Our Approaches

Common problems we see in cases involving cheques

Cheques are not as simple as many Canadians think! At OBSI, we find that people often misunderstand the rules relating to cheques and this can cause them to lose money, fall victim to frauds, and have problems with their financial institution.  

What is a cheque?

A cheque is a written promise from one person to pay another. A cheque is a document that instructs the bank to pay a certain amount of money from one account to another. 

A cheque is NOT a guarantee you will receive the promised money. For example, the cheque must be properly written and the cheque-writer must have sufficient money in their account to pay the amount promised.

How a cheque is processed

A cheque must be processed or "cleared" by the bank before the money promised by the cheque belongs to you. Even if the money from the cheque has been deposited into your account you may not be entitled to keep it if the cheque doesn't clear.

A bank will clear a cheque if it is properly written, there is enough money in the cheque-writer's account, and if there are no other problems with the cheque (like fraud, duplication, or a stop payment). A depositor cannot keep money promised by a cheque if the cheque does not clear. For example, if you deposit a cheque into your account and it is fraudulent, or there is not enough money in the account of the person who wrote the cheque to you, the bank will reverse the deposit and take the money back. 

Many people think that cheques can be cleared quickly - like in 3 or 5 days. Banks have much longer than that - up to 90 days or even longer - to reverse a cheque deposit if it turns out that the cheque-writer does not have the money they promised or that there are other problems with the cheque.  

Common problems that can arise with cheques

We see some common misunderstandings and problems related to the use of cheques. These include: 

OBSI’s approach to confidentiality

At OBSI, our dispute resolution process is confidential. This means that the consumers and firms that use our service have agreed not to disclose the content of discussions or correspondence they receive as part of our dispute resolution process for any purpose, including any subsequent legal proceedings, with some limited exceptions.

We explain below how confidentiality applies to our service and the consumers and firms that participate.

Why is our complaint process confidential?

• Confidentiality is an important feature of OBSI’s complaint process because it allows consumers and firms to feel comfortable sharing information with us as we work towards understanding the facts of their case, without fear that it will be used against them later.
• The confidentiality of our process also ensures that consumers and firms know they can speak to us and each other about how they prefer to settle their cases, without that information being used against them later. This helps both consumers and firms focus on getting to a fair resolution of their case by working collaboratively, and avoiding unnecessary posturing or hostile communications.
• This free exchange of information lets us get a full understanding of what happened and helps us to quickly and efficiently find resolutions that are fair in all the circumstances of the case.

How do we maintain confidentiality in our investigations?

• Firms and consumers that use our service have agreed to abide by our Terms of Reference (ToRs), which detail the role of confidentiality in our complaint process. When consumers sign a consent letter to participate in our process, they specifically agree to maintain this confidentiality. Firms agree to confidentiality as part of their OBSI membership agreement.
• Our ToRs stipulate that discussions and correspondence between the consumer, the participating firm, and their representatives must not be disclosed, except to a professional advisor (such as a lawyer or accountant) who has also agreed to confidentiality.
• Our ToRs also stipulate that consumers and firms cannot present our investigative findings in the courts nor call on the Ombudsman’s office to testify against either party. This means that all information in our case files and that we communicate to consumers and firms during an investigation are protected from disclosure, and includes:
  • all information collected from the consumer and the firm for our investigation.
  • the findings of our investigations.
  • any settlement, recommendation, or outcome that results from the complaint and is communicated directly to the consumer and the firm.
• We do not share information that we receive from one party with the other without consent. If any person provides confidential or personal information to us and requests that it not be disclosed to anyone else, we will not disclose the information, except with the consent of the person who provided the information to us or as required by law or by a regulator.
  • However, fairness requires that each party understand the information that we are using to reach our conclusions in their case. If consent is not given and the information is prejudicial to either party, we cannot use that information to make a recommendation.
• OBSI’s commitment to confidentiality is reinforced through our service standards. Our privacy policy complies with Canada’s privacy laws. We can only collect, use, and disclose client data with the consumers’ consent and only to the extent that it is required for our investigation, unless disclosure is required by law or by a regulator.

What are the exceptions to the confidentiality of OBSI’s process?

• Representatives: Consumers can share information with their professional advisors (such as their lawyer or accountant), or with any other representative they would like to help them with their case, as long as the representative has also agreed to the confidentiality of our process by signing our consent letter. 
• Regulators:
  • Consumers are free to share information with a regulator for regulatory reasons. This includes any discussions and correspondence they have had with us about their complaint. Consumers are also able to participate in the regulator’s complaint process while they are participating in our process.
  • Participating firms and OBSI must comply with written requests from a regulator for disclosure of information, documents, records, or things. If we have complied with such a request, the participating firm and the consumer may discuss the complaint and the underlying facts with the regulator.
• Legal Requirement: Where we are legally required to disclose details of our investigation.
• Publication of Refusal: If there is no settlement in a case and a firm has refused to offer the compensation, we think is fair in all the circumstances, or if a firm has failed to comply with its obligations under our ToRs, then our ToRs require that we report it to the appropriate regulators and publish the facts of the case. If we are obligated under our ToRs to publicly name a firm for refusing our recommendation for resolution, the consumer’s name and identifying details will not be released.

How does confidentiality apply to consumers?

• Subject to the exceptions above, consumers must keep any documents, letters, or other information they receive from us confidential.
• Consumers are not prevented from discussing the underlying facts of their case or telling their story about what happened to them before they came to OBSI, as they wish.

How does confidentiality apply to firms?

• Subject to the exceptions above, firms are required to keep any documents, letters or other information they receive from us confidential.
• When making a recommendation, we will keep information about the firm’s proprietary systems and security measures confidential.
• In the case of a refusal, if we have publicly disclosed details about a case, the firm and consumer may publicly refer to the information that was released to the public by us about the complaint.

Have questions?

If you have questions about confidentiality, feel free to contact us. For information about what to expect from our complaint process, read our What to Expect documents for consumers and firms.

OBSI’s approach to complaints about disputed credit card charges

Credit cards are a convenient and incredibly popular form of payment – according to Payments Canada, there were almost six billion credit card payments in Canada in 2018, totaling over $550 billion. These transactions usually go exactly as expected, but sometimes a consumer has reasons to dispute a transaction on their credit card statement. When this happens, the consumer usually wants a refund for the amount that was charged to their account.

Why do consumers dispute credit card charges?

When consumers request a reversal of a credit card charge, they often tell us:

1. they did not authorize the charge because:
   • their credit card was lost or stolen, or
   • they were a victim of fraud.
2. they did authorize the charge, but the charge should be reversed because:
   • the merchant charged more than the amount they authorized,
   • there was a billing error,
   • the merchant did not deliver the product or service,
   • the product or service received was not as described or what they expected, or
   • they were a victim of fraud by the merchant.

When consumers bring their complaints to OBSI, it is usually because their bank has refused to process a refund or chargeback the consumer believes they are entitled to, or because the consumer believes the bank has been unfair or made mistakes in how they handled the case.

OBSI will only review disputes between consumers and their bank – we do not investigate or resolve disputes between consumers and merchants.

What is the process for disputing a credit card charge?

In general, most cardholder agreements and legal rules require that consumers first approach the merchant who charged the card to resolve the problem. If that doesn’t work, consumers may request a refund or chargeback through their credit card issuer, which is often a bank.

The bank will investigate to determine if the consumer’s request is valid. Most credit card agreements require cardholders to cooperate with their bank’s investigation process. This means providing all relevant information within reasonable timelines and answering the bank’s questions truthfully.

While investigating the issue, the bank will usually refund the charge on the consumer’s card. However, if the consumer was not entitled to the refund, the bank will later reverse it.

Problems relating to fraud or stolen cards are usually resolved by refunds through the card network “zero liability” policies.

If the problem was with the merchant, the bank will submit a chargeback request through the credit card network – for example, VISA, Mastercard or American Express – and follow the credit card network's chargeback process. The credit card network will involve the merchant's bank in the process, and they will usually request information from the merchant.

