Service for the Dis-Serviced

The goal of the proposed Canadian Financial Services Ombudsman (CFSO) — a response to the Department of Finance’s 1999 bid to reform Canada’s financial services sector — was to hear and address consumer complaints regarding primarily banking activities. Chartered banks would be required to join the CFSO, said the government, while other federally-chartered financial organizations could choose to opt in to the CFSO or set up independent third-party dispute resolution services of their own.

However, the idea of a federal ombudsman with binding, decision-making powers just did not sit well with industry associations representing Canada’s banks, life and health insurers, property and casualty insurers, investment dealers and the mutual fund industry. While it was clear that a coordinated approach to consumer dispute resolution had to be developed — ensuring clear benefits to consumers, financial services organizations and the regulatory community — the CFSO model did not cut it. “This was sort of half a loaf,” recalls Doug Hyndman, who heads the “Joint Forum Task Force on Consumer Dispute Resolution” created in response to the government’s CFSO plan. “By covering only the banks and their subsidiaries, we would end up with an unbalanced system…We needed something more arms length — a body that would cover a broad range of financial services industries.”

And that is just what Canadian consumers will get when the National Financial Services OmbudService (NFSO) goes live on July 1, 2002. The industry-based consumer assistance service will provide more than 95% of Canada’s financial services consumers with a “one-stop shop” for resources if they have concerns or complaints related to everything from a bank account or an insurance policy to a stock portfolio or mutual fund. The NFSO will also set and maintain industry standards, ensure compliance to those standards, and produce annual reports. The system is endorsed by the Joint Forum of Financial Market Regulators (JFFMR), the Canadian Council of Insurance Regulators (CCIR), the Canadian Association of Pension Supervisory Authorities, and the Canadian Securities Administrators (CSA).

Government steps back

With the creation of the NFSO, the federal government has suspended its plan to implement its own ombudsman service. Jean-Michel Catta, spokesperson for the Department of Finance in Ottawa, says the government supports the industry-led project because it matches the government’s original objectives: ensuring Canada’s financial services consumers have access to a “strong, impartial and fair” third-party dispute resolution mechanism. “At the end of the day you’ll have an instrument which is even better than what we originally thought,” says Catta. “This will make it even stronger and in line with the very key objective, which is to increase consumer protection while at the same time fostering competition within the financial sector.”

To be sure, the NFSO is an idea that has been a long time coming, Canada’s financial services industry players agree. “We feel good about it in the sense that it is an industry initiative,” says Mark Daniels, president of the Toronto-based Canadian Life and Health Insurance Association (CLHIA). “It’s good for the industry, it’s good for consumers, and it hasn’t gotten caught up in the federal/provincial scene.”

Terry Campbell, vice-president of policy at the Canadian Bankers Association (CBA) in Toronto, describes the NFSO as “a really good example of how industry groups can come together to create a system for consumers that is literally seamless and transparent for consumers… It’s a really good model, a good dialogue among different levels of government and the industry players.”

And, Joe Oliver, president of both the Investment Dealers Association of Canada (IDAC) and the Mutual Fund Dealers Association of Canada (MFDAC), calls the NFSO “the most comprehensive and robust consumer redress system in the financial services industry in Canada and perhaps in the world…. Clients will be treated fairly, and that’s a good thing. And they’re going to have confidence in the system, and that’s a good thing.”

According to the JFFMR, convergence in the financial services marketplace has made it increasingly difficult to distinguish between the product offerings and services of banks, insurers, credit unions, investment dealers and other financial services providers. Consumers have become quite confused as to how to access the appropriate process if they have a complaint or dispute with a financial services provider. In some cases, there have been no processes in place at all, while in others there have been varying levels of assistance for resolving disputes. To complicate matters further, a dispute that crosses jurisdictional lines means consumers sometimes have more than one process to deal with.

In constructing the NFSO model, the task force analyzed the services available to financial services consumers through public and private sector organizations across Canada. The research looked at gaps, duplications, and the extent to which levels of service vary, and examined how other countries handle dispute resolutions.

Quebec stand alone

Hyndman says regulators in the province of Quebec have opted out of the NFSO task force, choosing to conduct their own study instead. But, he says, the national industry organizations involved in the NFSO will make the service available to Quebec consumers. The Ontario government is a member of the task force but is not part of the broader NFSO since it already has a government-mandated service in place called the Financial Services Commission of Ontario (FSCO).

