011 213 177 Q3-2011 175 Q4-2011 154 Q1-2012 162 Q2-2012 163 Q3-2012 Q4-2012 177 171 159 Q1-2013 Q2-2013 165 Q3-2013 149 Q4-2013 143 Q1-2014 142 Q2-2014 148 Q3-2014 Total Investments Banking
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