Consultation Document: Strengthening Canada's External Complaint Handling System

Table of Contents

Invitation for comments

Join in: how to participate

Overview

Background

Banks' internal complaints processes

External complaint handling processes

Guiding principles

Structure of Canada's external complaint handling system

Key attributes of an effective external complaint handling process

Profit structure of an external complaints body (ECB)

Funding model of an ECB

Scope of ECB functions

Complainant assistance

ECB recommendations

ECB governance structure

Next steps

Appendix A: Overview of the Ombudsman for Banking Services and Investments (OBSI) and the ADR Chambers Banking Ombuds Office (ADRBO)

Ombudsman for Banking Services and Investments

    Membership (banks)

ADR Chambers Banking Ombuds Office

    Membership

Appendix B: consultation questions – summary

Invitation for comments

Closing date: October 14, 2021

Join in: how to participate

Send us an email

Due to COVID-19 public health considerations, email submissions are preferred. Send us your comments to complaintsconsultation-consultationplaintes@fin.gc.ca with "Strengthening Canada's External Complaint Handling System submission" as the subject line.

Should you wish to provide comments by mail, please direct your submission to the following address:

Director General
Financial Services Division
Financial Sector Policy Branch
Department of Finance Canada
James Michael Flaherty Building
90 Elgin St
Ottawa ON  K1A 0G5

Subject to the considerations below, the Department of Finance Canada intends to make public some or all of the responses received and/or provide summaries in its public documents. Stakeholders providing comments are asked to clearly indicate the name of the individual or organization that should be identified as having made the submission. Submissions should preferably be provided electronically in PDF format or in plain text to facilitate posting.

In order to respect privacy and confidentiality, when you provide your comments, please indicate whether you:

Information received throughout this submission process is subject to the Access to Information Act and the Privacy Act. Should you express an intention that your submission or any portions of it be considered confidential, the Department of Finance Canada will make all reasonable efforts to protect this information.

The Department of Finance Canada will be responsible for managing submissions and any requests made under the Access to Information Act and the Privacy Act.

Overview

Canada's federal financial consumer protection rules serve to advance consumers' rights and interests when dealing with their banks. The Bank Act and its supporting Regulations set out the consumer protection rules that banks must follow, such as:

Effective complaint handling helps ensure that the financial system works efficiently and fairly, thereby enhancing consumer confidence in the system. When consumers can resolve their concerns quickly, they are more likely to have trust and confidence in obtaining financial products and services.

A strong complaint handling system supports and empowers consumers in their dealings with a bank to obtain a resolution to their complaint. Such a system should:

The rules for complaint handling systems in Canada are set out in the Bank Act, the Complaints (Banks, Authorized Foreign Banks and External Complaints Bodies) Regulations (referred to as the Complaints Regulations in this paper), and associated guidance from the Financial Consumer Agency of Canada (FCAC). The system comprises two parts:

  1. An internal complaints handling process at each bank
  2. An external complaint handling system to address complaints that are not resolved to the satisfaction of the consumer by the bank's internal process

The external complaint handling system in Canada relies on external complaints bodies (ECBs), which are independent, third-party entities.

In fall 2018, the Government of Canada took action to further protect consumers in their dealings with banks by introducing a new Financial Consumer Protection Framework that has over 60 new or enhanced measures to protect bank customers, including improvements to the complaint handling system. These legislative changes will be brought into force following the publication of supporting regulations and necessary systems changes required by industry and the FCAC.

In 2018, the Minister of Finance asked the FCAC Commissioner to review the complaint handling processes in banking and the effectiveness of the ECBs. The FCAC made the results of the review public in February 2020 in two reports:

In February 2020, the Minister of Finance announced that the Department of Finance Canada would launch public consultations to address the findings of these reports and determine how to further strengthen the external complaint handling system. This consultation provides an opportunity to seek views from stakeholders to help inform future directions. This consultation paper builds on the findings of the FCAC report and seeks input on the objectives, structure, and attributes of a strong and effective ECB system in Canada.

This paper provides background on the current ECB system in Canada, proposes guiding principles to inform future policy directions, discusses the findings of the FCAC report concerning the existing multiple ECB structure, and seeks views on the guiding principles and structural considerations. The paper also outlines specific attributes of the ECB process and seeks views on these attributes. The consultation questions posed in this paper are summarized in Appendix B.

Background

The complaint handling system in Canada has two parts: banks' internal complaint handling practices and the external complaint handling system.

Banks' internal complaints processes

Banks must have procedures for dealing with complaints internally, and they must designate employees responsible for implementing these procedures and dealing with complaints. FCAC guidance requires banks to provide consumers with a resolution 90 days from the date that a consumer escalates a complaint at the bank.

