Banks Solidly Chided by Feckless Regulator

PIAC reacts with bemusement at the high-level whitewash of banks’ aggressive sales practices

Despite it taking a solid year to get into action, investigate and report, despite reviewing 4500 complaints and talking to hundreds of bank managers, front-line employees and bank executives, despite reviewing 100,000 bank documents, despite extensive media stories documenting unfair, unsuitable and misleading sales practices by Canada’s big six banks, the Financial Consumer Agency of Canada (FCAC) today managed not to find widespread mis-selling of bank products, including travel rewards credit cards, personal lines of credit, increased credit limits, loans, mortgages, high-fee bank accounts and credit insurance in Canada.

The FCAC report is notable for detailing the bank sales culture and the extensive incentives to employees and managers to make sales. It also rightly points out that the control mechanisms employed by banks to discourage mis-selling are virtually non-existent. However, nowhere in this discussion is mention of the obvious fact that such a culture and such financial incentives clearly create a conflict of interest with bank customers, who are seen not as clients in their own right but as a means to an end of meeting sales targets, achieving bonuses or other “non-financial incentives” including company-paid trips and even promotions. This mistreatment leads to sales of products consumers don’t need, don’t want, and cannot afford.

The FCAC report also documents what every banking consumer already knows, namely, that the outsourcing of bank product sales to third parties, in particular those compensated by commission only, are a recipe for ignoring consumer needs and turbo-charges mis-selling.

But for all of its documenting of the general practice of bank mis-selling, the FCAC’s slim 24-page report provides no numbers or even quantification of complaints received or verified and absolutely no indication of which banks had more or fewer complaints regarding sales practices.  This assiduous avoidance of any hard facts, or clear accusations directed to any one bank (besides the group as a whole) smacks of protecting the industry and undermines the usefulness and integrity of the entire report. The message from FCAC is: consumers can do nothing about this situation; all of the banks do it and there is utterly no point in switching banks.  Suck it up buttercup.

In fairness, PIAC should mention that the FCAC did say out loud that: “retail banking culture encourages employees to sell products and services, and rewards them for sales success. This sharp focus on sales can increase the risk of mis-selling and breaching market conduct obligations. The controls banks have put in place to monitor, identify and mitigate these risks are insufficient.” That kind of language is unheard of in the cozy world of Canadian banking regulation. It is, in short, a strong chiding indeed.

However, having found that “the banks” nurture a culture of overselling, that that overselling creates a “risk” of breaching obligations to consumers, and that the banks effectively do not monitor or control this risk, the FCAC then confidently proclaims that it: “did not find widespread mis-selling during its review”.  Really? So, although there was a great risk of poor behaviour due to corporate sales culture, misaligned incentives, and virtually no oversight or internal controls, “the banks” were somehow resisting temptation to oversell to customers? While this may be theoretically possible, PIAC believes this conclusion is unlikely.

The hundreds of bank employee and customer stories conveyed to the CBC alone belie this conclusion.

The 4500 complaints from recent years reviewed by FCAC are but a fraction of those that are made directly to the banks each year, yet the FCAC in its report found that the banks were not keeping sufficient records of these internal complaints even to know how many were made, let alone the nature of the complaints – what the FCAC described as a “limited line of sight” to complaints.  What the FCAC has really described is wilful blindness of the banks to the fundamental conflict of interest with their customers.

So, to us, this is a problem.  And only the Minister of Finance can try to fix it. FCAC can’t and won’t.

How can the Minister of Finance fix this and avoid the potential dismantling of the banks as they turn away from their greatest strength and source of revenues, retail customers? By re-introducing his promised Financial Consumer Code – this time with real rules that require that banks act to act fairly, honestly and in good faith towards their clients and to sell products and services that are in the clients’ best interests. Anything less should be mis-selling and prohibited.

PIAC will be demanding a new Financial Consumer Code to make sales and performance of banking services work for consumers and to force banks to mend their ways.

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