Refund and chargeback processes require that consumers, banks and merchants follow strict procedures and timelines. Generally, consumers must dispute a charge within 30–45 days from the date of their statement. The bank and merchant involved also have set time limits to respond.

Consumer credit card protections

There are multiple protections in place for Canadian credit card users, including:

• Federal laws, such as the Bank Act and its regulations – These laws contain consumer protection provisions that apply to credit card customers of federally regulated banks. Most importantly, this includes limits on consumer liability when a card is lost or stolen.
• Provincial consumer protection laws – These laws give consumers the right to refunds from the suppliers or merchants they purchase goods and services from in certain circumstances and imposes some rules on credit card issuers to assist in this process. These laws also limit consumer liability when a card is lost or stolen.
• Cardholder agreements – These agreements describe the terms and conditions under which the financial institution lends money to the consumer through the credit card account, and usually include a description of the consumer’s protections and obligations.
• Card network rules – Financial institutions are required to follow these rules in order to process chargeback requests between cardholders and merchants. These rules are set by the credit card networks (e.g. Visa, Mastercard, American Express) and are international in scope.

We consider these rules, protections and obligations when we investigate and work to settle cases involving disputed credit card charges.

Our approach

Disputes relating to credit card charges are among the most common banking complaints consumers bring to OBSI. Usually, the consumer complains that the bank has declined to refund charges to their credit card, refused to follow through with a chargeback process against a merchant, or that the chargeback process has not concluded in their favour because the bank made errors in the way it processed the chargeback.

We can investigate a consumer’s complaint if their credit card issuer is a financial institution that offers our service. During an investigation for a disputed credit card charge, we focus on the obligations and actions of the consumer and the bank. We do not directly investigate or recommend compensation from the credit card network or merchant involved in the complaint, because they are not OBSI participating firms.

We will review what the bank did to determine if they:

• Complied with the applicable rules and regulations
• Followed their own policies and procedures
• Treated the consumer fairly and without bias
• Made reasonable decisions based on the available evidence

We will review what the consumer did to determine if they:

• Complied with the requirements of the applicable rules and regulations
• Complied with the requirements of their cardholder agreement, including protecting their card and their PIN
• Provided enough and/or valid reasons for their charge dispute
• Raised their concerns with the merchant and their bank within the required timelines

Complaints about credit card charges often involve disputes about whether the consumer authorized a purchase or whether they adequately protected their PIN. The outcome of these cases depends largely on the evidence in the case that each party can use to show what happened.

Our recommendations

Cases where we recommend compensation usually involve situations where the bank did not follow their own policies and procedures, the consumer was a victim of theft or fraud, or the bank made errors in its handling of the case.

Cases where we normally do not recommend compensation include situations where the consumer did not challenge the charges within a reasonable time, did not try to resolve the issue with the merchant first, did not protect their PIN, or did not cooperate appropriately with the bank’s investigation.

When we make a recommendation in disputed credit card charge cases, it is usually for the bank to compensate the consumer for the disputed charge plus interest. We may also recommend that the bank refund other fees or charges that have been incurred because of the disputed charge. In some cases, we may recommend non-financial settlements such as the correction of credit bureau records.

Consumer tips for challenging a credit card charge

The process of requesting a refund or chargeback can be frustrating, especially if you are not sure what to do. But there are important steps you can take to minimize difficulty in these situations and improve your chances of success:

Tip #1: Never share your card and your PIN.

This is a basic requirement in all cardholder agreements, but sometimes it can be harder than it sounds. Never give your card or PIN to another person, even if you trust them, and never ask another person for their card or PIN, even if your intentions are perfectly honest. Sharing of cards and PINs places the cardholder at risk if anything goes wrong later with a charge because they have breached their cardholder agreement. Consider using supplementary cards or using separate accounts for trusted helpers.

Tip #2: Review your credit card transactions regularly. If you see a problem, contact your bank immediately.

Review your credit card transactions carefully and regularly. If you use online or mobile banking, make a habit of checking the transactions on your card whenever you use the website or app. If you rely on statements, review them as soon as you receive them. If you see a charge you don’t recognize, don’t delay.

Fraudsters will try to make unauthorized credit card transactions without being detected, for example, by charging small amounts or using vendor names that might seem familiar. They will also often place charges for as long as they can. Contact your bank as soon as you become aware of any unauthorized activity on your account. All banks have time limits for reporting an unauthorized transaction.

Tip #3: If you authorized a transaction but there is a problem, work with the merchant to resolve it first.

If you have a problem with a credit card purchase, like faulty goods, or goods not delivered, there are laws, regulations and credit card network rules that can protect you. However, in order to benefit from these protections, you need to try to resolve the problem with the merchant first. Strict time limits apply, so don’t delay.

When reaching out to a merchant, explain the problem clearly and be specific about how you want them to resolve it. In some cases, the merchant may refund the charge, replace the goods, or offer another solution. If the merchant is unwilling to help, ask your bank for assistance.

Tip #4: Cooperate with your bank’s investigation.

When you dispute a credit card charge with your bank, they will investigate your request. Their investigation is most effective when you have provided complete information. Be sure to compile all the evidence that supports your reason for the chargeback, such as:

• the credit card statement showing the disputed charge,
• the original receipt, service contract, purchase order or invoice from the merchant,
• emails or other correspondence that shows you tried to fix the problem with the merchant,
• reasons to believe fraud happened.

If you are unsatisfied with your bank’s efforts to resolve your problem, contact us. We may be able to help.

Loss calculation in cases involving exempt market products

Overview

In general, where unsuitable investments have been recommended the goal of our recommendation is to put the investor in the place they would have been had the unsuitable recommendation not been made, which is the same as the approach to damages generally taken by the courts.

In cases involving exempt market products, we will generally follow our standard loss calculation methodology, with modifications that reflect the illiquid nature of some exempt market investments. You can find a simplified description of our standard loss calculation methodology here, or a more detailed description from our 2011 public consultation paper here.

To determine an investor’s losses, we need to be able to calculate the investor’s actual investment performance. For cases where the investments that have been unsuitably recommended are exempt market products, which are not traded on public markets, our loss calculation methodology will depend on whether a current or ending value can be determined for the security. 

Working with firms to understand valuation

We will work closely with the firm to understand the current value of any exempt market securities at issue in a case and will consider any evidence that they provide or that we can find about this. Often there is reasonable evidence that allows us to at least estimate an ending value. When an ending value can be reasonably determined, we follow our general loss calculation methodology using that ending value.

Where no valuation is possible

For cases involving unsuitably sold securities that may have value but where there is insufficient evidence available about the value of the security, it is not possible to conduct a loss calculation that takes into account the investor’s actual losses (since this depends on the current value of their investments).

In these cases, we follow our standard loss calculation processes but assign an ending value of zero to the security and calculate the losses on that basis. Since the amount of the recommendation calculated using this methodology could result in double recovery to the investor if there is any residual value in the security, in these cases we generally recommend that the investor transfer the security to the firm as part of the settlement.

In most cases, EMD firms have accepted our recommendations made on this basis, but on occasion (in one or two cases per year), firms will tell us that receiving securities from investors as part of a settlement is not acceptable to them. In these cases, we have worked with the firm and investor to find a mutually acceptable resolution.

Process for Assessing Investment Suitability and Compensable Losses

As an ombudsman office, our role is to investigate complaints with a view to resolving them in a manner that is fair and reasonable in all the circumstances. In accordance with our Terms of Reference, when determining what is fair, we must consider 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 conduct.

We are not a court or a regulator. Therefore, while we use the law and industry regulations as guides to determining fair outcomes, we are not bound by specific case law. Also, it is not our role to determine if there has been a regulatory breach before deciding whether compensation is warranted.

Our process is intended to be informal so we can resolve complaints as quickly as possible. At the same time, we apply the appropriate amount of rigor to each of our investigations to ensure the results are fair to the parties.

