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CONSUMERS ISSUES
1. Empowering Consumers
2. Strengthening Consumer Organisations
3. Disclosure and Transparency
4. Protection of Personal Privacy
5. Coercive Tied Selling
6. Financial Sector Ombudsman
7. Proficiency Standards for Intermediaries
8. Consumers and Internet Providers of Financial Services to Canadians

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SECTION F

CONSUMERS ISSUES

1. Empowering Consumers

INTRODUCTION

One of the four main themes of the Task Force report is empowering consumers so that they can act as a discipline to competition. The Task Force believes that there is an information and power imbalance between consumers and financial institutions. Many of its recommendations are therefore directed at reducing this imbalance.

Like the Task Force, the Committee believes that consumers have a key role to play in ensuring that the financial services sector remains competitive. Consumers are entitled to a competitive marketplace, accessible and effective redress mechanisms, clear information that is easily understood with full and timely disclosure, a marketplace with non-coercive sales practices and privacy protection for personal information.

While the Committee supports most of the Task Force’s recommendations with respect to consumer issues, it also has fundamental concerns with others.

The Committee’s conclusions on these issues are set out below in this section.

 

Background

Consumer protection received a substantial amount of attention in the work of the Task Force. According to the Task Force, a desirable financial services sector should provide consumers with:

• choice, with the absence of both coercion and the perception of coercion;
• transparency, with clear, easily understood and timely disclosure of product terms and conditions, risks, and conditions of sale;
• easily accessible and effective redress mechanisms; and
• access to and control by consumers over personal information. (Task Force Report, p. 121)

The federal and provincial governments share responsibility for consumer protection. The federal government regulates the consumer protection aspects of banking through its exclusive jurisdiction over banks. Its power to incorporate trust and insurance companies also enables the federal government to regulate some areas of consumer protection aspects relating to these federally incorporated institutions.

Among other things, provincial governments regulate provincially incorporated financial institutions as well as the market conduct of institutions.

The Task Force summed up the jurisdictional breakdown of federal and provincial powers in relation to consumer protection in the following manner:

• the federal government regulates the consumer protection aspects of banks and banking;
• the federal government regulates some consumer protection aspects of other federally incorporated financial institutions (trust and insurance companies) through its power to incorporate these institutions;
• provincial governments regulate the standards of competence and behaviour of financial intermediaries (e. g., insurance brokers and agents, securities dealers, mortgage brokers, financial planners); and
• provincial governments regulate the sale and content of financial contracts of trust and insurance companies, as well as credit unions and caisses populaires, and some provinces also state or assert that their regulation of the financial service marketplace applies to the banks. (Task Force Report, Background Paper #3, p. 12)

The Task Force has attempted to structure its conclusions in the area of consumer protection to suit the present framework of constitutional powers. Thus, the federal government would act in the case of banks and other federally incorporated financial institutions while the provincial governments would act in relation to financial institutions and intermediaries that are provincially regulated. At the same time, the Task Force strongly believes that the federal and provincial governments should bring some uniformity to market conduct standards through harmonisation efforts.

 

Task Force Recommendations

53) An efficient, competitive marketplace requires that the market conduct practices of suppliers of financial services should be such as to ensure full, plain and adequate disclosure to consumers; fair, reasonable and non-abusive transaction practices; and adequate redress mechanisms to resolve disputes. Governments and financial institutions should work together to achieve those goals.

54) The federal government should ensure that market conduct regulation, within areas of its constitutional jurisdiction, embodies best practices, bearing in mind the criteria described in Recommendation 53.

55) To ensure consistent market conduct treatment across Canada and across the spectrum of financial services providers, the federal government and the provinces should intensify harmonisation and co-ordination efforts in respect of the standards of market conduct.

 

Views of Witnesses

The four provincial securities commissions who made appearances before the Committee commented on these recommendations.

All expressed concern about jurisdiction over market conduct issues. The Commission des Valeurs Mobilières du Québec found confusing the Task Force’s recommendation that the federal government implement its recommendation "to the full extent of its jurisdiction" and the provincial governments "move their legislation toward best practices where these are not already reflected".

The Commission des Valeurs Mobilières du Québec took the position that more federal action could lead to inconsistent rules and jurisdiction shopping by institutions.

If the federal authority is persuaded to use to the fullest extent its powers, the risk becomes very high that in provinces like Quebec, where provincial institutions play a leading role, the result would be inconsistency in the rules applicable to the same market, depending on whether the institution is under provincial or federal jurisdiction.

