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Public Interest Advocacy Center Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

June 7, 2005

Gerry Salambier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
L'Esplanade Laurier
20th Floor, East Tower
140 O'Connor St.
Ottawa, Ontario
K1A 0G5

Dear Mr. Salambier:

RE: Consultation Document for the 2006 Review of Financial Institutions Legislation

Please find attached the Public Interest Advocacy Centre's (PIAC) comments on the consultation document. Please note that PIAC's comments on electronic transactions have already been submitted as part of the Canadian Consumer Initiative (CCI).


Susan Lott
Public Interest Advocacy Centre (PIAC)

General Review of Disclosure Provisions

Although disclosure is one of the few areas in which financial institutions are regulated at the federal level, it has never been an area of transparency and clarity for consumers. Most consumer agreements for financial products and services are written in a style that is not in plain language and produced in fine print to discourage easy understanding of the terms and conditions. These are standard form contracts for which the consumer has no ability to negotiate the terms. As consumers increasingly engage in electronic-based financial transactions, consumer protections for adequate and transparent disclosure of the conditions and limitations attached to consumer agreements becomes even more important.

In recognition of this, provincial consumer protection legislation in some jurisdictions is attempting to adjust this imbalance by legislating detailed consumer protections in this area.[1] This is appropriate, given the provincial government role with respect to regulating provincially incorporated financial institutions and market conduct. However, the federal government has exclusive jurisdiction over banks and other federally incorporated financial institutions, creating a consumer protection gap in those areas where provincial authority is not certain and federal regulation is not present. Consumers don't make fine constitutional distinctions as to which jurisdiction of government they should be presenting their questions or concerns in the area of retail financial services, nor should they be expected to. What is the Department of Finance's position with respect to banks complying with applicable provincial consumer protection regulations in the area of bank services?

One of those areas where there is a consumer protection 'gap' concerns disclosure provisions regarding interest rates associated with bank-issued credit cards. Consumers are inundated with large print introductory interest rate offers associated with credit cards, accompanied by fine print, usually in the form of a footnote found at the end of the agreement that reveals the real interest rate after the introductory period has passed. This is a deceptive practice and should be, at a minimum, be the subject of disclosure provisions (currently federal regulations regarding disclosure only apply to interest on deposit accounts and charges applicable to personal deposit accounts).

We note that the Financial Consumer Agency has indicated in its business plan an intention to implement a plain language credit card project with credit card associations.[2] We strongly support such an initiative, given the effectively 'inscrutable' nature of credit card agreements.

With respect to legislative requirements regarding disclosure that exist at the federal level, including holds-on-cheque policies, interest rates and frequency of interest paid on savings accounts and interest rates on loans, service charges on savings accounts and complaint procedures, we note that the Financial Consumer Agency of Canada's (FCAC) mystery shopping exercise in 2003, testing branch compliance with these legislated disclosures produced some very low rates of compliance in a number of these areas, when visited in person and even when information was requested.

Bank branches have a 42% compliance rate with disclosing the interest rate and the frequency of interest paid on savings accounts, a 50% compliance rate concerning disclosure their holds-on-cheque policy and a 72% compliance rate concerning interest rates and terms on loans.[3] Although their compliance is better concerning service charges on savings accounts (85%) and complaint procedures, clearly, banks are not adequately meeting their legal disclosure obligations under the current regime. It is hoped that the mystery shopping exercise will have a positive impact on the banks. However, this can only be gauged by further similar exercises to see if compliance has improved. If not, we would support legislative amendments to

One of the areas of great frustration for consumers relates to disclosure of bank fees and charges related to deposit accounts overall. Disclosure governs what information is provided to consumers, which includes not just the fees and charges but an explanation for changes. There is little or no explanation given to consumers explaining how these charges are determined and therefore why they are subject to change (i.e. increases). Such explanations are particularly required in the electronic environment, where invariably transaction costs decrease as one moves to electronic platforms.

Even if one were to make a concerted effort to find this information, consumers would still be lacking disclosure information in this area. The Canadian Bankers Association (CBA) offers an explanation of these charges on its website. It indicates that before the introduction of bank service charges for basic transactions, basic banking services were funded through the spread between interest paid on deposits and interest earned on loans. The CBA states that when the spread between deposits and loan rates began to shrink in the early '80s due to increased competition in the lending market, banks adopted a user pay system.[4] But what is the justification for a user pay system? Given that the interest paid on deposits (.1% – 2.00%) is much lower than the interest earned on loans, we question why these costs, or even a portion of them cannot be covered off by the bank? Why should consumers pay these unregulated costs on a user pay basis?[5]

Federal banking disclosure regulations should include the requirement for an explanation of the fees and charges associated with deposit accounts and services.

