CANADIANS’ EXPECTATIONS AND CORPORATE CONDUCT
1. Community Expectations
2. Access of
Low-Income Individuals to Basic Banking Services
3. Branch Service Access
4. Micro Credit
5. Partnerships with the
Voluntary Sector
6. Community Accountability
Statements
SECTION G
CANADIANS’ EXPECTATIONS AND CORPORATE CONDUCT
Background
The Task Force points out that banks have always had a special position in the Canadian economy which places them in a special relationship with the community. The Task Force goes on to note that the special position of banks in our society leads to two types of expectations:
Banks are expected to play a leadership role in the community, beyond their narrow business imperatives. They are expected to contribute to enhancing the quality of life of citizens through social responsibility and good corporate citizenship, by undertaking activities that may or may not be profitable.
Banks are also expected, in their business dealings, to support the community. There is concern that banks may decline to make profitable loans within the community because the risk-adjusted returns are not great enough or the administrative costs are too burdensome compared with alternatives that may benefit shareholders but not other stakeholders. (Task Force Report, Background Paper #4, p. 13)
Task Force Recommendations
87) There should be greater disclosure and transparency in respect of the performance of financial institutions in meeting community expectations. Government, institutions and concerned public interest groups should co-operate in identifying and resolving issues of unmet public expectations as they arise.
Views of Witnesses
The Committee heard very little, if any evidence, about this particular recommendation. Most of the witnesses’ comments were directed at the recommendations about community accountability statements and will be dealt with in that context.
Conclusions
The Committee has no comments on this particular recommendation. The issue of community expectations will be covered in the Committee’s comments on recommendations 99 and 100 (community accountability statements).
2. Access of Low-Income Individuals to Basic Banking Services
Background
The Task Force describes access to banking services for low-income Canadians in the context of their ability to "receive funds and make payments without undue cost or inconvenience. "
Research conducted for the Task Force reveals that a strong majority of Canadians believe that it is essential for all Canadians have access to basic banking services and products.
The Task Force points out that banks and governments have taken initiatives to improve access to financial services for low-income Canadians:
Major banks have reached agreement with the federal government on policies and practices for opening accounts.
Some governments at all levels have acted to improve access to financial services through increasing use of direct deposit and by entering into indemnity agreements with financial institutions. Direct deposit programs can help low-income individuals open accounts, and some indemnification measures eliminate holds on government cheques deposited by account holders. Indemnification agreements also allow non-customers to cash government cheques when presenting acceptable identification. (Task Force Report, Background Paper #4, p. 24)
Background Paper #4 refers to the February 1997 agreement between the federal government and the major banks to facilitate access to account and cheque-cashing services for low income individuals. This agreement decreased the number of pieces of identification required to open an account or cash cheques; ensures that employment and minimum deposits are not conditions for opening an account; and committed the institutions to train their staff to follow their banks' identification policies and to be sensitive to the needs of low-income individuals. In December 1997, the federal government and the banks agreed that an unsatisfactory credit report that did not reveal dishonest or fraudulent behaviour would not be a reason to deny an account.
The Task Force believes that the major barriers preventing further progress in achieving access to basic banking services are attitudinal and cultural rather than process-related. It notes that despite the policy of the banks there still appears to be a considerable problem serving a class of customer that is not likely to be profitable to the branch.
The Task Force made a number of recommendations improve access to basic banking services, but it stopped short of recommending that access be legislated immediately. The Task Force is prepared to see if progress is made "within a reasonably short time to resolve access issues". If progress is not made, however, the Task Force is of the view that the February and December 1997 agreements should enshrined in legislation.
Task Force Recommendations
88) The Task Force affirms that access by low-income Canadians to basic transaction services of banks and other deposit-taking institutions is a very important policy objective, and it urges the Government, financial institutions and social interest groups to continue to work constructively together to attain it.
89) Federally regulated deposit-taking institutions should aggressively pursue the implementation of the agreements reached between the Government and major banks in February and December 1997 concerning the opening of accounts and other access questions. Provincially regulated deposit-taking institutions should implement arrangements that are at least as effective.
90)To ensure access to basic banking services:
(a) The federal and provincial governments should make low-cost personal identification available to anyone requiring it, so as to eliminate problems of access arising from lack of satisfactory identification.
(b) Financial institutions, governments and social interest groups should work together to develop a common basket of services included in a standard basic account to be offered by all deposit-taking institutions. The basic account should recognise the impact of technology on basic banking services and, accordingly, should include a debit card as well as the right of the holder of a basic account to a specified number of withdrawals without additional charge.
