FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, April 1, 1998

• 1536

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call the meeting to order. This is not in camera right now. We are recording. We're on the record.

The first thing I'm going to ask is permission to read on the record a submission made by the Consumers' Association of Canada. You all have a copy. It's a three-page letter signed by Marnie McCall, executive director. Do I have permission to read this into the record?

Mr. Tony Valeri (Stoney Creek, Lib.): Absolutely, Mr. Chairman.

The Chairman: The letter reads as follows:

Consumers' Association of Canada
Box 9300
Ottawa, Ontario K1G 3T9.


March 31, 1998



The Hon. Maurizio Bevilacqua, Chair
House of Commons Finance Committee
Parliament of Canada
Ottawa, Ontario
K1A016

Dear Sir:

Re: Tied Selling

Consumers' Association of Canada (CAC) is a national, not-for-profit, volunteer-based organization founded in 1947 to advocate for consumers in the Canadian marketplace. Since the early 1970s, issues related to financial services have been a major focus of CAC's work.

In the spring of 1996, CAC and the National Quality Institute surveyed almost 9,000 Canadians in the Consumer Survey on Quality. Banks, trust companies, and credit unions were among 20 service providers consumers were asked to rate. When “excellent” and “good” ratings were combined, credit unions ranked 2nd, trust companies 6th, and banks 16th. In the second Consumer Survey on Quality, conducted in the spring of 1997, out of 21 services providers, credit unions ranked 3rd, trust companies 9th, and banks 17th. Banks clearly have some work to do to earn back consumer confidence.

You have no doubt heard that there is little evidence that banks engage in coercive tied selling with their customers. People who can be intimidated into doing something they do not want to do are not likely to turn around and complain about it. Individuals who have come forward often say they were afraid not to do what the bank wanted, because it might affect their future dealings with the bank or their credit rating.

At the level of policy, CAC agrees that banks, as institutions, do not condone, encourage or support coercive tied selling. However, banks, as institutions, are responsible for the training given to their staff. CAC believes one solution is better training of front-line staff. A lot of people do not seem to understand the difference between telling a customer, “If we had all your business, we could give you a better rate on your loan”, and telling a customer “We can't give you a loan unless you bring all your other business here”. The first is the kind of service most people would expect from a financial institution trying to do the best for their customer; the second is coercion.

CAC has addressed the issue of tied selling on a number of occasions, including before this committee. We addressed the issue in detail in our submission in September 1996, while protecting consumers from coercion. In a 1995 paper, Reform of Financial Services, CAC recommended that financial institutions be prohibited from using transaction-level customer information to market other products. At the same time, CAC recommended that financial institutions be allowed to make referrals to associated service or companies, provided that customers were informed they had no obligation to deal with the company, but could do so if they wished.

One of our concerns about the use of transaction level information is that it may facilitate coercive tied selling. In the summer of 1997, CAC questioned approximately 8000 of its supporters on a variety of consumer issues, including views on competition in the financial services sector and concerns about the security of electronic financial transactions, and confidentiality and accuracy of personal information in electronic commerce. Of the more than 1000 responses, 78% were concerned about the confidentiality of their personal information, 85% indicated they were concerned about companies that collect data, 61% were concerned about the security of their financial transactions.

As ownership of other financial services by banks increases, along with the proliferation of networking arrangements between and among financial services providers, the level of concern among consumers also increases. Banks have fiduciary responsibilities to their customers; as such, they must not only act in the best interests of those customers, they must also be seen to be doing so. Full disclosure and complete transparency are even more essential when the interrelationships among financial institutions automatically conflict with the interest of customers.

CAC recommended the introduction of the amendment being discussed here and we support its proclamation. Consumers are not well protected by the present laws concerning tied selling. A consumer who has been coerced should not have to prove, as has been the case under the Competition Act, that the particular institution made a practice of coercing its customers. Clearly, no individual consumer could ever prove such a thing and, just as clearly, no bank would make coercion a policy or approve, even tacitly, of the use of such practices. All consumers should have to demonstrate is that they were, in fact, coerced into a course of action they did not wish to pursue.

