Fairness and balance in the complaint process where interests of the dealer and registered representative must be considered!

My first substantial post on financial services issues in Canada for some time:

I had been “lightly” reviewing the Canadian OBSI and IIROC complaint processes until I came across this section within IIROC’s complaint handling guidance:

“There must be a balanced approach to dealing with complaints that objectively considers the interests of the complainant, the Dealer Member, the registered representative, employee or agent of the Dealer Member, and/or any other relevant parties.”

The issue of semantics is an important one: how you word your guidance has an impact on the outcome of a given complaint process. Complaint processes, from the internal all the way to the Ombudsman, take note of regulatory guidance. But the issue is of course more nuanced and detailed than this…..

The UK Financial Services Ombudsman uses the following terminology: “The law requires us to decide each complaint on the basis of what we believe is fair and reasonable. In doing so, our rules require us to take account of the law, rules and good practice in the industry. This is the way in which parliament specifically intended us to operate.”

The Canadian OBSI states similarly that they “We are balanced and objective in our work…Our decisions are based on what’s fair to both the client and the firm. We take into account general principles of good financial services and business practices, the law, regulatory policies and guidance, and any applicable professional body standards, codes of practice or codes of conduct”.

What does balance actually mean, especially with respect to consideration of interests?

Conflicts of interests are known to skew investment recommendations in favour of firms and registered representatives, with negative financial consequences for the investor. These financial consequences are either with respect to increased costs, hence impaired risk/returns on products and securities, and/or excessively skewed allocations with respect to actual risk profiles and for want of a better word, risk capacity.

If regulation assumes a buyer beware, caveat emptor, transactional relationship where disclosure is intended to satisfy mitigation of a conflict of interest, and where simple information parameters are used to define suitability for transactions initiated by an investor, and where it is assumed that the collection and calibration of these parameters is conducted with integrity, then the balanced consideration of interests would tend to support the costs and the wide boundaries of outcomes irrespective. A product recommendation, within current regulation does not have to be in the client’s best interests; it merely has to conform to the parameters of the KYC.

I say irrespective because conflicts of interest also risk influencing the parameter selection that lead the client towards a selection of parameters that may reflect the interests of the distributor. The sales process and its conflicts therefore risk overly influencing the parameters upon which a complaint process assesses outcomes, especially if the presumption is of process integrity with respect to their collection – note that industry risk profiling in research conducted on behalf of the OSC’s Investor Advisory Panel found that most industry risk profiling was not fit for purpose.

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