Priority Changes Needed to Federal Financial Institution Laws:
Closing Key Gaps in Accountability and Consumer Protection
Brief on Bill C-37 to the House of Commons Standing Committee on Finance (February 19, 2007) and 
to the Senate Committee on Banking, Trade and Commerce (March 22, 2007)

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The Canadian financial services sector has the following main characteristics:

  • access to basic banking service is an essential service, according to 90 percent of Canadians;
  • the market share control of the big five banks in most main service categories in most parts of the country is higher than in most industrialized countries;
  • the watchdog agencies over financial institutions lack either independence, resources, or strong enforcement attitude and record, and;
  • as a result, financial consumers are essentially on their own and up against very powerful, well-resourced financial institutions when shopping for, dealing with, or complaining about financial institution services, and the system is two-tiered (with much better service for wealthy people than for people with low-incomes).
The federal government's response in the past 20 years to the clear imbalance in the Canadian financial services marketplace between the powerful banks and other large financial institutions, and consumers who are on their own, has been as follows:
  • inaction most of the time (mainly due to the undue influence of more than 100 bank lobbyists, dozens of lobbyists for other financial institutions, as well as conflicts of interest (such as banks being the largest corporate sector donor to the ruling party every year, two former junior ministers of finance being former bankers, and much wining and dining of federal politicians by financial institution lobbyists);
  • protection of large financial institutions interests while the interests and concerns of 20 million financial consumers are largely ignored, and;
  • the passage of some measures in Bill C-8 in 2001 that all contained key loopholes (either in Bill C-8 or in related regulations) that undermine the measures in key ways.
As a result, in 2007 Canadian financial consumers, especially of banking services, lack key protections, and Canadian banks lack key accountability requirements, that have been in place in the U.S. and other countries for 10 to 20 years.

Set out in the rest of this brief is a summary of the key concerns and proposals of the Canadian Community Reinvestment Coalition (CCRC) that were not addressed in the 2001-2003 changes made by Bill C-8, An Act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions and subsequent regulations, and that are not addressed in Bill C-37.

If the proposals set out below are enacted, Canada will finally have an actually effective bank accountability and financial consumer protection system.

The CCRC's recommendations are set out in detail in the CCRC's Position Papers and two reports published since September 1997.

I. Service, Lending and Investment Record Accountability 

(a) Public Accountability Statements - Must be more detailed, and reviewed and graded
Changes made by Bill C-8 require banks and other financial institutions with equity (shares) of $1 billion or more to publish an annual "Public Accountability Statement" describing the contributions of the bank and its affiliate companies to the Canadian economy and society. The contents of the Statement, which of a bank's affiliates have to have a report in the Statement, and how and when the Statement is disclosed to the public are defined by regulations.

In the one banking area of business financing, the federal government developed from 1995 to 1999 what has become the SME (Small- and Medium-Sized Enterprises) Financing Data Initiative which involves a survey on the supply of business financing for Canadian SMEs (To see more details about the Initiative, click here). 

However, this survey does not accurately track demand for business financing (especially by business start-ups) nor whether the big banks are meeting that demand or unjustifiably turning away people and businesses that are credit-worthy. Without this key information (which is gathered in the U.S.) there is no way to hold banks accountable for failing to serve credit-worthy customers. 

Also in contrast to the U.S., this survey does not track demand and supply records by financial institution, and as a result some institutions could have very poor, unfair and discriminatory lending and investment records and there is no way to hold them accountable for their poor performance.

Also in contrast to the U.S., this survey does not produce regular data based on neighbourhood (the Canadian data is only broken down by province) nor based on the characteristics of borrowers (only one survey has been done on barriers specific types of borrowers face, in March 2002). 

To ensure that federal financial institutions are serving customers fairly and well, and to help Canadians hold financial institutions accountable, the requirements for the Statements and the Data Financing Initiative must be strengthened to include very detailed information on each branch's lending, investment and service record in terms of demand by customers in each category, and whether the branch is meeting that demand fairly and well (See below for related proposals under subsections II(c) and III(a)). The regulations that define the content of the Statements must be modelled on the requirements under the U.S. Community Reinvestment Act (CRA) -- To see details about the Community Reinvestment Act (CRA), click here -- To see details about the $4.2 trillion in reinvestments that have resulted from the CRA since 1977 (in a PDF-format document), click here).