In addition to recommending an amendment such as this, CAC also recommended that a general prohibition against tied selling apply not only to banks, but all financial services providers. All legislation within federal jurisdiction should be amended to include an equivalent provision. The federal government should urge its provincial and territorial counterparts to immediately introduce equivalent provisions in legislation within their jurisdiction, as Ontario is proposing to do with regard to mutual fund sales practices.

We repeat those recommendations to this Committee.

Yours truly,

CONSUMERS' ASSOCIATION OF CANADA

Marnie McCall
Executive Director



c.c. The Hon. Jim Peterson, Secretary of State for Financial Institutions
Harold MacKay, chair, Task Force on the Financial Services Sector
Gail Lacombe, President, Financial Services Committee

The Chairman: I'm also going to ask permission to read into the record a presentation or submission by the Canadian Community Reinvestment Coalition. It's a nine-page document. Can that be read into the record? Is that agreed?

Some hon. members: Agreed.

Statement by the Canadian Community Reinvestment Coalition:

BRIEF TO THE HOUSE OF COMMONS STANDING COMMITTEE ON FINANCE ON THE ISSUE OF TIED SELLING

“Canadian banks do not operate in an unregulated environment. Over the years, they have benefited a great deal from the protection of the Bank Act.”

(Excerpt from a speech by the Rt. Hon. Jean Chrétien, February 11, 1993.)

I. Background

(a) What Canadians Do For Our Banks

Canada's big five banks are the largest corporations in Canada (based on total value of their assets, in order of size: the Royal Bank, CIBC, Bank of Montreal, Scotiabank, Toronto Dominion). These assets include loans, which borrowers have to pay back to the bank, government bonds, shares in other companies, buildings, property, etc.

However, the basis of all these assets is the money over 20 million Canadians deposit in the banks. According to the Canadian Bankers Assoication, the deposit accounts of individual Canadians make up the largest single bank deposit category, both in number and total amount. When individual deposits are combined with the deposit accounts of businesses, they total $676 billion and make up 93% of the total capital base of the big five banks at the end of April, 1997. In contrast, shareholders' investments in banks total only $46 billion.

Without the capital base that these deposits provide, the big five banks would not have been able, at the end of 1996, to have developed the following asset base:

—$555 billion in Canadian dollar assets;

—$380 billion in foreign currency assets through operations in 120 countries; and

—over $405 billion in loans to business;

—total assets almost 23 times shareholder equity.

Also, without the capital base that depositors provide, the big five banks would not have reaped the following benefits in 1996:

—$41 billion in revenue from the interest paid on loans;

—$10 billion in revenue from bonds and securities (which together made up 75% of their total revenue of $54 billion).

A comparison of total assets, deposits and total loans of the big five banks compared to total revenues of Canada's federal, provincial and territorial governments gives a sense of just how big our big banks are. Each of the big five banks' assets, the Royal Bank's deposits alone, and Royal Bank and CIBC's total loans are greater than the federal government's annual revenues. And three of the big five banks' assets and deposits are greater than the combined annual revenues of all of the provinces and territories.

(b) What Canada's Governments Have Done for Banks: Decades of Privileges and Protection

Canada has one of the most highly concentrated banking sectors in the world. We have half as many banks as Japan, one-fifth the number of banks as Germany, one-seventh the number of banks as France, one-eighth the number of banks as Britain, and the United States has 200 times as many banks as Canada.

Our banking sector is so concentrated because our banks have, since 1967, enjoyed legal protection from competition by foreign banks and domestic financial institutions, and very high costs are an effective barrier to anyone trying to start a new bank. Up until very recently, there was a 10% individual, and 25% collective, limitation on the foreign ownership of Canadian-controlled, federally-regulated insurance companies and trust and loan companies; a 25% collective limitation on the foreign ownership of chartered banks; and a 12% ceiling on the size of the foreign bank sector in Canada. As a result, there are only approximately 50 foreign banks in Canada. Despite not facing these limitations any more, foreign banks still have to raise millions in capital in order to open a subsidiary, need approval of the Minister of Finance to open branches, and no one person or organization can own more than 10% of a chartered, domestic bank (e.g. the big five banks and a few, much smaller banks).

Almost all the foreign banks in Canada operate solely as investment banks specializing in financing large corporations because, as their representatives stated in the May/June 1966 issue of Canadian Banker, they feel that the costs of trying to compete head-to-head for personal and small business lending and service are so high as to make it futile.

