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OBSI’s arms are now twice as long, but weaker than ever.

Last December, CSA mandated most EMDs and portfolio managers use the ombudsman to resolve disputes. On August 1, OBSI’s membership will double to more than 1,600.

CSA says the move “is an important component of [its] investor protection framework,” but rhetoric and reality have parted ways.

Anyone who understands children knows that failure to enforce the rules invites continued bad behaviour. Firmly and consistently enforcing penalties for bad behaviour, like no TV or video games for two weeks, usually brings them back into line.

The same principle applies to grown-ups, though this basic fact appears lost on CSA.

But not everyone’s unaware.

Back in 2011, OBSI commissioned a review by The Navigator Company, an Australian management consulting firm. It zeroed in on the ombudsman’s critical flaw.

OBSI can’t require anyone to compensate wronged investors. Instead, it relies on a combination of goodwill and the public relations worries of accused firms. The ombudsman’s only recourse with a firm that won’t cooperate is to issue a press release stating who refused its recommendation, who (in its view) was victimized and how much that investor lost.

Navigator’s report showed that naming and shaming wasn’t as effective as hoped. Between 2007 and 2011 there was “significant deterioration of goodwill from member firms”—and, increasingly, firms weren’t paying suggested restitutions.

The current system won’t work so long as firms can refuse payment, said the report, so OBSI needs binding enforcement powers.

Fast forward to 2014, and it’s déjà vu, as the trend to avoid restitution payments continues (see “OBSI’s record in 2013,” right).

This February, the OSC’s Investor Advisory Panel sent a letter expressing frustration over continued dithering on OBSI. That panel has repeatedly urged CSA to do something about the ombudsman’s lack of enforcement powers—so far, no response. Including EMDs and PMs in OBSI’s oversight mandate will make the body weaker, the letter warns. Absent additional resources for the bloated membership roster, OBSI could face “workload, staffing and funding stresses.”

The IAP was too polite. CSA’s rule change doubles the number of firms that can laugh off OBSI’s restitution recommendations.

How an end result this pathetic can be counted as an “important component” of CSA’s investor protection framework is unclear. It’s also a mystery why OSC’s failed to respond to its advisory panel’s cogent complaints.

Recent changes aside, OBSI remains a toothless tiger. And that’s why CSA shouldn’t have wasted time deciding which types of advisors should fall under OBSI’s purview. That action distracted them from the real choice: give OBSI bona fide enforcement powers, or cull it.

Dean DiSpalatro is senior editor of Advisor Group.

Originally published in Advisor's Edge

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