In addition, banks must annually disclose complaint handling information to the public, such as:

The FCAC estimates that consumers brought over 5 million complaints to banks in 2018, most of which are handled internally. In contrast, ECBs investigated just over 500 complaints about banks in 2018 and were contacted just over 4,600 times by consumers about their banks.

Legislative changes made to the complaint handling rules in 2018 further strengthen banks' internal complaints processes by, among other things:

The FCAC will use its supervisory tools to address any issues arising from its Bank Complaint Handling Procedures report. Banks' internal complaints processes are not the subject of this consultation paper.

External complaint handling processes

ECBs deal with consumer complaints about banking services and products, and are a key element of Canada's Financial Consumer Protection Framework. All banks in Canada must belong to an ECB. A consumer can escalate their complaint to the ECB when they are unsatisfied with the bank's final offer, or when 90 days have passed since the date they escalated their complaint at the bank. Banks must provide consumers with information on how to escalate a complaint to the ECB.

In order to operate, an ECB must be approved by the Minister of Finance on the recommendation of the FCAC Commissioner. FCAC guidance establishes the criteria that the Commissioner will consider, and provides information about the application process, including details on how to demonstrate that the ECB will be able to meet the requirements established in the Bank Act and the Complaints Regulations.

The Minister may revoke approval of an ECB if the Minister considers it appropriate. In deciding whether to revoke approval, the Minister may consider all matters relevant under the circumstances. To date, no ECB has had its approval revoked. An alternate approach exists under the Bank Act whereby the Minister may designate a single not-for-profit ECB that all banks must use, revoking the approval of all other ECBs.

Legislative requirements are in place that set out how ECBs must execute their functions. Approved ECBs are required to operate in a manner that is consistent with the standards of good character and integrity. They are also required to maintain impartiality and independence when dealing with a complaint, and to meet certain minimum standards, including:

As part of the new Financial Consumer Protection Framework under the Bank Act, legislative changes made to the complaint handling rules in 2018 aim to strengthen the accountability of the external complaint handling system. These changes include enhanced public reporting and a new requirement to publish summaries of their recommendations.

Currently, there are two ECBs approved by the Minister of Finance:

OBSI was created in 1996 as the Canadian Banking Ombudsman and initially served as the ECB for the entire banking sector. ADRBO was established in 2008, and several banks have since adopted it as their ECB. Appendix A provides a complete overview of the activities of each ECB along with their membership.

Guiding principles

The following policy principles, rooted in international best practices, can serve to guide and inform future policy directions for Canada's external complaint handling system.

Question

  1. Are these principles appropriate to guide future policy directions on the structure and key elements of the ECB system in Canada?

Structure of Canada's external complaint handling system

The FCAC's report on the operations of ECBs identified several broad issues concerning the structure of the external complaint handling system in Canada (see summary box below). The FCAC has suggested that Canada's multiple ECB model may undermine consumers' trust and confidence, reduce accessibility, add complexity and inefficiency, and complicate regulatory supervision. The FCAC identified these issues through, in part, an assessment of international standards and reports by experts in the field. These findings from the FCAC are quoted directly in the summary box below.

Excerpts from FCAC report The Operations of External Complaint Bodies

  • "During this review FCAC identified broader issues related to the structure of the multiple-ECB model." (p. 28)
  • "The multiple-ECB model is not consistent with international standards, particularly where banks – rather than consumers – choose the ECB. This model can have a negative [e]ffect on consumers' perceptions of the fairness and impartiality of external dispute resolution. This has the potential to undermine one [of] the principal purposes of effective complaint handling, which is to enhance consumers' trust and confidence in the financial system." (p. 28)
  • "The Agency is also concerned about the additional complexity and inefficiencies introduced by the multiple-ECB model. The challenge of raising consumers' awareness about their right to escalate a complaint is compounded when there are multiple external dispute resolvers. ECBs are challenged to make the required investments in processes and operations, given the relatively small number of complaint investigations they undertake on an annual basis." (p. 29)
  • "Regulatory supervision is more complicated and resource intensive when there are multiple ECBs that have adopted different practices, as operational differences can disguise compliance issues." (p. 29)
  •  "FCAC also has concerns about whether the competition between ECBs for member banks is benefitting consumers. FCAC notes that only 2 of the large six banks have elected to be members of the ECB that compares most favourably to international best practices, such as promoting accessibility by conducting active investigations." (pp. 28–29)

In terms of international best practices, the FCAC's report notes that the World Bank has suggested that allowing banks to choose among multiple external dispute resolution bodies poses severe risks to their impartiality (see Resolving disputes between consumers and financial businesses: Fundamentals for a financial ombudsman (available in PDF only), World Bank). The World Bank has also noted that the multiple ECB model where banks choose an ECB is unusual. Very few other countries, if any, feature a multiple ECB system where banks are permitted to choose between service providers.