(c) Deposit-taking institutions should make standard basic accounts available at reasonable charges. There is no need to legislate the price to be charged by financial institutions as long as the basic accounts are readily available at a reasonable price. From time to time, the Department of Finance should monitor the basic account prices charged to ensure that they remain reasonable.
(d) Deposit-taking institutions should be required to post prominently in each branch the terms and conditions of their most economic transaction account, together with the identification requirements needed to open one.
(e) In order to encourage access to accounts, governments should use direct deposit for all government programs that provide regular benefits. There should be provision for master accounts where appropriate. Although such programs should be optional for those who do not want to receive direct deposits, every effort should be made to encourage participation.
(f) To eliminate any reason for financial institutions to place holds on government cheques when adequate identification is presented, governments should implement indemnity programs with financial institutions pursuant to which low-income people, whether or not they are customers of the institutions, can gain immediate access to their funds. Financial institutions should ensure that there are no holds when indemnification agreements are in place.
(g) Financial institutions should continue to work with community groups to develop and implement effective training programs for staff, reinforced by incentive and compensation policies at the branch level, to ensure that the objectives of the February and December 1997 agreements on access are achieved.
91) The Task Force notes the absence of solid data on the number of "unbanked" in Canada and the reasons why persons remain outside the system. The Department of Finance should immediately undertake a careful survey to benchmark the extent and nature of the access problem so as to better develop public policy and enable financial institutions to be fully responsive. The Government should regularly monitor progress toward improved access through "mystery shopping" and other methods, and should repeat the benchmark survey at regular intervals.
92) Although the Task Force would prefer to see access problems resolved by a co-operative effort of governments, financial institutions, and social interest and community groups, it must be recognised that in a modern society access to financial services is of vital importance. Therefore, if significant progress is not made within a reasonably short time to resolve access issues, the Government should legislate the terms of the February and December 1997 agreements, with appropriate sanctions for non-compliance.
Views of Witnesses
To the extent that witnesses commented on the issue of access to basic banking services, all supported the thrust of the Task Force’s proposals. They also stressed the importance of providing access to basic banking services to low income Canadians.
The National Council of Women of Canada (NCWC) applauded the recommendations, but was concerned that access would not be achieved without legislation. It called for legislation at an early stage. In a similar vein, the Taskforce on the Churches and Corporate Responsibility (TCCR) focussed on how it would be decided if legislation was needed to deal with access. The TCCR notes that the Task Force offers no definition of progress, nor does it establish who will judge whether progress is being made. The TCCR was of the view that a public agency, such as the ombudsman, should be charged with holding the banks accountable for their service to low income Canadians.
The Canadian Association of Retired Persons argued that it is in the financial self-interest of the banking industry to ensure that low income Canadians have access to banking services.
The Canadian Community Reinvestment Coalition (CCRC) maintained that the 1997 agreement between the banks and the government. with respect to access has not worked. The CCRC argued that various tests of effectiveness of the policy to improve access have demonstrated that the agreement is not working. It called for immediate action to require deposit-taking institutions to provide access to basic banking services and significant fines for banks who refuse to provide access. (Duff Conacher, October 1, 1998)
The National Anti-Poverty Organisation (NAPO) argued that systemic discrimination is the primary reason why many low income Canadians do not have access to a bank account or are deprived of the ability to cash a government cheque. NAPO noted that:
There have been numerous reports that have documented how low income Canadians have been denied service and treated with contempt by banks and other financial institutions for no other reason than their class. They are routinely treated rudely, patronised, humiliated, ridiculed and denied service. Often their only option is cheque-cashing outlets that gouge the poor with excessively high fees. (Brief, November 5, 1998, p.2)
NAPO believes the various tests of the February 1997 agreement have demonstrated the need for more substantial action than that proposed by the Task Force.
