Consumers depend on Fidrec, the Financial Industry Disputes Resolution Centre, and its job is to mediate disputes between customers and financial institutions.
But is it fair?
Fidrec is somewhat of a monopoly since consumers with a financial dispute have almost nowhere else to turn. The Small Claims Tribunal does not hear financial cases. One can take a case to the courts -- even after losing at Fidrec – but it’s expensive. Costs can easily exceed the damages sought. Contrary to popular perception, Fidrec is not a government body. It is a limited liability company, registered in 2005 and listing over 400 “subscribers” on its web site. All are financial institutions like banks, brokers, insurers and financial planners. Most prominent are the 130 banks.
Fidrec hires, fires and reviews the performance of its adjudicators. It also pays their salaries, which come primarily from the financial institutions. They provided start-up capital and pay $500 per case, while plaintiffs must pay only $50.
On the one hand, the lower cost benefits small investors. On the other hand, it may hurt them as well since Fidrec relies on the financial institutions -- who are defendants -- for its financial survival. Does this introduce a subtle bias at Fidrec in favour of the hand that feeds it?
Some of the adjudicators are retired judges and Fidrec’s web site shows that most who heard structured product cases are from big law firms.
Lamb vs wolf negotiations
How many of these law firms have financial institutions as clients or potential clients? How many if any have excused themselves because of actual or potential conflicts? These key questions have never been addressed.
Fidrec’s most well-known cases involved structured products like Lehman Brothers’ Minibonds and DBS’s High Notes 5. Those and all other cases require that plaintiffs make an effort to resolve their complaint with the financial institution before bringing it to Fidrec. It sounds reasonable but presents two problems:
First, it is unusual for a plaintiff to turn over all his evidence to the defendant and get nothing in return. The financial institutions can use the evidence against the plaintiff if the case eventually goes to Fidrec or the courts.
Second, a financial institution, like a bank, would receive a complaint from a customer and then review the customer’s file. It would look at the bank’s total relation with the customer including loans, deposits, investments and the length of time they have been a customer.
If it’s a highly profitable relationship, the bank may find it worthwhile to offer a generous settlement to keep the client. If it’s not, the plaintiff has less bargaining power and may receive less compensation, if any. This makes sense from the bank’s perspective. From the client’s point of view, it could help or hurt but it has nothing to do with the merits of the case. It favours the rich and well connected. It hurts the less affluent.
A second problem is consistency. Courts, for example, are transparent. In contrast, Fidrec requires that its plaintiffs sign a declaration not to disclose anything about the case’s proceedings or its outcome.
Other arbitration cases (non-Fidrec) may have non-disclose clauses, but these are agreed to by both sides. They are not gag orders imposed by an arbitrator, which happens to be a private limited company owned by the defendant. Common law relies on precedents for fairness and consistency. They make it likely that similar cases will be settled similarly. It is hard to establish precedents, however, without knowing the outcomes of cases and no Fidrec case is publicly available.
Defendants are large financial institutions with a legal staff and a history of how similar cases were adjudicated or settled by their own firm.
It is a powerful advantage and gives the financial institution at least a partial history of precedents plus expert advice on how to interpret them.
Larry Haverkamp, Finanicial columnist and adjunct faculty in Finance, Economics and Statistics at SMU
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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