An Accountability System For Financial Institutions in Canada: How To Ensure They Meet a High Standard of Performance CCRC Position Paper #5 Summary (December 1997)

Canada's banks have reaped enormous benefits from decades of privileges and protection granted by Canadian governments, including a huge growth in assets, market dominance and record profits. The Big Five banks are the largest corporations in Canada, based on assets. Each bank's assets are greater than the federal government's annual revenues and together they control a large majority ($1 trillion) of all deposit-taking institution assets, trust companies, investment company assets, small business, consumer credit & mortgage lending. Big Five bank profits have more than doubled since 1993, and in 1997 the Royal Bank had the highest corporate profit ever in Canada.

Given that the banks would not be as large or profitable as they are without these privileges and protections, and the deposits of over 20 million Canadians, banks are in position of public trust with regard to the money they manage. Yet many Canadians are not satisfied with the banks' performance. Surveys in 1996 and 1997 by the National Quality Institute of over 8,000 Canadians found that banks ranked in the bottom five of 21 industries in terms of customer satisfaction. And small businesses have consistently ranked access to capital as one of their top 10 concerns in annual surveys over the past decade.

Based on their position of public trust, and on the problems faced by financial consumers and small businesses, the Canadian Community Reinvestment Coalition (CCRC) is urging the federal government to enact legislation to ensure that banks and other financial institutions serve all customers fairly and well. The federal government has recognized the need for regulation of the financial services sector. As the discussion paper on the 1997 Review of Financial Sector Legislation stated:

"There is no question that regulations are required in the financial sector. Regulations not only protect the consumer, they set out the rules of the game so that the sector can operate smoothly." (p.19).

Unfortunately the federal government has failed to enact effective measures to hold financial institutions accountable to consumer, small business and community interests on key issues of concern.

Laws in the U.S. have worked well for 20 years to ensure that financial institutions meet the needs of communities in which they have branches. It's s worth noting that both the Bank of Montreal and the Toronto-Dominion own U.S. financial institutions that comply with U.S. community accountability laws, while still providing a significant percentage of each bank's overall profits. Based on the U.S. system, the CCRC proposes that the federal government enact requirements for banks and other financial institutions to do the following:

• Determine the legitimate investment needs of each community the financial institution serves, and how it is meeting those needs, by disclosing each year for business and community development loans and investments:
• the number of applicants, and the number approved and rejected, with reasons for rejections, as in the U.S.;
• the number of loans and investments called by the institution;
• the default rate and loss rate for loans and investments; and
• as in the U.S., the above information categorized by size of loan or investment; size, type and location of the business or development; and gender of the business owner.

In essence, this information would reveal the demand for capital by different sizes and types of businesses, and whether financial institutions are meeting the demand. The Liberal, Progressive Conservative, NDP and Bloc Quebecois parties have all called in their policies or election platforms in the past year for similar requirements to be enacted in Canada. The CCRC also proposes that 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 public should have the right to make submissions to evaluators about the performance of financial institutions. The institution would receive a poor grade if the evaluation reveals, for example, that the institution arbitrarily rejects certain types of loan applicants, maintains excessive barriers to access to basic banking services, or has a high rate of complaints or successful lawsuits against the institution.

The CCRC urges that, after a two-year transition period to develop the evaluation system, the following incentives should apply to financial institutions to encourage them to improve their performance:

• As Ontario has done, the federal and provincial governments should be permitted to insist on a satisfactory performance rating before services are contracted out to a financial institution;
• As in the U.S., government should be permitted to deny applications to expand by a financial institution with an overall failing grade;
• Senior representatives of the financial institution should have to attend a public meeting in any community where the institution has a failing grade to explain how the institution plans to improve its performance;
• The current fines set out in financial institution legislation should be levied against institutions with failing grades; and
• As Ontario has done, federal and provincial governments should consider imposing a surtax on financial institutions, combined with a tax credit that could be applied to the surtax based on the institution's s performance in meeting community needs.

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

• Fund an independent ombudsman with the power to make binding rulings, as part of the overall financial institution accountability system in Canada (See the CCRC’s Position Paper #1, Bank Ombudsmen: Why They Must Be Independent for details).
• 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 #2, Access To Basic Banking Service: Ensuring A Right to This Essential Service for details).
• 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 CCRC’s Position Paper #4, A Financial Consumer Organization for Canada: Balancing the Financial Services Marketplace for details).

These are reasonable ways to 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.