If we conclude that an investor complaint does not have merit, we will explain our reasons to the investor and firm. If we conclude that an investor complaint has merit, we will determine what amount, if any, we believe the firm should compensate the investor.

Suitability complaints

In the majority of investment complaints we receive each year about advice-based accounts, investors complain that they received poor advice, their investments or investment strategies were unsuitable and/or that their investments did not perform as they expected. In such “suitability” complaints, investors ask to be compensated for the investment losses they incurred.

When making investment recommendations to their clients, investment advisors and their firms¹ have three main regulatory obligations:

1. They must learn each client’s personal and financial circumstances, investment knowledge and experience, investment time horizon, investment objectives and risk tolerance (known as “Know Your Client” or “KYC” information).
2. They must know the risks and characteristics of the investments they are recommending (known as the “Know Your Product” rule).
3. The investments they recommend must be suitable for their clients given their KYC information.

However, advisors and firms are not responsible, and in fact are not permitted, to guarantee the performance of any investment that involves risk.

Context underlying OBSI's approach

Since OBSI was formed and tasked with the resolution of investor complaints in 2002, we have constantly worked toward improving and standardizing our approach to suitability cases. We developed our approach not only with the benefit of first-hand investigation and case resolution experience, but also with guidance from external legal counsel. To respond to calls for greater efficiency and a consistent application of the approach to the increasing volume of investor complaints, we also established a separate team dedicated to provide consistent and high quality loss calculations for all investment complaints handled by OBSI. Beginning in 2011, we conducted an extensive two year consultation on our process for assessing investment suitability and calculating losses; after receiving extensive feedback from industry and investors, the Board approved the process outlined in this document.

The overall objective of OBSI’s approach is to determine a reasonable estimate of the financial position the investor would be in if unsuitable investment advice had not been given and acted upon. Recommended compensation amounts can range from small to very large, in some cases approaching OBSI’s compensation limit of $350,000. Therefore, investment firms often request a great deal of supporting detail and analytical rigor from OBSI to validate the compensation amounts we recommend. This is particularly true where extensive internal discussions among individuals within investment firms are required before a decision to accept or reject an OBSI recommendation is made.

Our goal is reasonably estimate an investor’s compensable losses, if any, in a way that is as accurate and fair as possible and that minimizes ‘20/20’ hindsight. For example, we specifically focus our calculations on unsuitable investments to minimize interference with the advisor’s suitable recommendations. We always use historical data for the relevant time frame for our suitability assessments and suitable performance comparisons (also referred to as ‘notional portfolios’) so our assessments are made on the information that pertained at the time. Our methodology also contemplates a range of options, some of which involve using suitable performance comparisons and some of which do not.

Process overview

Step 1: KYC determination

Documents, such as KYC forms, are central to our investigation. However, in many suitability complaints, the investor complains that their KYC information was not accurately recorded, that they did not understand the KYC forms they signed, and/or that their advisor did not review the KYC forms or explain their significance. Therefore, we often need to collect and consider additional evidence by interviewing the parties and conducting research to determine if the KYC forms reflect the investor’s actual KYC information during the period of time in question.

Step 2: Suitability analysis

We analyze the investments and strategies recommended by the advisor to determine if they were suitable for the investor based on their KYC information. If the investments were suitable, we will not recommend that the firm compensate the investor, even if the investor has incurred losses. The advisor’s responsibility is to recommend suitable investments, not to guarantee performance. If we find the investments were unsuitable, we move on to determine if the investor incurred financial harm as a result.

Step 3: Determining financial harm and compensation

In most instances, we will compare the performance of the investor’s unsuitable investments to the performance of common indices. However, if the circumstances warrant it, we have several other options for calculating whether an investor incurred financial harm as a result of unsuitable investments. If we determine that the investor did not incur financial harm, we conclude our investigation by explaining to the investor and the firm why we believe no compensation is warranted. If we determine that the investor incurred financial harm, we will consider whether the investor should bear responsibility for some of the loss before determining the amount we believe the firm should compensate the investor.

KYC determination

A: Review of documents

The first step in our investigation is to examine all relevant documents, which typically include but are not limited to:

• new account application forms, and any updates;
• supplementary KYC collection documents, and any updates;
• financial plans and investment policy statements;
• disclosure documents signed by the investor and/or provided to the investor by the advisor;
• any other documents signed by and/or provided to the investor before, at the time, or after the advisor recommended that the investor buy, sell or hold an investment in their accounts;
• any documents or information relied on by the advisor in formulating their recommendation to the investor;
• the investor’s account statements;
• any contemporaneous notes taken by the investor and advisor during the course of their relationship;
• any correspondence exchanged between the investor and advisor during the course of their relationship; and
• the firm’s internal investigation file.

Key principle

When reviewing KYC forms and other relevant documents, whether signed or not, we will consider when and how they were completed, whether copies were provided to the investor, and whether the wording on the documents is clear and expressed in terms that the investor was likely to understand.

B: Interviews

Interviews are a continuation of the evidence collection process. We are aware that the recollection of past conversations and events may be affected by the passage of time and the parties’ self-interest, and we take this into account during our investigations. Nevertheless, such interviews often provide additional important information that needs to be considered to accurately assess the circumstances. We interview the investor, the advisor where possible², and other relevant individuals at the firm such as the branch manager and compliance officers, who may have information relevant to the complaint. The topics we discuss may include but are not limited to:

• the recorded KYC information and the process used to collect and discuss it;
• any documents or information that appear to support or contradict recorded KYC information;
• the investor’s personal and financial circumstances, including their employment status and background, family circumstances, income, net worth, and how these circumstances may have changed over time;
• the investor’s investment experience and knowledge;
• the investor’s financial goals and objectives, liquidity requirements and time horizon for the investments in question;
• the investor’s willingness and ability to take risks and bear losses;
• the advisor’s recommendations and the reasons for them, the information the advisor relied on when making the recommendations, and the discussions the advisor had with the investor about the recommendations; and
• the information the advisor provided to the investor and the investor’s understanding of it.

C: Other evidence

When investors and advisors have conflicting recollections about their discussions, it may be necessary for us to collect and consider additional information. This may include reviewing and asking questions about previous or other investment account statements, employment, income tax and other financial statements. We may also interview third parties, such as previous or current investment advisors or other professionals who provided financial services to the investor and had knowledge of the investor’s KYC information, or individuals who attended meetings between the investor and the advisor.

D: Reaching a conclusion

In some cases, the evidence supports the documented KYC information. In other cases, the evidence indicates that the investor’s actual KYC information was different from what was documented.

We note that an investor’s KYC information may change over time. In some cases, the evidence may indicate that an investor has more than one set of investment objectives and risk tolerance parameters over the relevant time frame.

The determination of the investor’s KYC information informs Step 2 of our process: an analysis of the suitability of the investor’s investments and strategies.

Suitability analysis

When assessing suitability, we determine the risks and characteristics of the investor’s investments and strategies at the time they were recommended and at appropriate intervals, and compare them to the investor’s KYC information. Investments and strategies are suitable when they are consistent with the investor’s KYC information.

Key principle

Investment performance is not relevant to a suitability assessment. The fact that an investment has declined in value does not necessarily mean it’s unsuitable. Similarly, an investment that has performed well is not necessarily suitable.

A: Determining investment characteristics and risks

We consider the investment advisor’s or firm’s analysis, particularly any analysis conducted at the time of the recommendations, and the information they relied on in their assessment. In addition, we consider the firm’s policies, procedures and guidelines for assessing securities, portfolios or strategies that were in effect at the time recommendations were made. We also consider the firm’s definitions and security ratings, if any. Finally, we take into consideration any relevant regulatory guidance on specific investments and strategies.

