FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, March 30, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.): I'd like to call this meeting to order. As you all know, we are here pursuant to Standing Order 108(2). We're studying the tied selling provisions in the Bank Act.

This afternoon we have as our first witness Mr. Douglas Clark, chartered accountant. Mr. Clark, you have been sitting in since this morning, so you have a clear understanding of how these committee hearings work. You'll have approximately 10 to 15 minutes to make your presentation and thereafter we will engage in a question-and-answer session. Welcome.

Mr. Douglas Clark (Individual Presentation): Thank you very much, Mr. Chairman.

Does everyone have one of these? I'll be referring to it.

I must first start by thanking the members of this committee for the opportunity to speak on the issue of tied selling that is contained in Bill C-82, passed during the previous Parliament.

My qualifications to speak to this issue are as follows. In 1979 I graduated from the University of Toronto with a bachelor of commerce degree and joined Coopers & Lybrand in Toronto. In December 1982 I was admitted to the Institute of Chartered Accountants of Ontario. During these Coopers years I audited banks, mutual funds, brokers, insurance companies, and large mining companies. Thus I gained an understanding of the inner workings of the financial services sector. In 1987 I began my own business specializing in professional accounting services, mainly to the same financial service sector in the greater Toronto area. I'm a member of the Toronto Board of Trade and the Aurora Chamber of Commerce.

Until my first letter to the chairman of the Royal Bank, I was not aware of the sensitivity of the issue of tied selling to the people of Canada.

I'll refer first to the letter on N2. I've indexed these in alphabetical order. I'll start with near the last of the letters. There's a letter to Paul Martin starting on N1.

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[English]

In my letter to the Honourable Paul Martin, I concluded on N2, the last page, that the issue of tied selling hits every Canadian close to home, because in order to obtain credit, we must tell the bank everything about our personal affairs. The bank is then in a privileged position, and if it uses this information to strong-arm people into making bad decisions to its own advantage and to their severe disadvantage, it is wrong.

In the Royal Bank's desire to be the top financial powerhouse in Canada, they appear to have forgotten who gave them that position: the farmer in Alberta, the fisherman in P.E.I., the lumberman in B.C., the single mom in Ontario, and the child in Quebec who opened his first bank account.

Before you is a package showing in detail chronologically the sequence of events that led to my appearance here. It contains all the letters sent to and received from the Royal Bank. It also has three Toronto Star articles, two Toronto Sun articles, one Montreal Gazette article, and one Aurora Weekly article.

Interestingly, last Friday, I got a call from Fidelity, and the interesting thing was that the Fidelity president was in Toronto from Boston, and his mother, who still lives in Halifax, mailed him a copy of this article on my case that appeared in the Halifax paper. It was too late for me to include this article in the package, but I mention it to point out that Canadians all across this country are concerned about this issue.

My year-end was January 31, 1998. At that time my Royal Bank account manager asked if I needed an increase in my line of credit. I simply said yes and asked for $40,000 more.

Let's go back to the beginning of the exhibit. The letter that started it all is on A1, dated February 16, 1998, to John Cleghorn.

The week before I sent this letter, I received a call from Nicki Lawrence, the account manager, to indicate that my request had been rejected unless I sold my Fidelity mutual funds and purchased Royal Bank mutual funds. I had given her all my corporate and personal information as part of the annual review. She knew everything about me, and I was shocked that such a thing would be requested.

I refused categorically and then asked about the verbal agreement we had from 1996. At first she denied there was a verbal agreement. I asked to be put on hold while she confirmed the fact that I had put up an $40,000 more in security than was requested. She came back on the line and confirmed that the security had been put up as I stated. I then officially asked that the verbal agreement be executed. She refused. I then cancelled my request. The conversation ended.

On Monday, February 16 I sent letter number one to the Royal Bank chairman. Within a minute of receiving her copy of my fax, the account manager phoned, saying, “Great letter, Doug, but the shit will hit the fan when the chairman gets the letter. It'll be your word against mine.” I said, “Nicki, I tried to be totally factual. Do you disagree with any of the facts?” Her response: “No, you stated all the facts correctly. I just disagree with your use of the word `coercion'.” My response was to agree to disagree on the use of this word.

Afterwards I was struck with the fact that her concern was about the use of this word, “coercion”, and she appeared to think that it was okay to exert pressure on me to sell my mutual funds to my great disadvantage, a very bad business decision.

I just wanted to show you how bad a decision it would have been, and this highlights some of the problems we came across in the morning. So let's turn to F2 and F3.

I'll put it into perspective. Fidelity mutual funds are number two in sales in Canada, and number one in Canada for mutual fund sales is the Royal Bank of Canada. Let's remember that fact and look at the returns. I just asked my broker to go through my portfolio, and wherever there was a match between Fidelity and Royal Bank, an exact match to what I had, I wanted just a two-year comparison where there were two years of figures.

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Look at Fidelity European Growth. In 1997, it was 26.9%. Royal European Growth was 21.5%. In 1996 this Fidelity fund was 26.2%, while Royal's was 19.5%. Fidelity True North is Fidelity's main Canadian equity fund; in 1997 it was 24.1%. Royal Canadian Equity, which is the same fund, was 12.9%.

We were all talking about the Far East funds and how badly they had done in the last little while. Look down at that one. Fidelity lost 22.2% and gained 21.7% in 1996. But look at the Royal Bank, which showed a 38% loss and 8.5% gain.

I broke even on Fidelity; I would have lost 30% on the Royal Bank.

We'll go back to what I was saying. If I had given in to what the Royal Bank wanted me to do two years ago, I would have made a very bad business decision.

I'm going to insert this question in my speech. Why is the Royal Bank number one when their returns are so bad compared to their number two competitor? It's just a question. I don't have the answer, but there are a lot of Canadians out there who may be making bad decisions for their retirement by just going with a bank without the option to compare all the other mutual funds. That's all I'm going to say on that one.

On March 5 I received a call from Julie A. Hardie, a Royal Bank manager. I sent the letter on February 16 and I finally got a call on March 5. The call was about a letter that was sent on March 3. I had not received it yet.

If we go to C1, we'll see this letter. Now even though I hadn't received it, I discussed it with her without knowing what it said. I asked her about the legally binding agreement. She said that she was not in the position to comment on the credit issues and had to run to an important meeting, so our conversation was terminated. It was just a telephone conversation. She agreed to fax me the letter, which is right here on C3, and call me. We traded calls, but never spoke again.

The next day, March 6, in total frustration, I sent a second letter, which is D1 and D2. So now we're up to letter two.

By the following Monday, March 9, I packaged these three letters and sent them to the Toronto Star, the Toronto Sun, and the Globe and Mail. On March 12, the first two articles—see E1 and F1—appeared in the Toronto Sun and the Toronto Star. Here's the Toronto Sun article, the real article, and here is the Toronto Star article. One of them appeared on the front of the business section with my picture in front of the Royal Bank holding the letter you just saw on the page before.

It was noted in these articles that you see in E1 and F1 that the Canadian banking ombudsman was still denying that any complaints had been received. So I sent a letter to the editor. See G1, which is the next page. Then just as Linda Leatherdale of the Toronto Sun was preparing an article for the following Sunday, the ombudsman called me to say that I was now the first real case of tied selling in Canada and would now be recorded in his annual statistics.

In order to eliminate some confusion—we heard a lot of reports about things not being reported and nothing being recognized—I spoke with him. I had gone to him—look at G1—two days after I mailed the first letter on February 6. He appeared at the Aurora Chamber of Commerce luncheon. I handed him a letter on the Wednesday after he spoke. I said that I thought this was his first case of tied selling.

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When he called me back that day, he said he thought the confusion was because it didn't come through the normal channels. In other words, I didn't go to the bank first. Let them resolve it, and then it goes up to him.

He wasn't in a position to recognize it, but as the press started to call him about my case—he's going to talk afterwards—he made the decision, shortly before he called me, that he was going to recognize my case as the first case. You can ask him questions.

I think it was just because the rule stated it had to be a certain way. Maybe because of the way my case went, it wasn't exactly kosher or the way it had been planned, but he finally realized it when the press reported this. I think he said it the same week the letter went out to the Royal Bank ombudsman, and he left a message on my machine on that Friday after I sent the first letter that he didn't want to make any more comments until he heard back from the Royal Bank ombudsman.

I took that to mean it was now an official complaint. You can ask Mike when he's up next how the procedure works, but I think he will confirm I'm now probably the first real recorded case of tied selling in Canada, so there won't be this difficulty again.

The next day, March 13, 12 minutes before closing I received a fax—that's on I1—from George F. Gaffney, who is the executive vice-president of the Royal Bank, stating I was going to have a meeting with the regional VP, Blair Boyd.

On March 17 word came that the Ontario finance minister was being pressured to remove tied selling from the securities legislation he was going to present. I sent a letter—J1—to my MP, Frank Klees, and to the same three papers. Valerie Lawton immediately called me back. I told her what I knew and that I had an idea there was a letter out there dated March 10—I didn't have a copy of it—and she said “Don't worry, Doug, I'll find it.” She got a copy of the letter and the article then appeared the next day, on March 18. If you refer to L1, it's the Toronto Star article that was the result of my putting her on to this letter of March 10. The tied selling issue again hit the press.

The same morning this letter on the Canadian Banking Association trying to pressure Mr. Eves into removing tied selling came to the press, I met with the Royal Bank vice-president, Blair Boyd. He had already read the article from Valerie Lawton mentioned above. We had a very frank and direct meeting, resolving all our outstanding differences. I sent a letter—M-1, or what I'll call letter 3—to the Royal Bank chairman.

He told me—and this is interesting—he had reviewed the file from cover to cover and although he could find nothing written down about the verbal agreement, he was satisfied there was an agreement. He went on to say he agreed with me and did not understand why I had been turned down. Since the bank had already considered me qualified and made me an offer of personal credit, as the sole owner of the business and being the same person, I should automatically have been qualified for corporate credit.

This highlights the difficulty small-businessmen have dealing with the large banks. They don't necessarily understand how small business works, and if you have a good credit rating personally, it means you also have a good credit rating corporately.

He then made an unsolicited offer to give me an additional $40,000 with no conditions any time I requested it. So I thought for a few seconds and I accepted the offer and made the request. I figured after all I'd been through, I wasn't going to turn that one down.

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Mr. Boyd said it would take just one phone call and the increased line of credit would be on my account by the close of business the same day, March 18. I expressed surprise that he did not want me to sign anything, or sell any of my mutual funds. Big laugh: “No, Doug, it's unconditional. You don't have to sell any mutual funds.” We parted, and that was that side of the story.

I then set up a meeting for Tuesday of last week, March 24, 1998, at 11 a.m., to sign the personal guarantee and postponement of claim. I requested to continue using the same account manager. Blair Boyd, the VP, met with her the previous day to make sure it was okay. It was. Therefore, I signed the guarantee with the same manager.

Just as I was leaving, she asked when I needed the additional line of credit, because it would take four to five days to set up. I said, “As soon as possible”, and left.

It was a good thing I did not rely on the second verbal promise of the Royal Bank made on March 18; otherwise, my cheques would have bounced.

I believe the practice of tied selling is very widespread, but like the issue of sexual abuse 20 years ago, people are terrified about coming forward, or, like other abuse victims in the past, they are not aware that they have rights.

At this point I would like to express my appreciation to Les Whittington and Valerie Lawton of the Toronto Star and Linda Leatherdale of the Toronto Sun. It is only because of the courage of these reporters and their willingness to report this story that dozens of people have started to speak out.

Like the sexual abuse of the past, financial abuse will stop only when it's exposed. Tied selling is nothing less than abuse of—and abusive—power. It is now the job of our elected officials at both the federal and provincial levels to deal with it.

I want to conclude with my letter to the Honourable Paul Martin, on N1 and N2, which cites a personal example that shows the dangers of self-regulation without statute protection.

I'll briefly say that the Ontario Institute of Chartered Accountants, one of the biggest and most powerful self-regulated bodies, did a major about-face on their out-of-date advertising rules eight years ago. I went to my MP, the present chairman of this committee, and he was willing to help one of his constituents by using a law on the federal statute books. My case, or the case with the institute, if you want to read it, starts at the bottom of page N1.

Let the law on tied selling in Bill C-84 be enforced and remove all the sections that make it a weaker law, because by removing tied selling from the legislation, you in a sense would be tying the hands of our elected officials while allowing Mr. Cleghorn, and others like him, to be on top.

Something I've said all along is that we have to be very careful. We must ensure that the benefits of a monopoly do not accrue only to the shareholders but also extend to the Canadian public.

Thank you very much for your time.

The Chairman: Thank you very much, Mr. Clark.

Mrs. Karen Redman (Kitchener Centre, Lib.): Mr. Chairman, on a point of personal privilege, I do understand that Mr. Clark has done a lot of work and cares passionately about this issue, but I do take exception to this being compared with sexual abuse. I don't have a problem with talking about it as being cloaked in secrecy, and there are certain areas where the analogy may ring true, but I do take exception to the comparison of that issue with this issue.

Mr. Douglas Clark: I didn't mean to offend you.

The Chairman: Thank you, Mr. Clark.

Thank you, Mrs. Redman.

We're going to move to the question and answer session now, with Mr. Solberg.

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Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman.

Thank you, Mr. Clark, for coming to appear before us. The case you raise is very troubling. Some of the things the bank did—it's not even alleged to have done them, they basically admit in the documents that they did these things—I think most people would regard as absolutely wrong. Having said that, I also note that the bank has been fairly quick to try to patch things up, even though they stumbled along the way. Given that, wouldn't self-regulation, combined with the transparency and scrutiny that comes with the ability to raise these things in the media, go a long way to eliminating these sorts of things?

Mr. Douglas Clark: You make one assumption, and I think this is the biggest assumption: that people are aware of their rights. I think we have a long way to go. Ever since these articles hit the press, I've been walking in downtown Toronto and I can't get down Yonge Street without someone stopping me, a total stranger, and pouring out their soul to me about something that's happened with the Royal Bank or with another bank.

To give even a personal example, this morning at 5.30 when I was booking into my flight with Air Canada down at Toronto International, the lady who was giving me my boarding pass said, “I know you. Weren't you in the paper?” So I started to talk to her and she said, “My bank just did that to me and I didn't know it was wrong”. She asked me if I had the newspaper article and she ran down the hall and all the flight attendants down at Toronto International Airport right now are reading about this case as we speak. They were totally unaware that what the bank was doing to them was inappropriate. I won't tell the case.

Another example concerns a friend. Again, he's petrified of the bank finding out, but he read the Toronto Star article on the Thursday and he called his bank the next day. They had actually told him if he sold his mutual funds and bought their mutual funds he would have the line of credit. He had the Toronto Star article. He called them back and said “Did you read the Star today? My friend Doug Clark is on the front page.” Do you know what they did to him? They slammed the receiver in his ear. I won't identify which bank it is because he doesn't want them to know.

My concern here is that what you say is right, but there has to be an education process. Only when there's an education process so that people know what their rights are will they basically stand up.

I thought of a few very practical examples. In the mutual fund industry we have to give a prospectus. Every time someone buys a new mutual fund, by law they have to be given a prospectus. Well, what's wrong with putting investors' rights on the front cover of that prospectus? You know, a little statement that if you bank with your bank, or you buy with your broker, you don't necessarily have to buy this mutual fund with the same broker.

The other problem is that you have a folder here, you go into a bank and you have a bunch of folders about your rights, but you have to go to the information section and pull out the right folder and then you have to go six or seven pages back. Most people don't do that. Maybe what we need to do is something very simple and very practical. We need to put a plaque or something on the wall, so when you're standing in line waiting to be served, with your money, you see this plaque showing the rights that you have as an individual. Since you make the mutual fund company put it on its prospectus, then make the bank put it on the wall.

You have to raise the visibility of what the rights are, what Canadians have rights for, in order for them to realize that they're being abused in the sense of financial abuse. We need practical solutions like that.

I know that part of the problem is that the banks have—if you can believe this—low margins. In other words, they have to sell a lot of product to make a buck. That's not service charge oriented. The problem is they need security, but in the zealousness to get the security, banks tend to take the easy route.

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I've enclosed my personal guarantee. It's on P2, P3, and P4. Now, if you just look at that document, it's pretty scary. It's a very detailed and complex document. What that means is if I don't pay my loan back, the bank can collect from everything I have and everything I own. The problem is, in order to do that, if I don't have the securities with the bank, they've got to put me into receivership. They've got to appoint a receiver and they've got to go through a very complex procedure to do that. They can still recover it.

In my case, my RRSP funds are not what's called segregated. What that means is they're segregated or lodged with an insurance company, so in the event of a receivership the bank can't get them. In my case, they're not segregated, so in the event of a receivership the bank can get them. But the point is, the bank doesn't want complications and the process is very complicated. The banks want to be able to access the recovery of their loans very quickly and very easily.

You have another possibility here. I think we can look at making it easier, maybe, for security to be pledged. Maybe that would eliminate the pressure of feeling that you had to sell your mutual funds and buy their mutual funds. That would give the advantage to people of being able to choose higher performing mutual funds and the banks would have the satisfaction of being able to recover on their loans. I'm trying to give you a sense here of some of the ideas.

I think most people will not stand up to their bank because they're not in the position I am, and that's the honest truth. As of April 13, when my last van payment goes through, I have zero personal debt. The only debt I have is to run my company, and that's what this is addressing.

Now, since I've paid for my house and because I have no personal debt, I can afford to stand up to the Royal Bank. I can easily walk over to any other financial institution and probably get as good or better a deal because I'm in that position. Why am I here? I opened up with my background because I feel it's important for me to stand up for those who can't.

In my personal friend's case, my neighbour's case.... I'll give you another example. My neighbour says “I'm being leaned on to transfer all my business, to sell my mutual funds and buy Royal Bank mutual funds”. He says “I don't know what to do. They're going to cancel my line if I don't do it.” So I got very creative. I asked him if he had mutual funds and he said he did. I told him to call a friend of mine down at Dominion Securities, Plaza Branch. I told him to open an account, transfer all his mutual funds down to him and then call the Royal Bank back and tell them they had all his business. He did as I said and I out-snookered them, because he complied with everything they said. They now have the assets under a sister company. He's done everything they said and he's safe, but that was creative and it worked.