In addition, as under the U.S. CRA the federal government should evaluate the above data and regularly grade each financial institution's performance in serving each community, and penalize and require financial institutions with poor grades to take corrective actions (To see the CCRC's position paper describing how this bank accountability system should work, click here).

(b) Government contracting - Prohibit poor performers from bidding on government contracts
The federal government hands out tens of millions of dollars of business to federal financial institutions and requires nothing in return. Government contracting can and should be used as an incentive to ensure financial institutions are serving all Canadians fairly and well.

A mandatory condition for any financial institution bidding on federal government contracts should be that the institution proves (through the data disclosure system proposed above in (a)) that it has a fair and very good service, lending and investment record every year for the previous 10 years.

II. Consumer Protection and Accountability

(a) Consumer-run Financial Consumer Organization (FCO) - Must be created
As set out in the CCRC's fourth position paper (To see it, click here), and as recommended in September 1998 Report of the Task Force on the Future of the Canadian Financial Services Sector (See Recommendation #56(b) on page 208 of the Report), and by 1998 reports of the Senate Committee on Banking, Trade and Commerce and the House of Commons Standing Committee on Finance, and as supported by a majority of Canadians according to a national poll, the federal government should facilitate the establishment of a consumer-funded and directed Financial Consumer Organization (FCO) by requiring financial institutions to enclose periodically a one-page FCO membership flyer in the institutions' mailings to their customers (at no cost to the government or the financial institutions).

An FCO is a necessary complement to the proposed government-run Financial Consumer Agency and the Canadian Financial Services Ombudsman (CFSO) because it will ensure that the consumers have a place to call that is broad-based, well-resourced, independent of governments and the industry, and dedicated to serving consumers. The FCO will also ensure that consumer representatives on the board of the CFSO and the Canadian Payments Association's Stakeholder Advisory Council actually represent consumer concerns.

(b) Cashing cheques and holds on cheques - Must create a clear right to deposits overnight
Changes made by Bill C-8 require bank branches that have tellers to cash a government cheque of up to a certain amount if the cheque is presented by an individual who does not have to have an account with the bank, but must fulfill other specific requirements (section 117). The Bill also requires banks to disclose their hold policies for other types of cheques to customers in writing (section 110). The amount and circumstances under which a government cheque will have to be cashed was defined by regulation.

In order for these requirements to in any way create a meaningful right to cash a cheque, the regulations must require all staffed branches of all financial institutions (including trust companies) to cash any government cheque, and, as in the U.S., impose legal limits on cheque holds on all deposited cheques. 

Bill C-37 only reduces the cheque hold period from the usual 10 days to 4-7 days, but according to the Canadian Payments Association, 98% of cheques clear through the Canadian system overnight. As a result, the legal limit on cheque holds must require that, in most circumstances, depositors have a right to access funds from a deposited cheque the day after the cheque is deposited.

(c) Financial Consumer Agency of Canada - Require penalties and disclosure of violators
Changes made by Bill C-8 created the Financial Consumer Agency of Canada (FCAC) headed by a Commissioner. Unfortunately, the first Commissioner Bill Knight had a very weak enforcement attitude, and as a result many banks were not penalized in any way even though they clearly violated fundamental consumer protection measures in the federal Bank Act

For example, the FCAC conducted a "mystery-shopper" survey in 2003 that involved unidentified people checking whether more than 1,600 bank branches were complying with the Bank Act in key consumer protection areas. The survey found that:

  • 57.7% of branches were violating the legal requirement to post interest rate information for accounts;
  • 49.6% of branches were violating the requirement to have a clear, publicly available policy on holds on cheques;
  • 31.4% of branches were violating the requirement to have their Public Accountability Statements publicly available;
  • 27.5% of branches were violating the requirement to publicly available information on interest rates and terms for loans;
  • 24.9% of branches were violating the prohibition on tied-selling;
  • 5% of branches were violating the requirement to cash government assistance cheques when presented with required identification, and;
  • 2.7% of branches were violating the requirement to post a notice about branch closure. 
The survey did not include a test of whether banks were complying with the requirement to open accounts when required identification is presented, even though this area was well-identified as a major problem area for the banks in past surveys, and even though Bill C-8 created new account-opening rights for customers.

