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Consumers Association of Canada Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
Consumers Association of Canada
Comments on the Department of Finance Consultation Paper
An Effective and Efficient Legislative Framework for the Canadian Financial Services Sector
Dr. James Savary
Department of Economics
Member, Finance Committee
Consumers Association of Canada
May 19, 2005
The Consumers Association of Canada (CAC) is pleased to provide to the Department of Finance its views on the present state of financial services in Canada and to address specifically the issues on which the Department seeks comment.
If they are to make efficient choices, consumers need to be fully informed. How well do financial service providers (FSP) meet their obligations to disclose? While disclosure has improved over the last few years, more needs to be done. CAC suggests the following:
- Pertinent information needs to be explicit, in writing, in plain language, and should also be on the web.
- Vendors must be specific about risk, rate of return, borrowing rates, commissions, trailer fees and any other information germane to the decision making process
- Vendors must be clear about complaint handling procedures, and deal with complaints efficiently and in a timely fashion. They must explain what recourse the consumer has in the event that the FSP cannot resolve the complaint to the consumer's satisfaction. In particular, they must inform the consumer about any dispute resolution system to which they adhere. Best practice would have the FSP adopt the forthcoming ISO standard 10002 on complaint handling. Since ISO 10002 will be a guidance standard rather than a prescriptive standard, the FSP would have to disclose both where they fail to meet the standard and where they exceed it.
One area in which disclosure is made but is opaque is the disclosure of credit card interest rates on new credit card accounts. Specifically, in the promotional material for new credit card accounts an artificially low rate is prominently featured. While the fact that this rate applies for only a brief period of time is disclosed, though often not as prominently, only a very persistent consumer can discover what the ongoing rate is. Concealing the "regular" rate by putting it in a very small font as one footnote among many may meet the letter of the law requiring disclosure, but certainly not the spirit. While it might be argued that this is a marketing issue, not a subject for regulation, CAC would disagree. We would like to see the regulators require that the continuing rate to be charged after the promotional period is over be disclosed as prominently as the promotional rate.
CAC shares the view of other consumer groups that the experiment with voluntary codes of conduct has demonstrated that more formal regulation is needed if the consumer is to be truly protected. FSPs appear to be unwilling to put in place procedures to ensure that staff are properly trained in the code, nor do they advertise it to their consumers, nor do they inform consumers of their rights under the code. Part of the difficulty is that when the code is reviewed FSPs send junior or at best middle range staff to the committee meetings. These individuals, despite their commitment to the code, are not themselves decision makers and are too junior to influence decision makers. Voluntary codes only work when senior management are part of the process and unreservedly buy in to it.
CAC now believes that consumers need more protection in the increasingly complex electronic world that is emerging. This can only be provided by comprehensive legislation governing all electronic financial transactions. We urge the government to begin work on such legislation, and CAC is prepared to provide detailed advice on the nature and scope of such legislation. In particular, it is a fundamental principle of the economics of law that the allocation of risk should reflect the relative ability to bear that risk. This needs to be taken into account in any legislative framework governing electronic financial transactions. Such legislation would also need to require FSPs to fully disclose all risks that the consumer would have to bear, all costs to the consumer, and what recourse is open to the consumer in case of a dispute.
i) Cheque Imaging
CAC would like to signal its support for the CPA's proposal to implement cheque imaging, which enables cheque truncation at the point of deposit. This change introduces significant new efficiencies into the system; the speed of cheque clearing will be enhanced and the cost will be significantly reduced once the capital costs of implementing the system are properly amortized. Moreover, storage and retrieval of cheque images will clearly be less expensive than the present paper based system, and the potential for deposit taking institutions to offer new financial management features to consumers is significant.
CAC is represented on the Stakeholders Advisory Council, and was at the table as the the rules governing cheque imaging were developed. We are satisfied that the rules in place will ensure the system will work and that consumers will be adequately protected. In fact, it can be argued that potentially, at least, the incidence of fraudulent cheques should be significantly reduced.
We are happy to support the CPA's request that the Bills of Exchange Act be amended to permit cheque imaging.
ii) Cheque Holding Period
While it may appear to be a minor irritant, the length of cheque holding periods that some FSPs impose on their customers has become an issue. The Canadian Payments Association (CPA) is rightly proud of the fact that in Canada cheques clear within twenty-four hours. Given that laudable fact, there seems to be no real reason to put a hold on cheques of up to seven days, yet CAC regularly hears from consumers that have suffered that experience. While the evidence is anecdotal, CAC is aware of an instance in which an FSP imposed a seven day holding period on a cheque deposited to the consumer's account which was written on that same consumer's account on another FSP in the same city. We suggest that FSPs be required to limit cheque holding periods for cheques written on a domestic FSP to twenty-four hours. Once cheque imaging is fully in place, even 24 hours is probably longer than necessary.
iii) Limits on First Mortgage Funding
Another issue that has been raised is the limitation of first mortgage funding to 75% of the purchase price for housing. While generally Canadian consumers are well served in terms of levered CMHC mortgages and second mortgages through FSPs at relatively reasonable rates, CAC believes that raising the limit on first mortgages to 95% would not impose undue additional risk on FSPs, while significantly reducing the cost of housing to the consumer. One objection that has been raised to this proposal is that it might hamper investment in low cost rental housing, leaving those who cannot afford to purchase housing without an alternative. CAC believes that this objection is overstated, and even if true could be better addressed in ways other than forcing the majority of consumers to pay higher costs than necessary through having to take out second mortgages, as is the case at present.
This completes CAC's reaction to the issues raised by FCAC. We would be remiss, however, if we did not point out to the Department our strong objections to the notion of mergers between any of the six largest banks in Canada. We have made that case in our submission to the Senate Committee on Banking, Trade and Commerce, and will make it to the corresponding Commons committee when the opportunity arises, but it should be made here as well. Briefly, there is no public interest case that can be made for allowing intramarket mergers. On the contrary, there is plenty of evidence that such mergers will result in the transfer of income from small business and consumers to shareholders of large banks and very little evidence to indicate the likelihood of any trickle down of benefits to consumers in the form of lower bank charges, lower interest charges or, indeed, more bank branches. Canadian banks are now among the most profitable in the world (Globe and Mail Report on Business, May 10, 2005), so it is difficult to accept the claims of merger advocates that without merger Canadian banks will be disadvantaged in the global marketplace. One benefit of the rapid run up in bank profits is that it will provide a test of the contestability hypothesis, much beloved by merger proponents who seem unaware of the strong assumptions that underlie the concept. If the contestability hypothesis holds, we may expect to see a substantial number of new entrants, both foreign and domestic. In the vernacular, don't hold your breath.