As a result of protection from foreign competition, and that the federal government has allowed them to operate in almost every area of the financial services industry, the big five Canadian banks have grown enormously, as detailed above, and they now control many areas of the financial services industry, as follows:

—over 65% ($1 trillion) of all deposit-taking financial institution assets in the country (Canada's 11 domestic banks control 93% of the total assets):

—80% of the assets and all but a few of the large investment brokerage companies; and

—a majority of small business, consumer credit and mortgage lending.

Taxpayer dollars totally $4.5 billion facilitated bank takeovers of several failing trust companies in the past several years (especially 1991-92), so that banks now own over 15 trust and loan companies (the only large independent trust company left is Canada Trust). Between 1984 and 1993, the total assets of trust and loan companies associated with the banks increased from $36 billion to $150 billion. In addition, even though the federal government allowed banks unrestricted access to the mutual fund industry only nine years ago, the list of the ten largest mutual fund companies in Canada already includes five banks and these banks control 30% of the total industry assets.

In the area of access to capital for business, the banks are by far the largest source of loans and other forms of credit. At the end of 1996, the total authorized business credit of the seven largest banks was $456 billion.

Altogether, the business lending and investment of all financial institutions other than the big seven banks amounts to only about 20% of the banks' total business lending ($97.5 billion). Federal government lending and granting programs, totalling at most $4.5 billion, are not sufficient to close this gap. It is clear that the total of potential non-bank funds available to business generally, and to job-creating small businesses trying to start up or expand, is minuscule compared to the financial resources of the chartered banks. In order for Canadian small businesses to be globally competitive and to continue creating jobs, Canadian banks must be accountable to ensure that they are serving the needs of this key sector of the Canadian economy.

Through their lending and investment activities, Canada's big banks enjoy the privilege of a government-sanctioned key role in the creation of the money supply. And this role has been subsidized in the past several years by federal government guarantees for small business loan defaults under the federal Small Business Loans Act (SBLA). The total cost to the federal government of guaranteeing defaults under the SBLA has been $258 million since 1992 (or 2.5% of loans) according to the federal Auditor General, who has criticized the program's poor cost-to-job-created ratio. A similar system in Quebec (known as the Paillé), in place since December 1994, has resulted in a reported total cost of $116 million as the provincial government has covered loan defaults for banks and caisse populaires, mainly due to lax safeguards to ensure that the financial institutions were lending to viable businesses (See the CCRC's fifth position paper), An Accountability System for Canada's Financial Institutions: How to Ensure They Meet a High Standard of Performance, for more details (released December 1997).

(c) Record Bank Profits: A Result of Privileges and Protections

These high privileges and protections have helped Canada's big five banks reach record profit levels in the past three years. In 1995, the big five banks were amongst the seven corporations with the highest profits in Canada, their profits have almost doubled since 1993, and in 1996, the Royal Bank recorded the highest profit ever by a Canadian company ($1.43 billion). The banks' profits for 1997 increased significantly, up 19% over 1996 to $7.5 billion, as the Royal Bank broke its own record profit level (up to $1.68 billion) and the CIBC and Bank of Nova Scotia registered the second and third highest profit levels ever (at $1.55 billion and $1.5 billion respectively). Three of Canada's big five banks (Royal, CIBC and Bank of Montreal) are amongst the top 16 most profitable banks in the world.

(d) Privileges and Protections Mean Greater Responsibility

Bankers like to characterize Canada's big banks as private corporations, which should give priority regard to shareholders' interests, with their employees and customers coming second and third.

However, given that the banks would not be as large or as profitable as they are without individual Canadian's deposits and the privileges and protections granted them by the Canadian governments, banks are much more like public utilities.

Public utilities such as hydro-electricity, water, telephone and cable-TV are granted the significant privilege of usually almost exclusive rights to generating and exploiting a natural resource. Similarly, banks have been given the significant privilege of playing the major role in generating and exploiting an human-created resource, namely money. Both utilities and banks are in a position of public trust with regard to the resources they manage.