Among other things, NAPO recommends that;
- the Canadian Human Rights Act be amended to include "social condition" as a prohibited ground of discrimination;
- legislation be introduced to require financial institutions to open an account for any person who has sufficient information;
- at least one low cost account option be provided by every bank with no minimum balance required, no monthly fee, and a minimum of eight transactions per month;
- legislation should require financial institutions to cash all government cheques without charge regardless of whether the customer has an account;
- legislation should prohibit holds on all government cheques provided sufficient identification is provided;
- legislation should fix the maximum hold time that financial institutions can place on non-government cheques; and
- the Department of Finance should be responsible for semi-annual monitoring of the performance of financial institutions in providing access to basic banking services to low income customers and financial penalties should be imposed if performance is not adequate. (Brief, November 5, 1998, p. 13)
The Chief Executive Officer of the Bank of Nova Scotia also felt that the 1997 agreement has not worked as well as it should have. He supported the idea of an affordable non-discriminatory bank account. However, he would prefer to work out a solution that was acceptable to all involved rather than have access legislated. (Peter Godsoe, October 7, 1998)
Conclusions
Access by low income Canadian to basic banking services is an issue of fundamental importance to the Committee. Indeed, in modern society access to financial services is virtually a necessity.
The Committee heard evidence from NAPO of discriminatory practices by financial institutions against low-income Canadians such as making welfare recipients wait in line outside a branch to cash a government cheque and refusing to cash cheques on certain days. The Committee deplores these practices.
The Committee is also aware that "mystery shops" conducted by the Task Force, consumers organisations and the Canadian Bankers Association to test the February 1997 agreement to facilitate access to bank accounts and cheque cashing have shown that the agreement has not worked well. The Task Force’s scepticism about the effect of the February 1997 agreement is well documented in its report.
We believe that the major problems preventing further progress are attitudinal and cultural, not problems of process. It appears that notwithstanding the stated policy of the banks, and some bright spots in actual practice, there is still a considerable problem "on the ground" in serving a class of customer that is not likely to be profitable to the branch. The increased trend in all financial institutions to focus more resources and attention on profitable customers is exacerbated in this situation by stereotypical attitudes toward individuals with low incomes. Unfortunately, this is a problem not simply of attitudes of some bank employees but of attitudes toward low-income individuals that are more general in our society. (Task Force Report, p. 163)
The issues for this Committee are the same as the issues that faced the Task Force: how to ensure that basic accounts are made available to low-income people who want them, and how to ensure that these customers are treated with courtesy and respect.
Recommendations were made to the Committee that basic accounts at an affordable price should be legislated, as a right of all Canadians. However, research reported in Background Paper #4 shows that basic accounts at affordable prices are available at most of the major banks.
Some witnesses want access to basic banking services legislated immediately; others are willing to wait to see if co-operative efforts by the financial institutions, government and social interest and community groups produce results.
At this stage, the Committee believes that the best way to attain access to basic banking services is through continued institutional commitment at the highest corporate level, co-operative efforts, the training of employees, and monitoring the institutions’ progress. Direct deposit of payments made under government programs will also assist in this regard. Direct deposit programs, however, should be optional for those who do not wish to participate.
The Committee therefore supports the Task Force’s recommendations with respect to access to basic banking services. Progress in achieving access should be monitored closely by the Department of Finance. If progress is not achieved quickly, then the federal government should move to legislate access.
Background
Public interest in branch closures is significant. Consumers tend to feel a great deal of affinity toward their bank branch. As the Task Force noted in Background Paper #4:
A branch office forms an important link between a financial institution and the community it serves. To many customers, it offers personalised banking services with which they are familiar and comfortable. It allows borrowers an opportunity to develop a customer relationship that may be critical, in many cases, to assure a stable source of credit. Increasingly, it serves as a source of advice to investors, whose choice of investment vehicles continues to expand. These relationships are threatened when branches close. (Task Force Report Background Paper #4, 1998, p. 3)
People still want to have the option to do their banking at a branch; this despite the many advances that have taken place in electronic and telephone banking.
According to the Task Force, the closing of branch facilities by financial institutions raises two policy issues:
- Should government intervene in business decisions to open or close service locations?
- Do financial institutions closing branch facilities and/ or governments have a responsibility to ease the transition difficulties for the affected community?
Under present government policy, a deposit-taking institution wishing to close a branch is only obliged to inform customers of the location to which their accounts have been transferred. Some financial institutions, however, have gone beyond this to ensure the continuation of some form of financial services in the community.
The Task Force points out that the loss of a branch facility may be eased in many ways.
Alternative institutions could enter the market to fill the gap; customers may learn new ways to access financial services; and borrowers may be assisted in forming new relationships with lenders. Banks may establish agency relationships to facilitate "part-time" branches or, as some banks now do, may schedule regular visits by bankers to small communities not served by a branch. The Task Force believes that the transition could be eased through co-operation between the financial institution, local governments, and local organisations such as chambers of commerce or service clubs. (Task Force Report, Background Report #4, p. 37)
The Task Force concludes that it would not be appropriate to prevent banks from closing branches or to require regulatory approval for such closures. However, the Task Force believes that the need for time to adjust is critical and financial institutions planning to close branches should be obliged to give reasonable notice to relevant stakeholders.