The resulting economic efficiencies from electronic transactions (such as the movement to cheque imaging) should be passed on to consumers.

Complaint-Handling Procedures

Industry practices around complaint handling have already been the subject of much discussion and fine tuning at the international level. We would therefore support the banking industry adopting the International Organization for Standardization (ISO) complaint handling procedures.

Cheque Hold Periods

There is clearly no longer a rationale for long hold periods on cheques, which are currently at the complete discretion of individual banks (although they are required to disclose the hold periods to customers). Financial institutions advertise that they are able to process cheques within 24 hours, therefore 24 hours should constitute the maximum period that a bank is able to hold a cheque.

It is important to note that the cheque clearing process is already benefiting from the introduction by some financial institutions of cheque imaging (rather than the physical processing of an actual cheque) and the intention of the Canadian Payments Association to lead an industry wide initiative to adopt a new clearing process based on cheque images by the end of 2006.[6]

We also have a strong concern about the negative financial impact of these hold periods on some consumers. We were pleased to see in the consultation document recognition by the Government that there is a relationship between long hold periods on cheques and the use by moderate and low-income consumers of alternative financial services providers, where high fees are associated with cheque cashing services.[7]

Other Issues

Bank branch closures and banks as community institutions

We are concerned that bank branch closures are not subject to Ministerial approval, but at the discretion of individual banks, with minimum requirements for public accountability upon a branch closure. We are aware that the FCAC oversees the Notice of Branch Closure (Bank) Regulations, which simply ensures that customer and public notice of a branch closure is provided and gives the FCAC the power to order consultations between banks and the communities they serve.

We don't think that this is sufficient to enable banks to meet their role and responsibility within the community. The way to ensure financial institutions' role and responsibility to the communities they serve (and to those citizens that keep them financially viable by purchasing retail services) is through legislation equivalent to the U.S. Community Reinvestment Act.

This Act requires banks and smaller banking institutions to serve all the communities in which they are chartered and from which they take deposits. The Act empowers federal agencies to examine and rate banks based on how many loans, investments and services they offer to low and moderate income consumers and neighbourhoods in light of the performance context in which bank operates. The Act has been an important catalyst for community development and for the development of small business. However the Act would have to be extended to include recognition of changing culture of banking, electronic banking and the fact that many financial services are now offered by non-deposit taking institutions. The Act would also describe expanded oversight powers for Financial Consumer Agency of Canada.

The emergence of two-tiered system of financial services

We are concerned that recent years have seen the emergence and to some extent, the entrenchment of a two-tiered system of financial services: one system characterized by the use of regulated, deposit taking financial institutions and the other characterized by the proliferation of non-deposit taking institutions offering 'bank-like' services (cheque cashing and payday loan companies) but at much greater cost to the consumer.

This sector appears to be emerging because mainstream banks are not meeting the banking needs of a growing segment of its customers. Those served by this second-tier are moderate-income individuals paying exorbitant amounts for services they could be receiving at much lower cost by mainstream financial institutions. These services are not having the effect of providing competition in the marketplace to existing banking services. They are serving a market that has turned away from banks because they either cannot qualify for certain products or services they need or are simply alienated from banks, but are effectively exploiting this market by charging higher priced products and services.

In our discussions with departmental authorities and elected officials, there appears to be some recognition but little knowledge about the reasons behind this disturbing trend. We believe that this situation demands closer examination by the Minister of Finance and federal financial institutions. Consumer organizations have been researching specific elements of this trend, but the size of this phenomenon demands that similar and most exhaustive research be undertaken by Government.

1. See the Ontario Consumer Protection Act, 2002, which comes into force July 30, 2005. [Return]

2. Financial Consumer Agency of Canada, FCAC Business Plan, April 2005-March 2007 [Return]

3. Financial Consumer Agency of Canada, 2003 FCAC Mystery Shopping Results at 3. [Return]

4. Canadian Bankers Association website: http://www.cba.ca/en/toolbar/faq.asp?fl=0&pm=true#11 [Return]

5. A recent national survey commissioned by Coast Capital Savings, a B.C. credit union, found that participants between the ages of 19 and 55, with a chequing account, paid on average $21.50 in fees on that account. Reported in Rob Carrick, "B.C. credit union drops service fees in bid to get more people in the door" The Globe & Mail (18 January 2005) at B.17. [Return]

6. Canadian Payments Association, Cheque Imaging in Canada: A Change Whose Time Has Come (6 January 2004). [Return]

7. PIAC's own research on users of alternative financial services reinforced this point. Focus groups indicated that long hold periods on cheques were an important factor in their decision to use cheque-cashing services, despite the high costs. (Source: Sue Lott and Michael Grant, Fringe Lending and "Alternative" Banking: The Consumer Perspective (Public Interest Advocacy Centre: November 2002) at 107) [Return]