Banking Ombudsmen: Why They Must Be Independent CCRC Position Paper #1 (September 1997)

I. Background

(a) How and Why the Canadian Banking Ombudsmen System Developed

Canadians have long complained regarding the service provided by the chartered banks. Particularly vocal have been representatives of the small business community. Given the fact that small business has been the major job creator in a job-starved economy their complaints attracted the attention of politicians of all political persuasions. Among other things, the political pressure resulted in an agreement between the federal government and each of the chartered banks to establish ombudsman offices between 199 and 1995. However, it must be noted that those selected by each of the banks to serve as their ombudsmen were bank employees. This is analogous to someone deciding to take a company to court and finding out that the judge assigned the case was an employee of the company being sued.

In addition to the ombudsmen employed by each of the banks the federal government and the industry agreed in 1995 that as a whole, the banks should employ an ombudsman to deal with complaints which are not resolvable between a client and their particular bank. However, this ombudsman's salary is also paid for by the banks. In essence, there is no independent ombudsman to whom bank clients can turn to and get an impartial audience to hear their concerns.

As the complaints against the banks have continued the banks have extended the mandate of their ombudsmen to allow them to hear complaints on all issues and not simply those related to small business. However, given the process for appointing ombudsmen, consumers will not be dealing with an independent body but rather a glorified complaints department for the banks. It is our contention that the Canadian banks did not get into the ombudsman business out of an altruistic desire to deal with customer complaints but rather, as a public relations gesture to forestall any direct government action compelling them to deal fairly with their clientele.

(b) The Canadian Banking Ombudsman - A Fatally Flawed System

All of the individual bank ombudsmen are employees of the banks. The Canadian Banking Ombudsman, who deals with complaints not resolves between an individual bank and its customers and began operating in July 1996, reports to a board made up of five (5) bankers and three (3) so-called independent directors (all of whom were appointed by the banks). While the Canadian Board is being expanded to include two additional independent directors, the Board will still be half comprised by professional bankers. Clearly, the Canadian system was simply not designed to provide a fair hearing for consumers or impartial rulings.

For the year ending October 31, 1996 the individual bank ombudsmen received 705 clients (for this period the ombudsmen were limited to dealing only with small business complaints). By October, 1996 the Canadian Banking Ombudsman had received 18 complaints. He also recently released a report claiming that for the six month period ending April 30, 1997 he received only 35 formal complaints.

As he released his report, the Canadian Banking Ombudsman expressed surprise at the low number of complaints. Some commentators have used thlow number to justify the current system as well as claim that there is not that much discontent in the public with banking services. However, this claim ignores the significant flaws in the system, as follows:

1. Many consumers are simply unaware of the existence of the bank ombudsmen,banks have not systematically notified their customers of the existence of the ombudsman system;
2. One cannot complain to the industry ombudsman without having worked through the individual banks' internal complaint process up to the bank's ombudsman and this is a time consuming process;
3. The individual bank ombudsmen are employees of the banks;
4. Even if one is prepared to undertake the appeal process, the Canadian Banking Ombudsman will not review the complaint until the complainant has agreed, in writing, not to use any of the information gained from the process nor the industry ombudsman's decision in any legal action, nor call the Ombudsman to testify;
5. The Canadian Banking Ombudsman is an employee of the Canadian Bankers' Association; and
6. The rulings of the individual banks' ombudsmen and the Canadian Banking Ombudsman are not binding on the banks.

In summary, the Canadian bank ombudsmen system has been designed to either keep consumers and small business unaware of its existence or, for those aware of the procedure, to make it time-consuming and with no binding decision at the end of the process. All of these factors discourage the use of the ombudsmen system.

(c) The Task Force Discussion Paper

On Friday, June 13, 1997 a Discussion Paper was issued by the Task Force on the Future of the Canadian Financial Services Sector. In question number 2.10 the Task Force refers to ombudsmen has being one response adopted by the Canadian banking community in dealing with customer complaints. The Task Force then only asks whether this model should be extended to other types of financial institutions.

Nowhere does the Task Force mention that these ombudsmen are either bank employees or, in the case of the industry ombudsman, paid for by the Canadian Bankers' Association. Furthermore, no mention is made of the fact that if their rulings favour the customer they are not binding on the bank in question. Finally, no mention is made of the ombudsmen systems in other countries, or that the Task Force is interested in examining those systems to see whether the Canadian system could be improved.

First, the British Banking Ombudsman, established in 1986, is independent of the banks. The Ombudsman is appointed by an independent Council consisting of eight (8) members, five (5) of whom are independent while three (3) are appointed by the banks. There is also a Board comprised of between five (5) and 15 senior bankers. The three bank industry representatives on the Council are chosen by the Board with the approval of the Council (not to be unreasonably withheld). Four (4) of the non-banking members are appointed by the Council with the approval of the Board (not to be unreasonably withheld). The four non-bankers generally consist of a senior academic, a trade unionist, a senior consumer advocate as well as public personality (generally a broadcaster). The Chairman of the Council, who cannot be banker, is appointed by the Board with the approval of the Council (not to be unreasonably withheld).