The decision in 1967 to protect Canada's banks from foreign competition was made because it was believed that Canadian banks could best serve the national market. Even though this decision essentially gave the banks a monopoly on provision of banking services, they were not required in return to meet any standards of service or other formal obligations to serve Canadians and the Canadian economy well. In contrast, public utilities are required to meet service standards, supply services across the country, and provide detailed statistics concerning their costs and revenues whenever they want to change the rates they charge customers.

Some commentators, the banks included, of course, argue that if consumers are unhappy with banks, there are other sources of banking services, including access to capital. This argument ignores the fact that in the Canadian fiancial system, banks are the major source of financial intermediation, as detailed above, concerning the banks control of various sectors of the financial services industry.

Given that the banks have enjoyed extensive privileges and protections for decades, allowing them to gain a significant level of asset and market control of financial services in Canada, and placing them in a position of public trust, banks should face higher standards in many areas of their activities than do other corportions.

(e) Problems for Consumers

In the area of consumer problems, the results of surveys of over 8,000 Canadians concerning customer satisfaction with various Canadian industry sectors conducted in 1996 and 1997 by the National Quality Institute placed banks in the bottom five of 21 industries along with regulated monopolies such as cable-TV companies and Canada Post. In contrast, respondents ranked credit unions as the third best industry sector for customer satisfaction, and trust companies ranked ninth. The survey measured courtesy, promptness of service, product information, after-sales service and complaint-handling service.

In addition, a study released in June 1996 by ACEF-Centre of Montreal concluded that 3% of Canadian adults do not have an account with a financial institution. Other surveys have shown that low-income Canadians are even less likely to have an account. An Environics poll, conducted in 1995, found that 8% of customers with an annual income of less than $25,000 (which, acccording to 1994 Statistics Canada data, would mean at least 400,000 Canadians) do not have an account.

These surveys have prompted requests for more detailed disclosure by the banks of key information in the consumer services reas, which to date the banks have refused to disclose, and the federal government has refused to require disclosure of the information.

In one particular area, service charges and credit card interest rates, consumers across Canada have expressed their suspicions about being “nickelled and dimed” for several years. While several bank executives have acknowledged that this is a primary concern of their customers, the banks have to date not disclosed information to prove that they are not gouging consumers in these divisions of their operations (i.e. by disclosing their profit margins for these divisions and demonstrating that their profit margins are reasonble). Without this information, how can anyone judge whether the banks provide their services at a fair and reasonable price?

In the complaint-handling area, banks do not report the number of complaints they receive each year in their annual reports. They have also set up offices of bank ombudsmen, all of which are selected, paid and directed by the banks and none of which can make a ruling on a complaint that binds the banks in any way. In contrast, in Australia and Britain, the ombudsmen are independent and can make binding rulings on complaints. Without an independent and effective system of compiling and addressing consumer complaints, how can anyone claim that they have enough information to determine the level of service provided by banks to Canadians?

Another key problem is that financial customers are not oranized overall to be able to hold the banks and other financial institutions accountable for poor service, mainly because of systemic barriers to consumers banding their resources together to form board-based and well-resourced industry watchdog groups. (See the CCRC's Position Paper No.4: A Financial Consumer Organization for Canada: Balancing the Financial Services Marketplace for details.)

II. Government Actions to Date: Insufficient to Hold Financial Institutions Accountable or Solve Consumer Problems

A major reason for the lack of effective action recently by Canadian governments, the federal government in particular, on issues of concern to financial consumers, has been their orientation concerning regulating business, and specifically the federal government's misguided belief in self-regulation and voluntary codes. Proposed federal government legislation is now accompanied by a “Regulation Impact Assessment Statement”, which is based in part on the results of a “Business Impact Test” (BIT) consultation. The BIT was developed by business in co-operation with the Canadian Manufacters' Association, the Treasury Board of Canada and Industry Canada. It is aimed at ensuring that legislative and regulatory changes do not hinder Canadian business competitiveness. To quote the preamble of one BIT statement, the BIT “solicits businesses preferred policy choices” and “provides [businesses] with an opportunity to influence the government's policy-making process.”.

The BIT raises a fundamental question: Where is the corresponding Consumer Impact Test and consultation process that gives consumers“an opportunity to influence the government's policy-making process?”. The answer, unfortunately, is that there is no corresponding test.