So there are other things that can be done, but I'm trying to balance off.... I think what's happening here is we have to put a lot of money.... It is not only what the House of Commons may want to do, but I think the industry as a whole has to educate the public on their rights and put in very strong self-regulation.

I hope that I never have to again get my MP to put two federal lawyers on the case and possibly issue preferred indictments in order to get a self-regulated body to throw out a very archaic self-regulating rule. In my case, it was advertising. In the financial service sector, it's going to be tied selling.

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Unless you have that big club over the head of the people who are doing the self-regulating, they won't be as careful as they may be. I think it's important to put extremely strong legislation in place first, and then put a little thing in here saying that if self-regulation doesn't work, the statute provision kicks in. In other words, what you're doing is giving the elected officials.... If it's not working, then you can call your MP, you can call your MPP if it's securities legislation, and you can get your representative to make the assessment with the fellow behind me, the ombudsman.

In this case it didn't work. In this case, we probably will have to club one financial institution severely in order to bring all of the others into line. But you have to have the balance of the two.

I'm not saying to go around and club everyone. Only use the club after the self-regulation is shown to be not working. As a government and as a country, I don't think we can't afford the cost of financing self-regulation with public money. But we also have to make sure that self-regulation has the motivation to work.

Okay, I've said enough.

The Chairman: Thank you.

Madame Lalonde.

[Translation]

Ms. Francine Lalonde (Mercier, BQ): Thank you very much, Sir, for speaking to us. I must say that I appreciate the courage it must have required.

You are probably right when you say that, if you had not been in an comfortable position in terms of personal credit, you could not have brought pressure to bear. It is very useful for us to hear you. As a member of the Industry Committee, which is specifically responsible for loans to small businesses, I am very receptive to what you say. One can understand how much pressure there can still be, despite the provisions of the Small Business Loans Act, when it comes to lending to small businesses.

I must say that I am not shocked by your comparison with the way women could react to sexual harassment 20 years ago. In our society, where a good credit record is so important, when someone is denied credit by a bank, it is as if that person were guilty of something. It is this kind of guilt that prevented women to speak of the sexual harassment they had to put up with.

It seems to me that a strong law is essential and that self-regulation is not enough. In any case, if you had not had this publicity in the newspapers, you undoubtedly would not have had this letter, this call, and this result from the Vice-President of the Royal Bank. Do you agree with that?

[English]

Mr. Douglas Clark: I do agree with that. I don't think there's any way I would have, or it would at least have been a lot slower in coming. When you send a letter to the president of a bank and get a response back from an account manager who doesn't have the authority to deal with the issues.... The only reason it got notched up when it did was because it hit the press.

[Translation]

Ms. Francine Lalonde: In Ontario, has the Minister maintained the provision against tied loans in his Bill?

[English]

Mr. Douglas Clark: As far as I know, it hasn't been removed. I haven't spoken with him or had a chance to speak with my MP, though, so I can't say anything definitive at this point.

[Translation]

Ms. Francine Lalonde: In Québec, there is a provision, and it will also be reinforced.

I thank you very much for your contribution, but I will add a question on the possibilities of informing people and businesses about their rights. You are right when you say that, even though there is legislation, the rights provided under this legislation are not well known, and people are therefore likely to give in to some kind of blackmail anyway.

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[English]

Mr. Douglas Clark: No. You're absolutely right. I actually offered to assist the executive VP of the Royal Bank in his training program. I don't know whether he is ever going to take me up on it, but I did offer to help. I'm waiting to hear from him. But I think you're right when you say there needs to be a much broader educational effort. Personally, I think the press is quite willing to assist with this, because they're as sensitized about it as you and I are, and that has certainly come through in the coverage.

[Translation]

Ms. Francine Lalonde: One last question, Mr. Chairman.

The Vice-President did not hesitate to offer you an agreement. There was no problem, nor was it suggested in any way that your credit margin should be tied to any mutual fund transfer. However, do you think that pressure was put on you at the lower level primarily because of practices relating to possible performance objectives? Because of these things, legislation is absolutely essential. Without legislation, performance objectives will continue to prevail.

[English]

Mr. Douglas Clark: I think you're right. My mutual funds come out of my account at the beginning of every month—it's spread over 12 months—and I've been doing that for several years. At the beginning of every year, during RRSP season, my account manager, who already knows how it operates, still calls me and asks me if I want to buy the Royal Bank mutual funds.

That, to me, means that they're told they have to make that call, irrespective of whether the person needs it or will accept it. And in answer to your question, yes, at bottom I have a sneaking suspicion that without the publicity it wouldn't have happened.

As well, the thing I didn't mention is that they have.... No line is refused without being refused by the level up from the person who did the refusal. In other words, the account manager would have had to have gone to her manager, who would have then rejected my request as well, and at that point, he might have been the one, although I could never say this, because I've never talked to him in all the years I've been there. When I went to the 11 o'clock meeting, his door was shut and he didn't come out. Okay. It was very interesting. But maybe he said “See if you can get some of his other business and then he has the loan.” So I have no idea, I have no way of knowing whether that was the case or not, but it wouldn't surprise me.

And that raises the other issue. I think, and this is a very.... I mention this example because I want to be fair to the Royal Bank. I ran into the former branch manager of the Aurora Plaza branch on the day before the meeting of March 18. He sees me, stops his meeting, pulls me into an office, shuts the door and says “Doug, you'll never have any idea of what a major impact your letter had when it hit the press.” “What do you mean?” I said.

His name is Larry Otterman. You might even know him, Maurizio. He said they had a conference call with every salesperson across the country—a conference call!—from Newfoundland to Victoria on the day of the March 12 articles, which appeared in the Toronto Sun and the Toronto Star. And then, he said, over the next four days they had emergency training sessions throughout the whole Royal Bank system.

Now here's my question: Were they trying to train them how not to get trapped in tied selling, or were they trying to train them to make sure they didn't practise tied selling? I'm not sure. I didn't have the heart to ask him. But it did have a major impact on the Royal Bank, and in a sense I'm sorry that it would all come down on the head of this account manager, but those are the facts of life. I think the bank was responsive internally. I just hope that it reinforced the need to be very careful.

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[Translation]

Ms. Francine Lalonde: Thank you, Sir.

[English]

The Chairman: Mr. Casey.

Mr. Bill Casey (Cumberland—Colchester, PC): Thank you.

Based on your remarks and your really good presentation and my own experience and the testimony we had this morning, it appears to me that tied selling is not the exception. It's quite frequent or quite pervasive.

When I read the remarks by bank presidents and officials, they say they have a policy against tied selling, that it's absolutely against their policy. How can they be saying those things when it is so pervasive in the business? You can only give me your opinion, but is your opinion that there is no communication between senior management and the retail level, or is it a part of their strategy to not know? What do you think?

Mr. Douglas Clark: I think maybe the senior management looks at it somewhat differently. They look at sales targets, they look at the ability to meet objectives, and maybe in a sense they put the pressure on the lower-level staff, some of whom, as I think is this account manager's case, interpret what the objectives are and in an overzealous effort to meet the targets cross the line.

I think personally that's what happened. And I think that senior management has to take responsibility for using almost coercive tactics on its staff. And when you use those types of pressure tactics on your staff, you're ultimately going to have errors made in judgment and errors made in things that happen like this. Again, I think it's critical that we not only educate the public, but I think it's highly critical that we educate the internal staff of these soon-to-be mega-banks.

Let's face it, the Royal Bank, when they merge with Bank of Montreal, will have 17 million customers in Canada, which is, in my calculations, if you take the population as over 31 million, over half of the Canadian public in one bank. The pressure is going to be on, and we have to somehow balance the need to enhance shareholder value with the need to make sure that the Canadian public benefits from having a very secure banking system, which I think is the objective of it all.

Again, my concern is that the benefits of monopoly not only accrue to shareholders but also employees and the Canadian public. It's now in your bailiwick.

The Chairman: Your final question, Mr. Casey.

Mr. Bill Casey: I don't know if you were here, but this morning I related how in my experience as a financial adviser I had a customer who asked the bank to move his account from the bank to my office for investment because he wanted to change his investment objectives. When the money didn't come, the customer went over to the bank and the bank assistant manager said “The 2033 form is on the manager's desk. He has exceeded his maximum allowable number of accounts moved out this month, so you'll have to wait until next month before we can your money out.”

I believe that again is an indication of what you're saying: the pressure is on the staff and that pressure gets pushed on to the customer as well. Even though the senior management says we have a policy that doesn't allow tied selling, then the pressure is put on the staff to accomplish certain goals and objectives, and that gets turned into pressure on the customer.

Mr. Douglas Clark: I might relate just a simple story in answer to this question. The chief operating officer of Fidelity, David Denison, was telling me that there have been numerous cases of what he'll call “administrative coercion”. And what he'll tell you in that is that when Fidelity is asked to transfer an RRSP over to a bank, they do it the same day. If the bank is asked to transfer a mutual fund over to Fidelity, he says it takes weeks, and sometimes months and sometimes longer, and he says they kill the client administratively by not responding quickly to the request to transfer. So a simple thing that you as legislators can do is you can put time constraints on how long a request takes to transfer.

The good firms that are doing it quickly now will have no problem with this. The ones that take months to do it will be the ones that have problems with it.

The Chairman: Mr. Clark, thank you very much.

Mr. Cullen, followed by Ms. Redman.

• 1620

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thank you, Mr. Clark. I congratulate you. I'm sure in a macro sense you're helping to sensitize the banks to this particular issue. But when I look at the circumstances I wonder, when you had this proposal given to you by the account manager, were you not tempted to say “Is this the way you're proposing it?”, and if it was, to go to the branch manager and say “This just won't work. I can't believe this is being proposed. If it's like this I'm going to yank my accounts and go down the street.”

Mr. Douglas Clark: She basically said I didn't come within the ratios. What she meant by that was I didn't come within the pre-set parameters of the bank. I already knew the system because I've been in the industry so long, so I knew there was no way to budge her from that because I'd already been refused, probably down at Beaver Creek, because of the size of the credit loan. This one probably went down to the regional office, so I knew there was no way I could fight the system on it.

Part of the reason I then took the weekend and wrote the letter to John Cleghorn was because only he at his level was in a position to change the rules.

Mr. Roy Cullen: You may know the rules better than I do, but if my branch manager couldn't sort this one out I would clearly move my account.

Was there any sort of justification given, such as better collateralization of your loan or any sort of rationale, or was it as boldfaced as you state here? You had to sell your Fidelity funds and buy the Royal Bank funds.

Mr. Douglas Clark: It was sell your Fidelity, buy the Royal Bank. That was it.

Mr. Roy Cullen: Just as a matter of information, do you deal with RBC Dominion Securities Ltd.?

Mr. Douglas Clark: No, I take the approach that I don't want to have all my eggs in one basket, and this is probably what's irritating them. I use a small independent broker, Thomson Kernaghan, and I've used them for years. They've given me great service. I specifically want to keep my eggs in various baskets because I find I get better service that way.

I also knew Royal Bank mutual funds were bad performers. It also comes down to who are the big banks looking out for, themselves or the people they're serving?

Any Royal Bank account manager who advises you to take Royal Bank mutual funds has not looked at the numbers, has not looked at the results. They are not looking out for the interests of their client. Why? Because these two-year comparisons are not atypical of what the result has been.

The other point I'd like to make is I think the banks have the ability to service their clients in a better fashion, but they should not have account managers making recommendations to clients on investment decisions. In the Royal Bank's case, its Dominion Securities people should be making recommendations. If I talk to my friends who use DS, the people at DS don't recommend Royal Bank mutual funds because they're not good performers. They recommend Fidelity and others that are better performers for their RSPs.

Why doesn't the bank use the people in their sister companies that are controlled ultimately by the same owner, the Royal Bank? I think there's a lot of competition within these big banks and they get more rewards if I buy Royal Bank mutual funds than if they refer me to someone in DS who can make a better investment recommendation. If I were to get into how the compensation packages and rewards within the bank work, my case is telling me they do not have proper compensation structures in place that reward the bank staff for making sure the client is serviced in the best possible way.

The Chairman: Thank you, Mr. Clark.

Mrs. Redman.

• 1625

Mrs. Karen Redman: Thank you, Mr. Chairman.

I do appreciate the work you have done, and I think you should be proud of making people more sensitive to this, Mr. Clark.

You make an interesting point when you talk about banks being able to serve the consumer better than the way they're doing right now. Specifically, a previous presenter—and I know you were here for that—mentioned that he felt this was systemic. I guess that's something I'd like to hear you comment on.

He also asked about striking down proposed subsections 459.1(2) and (3), leaving in proposed subsection 459.1(1). I'm wondering if you would comment on whether you think that is at least a step in the right direction.

Mr. Douglas Clark: I haven't read proposed subsections 459.1(1) and (2), but if it weakens the prior section, I think it's a good idea not to put it in. If anything, I would strengthen it, and make it even a little stronger, as strong as you possibly can, and not have it thrown out of court.

You have to be careful that you don't make it too strong, because if you make it oppressive, the courts could throw it out. But you want to make it strong enough that the banks would be afraid of tripping over that line. In that way, you then tell the fellow behind me, the ombudsman, to try to get everything resolved so that only the really blatant cases come to....

Putting it another way, if that legislation, just that one section, had been in force now, what would my case be impacting on the Royal Bank if you had made it retroactive to January 31 of this year? The Royal Bank would be literally running for cover. You'd make an example of the Royal Bank, and then it would be years, I hope, before it ever happened again.

Maybe I'm being too melodramatic on this, but it's just a question.

The Chairman: That was one of the questions I was going to ask you, how the process would have been helped if this section had been in place.

Mr. Douglas Clark: I think the process would have been helped because I would have called you again, and said, “Maurizio...”. But honestly, before I even suggested that, I would have asked the ombudsman behind me to maybe work with the bank.

How can I say this? Maybe I'll switch into another area here.

In the area of transfer pricing, you have right now, in Revenue Canada, what's called.... The people who are shipping goods back and forth across borders have to show that they have procedures and processes in place to prevent transfer pricing from being abused. In other words, the other way of saying it is, they make sure companies aren't evading taxes by shifting costs onto Canadians and then essentially paying less taxes. They have to show there are procedures in place and they're working in order to escape the provisions of this Revenue Canada taxation act.

So I would say there are a lot of things you can do to help the banks. Maybe if there was specific legislation in place that the bank had to show that they had properly trained their staff—they had to show this, this, and this—to prevent the abuses, and there also had to be other things in place, and if the bank hadn't done this, they'd then be presumed guilty.

The Chairman: How long have you been dealing with this particular bank?

Mr. Douglas Clark: Ten years.

The Chairman: Have you been subject to pressure before?

Mr. Douglas Clark: No.

The Chairman: How many accounts and people who “may”—quote unquote—be subject to so-called tied selling would exist in this country? Do you know, more or less? You were saying 17 million, or something like that?

Mr. Douglas Clark: If the Royal Bank and the Bank of Montreal merge, there will be 17 million customers.

The Chairman: That's just one bank.

Mr. Douglas Clark: Yes.

The Chairman: So the total, if we took a wild guess, would be.... I'll ask the CBA and others who are going to come before us for a precise number of how many people actually use banks and how many complaints were received, just to put it into proper context.

Now, I'm not saying this practice is not happening. Obviously it is, and your case is evidence of that. But I also want to see what the extent of it is. Is it an industry-wide practice? How pervasive is it? I think Mr. Casey feels it is, but I'd like to hear more about it because I'd like to get a good feel for how this is practised.

• 1630

In your case, there were two issues that you were upset about. One was the issue of the verbal agreement that you referred to and which was not honoured. The other one was that tied selling was taking place. But these two are independent of each other, is that correct?

Mr. Douglas Clark: Somewhat. They wouldn't have tied it had they followed through with the verbal agreement. They would have said they had to follow through with the agreement, so they wouldn't have even asked for the sale of my mutual funds. They would have said that I had a verbal agreement, so they would have just given it to me because they didn't have any choice.

The Chairman: Also, it seems to me that a lot of your comments are directed at maybe a lack of training on the part of some of the loans officers. That's a major issue to you, isn't it?

Mr. Douglas Clark: Yes, I would say that. I'm assuming that she did not do it maliciously. I've known her for a while, and I don't think it was. So the only thing you can assume is that if it wasn't done maliciously, it was either done under lack of training or under the pressure on her to meet her sales objectives.

The Chairman: So would you use the term “coercion” in this case?

Mr. Douglas Clark: Pardon?

The Chairman: Is it coercion in this case, according to you? Can people who are not aware that they are actually doing something that they're not supposed to do...? Does intent play a part here in any way, shape or form?

Mr. Douglas Clark: You can coerce someone without even being aware of it, and I think that's what was happening here. Because she was following the pressure that was put on her by the targets she was trying to meet, she was definitely coercing me, was basically tying the grabbing of credit to purchasing other services.

I'm trying to sense where you're going on this.

The Chairman: You understand that I'm just trying to get some answers.

Mr. Douglas Clark: Yes.

The Chairman: Is the issue of training personnel very important to you?

Mr. Douglas Clark: It is.

The Chairman: Is that self-regulated by the industry, or do you think we should tell people how to train?

Mr. Douglas Clark: I think the industry will train if it is under sufficient pressure to try to prevent things like this from happening again. I think the training programs would kick in, and I suspect that the Royal Bank training programs now are in the higher degree of activity as a result of my case.

The Chairman: With the issue that happened to you, that whole incident, the person wasn't really malicious. That's what you said.

Mr. Douglas Clark: No, I really don't think she was.

The Chairman: So you just think it's a lack of training or—

Mr. Douglas Clark: Or excessive pressure put on from upper management.

The Chairman: Okay, Mr. Clark. You've done great work. You've given us one of the better presentations with all these exhibits. You're sort of a real-life example of what may in fact be occurring, and we thank you very much.