In most cases, we also conduct an independent assessment of each security’s characteristics and risk level at the time of the recommendations. We assess the profile of the account including such factors as its diversification and asset allocation as well as the complexity and risks of any accompanying strategy such as active trading strategies or the use of margin or leverage. Furthermore, we consider how the risks of a security or account may have evolved over time given changes to a security issuer’s circumstances, and/or economic or market developments.

With very few exceptions, when assessing mutual funds, we use the investment objectives, investment strategies (including the asset allocation), and risk ratings published in the mutual fund company’s simplified prospectus.

For other types of securities, we review offering documents, annual reports, marketing materials, and any other relevant publications or information, and consider factors such as:

• the type of issuer, its size, industry sector and the nature of its business;
• the issuer’s history, dividend or interest payment record, financial situation, and how it compares to other industry participants;
• any special characteristics or features of the security;
• the security’s investment objective, underlying investments, projected returns, if any;
• the qualification of the issuer’s management, its track record, and counterparty risk;
• issuer or third-party risk ratings and any available analyst reports;
• the costs of the security and the currency in which the security was purchased;
• relevant news releases, corporate, market, social or economic events;
• trading history, liquidity, price volatility; and
• risk measures such as beta and standard deviation.

We understand that an investment account may not always be exactly aligned with the investor’s investment objective and risk tolerance parameters, and we will consider the cause (such as changing market values) as well as the degree and duration of any deviation.

Example

Consider an investor with a medium risk tolerance whose account includes low-, medium-, and high-risk investments. We may find the high-risk investments exceeded the investor’s risk tolerance.

While investments of different types can be combined to reduce the overall risk of an account, it’s not a given that low-risk investments “offset” the risk of high-risk investments. If an advisor says they used a portfolio approach to achieve a medium risk level, we would ask to see supporting documents (such as an asset allocation plan) to show that the combination of investments at various risk levels was in keeping with the investor’s medium risk tolerance. We would also ask whether the advisor explained to the investor that the account could contain some high-risk investments and that the investor was aware of – and understood – the implications.

B: Disclosure doesn't invalidate an unsuitable recommendation

Disclosing the risks and characteristics of a recommended investment or strategy is a key element of an investment advisor’s and firm’s responsibilities. However, disclosing information or providing investment literature does not override the advisor’s obligation to recommend investments that are suitable for the investor. In other words, disclosure does not make an investment or strategy suitable if it’s otherwise mismatched with the investor’s objectives and risk tolerance.

Key principle

Investors should be able to rely on their advisor and firm to make suitable investment recommendations without having to verify their suitability. However, we will consider an investor’s level of investment knowledge and sophistication and their ability to make an informed assessment about their advisor’s recommendations.

C: Making a suitability determination

If the evidence indicates that the investor’s investments and/or strategies were suitable given their KYC information, then we will conclude our investigation and communicate our reasons to the investor and firm. In these circumstances, we would not move on to assess the investor’s loss because the advisor is only responsible for recommending suitable investments and cannot guarantee the performance of any investment that involves risk.

If we determine that the investments and/or strategies were unsuitable for the investor, we then move to Step 3 of our suitability and loss assessment process: determining financial harm and compensation, if any.

Determining financial harm and compensation

In cases where we conclude that the investments and/or strategies were unsuitable for the investor, we then determine what financial harm the investor suffered and what amount, if any, we believe the firm should compensate the investor.

Key principle

If the investments and/or strategies the advisor recommended were unsuitable for the investor, we typically calculate the performance of the unsuitable investments and then the position the investor would have been in had they been suitably invested. If the investor’s actual unsuitable investments performed worse than suitable investments would have, the difference is the investor’s financial harm. Where the investor incurs financial harm, we determine whether the investor should bear some responsibility for the harm before making a final determination regarding the amount we believe the firm should compensate the investor.

Examples of financial harm calculations

• If an investor lost $10,000 as a result of unsuitable investments, but would have lost only $6,000 on suitable investments, the investor’s financial harm would be $4,000.
• If an investor lost $10,000 as a result of unsuitable investments, but would have gained $3,000 on suitable investments, the investor’s financial harm would be $13,000.
• If an investor gained $10,000 as a result of unsuitable investments, but would have gained $15,000 on suitable investments, the investor’s financial harm would be $5,000.
• If an investor lost $10,000 as a result of unsuitable investments, but would have lost $15,000 on suitable investments, the investor did not suffer financial harm.
• If an investor gained $10,000 as a result of unsuitable investments, but would have gained only $2,000 on suitable investments, the investor did not suffer financial harm.

A: Calculating actual investment performance

Our first step is to calculate actual gains or losses over the relevant time frame on the investor’s unsuitable investments. We consider the amount invested, less withdrawals, amounts paid to the investor (such as cash dividends or distributions) and applicable transaction or carrying costs (such as fees), compared to the value of the investments or portfolio at the end of the relevant period.

B: Suitable performance comparison

OBSI's Approach to Calculating Investment Losses

People often complain to us that they lost money because their investments were not suitable for them and their advisor gave them bad advice. When we receive this type of complaint, here is what we do to see if that is true.

Finding out if the investments were suitable

We start with the person's investments and situation to find out if they got good advice. That means looking at:

• personal and financial circumstances
• what they know about investing
• how much money they were willing to lose or wanted to make
• how long before they needed the money
• what they wanted the investments to do for them

If we determine the investments were suitable for them, we will explain why. If they were not, we will work to find out if they were financially harmed as a result.

Determining financial harm

We follow three-steps to calculate financial harm:

1. We calculate how much money the person lost on the investments that were not suitable for them.
2. We calculate how much money they would have made if they had been suitably invested.
3. We then compare the two amounts. If the person would have made more money on investments that were suitable for them, then they incurred financial harm.

Our loss calculation process is complex and is done by financial experts. During our process, we consider:

• the activity in the account (e.g., when investments were bought and sold)
• any payments from the investments in the account (e.g., whether any interest or dividends got paid and re-invested)
• the transaction fees paid
• any other costs

Case example

Mr. Smith originally invested $100,000. Two years later, his account has $79,000 in it. During that time, he paid $1,000 in fees. He also lost $20,000 on his investment. The $79,000 in his account equals his starting investment minus the fees he paid and minus the money he lost.

This does not necessarily mean that Mr. Smith had $20,000 of financial harm. To find out if there was financial harm, we need to compare his losses to what would have happened if he was invested suitably. To do that, we look at how suitable investments performed during that time.

Assume Mr. Smith's $100,000 was invested suitably. Those investments increased by $10,000. During that time, he still would have paid $1,000 in fees. But his account would have $109,000 at the end of the two years.

We then compare these two outcomes. In this case, Mr. Smith's financial harm would be $30,000. That is the difference between what his money is now worth and what his money would have been worth if he had been invested suitably. You can see this example in the table below.

It is important to remember that the wrong kind of investments don't always lose money and the right kind of investments don't always make money. Investments all have some risk. Investments can lose money even when they are suitable for the person.

Also, sometimes investments that are wrong for a person make more money than investments that are right for them. When that happens, even though the person got bad investing advice, they have not had any financial harm. 

Deciding how much compensation is fair

We may determine that a person's investments were not suitable for them and that they had financial harm because of it. If so, we look at whether the advisor should pay for all the financial harm or just some of it. This depends on whether the investor has any responsibility for their own financial harm. To decide that, we will look at things like:

• the relationship between the investor, the advisor and the firm (e.g. did the advisor make all the decisions or were decisions made together?)
• how much the investor understood about the investments
• the information that the investor had at the time
• whether the investor took reasonable steps to protect themselves when they found out there was a problem

Once we have a full picture, we decide how much compensation is fair. We will communicate this to the investor and the firm. We will then work with both to resolve the complaint in a way that is fair. 

Useful links

Our website contains a lot of information about our approach, our process, and how we can help consumers and small businesses. Here you can find additional information about our investment suitability and loss assessment process.

OBSI's approach to the six-year limitation period

What is a limitation period?