Moreover, conflicting or even just divergent standards would lead to regulatory arbitrage by participants, which would quickly prove to be detrimental to consumers.

From the industry perspective, such a situation would undermine its competitiveness, perhaps significantly. A single institution or group of institutions might find itself subject to different standards and thus face a very difficult situation. (Brief p. 21)

The Alberta and British Columbia Securities Commissions argued that consumer protection regulation in relation to all financial products should be conducted at the provincial level.

Market regulation for all financial service providers should be assumed by the provinces and territories. The market regulator would be responsible for all market contact, integrity of markets and consumer protection. Efficient and effective market regulation would be achieved by consolidating within each province or territory the existing regulators for market integrity and consumer protection, principally the securities and insurance regulators. The resulting provincial based regulators would then co-ordinate and harmonise on the basis of the model ... of the virtual national securities commission.

To the extent necessary, transfers of regulatory authority would have to take place between the different levels of government. The market regulatory organisation would take a functional approach to regulation, which would mean consistent regulation across product lines, flexibility to accommodate differences between products, and to facilitate financial integration and innovation and would promote commercial certainty to market participants and provide clarity to investors. (William Hess, October 29, 1998)

The Chair of the Alberta Securities Commission went on to relate what he believes would be the obvious benefits to Canadian consumers of the proposal to have market conduct regulation in provincial hands.

There would be one market regulator to deal with matters of concern to consumers. There would be a common disclosure regime across products that would make it easier for the consumer to do comparative shopping, and it would provide a level playing field between institutions which would increase competition... (William Hess, October 29, 1998)

The Chair of the British Columbia Securities Commission felt that it would be preferable to have market conduct regulation and prudential regulation conducted by two different organisations as is the case in Australia.

There are some advantages to splitting prudential and market regulation and the federal-provincial context in which we operate in Canada probably lends itself easily to a division between federal regulation of prudential matters and provincial regulation of market conduct because we have an existing structure of securities commissions. If you leave it at the provincial level it avoids the whole issue of negotiating transfers of jurisdiction and having provinces opt out as we had in the discussions a few years ago at the federal securities commission. It builds on expertise that is there and the advantages of having a regionally based structure which is desirable for market regulation when you want to be close to the street, you want to be close to the people you are regulating and close to consumers for whose benefit the regulation is there. That is why we are leaning to the Australian model as one that Canada ought to adopt. (Douglas Hyndman, October 29, 1998)

The division of functions model was also endorsed by Mr. David Brown, the Chair of the Ontario Securities Commission. He pointed out that the demolition of the traditional four pillars of the financial services sector has facilitated dramatic changes in the role of market participants.

We now have a financial marketplace where domestic and foreign banks, securities dealers, trust and insurance companies, credit unions and other intermediaries offer many similar services, but under quite different regulatory regimes. In fact the left-hand sides of the balance sheets of most of these players are virtually identical. The business of banks and their investment dealer and trust subsidiaries are becoming increasingly integrated. (David Brown, November 2, 1998)

He also noted that Canadian securities commissions are examining the viability of regulating along business activity rather than institutional lines.

We think, for example, that it is unlikely that the regulation of banks exclusively buy federal authorities and the exclusive regulation of their wholly-owned investment dealer subsidiaries by the provinces will produce the best regulatory result, and clearly, we believe that the state of affairs has contributed to the concern about consumer protection set out in the MacKay report.

In the Canadian context, OSFI would be the natural choice for the prudential regulator... We believe that the prudential regulation of provincial trust companies and insurers by provincial bodies should also be slowly transferred of migrated over to the federal authorities by provincial agreement.

Clearly, we also believe that the securities commissions through the Canadian securities administrators would be the natural choice to regulate market activity for all financial players. (David Brown, November 2, 1998)

 

Conclusions

The Committee accepts the premise of the Task Force that consumers have a vital role to play in maintaining and enhancing competition in the financial services marketplace. The Committee also agrees with the Task Force that the federal government should ensure that market conduct regulation, within areas of its constitutional jurisdiction, embodies best practices. Furthermore, the Committee supports efforts to ensure consistent market conduct treatment across the country and across the spectrum of financial services providers.

While the Committee generally supports recommendations 53, 54 and 55, it is also supportive of the regulatory models outlined by the securities commissions. The Committee firmly believes that market conduct regulation and prudential regulation should not be conducted by the same regulator. The Committee can also foresee a greater role for securities commissions in the market conduct arena as the regulatory focus shifts from an institutional to a product or functional focus.

