On December 19, 2013, the Canadian Securities Administrators published final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and the related Companion Policy [available here]. The rule amendments will require registered firms to become members of the Ombudsman for Banking Services and Investments (OBSI) in order to provide "independent dispute resolution services or mediation services" to their clients that are individuals or entities which are not "permitted clients". The rule amendments are expected to become final on May 1, 2014 and registrants will have until August 1, 2014 to comply with the requirements and enhanced CSA expectations. The new regime will not apply in Québec, given the existing complaint handling requirements in that province and the mediation service provided by the Autorité des marchés financiers (AMF).
Registered firms that advise or trade with only institutional "permitted clients" will not have to comply with the new regime; the new regime will also not apply to registered investment fund managers in that category of registration. Firms that are members of the self-regulatory organizations (SROs) will not be affected by the new rules, given that SRO regulation currently requires these firms to be members of OBSI.
While the rule amendments may be simple on first reading – we note some of the highlights below – layers of additional complexity are added when one considers the new and enhanced status of OBSI and its unique – and still quite unknown – status in Canada's regulatory environment. Not only must registrant firms understand the CSA's requirements and expectations, it will also be necessary to become familiar with how OBSI operates, both formally and in practice. There is much that is as of yet untested, including how the announced CSA monitoring of OBSI will work, as well as the ability of OBSI to manage its significant increase in membership and the increased expectations of investors and investor advocates. It is also relevant to note that OBSI is a dispute resolution organization, with no powers to actually enforce any of its recommendations, and does not provide a mediation service, notwithstanding that the rule amendments suggest that applicable firms have the option of providing independent dispute resolution services or mediation services (two completely different concepts) to their clients.
The following documents are important reading, along with the final rule amendments:
- Memorandum of Understanding concerning oversight of the Ombudsman for Banking Services and Investments ("OBSI") among the participating members of the Canadian Securities Administrators and OBSI – December 19, 2013 [available here]
- OBSI Terms of Reference [available here]
- Consolidation of By-Law No 1 and By-Law No 2 of OBSI available here]
- OBSI Newsletters, including the December 19, 2013 Newsletter, which announces the fees that will be payable on an annual basis by registered firms as members of OBSI [link to Newsletters here].
COMPLAINT HANDLING AND DISPUTE RESOLUTION – COMPLAINTS RECEIVED BEFORE AUGUST 1, 2014
NI 31-103 has long required registrants to document and respond to complaints made to the firm about products or services offered by it or any of its representatives. The Companion Policy to NI 31-103 provides an extensive explanation of the CSA's expectations for complaint handling, including when responses must be made in writing and the expected timelines for such responses. Guidance is also given on what firms should do when complaints are made verbally (request clients put these complaints in writing and provide "reasonable" assistance to allow the client to do so). The CSA also explain that they expect firms that are licenced to sell or distribute products that are not securities (such as insurance) to inform clients of the complaint mechanisms for each sector in which they do business and how to use them.
Although the regulatory policy behind the following requirement is not intuitively obvious, firms that were first registered after September 28, 2009 have always been expected to make an independent dispute resolution service or mediation service available to complainants, free of charge – and to tell clients how they can access the chosen service. Firms that are members of the self-regulatory organizations (SROs) must comply with the applicable SRO requirements on dispute resolution, which generally require the firms to be members of OBSI.
All other registrants (that is, firms that were already registered when NI 31-103 came into force on September 28, 2009) have been exempt from the dispute resolution requirement, which exemption will end on August 1, 2014.
Under the final rule amendments
- SRO members will continue to comply with the existing SRO requirements
- Registrants first registered after September 28, 2009 will handle complaints and provide dispute resolution/mediation services as they do today, for any complaints received by the firm on or before August 1, 2014
- Registrants that were already registered on September 28, 2009 will not be required to provide dispute resolution/mediation services in respect of complaints received by the firm on or before August 1, 2014.
The complaint handling and dispute resolution provisions do not apply to firms in their capacity as registered investment fund managers.
COMPLAINT HANDLING AND DISPUTE RESOLUTION – COMPLAINTS RECEIVED AFTER AUGUST 1, 2014
The rule that mandates "complaint handling" is not affected by the final amendments (that is to say, the CSA have not amended section 13.15 of NI 31-103, although some enhancements have been made to the Companion Policy).
Section 13.16 of NI 31-103 has been replaced. Highlights include:
- A new definition of "complaint" for the purposes of
determining which complaints can be escalated by the client to
dispute resolution – a complaint is one that
- Relates to trading or advising activity of the firm or its representatives and
- Is received by the firm within 6 years of the day when the
client first knew or reasonably ought to have known of an act or
omission that is a cause of or contributed to the
- Complaints made by "permitted clients" that are not individuals are not subject to the dispute resolution mechanics, which will mean that firms that have only institutional "permitted clients" as clients will not be subject to the new rules. Conversely, any complaint by an individual client or an entity that is not a "permitted client" will be subject to the new mechanics.
