January 21st, 2011
On January 14, 2010, the Investment Industry Regulatory Association of Canada (“IIROC”), the self regulatory organization (SRO) that regulates all investment dealers in Canada, enacted what is almost certain to be a major expansion of its 15-year-old mandatory arbitration program. In particular, IIROC has increased from $100,000 to $500,000 the upper limit on client claims that are required to be resolved through binding arbitration if the client requests it.
IIROC’s mandatory arbitration program was initially launched in Quebec in 1993 and in Ontario in 1999 with a $100,000 limit. Since then, it is fair to say that a majority of client claims against investment dealers have still proceeded by way of actions in the courts and not through arbitration. This is primarily due to the low monetary limit on the claims for which arbitration is mandatory upon a client’s request. Even with procedures in place to make the arbitration of client-dealer disputes more efficient, the cost of arbitrating disputes is still significant and often not warranted for claims of less than $100,000.
The number of broker-client disputes that are arbitrated is almost certain to significantly increase with the higher $500,000 monetary limit. In addition to the increase of the monetary limit, the IIROC arbitration program has also been amended to permit a client to elect to eliminate the arbitrator’s discretion to award legal costs to the unsuccessful party unless that party has acted improperly or vexatiously in the proceedings or has unreasonably prolonged them. According to IIROC, this change is designed to address concerns that adverse costs awards could discourage clients from pursuing the arbitration process to resolve their disputes.
Unlike much of what IIROC does, these particular changes met with almost unanimous approval from investment industry stakeholders when they were initially proposed. There are good reasons for this. The changes will undoubtedly divert many more disputes from the public, time-consuming, and expensive court system to the confidential and potentially more efficient arbitration process. IIROC is even touting the fact that some arbitrations can, where the parties agree (and presumably there are no issues of credibility), be conducted through a “hearing in writing” without any actual testimony from witnesses. On top of that, the parties are able to choose their arbitrator from a roster of senior lawyers and retired judges who are used to dealing with broker-client disputes rather than risk a trial before a judge who may have no prior experience or understanding of how the investment industry works. Further, the confidentiality of the arbitration process can be a major plus for image-conscious brokerage firms or clients unwilling to expose their financial dealings in a public trial. Finally, arbitrator’s awards under this program are final. There is no right of appeal except in very limited circumstances. This all adds up to a process that is attractive to investment industry participants anxious to resolve disputes with clients quickly, finally and quietly.
It is important to note that arbitration is not mandatory if the client does not want to arbitrate. Clients still have recourse the courts for all claims, if they choose that route. It is also important to note that $500,000 is not a hard ceiling. If the client and the broker both want to arbitrate a dispute involving more than $500,000, they can agree to do so.
IIROC has indicated that it will continue to monitor the effectiveness of its arbitration program and that it is open to possible further changes to the monetary limit in the future. It is probably a safe prediction that IIROC will, at a minimum, find a significant increase in the proportion of civil claims that are diverted away from the courts and into arbitration.
The IIROC News Release regarding the changes to the arbitration program can be found on its website at: http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=D088F7A4F6D84FBFABB7BF61656B13C8&Language=en