Mr. Douglas Clark: Thank you very much, Mr. Chairman.

The Chairman: I want to suspend for three minutes.

• 1634

• 1639

The Chairman: I'd like to call the meeting back to order and welcome Mr. Michael Lauber, the Canadian banking ombudsman.

Mr. Lauber, we look forward to your presentation. As you have probably gathered by now, we'll probably have some very interesting questions for you.

• 1640

Mr. Michael Lauber (Canadian Banking Ombudsman): Thank you very much, Mr. Chairman.

Thank you for the opportunity to appear before the committee today on this important topic of tied selling. I appeared before this committee about this time last year on the same topic, among other things, and I told the committee at that time we had not received any complaints about tied selling.

Today I'd like to take a few moments to bring you up to date on the role and the operations of the Canadian Banking Ombudsman so you know where we are today, and then I'll tell you about our experiences with tied selling and the experiences of the bank ombudsmen with tied selling.

I sat through the whole day today and I'm going to sit through the morning tomorrow, because I'm put in the position of having to resolve disputes and adjudicate in the area of tied selling. So I thought I should be here and get the total flavour of the moment and various people's perspectives on what tied selling is and isn't. That's why I've been here all the time.

Just to tell you a little about the Canadian banking ombudsman, we're an independent dispute resolution body. Our customers are small and medium-sized enterprises and personal banking customers. Our role is to evaluate the fairness of a customer complaint situation, not the legalistic perspective. We rely on industry codes and practices, such as tied selling, small-business codes, and privacy codes. We don't set the standards; we use them as benchmarks in determining what is proper and what is fair in the situation.

We cover all bank services. We deal with the issues of privacy and tied selling. We're a not-for-profit corporation created in the middle of 1996. We're an industry self-regulatory body. We started with seven member banks; we have 12 today. I report to a board, the majority of whom are independent directors who are not related to banks. As for my staff, at the moment there are six of us; one is located in Montreal and four are bilingual.

I think you've gotten a flavour of the process today: if a customer has an issue at the bank, they go to the bank and complete a dispute resolution process, they go to the bank ombudsman, and then they appeal to our offices, the independent body.

We look after all customers of the bank group, which is the bank; the trust subsidiary; the investment subsidiary, discount and otherwise; and the life insurance and casualty subsidiaries of the banks.

To give you an idea of some of our activities, to date we have made recommendations to the banks, all of which have been followed, and in monetary terms, our largest awards have been in the area of $260,000, $120,000, $37,000, and $25,000—not that money is necessarily the issue that makes a complaint a big issue, but it is important.

Awareness is an important issue with us. The question has come up a number of times here today; Tom Caldwell raised the issue this morning about the awareness of the ombudsman process.

I can tell you I've had almost 50 television or radio interviews across this country and untold number of quotes in the newspapers. I've estimated 50 million contacts, as the media would put it, and I'm actually having it calculated, out of curiosity—there's a company that does that.

I think the awareness level is quite reasonable. From the small business perspective, I just this week delivered 50,000 brochures to the Canadian Federation of Independent Business, who are going to distribute them to all of their members. They'll need more, but we started with 50,000. You have the brochure there. I'll be sending it to all members' riding offices and so forth.

It's a process that works. We're creating, within the banks and outside the banks, an awareness of the need to deal with customer complaints. The ombudsmen in the banks tell me there's a culture change: there's far more awareness of addressing the issue of a customer complaint and resolving it. And that's what it's all about.

We sit there at the top as an appeal level. The banks want to control their complaints. They want to deal with their customers. They want to keep their customers by resolving their complaints. We put the pressure down, the ombudsmen and the other focuses put more pressure down on the operating level of the bank, and things get dealt with.

• 1645

So I think it's working. It will get better. We're the independent part of the process and we are putting that downward pressure that makes it work. Ultimately, what really happens is that the culture matures in the bank. Look after your customers and deal with your complaints, whether this involves privacy, tied selling, or the process of calling a loan.

Just for some background, our board recently approved the expansion of our services. If other financial institutions wish to join Canadian Banking Ombudsman Inc., we would be pleased to have them. We'll take all trust companies, credit unions, other financial institutions, foreign or otherwise, such as Wells Fargo, GE Capital, Newcourt, or Beneficial. Any of them can join.

The idea is the concept of more one-stop shopping. The banks are in so many of these different areas. Insurance is left on the side for the moment because it's sort of unique out there, but maybe some day, we would welcome them too.

In terms of complaints, in the last fiscal year, we had 96 formal complaints for investigation to our office. There were 606 of what we call inquiries. People are calling for information, direction. We determine whether they really do have a complaint or need direction somewhere in the banks. In the first quarter of this year, we had 46 formal complaints out of 208 inquiries.

We've recommended in favour of the customer in 40% of the cases, which is a very, very high number. I wouldn't expect to maintain that, but it has been carrying on pretty consistently at the moment.

We have fully or partially satisfied between 50% and 60% of the people who have come to us with a complaint. As I said, I don't think these are necessarily benchmarks that are going to stand in the long term because they go through the ombudsman and the case gets a very thorough review at that level. So those numbers may drop.

Anyway, on to tied selling. We have had now, as of last week, one formal complaint to our office on the issue of tied selling. It's not Doug Clark. He was solved by the Royal Bank. He's not a complaint to our office. Okay? The Royal Bank dealt with him. They resolved the question with him, and that's the way it's supposed to be.

I met Doug. He gave this thing to me. I came back and faxed this thing. I told Doug that I would send it to the ombudsman of the Royal Bank, Verne McKay. They dealt with it. I only know second-hand what went on. It was mostly from Doug. But that's the way the process is supposed to work.

Look at the one that came to us this week. I got a little information on it. We talked to the individual. I don't think it is tied selling. The person used the word “coercion”; we recorded it as tied selling.

The bank ombudsmen, in the last year and a half, have had six complaints brought to them under the name of tied selling. One of those has been recognized as tied selling—that was Doug Clark—while the others have not. I've looked at the details in short write-ups on those complaints. They've been dealt with at the bank. I don't have the detail. They were not tied selling based on the information that was brought to me. They were really incentive selling and people were confused.

Consider the issue of whether people are shy in coming to the bank ombudsman. A number of people, including Doug, have made that point that people are afraid to come for bank dispute resolutions and the bank ombudsman.

Since the process started, which was about roughly two years ago now, more than 6,000 people have come to the bank ombudsman with their complaints. Some of them quite frankly have been far more emotional than with a tied selling issue where somebody felt pressured. I don't think people have any reluctance in coming to the bank ombudsman in that case.

While 6,000 went there, we had about 1,000 people come to us for information and so forth. But really, I guess over that period, more than about 125 or 130 were coming for a formal investigation. But 6,000 went through a full review at the bank ombudsman level. That, to me, is not saying that they're shy.

• 1650

Other than that, the experience in the tied selling area has basically been to carefully follow the issue. I've recognized it's an important topic. I've followed it in the media and other places, talking to people like Doug and so forth.

But you have to remember, my perspective on all bank industry issues comes from an independent point of view. While I'm on the edge of the industry, I'm independent of the industry. I don't see day-to-day operations and I don't see any satisfied customers, because the only bank customers who come to me are those who are unhappy.

So I wouldn't pretend to say I have a balanced view of things. I hear not just when the bank errors but also when the resolution process within the bank fails and the complaint is escalated through the process up to my office.

After the recent media coverage, I received two letters, one of which came from one of the investment advisers that Caldwell mentioned this morning. Now, if the facts are right, they would be tied selling. One involved a bank, he thought, and the other involved a credit union, he thought. But they would have been tied selling, if they were. He was not terribly specific.

A lot of people are getting involved in this issue. Another person wrote to me after the publicity. He had two personal instances that happened to be with a trust company. I talked to him for about 20 minutes on the phone, and neither one of his issues had anything to do with tied selling or coercion, yet he was very upset that he had been pressured and coerced, based on reading the articles in the paper. It was straight incentive selling. He was being offered a discount interest rate if he had multiple products with the bank. That is straight incentive selling.

That's what we've seen in the last little bit. We haven't seen anything more coming out. There's the one, as I say, that's come to our office recently. I have talked to them, or my deputy did, and I'm quite satisfied that unless there's further information, it is not tied selling.

I think there's a lot of confusion between what is tied selling and what is incentive selling. I think obviously there's education to be done, both with the public and within the banks, without question, but I don't think the 6,000 people who complained to the bank or the 1,000 who came to us, and many others, are being shy about coming forward with their complaints.

I can say that Verne McKay, the ombudsman of the Royal Bank, did look at Doug Clark's complaint. He reflected to me the other day that the recent experience has been good for the bank. It's focused employee attention on this issue and the importance of this issue and has also pointed out the need for continuous training. That's more or less a general quote of what Verne had to say.

I was at the session hosted in your riding the other day, having lunch with one of the bankers, when the topic came up. I think some of the publicity recently has sharpened the awareness that there's an issue there. They do have to learn the issue. They do have to be careful, and they have to understand what is right and what isn't right.

So I think Doug is right. The publicity is good.

Those are my remarks on this. As far as Doug's case is concerned, had he chosen to approach his manager or the regional vice-president or something, he would have been dumped into the dispute resolution processes at the Royal Bank. He would have ended up very quickly with Verne McKay. I think the resolution would have been very similar to what it is.

I trust media publicity does not affect the ombudsman process. I don't think in our office or in any of the ombudsman offices we are effecting our decisions based on whether the complainant chooses to go the media or not. My normal reaction is to do what you think you have to do, but it's not going to make any difference. We're still going to evaluate the case thoroughly. We're going to make our judgment based on that evaluation, not on how much media attention you get. It's fairness, and fairness goes both ways.

The Chairman: Thank you, Mr. Lauber.

We'll start with Mr. Solberg.

• 1655

Mr. Monte Solberg: Thank you very much, Mr. Lauber, for joining us. With respect to something you mentioned early on about how well-known the ombudsman is becoming, are there requirements in the banks right now to state somewhere on a wall—like Mr. Clark was suggesting about a consumers bill of rights—that the ombudsman office does exist, and that all the banks have an ombudsman, and that kind of thing?

Mr. Michael Lauber: To start with, the banks all have their literature within the bank. Generally speaking, they have a base brochure that is on customer satisfaction and the complaint resolution process, and is a self-standing document in most cases. That describes their process: how to make a complaint in the Royal Bank, the TD Bank; how to get in touch with their ombudsman; how to get in touch with us. There is also the statutory requirement in there that they can also go to OSFI. That's in all those brochures.

They've recently put out privacy brochures, which again all contain the reference to the dispute resolution process, the ombudsman for the bank, our office, and I think OSFI as well.

The tied-selling brochures that have gone out—well, the CBA brochure makes reference to the process. As for the banks' individual brochures, I happen to have just picked up the Royal Bank one, and it has a reference in it to the process, the Royal Bank solution centre, the office of the ombudsman of the Royal Bank, and the Canadian bank.... It's all through their literature.

Mr. Monte Solberg: Okay. I appreciate that. I guess one of my concerns is that most people probably don't pick up the brochures. Wouldn't it make more sense to have a copy of this sort of thing on the wall of every loans officer in every bank? Then when you were in there you could see it sitting over top of the shoulder of the loans officer in front of you, and you could be reminded of this. If the desire of the banks is to really make the office of the ombudsman—both the bank ombudsman and your office—known, why wouldn't we do that? Then perhaps we'd go some way to maybe avoiding some of the problems we're having today.

In this specific case, at least it would have gone through the ombudsman's office, perhaps. Wouldn't that make some sense?

Mr. Michael Lauber: Well, Doug was well aware of the ombudsman process, I believe.

Mr. Douglas Clark: Actually, no, I sent the letter first and then found out about it.

Mr. Monte Solberg: But wouldn't it just make some sense to do that? You're talking about finding out how many hits you got in the media and that kind of thing, but wouldn't it make sense to do it right in the banks?

Mr. Michael Lauber: You're not going to get an argument out of me over exposing the ombudsman process, but I think the banks have done.... For instance, we recently did a survey for my board because it wanted to know what was happening, and we asked the banks to provide us with the information. There's an awful lot of information that has gone out to the customers of the banks, publicizing the ombudsman process. There really has—a great deal. I think it was in January, for instance, that the TD put a flyer in to every single business customer in the bank.

Mr. Monte Solberg: Okay. My follow-up question, and my last question, is that Mr. Clark recommended that there be self-regulation in the banks, but that it be backed up with the club, as he said, of the law, of the statute. If self-regulation isn't adequate, then ultimately the law would kick in, and that would be the club that would put the banks back in line.

I'm curious to know if you have some thoughts on that, if you've studied some of the other professions that use that type of self-regulation. I think the CAs use that.

Mr. Michael Lauber: I'm a chartered accountant, myself, so....

Mr. Monte Solberg: Okay.

Mr. Michael Lauber: You could take a look at the paper I submitted ten days ago to Industry Canada on the the use of personal information. I think you'll find that I took a very strong point of view that it should be a self-regulatory process, and that if, as, and when the industries—this is far beyond banking—don't respond to the challenge, then that's the time for the government to step in and do something. But I think they should be challenged to do it themselves. That's the theme of that paper, and I wouldn't think this is any different.

Mr. Monte Solberg: Okay, thank you.

The Chairman: Madame Lalonde.

• 1700

[Translation]

Ms. Francine Lalonde: Mr. Lauber, I have read the small brochure you gave us. Frankly, I was extremely surprised. You will allow me to read the last paragraph.

It is written in French:

Are there any issues the Ombudsman cannot address?

Yes. The Ombudsman cannot examine complaints regarding general rates for products and services, such as interest rates, service charges, credit card charges, etc.,...

This "etc." may have serious consequences.

...regarding bank policies for granting credit or issues which are or have been subject to a lawsuit.

Is there anything you can actually decide on? On the politeness of tellers, or on the need to serve ourselves at automatic teller machines?

[English]

Mr. Michael Lauber: Madam, we can investigate just about everything about a customer complaint within the bank. But what this is saying is that in terms of the general pricing of products and services, our responsibility is to investigate and determine the fairness of an individual customer's complaint at the bank. We can't deal with the broad industry-wide issue that credit card interest rates are at 19%. For that individual customer I can't do anything.

So our office isn't designed to do that. If a customer is being unfairly service-charged on a special transaction, a business transaction, and it's unreasonable, I can deal with that. But there's no point in my trying to deal with the fact that the general service charge in the bank is 50¢ a cheque and it applies to you, you, and you. It's not what our office is designed for.

With respect to credit-granting policies, banks have criteria on which they will make a loan. The amount of security, let's say on your mortgage, the amount of income you're required to support a mortgage—if the bank meets those criteria we can't challenge that. But what we can deal with is the process. Because it's not the criteria that are.... The criteria are fine. The problem with the customer usually will be that the bank didn't follow its procedures. Other things got in the way of the decision. The personalities got in the way. Or it wasn't properly reviewed. Or the bank didn't collect all the information they should have collected to make an assessment.

The fact that the bank may require of the consumer that they have salary or family income of $50,000 a year to support a mortgage of $80,000 or whatever those numbers should be, that's fine. But if they impose conditions that are unreasonable outside their own policies, that's where we would deal with it. It's a one-off problem that we deal with.

Now in the third thing, the matters that have been before the courts, it's not up to an ombudsman to second-guess a judge. It's just inappropriate for an ombudsman to second-guess the courts.

[Translation]

Ms. Francine Lalonde: May I tell you something? If I myself read it like this, many people could also read it like this. With this kind of publicity, it is hard to believe that we can go to the Ombudsman.

I could also question the fact that the mandate is so “limited.” As for credit policies, the margin between the policy and its implementation may be narrow. This makes me wish to see... It must be in the documents I have, but we have so many. Not that the CBA does not provide information, but as you know, too much is sometimes like not enough. I do not know if I have the Ombudsman's mandate. It would be interesting to have it.

• 1705

I return the question. Do you think that, after having read this, anybody could think, if they have a credit problem... This is big, isn't it? In the end one might say: "Are there any issues the Ombudsman cannot examine?"

When it comes to credit policies, there could be a problem. It could be the person's perception of the credit policy, and it could be the credit policy that could be questioned. You do not need to do it publicly, but...

[English]

Mr. Michael Lauber: We have not had trouble with it. We haven't had much comment on this, but I take your point under advisement.

The important issue is that our role is one customer and their specific complaint at a time. In terms of other ombudsman processes in banking, their mandates are much narrower than ours, by the way. In the U.K., for instance, they use the term related to credit “mal-administration”; in other words, just badly administering a process in general. That's really what we deal with too: mal-administration of the credit process in those credit complaints. But credit is a small percentage now. It's probably around 20% overall of the complaints coming to us.

[Translation]

Ms. Francine Lalonde: That may not be surprising.

[English]

The Chairman: Mr. Nystrom.

Mr. Lorne Nystrom (Qu'Appelle, NDP): I have two questions. I want to first of all welcome you to the committee and commend you on the work you are doing.

I wanted to ask you, through your experience, whether or not you think you'd recommend that we need an independent ombudsman to look after financial institutions. You say right in your brochure—and Madam Lalonde was talking about some of this—that the banks are not required to follow your recommendations. You are not independent of banks; you're an independent board, but the banks do own you. It's a bit like the chickens having a complaint about Colonel Sanders, and the ombudsmen are Colonel Sanders and Colonel Sanders' brother. There is really a bit of a vested interest and a conflict there.

Mr. Michael Lauber: I am the independent ombudsman for the banks.

Mr. Lorne Nystrom: Yes, but I notice who owns you—the banks.

Mr. Michael Lauber: No, they fund us.

Mr. Lorne Nystrom: They fund you and—

Mr. Michael Lauber: I report to an independent board of directors.

Mr. Lorne Nystrom: But the banks are funding you, and do you bite the hand that feeds you? I don't want you to get defensive about this—

Mr. Michael Lauber: No, no.

Mr. Lorne Nystrom: —but I wanted to ask you whether or not we've reached the stage in this country where we need an independent ombudsman who is not relying on the funding of the banks.