The federal government has been using the BIT and, as a result, in part, favouring voluntry codes as the sole means of so-called regulation in many areas over the past few years. Voluntary codes have been favoured also because the government has believed that spending on enforcement must be cut, and that these cuts will save money in the long run.

However, voluntary codes have not been confirmed as an effective form of regulation, and most of the evidence states that they work only in very limited, specific situations. As the May 1994 report by the Public Interest Advocacy Centre, (Voluntary Codes: A Viable Alternative to Government Legislation?) concluded, even the adaptation and adoption by the Canadian Bankers Association of the Canadian Standards Association's Moral Code for the Protection of Personal Information will provide little assurance that consumer privacy will be adequately protected in the marketplace. The existence of other voluntary codes in the financial services industry likewise provide little assurance to consumers. Voluntary codes, on their own, are simply inadequate means of ensuring compliance with rules, as pointed out by Canada's privacy Commissioner, in his submission to the Standing Senate Banking, Trade and Commerce Committee (April 25, 1995).

To take an example from another issue area, the 1994 KPMG Environmental Management Survey revealed that, for 95% of company respondents, the motivating factor for developing and adhering to an internal environmental management system was compliance with regulations. Without regulations, the number one motivation for adhering to voluntary internal codes would have been absent fo the industries surveyed, which included financial institutions.

After years of embracing voluntary compliance in lieu of regulation, the federal government finally, in 1995-96, studied whether they work under the Voluntary Codes Project undertaken by Industry Canada's office of Consumer Affairs (OCA) and the Treasury Board Secretriat's Regulatory Affairs Directorate (RAD). The conclusions of these various studies are that voluntary codes only work in very specific situations that meet all of the following conditions:

1.    Is the code and enforcement system developed jointly by consumer, government and industry representatives?

2.    Is there detailed and effective disclosure of the businesses activities in the areas covered by the code?

3.    Is there public, independent and fully-resourced auditing of whether the businesses meet the standards in the code by an enforcement body that is accountable to the public?

4.    Are there sanctions for violations of the code sufficient to discourage the prohibited practices?

5.    Are appeal mechanisms available for unsatisfied consumers?

6.    Does the government support the code and enforcement system?

7.    Is there a periodic review and updating of the code, involving consumer, government and industry representatives?

It should be noted that these conditions, taken together, amount to the conditions for effective legislation or regulation of any area of business activity. An important difference between regulations and voluntary codes, however, is that regulations usually apply to all businesses active in a particular area, while a voluntary code only applies to businesses that volunteer to have the code apply to them. As a result, many businesses can avoid scrutiny of their activities if government relies only on voluntary codes to restrict the activities of an industry sector.

The federal government has recognized the need for regulation of the financial services sector. The discussion paper on the 1997 Discussion Paper of the Task Force on the Future of the Canadian Financial Services Sector also stated that the financial services sector has traditionally been a segment of the economy where regulation is accepted and expected. (p. 6)

However, the federal government's actions have contradicted the recognition of the need for regulation of the financial services sector. As a result, the federal government has failed to develop and enact effective measures to enable governments and individual Canadians to hold financial institutions accountable to consumer, small business and community interests on key issues of concern.

For example, during the consultation period on changes to the Bank Act and other financial institutions legislation between April 1995 and July 1996, Doug Peters, the Secretary of State for International Financial Institutions and responsible for the changes, held 45 meetings, all with industry representatives, and gave nine speeches, all to industry associations. During this consultation period, Mr. Peters did not meet with any consumer groups.

The federal government's proposed changes to the Bank Act and other laws that were introduced after the consultation period (in February 1997) reflected the bias in Mr. Peters' consultation process. The government did not require financial institutions to do very much at all to protect consumers and instead allowed the banks to develop their own ineffective, voluntary, self-enfocused measures in several areas as follows:

—banks were not required to protect the privacy of consumers (the legislation only says the government may require banks to put self-enforced measures in place);

—financial institutions were only asked, not required, to adopt a policy and self-enforced complaint-handling system for tied-selling, which will be reported on by the banking industry ombudsman, Michael Lauber, who is selected, paid and directed by the banks and cannot make binding rulings on any case (See the CCRC's position paper No. 1, Bank Ombudsmen: Why They Must Be Independent;

—the government accepted the banks' proposals for a self-enforced system concerning access to basic financial services for people with low incomes (See the CCRC's Position Paper No. 2, Access to Basic Banking Service: Ensuring A Right to This Essential Service for details); and

—the government accepted the banks' proposals for a self-enforced system concerning information about banking charges.