Task Force Recommendations
93) In order to provide customers and affected communities with a reasonable time to adjust and seek alternative services when the branch of a deposit-taking institution is to be closed:
(a) Federally regulated deposit-taking institutions should be required to provide at least four months’ advance notice before closing branches. The notice should be posted prominently in the branch, communicated to all customers and relevant local authorities, and published in community newspapers.
(b) The financial institution should work proactively with the community to explore alternatives and to ease the transition.
(c) The Task Force urges provinces to consider a similar requirement for provincially chartered deposit-taking institutions.
Views of Witnesses
The Committee heard a great deal of evidence on the importance of branches. Of particular interest to the Committee was the fact that much of this evidence came from the financial institutions themselves.
The Chief Executive Officer of Canada Trust was adamant that electronic and telephone banking would not replace branches.
We strongly believe that branches are important. We disagree completely with the assumption by come commentators that electronic and other distribution channels are eclipsing branches. This is not our experience and is not the trend in the industry. We should know. Canada Trust has proportionately more telephone banking and more Internet banking by a significant margin than any bank in Canada. We based our strategy on seeing how far we could push this so we would know whether branches matter or not — and they do.
Virtually all new customer relationships originate through branches. In our experience, electronic banking complements branch transactions. You may be interested to know one simple fact: The customers who currently use our Internet banking system indeed visit our branches more frequently than customers who do not use Internet banking. (Ed Clark, October 7, 1998)
The Chief Executive Officer of the Bank of Nova Scotia expressed a similar view.
I think the death of the branch is akin to Mark Twain saying that his death was vastly overstated when he read his obituary in the newspaper. Most of the top retail banks in the world, such as Lloyds, would agree with that. Are we going to rationalise? Are we using technology to take costs down? Can Scotiabank gain 10 per cent efficiency over the next two, three or four years without merging? Of course. We are paid to do that. However, we get most of our new sales, and we have most of our great relationships, with branches. Two-thirds of all our customers still think of us and the relationship as a branch. Sure, 80 per cent or 85 per cent of transactions move electronically, but that is what they are, transactions. (Peter Godsoe, October 7, 1998)
The Chief Executive Officer of the National Bank maintained that the there were not too many branches but too much branch floor square footage.
The Fraser Institute, however, argued that because technology is supplanting the traditional branch there is no longer a large need for the physical presence of bank branches in each community. (Brief, October 18, 1998, p. 3)
A number of witnesses expressed concern about branch closings and the reduction in branch operating hours. The Taskforce on the Churches and Corporate Responsibility felt that if a branch reduces hours of operation, or only accepts cash deposits on particular days it is effectively closed. It was concerned that the overall trend appears to be in the direction of reducing the activity that involves interaction with people.
CARP stressed the effect that branch closings have on rural areas, small towns, poorer urban neighbourhoods and seniors. The British Columbia Minister of Small Business, Tourism and Culture told the committee of the impact of a branch closing on one community in his province.
In Peachland, British Columbia, in the Okanagan, there was an example of a bank branch that had closed. There were no banks in the town and the residents had to travel 12 kilometres to Westbank. What they told the task force was we lost something in our community. It hurt us directly and people go and shop in the other community; it took away business from our community. It was an example of how bank closures in a small community, for supposed efficiencies, was hurting them. (Ian Waddell, October 28, 1998)
Branch closings in low income neighbourhoods were a particular concern for NAPO. The Organization described the importance of branches to such communities.
Branches can often play a notably different role in a community than that of a retail outlet for consumer goods and services. In low income communities bank branches have a significant influence on the present and future health and well-being of individuals and the community as a whole. Branches act as the faucets at the end of a cash pipeline which allow money to flow into the community. Removing the branches is like turning the taps off, and causing a financial draught which saps the life out of a community.
People in low income communities have few financial options… These customers often include low income seniors who not only face technological barriers, but are very hesitant about moving their banking business to a different bank. (Brief, November 5, 1998)
The National Council of Women of Canada called on the government to work with financial institutions to keep branch service available until it is clearly no longer viable.
The Canadian Community Reinvestment Coalition agreed with the Task Force’s recommendation but further argued for the disclosure of branch profit, loss and net income statements for years preceding a closure.