Incredibly, Commissioner Knight did not prosecute or penalize any of the more than 800 bank branches found by the survey to be violating the Bank Act .

And because Bill C-8 contained a huge loophole that prohibits the Commissioner from naming any financial institution that has violated the law unless the Commissioner prosecutes the institution, none of the banks whose branches were in violation of the law have been publicly identified.

When the FCAC next conducted its mystery-shopper survey in 2005, it weakened the survey in the following ways (in a transparent move to let the banks off the hook for ongoing violations of the law): 

  • only a few hundred bank branches were surveyed;
  • the branches were only tested in two areas -- cashing government assistance cheques (which had been the second-best area of performance in the 2003 survey) and opening accounts.
In addition, the Commissioner only prosecuted two financial institutions during his five-year term as Commissioner, and so only those two institutions were named publicly as violators of the law (again, as noted above, the Commissioner can only name a financial institution if the Commissioner prosecutes).

As a result of the FCAC's weak enforcement record to date, and loophole-filled enforcement powers, the federal government and financial customers have no idea which banks have good or bad service records, nor are there any effective incentives for financial institutions to comply with the law.

To end this enforcement charade, the Bank Act must be changed to require the Financial Consumer Agency of Canada Commissioner to penalize any financial institution any time the institution or its employees violate the law, and to require the Commissioner to disclose the name of the financial institution and the terms of settlement whenever the Commissioner finds that an institution has violated the law.

(d) Branch closures - Must ensure full review of withdrawal of service
Changes made by Bill C-8 (sections 119, 526) require those bank, trust company and other deposit-taking financial institution branches that have tellers that open personal accounts and give cash to customers to give notice if it withdraws those services or if it is going to close. How far in advance the notice must be given, and how and to whom it must be given, and under what conditions the bank will be required to hold a consultation meeting with customers of the branch and others is defined in regulations.

In order for these requirements to in any way ensure that branches are not closed arbitrarily, the regulations must require all branches (staffed or not) to give 4 to 6 months notice of a withdrawal of service or closure (with the notice including the contact information for the Financial Consumer Agency of Canada (FCAC) and the Canadian Financial Services Ombudsman (CFSO)); and in the case of a proposed closure the regulations must require all branches to conduct a meaningful public consultation with the community, including disclosing an independent audit of the branch's profit/loss record and net income for the previous 5 years (so that the public can judge whether the closure proposal has any merit.

(e) Financial Services Ombudsman - Must be made more independent and have binding powers
Bill C-8 gave the Minister of Finance the power to create a new Canadian Financial Services Ombudsman (CFSO) structured as a non-profit corporation that will handle complaints from consumers about banks only. The Bill also gave the Minister the power to appoint the majority of the CFSO's directors, who will each be independent of the government and the banks (section 115). 

The Bill also required other federally regulated financial institutions to be members of a third-party complaint resolution system, and they can join the CFSO if they want (sections 408, 524).

However, the Minister of Finance subsequently let federal financial institutions off-the-hook by allowing them to set up and control their own ombudsman service.

As set out in the CCRC's first position paper, in order to be effective the federal government must establish an ombudsman, choose its initial directors, require all federal financial institutions to be covered by the CFSO, and the CFSO should have the power to make binding rulings, rather than relying solely on publicity as a means of ensuring compliance.

(f) Plain language disclosure - Must be required, especially audit/disclosure of fees and profits
Bill C-8 gave Cabinet the power to make regulations concerning disclosure of information of any product, service, policy, procedure or practice of a bank or other federally-regulated financial institution, or any consumer protection measure (section 119, 149, 155, 409, 519). Subsequently, the government worked with the provinces and the financial services industry to develop model, voluntary, plain-language contracts that fully disclose relevant information to customers.

In order for disclosure rules (and every other consumer protection measure) to in any way have a meaningful effect, they should be set out in law (not voluntary codes), and require plain language and full disclosure in all cases. 

In particular, the law should require an independent audit of, and disclosure in annual reports of the costs, revenues, and profit margins of financial institutions' in-branch, bank machine, Internet, and credit card operations to ensure that pricing for these products and services does not amount to gouging.