As a general legal principle, anyone who knows they have a claim against another person is required to make their claim within a reasonable amount of time, or they lose the right to do so. This is because allowing people to hold their claims forever and only bring them forward when they feel like doing so is harmful to the person they are claiming against. Also, it is more difficult to find reliable evidence about things that happened in the distant past. The period of time in which a claim must be brought forward in the courts is known and the "limitation period."

Limitation periods are provincial laws and are a bit different in each province. The limitation period is two years for most court actions in most provinces and three years in Quebec. There are exceptions and it is very important for people with possible claims to get legal advice about the limitation period that applies to them.

OBSI's limitation period

Legal limitation periods don't apply to OBSI. But for fairness reasons, we impose a limitation period on claims that consumers bring to us. Our rule is found in section 5.1(e) of our Terms of Reference (TORs). This limitation period was recommended by an external review in 2012. It was added to our TORs in December 2013 after a public stakeholder consultation process. OBSI's limitation period is six years.

This means that we will only consider a complaint if the consumer raised their complaint with their firm within six years after the consumer knew or ought to have known about the problem. Once the consumer receives the firm's response, he or she must complain to our office within 180 days.

We cannot investigate a complaint, or will stop investigating, if we determine that it is outside this six-year limitation period. If we can determine this before we open the case, we will let the consumer know right away. However, we often need to begin an investigation to be able to determine if a consumer took too long to complain.

When does the six-year limitation period start?

OBSI's limitation period starts on the earlier of:

• The day on which the consumer first knew about the issue or problem.
• The day on which the consumer reasonably ought to have known about the issue or problem.

The day on which the consumer first knew about the problem can be determined by considering when:

• they were first told about the problem
• when they first complained about it
• or when they took action to address the problem (such as selling investments or changing banks)

We determine the day when a consumer ought reasonably to have known about an issue or problem by considering what a reasonable person in the complainant's circumstances, with the complainant's abilities and limitations, ought to have known. This includes a consideration of:

• The nature of the relationship between the consumer, the advisor, and the firm.
• The consumer's level of investment or banking experience, knowledge and sophistication.
• The timing, form and nature of the information provided to the consumer and their ability to understand it.
• Whether and when the consumer raised any concerns with the advisor or firm about the circumstances leading to the complaint, what advice they received, and what action, if any, was taken.

Other time limits may also affect a case

There are a number of other time-based mandate and investigation issues that also need to be considered. Some of these are:

• The firm has had 90 days to consider and resolve the complaint from the time the complainant complained to the firm. This period ends when the firm sends the consumer their final response letter, even if the 90 days has not passed.
• The consumer has to bring their complaint to OBSI within 180-days after receiving the firm's letter.
• Losses associated the complaint may be calculated on a different timeframe, for example:
  • We may open a case that came to us within six years of when the consumer knew or ought to have know of the problem, but their losses may have started many years before that. In that case, we will consider the losses from before the six-year period.
  • We may also end our loss assessment at a time when we believe the consumer should have mitigated their losses.

How the six-year limitation period works

Example 1 – OBSI case not opened

A consumer opened a new bank account in 2010. She was charged account fees of $29.95 per month.

In 2011, the consumer realized that her account fees should have been $14.95 per month. She transferred her money to another bank and closed her account.

In 2019, the consumer contacted her previous bank to complain about the excess fees she was charged. Unsatisfied with the bank's response, she contacted OBSI.

When we first received the complaint, we determined that the consumer had discovered the error and transferred her account away from the firm eight years before complaining to the firm.

Therefore, the case was clearly out of mandate on the basis of our six-year limitation period. We informed the consumer that we would not be investigating their complaint. The consumer was sent a closing letter explaining the reason for our finding.

Figure 1: OBSI six-year limitation period elapsed

Example 2 – OBSI case opened, then closed during investigation

An investor with moderate investing knowledge opened a new account in 2007 and requested guaranteed, low risk investments. Her advisor instead invested the account in medium risk mutual funds.

In 2008, the market experienced a large downturn which significantly decreased the value of her investments. She had believed her investments were guaranteed and knew they should not decline in value. However, all her friends experienced similar losses and her advisor had told her that her investments would come back in value.

In 2010, the consumer's investments continued to fluctuate in value, but never fully recovered from the losses she incurred. She demanded that her advisor switch her investments into safe investments, which he did.

In 2015, the consumer complained to the firm about losses she incurred due to unsuitable investments. Unsatisfied with the firm's response, she contacted OBSI.

The limitations issue was identified when the case was opened and the Investigator examined that issue first. They focused on what occurred in 2008 when the consumer noticed a large downturn, even though she said she believed her investments were guaranteed and low-risk.

The investigator concluded that in 2008 the investor ought reasonably to have known that her account was not invested in guaranteed and low risk investments. Therefore, the six-year period for the investor to complain to the firm began in 2008, when the consumer reasonably should have known of the problem and ended six years later, in 2014.

Because the case was out of mandate the Investigator did not investigate the issues of her instructions not being followed or the suitability of her investments and did not calculate her losses. They discussed our findings with the investor over the phone and through the investigation closing letter and closed the file.

Figure 2: OBSI six-year limitation period elapsed

Example 3 – OBSI case opened, then closed during investigation

In 2004, a consumer purchased a three-year GIC with quarterly interest payments.

The consumer received all interest payments until the GIC matured at the end of year 2007. However, since the bank did not receive payout instructions for the principal, when the GIC matured it was invested in three-month T-Bills. The T-bills continuously rolled over, and the interest was reinvested, in accordance with the bank's policies.

In 2015, upon reviewing old files, the consumer discovered that he still had what he believed was a GIC with the bank and requested a redemption. The bank redeemed the T-Bill and sent the consumer his original principal plus interest he had earned at the T-Bill rate.

He complained to the bank asking for interest he would have earned on GICs, which was higher than the T-Bill rate. Unsatisfied with the bank's response, he contacted OBSI.

When the case was opened, we noted that the issue giving rise to the complaint had occurred 11 years before the complaint to the bank. When the investigator began work on the case, the limitations issue was the issue considered.

The investigator examined the evidence available and determined that the consumer should reasonably have known of the problem at the end of 2007, when he did not receive his principal back and stopped receiving quarterly GIC interest payments. Therefore, the limitation period began in 2007 and ended six year's later in 2013.

Since the consumer did not actually complain to the bank until 2015, the investigator found the case out of mandate and closed the case. They discussed our findings with the consumer, included our reasons in the investigation closing letter and closed the file. An investigation of the consumer's losses was not necessary. 

Figure 3: OBSI six-year limitation period elapsed

Example 4 – OBSI case opened and investigation completed

An unsophisticated investor opened a new account and received an unsuitable recommendation in 2004.

In 2008, the investor thought there was a problem with the advice he received in 2004, even though he couldn't specifically or accurately describe it. He raised his concerns with his advisor and was told his investments were appropriate and he should remain invested. He trusted his advisor's advice.

In 2012, the investor sought an opinion from a different advisor and was told his investments were unsuitable.

The investor complained to the firm in 2016, and to OBSI later that year.

When we opened the case, we noted that the issue giving rise to the complaint occurred 12 years before the complaint to the firm. We also noted that the consumer indicated that they may have known of the problem eight years before complaining to the firm, but it was not clear that this was the case.

Once the investigator began work on the case, they examined the issue of what happened in 2008. The investigator determined that the consumer was unsophisticated and reasonably relied on their advisor's advice at that time.

The investigator then considered what happened in 2012. They determined that the consumer then knew or reasonably ought to have known about the problem at that time after they had consulted with an independent professional. Therefore, that was when the limitation period began. The investigator also determined that this was when the loss calculation period ended because, at that time, the consumer should have been able to mitigate their losses.

Therefore, the investigator determined that there was no limitation period problem in this case. The loss calculation period would run from 2006 to 2012. The investigator completed the investigation.