Question

  1. What ECB system structure would best address the deficiencies identified in the FCAC report and most effectively uphold the guiding principles outlined in the previous section?

Key attributes of an effective external complaint handling process

The FCAC report also identified areas where ECBs could improve their policies, procedures and complaint handling practices. Beyond the structural considerations identified above, the government is seeking stakeholders' views on the key attributes of an effective external complaint handling system in Canada. In particular, the government welcomes stakeholder views on:

Considerations and questions for discussion on each of these issues are outlined below.

Profit structure of an external complaints body (ECB)

In Canada, the current system does not set out requirements on the profit structure of an approved ECB, including whether it operates as a for-profit or not-for-profit corporation. ADRBO's parent firm, ADR Chambers, operates on a for-profit basis while OBSI operates on a not-for-profit basis.

In its ECB report, the FCAC found that both ECBs find in favour of the banks roughly the same percentage of time and did not find evidence that a for-profit funding model resulted in more favourable treatment of the banks.

Question

  1. To what extent does the profit structure of an ECB have a real or perceived impact on the impartiality and independence of an ECB?

Funding model of an ECB

In Canada, there are no legislative requirements on how an approved ECB should fund itself. Currently, the two ECBs use different models: OBSI's assessment formula for banks is based on institution size and historical complaints data, and ADRBO's assessments are based on the average number of complaints plus an hourly rate for complaint investigations. In both cases, the banking operations of the ECB are fully funded by its member banks.

It is not clear how an assessment formula impacts bank consumers. A model linked to the volume of complaints at each bank could give banks an incentive to resolve more complaints internally and invest in internal complaint handling systems. The FCAC noted concerns raised by consumer groups that the hourly rate model compromises the impartiality and independence of the ECB.

Question

  1. To what extent could an ECB's assessment formula impact the real or perceived impartiality and independence of the ECB?

Scope of ECB function

In Canada, approved ECBs can undertake additional dispute resolution functions unrelated to bank complaints. Both ECBs undertake non-banking complaint handling functions: ADRBO is a branch of ADR Chambers, a general dispute resolution service firm, while OBSI membership is required for all registered dealers and advisors by the provincial securities commissions (outside of Quebec).

An ECB's non-banking dispute resolution services may benefit bank consumers. For example, a common ECB for both the banking and investment industry, such as OBSI, may more quickly identify whether a complaint is banking- or investment-related. Knowledgeable staff can help ensure that the ECB is effective, and a common ECB may help promote efficiency in the complaint process.

As a branch of the large general service legal firm ADR Chambers, ADRBO may benefit bank consumers through economies of scale by, for example, having access to a broader range of experienced dispute resolution professionals, such as arbitrators, mediators, retired judges and lawyers.

Question

  1. What are the benefits to consumers from a banking ECB that provides non-bank dispute resolution services? Are there drawbacks?

Complainant assistance

Complainant assistance is a continuum of supports and can range, for example, from providing information to help a consumer formulate a complaint to working with a consumer to collect documentation and describe their complaint.

In Canada, there are no legislative requirements governing the type of assistance that an approved ECB should provide to complainants.

The FCAC's ECB report notes that the average consumer is unlikely to know how to navigate the process of bringing a complaint to an ECB without assistance. Therefore, consumer assistance can be useful in promoting accessibility in the complaint handling system. It can also help promote efficiency because consumers receive the assistance they need in order to provide the documents and information they need to move their complaint forward in a more timely manner. Complainant assistance may help ensure that consumers can access the dispute resolution services of an ECB without additional costs, such as retaining a lawyer or another expert. On the other hand, depending on the level and type of assistance offered, it could impair perceptions of independence and impartiality of the ECB.

Question

  1. Should an ECB be required to provide complainant assistance, and what type of complainant assistance should be provided?

ECB recommendations

Under the current system in Canada, ECBs issue non-binding recommendations. If a bank were to refuse to comply, the ECB could choose to publish its recommendation; none have ever been published for banking complaints. One of the two ECBs offers an appeal-like function under certain circumstances to consumers who remain unsatisfied with a final recommendation.

Recommendations that are binding on banks may require a more formal adjudication process with appeal rights, which could add a level of complexity to the complaint handling system, possibly making the process more time-consuming.