Mr. Michael Lauber: You have an independent ombudsman. I don't think the funding is a problem, quite honestly. It works. All the banking ombudsman schemes around the world really are all structured exactly the same way we are. They're funded by the financial institutions; they report to independent boards of directors. We're not structured any differently. We're totally independent and the banks have followed all of our recommendations. There's no problem there, so I don't know why people are concerned about it. If the banks weren't following our recommendations, I would say there was something to worry about.

Mr. Lorne Nystrom: So you wouldn't make a recommendation for a totally independent office that is not funded by the banks, that's what you're saying.

Mr. Michael Lauber: We are a totally independent office.

Mr. Lorne Nystrom: Yes, but that is not funded by the banks.

Mr. Michael Lauber: That is not funded by the banks? Who's going to fund it?

Mr. Lorne Nystrom: There are many ways of funding an independent agency and tribunal in this country.

Mr. Michael Lauber: Put it this way: if the funding came a different way it wouldn't change the operation of the office.

Mr. Lorne Nystrom: My other question is, you say you have several hundred complaints and so on; that 40% of them are resolved in a positive way, and 50% or 60% of the people are satisfied.

Mr. Michael Lauber: Yes.

Mr. Lorne Nystrom: What are the major complaints? What are the major complaints you've satisfied people on? Do you have two or three that are really there?

Mr. Michael Lauber: Small businesses are roughly 25% of the total complaints, and half of those are credit recovery. The rest of them are personal and they're all over the map—transaction-oriented, investment products, a very small number of privacy—but they're mostly transaction-oriented. There are few about the slow transfer of RSPs, but it's basically a broad range of services. There's a lot of bad debt and credit card, people not paying their credit cards.

• 1710

Mr. Lorne Nystrom: Based on some of these, are you willing to make some policy recommendations to the committee? As Mr. Clark said, a deadline for the transfer of RRSPs, are you in a position to recommend that?

Mr. Michael Lauber: The industry has a stated policy on the transfer of registered products.

Mr. Lorne Nystrom: That's not my question. Are you ready to make policy recommendations to the committee on some of the things you're discovering that might be problems? Or is everything perfect?

Mr. Michael Lauber: No, obviously it's not perfect. I come here today on the subject of tied selling. There are some areas where, sure, we probably could. It's not really my role to recommend a policy. But we're making people aware. The annual report will be out. It will talk about some areas of difficulty.

Mr. Lorne Nystrom: So it's not really your role.

Mr. Michael Lauber: It's not the mandate to do it. You have to remember, Mr. Nystrom, my perspective as well. I only see where the system failed and where the customer is unhappy, and that's a small number of people. You can't go and try to re-engineer a whole system from that perspective alone.

The Chairman: Mr. Casey.

Mr. Bill Casey: I find it absolutely amazing that you have only had 606 complaints. I'm sitting here with my pen trying to figure out how many accounts there are in Canada. There must be 40 million, 50 million, 60 million bank accounts.

Mr. Michael Lauber: Oh, there could be.

Mr. Bill Casey: And you had 600 last year, and 96 you investigated. Doesn't that seem strange to you, out of 40 million?

Mr. Michael Lauber: Maybe the banks are doing a great job, I don't know.

Mr. Bill Casey: We wouldn't be here, probably, in that case.

Mr. Michael Lauber: Of those people, 6,000 got to their bank ombudsmen with their complaints in that period. Of that number, there would be about 120 on that full year-and-a-half basis who have come to us on a formal complaint basis. The bank ombudsmen are satisfying roughly 70% of the people who come to them with complaints. They're resolving 70% of those complaints.

Mr. Bill Casey: I believe that this little rule here in your book that says you must go to the bank first probably screens out 95% of the people who would complain ordinarily, because they don't want to go back to the bank they already left with a bad feeling and where they don't dare complain. That's my experience as a financial adviser.

Mr. Michael Lauber: Well, 6,000 got as far as the ombudsmen. How many got into the dispute resolution body, the other levels of the bank? Probably three or four times that number.

Mr. Bill Casey: I've only got 606 here.

Mr. Michael Lauber: That's my office. In the approximately two years since they started, roughly 6,000 customers got as far as the bank ombudsmen, brought their complaints to the bank ombudsmen.

Mr. Bill Casey: Would you change the rule to allow people to complain to you directly, without going back to the bank?

Mr. Michael Lauber: I can tell you that the Australian ombudsman system is structured that way. They don't have the ombudsmen in the bank. They have sort of middle-management people running complaint departments in their banks. He spent a couple of days with us in Toronto in my office and with a couple of the ombudsmen. He just wrote me last week and referred to our marvellous system in Canada where the banks have the ombudsman process within the banks managed by senior executives. He thinks it's fantastic.

Mr. Bill Casey: Don't you think if consumers set up the bank ombudsmen system they would set it up so that the consumer could go to you without going back to the bank? If this were set up for the benefit of consumers, don't you think it would be set up so that they could go to you directly?

Mr. Michael Lauber: The bank wants the opportunity to resolve the complaint with their customer.

Mr. Bill Casey: That's what the bank wants. Now, would the consumer do it? If we left it up to the consumer, do you think the consumer would design a different program?

Mr. Michael Lauber: They might. In the United Kingdom, you go straight to the bank ombudsman. Bank ombudsmen in the United Kingdom received, if I have my numbers right, 8,000 or 9,000 complaints last year, complainants that came to the bank ombudsman. He investigated 600 or 700 of them, and the rest of them he sent back to the bank to be resolved, because the bank is the one that has the information and can resolve them.

• 1715

I'm just comparing two alternative schemes, you see.

Mr. Bill Casey: I guess my little point here is that this plan was set up, as Mr. Nystrom said, by the banks, and it's designed to give them the benefit of the doubt, perhaps, as opposed to a system that would be set up by consumers.

Mr. Michael Lauber: But it was set up along the lines of the benchmark ombudsman schemes around the world.

Mr. Bill Casey: Set up by banks.

Mr. Michael Lauber: But they're highly regarded; they're the benchmark schemes.

Mr. Bill Casey: If this were set up to really help consumers, though, it would be set up so consumers could go to you directly without going back to the bank, where they already feel uncomfortable.

Mr. Michael Lauber: But you still have to go back to the bank.

Mr. Bill Casey: Well, at least they'd have somebody to help them, and that's the problem.

Mr. Michael Lauber: Understand the role of the ombudsman in the bank. The ombudsman in the bank by and large is a pretty senior executive. Mostly in the big banks they're senior vice-presidents or senior vice-presidents retired. They are set up in an independent office. They report to the chair of the bank and to the full board of the bank or to the board committee. They have a lot of autonomy and independence within the bank, and they're structured that way.

Not to pick on Verne McKay of the Royal, but in a media response once, when he was challenged on this very point, Verne said, “Look, the Royal Bank pays me to be independent”. Sure, he's an employee of the bank, but his job is to take an independent view of the complaint and try to resolve that within the bank. Then I'm the independent body that second-guesses his view.

Mr. Bill Casey: I just made a list of four customers, as a financial adviser. I just thought about four who had problems with the bank, and I'll just give one. One was a businessman who went to the bank to move his RRSP. I don't know the words that were used, but the bank left him with the impression that his business line of credit would be called if he moved his RRSP away from the bank.

That man would not go back to the bank to complain, for the same reason he came out of the bank shaken. He would not go back to the bank and complain about it for fear he would have his line of credit called. So you would never hear about it and the bank would never hear about it. I'm just saying if this were set up so that person could call your office, you might get more than 606 calls.

Mr. Michael Lauber: In a case like that, though, what I am going to do with that? Believe me, there are two sides to every story.

Mr. Bill Casey: I agree.

Mr. Michael Lauber: I don't care how credible that person is when they come and talk to you. When you go back and start looking at the case from the other side, there are two sides to every story. You cannot investigate a complaint from one side. So you have to go right back to the bank anyway.

That's the problem. You can't just come to me and I'd say, “Gee, that sounds terrible. They really shouldn't do that.” There's no way I can make that assumption without getting the bank's files. We have access to the complete files of the bank. We have a pile of them. Most of them even leave their privileged legal information in their files when they send them to us.

But the trouble with that kind of thing and the whole area of tied selling is there was no fly on the wall listening at that time, and tied selling can be as simple as somebody making a mistake in how they phrase things or in the ordering in which they dealt with them.

In Doug's case, the account person dealt with Doug in the wrong order. Had she flipped the order around and said, “Here's the loan. That's fine. For the loan you're going to bring me collateral of x number of dollars and we're in business on the loan. Now, Doug, can I talk to you about some interesting opportunities I have here for you?”, everything would have been fine. The trouble is she put the interesting sales opportunities in between.

Mr. Bill Casey: Would the situation I just described be tied selling, in your mind, or wrong? I agree there are two sides to every story, but if that were true, exactly the way I described it—

Mr. Michael Lauber: If it were true that giving the loan was tied to bringing or keeping the RRSPs there, that presumably would be tied selling, because there's no reason the RRSPs have to be there or have anything to do with that loan.

Mr. Bill Casey: For a corporation.

Mr. Michael Lauber: Yes.

Mr. Bill Casey: But he would have to go back to the bank to complain about it.

• 1720

Mr. Michael Lauber: Now, if it were other security, and if they said “Look, your business doesn't support that loan in its own right; I need $50,000 of your personal securities pledged in support of a guarantee of that loan”, that's perfect. It's how you deal with it.

Mr. Bill Casey: Right. Okay.

The Chairman: Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chairman.

Thank you, Mr. Lauber, for appearing before the committee today. You made a distinction earlier between tied selling and incentive selling. In lieu of examples, could you define that for us, and help the committee that way?

Mr. Michael Lauber: An incentive sale would be...well, the one the guy called about. His son was getting a mortgage for his first house. The bank had offered him prime plus ¼, or something like that, on his mortgage.

Mr. Roy Cullen: I'm sure that's useful, but is there any way to define both tied selling and incentive selling?

Mr. Michael Lauber: Incentive selling is when you give the customer a benefit in connection with the sale of another product or a group of products. The customer wins out of the transaction. You get your mortgage but you get half a point off your mortgage if you also buy your RRSP through the bank. You win. You save half a point on your mortgage.

A typical thing is in the promotion. The banks at RRSP time offer loans for RRSPs. If you buy that bank's investment product, maybe you can get your loan at prime. If it's a general loan for the purposes of buying your RRSP, you get the standard rate, which may be prime plus a half, or prime plus one. You get a benefit from buying the bank's product. That's a beneficial sale.

Now, if they wouldn't do that, and said whatever you borrow, we won't give you a loan unless you buy the bank's product, then that would probably be tied selling, in that case.

Mr. Roy Cullen: I think you're saying that the difference is, in tied selling, one service is conditional on your taking another product or service.

Mr. Michael Lauber: That's right. In the case of this, you could only have your business loan if you bought your RRSP product there, because your RRSP can't be security anyway. So there's no reason to have an RRSP there from collateral for a loan. They maybe could give a preferential rate if you bought your RRSP there, or brought it in.

Mr. Roy Cullen: In your mind, are the two things very different? Is is black and white, or is there any grey in between?

Mr. Michael Lauber: I'm sure there are some cases that aren't absolutely clear-cut, but basically, tied selling is where you are forced or coerced into buying a second product and there's no benefit. You're being hurt rather than helped. On a preferential, you're clearly being given an incentive, and usually a financial reward. You're better off financially by having bought the second product, or the two products.

Mr. Roy Cullen: Thank you.

Switching gears for a moment, with the banks moving, as I understand it, more to wealth management, it seems to me—and your role is not perhaps to anticipate policy, but I'd be interested in your perspective on it—with the banks at, say, the retail level, or any level of a bank, having access to more information, whether it be RRSPs, GICs, savings accounts, insurance, or whatever within a total portfolio, will there not be more incentive, if you like, for various employees who are paid commissions to sell certain products or services to try to access that information and use that as a selling tool?

How would you advise this committee as to how that should be structured to avoid that kind of situation?

Mr. Michael Lauber: The banks have a privacy code about sharing the customer's information within the bank and within the divisions of the banks. They can't share that information.

• 1725

As I say, I'm a chartered accountant, so I've come from outside banking. I've had no background in banking at all. One thing that I guess I've been impressed with is the culture of confidentiality within the banks. They are extremely private organizations as far as sharing and using customer information. Even with the working relationship we have between the banks and the bank ombudsmen and so forth, until we have a privacy release from that customer, we get nothing. And that's good, because what you do have you have permission to have and you can't make a mistake.

They're very private organizations, and when it comes to sharing information for marketing purposes, they have their privacy codes—I'm sure you've seen them—based initially on the Canadian Standards Association privacy code and adapted for the Canadian Bankers Association. In turn, each bank has adapted that for its own purposes, each one building on the other, “can't be less than” and so forth.

So I haven't seen that as a problem.

Mr. Roy Cullen: No, not at this point. Policy is policy and corporations always have the best of intentions, but human nature being what it is, are you concerned that the pressures to break down these barriers might be quite intense if there are incentives? Or do you think the banks, as you say, have such a positive record and culture that they'll be able to manage that process?

Mr. Michael Lauber: You have 225,000 people, I think, working within the banking industry. On a daily basis they are doing complex transactions, simple transactions and so forth. And it would be naive to think that somewhere once in a while somebody's not going to make a mistake, go too far or say the wrong thing. We all get up and have a bad hair day once in a while. Mistakes are going to happen, and that's what the process is for.

And that's what our process is for: when that mistake happens, if it's not resolved at the branch, if they don't stand up to their mistake and admit to Mr. Jones, for example, that they messed up, they apologize and they'll make it right, the process is accessed and it gets to an evaluation and somebody will make sure that Mr. Jones gets treated fairly. And that's what the process is all about, the mistake that's not dealt with right away.

The Chairman: Thank you, Mr. Cullen. Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you.

As I listen to you describing this, it seems to me that it's a whole bunch of issues about terms and what people mean by tied selling. It sounds like there's a whole lot more grey than there is black and white on the edges. And it seems like the issue is about a power imbalance or a perceived power imbalance; it's about consumers knowing their rights. And while you may only have had one case, and Mr. Casey's friends may have come forward or not come forward, there could be a lot of people who've been “tied sold” and feel quite comfortable with that and have never come forward to complain because they thought that was normal practice.

Mr. Michael Lauber: Yes.

Ms. Paddy Torsney: So really, this discussion with you is not very clear, because, sure, you have had only one complaint and the banks have had only six, but who knows how often it's happened? And I can't imagine that you have not been told by people at parties or wherever, if you really engaged them in a discussion, that they're concerned, that there isn't some uneasiness about certain suggestions for moving accounts.

Mr. Michael Lauber: I can honestly tell you that in this job what's interesting is that you're a little like a medical doctor who goes to a party and—

Ms. Paddy Torsney: Try being an MP.

Mr. Michael Lauber: —everybody has their bank stories. And you go to the golf club and everyone has their bank stories to tell and so forth. But quite honestly, nobody in that environment has raised the tied selling issue. They've had all kinds of horror stories, and I've heard some beauts, but I honestly haven't had a tied selling one come to me on that basis.

Obviously tied selling takes place, because people make mistakes and they go beyond the bounds and push it. We hear the stories and so forth, so there has to be some truth to them. But I don't think it's systemic.

Ms. Paddy Torsney: So what are the other 605 complaints that came into your office that we need legislation for?

Mr. Michael Lauber: You don't need it.

Ms. Paddy Torsney: This is an issue that you're telling us is not an issue, that this legislation, then, is superfluous and that whatever else is going on in terms of consumers' issues, is the other 605 calls that your receptionist got, only 96 of which needed your intervention. What's going on out there?

• 1730

Mr. Michael Lauber: They're all over the map. I'll take a look here. We've got some stats here somewhere. It would give you a little better idea if I had them in front of me.

Ms. Paddy Torsney: Do you think we need this legislation?

Mr. Michael Lauber: On this? Well, I can say that based on what's come to me, no. I haven't seen a big enough problem here at this point coming to my office. That's all I can judge on.

Ms. Paddy Torsney: So we don't need to enforce sections 1, 2, or 3 in this?

Mr. Michael Lauber: I'm afraid I didn't fully follow the argument on sections 1, 2, and 3.

To just give you some background, in the last fiscal year, in our office, there were 61 complaints for personal.... Actually, 23% had to do with credit collections, while 30% had to do with accounts and transactions. That's any sort of a transactional thing in the normal course of business that glitches. It could be putting on a stop payment. It could be NSF cheques. It could be anything like that. Privacy and confidentiality involve 3%, which is a couple of cases. Service and advice is 8% of them and so forth. Card services are 10%.

The bank numbers lean more heavily toward credit in the bank ombudsman numbers, which I also get and report on. But basically, there's a pretty good spread. Credit is the major one in small business particularly where half of the small business complaints were in credit collection.

Credit collection by and large in a small business area didn't have much to do with the business decisions of whether that business was going to survive or not or whether the business was in trouble. Most of them, if you start digging into them, showed that it was the process they went through.

Now we're back to this maladministration or whatever, the process of the credit. The businesses I think were generally businesses that were in trouble. The process wasn't followed properly. The people weren't treated well. They weren't given enough time. They weren't given the right advice or the right opportunities. That was generally it, because the business decision was okay.

Ms. Paddy Torsney: So, Mr. Lauber, on this issue, we seem to have some discrepancy between your experience and what people are telling their MPs and what certain banks are experiencing and various things. Is the issue really that consumers don't know their rights?

Mr. Michael Lauber: I'm sure an element is the awareness of what's right and what's wrong out there. Even within the banks, there's a training issue, obviously. The Royal Bank has said that publicly and also to me. They said there's a training issue. There's an emphasis on it. It's there.

I'll just roll it back 18 months. As a consumer, who had ever heard of the term “tied selling”? Practising as an accountant, I don't think I ever heard the term “tied selling” until I got into this job. I had probably been in this job a while before I heard the term “tied selling”.

I think I understood the concept of coercion, and the vast majority of people are hard to coerce. In some of the cases that were talked about here, I don't understand why people would stand to be coerced because they weren't in a position in which they could be pressured.