In terms of branch closures, we agree with the task force that there should be a public review and also a four-month notice concerning any branch closure. However, we feel that, for the community to have full information regarding the reasons for branch closure, the branches should be required to disclose their profit, loss and net income record for the previous few years. Banks often give the fact that a branch is not profitable as the reason for closure. This recommendation would force them to prove that. (Duff Conacher, October 1, 1998)
The Retail Council of Canada gave importance evidence about the importance of local branches to retailers.
First, there is the deposit of cash and cheques, which, in spite of the great strides made with electronics, still represent more than 50 per cent of the payments deposited by retailers on a daily basis. Often the deposit must be made during the day in order to make sure that there are sufficient funds in the deposit account to pay cheques that have arrived at the branch on that same day.
Second, after the bank has closed for the day, retail stores that are open late into the evening need the facilities of a night depository.
Third, for all of the electronic services we refer to — cash management services, letters of credit that can now be done electronically, the Interac debit card service, electronic credit card services — the retailer must go to the branch to negotiate. Technology does not replace the benefits of sitting across the desk and negotiating the prices for services and the terms for quality of that service.
The fourth example is the negotiation of a loan. While there are great advances in teleconferencing and video conferencing, those are not substitutes for a local branch manager or a local bank representative living day by day in a community. That branch manager or bank representative knows the state of the local economy, which organisations are on strike and which are not, and the exact level of unemployment. That person is able to sit there with the retailer and understand very specifically what influences there are on that business and can negotiate operating lines of credit. (Ken Morrison, October 27, 1998)
Many of the witnesses supported the notion of a notice period before a branch closure. Few considered the idea of forcing institutions to keep branches open although, one witness thought that consideration should be given to restraining the closure of the last branch in a community.
Conclusions
The Committee supports recommendation 93 that federally regulated deposit-taking institutions must give four months notice before a branch can be closed.
This should not be interpreted to mean that the Committee believes that the government should interfere in a business decision to close a branch. The Committee recognises that with changing technology and new means of delivering products and services, some branch closings are inevitable. Indeed, the Task Force notes that, between 1991 and 1996, 119 branches closed their doors.
The evidence before the Committee attests to the importance of branches to businesses and consumers. Indeed, in some situations, a branch closure may result in considerable hardship. The crucial question for the Committee is how to ease the difficulties that closures pose.
The Committee believes that the four month advance notice period will ease help to ease the disruption. This is not an onerous requirement for financial institutions to meet. In fact, one large institution told the Committee that it has already adopted a four-month notice period for branch closures.
The Committee also believes that access to financial services can be continued in the face of closures if financial institutions pursue new avenues for providing these services. To ease the disruption of closures, financial institutions should consider entering into partnerships with retailers, small general stores in rural communities (the Committee heard evidence that this is being done in some communities), post offices, drug stores, supermarkets and grocery stores.
Background
In Background Paper #4, the Task Force Report refers to micro-credit as small loans made to individuals to sustain self-employment or start up very small business enterprises. The report notes that there is no standard definition of micro-credit, although people most familiar with micro-credit suggest that loans rarely exceed $7,000. (Task Force Report, Background Paper #4, p. 38)
The Task Force points out that the micro-credit market is not usually served directly by traditional institutions, but many small business owners receive loans from such institutions because they finance their businesses through their credit cards.
A number of micro-credit programs have been established across Canada over the past 10 years to serve people who cannot get micro-loans from financial institutions. These programs are usually sponsored by private organisations such as the Calmeadow Foundation, the Montreal Community Loan Association and others. Micro-financing is also available from some federal government programs, including the Atlantic Canada Opportunities Agency (ACOA), Human Resources Development Canada, Industry Canada's Aboriginal Capital Corporations and the Business Development Bank of Canada (BDC). Some provincial governments also provide micro-financing.
The Task Force recognises the contributions made by micro-credit programs in assisting individuals to gain credit from other sources. The Task Force believes that there is scope for the productive expansion of existing micro-credit programs and the support of new programs.
Task Force Recommendations
94) The Task Force recommends that governments, financial institutions and community groups establish partnerships to promote micro-credit programs that assist individuals to establish and build new businesses and thereby contribute to self-employment.
95) Governments should participate in micro-credit by providing basic start-up and infrastructure support to pilot micro-lending programs that can demonstrate soundly based loan plans and that are unable to secure administrative financing from other sources. Governments should not fund loans under micro-credit projects.
