OP-ED

The federal Conservative government often claims it is "new" but so far it is using an old, ideological approach to bank accountability that has never been effective in Canada and was abandoned 30 years ago by the U.S. government.

The Conservatives seem to believe that there is healthy competition in banking service, lending and investment across Canada, and that the government should not do anything to require Canada's big banks to charge fair prices, to treat borrowers fairly, nor to lend and invest responsibly.

Mr. Flaherty seems so committed to this hands-off approach that a few weeks ago he made the false claim that the government "does not regulate the day-to-day transactions of financial institutions with respect to fees and services."

In fact, through the Bank Act and many related regulations and agreements, the federal government regulates all areas of banking, including fees and services. 

So while the growing pressure on the federal Conservatives to do something to decrease at least some banking fees has caused federal Finance Minister Jim Flaherty to urge the banks to consider giving breaks to lower-income Canadians, seniors and students and persons with disabilities, both he and Prime Minister Stephen Harper have so far indicated that, in the end, they believe letting the banks do whatever they want will produce a solution. 

All Canadians should be concerned by this attitude and should push the federal Conservatives to face the reality that the Act and regulations are not strong enough to counter the lack of competition in most areas of banking and the related power of the big banks, and press them to take effective action as the U.S. did 30 years ago to solve clearly identified, long-standing banking problems.

The banks control of the Canadian market is due to several factors dating back decades as banks have always had more flexibility in their lending  than Canadian trust companies and credit unions (because of their national lending network).  Forty years ago the federal government passed measures protecting Canada's banks from foreign competition and takeover, and then about 20 years ago facilitated the big banks taking over several failing trust companies.

All of these policy moves were in the public interest, but of course also helped the banks grow and prosper.  In the past 20 years however, the federal government has essentially allowed the banks to increase their market control to much higher levels without a corresponding increase in bank accountability.

First, in the early 1990s the banks were allowed to buy investment banks, and they soon controlled 80 percent of the assets in that sector.  The banks could now coerce customers to switch their investments from other investment companies by making it a condition of receiving a mortgage or credit card. 

Although such tied-selling was finally made illegal in 2001, the decade during which it was allowed gave the banks a powerful way to gain new customers, the ban on tied-selling is still not effectively enforced, and the maximum $100,000 fine is too low to discourage violations (given that each of Canada's big banks makes more than $15 billion in revenue each year).

For the past 15 years, the banks have been allowed to shut down branches wherever and whenever they want, reducing competition in many villages, towns and city neighbourhoods.

In 2000, the federal Liberals also allowed, without any public interest review, the competition-reducing move of TD Bank taking over the last significant trust company in the country, Canada Trust (To see the federal government's review process for bank mergers that should have been used in the TD Bank takeover of Canada Trust, click here -- To see the CCRC's analysis of the TD Bank takeover of Canada Trust, click here).

While the barriers to foreign banks setting up in Canada were lowered a decade ago, none have chosen to invest the high amounts of money needed to set up branches, in part because the banks already control all the best locations. 

Conveniently located branches are the key to attracting a significant number of bank customers, as most Canadians need and want teller service, which is why the few Internet banking companies have also failed to take many customers away from the banks.

And while credit unions have gained ground in some areas of the country in the past decade, and for years have been market leaders in Quebec, overall the banks still have the large majority of customers in every main product and service area in almost every area of the country.

While the government may hope that Canadians would all switch all the time to increase competition, almost all Canadians don't do so because they know it will cost them time and money and convenience for little return (as the banks and credit unions usually follow each other's prices and service options).

Finally, high profits in any industry sector is evidence of lack of competition according to Robert Pitofsky, former head of the U.S. Federal Trade Commission (FTC - the equivalent of Canada's Competition Bureau), and Canada's big banks have been recording record-high profit levels in the past few years.

Some may say, wait a second, competition increased in 2000 when the banks were ordered by the Competition Bureau to end their cartel and open up the bank machine network to other companies.  True, banks did lose a lot of machine locations because these new companies offered corner stores and others a better deal. 

But these companies are not really competitors, they are facilitators that allow bank customers to access their bank account.  CIBC was the first to recoup it's loss of locations by doubling its fee for using another bank's or company's machine, and by the end of 2001 all the other banks also doubled their fees.

Mr. Flaherty and Mr. Harper, if there was healthy competition between the banks, don't you think one of the banks would have cut this fee in the past six years? (To see more details about the banking fee issue, click here)

This one fee is only one of many highly questionable banking fees, however, and bank officials have made it clear that if the government pushes them to lower one fee, they will just add to other fees to make up the difference.

So if the federal Conservatives are actually concerned about protecting bank customers from gouging, they must require the banks to undergo an independent audit of all bank fee changes in the past 15 years, every year in the future, and require fees to be decreased wherever the audit finds excessive profit.