Figure 4: OBSI six-year limitation period & loss calculation period

OBSI's Approach to Non-Financial Loss

While recommendations to compensate "loss, damage or harm" are part of OBSI's mandate, we often get questions about our approach to what is commonly called non-financial loss, which doesn't involve monetary loss for a client.

These are the cases where we believe the loss or damage for the client goes beyond direct financial loss because of the distress or inconvenience involved. It may also involve loss of reputation, damage to credit ratings or loss of privacy.

While every file is unique, and we consider what is fair in all the circumstances, it's important for all parties to know that we look at cases and consider recommendations consistently.

What is a non-financial loss?

A non-financial loss does not have a direct monetary value. In OBSI's dispute resolution process, a common example is the distress or inconvenience caused by a firm's maladministration or error.

Does OBSI recommend compensation for non-financial loss?

For the most part, our recommendations for compensation are designed to put clients back where they should have been if there hadn't been an error or poor advice. However, occasionally we have a case where we believe the loss suffered goes beyond direct financial loss because of the distress and inconvenience, or other non-financial loss, involved. In those cases, we will recommend compensation to recognize that loss as well.

In some cases, we may also recommend compensation even when there is not a direct financial loss.

In addition to distress and inconvenience, are there other non-financial losses OBSI will look at?

OBSI will also look at loss of reputation, damage to credit ratings and loss of privacy. In some cases of privacy breaches we may recommend that the complaint is better handled by the appropriate privacy commission.

When does OBSI not recommend compensation for non-financial loss?

All clients experience some inconvenience when dealing with a dispute with their financial institution. OBSI will not recommend compensation for the distress or inconvenience that may be expected as a normal part of doing business or for the time and effort required to make a complaint, unless it exceeds what we believe to be reasonable under the circumstances.

We do not look at health issues, such as stress or other medical conditions, when assessing non-financial losses. Nor do we consider claims for pain and suffering.

Our recommendations to compensate for non-financial loss should not be viewed as punishments. Where warranted, that is the role of a regulator or court. Similarly, we do not levy fines or award punitive damages.

Non-financial loss does not include "indirect" financial losses. If, for example, a client takes time off work to resolve a complaint and loses income as a result, that may be considered in the calculation of financial loss depending on the circumstances.

How often, and how much, does OBSI recommend for non-financial loss?

We have been making recommendations for non-financial loss since our office was formed in 1996. Except in extreme cases, the recommended compensation ranges from $100 to $5,000, but in most cases is less than $1,000.

Clients who consider their non-financial losses to be significant, or who want damages in addition to reimbursement, may want to pursue their complaint through other avenues such as the courts.

Do recommendations for non-financial loss always mean a financial award?

No. OBSI may recommend that firms compensate clients in ways that are not monetary, such as a letter of apology, restoring a product or service, correcting a credit bureau record or explanatory letters to a client's creditors. 
What do we consider in determining the amount of recommended compensation? 
While there is no exact measuring stick for assessing fair compensation for non-financial loss, we will consider the following as we make our recommendations:

• Was the non-financial loss prolonged?
• Was the non-financial loss significant?
• Has the client been through a period of unnecessary financial hardship?
• Was the complaint process itself unnecessarily difficult or prolonged?
• Did the client contribute to their non-financial loss?

Related case studies

How OBSI may compensate for non-financial harm

How does the OBSI approach differ from the courts?

OBSI's approach to cases is different than the approach typically taken by the courts fundamentally because, as an ombudsman service, our purpose is different. Both courts and ombudsmen are expected to decide cases in a fair manner. However, ombudsmen are expected to deal with cases much more quickly, with less cost to the parties and without requiring the parties to have lawyers. To meet these expectations, our approach is less formal than the courts. Also, like other ombudsmen, our process is "inquisitorial," not "adversarial." That means, our investigators determine the issues and ask both parties questions as opposed to the courts which rely on the parties' lawyers to do that.

We deal with many more cases and do so much more quickly and cost-effectively than a court could

Every year, we investigate and settle hundreds of cases, mostly for amounts of less than $20,000. We resolve these cases quickly - usually in less than two months for banking cases and less than three months for investment cases. This helps consumers and firms move beyond their dispute efficiently so they can get on with their lives and their businesses.

Our processes are less formal than the courts

We are an informal alternative to the courts - and our approach to resolving disputes reflects this. We are required to resolve complaints fairly. This means that, pursuant to our Fairness Statement, we resolve complaints using an informal, non-legalistic approach that takes into account the legal rights of the consumer and the firm, as well as general principles of good financial services and business practice, regulatory policies and guidance, professional body standards and any relevant code of practice or conduct that is applicable to the case. Above all, our recommendations reflect what we believe to be fair to both parties in all of the circumstances of the case.

We do not have the power to compel the attendance of witnesses, take evidence on oath or test evidence by cross-examination. We talk to both parties and interview others who have relevant information, but we do not conduct oral hearings. Such procedural mechanisms would not be necessary or helpful to our work as an ombudsman service.

Our approach is inquisitorial, not adversarial

Unlike courts, an ombudsman service is not limited to looking only at the issues the consumer has focused on in their complaint. Our approach is "inquisitorial," or non-adversarial, meaning our investigators ask the questions they think are relevant to the case and also do their own research and analysis in the process of reaching a decision. Our process is designed so that neither party needs to have legal representation to be assured of a fair outcome. We listen carefully to both parties, let each one know about the information we have that is contrary to their position and concentrate on the facts of the case and our own expertise, rather than the complaint as presented or who can present the most persuasive legal arguments. We also encourage early informal resolution wherever possible - something that is not a priority in the courts.

All of these differences reflect the unique nature and purpose of an ombudsman service and are consistent with the best practices of financial ombudsmen around the world.

For a more detailed discussion of these issues, please see our Backgrounder on Natural Justice and the OBSI Process.

OBSI's approach to account closure or relationship-ended complaints

Sometimes banks decide to end their business relationship with a consumer and close the consumer's accounts. When that happens, consumers often feel they were treated unfairly. They may feel they deserve an explanation and did not get one or that they were not given enough time to transfer their accounts.

When can a bank close a consumer's account?

In general, banks are allowed to end their business relationships with their customers. In some unusual situations, they are required to do so. When this happens, the consumer will be given notice that their accounts with the bank will be closed and they have to transfer their money to another bank. In some rare situations, the bank does not give notice and just closes the accounts and sends the consumer's money to them.

Usually, banks give consumers reasonable notice of account closures. This notice is typically 30 days. This is to give the consumer time to transfer accounts to another bank. Usually, the notice is made in writing. It is sent to the email and/or mailing address the bank has on file. Consumers are responsible for notifying their bank of any change to their contact information.

Banks are not required to explain the reason for an account closure and they generally don't. Some account agreements will list reasons why an account may be closed, such as:

• if the account is overdrawn, or
• if the bank suspects the account is being used for improper use

Most account agreements state the bank can close the account without giving a reason.

Our approach 

Generally, if the bank provides the consumer the notice required in the account agreement or reasonable notice, we do not recommend compensation. This is because the bank is entitled to end its business relationship with a consumer. When we consider what reasonable notice is in a case, we will look at whether there was a special situation that warranted more notice or flexibility. We may also investigate if the bank's decision to close the account was:

• biased
• in keeping with its policies and procedures
• carried out in a fair manner given the consumer's situation 

Usually, we find banks have given reasonable notice. In rare cases, we may recommend a refund of fees or compensation if not enough notice was given.

We are not able to challenge or change a bank's decision. We are also generally not able to tell the consumer the bank's reason for account closure.

Consumer tips for handling an account closure 

It can be very upsetting when your bank decides to close your accounts. Remember that the bank is a business and its decisions are not personal. You usually will not be able to find out the bank's reasons. But there are things you can do, including:

Tip #1: Search for a new bank immediately.

As soon as you receive notice of the account closure, start your search for a new bank. It is your responsibility to open a new account elsewhere quickly. This is important so you don't miss payments or get charged fees that you could have avoided. 

Tip #2: Take inventory of your account activity.