96) Governments should review all social assistance programs to ensure that micro-credit loans do not reduce social assistance benefits, thereby creating a disincentive for individuals seeking self-reliance through micro-credit financing.
97) Banks and other financial institutions should be encouraged to develop partnerships with micro-credit programs in local communities. For example, credit-granting institutions could provide administrative support and know-how to micro-credit enterprises to develop systems, such as loan application evaluation procedures, or could fund program overhead costs.
Views of Witnesses
To the extent that the witnesses and submissions commented on micro-credit, they were highly supportive of the Task Force’s recommendations.
Noting that micro-credit has provided substantial poverty alleviation in underdeveloped countries, the National Council of Women of Canada (NCWC) was pleased that the Task Force supported the development of micro-credit in Canada.
Professor Colin Dodds of St Mary’s University contended that micro-credit was essential to encourage small business start-ups and development. He argued that it was important to find innovative financing vehicles for such businesses.
The Chief Executive Officer of the Royal Bank of Canada told the Committee that the Royal Bank and the Bank of Montreal are active in micro-credit in Canada through a partnership with the Calmeadow Foundation.
In his brief to the Committee, Martin Connell, President of Calmeadow, characterised the market for micro-credit as self-employed Canadians who:
- do not have a credit history;
- do not have collateral security or a regular paycheque;
- have had a blemish on their credit history;
- lack confidence in their enterprise and would feel uncomfortable approaching a bank;
- have suffered a previous failure of their business. (Martin Connell, Brief, November 4, 1998, p.2)
Mr. Connell told the Committee that because micro-lending has high transaction costs and a high level of social intermediation "it is not for the banks and other formal financial institutions." He also advised that micro-lending is not for the government since micro-enterprise borrowers are wary of government and tend to treat loans as grants.
Mr. Connell went on to suggest a plan for encouraging micro-lending.
What banks, formal financial institutions and governments can do, however, is help support the dozens of small, community-based microlenders at the grass roots.
Instead of dealing directly on a one-on-one basis with this myriad of microlenders ... it might make sense to create a national independent fund, with a couple of regional offices, that can analyse applications of the local microlending organisation, provide advice and technical assistance, capital and operational grants to those organisations selected. (Martin Connell, Brief, November 4, 1998, p.4)
Conclusions
The Committee is of the view that the micro-credit market can help to create jobs and produce certain social benefits for the individuals involved and the community at large.
The Committee recognises the important role of micro-credit programs in providing financing to individuals who cannot obtain credit elsewhere.
It would appear from the Task Force Report and from the evidence presented to the Committee that governments should not be directly involved in micro-lending. Governments could, however, foster micro-lending in other ways. The Task Force makes a number of recommendations in this regard and the Committee whole-heartedly supports them. The Committee also urges financial institutions to develop partnerships with micro-credit programs in local communities.
5. Partnerships with the Voluntary Sector
Background
The Task Force recognised that the voluntary sector plays an important role in strengthening Canadian communities. The report noted that the five largest banks are the largest contributors to charitable causes. The Task Force believes that leaders of financial institutions should explore how to develop new ways of serving Canadians with leaders of the voluntary sector.
The Task Force hopes that conversations among the leaders of the two sectors could begin, with government assistance if necessary, to flesh out pilot projects for quick implementation. While the Task Force believes that action should come from leaders of the voluntary and financial sectors, the Government should consider sponsoring a round table to discuss the issues, problems and opportunities, if this would be helpful to launch the process.
Task Force Recommendations
98) Financial institutions should work with the voluntary sector to develop new, innovative partnerships that would help build stronger, healthier and more caring communities. Leaders in the financial institutions and in the voluntary sector should work together to this end, beginning with innovative pilot projects.
Views of Witnesses
The Association of Canadian Law Foundations favoured recommendation 98. Overall, however, there was very little evidence presented to the Committee on partnering with the voluntary sector.
Farm Credit Corporation felt its recent community relations program follows the spirit of recommendation 98
In concert with recommendation number 98, FCC has recognised that the relationship it has developed with the communities served is broader than their business transactions. To strengthen partnerships with communities across Canada FCC has recently introduced what we refer to as our "Community Relations Program" through which FCC commits one per cent of its net income to meet the needs of charitable and not-for-profit community activities and programs. (John Ryan, October 26, 1998)
Conclusions
The Committee makes no recommendation on the issue of partnerships with the voluntary sector. However, the Committee acknowledges the need for and importance of involvement by financial institutions in the voluntary sector.