- A firm must acknowledge receipt of a complaint in writing as soon as possible and describe the independent dispute resolution service that will be available to the client and what steps the client must take to take advantage of the service.
- A firm must give written notice of any rejection of a complaint or any offer to resolve a complaint – and again provide the client with the information previously given about the independent dispute resolution service.
- A firm must make an independent dispute resolution service
or mediation service available to a complainant, free of
charge, within the following deadlines:
- 90 days after the firm receives the complaint, if the firm hasn't notified the client of its decision to reject or settle the complaint AND the client has notified the applicable service that he or she wishes to have the complaint dealt with by the service.
- 180 days of the client's receipt of the firm's written rejection or settlement offer, where the client has notified the applicable service that he or she wishes to have the complaint dealt with by the service.
- Clients must agree to claim an amount that is no greater than $350,000 in order to take advantage of the services offered by OBSI. Note that clients must initiate using OBSI and may also explore (at their own cost) other avenues.
- Firms must take reasonable steps to ensure OBSI will be the service that is made available to clients in respect of complaints. The CSA explain that this means that applicable firms must, by August 1, 2014, be members of OBSI, including paying the fees of OBSI. It is clear that firms need not make other services available (that is, any other dispute resolution or mediation service) – only the services available through OBSI are necessary. Firms must not misrepresent OBSI's services or exert pressure on a client to refuse OBSI's services.
The relationship disclosure information provided by firms to clients must be updated to include information about complaint handling and dispute resolution – and we recommend updating compliance policies and procedures manuals to clarify the new requirements and procedures that firms and their staff must follow.
Once a client chooses to escalate a complaint to OBSI, then the complaint will be processed through OBSI according to its procedures and work-flow. The amendments to NI 31-103 do not address how OBSI will handle the complaint nor does the CSA regulate OBSI in the same way as the CSA regulate (for example) the SROs. NI 31-103 does not mandate that firms must adopt any recommendation made by OBSI, which is appropriate given OBSI's status. Rather, under OBSI's Terms of Reference, OBSI is required to make recommendations on the disposition of a complaint escalated to it by a complainant and if the registered firm does not accept a recommendation made against it, then OBSI will publicize the name of the firm, its recommendation and the circumstances of the complaint, as it sees fit, after first reporting its proposed public statements to the firm's regulator. Firms can also be cited by OBSI as "non-cooperative", and OBSI will report that citation to the firm's regulator.
OBSI is an "independent" non-regulated entity, which was first created in 1996 by agreement of the Canadian chartered banks in order to provide an avenue for resolution of complaints made against the banks by bank customers. It is governed by an independent Board of Directors, which appoints the Ombudsman and CEO. Its mandate has grown exponentially since 1996.
The December 2013 MOU entered into between the CSA and OBSI sets out broad high-level principles that the CSA expect OBSI to follow, and also
- Establishes an OBSI Joint Regulators Committee (JRC). The members of the JRC are expected to consist of representatives of the CSA, IIROC and the MFDA. Representatives of OBSI may be invited to attend these meetings. The MOU establishes the terms of reference of the JRC.
- Requires OBSI to undergo an "independent evaluation of its operations and practices" by May 1, 2016. Thereafter independent evaluations must take place at least once every five years.
BECOMING A MEMBER OF OBSI
Firms which must become a member of OBSI by August 1, 2014 must complete OBSI's "company information form" and pay the annual fees, which OBSI has set at $165 per representative (dealing or advising, as the case may be). Fees for the 2014 calendar year will likely be prorated. OBSI has grandfathered SRO member firms to their existing fee structure, while scholarship plan dealers which are already members of OBSI have a two-year transition period before being required to pay the (dramatically) increased costs.
The MOU states that OBSI should have a fair, transparent and appropriate process for setting fees and allocating costs across its membership. To date, OBSI has not published an explanation of its fee structure, which under its By-laws, is set by the Board of OBSI.
In its December 19, 2013 Newsletter, OBSI explains that it will send each registered firm (presumably including those who will not be subject to the new rules because of the nature of their clients) a "membership package", which will include the company information form and the fees payable, as well as some literature on how OBSI operates.
UNDERSTANDING THE IMPLICATIONS OF THE NEW RULES AND BEING A MEMBER OF OBSI
The lawyers listed below can help you understand how the new regime will apply to you – and how you should approach this new world of complaint handling and dispute resolution. Our securities litigation partners have extensive experience with dispute resolution and mediation, including how complaints are handled at OBSI.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.