(g) Fines for violations of law - Must be increased
The maximum fine of $100,000 for violations of consumer protection measures is not high enough to ensure that financial institutions comply, given that the annual revenue of many institutions is more than $10 billion. The maximum fine should be increased to $50 million.

III. Mergers, Takeovers and Ownership and Control Issues 

(a) Bank mergers - Enact moratorium, legalize and apply Review to all takeovers
The federal government issued Merger Review Guidelines in 1999, committing to a Merger Review Process for proposed mergers between banks (and, if any are created, bank holding companies) with equity (shares) more than $5 billion. 

The Process assesses proposed mergers and approves them only if the merger does not unduly concentrate economic power, does not significantly reduce competition, and does not reduce the flexibility of the government to address prudential concerns.

Banks that propose to merge have to prepare a Public Interest Impact Assessment (PIIA) that sets out the costs and benefits of the merger on lending to consumers and small businesses, on branch locations and overall service, on international competitiveness, on employment, and on technology. The House of Commons Standing Committee on Finance will review the PIIA and will hold public hearings.

As set out in the CCRC's fifth, sixth and ninth position papers, the government should maintain a moratorium on all expansions of banks and bank powers until the community reinvestment, accountability, consumer protection and foreign bank-branching measures recommended by CCRC (See subsections I(a), and section II above) have been in place for at least two years. This time period is needed to determine whether foreign or domestic banks will provide significant competition to Canada's big banks, and whether our big banks serve all Canadians fairly and well.

In addition, the Merger Review Process should be enacted in law, and expanded to become a Financial Institution Expansion Review Process and, in addition to the proposed Review Process criteria set out in the Merger Review Guidelines, the lending, investment and service record of any institution involved in any proposed expansion (e.g. all takeovers or mergers with any other financial institution or other company) should be reviewed and graded and if an institution has a failing grade in any area, the institution should be required to take corrective action before the expansion is allowed to take place, as under the U.S. Community Reinvestment Act (again, see subsections I(a) and section II above).

(b) Share ownership levels for large banks - Should be decreased back to 10%
Bill C-8 made a change to allow one investor to hold up to 20% of any type of voting shares and up to 30% of any type of non-voting shares of a bank with more than $5 billion in equity, subject to a review. The Bill also contains new measures to ensure that one shareholder, or shareholders acting together, do not directly or indirectly control any bank. (section 93)

The CCRC opposes this increase of share ownership levels because the increase allows a few shareholders (including foreign shareholders) effectively to control a large bank (mainly through selection of directors and executives). The share ownership limit should be decreased to its previous level of 10%.

(c) Foreign banks - Maintain barriers to foreign entry, and regulate all activities
The government passed legislation in 1997-1998 allowing foreign banks to set up two type of branches directly in Canada: a full-service branch that may only take deposits of more than $150,000; or a lending branch that is not allowed to take deposits. Foreign banks can still set up a Canadian subsidiary rather than opening branches directly. Bill C-8 allowed foreign banks to engage in permitted investments and business powers in similar ways to the provisions in Bill C-8 concerning domestic banks.

The CCRC'S position is that Canada should not increase the rights or powers of foreign banks or other foreign financial institutions through either World Trade Organization agreements or domestic legislation, as increased control by foreign entities threatens Canada's economic sovereignty.

In addition, the government should ensure that all community reinvestment, accountability and consumer protection laws and regulations apply to all federally-regulated financial institutions in Canada, including foreign financial institutions, branches, subsidiaries or virtual entities offering services in Canada.

(d) Holding companies - Should not be permitted
Bill C-8 made a change to allow widely held financial institutions to incorporate a regulated holding company that could own or control as subsidiaries federal financial institutions, other financial-sector related companies, and a few non-related companies. The Bill also allowed closely held insurance and trust companies to set up unregulated holding companies, although demutualized insurance companies were only allowed to set up a regulated holding company (section 173).

The CCRC opposes the holding company structure because it allows financial institutions to rearrange their corporate structures to avoid consumer protection and accountability laws and regulations.

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Canadian Community Reinvestment Coalition
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Copyright 2007CCRC