And if the Conservatives are actually concerned about protecting bank customers and communities across Canada they must also take action on the past decade of record high credit card interest rates and unjustifiable branch closures, and on the very limited surveys conducted by the federal government that have found some women, youth, visible minority entrepreneurs face discrimination when trying to start up or grow a business, and on the larger question of irresponsible lending and investment by Canada's banks.

In 2001, the federal Liberals passed some limited bank accountability measures in Bill C-8, but undermined them all with huge loopholes.  (To see a summary of the measures and the loopholes, go to: Comparison of Bill C-8 to the CCRC's Recommendations (2001) and/or to Priority Changes Needed to Federal Financial Institution Laws (February 2007).

For example, banks were required to remove many barriers to people with low incomes opening accounts, but still allowed to put whatever hold they wanted on cheques.  As a result, most banks put a 10-day hold on all cheques, effectively ensuring anyone with a low income would not open an account.

Banks were also required, through contracts with the government, to offer a low-cost, no-frills account, but were allowed to hike fees in other areas of their operations with no limits.

Banks were also required to give four to six months notice before closing a branch, but were not required to prove that the branch closure was justifiable because of lack of customers or profit from the branch (and, as a result, branches have been closed in many low-income neighbourhoods across the country).

The Liberals also required the banks to produce annual Public Accountability Statements, but did not require the Statements to include enough detailed information to hold the banks accountable in any way.

Given that customers pay for all bank lobbying and advertising and donations, the Task Force on the Future of the Canadian Financial Services Sector recommended in its September 1998 Report (See Recommendation #56(b) on page 208 of the Report), and the House of Commons and Senate committees that reviewed the report endorsed the recommendation) that federal Liberals to require the banks to enclose a one-page promotion pamphlet in their mailings to their customers that would invite customers to join a national, customer-funded, democratically structured, customer-directed “Financial Consumer Organization” to assist bank customers and lobby on their behalf. (To see the CCRC's position paper describing the FCO proposal in detail, click here) 

Instead, the Liberals established a government-run agency, the Financial Consumer Agency of Canada (FCAC), but limited what consumer protection measures it could enforce and allowed the FCAC to decide whether it would disclose publicly the identity of banks who violate the law.  Unfortunately, the attitude of the first head of FCAC, Bill Knight, was that consumers could and should shop around to protect themselves, and he publicly named one bank even though he found more than 120 serious violations.

In contrast to the ineffective action of the Canadian federal government in the past 20 years on bank accountability issues, in the late 1970s the U.S. federal government passed bank accountability measures in the Community Reinvestment Act (CRA) and related laws to ensure that banks charge fair prices and treat customers fairly (even though many U.S. banks face more competition than Canada's big banks).  The laws were strengthened 20 years ago -- To see details about the Community Reinvestment Act (CRA), click here)

Since then, banks have been required to provide detailed data about their service, lending and investment records to the public and to government regulators who regularly review the data and grade each bank's performance.

If a bank has a poor record, the U.S. government can turn down applications by the bank to expand, merge or take over another financial institution, and can also require the bank to take corrective action such as establishing a targeted service, lending or investment program.

The U.S. bank accountability system has resulted in more than $4.2 trillion being reinvested in neighbourhoods and communities that were discriminated against by banks (in housing, business and economic development, consumer and farm loans and investments), in bank branches being kept open if a closure is not justifiable and full-service banking being maintained, as well as many fairness changes to bank services and prices. (To see details about the $4.2 trillion in reinvestments in a PDF-format document, click here).

In addition, more than 30 states in the U.S. have limited credit card interest rates, and there is a federal law that requires banks to give customers access to deposited funds when their cheques clear.

The Bank of Montreal, Royal Bank and TD Bank all own U.S. banks that have operated profitably and successfully under the CRA bank accountability system for years.  Bank of Montreal-owned Harris Bankcorp. of Chicago, Ilinois has been required in the past to invest hundreds of millions of dollars in targeted loans under the CRA.  An as part of its takeover of U.S. bank in 1996, TD Bank (owner of Banknorth in the U.S.) had to set up a CRA compliance monitoring committee that reports regularly on its CRA investments and performance and plans to its Canadian board of directors in Canada.

So 30 years ago in the U.S., the home of capitalism in the world, the government recognized that banks provide essential services, and that even if healthy competition existed laws were needed to ensure these services are provided fairly at fair prices as they are essential to the economic health of individuals, businesses, communities and the economy overall.  And all U.S. governments since have maintained these laws.

The federal New Democrats and Bloc, and some Liberals, have recognized what the U.S. government realized long ago, but federal bank accountability laws remain ineffective. 

The question now is, will the federal Conservatives and conservative Liberals wake up to reality and take effective action to ensure Canada's six big banks are providing their essential services fairly and at fair prices to more than 20 million Canadian bank customers, or will they continue to let the banks do whatever they want with Canadians' money at whatever price? (NOTE: To see the CCRC's position paper describing how this bank accountability system should work, click here)