III. How to Solve Tied-Selling and Other Consumer Problems

We feel that it is essential that performance of financial institutions, particularly in the context of any expansion of powers of a financial institution, or transactions such as mergers and takeovers, be reviewed with regard to their record on issues such as tied-selling, access to financial services for low income Canadians, availability of finance to small businesses, and other consumer issues. Otherwise, how is it that anyone can prove that such increased powers or transactions provide benefits to customers, the key issue about which we shall all be concerned?

In the U.S., under the federal Community Reinvestment Act (CRA) periodically and specifically when a bank wants to expand in any way (through a merger or acquisition, or by opening a new branch or setting up a new automatic banking machine) the bank's record of lending, investment and providing service is reviewed by the regulators. Citizens groups are given standing in these reviews to present their views on the bank's record in these areas. Importantly, the regulators can refuse to grant the expansion application if they determine that the bank's record is poor.

The criteria used in the U.S. evaluation process are an appropriate benchmark for the Canadian approval process. The U.S. evaluation is based on information set out in a disclosure statement to the regulators. Unfortunately, Canadian chartered banks are currently not required to disclose the same level of information as their U.S. counterparts. Ironically, however, the Bank of Montreal and the Toronto Dominion Bank are both very familiar with the U.S. requirements through the process they had to comply with leading up to their acquisition of U.S. financial institutions. Both the Bank of Montreal and TD Bank have projected healthy profits from their U.S. subsidiaries, which raises the further question as to why they would resist, as they to date, similar requirements being enacted here in Canada?

For example, before the Bank of Montreal could expand its subsidiary, Harris Bank of Chicago, in 1994, Harris Bank had to correct its poor lending and service record, which was revealed by disclosure of data under the CRA. It did so by pledging $327 million in credit and assistance over five years for affordable housing and small business loans and to meet other needs of communities in the Chicago area.

Across the U.S., thanks to the CRA, poor performance by financial institutions in servicing some communities has been revealed, and the instituions have invested $353 billion in these communties to correct their poor performance.

Accordingly, in order to determine whether Canada's banks serve Canadians and the Canadian economy well, and particularly to determine whether such transactions are in the national interest we recommend that:

1.    The federal government set up a disclosure and review system, based upon the U.S. system which has worked effectively for 20 years (as detailed in our fifth position paper, An Accountability System for Canada's Financial Institutions: How to Ensure They Meet a High Standard of Performance, released in December 1997).

As part of this system, the CCRC recommends that:

2.    The federal government enact the following requirements to determine how well financial institutions are serving consumers in each community by requiring each institution to disclose each year:

—the number of complaints received, and the rate of resolving complaints;

—the number of lawsuits initiated by customers against the institution, and the number won, lost or settled, as compared to lawsuits by the institution;

—whether the banks are providing access to basic banking services for all residents of Canada (based upon an independent audit); and

—as in the U.S., the location of branches opened or closed.

The CCRC also proposes that the federal government evaluate the above data and grade each financial institution's performance in serving each community, as in the U.S. The institution would receive a poor grade if the evaluation reveals, for example, that the institution has a high rate of complaints or successful lawsuits against the institution about tied-selling or other problems, or arbitrarily rejects certain types of loan applicants, or maintains excessive barriers to access to basic banking services.

The CCRC urges that, after a two-year transition period to develop the evaluation system, incentives should apply to financial institutions to encourage them to improve their performance (See our fifth position paper for more details).

(a) How to Prevent Tied-Selling Specifically

When a commercial organization pays a premium to acquire another organization, as the Royal Bank proposed in its bid to takeover of the London Insurance Group last summer, it is based on a valuation that assumes that a certain synchronicity exists between the two commercial entities that will result in their combined value being greater than their value as commercially separate entities.

This element of financial theory should raise concerns that there is a substantial likelihood of some level of utilization of common data bases between the two financial institutions, and that this utilization will increase the potential of tied-selling and the related problem of invasions of privacy. This is especially the case since these practices are currently not prohibited by law.