6. Community Accountability Statements
Background
The Task Force recognises that financial institutions play an important role in the communities they serve but there is no commonly accepted way for them to report on their performance in order to provide a basis for discussion with the public on community needs and expectations. (Task Force Report, Background Paper #4, p. 47)
The Task Force proposes that all federally regulated deposit-taking institutions and life insurance companies should be required to produce annual Community Accountability Statements. The Community Accountability Statements would inform the public of the institution's contribution to the community through activities such as:
- investment in community development;
- corporate philanthropy;
- support of community activities and partnerships with the community;
- the participation of employees in community service;
- the employment provided;
- taxes paid to all levels of government; and
- any other relevant issues.
The Task Force proposes that the format and content of the Community Accountability Statements would be left to the institution to determine.
Task Force Recommendations
99) Each federally regulated deposit-taking institution and life insurance company should be required to make available to the public and file with the Minister of Finance one or more annual Community Accountability Statements to describe its contribution to the community and to identify emerging community needs to which it intends to respond. The Minister should table all such statements with the Standing Committee of the House of Commons on Finance. The Community Accountability Statements will serve as the basis for a continuing dialogue between leaders of the financial institutions and the community.
100) Provincial governments should consider implementing similar requirements for Community Accountability Statements from financial institutions within their jurisdiction.
Views of Witnesses
Several witnesses commented favourably on the Task Force’s recommendations concerning Community Accountability Statements.
Many of the financial institutions supported the community accountability statement concept. Indeed, they welcomed the opportunity to communicate their community involvement.
The Chief Executive Officer of the Royal Bank of Canada said the following about community accountability:
In particular, we agree with the task force that Canadians believe banks have greater public responsibilities than other businesses and that they also expect banks to play leadership roles in their communities. At the Royal Bank, we are proud of our record of community involvement and endorse the recommendation by the task force that all federally regulated deposit institutions and life insurance companies be required to file a community accountability statement with the Minister of Finance.
In supporting this community accountability statement concept, we are ready to help build an open, inclusive and transparent consultation process with various community groups to collaboratively develop a score card of accountability, with respect to community expectations. (John Cleghorn, September 29, 1998)
He also spoke of a community score card.
When I talk about a community score card, it is something that we want to work up between individual communities. The MacKay task force, rather than laying out exactly the way it should be, lays out certain criteria, with which we would agree. They also say it is not just banks. It will be other people that are in financial services, which is fair.
There is a perception that perhaps banks do not do enough, whereas others might. ... There must be some kind of common score-card, although they do not attempt to do that here, to be able to get a meaningful comparison.
I would not add too much to what MacKay has already indicated, namely, the various areas that could be covered, but it should be broader than just lending. It would be things such as partnerships in micro-credit, for example. ... Another area would be in the area of volunteer support, both by the employees and the institution itself.
In looking at scorecards, we found that you might have a different score-card for Toronto than for Charlottetown. It is important that the communities have some say as to what is important in their particular area and what they think should be on a score-card. We are talking about forming a grassroots score-card, as opposed to one that serves everyone from Newfoundland to Vancouver Island. (John Cleghorn, September 29, 1998)
One witness suggested that the accountability statements should include information pertaining to credit availability to large and small businesses by region as well as information on the level of competition by region. (Terry Norman, October 20, 1998)
Professor Jean Roy thought that the Task Force’s proposals were laudable but he nonetheless felt that they might place large Canadian institutions in a difficult position vis-à-vis their competitors.
One the one hand they are being asked to play a social role, and on the other hand the new financial environment risks placing them in competition with various types of financing companies which are not subject to the same obligations. (Jean Roy, October 23, 1998)
Some witnesses were concerned that the community accountability statements would be "window dressing" — a public relations exercise, or "annual corporate boast". CARP, for example, commended the banks for their significant level of support to charities, but was concerned that the statements might become a public relations exercise.
The President and Chief Executive Officer of Maritime Life Assurance Company supports the Task Force recommendation but cautioned that the statements might turn into an opportunity to brag. He was concerned that "people might lose track of why they are doing this in the first place which is to build stronger communities where we live and work." (William Black, October 21, 1998)
Canada Trust voiced a different concern about community accountability statements. It cautioned that the statements could become an onerous exercise for smaller institutions and therefore a barrier to entry. Based on its experience in the United States, it expressed doubt about the effectiveness of a legislated approach.