Ms. Paddy Torsney: It's all about perception. If I feel like I'm being coerced and I don't have the power to go somewhere, then I'm being coerced.

Mr. Michael Lauber: As for some of these people, I don't know why they wouldn't just tell the bank to get lost and go somewhere else because they were mobile.

Ms. Paddy Torsney: Maybe there's no other bank in town.

Mr. Michael Lauber: Well sure, but at most places there's a choice.

Ms. Paddy Torsney: Been to rural Canada lately?

Mr. Michael Lauber: Yes. Well, 75% of the population of the country live in five centres.

Ms. Paddy Torsney: Okay.

• 1735

Mr. Michael Lauber: So people do have a choice in many cases. Somebody who is paying their mortgage and paying their credit cards can't be pressured by their bank. If they are, there's no reason why they shouldn't take that through the complaint process. I'm quite sure that the people who are pressuring there are going to get their toes stepped on fairly hard if they do.

There are people who are vulnerable because they are too much in debt, and I can see them being afraid to come forward. But somebody who has their mortgages and credit cards up to date—and that's most people—if they're pressured, should go to the ombudsman, and I'll tell you, they'll be heard.

Ms. Paddy Torsney: Yes. Power imbalances are kind of dicey. Okay.

The Chairman: Thank you, Ms. Torsney. Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chairman.

Based on your own definitions of incentive sales and tied selling, there's actually a question that I wanted to ask, but you've already answered it. Is tied selling wrong?

Mr. Michael Lauber: I think so, yes.

Mrs. Karen Redman: Do you think most people generally in the banking business would agree that it's wrong?

Mr. Michael Lauber: I think so. Sure. They've issued a statement that says it is.

I don't care what business you're in—to use coercion to sell a product I think is wrong.

Mrs. Karen Redman: So section...I think it's 495.1, which basically entrenches that in legislation—is there a reason in your estimation, other than based on the vast volume of complaints, not to go that route?

Mr. Michael Lauber: I'm not sure what the negative side of having it there is, and I don't know how it would impact on that innocent mistake. I just wonder whether it's too much, because the person in the bank who makes a mistake and uses coercive selling on a person—what is the impact of that on that person or the institution when it's in legislation? I don't know the answer to that. I'm not a lawyer.

I know that in a dispute resolution process, that customer can get some satisfaction. Any discipline out of the law, I believe, is only a penalty on the institution. The law wouldn't be able to bring any satisfaction to the customer. That would be my understanding of the law.

It's like going to the Investment Dealers Association. They can penalize the institution, but they can't do anything for the customer.

The Chairman: So you don't think that enacting that section would really change anything, then?

Mr. Michael Lauber: Mr. Chairman, I'm not a lawyer. I'm not in the banking industry and operating in the banking industry. From my perspective, whether the law is there or not, if you bring a customer to me who has clearly suffered from tied selling, I will deal with that customer on the basis of that and ensure that they are treated fairly in the process.

Mr. Bill Casey: I was just listening to this, and I want to ask you another question about another example.

The Chairman: Go ahead, Mr. Casey. You can ask your question.

Mr. Bill Casey: I had a retired couple who wanted to move their RRSP to us, and the banker said to them, “Sure, no problem, but where are you going to get your mortgage next time?” Is that tied selling?

Mr. Michael Lauber: Yes, probably.

Mr. Bill Casey: I've had twice as many tied selling complaints as you have.

Some hon. members: Oh, oh.

Mr. Bill Casey: I've had two. You've only had one.

Mr. Michael Lauber: You should send them to me.

Mr. Bill Casey: The system doesn't work. The system doesn't work. It's designed for the banks and not for the clients.

Mr. Michael Lauber: Tell them to write me a letter.

Mr. Bill Casey: They're afraid they're going to lose their lines of credit and their mortgages.

Mr. Michael Lauber: Hold it. They just had a couple of hundred thousand dollars in investments. I can't imagine they can't move—

Mr. Bill Casey: These are small amounts of money, and people who can't do that.

Anyway, I just wanted to make my point that I don't think your system is working right.

The Chairman: You have to fight for your rights, as well.

Mr. Schmidt, and then Mr. Pillitteri, and then we're going to wrap it up.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, Mr. Chairman.

This reminds me very much of the industry committee's study about three and a half years ago, when they talked about access to capital for small business. The business people appeared before us and said there's a problem, and the banking people came to the committee and said there's no problem. Business people said there's a credit crunch. The banks told us, no, there's no credit crunch. The business people said they didn't get any help from the banks.

• 1740

The upshot of all of this was the creation of the position of ombudsman. It came as a result of no problem. Obviously there was a problem. There was a problem, but you're telling us now there is no problem.

There's all kinds of anecdotal evidence. We've had it from Mr. Casey. I have all kinds of anecdotes and everybody around the table has anecdotal evidence. The fact the formal process isn't used should tell you something. It's partly awareness and partly a lot of things. But the real question is what do you really want to do as an ombudsman? Do you want to help the customer? Do you want to help the bank? Do you want to make sure tied selling doesn't happen in Canada?

Mr. Michael Lauber: My mandate and my role is to ensure the customers who come to us with problems with their banks get a fair resolution of their problems, whether it's a credit problem, a transactional problem, tied selling or privacy. Our interest is the customer. The banks can look after themselves. They have their processes. They come through the process and if they appeal to our office we look at it on that basis.

Mr. Werner Schmidt: If that's correct, your whole orientation is toward process and has practically nothing to do with substance or justice. That's what this coercion thing is all about; that's what this power imbalance thing is all about. We can talk about process until the cows come home.

I sat on the board of governors at the University of Alberta, and the constant problem we ran into was not justice, it was process. Every issue and every dispute was resolved on the basis of process, and whether the guy had really done something wrong or not wasn't even the issue. The issue was whether you used the right process. If you commit an injustice against someone or do something wrong, it doesn't matter whether you use the right process, it's still wrong. I think that's the issue.

Mr. Michael Lauber: We're not driven by the process. We're driven by what happened and whether the customer was treated fairly and got a fair resolution of the problem.

Mr. Werner Schmidt: Okay, what does fair mean now?

Mr. Michael Lauber: Fair is somewhat of a subjective term, but in the broad sense of is it fair, should it have happened this way? How did it happen? Should it have happened? Was the customer treated with equity, fairness, and so forth? It's just broadly speaking. We look at benchmarks, such as codes and so forth, and they're important. But ultimately, should that person have received that loan? Did that process work properly or not, and did it deny him that loan improperly? That's fairness.

Mr. Werner Schmidt: That's very interesting, because in the ombudsman's resolution it makes it very clear you have no authority to deal with credit lending policies or anything like that. All you are dealing with is the actual process of granting that loan. I suggest that whether or not to grant that loan is the substance and what the complaint is all about. The process is one part of it, admittedly, and if there's a conflict there that's bad, I agree. But you have no way of ever getting into whether or not that person should have been granted the loan in terms of the substance of the issue.

Mr. Michael Lauber: That's not true, really. We talked a bit about this earlier. It's the issue that the banks have a policy. I used a fairly straightforward mortgage as an example. You have to have a family income, let's say, of $50,000 in order to qualify for an $80,000 mortgage. It's a policy of the bank, and most of the banks probably have similar benchmarks. A person doesn't get a mortgage for a lot of different reasons.

It's all those different reasons we will look at and determine. If they qualified—they have the $50,000 for the $80,000 and so forth—why didn't they get the mortgage? Yes, that part is process. It's the treatment of the people. Was it properly evaluated at all steps along the line? Was any discrimination, one way or another, involved in the assessment of the loan? That's all part of the process, and that is a major part of whether a person gets credit or not.

• 1745

Mr. Werner Schmidt: How many of your problem resolutions have resulted in a person who was refused a loan being granted a loan?

Mr. Michael Lauber: Quite frankly, we've had more on the collection side. There have been some.

Mr. Werner Schmidt: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Schmidt.

Mr. Lauber, for the record, though, you did state a sense of, for you to make a value judgment, tied selling is wrong according to you? That's pretty clear, right?

Mr. Michael Lauber: Yes. You can't use coercion.

The Chairman: I'm going to go back to Mr. Pillitteri and then I'm going to go back to Madame Lalonde.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.

Mr. Lauber, this morning you were here and you also heard some other presentations. There were comments. Some people say financial consultants, individuals and security dealing and different things, and there is a tendency to believe one goes to the bank and their business is strictly either take my deposit or give me a loan. We have a tendency of not believing individuals that....

Also, bankers should be consulted in helping you along. Maybe your business is not on proper footing, maybe your loans are not in proper footing, and it would want to consult you on a better way to manage.

As a matter of fact, I state this because as late as last week I was sitting in on one occasion in a bank where the individual had a $750,000 property security, and he only had a $275,000 mortgage on there. He just wanted another $100,000. He was making all kinds of accusations where the bank was trying to coerce him—this was personally to me—to get it into another type of loan. After sitting in on it and seeing what the manager...and so on, I never found.... I wonder sometimes how many of these complaints you have had are really frivolous, in the style that I'm talking about.

Mr. Michael Lauber: Of the total complaints that come to us, there's probably one-third, right off the top, that don't have a lot of substance to them.

Mr. Gary Pillitteri: A lot of substance to them?

Mr. Michael Lauber: Yes. We get a lot of calls in the full moon, too, so—

A voice: So do we.

Mr. Michael Lauber: Anybody in the complaint business apparently does.

Mr. Gary Pillitteri: In your role as an ombudsman, I can understand the tied selling; I can understand the coercion. But in your role as ombudsman, when a client is refused a loan, really what power do you have in overturning this loan, unless it is properly secured?

Mr. Michael Lauber: Well, if it fails the bank's lending criteria and they have been properly evaluated and applied...none.

Mr. Gary Pillitteri: Thank you.

Mr. Michael Lauber: However, there are many cases where that hasn't happened, and I think we've had more experience on the collection side than that. The people have received compensation, and so forth, because the bank's process was wrong.

Mr. Gary Pillitteri: My final question is, as my colleague asks, how long does it take for a response when one makes a complaint to the ombudsman? Six weeks? Two months?

Mr. Michael Lauber: They hear from us right away. It can take a couple of months. I have some business cases that have been going on for a year and a half and will keep going on, because it's a process. The business in still ongoing.

One real estate based one that has just gotten cleaned up I've worked on for eighteen months. It was one of the first calls I got. We've just finally ended up restructuring the whole thing, and the guy is now set up and going. After eighteen months, he's now secured and he has saved his investment. He would have lost it without our intervention.

• 1750

[Translation]

The Chairman: Ms. Lalonde.

Ms. Francine Lalonde: I have two brief questions.

First, you are against tied loans, but if it were a bank's policy, you could not interfere, since it would be the policy, and you cannot interfere with the policy.

Second, the answer you gave a few moments ago troubled me. You said that , in Mr. Clark's case, ultimately, the problem with the first two bank representatives was that they had not asked him if he had collateral for this additional credit. Then they could have asked him: "Well, have you seen the conditions we offer for mutual funds?" If things had happened this way, you would not have approved Mr. Clark. Yet, because he went to the newspapers and was able to speak directly to the Vice-President, he was granted additional credit without any other collateral.

You must admit that he was right to go to the newspapers rather than go to you.

[English]

Mr. Michael Lauber: I don't think he argued about the fact of putting up collateral for his increased line of credit. I don't think that was ever an issue with him. He didn't object to it.

[Translation]

Ms. Francine Lalonde: I am talking about the essential. That is what happened.

[English]

Mr. Michael Lauber: I think he said he got the loan without putting up any collateral.

[Translation]

Ms. Francine Lalonde: That's it. Yes, yes, he said so.

[English]

Ms. Paddy Torsney: It was already previously put up.

Mr. Michael Lauber: It was already there?

Ms. Paddy Torsney: It was already there. That was the whole point. He had advanced collateral but didn't get the money.

Mr. Michael Lauber: You see, the issue with that—and I think Doug acknowledged it in response to a question from the chair—was that they had discussed the loan and then discussed the collateral and agreed on it. If they sort of shook hands and the bank then said, “Now, Mr. Clark, can I tell you about the other services and products that we have at the bank that might be of interest to you?”, that's a sales initiative. The bank is no longer tying to it. He has the loan.

I think Mr. Casey referred to a situation like that earlier. You're no longer tying it to another product. It's the person doing their job of selling bank products to the customer. Hopefully that person is saying, “Look, Mr. Clark, I think these are good products and I think it would be good for you to consider them for your portfolio”. But he's no longer being coerced at that point; he's being sold.

[Translation]

Ms. Francine Lalonde: But he was still refused what he had previously asked for. He only obtained it because he spoke to the Vice-President, after going to the newspapers.

[English]

Mr. Michael Lauber: I don't think his loan was turned down. It was not.

[Translation]

Ms. Francine Lalonde: It is the increase of that, or I did not understand anything. The papers are there.

[English]

Mr. Michael Lauber: No, I don't think—

[Translation]

Ms. Francine Lalonde: Otherwise, he would not have done that.

[English]

Mr. Werner Schmidt: May I quote from his letter?

At that time the uncovered...security dropped by $40,000, but I decided to set up the maximum mortgage.... It was my understanding that this...would be available...in the future.

I received a call in the beginning of February 1998 from my account manager, Nicki Lawrence, indicating that my request had been rejected, unless I would be willing to sell my Fidelity Mutual Funds and purchase Royal Bank Mutual Funds.

That's what it says in his letter to Mr. Cleghorn.

Mr. Michael Lauber: And that was a security issue in terms of what was acceptable security. But Mr. Clark's financial position, as I understand it, supported his loan. He had lots of collateral, including other things that could have been put up for that, so I don't think his loan was in question. He should not have been challenged to convert or transfer those securities, no. But had he taken....

• 1755

Let's go back through this scenario. Mr. Clark asks for a loan. They agree on the loan if he puts up so much collateral. Let's get to that point: “Mr. Clark, you send it in. I don't care whether it's shares of Trimark or Bell Telephone or what. You send in $50,000 market value and we're in business.” And they shake hands at that point.

Now, if he wants to sit down with him and say, “Look, Royal Bank mutual funds are going to outperform your present holdings and you should convert”, that's a separate issue. Where the real mistake was made here is that got into the middle of the loan and collateral issue. That's where the bank made a mistake. The bank recognized the account person made a mistake, they've apologized to him, and they've made it right. And Mr. Clark told me he intends to carry on as a customer of that bank.

[Translation]

Ms. Francine Lalonde: Excuse me, but I will read a short line to you. The meaning is as follows:

[English]

He [Mr. Blair Boyd] then made an unsolicited offer to give me the additional $40,000 with no conditions any time I requested it.

Mr. Michael Lauber: He requested it?

Ms. Francine Lalonde: Yes. “It's unconditional. You don't have to sell any mutual funds”, said Mr. Boyd, with a big laugh.

Mr. Michael Lauber: No, he didn't have to sell any mutual funds, but he may still have put up collateral. He probably has put up his Trimark mutual funds as collateral.

Ms. Francine Lalonde: Yes, in the beginning, but until then, he didn't get the supplementary $40,000. That is the truth. He wanted that. Anyway, we have all the papers here.

The Chairman: Mr. Lauber, on behalf of the committee, I'd like to thank you very much. Obviously the time we've taken with you really illustrates that we want to hear from you. We'll probably call upon you again to clarify some of the issues.

Mr. Michael Lauber: I'd be pleased to come back.

The Chairman: It's been extremely helpful. Thanks.

I'm going to suspend just for two and a half minutes.

• 1757

• 1804

The Chairman: I'd like to call the meeting to order and welcome the representatives from the Canadian Association of Insurance and Financial Advisors: André Richard and Susan St. Amand, members of the parliamentary advisory committee, and Mark McCarvill, director of government relations.

You probably know how the finance committee hearings work. You have approximately 10 to 15 minutes to make your presentation and then we'll have questions and answers. You may begin.

• 1805

Mr. André Richard (Member, Parliamentary Advisory Committee, Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman.

This is quite intimidating for the two of us, because this is the first time we've appeared in front of such a committee.

We're really coming to you from the base. We have been in financial services for some 35 years. I have been with my company for 27 years now. I'm on the managing side, and Susan is on the sales side.

I actually supervise the work of 27 agents. I've been a manager in Hull for the past 24 years. Susan works mainly on the Ottawa side.

I want to start by thanking you and your committee for the opportunity to appear before you today. I also want to commend the government for choosing to hold these hearings in the first place.

Bank tied selling doesn't exist just in isolated newspaper stories. It is an important issue that concerns our members, their clients, and, we believe, Canadian consumers in general.

In a moment I will ask my colleagues to provide you with the results of our survey as well as some insight into why tied selling happens and how your committee can help stop it, but first I want to give you a brief overview of our association and why the issue of tied selling concerns our members.

The Canadian Association of Insurance and Financial Advisors, formerly known as the Life Underwriters Association of Canada, has a long history of serving Canadian consumers, dating back to our original incorporation as an association in 1906. Our 18,000 members across Canada help Canadians every day to achieve financial security through a wide range of financial products and services.

[Translation]

The members of our volunteer organization provide Canadians with solutions for their financial needs, including life or health insurance, annuity contracts, retirement investments, investment funds, or related financial products.

The Canadian Association of Insurance and Financial Advisors (CAIFA) also includes the Congrès des assureurs-vie avancée (CAVA), which meets the needs of our members who operate in more specialized areas such as business succession planning, estate planning, fringe benefit plans, and pensions. Most clients of these members are small business owners.

We welcome this federal government initiative to set up this committee for reviewing and reinforcing consumer protection, and more specifically, for reinforcing the protection of consumers' interests against federal financial institutions, and specially for examining the issue of abuse in tied sales.

Mr. Chairman, the following sentences were taken from the Department of Finance report, following the 1997 review of the legislation governing financial institutions.

The government is [...] conscious that market conditions generally prevent companies from forcing consumers to buy products they do not want. This approach, however, does not guarantee that these companies will never try to force a consumer to buy a product in order to acquire another one, which is obviously not in the consumer's interest.

