Investor complaints critical to financial markets functioning properly 

Recent publication of a final report by the Board of the International Organization of Securities Commissions (IOSCO) has laid down rules for retail investor complaint procedures in financial markets.  The January 2021 report, entitled Complaint Handling and Redress System for Retail Investors, encapsulates the received wisdom of its “Participating Jurisdictions”, all 47 of them, including Australia, the United Kingdom and the United States, along with some more obscure ones like Armenia, Kazakhstan, Quebec and Tunisia.  Curiously not New Zealand, which is nowhere evident in the report.  After analysis of survey inputs from the Participating Jurisdictions, the report has boiled down best practice for retail investor complaint handling and redress to a set of nine “Sound Practices” (SPs).

According to the IOSCO report, effectively managing retail investor complaints is a big deal for running financial markets properly.  It cites other authorities such as the World Bank, the G20 and the OECD as backing this view and approvingly quotes Principle 9. Complaints Handling and Redress from an OECD report of October 2011, G20 High-Level Principles on Financial Consumer Protection, which principle sets out the core essentials of what is expected:

Jurisdictions should ensure that consumers have access to adequate complaint handling and redress mechanisms that are accessible, affordable, independent, fair, accountable, timely and efficient. Such mechanisms should not impose unreasonable cost, delays, or burdens on consumers. In accordance with the above, financial services providers and authorized agents should have in place mechanisms for complaint handling and redress. Recourse to an independent redress process should be available to address complaints that are not efficiently resolved via the financial services providers and authorized agents internal dispute resolution mechanisms. At a minimum, aggregate information with respect to complaints and their resolutions should be made public. (IOSCO report p. 3, OECD report. p. 7).

The OECD report itself sums up in one sentence why proper handling and redress of complaints laid by the investing public matter: “Consumer confidence and trust in a well-functioning market for financial services promotes financial stability, growth, efficiency and innovation over the long term” (OECD report. p. 4).

Nine sound practices for the world to follow

The IOSCO report lists and expands on nine SPs that effectively unpack the OECD report’s Principle 9:

• SP1: Establishing a system for handling retail investor complaints.

• SP2: Taking steps to raise investor awareness of various available complaint handling systems.

• SP3: Making available as many channels as possible for retail investors to submit complaints.

• SP4: Taking steps to support complaint handling systems.

• SP5: Encouraging financial service providers (FSPs) to offer a wide range of resolutions to retail investor complaints.

• SP6: Using complaint data to identify areas for new or enhanced investor education initiatives.

• SP7: Using complaint data for regulatory and supervisory purposes.

• SP8: Seeking input from retail investors about their experience with complaint handling systems.

• SP9: Making ADR [alternative dispute resolution] facilities operated by or affiliated with a regulator more accessible for retail investors.  

(IOSCO report p. 2)

Every jurisdiction in which securities laws are administered is effectively tasked by the IOSCO report with checking its retail investor complaint regime against the nine SPs to find out to what extent there is compliance with them, and to act to upgrade its regime where instances of non-compliance are to be found.  Implicitly, that includes New Zealand.  Our own country’s investor complaint handling and redress system should be at least as good as that summarized in the nine SPs and the explanation given of them by IOSCO.   If our system is in fact better than the IOSCO report describes, then so much the better for New Zealand’s investors.

Ins and outs of complaint procedures

A strength of the IOSCO report is that it goes into detailed comparative analysis of how various Participating Jurisdictions deal with matters such as complaint handling, alternative dispute resolution (ADR), and civil court action.  In that context, it can be seen that the nine SPs are in practice interpreted and undertaken in various ways that achieve effective compliance via different but convergent means.  Lessons can be learned and applied from this comparative approach.   

The report also recommends that financial market regulators should take heed of the types and volumes of retail investor complaints and redresses that occur in their bailiwick in order to refine more accurately their powers, oversight and interventions.  In that manner, a complaint and redress regime can significantly assist the OECD’s stated objective of fostering consumer confidence and trust as a means to the end of promoting long-term financial stability, growth, efficiency and innovation.  Retail investor complaints are thus a good thing, albeit that the IOSCO report wryly notes that, “It is true that investors dissatisfied with the outcomes they received would be unlikely to have anything positive to say” (IOSCO report p. 24).

An oddity of the intended practical application of these SPs, however, is that FSPs are very narrowly defined by the IOSCO report in a way that primarily captures investment distributors and advisers, but almost entirely omits issuers.  Thus in its definitions section, the report states:

“Financial service provider” or “FSP” refers to firms that provide securities products and services to retail investors, including broker-dealers, investment advisers, and, in certain jurisdictions, banks.

It is plain that this definition is intended to apply to entities that distribute products and provide advice related to them.  This impression is strengthened by the definition immediately above in the report’s text that states:

“Complaint” refers to complaints by retail investors against financial service providers and their agents and employees. In the section on civil remedies, complaints against issuers of securities may be included.