The British Ombudsman is appointed by the Council with the approval of the Board (not to be unreasonably withheld). However, he is responsible solely to the Council in his general management of the Scheme and only the Council can dismiss him. Furthermore, the Ombudsman is not responsible to anyone for his decisions in individual situations.

Anyone who has received a banking service from a member bank of this system can submit a complaint, including small businesses with annual revenues of less than one million pounds ($2.25 Million Canadian). The system is free for all complainants.

Second, the financing of the British Banking Ombudsman is required by the Council, and therefore not under the control of the banks as in Canada. It is the responsibility of the Bank Ombudsman to prepare a draft annual operating budget for submission to the Board. The Board approves the budget and levies the cost from the member banks. Small banks pay a flat fee plus a further sum for each complaint. Large banks meet the rest of the cost, one quarter pro-rata to the number of accounts which they have and three quarters pro-rata to the number of complaints which come to the Ombudsman from them.

Third, the Ombudsman's decisions are binding on the banks (for awards up to 100,000 pounds or approximately $225,000 Canadian). Complaints which are not returned to the banks for resolution go through an investigation process. A preliminary assessment is then made at which time the parties can settle. If not, there is a further investigation leading to a formal recommendation. The parties can settle up to the issuance of the formal recommendation. However, once the formal recommendation is issued it is binding on the bank.

The fact that the rulings of the British ombudsman are binding on the banks and that the service is free to consumers provides a significant incentive to bank clients to pursue matters with the ombudsman. Banks are aware of this fact. Therefore, it is highly probable that unless they are convinced of the righteousness of their position, the banks will be more interested in resolving client complaints than seeing the matter referred to the Ombudsman.

In 1995, 7,424 complaints were filed with the British Banking Ombudsman. An additional 2,223 were brought forward from 1994 for a total of 9,647 complaints handled in 1995. Of this total, 7,867 were deemed to be eligible complaints. After further screening 6,587 complaints were returned to the banks for resolution. Of this total 1,887 were carried forward to 1996.

Australia has chosen to model its system on the British model. The Australian system is run by a council of seven (7) members consisting of three (3) bank representatives, three (3) consumer/community representatives and an independent chairman. The Consumers' Federation of Australia has described their system has "reasonably effective".

"the government establish an independent office of the Bank Ombudsman to investigate complaints of breach of duty or by the banks. As in the United Kingdom, the ombudsman should have the power to require banks to pay compensation to complainants for financial loss, inconvenience and stress."

The Canadian banks' feeble attempt to develop a bank ombudsman system was simply the banks engaging in a public relations gesture to avoid what the Industry Committee intended. The question is: Why did the government settle for so little and not implement the Industry Committee's recommendation?

The above question is particularly relevant in view of the continued reporting of record profits by Canada's protected banking sector at a time when consumer disenchantment is as high as the profits. It may be that the government was not willing at the time to make a decision opposed by the Canadian Bankers' Association. However, the recent election results made it clear that the public wishes to see the government address citizen concerns effectively, including concerns about banks.

The fact that the Task Force on the Future of the Canadian Financial Sector Discussion Paper does not describe the British Ombudsman Scheme raises the continuing concern that it may follow the federal government's attitude to date and may not be prepared to make recommendations favouring consumers that would be opposed by the Canadian Bankers' Association, such as recommending the establishment of an independent bank ombudsman system.

IV. CCRC Recommendations

In view of the significant flaws in the current Canadian banking ombudsman system, the Canadian Community Reinvestment Coalition (CCRC) recommends that the federal government take the following actions to correct the flaws in the current system and to ensure that a fair complaint-handling and ombudsman system exists for Canadian banking consumers:

1. Accept the recommendation of the House Industry Committee.
2. Take actions to establish an independent banking ombudsman. The goal should be to tailor the British model to Canadian realities. There are two possible ways for the government to accomplish this task. The government could instruct the Task Force to accept submissions and on that basis make a recommendation as to how an independent ombudsman ought to be established. Or the government could ask the House Industry Committee to recommend how its proposal can be enacted to Canadian specifications. In view of the total refusal of the Task Force to refer to the British Ombudsman Scheme in their Discussion Paper we recommend that the government follow the second route.
3. All Schedule I banks operating in Canada should be required to contribute to the financing of an independent ombudsman. Given that an independent ombudsman could make the current in-house ombudsmen redundant, most of the funding could come from diverting existing expenditures on in-house ombudsman.
4. Schedule II banks should have the option of participating in the ombudsman system.
5. Should the ongoing multilateral negotiations taking place in Geneva under the auspices of the World Trade Organization lead to greater liberalization of the Canadian market in financial services, the government should adjust the requirements obligating banks to participate and contribute to an independent ombudsman to ensure that foreign banks and their customers are covered by the system.
6. Once an independent ombudsman has been established, all Schedule I banks should be required to enclose a flyer in mailouts to their customers informing them of the banks' complaint handling processes and the ombudsman system.