It is our opinion that, considering the special relationship financial institutions have with their clients, these clients are particularly exposed to coercion, and that market conditions and the Competition Act do not provide sufficient protection in this respect.

• 1810

[English]

As we noted in our October 1997 submission to the MacKay task force, those bank customers who need credit the most are also the ones who are most vulnerable to tied selling. The owners of small businesses, for example, are particularly dependent on maintaining lines of credit to meet the obligations of their businesses and their employee payrolls. They are not going to jeopardize their business just so they can exercise the right to choose where to buy their mutual funds. And who could blame them?

Young working families, eager to purchase their first home, may also trade the freedom to choose in exchange for that desperately needed mortgage. These same small-business owners and working families are among the clients of our members who will be referred to in our survey. They deserve protection.

Mr. Chairman, if I may, I would now ask CAIFA's director of government relations, Mark McCarvill, to briefly share the highlights of our membership survey on tied selling.

The Chairman: Thank you very much, Mr. Richard.

Mr. Mark McCarvill (Director, Government Relations, Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman. I'll go briefly through this.

CAIFA decided to conduct a membership survey on tied selling for three main reasons. First of all, the common activity of CAIFA's 18,000 members is providing financial security to Canadians. Our members advise our clients on the total financial needs of families, individuals, and small and medium-sized businesses. In doing so, they acquire an intimate knowledge of the economic needs and circumstances of Canadians in all social and income groups.

We believe our members are in an excellent position to receive reports from their clients about attempted bank tied selling, and we wanted to give your committee the benefit of this unique and we believe very relevant perspective on tied selling in the Canadian marketplace.

Second, we wanted to quantify the extent of the problem our members are having in competing with banks in what they perceive as an unlevel playing field. Our members routinely lose business and sometimes even major clients to banks, which use the leverage of credit to pull them away.

We wanted to know, for example, what percentage of our members had themselves been targets of bank tied selling, how many of them had heard similar concerns from their clients and what specific kinds of tied selling were occurring. This we accomplished.

Finally, we wanted to be able to respond to those who point to the absence of written documented cases of tied selling as evidence that there is no tied selling problem. We wanted to be able to provide your committee with real documented cases of tied selling where the consumers affected actually agreed to have their names used publicly in writing. This we also accomplished.

Understandably, most of our members' clients who report being affected by tied selling fear that pointing the finger at their bank will only compromise their already precarious financial situation. Yet about two dozen consumers from all parts of Canada who believe they were targets of bank tied selling are now being interviewed by our public affairs department to obtain written statements concerning their cases.

We were unable to contact all of these people in time for our appearance today, Mr. Chairman, because the cut-off date for our survey was only last Friday. We expect to be able to provide this information to your committee within about two weeks.

Mr. Chairman, while our survey was conducted internally, it was submitted for inspection to an outside polling firm, Compas Research, which found the survey to conform to Canadian survey industry standards. A letter to that effect is attached to our submission.

The committee has the complete survey report. Perhaps I'll just draw your attention to a couple of results that we find particularly important.

While bank staff would presumably expect that professional insurance and financial advisers would be somehow immune to tied selling, they still attempted to tie sales to more than a quarter of our members in the last 12 months alone. The obvious question raised by this in our mind is if insurance and financial advisers are not even immune to bank tied selling, what chance does the average consumer have of exercising free choice in the financial services marketplace?

Second, two-thirds of our members said that at least one of their clients reported to them a clear attempt at bank tied selling in the past 12 months. Only 6% said they had definitely received no such reports from our clients.

• 1815

Finally, on a bit of a pessimistic note, half of our members believe that tied selling would persist, even in the face of new government regulation. The three most frequently cited reasons for this pessimism are as follows. They believe that front-line bank staff would continue to face pressure from senior bank managers to aggressively sell bank products; in other words, the culture would not respond to the regulation. Second, our members don't believe the federal government would be able to actually enforce such a regulation. And third, our members don't believe the banks themselves are interested in enforcing such a regulation.

At this point I'd ask my colleague, Susan St. Amand, to offer some concluding remarks on bank culture, from her unique perspective.

Ms. Susan St. Amand (Member, Parliamentary Advisory Committee, Association of Insurance and Financial Advisors): Thank you.

Mr. Chairman, I would like to move from the big picture on tied selling that was just presented to the little picture: what goes on in the branch and why. My comments on tied selling are based on my own experience, first as an assistant manager who went through the management training program and worked at one of the major six banks for six and a half years, and now as an independent insurance and financial adviser.

First I would like to emphasize one fact. Tied selling in the bank does happen. I have seen it and I don't agree with it.

Second, I am not a disgruntled employee. In fact I feel my banking experience has helped to provide a solid basis for my current profession.

Why does tied selling happen? Bank culture is a major reason. Many people may not know this, but there's tremendous management pressure on front-line bank staff to push the bank's products. Many staff are now paid partly on bonus or commission, but most important, their performance reports, their appraisals, are now a major part of how many products they sell: How many new clients did you bring in? How many new credit cards have been applied for? How many RRSPs have been brought in? And so on. If they do not meet their quota, they are very often either refused a salary increase or promotion and moved off the front line, or possibly even let go.

Tied selling pressure from customer service representatives is not the biggest concern. Most tied selling occurs when customers don't have enough confidence in their financial position to say no thank you to the bank pressure and say “I'm just going to move down the street”.

In other words, when they are applying for a loan or some type of credit, if a customer is armed with the knowledge that he or she can go somewhere else without too much hassle or too much cost, then they don't let the bank coerce them into ordering new services or transferring all of their assets and liabilities to one institution.

Here is one typical example from my experience as a financial adviser. A small-business owner has a $100,000 line of business credit and a $25,000 RRSP with her bank. I should note that the RRSP is not pledged as collateral against the loan. To get the business credit in the first place, she had to go to her accountant and get specific reports completed at a specific time, which cost her, and then, after some time and money, she got the line of credit.

Shortly after, she decided to transfer the RRSPs from her bank to get a better rate. The bank phoned and said, “Before you do that, you should know that part of what we were looking at when we looked at your portfolio was the fact that you had RRSPs with us, and therefore we feel they are evidence of good faith. So we would like you to rethink moving your RRSPs.”

That's the term they use. It is never as blatant as “Transfer the RRSP or we'll call in your line of credit”. It's “We require evidence of good faith”.

Is this business owner going to risk having to go to all the trouble and expense of applying for another $100,000 line of credit just to exercise her right to choose where to put a $25,000 RRSP? Probably not. And that is one reason small business owners, professionals, etc., and others with more complicated and precarious financial situations are most at risk to tied selling.

I might just add, Mr. Chairman, that if a consumer does not feel empowered enough to say no to her banker, she will certainly not take the extra step of seeking out the help of an unknown third party such as the banking ombudsman. Most consumers aren't even aware that a banking ombudsman exists.

The fear of bank retaliation is why the CAIFA survey found that so few tied selling victims were willing to release their names publicly.

I should also add that the banks may tell you tomorrow that life insurance agents are just as bad when it comes to marketing practices and that we shouldn't throw stones if we live in glass houses. Please let me address that issue head-on.

The main problem with the argument, Mr. Chairman, is that independent financial advisers hold no power over their clients. Insurance policy holders are completely free to switch independent advisers as often as they choose if they feel they are not being served well. Many in fact have more than one adviser already.

• 1820

If a client of mine wants to switch agents, all he or she has to do is sign over a letter that says “I wish to assume somebody else as agent”—it's a letter of record—“on this particular policy” and somebody else is able to look after it. There is no service charge to pay, there is no change in the individual's contract with the institution and the premiums stay exactly the same. There is no contractual change made. I have no power whatsoever to retaliate against the loss of a policyholder.

By contrast, many bank lenders know they have power over their borrowers. Occasionally they like to wield that power, so don't be misled by the glass houses argument.

To conclude, Mr. Chairman, the case of tied selling I described is just one example of what I've seen time and time again and it frustrates me, for two reasons. First, families and small businesses lose because they feel they have lost their right to choose. Second, I lose as a financial adviser since business and clients are taken away from me against their wishes and there's nothing I can do about it. The phrase used too frequently is “I had no choice”.

And that's why we're here: to ask this committee to recommend that the government proclaim the tied selling regulations contained in proposed section 459.1 of the Bank Act and to level the playing field between banker and bank customer and between banker and financial adviser.

Will you be able to stop tied selling with the stroke of a pen? Of course not. It will take years to change a culture of sales pressure that has built up over decades, but that makes it all the more urgent that we act now.

Thank you. We look forward to your questions.

The Chairman: Thank you very much, Ms. St. Amand.

We'll move to the question-and-answer session. Mr. Schmidt.

Mr. Werner Schmidt: Thank you very much, Mr. Chairman.

And thank you for being here. I'm sorry you had to wait so long, but I'm glad you're here nevertheless.

I would like to ask you about your right-up-front recommendation to ask the government to proclaim proposed section 459.1. You don't distinguish whether that's all of proposed section 459.1, proposed subsections (1), (2) and (3), or whether it is simply proposed subsection 459.1(1).

Mr. Mark McCarvill: We'd recommend that you proclaim the entire proposed section, subsections (1) through (5).

Mr. Werner Schmidt: Okay. We heard from the insurance bureau this morning that their suggestion was that proposed section 459.1 be proclaimed, but not proposed subsections (2) and (3).

Mr. Mark McCarvill: I haven't seen their submission, unfortunately. My understanding of the section is that proposed subsection 459.1(1) is the tied selling rule—you can't do tied selling—and proposed subsection 459.1(2) is cross-selling and explicitly allows banks to do what they call “relationship building”. So CAIFA has no problem with allowing that proposed subsection to stand.

Mr. Werner Schmidt: So in CAIFA's opinion proposed subsections (2) and (3) don't negate or in anyway confuse or make unclear the provisions of proposed subsection (1).

Mr. Mark McCarvill: No, we don't think so, Mr. Chairman. I think the idea of trying to split tied selling and cross-selling is a difficult one and I think a lot of people see a very fine line between the two. There are a number of ways the government could have drafted that section and we're certainly not going to pretend to be experts in knowing the best model of any tied-selling regulation in North America, but we think this proposed section gets it just about right.

Mr. Werner Schmidt: Okay. Thank you very much.

My other question has to do with a recognition that there are some very severe vested interests in this whole business right now, the vested interest that you have as financial planners to keep clients and the vested interests of the bank to try attract more clients than they already have and to hold those they do have.

Because with regard to one of the cultures, I think, that Madame St. Amand suggested exists in the whole financial world, that culture exists whether it's banks or insurance companies or independent advisers: try to get all of the individual client's financial matters under your control. That's the best way to go, because then you can provide service in all these various areas and if you're a good solid broker you can access the banks on this thing, trust companies on that, investment dealers over here, mutual companies over there and so the case goes on. The idea is to manage the maximum of an individual's financial resources. Is that not the culture of the orientation of insurance and financial advisers?

• 1825

Mr. André Richard: Yes, I would say that. We do so, though, in order to better serve the client. The better we know him, the better we can help him. But we use no means like a loan. That is giving him kind of a carrot to do that. We don't use means like that.

Mr. Werner Schmidt: That's the big difference. The first part of the culture is the same, but with the other part of the culture you don't have the lever to club him over the head in order to say that if he doesn't buy from you then he's not going to get his loan. That's the fundamental difference between the two cultures.

Ms. Susan St. Amand: I might just add something to that. I cannot go to an insurance company and say that my client has moved all this money over here, so please insure him for a million dollars. There's a risk associated with it that's just not going to happen, so the power that I wield is not the same as what the bank has.

Also, as an independent broker-adviser, I deal with more than one institution. It's not uncommon for me to have a client with say an individual long-term disability policy with one company, a life insurance policy with a different company, and an RRSP with another different company, and to perhaps work with another broker—what with me being a stockbroker—or somebody else, or even a banker, in reams of my client's financial position. It's not uncommon for me to work with more than one adviser on a client's file.

Mr. Werner Schmidt: I want to ask one more question, Mr. Chairman.

As a financial adviser, have you seen the statement on tied selling that was put out by the Canadian Bankers Association? I would like to read a section of it to you and ask you how you would interpret that section:

Banks have an obligation to manage credit risk prudently; all customers benefit when banks discharge this obligation faithfully. Accordingly, for the purpose of managing credit risk, banks may impose certain requirements on borrowers, as a condition of extending credit. For example, a bank may require a borrower to obtain a product or service, such as a transaction or operating account, or refrain from taking on additional debt as a condition of granting a loan. In addition, a bank may require that a product or service obtained by a borrower from a particular person as security for a loan meet with the bank's approval. Any requirements imposed for the purpose of managing credit risk will be consistent with the level of the risk being undertaken, and will be for the sole purpose of managing that credit risk.

In your interpretation, just on a quick once-over, does what I've read give the bank the orientation that, yes, it will do cap tied selling?

The Chairman: Maybe we could get a copy of the material for them.

Ms. Susan St. Amand: I think it would be easier if I read along.

Mr. Werner Schmidt: Okay, and I think it's a question I definitely would ask you to examine. There are some people who have read this and have said it means the bank can and will, as part of its policy, impose certain conditions as a condition of granting a loan, which is the very thing you're saying they should not be able to do. The bank is saying this is its policy and that it will do this.

Mr. Mark McCarvill: Mr. Chairman, just from having heard the statement read, we have absolutely no objection to any financial institution following prudent investment policies, whether it's a life insurance company or a bank. We don't want—

Mr. Werner Schmidt: No, that's not the question.

Mr. Mark McCarvill: It's when they move beyond what's necessary, into getting more business, not for legitimate reasons but for other reasons.

Mr. André Richard: Mr. Chairman, maybe they do refer to the fact that for some business loans they will require a life insurance policy to be assigned as collateral to guarantee the repayment in case the borrower dies.

Mr. Werner Schmidt: Oh, sure, we know that's there. That exists now. But if you want to tie it down to one sentence, it's really the one that reads “For example, a bank may require a borrower to obtain a product”—which could be a mutual fund—“such as a transaction or operating account” with them.

Ms. Susan St. Amand: As an individual just looking that over, I would say that it does say they would do tied selling. At least that's the way I read it.

• 1830

Mr. Werner Schmidt: I read it exactly that way as well. I have no problem with the bank requiring adequate security. I think that's just plain good sense.

Ms. Susan St. Amand: That's a must.

Mr. Werner Schmidt: Well, sure. They should do that. I think they also need, André, the same kind of thing if they should die. There should be insurance to pay the principal. I think that's absolutely okay. But they shouldn't require a particular insurance company that would insure that loan. As long as it's a registered insurance company, well, go buy your insurance somewhere.

This other part goes beyond that. It says that if you're going to get this loan, you have to either put in an account, buy an RRSP there, or buy mutual funds from them. I think that is tied selling. I think it is their policy that they will do this.

Ms. Susan St. Amand: I would agree with that statement.

The Chairman: Mr. Casey.

Mr. Bill Casey: Thank you. Thank you for coming and thank you for doing this survey. We're all talking about this, but you put down in black and white what we all kind of know in the business.

Would you explain chart 9 to me, which is on page 13?

Mr. Mark McCarvill: We asked members whether or not—this is back in question 7—they believed bank staff would generally obey a new regulation prohibiting tied selling. About a quarter said yes, a little over half said no, and more than a quarter said they didn't know, as there are so many factors involved.

Of those who said no, which was a little over half, we asked them why exactly they felt that way. We gave them three choices plus another column for other reasons. We found that sales pressure from senior managers got the most mentions. It was that you can't regulate out a culture.

Mr. Bill Casey: This is bank managers, senior managers of a bank.

Mr. Mark McCarvill: Yes, that's right. They also thought that it would be difficult for the government to actually regulate this, so the enforcement is something they were concerned about.

Finally, they thought that, the sales culture aside, the banks would not take it seriously enough that they would enforce it themselves.

Mr. Bill Casey: Do you think the senior management of banks know the level of tied selling that goes on on a day-to-day basis in a retail branch? Do they know it and then look the other way? Do they not know it, or what?

Ms. Susan St. Amand: I would say they probably don't know it. My feeling is they don't know. When I was in the bank, from when I was there and from my experience, they don't really know the extent of it.

Mr. Bill Casey: So the pressure comes down on staff to produce and meet certain quotas, and that ends up in pressure on the customers. Senior management has a policy of no tied selling, but then they have a second policy that puts pressure on the staff that results in tied selling. Is that right?

Ms. Susan St. Amand: Exactly. In my experience, people in place in the bank often don't feel that they even have a choice in the way they're conducting their business. They feel they have to do things the way that they do things in order to make the results come through. They don't often feel a responsibility. They don't feel responsible to the client.

For example, as an independent adviser, in terms of everything I deal with for my clients, I feel responsible for that, which is why I carry my own errors and omissions insurance, etc. I'm always concerned and asking myself: what if I make a mistake? But in the banks, certainly from when I was there and in my experience as an employee of the banks, I didn't feel that same level of responsibility in terms of what the bank was saying. They just said that this was bank policy or this was the way you do things. You sort of did things the way you could do them.

I was in seven branches in six and a half years. In every branch, the way that information is passed down and the way the training goes is different. The one thing that remains constant is that there's never enough time to tell your employees how they should be acting in situations such as this and tell them exactly what the end result is so that they can feel responsible for their actions.

Mr. Bill Casey: What year were you with the bank?

Ms. Susan St. Amand: I was with the bank from 1982-89.

Mr. Bill Casey: Did you see an evolution of banks from service to sales?

Ms. Susan St. Amand: Absolutely. When I was in the system, I was one of the first ones to go through the Xerox training sales course. “Selling Skills III”, I think it was called at the time. When I left the bank, at the end, they were then putting every employee through that training program. They had decided that, from the tellers all the way up, everybody must be trained in this manner.

Mr. Bill Casey: This is an evolution that brought us to where we are and why we're here today?

Ms. Susan St. Amand: Absolutely.

• 1835

Mr. Bill Casey: Thanks very much.

I'm sorry to miss the pizza, Mr. Chairman, but I have to go. I thank you very much for allowing us to participate in the way we have today. It's been excellent.

The Chairman: Thank you. There'll be more pizza for the rest of us, Mr. Casey.

Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chairman. Thank you, lady and gentlemen.

Far be it for me to challenge COMPAS, but I will try to do that anyway, because in its letter it says you wanted an objective third-party assessment. The question was “Does the data accurately reflect the opinions of the universe that it purports to represent?” Yes, the universe is the universe, but the universe is your members, is it not?

Mr. Mark McCarvill: Exactly, and that's as much and as little as we're suggesting it does.

Mr. Roy Cullen: Okay. I'm not suggesting you're doing otherwise.

Would it be fair to say your members would not like to see tied selling unleashed and uncontrolled?

Mr. Mark McCarvill: Absolutely. I think we found in our survey results that it's a problem and they're losing business and clients. So there's no question there is some self-interest involved. But also, as you can see, the idea of having a client feel he or she has no choice is distressing as well.

Mr. Roy Cullen: We've all been in these circumstances where you sort of look at a questionnaire and know the answers you're supposed to give. I'm not trying to belittle the survey, but if I know it's in my best interest to show there's a lot of tied selling, maybe I'll tick more of those boxes than I might otherwise. Is that fair to say?

Mr. Mark McCarvill: That's an excellent question. I think any membership survey is definitely open to speculation about the motivations for people responding in a certain way, although I think the fact that about two-thirds of our members said they weren't really familiar with any tied selling should indicate they did take some time to think about the definitions. We tried to make it as fool-proof as possible so we didn't have people artificially inflating the number of responses.

The other comment, too, is there are other groups that participate in this way in policy development. The CFIB, for example, questions its members on small business lending practices by banks. Obviously, the results of those surveys are going to be used by policymakers like yourself.

Mr. Roy Cullen: Yes, but with respect, I've seen a lot of the CFIB surveys and there's never been a real conflict. The CFIB is small business, it's not banks. So if you ask CFIB members about tied selling, for example, and if they would like to see a competitive marketplace, they might have that bias.

I find these surveys sometimes very useful, but in this particular case it seems to me there's a bit of a potential conflict here. Your members don't want to see uncontrolled tied selling. Is that correct?

Mr. Mark McCarvill: I don't think anybody does. So I don't know how that would make us particularly on one side or another.

Mr. Roy Cullen: But if I'm filling in the questionnaire and I'm one of your members—let's say I'm trying to deal with this as objectively as possible—if I read the question, I will know that as an association and an industry, we want to show there's as much tied selling as possible.

Mr. Mark McCarvill: That's absolutely a fair comment and I cannot contradict it at all. All I can say is we did the best we could to make this as neutral as possible. The cover letter and definitions are taken right out of the Bank Act. So with all those caveats, you obviously have to make the decision about how much weight you give this kind of a survey, no question.

Mr. Roy Cullen: Did you ever think of surveying the population at large, Canadian business generally, or consumers generally?

Mr. Mark McCarvill: It's a good question. We thought we'd start with our members, who we think have a very particular perspective to share on this. There are obviously pros and cons to polling the general membership on an issue as complicated as tied selling. Does the general population have a good idea of what that concept means? How do you ask people over the phone, disturbing them from their dinners, whether they have been the subjects of tied selling? What kind of response are you going to get? So we thought we'd start with our members on that one.

• 1840

Mr. Roy Cullen: Number three, “Is there any indication in the design or methodology that the results were unduly biased by the questionnaire, the design...” I'm sure in the context of the survey that's correct. But if you look at chart number one, for example, if you look at 64% and you look at that quickly, you think, that's a big number. Then you read it and it says “64% said that at least one of their clients...” You know, there are ways of portraying statistical information. I'm not saying it's being done deliberately, but you really have to read it. It says “64% said that at least one of their clients reported to them a clear attempt by the bank to tied selling”. Later on you say 30% report they were not even sure, because they may be getting mixed up between cross-selling and tied selling. But then you say: “This uncertainty can likely be attributed to the fact there's often a thin line between tied selling and cross-selling”.

Would it be fair to say that of the 64% who said there was at least one of their clients, maybe some of them potentially were getting mixed up between cross-selling and tied selling? Or do you think it was absolutely crystal clear?

Mr. Mark McCarvill: There's no way of knowing for sure, unless I obviously call them one by one. I think we took every precaution we could to eliminate any confusion—for example, the definitions, and in the question we even refer to the definitions again. We try to hit them over the head with the idea that these are two separate ideas. So I think if there was an unreasonable amount of confusion, that 64% would be even higher. There's tied selling and there's cross-selling, so if you put the two together it should be 95%, for example. Is there a possibility? Of course there is.

Mr. Roy Cullen: I appreciate your answers. I'm just trying to, for the benefit of others on the committee, point out that we should really look at that survey data in the context you've just presented. There may be tied selling, but if you just looked at this survey you might have a slightly biased view of how big it is. Thank you.

Mr. André Richard: Mr. Chairman, I would just like to add that there is a very thin line between tied selling and cross-selling. Many times it could be a matter of perception by a client. Maybe the bank manager believed that he's only cross-selling, but the client's perception is, because of his financial matters, that it's actually tied selling and that he should act.

Mr. Roy Cullen: Mr. Chairman, I would like one last question.

The Chairman: Just one.

Mr. Roy Cullen: We asked the previous presenters if they would define for us tied selling versus cross-selling or incentive selling. Is cross-selling the same as incentive selling? How would you define it? Without giving examples, how would you define cross-selling and then how would you define tied selling?

Mr. André Richard: Cross-selling to me is when you're offering the product you sell without having any incentive other than maybe a better rate because of the number of products. Tied selling is...actually there's no such thing as an incentive other than granting something for it. I will tell you that in the course of my many years of experience I feel very badly seeing someone, especially business people who have built up small businesses...and usually an agent will be the first one to carry on the financial planning with these people. They will build up a sizeable RRSP. Many a time, since we're mostly involved with risk, we look very carefully at making sure that this RRSP is creditor-proof using our product. But then what happens is that the businessman may run into some temporary financial difficulty and the first thing we hear is he has to transfer it to the bank in order to get his credit margin.

• 1845

What is really disturbing is to see that this amount, which was creditor-proof for this person to at least enjoy a minimum retirement, is actually thrown out to creditors. I have seen so many cases of such a scope.

Even last Friday I had to answer a letter from a lawyer where such a thing happened. The poor guy went bankrupt, and his RSPs, which were creditor-proof with us because his wife was beneficiary—it was an annuity—were just washed out in the bankruptcy that proceeded. We witness a lot of this.

The Chairman: Thank you, Mr. Richard.

Ms. Torsney.

Ms. Paddy Torsney: I want to clarify: Mr. Schmidt was asking about this section on managing credit risk, and I think there was an implication that you thought some of this related, in fact, to tied selling. Is that correct?

Ms. Susan St. Amand: Yes.

Ms. Paddy Torsney: Could you clarify what you thought was tied selling?

Ms. Susan St. Amand: Basically where it was saying a bank may require a borrower to obtain a product or service, such as a transaction or operating account or taking on additional debt, as a condition, that part basically, to me, makes sense. You have to have a bank account with them if you're going to borrow money, and they have to have a certain amount. But it's when they say “may impose certain requirements on borrowers as a condition of extending credit”, and in addition, again, on the top, a bank may require that a product or service obtained by a borrower from a particular person as security for a loan meet with the bank's approval. In other words, to me, the bank is saying that this RSP is okay but that RSP isn't, or this mutual fund is okay but that mutual fund isn't.

Ms. Paddy Torsney: You don't think that would relate also to the provision that it has to be an acceptable insurance policy, for instance?

Ms. Susan St. Amand: I think it would depend on how you were reading it when you were, but I would say it would depend on, again, your financial position and whether or not you felt that it was....

Ms. Paddy Torsney: Okay.

Ms. Susan St. Amand: I agree with you. If, for example, a bank said we don't think it's appropriate for you to have a high-risk international portfolio because of your debt ratio, then I would think that would be fine. But if they would say I think it doesn't really matter which type of fund you're in, as long as it's ours, then that's another.

I have had an example of that, where one of my clients who had RSPs moved them to a bank, and I was quite surprised when the bank actually suggested some rather high-risk funds of their own, because my feeling about this client was they were in a bit of a precarious financial position and I'm not sure that that level of risk.... I said if I were the one lending the money, I would feel that these funds were too risky for the amount of debt, but nonetheless....

Ms. Paddy Torsney: You don't have any confidence that even if we were to impose these regulations this process will stop.

Mr. Mark McCarvill: I think the members who don't think it would work understand that it's a complicated situation, that it's not something you can simply regulate out of existence overnight. There is a cultural factor. I think what they're suggesting is not that they believe there is no political will. I think they understand there is a political will; that's the reason you're holding these hearings. I think what they're suggesting is that they see it's a difficult problem and they're trying to tell you it is a problem and they would like your help with a solution.

Ms. Paddy Torsney: Ms. St. Amand, you implied that part of it is also because of the culture or the training that people have, and that now they're working on bonuses and stuff like that. But most bank employees are on salary and then have some sort of bonus scheme. Are you guys totally commission, or are some people actually paid a salary?

Ms. Susan St. Amand: No, we're pretty much all commission.

Ms. Paddy Torsney: So wouldn't there be more incentive for people in your industry to—

Ms. Susan St. Amand: Conduct tied selling?

Ms. Paddy Torsney: —or not coerce but be a little more insistent?

• 1850

Ms. Susan St. Amand: I would think it would be very difficult. I've thought about that. That's a good question. I've tried to think about whether or not I could actually coerce or give any undue pressure to a client for any reason to do business with me, and I can't think of any reason somebody would do business with me other than the fact that they thought I was good at what I did and they thought I was a good business person and was going to take care of their needs appropriately.

It's all about risk and power or perceived power, and there's really nothing I hold, as I said earlier. I can't insure somebody if the insurance company is not going to accept them on risk. That's the only thing I could see in those terms. There's nothing really I could offer them if they brought another product over.

Ms. Paddy Torsney: What if they couldn't get life insurance because they were sick?

Ms. Susan St. Amand: If they couldn't get life insurance because they were sick, then they couldn't get it. There's nothing I can do. No matter how much, say, RRSP money they transferred over to me, that is never going to change. I can't get them insurance. By the same token, if they have an insurance policy currently in place and now they are uninsurable, there's nothing I can do with that either, other than become agent of record and then service that contract for that client, and should their estate need some servicing at the time of death, then I would be there to provide that to them.

The Chairman: So what do you risk? Banks risk their capital. What do you risk?

Ms. Susan St. Amand: As an independent adviser?

The Chairman: Yes.

Ms. Susan St. Amand: What I risk is my reputation and my livelihood.

If I incorrectly advise a client and they run into difficulties and for some reason it's found that I have incorrectly done something, then they can sue me. They can certainly come after me and they certainly can ask for whatever in a court of law. So I am personally responsible for all of the recommendations I make.

The insurance company's risk is basically the risk of the insurability.

The Chairman: Let me ask you one final question. Let's say we were to follow your advice and go ahead and recommend that this section be enacted. How long do you think it's going to take for the whole system to adjust to it, and what does it actually do for the customer?

Were you following the issue of Mr. Clark?

Ms. Susan St. Amand: I've read about it, but I wasn't here earlier when he was presenting.

The Chairman: At the end of the day, you have to come up with a resolution to the issue, right?

Ms. Susan St. Amand: Absolutely.

The Chairman: If we moved on this tied selling issue, what exactly do you think would be accomplished? How would we improve the system? That's what I'd like to know.

Ms. Susan St. Amand: I think the banks would pay a little more attention, and perhaps those people who are the senior managers but don't really know it's happening every day in the branch would say, “Maybe we should pay attention to this. Maybe we should meet with our employees.”

Just as, when they join the bank, they sign a confidentiality agreement to say they're not going to tell other people about the personal banking situations of the clients, perhaps the managers should also talk to the employees and say, “Tied selling is not something we condone. It's not allowed. There's regulation, and this is what happens if we're caught doing it, so please don't go there.”

The Chairman: The major issue here, though, is that the employees really need to be more sensitive. They need to understand. They need to be told and retold that tied selling is just wrong; you just don't do it.

Ms. Susan St. Amand: Yes, the employees do, and the customers or the clients of the banks also do, because many individual consumers out there don't really understand or know or think they have a choice. That's part of the problem, a big part of the problem.

The Chairman: All right.

On behalf of the committee, thank you very much. We're going to be looking at this survey very closely, and I'm sure it's going to help us with the issue. Thanks.

We're going to take a seven-and-a-half-minute break.

• 1855

• 1906

The Chairman: I would like to call the meeting to order and welcome the representatives from the Canadian Life and Health Insurance Association: Mr. Greg Traversy, executive vice-president, policy development; Mr. Jean-Pierre Bernier, vice-president and general counsel; and Mr. Frank Zinatelli. Molto bène.

You've been sitting here for a while and I'm sorry for the delay. You know you have approximately 10 to 15 minutes, whatever you need to make your introductory remarks, and then we will get to some questions and answers.

[Translation]

Mr. Greg Traversy (Executive Vice-President, Policy Development, Canadian Life and Health Insurance Association): Thank you, Mr. Chairman and distinguished members of the committee.

I would first like to point out that we feel highly privileged to have been invited to contribute to the permanent committee's proceedings on this important legislation.

Our introductory comments will be mainly in English, but we will be happy to answer questions in both official languages.

[English]

As you indicated, Mr. Chairman, we are very pleased to be appearing here today on behalf of the Canadian Life and Health Insurance Association, which is the voluntary non-profit national association of life and health insurers, representing over 80 companies, accounting for over 90% of the life and health business transacted in Canada.

I should note that Mr. Zinatelli is our associate general counsel.

Let me begin my remarks by drawing the committee's attention to the submission on the subject of coercive tied selling, which I hope has been circulated to you and your colleagues, Mr. Chairman. Included in that submission is a brief profile of the industry for those of you who are interested in further information on the industry, its products and its customers, which include over 20 million Canadians.

As our submission indicates, federal legislators recognized many decades ago the risk that lending institutions could conceivably exercise undue influence on the insurance purchase decisions of their borrowers. And indeed, that recognition led Parliament to put in place, in 1923, provisions to protect consumers from coercive tied selling in relation to the purchase of insurance products necessary to secure credit. Those provisions, which remain in force today in a form very similar to the original ones dating from the 1920s, have been and remain important consumer protection safeguards.

Correspondingly, when Parliament was first considering the proposed new tied-selling amendments as part of the review of Bill C-82, our industry expressed the strong view that protective provisions should remain in place at all times and that the existing provisions should not be allowed to lapse while amendments were under consideration.

Naturally we were very supportive, then, of the government's decision to leave the existing provisions in place until their possible replacement by amendments which have not yet been proclaimed and which this committee is indeed now examining.

When the government announced that the proclamation of the new tied-selling provisions would be deferred until this committee had undertaken further hearings, the government also called on financial service industries to develop new guidelines to deal with tied-selling practices.

Since then, the life and health insurance industry has indeed developed and formally adopted new national guidelines on screening life agents for suitability and reporting unsuitability, which includes the requirement to report any coercion or tied selling to the appropriate insurance regulator. Because they're relatively voluminous, we have provided the committee with copies through the committee clerk rather than annexing them to our submission. These guidelines took effect on January 1 of this year, and are now in the early stage of implementation. Indeed, my colleague Jean-Pierre and I will have an opportunity to discuss progress on this implementation at the annual meeting of the Canadian Council of Insurance Regulators later this week in Quebec City.

• 1910

Of course these new guidelines supplement and complement a relatively extensive body of existing legislative and regulatory provisions relating to tied selling, ones that already apply to life and health insurers in every province. Indeed, we have also filed with the committee clerk a representative list of legislative and regulatory provisions from every province in relation to coercion, undue pressure, and tied selling.

With these background considerations in mind, Mr. Chairman, our submission goes on to compare the proposed new tied selling provisions that this committee is now considering with those that are currently in force. With your permission, I will call on my colleague, J.-P. Bernier, to briefly summarize the results of that comparison and to outline the industry's bottom line with respect to the possible proclaiming into force of the new provision.

Mr. Jean-Pierre Bernier (Vice-President and General Counsel, Canadian Life and Health Insurance Association): Thanks, Greg.

The prohibition against coercive tied selling has been an important consumer protection feature of Canada's banking legislation for more than 74 years. Indeed, it was incorporated in the Bank Act in 1923 to protect borrowers from being coerced to purchase insurance from a particular insurer as a condition for obtaining a loan from a bank.

The wording of the 1923 tied selling ban is interesting. It reads as follows:

No agent or manager of any bank shall act as agent for any insurance company or for any person in the placing of insurance, nor shall any bank exercise pressure upon any borrower to place insurance for the security of such bank in any particular insurance agency. But nothing herein contained shall prevent such bank from requiring such insurance to be placed with an insurance company which it may approve.

What is interesting to note is that the current provisions found in subsection 416(5) of the Bank Act today are almost identical to what they were 74 years ago. The only exception is that today there is a requirement on the bank that it shall not unreasonably withhold its approval of an insurer.

In the recent past, the issue of tied selling has been reviewed by the government to ensure that the interests of financial consumers continue to be protected in an era when banks are offering more products and services than before. A new restriction on tied selling has been proposed by Bill C-82, to replace the existing restriction effective September 30, 1998. It is under consideration by your committee. The proposal is broader in scope than the existing subsection 416(5).

The new provisions would preclude a bank from imposing undue pressure or coercion on a person to obtain a product or service from a particular supplier as a condition for obtaining a loan from the bank. By comparison, subsection 416(5) only prohibits a bank from pressuring a borrower to select a particular insurance company for placing insurance for the security of a bank loan. Basically, the subsection 416(5) restriction has been extended to apply to any product or service that is offered by any supplier, including the bank or any of its affiliates.

• 1915

Our member companies have carefully examined the new tied selling provision and found the improvements sufficient. The bottom line for our industry is that if this committee recommends that the new tied selling provisions be proclaimed in force, it would be a positive and viable outcome. On the other hand, if the committee decides to explore other possible approaches, our industry stands ready to contribute as fully as possible to such deliberations.