Create a list of regular transactions that will be impacted by the closure of your account, such as:

• pre-authorized debits, monthly bill payments and automatic subscription or membership renewals
• loan repayments
• direct deposits of pay or retirement income, investment dividends and government benefits
• GIC renewals
• post-dated cheques
• scheduled gifts to charities

Identify all the organizations that initiate these transactions. Provide information about your new account to them as soon as possible. Again, this will help to avoid disruptions, unnecessary fees or penalties for missed payments.

Tip #3: Communicate any special circumstances to your bank.

Do you have any issues that mean you need extra notice or flexibility during the account closure process? In certain situations, it could reasonably take more than 30 days to complete an account closure, for example if the account is:

• registered (e.g. TSFA, RRSP, RIFF, RESP)
• maintained for business-related purposes
• a loan that must be repaid
• a term loan that has not yet reached its expiry date
• holding a non-redeemable proprietary GIC that cannot be transferred until its maturity date

If you have these kinds of issues, contact your bank to explain why you need more time to close the account. Tell them how much additional time you need. In some circumstances, the bank may decide to be flexible. 

OBSI's approach to risk rating of securities and portfolios

Risk rating of securities is a key component of suitability analysis

As part of OBSI investigations, we often need to assess the suitability of a complainant's investments. To do so, we follow industry-accepted principles and best practices to compare an investor's needs and circumstances to the risks and characteristics of their investments and investment strategies. This document provides a high-level explanation of our approach to investment risk assessment in general and outlines the types of information we consider and analyze for several common asset types.

How we assess investment characteristics and risks

OBSI independently assesses the risk of individual securities as well as investment accounts and portfolios and how the risk profile changes over time. In a typical case, our analysis has two major phases:

1. Information gathering and independent analysis of the risk of each security in an account and portfolio
2. Assessment of the aggregate account or portfolio risk

We outline below in greater detail what is involved in each phase of our analysis.

Phase 1: Information gathering and risk analysis of each security

We start by collecting and considering a broad range of information about each security at the time(s) they were recommended to an investor and at regular time intervals as they continued to hold the security.

The determination of the regular time intervals will depend on the level of trading activity in the account or portfolio. Monthly or quarterly intervals are used when there is a lot of trading activity, while semi-annual or annual intervals are used when there is a limited amount of trading activity.

Equities

When assessing equity risk, we begin with the analysis of the issuer's financial statements to understand its current and past profitability, financial position and cash flows[1]. We also examine the firm's market data to assess its financial ratios relative to its industry/peer groups (e.g., price to earnings, earnings per share, cash flow yield, debt to equity, profit margins, etc.), dividend payment history (if applicable), market capitalization and liquidity, and its trading history including beta and price volatility (standard deviation).

While quantitative financial criteria are of primary importance in the risk ratings of securities, qualitative factors can also be important components of the overall risk assessment. To analyse these factors, we conduct an assessment of all other relevant sources of financial, industry and operational risk[2], including the issuer's:  

• industry sector(s), product lines, competitive position and economic outlook
• business model (including whether it is a private or public company)
• lifecycle stage (i.e., start up, rapid growth, mature, decline)
• corporate governance
• regulatory filings such as offering documentation, annual reports, MD&A (particularly the stated risks in the MD&A section)
• significant news releases, corporate, market, social or economic events

During this phase, we will also consider the analysis of other industry professionals, including historical analyst reports (where appropriate), consensus ratings (if any), and any analysis conducted by the firm and/or advisor, particularly any analysis conducted at the time of investment recommendations. We may incorporate these factors or use assessment techniques presented by the firm and/or advisor where we find that such factors or assessment techniques were reasonable and appropriate in all of the circumstances of the case.

Based on this analysis, we will form a view of the risk rating for each equity at each relevant point in time.

Fixed income

When assessing the risk of fixed income securities, we focus our analysis on the issuer's credit risk. Credit risk is defined as the risk of loss resulting from an issuer failing to make full and timely payments of interest and/or principal and takes into account both default risk and loss severity in the event of a default[3]. To determine an issuer's credit risk, OBSI considers several factors including:

• issuer credit rating(s)[4] published by the major credit rating agencies, if available
• the issuer type (e.g., government, quasi-government organization such as a crown corporation, or a corporation)
• the industry sector and the nature of the issuer's business, if applicable
• key financial credit measures, such as profitability, leverage and interest coverage
• whether the debt is secured or unsecured. If secured, the nature of the security will be considered
• the debt seniority or ranking in relation to the company's other debt obligations
• the term to maturity
• the yield and how it relates to benchmark yields (referred to as spread risk)
• the issuer's interest payment history
• the market for the issue and its liquidity
• reasonable analysis from other industry professionals, including the firm and/or advisor's contemporaneous analysis

Mutual funds

When assessing mutual funds, OBSI generally relies on the risk ratings published in the mutual fund company's simplified prospectus or fund facts document.

Phase 2: Assessing the risk profile of the account or portfolio and any changes over time

Next, using the risk ratings determined in the first phase of analysis, we will assess the risk profile of an account or portfolio and compare it against the investor's investment objectives, risk tolerance and personal and financial circumstances.

This assessment will include an analysis of additional risk factors, such as the account's diversification and asset allocation, as well as the risks of any accompanying strategy, such as active trading strategies or the use of margin or leverage. We will also consider how the risk of an account or investment portfolio changed over time as a result of trading activity, changes in a security issuer's circumstances and/or economic or market developments during the relevant investment period.

Sometimes a firm or advisor informs us they combined low-risk and high-risk securities to achieve a medium-risk portfolio profile. In these instances, we will ask for supporting documents and analysis (such as an asset allocation plan or a correlation analysis) to show that the combination of investments at various risk levels did in fact achieve a medium-risk profile for the overall portfolio. In practice, we have found that the risk characteristics of high-risk investments with respect to volatility and magnitude of total loss are usually much higher relative to the profile of medium and low-risk securities, and consequently such "risk offsetting" is difficult to achieve.

Questions?

Should you have more questions about our risk rating process, feel free to contact us.

In addition, you can find detailed information about the other components of our investment suitability and loss assessment process in our Consultation Paper: Suitability and Loss Assessment Process and in Our Approaches section of our website. 

OBSI's approach to handling investor complaints involving segregated funds or other insurance investment products

• Whereas the Ombudsman for Banking Services and Investments (OBSI) is an independent alternative dispute resolution service mandated to provide an impartial review and make recommendations for the resolution of investor complaints arising from the provision of investment products and services to retail investors by its participating investment firms and their licensed representatives;
• Whereas securities regulators, with the exception of the Authorité des marchés financiers in Québec, have required investment firms within their jurisdiction to make OBSI available to their clients in respect of unresolved eligible complaints; and,
• Whereas investor complaints can arise that involve or include segregated funds and other insurance investment products made available to retail investors by insurance firms through licensed insurance representatives; 
• Whereas insurance firms are subject to different legislation and rules than investment firms which are participating firms in OBSI; 
• Whereas OBSI's Board of Directors has clarified through a revision to OBSI's Terms of Reference that OBSI will not review investor complaints about segregated fund investments; 
• Whereas it is in the interest of all investors that they be referred on a timely basis to the appropriate Ombudservice to have access to a free and impartial review of their complaint involving segregated funds and other insurance investment products; 
• Whereas the insurance industry has put in place the Ombudservice for Life & Health Insurance (OLHI) to handle complaints arising from the provision of insurance products and services, including segregated funds and other insurance investment products, by its participating insurance firms:

The following protocol shall be adhered to by OBSI:

1. Segregated funds and other insurance investment products not in mandate for OBSI

   OBSI does not have a mandate to review complaints relating to segregated funds and other insurance investment products whether or not such products are distributed by subsidiaries or affiliates of OBSI participating firms.