To give one example of the inadequacy of allowing financial institutions to protect consumers themselves, the Toronto Dominion Bank has sent a brief flyer to its customers stating that unless they contact the bank by the end of this October, the bank will proceed to share the information it has with all its subsidiaries. This method of addressing this issue clearly favours the bank's desire to share this information, while failing to adequately protect the consumer by fully informing them of the impacts of this sharing of information, and giving them a fully informed choice concerning this practice. This method is very similar to the negative-option billing practice which was attempted by cable-TV companies and roundly rejected by consumers in January 1996.

In order to address these issues adequately and to protect consumers, we make the following recommendations:

3.    Tied-selling, meaning a coercive act where a financial institution refuses to sell a product to a customer unless that customer also buys another product from the institution, should be prohibited in law and significant financial penalties should be enacted to protect consumers by strongly discouraging such behaviour.

4.    The sharing of personal information between financial institutions and their associate or subsidiary institutions should be strictly prohibited unless the consumer gives their explicit consent to the sharing of the information, and regulations should be enacted governing the retention, protection and use of this information by the private sector as a whole, and financial institutions in particular.

5.    The review of any merger or expansion of a financial institution's powers should include an assessment as to the likelihood of increased tied-selling and invasions of privacy and, if such transactions are approved, a mechanism to monitor tied-selling and protection of privacy ought to be established. As part of this monitoring mechanism, banks should be required to disclose the number of complaints they receive each year concerning these practices.

IV. Other Key Accountability Measures

In addition, as detailed in the CCRC's four other position papers, banks and other financial institutions, including foreign financial institutions operating in Canada, should be required to:

6.    Fund an independent ombudsman with the power to make binding rulings, as part of the overall financial institution accountability in Canada (See the CCRC's Position Paper No. 1, Bank Ombudsmen: Why They Must Be Independent for details).

7.    Guarantee all persons able to prove that they are residing in Canada, upon proof of status that does not require extensive identification, an account with a deposit-taking financial institution, including the option of a low cost, no frills account, and protection from arbitrary and excessive holding of cheques (See the CCRC's Position Paper No. 2, Access to Basic Banking Service: Ensuring A Right to this Essential Service for details).

8.    Facilitate the start up of a Financial Consumer Organization (FCO) by enclosing the FCO's flyer in their mailing envelopes sent to their customers. If they do not do so voluntarily, the federal government should legislate the FCO's right to enclose its information and solicitation flyers periodically in mailouts that financial institutions send to their customers (See the attached summary of the CCRC's Postion Paper No. 4, A Financial Consumer Organization for Canada: Balancing the Financial Services Marketplace for details.

These measures, when combined with the overall disclosure and performance review system set out above, are reasonable ways to prevent tied-selling and other consumer problems, and also require banks and other financial institutions to meet a high standard of performance in serving Canadians, based upon a U.S. system that has worked effectively for 20 years.

A FINANCIAL CONSUMER ORGANIZATION FOR CANADA BALANCING THE FINANCIAL SERVICES MARKETPLACE

Summary of CCRC Position Paper No. 4

If financial institutions refuse to enclose the Financial Consumer Organization (FCO) flyer in their mailings, the CCRC will hold federal Industry Minister John Manley to his pledge to ensure its creation.

The high level of discontent felt by Canadians about bank services is well known. Surveys in 1996 and 1997 by the National Quality Institute of 8,000 Canadians found that banks ranged in the bottom five of 21 countries in terms of customer satisfaction.

A lack of response by financial institutions to customer concerns is, unfortunately, matched by a lack of resources for consumers to advocate their interests.

To correct this imbalance in the marketplace, the CCRC is urging banks and other financial institutions to facilitate the creation of a Financial Consumer Organization (FCO). The FCO will help financial consumers with complaints about the over 500 products and services offered by financial institutions. The FCO will also address problems with service charges, credit card interest rates, mutual funds, privacy tied-selling, insurance policies, and corporate governance.