The Committee believes that the federal government should give serious consideration to proposals that would house market conduct regulation for all financial institutions within one jurisdiction. Since federally regulated financial institutions now comply with various provincial laws in conducting certain aspects of their business, it would not be illogical for market conduct standards in general to be administered at the provincial level.

 

2. Strengthening Consumer Organisations

Background

The Task Force believes it is important to move forward to strengthen consumer advocacy groups to enable them to participate in the multipartite exercises that it has recommended be carried out with respect to improving transparency and developing stronger privacy codes.

It considered two options to strengthen consumer advocacy groups in the financial services area, but did not indicate its support for either one.

The first option was the proposal put forward by the Canadian Community Reinvestment Coalition (CCRC). This option is based upon the utility-funding model used in the United States to fund ratepayers’ groups. In this model, utilities include in their mailing to customers a notice that allows customers to make a contribution to a ratepayers’ group that represents their interests at regulatory hearings. (Task Force Report, p. 142)

The CCRC model was explained in the Task Force Report. Essentially, the CCRC is suggesting that federally regulated financial institutions be required to include in mailings to customers a similar notice inviting them to join a Financial Consumers Organisation (FCO). The CCRC proposal suggests that the creation of the FCO should be co-ordinated by representatives of a broad- based coalition of existing citizens’ groups that are interested in the area of financial services. The mandate of the FCO would be to educate consumers about financial service industry issues, provide comparative shopping services and help with complaining about products or services, and advocate for consumer interests before the legislatures, regulatory agencies and the courts. The FCO would solicit membership fees from Canadians through voluntary or mandatory periodic mailings by institutions to their customers, and would also solicit donations that could be used to fund projects undertaken by existing citizens’ groups. (Task Force Report, p. 142)

The Task Force believed that this proposal might contain a basis for action, but felt that it required further elaboration.

A second option was to recommend creation of a new Office of Consumer Protection at the federal level. Given the large and continuing role of the provincial governments in the area of consumer protection, the Task Force decided that a new federal office was neither required nor desirable.

 

Task Force Recommendations

56)An efficient and competitive financial services marketplace requires continuing consumer vigilance and advocacy. To that end:

1. The Task Force urges consumer advocacy groups to work together to pursue the concept of the establishment of a Financial Consumers Organisation to ensure that there is effective consumer advocacy in the sector. Once a broad consensus of the groups is reached, governments and financial institutions should work with the sponsors to facilitate the organisation’s success.
2. OSFI, the Department of Finance and Industry Canada should ensure that adequate resources are available to support project research on consumer issues and to fund relevant consumer advocacy groups to participate fully in important public policy initiatives relating to consumer protection, including those recommended in this report.

 

Views of Witnesses

The CCRC put its case for a financial consumer organisation to the Committee. As indicated above, its model would require federally regulated financial institutions to include in their mailings to customers a notice that would allow customers to contribute to and become a member of the organisation.

The CRCC felt that it had strong public support for its proposal.

One of our key recommendations …is that financial institutions and government co-operate in enclosing a one-page flier with a lick-and-stick envelope that people would receive it in their bank statement, their credit card bill or their insurance premium statement envelope. It would describe the organisation and invite them to join. Environics surveyed over 2,000 adult Canadians and found that the majority of Canadians want this. Of those polled, 43 per cent indicated that they would be likely to join if they received the flier; and 64 per cent indicated that if a financial institution refuses to enclose the flier voluntarily, the government should require them to enclose it.

American institutions usually receive a 3 to 5 per cent response rate. In Canada, where 20 million fliers would be sent to bank customers, a group would be formed of 600,000 to 1,000,000 members. According to the Environics survey, people would be willing to spend $20 a year as a membership fee, which would give the group an annual budget of $12 million to $20 million.

This idea alone would be beneficial in helping governments to regulate banks. It would help people shop around. It would do complaint handling and significant amounts of consumer education. It would also level the playing field between the banks and consumers. (Duff Conacher, October 1, 1998)

Other witnesses such as the National Council of Women of Canada supported the creation of a financial consumers organisation. They recommended that financial institutions be required to enclose a one-page flyer in their mailings inviting consumers to join a consumer-directed financial consumers organisation. (Brief, November 5, 1998)

The Consumers’ Association of Canada (CAC) told the Committee that key alliances among consumers groups will be necessary if consumer organisations are to be effective advocates in the financial services arena. (Jennifer Hilliard, September 30, 1998)

The Executive Director of the Insurance Consumers Group. Mr. William Podmore, was not optimistic about the prospects for success of a financial consumers organisation that would be dependant upon consumer contributions for financing. He felt that, after a year or two of initial interest on the part of consumers, attention and contributions would wane and the viability of the organisation could be at risk.