...we have lived in both worlds because we have operated in the United States where you have the legalistic regime. We operate in Canada where we have the good-citizen regime. We had independent boards in the U.S. with whom we would meet jointly. The Americans would say, "It is clear to us that the legal system produces poorer results for the consumer than the good corporate citizen system." That is because once you create an atmosphere in an organisation that says do what you do in order to comply with the law, then what people do not realise is that what happens in the United States is, the reverse comes true. It then becomes, do not do anything else that does not comply with the law because we already have this regulatory burden. Thus, you meet your legal test literally, and you take away from corporate executives any moral responsibility to do the right thing. The state has said it will look after making the moral decisions. It will give you a set of very thick regulations.
In a sense, we were appalled to see how the industry operated. People did not step back and ask: What is the spirit of the legislation; what do they want us to do? We were the number one rated financial institution in the United States in terms of community reinvestment. Why? Because we took a Canadian attitude in the United States, rather than an American attitude, to community reinvestment. Our board was astounded that we took that view. They said, "Why would you do it? It is not required by law and you should only do what is required by law."
I think it will set the country back and you will take me off the hook, as a business leader, for any moral responsibility about how I run my business. (Ed Clark, October 7, 1998)
Some witnesses suggested that the federal government pass a law similar to the U.S. Community Reinvestment Act. The Canadian Community Reinvestment Coalition (CCRC) called for the enactment of such legislation. In responding to the recommendations of the Task Force, the CCRC recommended that community accountability statements include information about: the number of complaints received by the institution’s branches in the community, how complaints are resolved, the number of lawsuits by and against the institution and how they were resolved, and the pattern of opening and closing branches.
The CRCC also called for the definition of each community to be set through public consultation and for a standard format for the statements. Finally, it suggested that the statements should be reviewed by the government with public input and that the government should grade the performance of the institutions.
Conclusions
The Committee agrees that financial institutions must be accountable to the communities they serve. The Committee supports the objective of the Task Force’s recommendations relating to community accountability statements and believes that some form of annual accounting is desirable. The Committee does not, however, agree with the Task Force’s proposal for achieving this objective for the following reasons:
First, the Task Force’s recommendations are vague. The Task Force makes no attempt to define community, but rather leaves that decision to the institutions themselves. Is a community geographically based, market based, gender based, ethnically based?
The format and content of the statements would also be left to the institutions to determine. Although the Task Force outlines some of the activities that would be appropriate for inclusion in the statements, it leaves the content open to interpretation by the institutions. Furthermore, the Task Force appears to have given little thought to how the information is to be presented. Again, because the format is to be determined by the institutions, it may be difficult to make comparisons and for the public to relate the information to circumstances relevant to them.
Second, community accountability statements may be costly for smaller institutions and thereby constitute a barrier to entry and to competition.
Third, the statements may turn into a public relations exercise of questionable public value and considerable public expense since the cost would be borne by the consumer.
Fourth, the Committee has some concern that the statements might cause financial institutions to do what they feel they "have to do" to comply with the Task Force recommendations rather than what they "ought to do" to assist their communities. The government cannot legislate moral responsibility; the desire to serve and to be accountable to communities must come from the institutions themselves.
Obviously, the Committee has no objection to any financial institution voluntarily issuing a community accountability statement. The Committee believes, however, that much more thought is required to develop an effective method of disclosure whereby federally regulated deposit-taking institutions and life insurance companies would give an annual accounting of their community activities. We therefore urge the federal government to study this question and present alternatives before the end of 1999. In conducting this study, the government should be mindful of the costs of such an accounting and the need for the information to be truly useful to consumers.
Finally, the Committee would like to say a word about the U.S. Community Reinvestment Act (CRA). Some witnesses have called for such legislation to be implemented in Canada. Among other things, the CRA requires banks to satisfy the service and credit needs of the communities in which they are located. Banks are required to disclose lending and investment and service activities and are graded by regulators. The results of this activity are made public.
The Committee notes that the CRA was introduced in the U.S. to counteract widespread discrimination against low income communities. Institutions were denying loans to inner-city neighbourhoods while using their deposits to lend money to those residing in more affluent areas. The process is referred to as "redlining" because institutions would actually raw a red line on the map around poorer areas. (Task Force Report, Background Paper #4, p. 46)
The Task Force notes and the Committee agrees that it has not been established that similar conditions warranting such a mandatory approach exist in Canada. The Committee also believes that the CRA approach would be an onerous, costly regulatory burden on financial institutions.