Accordingly, when reading the IOSCO report, it is important to bear in mind that it is quite restrictive in its discussion of the financial industry entities that it requires to be subject to a customer complaint regime.  The evident operating assumption is that retail investors would ordinarily complain about faults in the distribution experienced and advice received from the industry, and not about flaws in the investment products themselves.   This mode of analysis seems to be insufficient to capture the fact that issuers of securities to retail investors can be legitimate objects of complaint and claims for redress.  There seems to be no substantive reason why issuers would not be subject to the nine SPs.

Payback time

The topic of investor compensation is extensively addressed in the IOSCO report, with a wide variety of approaches evident across Participating Jurisdictions.  Of note is that a substantial body of academic literate is cited which covers the topic, particularly from China, where it appears that mechanisms for investor compensation are under intensive consideration.  Not mentioned in the IOSCO report, perhaps because not elicited by the survey, is Australia’s plan to introduce a compensation scheme of last resort (CSLR) as a back up system for when other avenues of investor redress are not available or viable.  

The Australian CSLR project was launched by publication of the 2017 Supplementary Final Report, Review of the financial system external dispute resolution and complaints framework, conducted by the EDR [external disputes resolution] Review Panel.  The key recommendation of the Panel states, “A CSLR should be established. A CSLR, if established, should be limited and carefully targeted at the areas of the financial sector with the greatest evidence of need” (CSLR report, p. 13).  Of note is that the Panel further recommends that the CSLR should initially be restricted to compensation for “financial advice failures” (ibid. p. 13).  The justification given for the focus on financial advisers is that, “in terms of the value of unpaid determinations, financial planners and advisers account for approximately 92 per cent of unpaid FOS [Financial Ombudsman Service] determinations” (ibid. p. 40).  The Morrison government reportedly plans to introduce the necessary legislation to establish the Australian CSLR in June of this year, which is likely to stimulate debate in New Zealand as to whether something similar is needed here.

Complaining in Godzone

As noted above, the IOSCO report implicitly invites comparison of its recommendations with New Zealand’s existing complaint handling and redress system for retail investors.  There is already a mature, legislatively embedded infrastructure in our country for this purpose, which has of late been added to by the Financial Services Legislation Amendment Act 2019, which comes into effect this year on 15 March.  Significantly, the new Act preserves section 48 of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 concerning the necessity for FSPs to be members of an approved independent dispute resolution scheme (DRS) in respect of financial services provided to retail clients.  In the New Zealand context, a DRS corresponds to the ADR of the IOSCO report and the EDR of the CSLR report.  The Financial Markets Authority, which oversees financial market regulation in New Zealand, does not normally accept individual retail investor complaints against FSPs, but refers investors instead to independent DRSs as the appropriate entities. 

For licensed debt issuers, including non-bank deposit takers (NBDTs), licensed managers of managed investment schemes (MISs), and their licensed supervisors, there can be lessons to imbibe from the IOSCO report, albeit that it is pitched at regulators.  It is a requirement of an MIS or debt/NBDT product disclosure statement (PDS) to list the entities to which a retail investor may complain, as is spelled out in regulation 56 of Schedule 2 Part 1, and in regulation 46 of Schedule 4 Part 1, of the Financial Markets Conduct Regulations 2014.  Explicitly listed in the regulations as parties to complain to are the issuer or manager (as applicable), the supervisor, and an approved independent DRS.  Accordingly, it behoves debt issuers, including NBDTs, MIS managers, and supervisors to check their own retail investor complaint handling and redress systems against the nine SPs listed in the IOSCO report to see if there are any deficiencies to be remedied or improvements to be made.  Supervisors additionally have authority under the Financial Markets Conduct Act 2013 to examine the complaint handling and redress systems of the MIS managers and debt issuers they supervise in order to be assured that these systems actually work as they are supposed to.

Conclusion

“Adherence to best practice policies and procedures in managing retail investor complaints and redress must remain a non-negotiable minimum standard feature of New Zealand’s financial markets,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.

“The IOSCO final report ‘Complaint Handling and Redress System for Retail Investors’ serves as a welcome and timely reminder that issuers of debt, including non-bank deposit takers, managers of managed investment schemes, and their supervisors cannot afford to be complacent about investor complaints.”

“Issuers, managers and supervisors must remain vigilant to ensure that their investor complaint handling and redress standards and actions are fit for purpose, scrupulously maintained, and regularly reviewed for fairness and efficacy.”

“New Zealand’s retail investors cannot have trust and confidence in our financial markets unless they feel assured that their legitimate complaints will be dealt with properly.”

“To the end of assuring these investors, and to meet their regulatory obligations, issuers, managers and supervisors must all not only handle complaints satisfactorily, but also learn constructively from them, as valuable information, on how to do better in future.”

For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt at [email protected].