On the other hand, making ECBs' recommendations binding on banks could improve perceptions of fairness and impartiality. The FCAC suggests that this change could help address the perception that ECBs may lack impartiality and independence in resolving consumer disputes.

The Capital Markets Modernization Taskforce was appointed by the Government of Ontario in February 2020.  In January 2021, the taskforce released its final report to the Ontario Minister of financeFootnote 1 in which it recommends allowing the Ontario Securities Commission (OSC) to designate a dispute resolution services organization that would have the power to issue binding decisions. The 2021 Ontario Budget announced that the OSC is conducting analysis to inform its regulatory consultation process on the Taskforce's recommendations that fall within its purview.

Question

  1. Do you have views on whether the decisions of an ECB should be binding or non-binding on banks? Please refer to the guiding principles to support your position.

ECB governance structure

An approved ECB is free to establish its own governance structure, including the composition of its board of directors. The framework requires ECBs to demonstrate to the FCAC that they have a process for assessing suitability and integrity of directors, and they must also monitor and assess the board's commitment to and fulfillment of regulatory requirements, including the complaints process.

OBSI's board comprises a majority of non-industry representatives who have not been part of industry or government for at least two years. The remainder are appointed from a list of candidates provided by the industry. ADRBO's board of directors comprises five individuals who come from the field of alternative dispute resolution or other related fields such as business and law.

The governance structure of an ECB can help contribute to a fair and effective complaint handling process, including by having balanced representation of stakeholder groups on the board, such as consumers and industry. At the same time, the efficiency and responsiveness of an organization is supported by having knowledgeable experts on the board.

Question

  1. Should the government establish requirements for representation on the board of directors of an ECB? To what extent should an ECB be required to make public its governance process?

Next steps

The government invites all stakeholders to participate in this consultation process by responding to the consultation questions outlined in this document by October 14, 2021.

In responding to the consultation questions, stakeholders are encouraged to identify how insights and policy proposals serve to achieve the guiding principles outlined in the introduction.

Stakeholder feedback will help inform future policy directions for the ECB system in Canada.

Appendix A: Overview of the Ombudsman for Banking Services and Investments (OBSI) and the ADR Chambers Banking Ombuds Office (ADRBO)

Ombudsman for Banking Services and Investments

In 1996, the Canadian Banking Ombudsman (CBO) was created to provide services to small business with complaints against nine banks. Its mandate grew in 1997 to include unresolved complaints from retail banking customers. In 2002, CBO was renamed the Ombudsman for Banking Services and Investments (OBSI), and its membership was expanded to include all members of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.

OBSI is overseen by an independent board of directors, a majority of whom must not have been part of industry or government for at least two years. OBSI's Consumer and Investor Advisory Council was created to provide the input of consumers and investors into OBSI's governance and operations.

OBSI is a not-for-profit organization funded through assessments on financial institutions. OBSI calculates assessments based on the size of the bank and the total number and complexity of complaint investigations opened for member banks during the previous year.

Membership (banks)

OBSI member banks are accessible using its online search tool

ADR Chambers Banking Ombuds Office

ADRBO is a branch of ADR Chambers, a provider of general conflict resolution services operating in Canada and internationally. While ADR Chambers has been in operation for more than 25 years, ADRBO began operations in 2008 as the ombudsman for banking clients of the Royal Bank of Canada.

ADRBO is overseen by a board of directors who come from the field of alternative dispute resolution, or with expertise in other fields such as business or law.

ADRBO is a private company that operates on a for-profit basis. ADRBO assesses members' annual administrative charges based on the number of files investigated, then charges members an hourly investigation rate.

Membership

ADRBO member banks are accessible.

Appendix B: consultation questions – summary

  1. Are these principles appropriate to guide future policy directions on the structure and key elements of the ECB system in Canada?
  2. What ECB system structure would best address the deficiencies identified in the FCAC report and most effectively uphold the guiding principles outlined in the previous section?
  3. To what extent does the profit structure of an ECB have a real or perceived impact on the impartiality and independence of an ECB?
  4. To what extent could an ECB's assessment formula impact the real or perceived impartiality and independence of the ECB?
  5. What are the benefits to consumers from a banking ECB that provides non-bank dispute resolution services? Are there drawbacks?
  6. Should an ECB be required to provide complainant assistance, and what type of complainant assistance should be provided?
  7. Do you have views on whether the decisions of an ECB should be binding or non-binding on banks? Please refer to the guiding principles to support your position.
  8. Should the government establish requirements for representation on the board of directors of an ECB? To what extent should an ECB be required to make public its governance process?

 

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