As part of the NFSO’s mandate, each participating industry group will sponsor a new or existing dispute resolution service operating independently of the industry association and have its own board with a majority of independent directors. These dispute resolution services will assess complaints, work with both the consumer and the company to try to come up with a solution, and produce reports and recommendations. If the complaint has been fully dealt with at the financial institution level but the consumer wishes to take things further, the NFSO will gear the consumer to the appropriate independent ombudsman service. Recommendations will be publicized.

For example, customers with a banking related issue will not have to know where to go for help. If they wish, they can approach their financial institution in question, go directly to the Canadian Banking Ombudsman, or simply call the NFSO to be routed to the right person or department handling their specific complaint. “[The NFSO] is designed to be a referral mechanism to drill down the complaints at the level of the industry where they belong,” says Suzanne Sebourin, executive director, government relations at the Insurance Bureau of Canada’s (IBC) Ottawa office. “It’s not a centralized structure and it’s not overly bureaucratic.”

The Canadian Banking Ombudsman will continue to hear complaints from consumers who are appealing decisions made to their bank’s ombudsman. Last year, the individual ombudsman offices of 12 banks handled more than 1,800 complaints, with 154 making their way to the Canadian Banking Ombudsman. Says Campbell: “When you consider that there are 20 million banking customers in Canada, that’s a relatively small number that’s generating those complaints.”

Alternative resolution

The IDAC has an arbitration system in place for its 200 member firms that are involved in disputes up to $100,000. Costs are shared unless the arbitrator decides to allocate costs. The NFSO, though, will offer an alternative to this binding arbitration system. Oliver expects most consumers to go to the ombudsman service first “because it’s free” and then seek arbitration if they’re unhappy with the ombudsman’s recommendation.

The CLHIA, too, will continue to operate what Daniels calls “an informal conciliation service,” where trained dispute resolution officers work with clients and customers to resolve issues. The drawback, though, is that “at the end of the day, if you couldn’t get it (a resolution), you couldn’t get it,” he says. The NFSO, though, will offer a protocol to deal with these complaints, says Daniels. “We probably have about 25 to 30 a year that make it all the way up to the ombudsman,” he adds. “We get more complaints, but those complaints are handled by the companies or at a lower level…A lot of that stuff, if it’s done right, gets handled in the company — where it’s supposed to be handled. If it gets out of the hands of the company, that’s probably the worst thing you want to happen because it really means you have some kind of more-or-less impractical thing that shouldn’t have happened in the first place.”

Atlantic coast issues

In Newfoundland and Labrador, a Market Conduct Officer in the Superintendent of Insurance Office serves as a mediator between consumers and companies arguing over such matters as claims or underwriting practices. More than 1,000 telephone complaints are received each year, resulting in more than 100 written complaints. More than 80% of the complaints deal with property and casualty issues, with the remainder devoted to life, accident and sickness.

Because Newfoundland and Labrador has no restitution authority, “there’s nothing we can do but encourage the sides to settle it” if the company isn’t violating any regulations, says Winston Morris, superintendent of Insurance for Newfoundland and Labrador and chair of the Canadian Council of Insurance Regulators. “We can agree with the consumer that the organization has failed them,” he explains, “but as far as restitution goes we can only tell them to go to court”.

The NFSO, though, will provide that extra level of service to the people of Newfoundland and Labrador, he says. Hyndman explains that the industry-based services will have the authority to recommend that restitution be made to an aggrieved client. The financial services provider will not be obligated to follow the recommendation but, if it does not, the NFSO will publicize that fact. Further, Morris is happy that the NFSO will offer a local feel to the appeal process through fax, phone, and Internet. And it will bring an end to the many hours his staff spend scurrying between consumers and companies during mediation.

Although the NFSO initiative is industry-led, organizers intend the NFSO itself to be industry-independent. Morris explains that the majority of NFSO board members will be non-industry players to ensure consumer confidence in the system. And while an industry-led solution cannot enforce policies, recommendations will be publicized and could draw negative media attention to a company that does not abide by the recommendations. “We do recognize these ombudsman services will be operated by industry groups so there might be the perception that they may not be totally independent,” says Morris, who serves as the insurance lead on the NFSO task force. “That will certainly evolve over time. As regulators, we’ll have to ensure that the independence of the ombudsman certainly falls into place.”

But, even though he is optimistic that the complaint handling service for consumers will be improved through the NFSO, Morris is taking a wait-and-see attitude to the whole affair. “It’s something that will evolve over the next year or so…It will take a while to get it all sorted out so it’s working to everybody’s satisfaction.”