2. Handling of investor complaints exclusively involving segregated funds or other insurance investment products

   Where OBSI receives a complaint involving only segregated funds or other insurance investment products, OBSI will refer the investor to OLHI in writing, with a copy to OLHI, within two (2) business days of OBSI becoming aware that the investor's complaint is exclusively about segregated funds or other insurance investment products.

3. Handling of investor complaints involving both securities and some segregated funds or other insurance investment products

   Where OBSI receives a complaint that involves a mix of securities and segregated funds or other insurance investment products, OBSI will refer the investor to OLHI in writing, with a copy to OLHI, within two (2) business days of OBSI becoming aware that the investor's complaint involves segregated funds or other insurance investment product

   The investor will be asked to pursue their complaint with respect to segregated funds or other insurance investment products through OLHI.

   OBSI will proceed with its review of the investor's complaint with respect to only the securities involved in the complaint.

4. Referral of complainant to OLHI

   In the written referral mentioned in sections 2 and 3 above, OBSI will provide the complainant with OLHI's toll-free telephone and facsimile numbers, e-mail address, and postal address. If OBSI is also in verbal contact with the complainant, the complainant will be provided with any and all of OLHI's contact information desired by the complainant.

5. Referral of complainant to OLHI

   OBSI will provide to OLHI, within five (5) business days of the written referral mentioned in sections 2 and 3 above, all the information previously provided to OBSI that could assist OLHI in its complaint review. This includes all such information provided up to that point in time by both the complainant and the firm as well as any such information gathered by OBSI up to that point in time. In particular, OLHI will receive contact information for the complainant and the firm, correspondence if any, and any notes associated with the complainant's previous contact with OBSI. The written referral mentioned in sections 2 and 3 above will inform the complainant that this information is being provided to OLHI.

6. OBSI to take note of segregated funds and other insurance investment products in portfolio analysis involving investments that are not segregated funds or other insurance investment products

   Where OBSI is considering the suitability of an individual investment, a portfolio of investments, or an overall investment strategy, OBSI will take note of the existence of segregated funds and other insurance investment products in the investor's portfolio for the purpose of determining the investor's overall financial profile.

7. Consent and sharing of complaint information with OLHI

   OBSI will include the necessary language in its standard consent letter agreement to enable the sharing with OLHI of complaint information provided to OBSI.

8. OBSI to make public this protocol and volume of referred complaints

   OBSI will make public this protocol through an announcement in OBSI's e-newsletter, inclusion in OBSI's 2014 Annual Report, and will post the protocol in the appropriate section of OBSI's public website. OBSI will also provide information in its Annual Report on the number of complaints referred to OLHI.

Suitability

OBSI's approach to investment suitability and loss assessment

In many of the investment complaints we receive each year about advice-based accounts, investors complain that they received poor advice, their investments or investment strategies were unsuitable and/or that their investments did not perform as they expected. In such "suitability" complaints, investors ask to be compensated for the investment losses they incurred.

There have been numerous steps along the way of what has been a comprehensive process of consultation on OBSI's investment suitability and loss assessment process. OBSI has published two consultation papers; participated in an industry working group; solicited opinions from experts in loss valuation and the law; held three information sessions, one for each of the public, IIROC members and MFDA members; and consulted regularly with securities regulators, industry participants, investor representatives, and OBSI's independent Consumer and Investor Advisory Council. 

Regarding loss assessment, we provide alternative approaches for consideration that have been used by Canadian courts, financial services ombudsman offices in other jurisdictions, lawyers in settlement negotiations, and our Participating Firms in responding to client complaints. To view our Process for Assessing Investment Suitability and Compensable Losses click here.

In 2011 OBSI issued for public comment a consultation paper detailing our investment suitability and loss assessment process. After considering the feedback received, on May 10, 2012 we issued a second consultation paper detailing a series of proposed changes to our process. OBSI also published the Board of Directors' decision on changes to the methodology and OBSI's response to stakeholder feedback.

Systemic issues

OBSI's approach to handling systemic issues with the Joint Regulators Committee (JRC)

OBSI's Terms of Reference were amended in December 2013 to remove OBSI's systemic issue investigative powers1.

The Amended and Restated Memorandum of Understanding concerning oversight of OBSI among the Canadian Securities Administrators (CSA) and OBSI provides that the chair of the Board of Directors (Chair) of OBSI will inform the CSA Designates (the Alberta Securities Commission, the British Columbia Securities Commission, the Ontario Securities Commission and the Autorité des marchés financiers) of issues that appear likely to have significant regulatory implications, including issues that appear to affect multiple clients of one or more registered firms.

It is in the interests of investors and registrant ("Registrant" means a registered firm and a registered individual) that there is a process for the referral and review of these systemic issues.

The following protocol will be followed with regard to systemic issues.

Definition of Systemic Issues 

Systemic issues as referred to in this protocol shall encompass the following:

1. multiple complaints against one or more registered individuals about products or services provided to investors,
2. multiple complaints against the same registered firm about similar products or services provided to investors, or
3. the same complaint against multiple registered firms in a registration category and/or about similar products or services provided to investors which appear likely to have significant regulatory implications or to raise concerns about the registrant's fitness for registration.

OBSI Process

The OBSI Chair must inform the CSA Designates, in writing, of any potential systemic issue identified by OBSI within 30 days of OBSI making such a determination, providing sufficient detail about why OBSI considers the matter to be a systemic issue.

For purposes of this protocol, CSA Designates means those CSA staff representatives who are members of the JRC.

In determining whether there is a potential systemic issue, OBSI may consult with the JRC.

On request of a CSA Designate, OBSI will provide the name of the registered firm and/or the registered individual along with details of the issue. OBSI will continue to investigate and proceed with complaint(s) in the ordinary course.

Response to OBSI Notification

The CSA Designate which is the principal regulator for the registered firm will make the determination to investigate the systemic issue and/or refer it to the appropriate SRO for further analysis. If the principal regulator is not a CSA Designate, the CSA Designates shall advise the principal regulator of the systemic issue. If the registered firm and/or registered individual(s) are registered in more than one jurisdiction, the principal regulator will coordinate and inform the other regulators of the systemic issue and where appropriate may coordinate the analysis with the other regulators.

To determine next steps, the principal regulator, in consultation with the appropriate SRO (where applicable), will evaluate whether a systemic issue exists and assess the impact of the systemic issue on the registrant, the registrant category and/or investors.

Once the initial assessment has been completed, the principal regulator and/or the appropriate SRO may pursue a variety of responses. These may include, but are not limited to:

• initiating a compliance review or an enforcement investigation of the registered individual and/or registered firm relating to the systemic issue and/or the SRO undertaking a review of the registered individual and/or registered firm relating to the systemic issue, where this is within the jurisdiction of an SRO,
• initiating compliance reviews of the industry through sweeps on registered firm products and/or services, or
• assessing whether additional guidance and/or policy work are required to mitigate the systemic issue either at the CSA or SRO level.

If, following an initial review, the conduct at issue is the result of the acts or omissions of the registered individual and/or registered firm, the principal regulator or appropriate SRO may document the matter in the registrant's permanent registration record maintained on the National Registration Database (Recorded under the Alert category of Regulatory Notes on the National Registration Database), and where appropriate, may take further regulatory action such as terms and conditions or suspension of registration in accordance with the appropriate regulatory requirements.

If the systemic issue is referred to:

• an SRO for review, the SRO will keep the JRC and the principal regulator informed of the review
• a principal regulator that is not a CSA Designate, the principal regulator shall be asked to report back to the CSA Designates.

Each CSA Designate will advise the JRC at the next JRC meeting of any potential systemic issue brought to the CSA Designate's attention, including the steps that have been taken or will be taken to respond to the potential systemic issue by the principal regulator or an SRO.

1 Systemic Issue was defined in the TORs as a matter such as undisclosed fees or charges, misleading communications, administrative errors or product flaws discovered in the course of considering a Complaint against a Participating Firm which may have caused loss, damage or harm to one or more other Customers of the Participating Firm in a similar fashion to that experienced by the original Complainant.