The CCRC is calling on federally-regulated banks, trusts and insurance companies to help create the FCO by periodically enclosing a one-page flyer in the envelopes in which they mail their account statements, credit card bills, and insurance premium statements. The flyer will invited customers to pay an annual membership fee of about $20 to $30 to join the FCO. The flyer would be sent out at no cost to the financial institutions. This method has been used successfully to help residential utility ratepayers band together in four U.S. states to hold utilities accountable to their interests.

If only 3% to 5% of financial consumers signed up (the same response rate as the U.S. groups), the FCO would have between 600,000 and on one million members, and an annual budget from membership fees of between $12 million and $20 million. With these resources and large membership base, the FCO would be self-sustaining, broad-based and strong enough to counter the power of financial institutions in the marketplace.

The FCO will be governed by a board elected by and from amongst FCO members, with representation from across Canada. The board will hire staff to compare prices of products and service, help financial consumers with complaints and advocate consumer interests before the government and courts. The FCO will also act as an umbrella group and provide grants for existing groups active on financial services issues.

Industry Minister John Manley publicly stated his support of the FCO proposal in 1996, and pledged that he would push the banks to enclose the flyer if they refused to do so. A survey of 2,000 adult Canadians, conducted by Environics Research Groups in 1996, revealed strong support for the creation of an FCO using this method, as follows:

—51% agreed that a financial consumer organization is needed in Canada;

—43% said that they would likely join such an organization if they received a flyer enclosed in financial institution mailings, at an average of $28 annual membership fee; and

—64% said that, if the financial institutions refuse to enclose the flyer voluntarily, the government should require them to do so.

The CCRC is currently approaching financial institutions and financial industry associations to determine whether they will voluntarily enclose the FCO flyer in mailings to their customers. If financial institutions refuse to enclose the FCO flyer in their mailings, the CCRC will hold Minister Manley to his pledge to ensure the creation of an FCO, as most Canadians want.

The Chairman: Now we're going to look at the third report of the subcommittee on agenda and procedure for the Standing Committee on Finance. I guess I need approval for this.

Some hon. members: Agreed.

The Chairman: Okay. While you're looking at this.... We've already approved it, but I also would like you to consider the following. As you may know, the McKay task force will be reporting probably early in the fall. As a way to also get ready for the task force, I would like to make a recommendation to the committee that we hold approximately one to two weeks of hearings on the theme of how to build a world class financial services sector in Canada. We would have experts come in basically describing the criteria, what conditions do we need to set to really have a world class financial services sector in this country. If that's okay with everybody, we can begin to put lists of interveners together and start working on that project as well.

Mr. Lorne Nystrom (Qu'Appelle, NDP): When would you be looking at this, roughly? MacKay reports about mid-September.

The Chairman: Yes.

Mr. Lorne Nystrom: Elaborate a bit more about what you mean. You're talking about financial services, so you're looking at credit unions as well. You're looking at the whole sector—the insurance industry, the whole broad sweep.

The Chairman: Yes. As an individual, I have a real problem with viewing financial services sector by sector, because they're so interdependent. I also have a problem with dealing just in the domestic base, as so many of us do. I'd like to view it in international—

Mr. Lorne Nystrom: That's why I'm asking the question about what you were looking at.

The Chairman: Yes, that would be it. We'll get some criteria. I think we need to do that before we listen to the results of the MacKay task force, to be in a position to make wise recommendations.

Mr. Lorne Nystrom: What's the timeframe we're looking at, roughly?

The Chairman: We need flexibility, and this is something I'm going to be asking for, because I don't know when the seniors benefit is coming in.

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We also, as you probably know, have changed the way we're going to do pre-budget consultation. We're going to be doing one-day hearings, just before the economic fiscal update. We're going to be staggering them, so it gives us more time to think things through and to avoid the kind of rush that historically the pre-budget consultation has undergone.

Mr. Paul Szabo (Mississauga South, Lib.): I guess in anticipation and in talking about how you would build a great one, I assume we're contemplating that we're going to also have reference material and maybe briefings on how the current banking system works.

The Chairman: Yes. That would be part of the briefings, actually. We'll probably start off with that, like how it works now.

I think it's very important, if we want to make some excellent contributions after the MacKay report, that we are briefed well. So spending a week or two on that I think would be wise. I think I've spoken to everybody individually, and I think everybody's in agreement.

Now we move back in camera.

[Proceedings continue in camera]