[Translation]

We are available to answer your questions. Thank you.

[English]

The Chairman: Thank you very much, Monsieur Bernier, Mr. Traversy, and Mr. Zinatelli.

We will go to a question and answer session. We'll start with the government side. Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chair, and thank you, gentlemen.

Within your own industry, the life and health insurance itself, do you have any instances of tied selling or do you have any guidelines within your own industry, irrespective of the banks? I'm talking about health insurance tied to life insurance, etc.

Mr. Greg Traversy: Our industry is subject to legislation and regulation in every province. As I noted, we supplied to the committee clerk a representative list of provisions that are applicable to the industry. Perhaps it has not been sufficiently circulated because we prepared it during the day when we inferred the committee was very interested in this. We had it on hand and I'm sorry we didn't include it in our submission. Had we realized you would be strongly interested in that, we certainly would have. But it is there.

We face regulation and legislation in every province in relation to coercion, undue pressure or tied selling. As I was also mentioning, we have now supplemented that, effective January 1, 1998, with new guidelines on screening intermediaries, like insurance agents, for suitability, which include a requirement to report any instances of tied selling or coercion to the appropriate insurance regulator.

The very fact that legislation exists and our industry has developed those guidelines certainly suggests it's not something the industry takes lightly. As your previous witnesses were indicating, it's not as easy to imagine how this might transpire in the life and health insurance industry, which would typically approach you to offer one product. It's harder to envisage how it might take place. Nonetheless, I think you can see that provincial legislators and the industry itself have recognized this could conceivably be a possibility and have acted to prevent it and make it very clearly illegal, subject to sanction, etc.

One very interesting indicator is perhaps the following. The industry operates a consumer assistance service, which is a consumer hot-line service. We have call centres in Montreal and Toronto. We've been doing it for 25 years toll-free, and last year the call centre handled 64,000 calls. We get a certain number of complaints—typically around 1,000 per year of the roughly 65,000 to 75,000 calls.

We spoke to the manager in preparation for testifying. Interestingly, last year—I'm not aware this was unprecedented by any means—none of the calls related to tied selling. So our immediate evidence is it's probably far from common, but it's not taken lightly and there are laws against it and industry guidelines.

Mr. Roy Cullen: Thank you. Does your industry have any arrangements for getting tied selling or coercive tied selling with the banking institutions, with respect to life or health insurance? It could be commissions, it could be any sort of arrangement where someone comes into a bank, has business with the bank, and suddenly it's discovered they need insurance—like a sales lead or any kind of commission arrangement like that.

• 1920

Mr. Greg Traversy: Excellent question. Indeed, most of the insurance that banks associate with the extension of credit is not produced by a bank affiliate, but rather by an insurance company. There are networking or cross-marketing arrangements between not only banks but other lending institutions—trust companies, credit unions, and so on—wherein, for example, if you're obtaining a mortgage loan and there is a suggestion that you should take out insurance in the case that you die or become disabled, your financial obligations can be met.

Typically, those insurance products indeed are produced by insurance companies, most of whom, as I mentioned, are members of our association.

Mr. Roy Cullen: All right. That's all for me for now, Mr. Chairman. Thank you.

The Chairman: A question, Mr. Pillitteri?

Mr. Gary Pillitteri: Yes.

The Chairman: Okay, Mrs. Redman, you go first then.

Some hon. members: Oh, oh.

Ms. Paddy Torsney: First you'd better find out if he's going to pick a fight, and then you can let her go first.

Mrs. Karen Redman: Yes. I don't like going after him if....

Mr. Gary Pillitteri: No, no. I really don't like to pick fights, but I like to sometimes get a little bit controversial. I like to offer the carrot, but I also like to have a stick in my hand.

Let's get one thing clear. You're saying that we have regulations, which you presented. Of course you're under the provincial charter, and your regulations pertain to every different province in Canada, so you have to.... There's no national charter in your operation, it's all strictly provincial—right?—so some provinces have more restrictions in how they word for you to regulate and to operate than others. Am I correct in saying that?

Mr. Greg Traversy: Yes, that's right. Jurisdictionally, all marketplace activities of insurance companies are regulated at the provincial level, even though a majority of our member companies are federally chartered, and regulated for solvency by the federal regulator, OSFI, who will be your first witness tomorrow morning.

In terms of the marketplace, the activities of insurance companies constitutionally are regulated by the provinces. Mr. Pillitteri is certainly right in saying that one of the consequences is that the nature of legislation or regulation—in relationship, for example, to tied selling or whatever—can vary from jurisdiction to jurisdiction.

That, by the way, is one of the reasons we have, with some enthusiasm, worked on national industry guidelines, which, as I say, have come into effect. We've talked about them with all those different provincial regulators, and they all seem to like them, so it gives us a bit of standardization.

Mr. Gary Pillitteri: My follow-up: tell me, why are insurance companies not in the lending business? I mean, you are able to be in the lending business. There's no legislation stopping you from being in that business and offering packages, not only insurance but a package of two or three things.

Mr. Greg Traversy: Very good question. Indeed, in 1992, as Mr. Pillitteri is probably referring to, life insurance companies were granted new consumer lending powers—

Mr. Frank Zinatelli (Associate General Counsel, Canadian Life and Health Insurance Association): Extended.

Mr. Greg Traversy: Yes, extended consumer lending powers.

In the marketplace, to the best of my knowledge, there has not been to this date much take-up of that new scope. And why that is so is something that would certainly be better answered, I'm sure, by one of the business leaders in our industry. Certainly, as you reflect, Mr. Pillitteri, it hasn't happened yet at least.

Mr. Gary Pillitteri: I asked that question because it seems today that in a sense the banks—you know, in trying to do a task force on the banks, in trying to see what they're doing.... And specifically with this merger, you know, you say less competition. And I take a look at some of the legislation here in Canada, and say the insurance companies could get into all of this business. We would have more competition, you know. Or it could be mergers between banks and insurance companies rather than just banks by themselves. It is quite open to all people to get in this type of business. I'm looking at this as part of being more competitive and they say not necessarily; sometimes having so many in the field doesn't mean being competitive. All of them could be charging the same rates.

• 1925

What I want to know in terms of this legislation, which has been in place since 1923, on tied selling—it specifically mentions the banks, a lending institution—is if there is a need that now arises because you see more movement.

Before you answer that question I want to make some remarks on it based on my personal experience as a businessman. I live in Niagara Falls, and there's a tendency.... There's what they call hotel bedrooms in Canada, and there's an abundance of them. Paddy, I'm getting to the point.

Ms. Paddy Torsney: The honeymoon capital.

Mr. Gary Pillitteri: The honeymoon capital.

Ms. Paddy Torsney: I just wonder where this is going.

A voice: It's called the hospitality industry.

Mr. Gary Pillitteri: Okay, fine, the hospitality industry.

And being that they were in this industry and for the last half dozen years that industry has had a lot of problems.... As a matter of fact, I was just remarking that in over half of the hotels the landlords were the banks because they were not making their payments. I know that in every one of them the banks.... Some of banks only took as low as 20¢ per dollar on loans, some 50¢ per dollar.

Is there a possibility that they were having such a problem with all of these bad loans, as they might call them, but not realistically because the marketplace went down? A recession was there and the market value was no longer there and they started to call in more of their clients' securities. Do you think that was a possibility that has showed up now more because of the problem within the commercial end of it, the business end of it?

This is really what we're trying to touch here in tied selling, the business people who were really put under pressure. But those are the same people who have taken those losses and maybe the banks were trying to recoup some of these problems they were getting into. I could name you hotels where 20¢, 30¢ is the norm. I've sat in on a lot of those situations.

Mr. Greg Traversy: That's a very interesting hypothesis. I should mention just at the outset that the one area of lending the life insurance industry has indeed been active in historically is the area of mortgage lending. So the very problems that you're referring to are ones well known to our industry—too well known a few years back. Thankfully, as you know, real estate markets have turned up again and—

Mr. Gary Pillitteri: You're so happy now to get into the lending business again.

Mr. Greg Traversy: But your hypothesis is, I take it, that the reason for the increased awareness of tied selling could at least in part be that for quite a while, not too many years ago, there was this increased phenomenon of margin calls, people being.... I'm not competent to offer any professional judgment on that, but it's a very interesting hypothesis and might well be part of the reason why there's a heightened consciousness of this issue at this time.

Certainly other factors may well be that there has been this proliferation of the collapse of the pillars, an expansion of various new product types and so on. There may be many factors at work, but that may well be one of them.

Mr. Gary Pillitteri: Could I finish up, Mr. Chairman?

The Chairman: Just a very short question.

Mr. Gary Pillitteri: I want to go into the promotion of Niagara Falls. That is, I understand that banks and the insurance companies are tripping over each other in how much potential there is in my honeymoon capital of Canada, Niagara Falls. There will be some $4 billion to $5 billion in the next four or five years in building, because it is the fastest-growing area in Canada.

• 1930

Thank you.

The Chairman: Do you have a comment or a question?

Mrs. Karen Redman: I actually had a comment. I'd like to mention we have many bedrooms in Kitchener. It's a lovely area to come to.

Some hon. members: Hear, hear.

Mrs. Karen Redman: Thank you very much for your submission.

The Chairman: Thanks for your comment, Mrs. Redman.

Mrs. Karen Redman: I know you good people have been here all day, as we have.

Obviously you support the recommendation of embracing proposed section 459.1 in its entirety. I guess I would put forward to you a question that I've been grappling with over this whole issue all day. It doesn't sound to me like anybody would come out and say that tied selling is a good thing and it's not something that anybody would promote.

The problem, to my way of thinking, is in giving some kind of comprehensive definition to that. You already mentioned in your comments that bundling or cross-selling is something that not only does your industry do it, but it may be in the best interests of the consumer.

So I'm kind of grappling with what the definition is. One of the earlier witnesses talked about the perceived coercion as opposed to the real coercion. I'm wondering if that doesn't create the schism between the lack of reporting we seem to be having from any kind of formalized body or anybody who would receive those kinds of complaints. It may be explained by the fact that people will feel vulnerable and they don't want to come out and speak out against their bank, but there seems to be a lack of persuasive numbers. Yet the perception is that this is fairly systemic.

If you can get a question out of that, I'd like you to answer it.

Mr. Greg Traversy: Absolutely. Defining tied selling is something that is, as Mrs. Redman mentions, a challenge, because it's in very large part a perceptual issue as much as a fact issue.

I might just call on my colleague, Jean-Pierre, who spent a lot of time over the last year on these guidelines, just to mention how tied selling is defined for the purposes of the guidelines. Remember, the guidelines, which now have come into force and about which we're talking with the support of all the insurance regulators, put in place a requirement to report to the regulator any instances of tied selling. So that means you have to know what tied selling is.

Jean-Pierre, could you just perhaps elaborate?

Mr. Jean-Pierre Bernier: Sure. Coercive tied selling is prohibited in all ten provinces. It's also illegal for a banker to act as an insurance agent, and bankers are not eligible for an insurance licence in all ten provinces without exception.

We have an obligation to monitor sales practices for compliance with the law that applies to us. And because tied selling is defined with some variations between the province, we had to come up with a universal definition that would be applied in all jurisdictions. It is too costly, from a business standpoint, to develop a compliance program for one province and have a different compliance program for the province next door, and so on.

So 54 life companies came up with this definition in cooperation with the witnesses who were here just before us, who were previously known as the Life Underwriters Association of Canada, representing life agents. At the bottom of page 22 of our guidelines, we have defined, again in cooperation with the Canadian Council of Insurance Regulators, tied selling. It says that tied selling has a prohibition to make the purchase of product A conditional on the purchase of product B.

This is very simple. We had to be simple because these guidelines are to be adhered to by life insurance agents and brokers. So everything has to be very, very simple.

As a matter of fact, to a certain extent that's the prohibition they have in proposed subsection 416(5), which is that a bank is prohibited from making a loan conditional upon the purchase of an insurance product from company A.

Mrs. Karen Redman: It's simple, so it's clear and readily understood.

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Mr. Greg Traversy: So it comes back to that issue of choice that other witnesses and other committee members have referred to, where, as J.-P. has said, this is a circumstance when the consumer is being confronted with a situation where there is no choice offered: “to buy this you must buy that”.

Ms. Paddy Torsney: So you guys have all these volumes of paper about the laws in all the different provinces. Are there instances of tied selling in most provinces?

Mr. Jean-Pierre Bernier: We have an obligation to report—

Ms. Paddy Torsney: You were hoping someone else would answer, weren't you?

Voices: Oh, oh.

Mr. Jean-Pierre Bernier: —a legal obligation to report non-compliance with the prohibition against tied selling. In our guidelines we have developed a very simple form for reporting non-compliance. And there is a box for tied selling on the form. This form goes to the regulators and a copy also goes to the agents and the brokers for appropriate disciplinary actions. We will be meeting with the members of the Canadian Council of Insurance Regulators later this week in Quebec City, so we will know later this week. These forms came into force on January 1, 1998.

Ms. Paddy Torsney: Okay, but these laws have been in place for a number of years. Are there instances where they're broken?

Mr. Frank Zinatelli: There are two specific sections, really, which address tied selling. A lot of the other sections deal with coercion and unfair practices, which can cover tied selling. To my knowledge, only one case has been heard by a court or administrative body, in British Columbia, about a year ago. I'd be happy to make that case available to you. To my knowledge, there's only been one case.

Ms. Paddy Torsney: Okay, but this is my question. There are are all these rules and there is only one case, so if it's not happening why do we need all these rules?

Mr. Frank Zinatelli: A lot of these rules have been in place for many years for our industry.

Ms. Paddy Torsney: So if I go to any.... On page 7 of your brief, in the second half of your brief, you talk about where you've made investments; you have residential loans and commercial loans and have corporate stock. So I'm not going to find any incidences where the CAIFA company invested in that company and then got a group policy or life insurance policies or something like that.

Mr. Greg Traversy: Certainly not that I have ever heard of, and part of that would probably relate to the fact that the investment side of a company is completely separate from the product side. They're just totally different people. The investment behaviour of life insurance companies is very closely regulated and is subject to all kinds of detailed rules which are intended to ensure that the money is prudently invested. I've never heard of any incidences of tying together an investment decision with a product decision.

Ms. Paddy Torsney: I'm just trying to think. Let's say you have a big client with all kinds of group and life and benefits, and they say, “Look, we're a little tight on money right now and we're looking for some investors”—you wouldn't be a place to buy corporate stocks?

Mr. Greg Traversy: Not really. A purchase of stocks would be on a stock exchange, and in fact many life companies have their equity investments managed by arm's-length professional equity management firms.

Mr. Jean-Pierre Bernier: I've been in the life and health insurance industry for over 20 years and in all those years, to the best of my knowledge, the only reported case of tied selling is that court of appeal decision from British Columbia.

Mr. Greg Traversy: But interestingly, which way does cause and effect go? There have been laws and regulations in effect for many years and there are no instances, or very few instances, of tied selling. So which is the chicken and which is the egg? Who knows?

The Chairman: Mr. Cullen.

Mr. Roy Cullen: Mr. Chairman, that was the point I was going to make. You could argue, I suppose, that because of the laws there's been no.... It reminds me of a joke, just to introduce a bit of levity, Mr. Chairman, in an otherwise very serious evening.

• 1940

This chap is in Times Square in New York City and he's flicking his fingers and getting a lot of attention. So someone comes up to him and says “Why are you flicking your fingers all the time?” He says, “Well, it's to keep the elephants away.” The person says there are no elephants around for thousands and thousands of miles, and he says, “It works well, eh?” There you go.

Ms. Paddy Torsney: If we can ask you one last question, what was the punishment or the remedy in the B.C. example?

Mr. Frank Zinatelli: I'd have to check that. I'm afraid I don't know offhand.

Ms. Paddy Torsney: That's the other part of the law. What's the point of having it written if you don't have any remedy or punishment?

The Chairman: How important is this section, the culture?

Mr. Greg Traversy: The continued existence of a section on tied selling is certainly very important. That's why we were so very keen on seeing that subsection 416(5) stay in effect until such time as it's replaced. So a section is important.

How important is the replacement of subsection 416(5) by the new and somewhat broader section? It's of moderate importance, but I would think—and J.-P. may want to comment—certainly it was not one of our most fundamental goals during the Bill C-82 process. We welcomed the strengthening. We think it makes sense. On the other hand, I don't think it was something that was seen as an upfront rank kind of issue.

The Chairman: Mrs. Redman.

Mrs. Karen Redman: I have one small question. If it has been covered, I apologize.

The last group of witnesses talked about having a lot of skepticism from their membership that having this legislation in place would actually have an impact. Do any of you want to comment on that from your perspective?

Mr. Greg Traversy: I'd venture a comment and call on my colleagues to supplement it.

Our members share some attributes with banks. They're mainly large, very closely regulated financial institutions, and I can say without any exaggeration whatsoever that they take the letter of the law and of regulation tremendously seriously. I mean tremendously seriously. And I would be certainly thinking of our own member companies. I can guarantee this committee that when Parliament or a legislature from a province, or whatever, puts something forward, it is treated with extreme seriousness. So based on that experience, I myself would not really share the skepticism that was reported.

J.-P.?

Mr. Jean-Pierre Bernier: Without the tied selling ban in the Bank Act, and if you were to leave banks under self-regulation, the cost of compliance for us in comparison to the banks will put us at a competitive disadvantage, because we're not subject to self-regulation at the provincial level and banks are not subject—or at least they pretend not to be subject—to the provincial legislation when it comes to the distribution of insurance.

The Chairman: Are there any further questions?

Thank you very much.

Mr. Greg Traversy: Thank you, sir.

The Chairman: Mr. Zinatelli.

Mr. Frank Zinatelli: I would comment on the question that was asked just a minute ago about what happened in the B.C. case. There was an order from the court that the company cease selling that type of product. So there was an order. The summary that I have doesn't speak specifically to that case, but we can follow up.

The Chairman: On behalf of the committee I'd like to express our warmest and sincerest gratitude for your intervention. Thanks.

The meeting is adjourned.