The problem with asking consumers to fund particular organisations is that it is not an ongoing process on which you can rely. You may get many members the first year, because it is a new and interesting thing. The next year, however, you may get 5 per cent or 10 per cent of what you got the first year. It is not a viable and strong entity that will ultimately benefit all of Canadians by providing them with the protections that they need. (William Podmore, October 22, 1998)

Mr. Podmore suggested that serious consideration be given to recent models for legislated consumer organisations that had been adopted in some of the U.S. states.

 

Conclusions

The Committee is of the view that consumers have a vital role to play in the financial services sector. Discipline and responsibility in the sector will be achieved through strong, effective competition, appropriate levels of regulation and consumer oversight. In order to be effective overseers, consumers must be vigilant monitors and advocates.

The financial services sector is complex and diversified. New players are entering the market and established players are evolving. Moreover, financial services are an essential aspect of day-to-day life. For these reasons alone, the Committee believes that consumers should work together to establish an organisation dedicated to the financial services sector.

This task will not be easy. The Committee has long lamented the lack of a vibrant consumer movement in Canada. Perhaps narrowing the range of issues to financial services will give consumers the focus required to create an effective organisation.

The Committee is aware of the two models for a consumers organisation considered by the Task Force. Like the Task Force, the Committee is not prepared, at this time, to recommend a particular approach. However, the Committee urges consumer advocacy groups to work together to create an effective for consumer concerns. The Committee is of the view that the proposal put forward by the CRCC requires further study. To be effective, this model must be endorsed and supported by the major consumer advocacy groups active in Canada.

 

3. Disclosure and Transparency

Background

The Task Force spent considerable time considering the issues of disclosure and transparency. Overall, it concluded that Canada has a long way to go on these issues. According to the Task Force, our performance "falls short of what consumers have a right to expect and industry is capable of delivering." (Task Force Report, p. 127)

The Task Force notes in its report that disclosure and transparency, though related, have important differences. Disclosure determines what information is provided. Transparency is concerned with the clarity of that information, in other words, how easy is it for consumers to understand what has been presented.

Research conducted for the Task Force revealed that there is a great deal of room for improving the transparency of information provided by the financial services sector. Many documents are complex, confusing, and difficult to read and understand. Some submissions to the Task Force identified inadequacies with respect to disclosure practices followed in life insurance contracts.

The Task Force also commented on two specific aspects of disclosure:

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• the unilateral amendment of financial services contracts by financial institutions; and
• the absence of a consistent regime in Canada governing the disclosure of fees and commissions on transactions.

In concluding, the Task Force recommended that:

• governments undertake, as a priority, to lead a multipartite exercise with industry, consumer groups, and legal and other experts to improve the transparency of financial services documents;
• industry leaders commit to increasing transparency and allocate adequate resources to this task;
• governments, as they review financial institutions legislation on an ongoing basis, give weight to the desirability of transparency; and
• governments require the disclosure of all transactions- related commissions and fees of financial intermediaries, and that it be made illegal to have contractual terms that permit institutions to unilaterally amend consumer contracts.

 

Task Force Recommendations

57)Because the level of transparency in many financial services consumer contracts and marketing documents in Canada falls short of what Canadian consumers have a right to expect and industry is capable of delivering, financial institutions and their industry associations should intensify efforts to improve transparency and disclosure, using the following "best practices" guidelines:

(a) Timing: All essential information should be provided to the customer before a transaction is entered into, including the terms of the agreement between the provider and the customer.

(b) Presentation clarity: Documents should be presented in a manner which is capable of ready comprehension by a reasonably intelligent consumer in the marketplace.

(c) Organisational clarity: Documents should be formatted to highlight information that is important to the customer.

(d) Brevity: Documents should be as brief as possible, given the need for reasonable completeness from a commercial and legal perspective.

58) The federal government, working with the provinces, industry and consumer groups, should establish a multipartite Working Group to carefully review Canadian financial services contracts and marketing documents and to assess the extent to which Canadian institutions meet the best practices of transparency and disclosure. Where they fall short in a significant way, the Working Group should establish an action plan so that appropriate remedial action is taken, whether at the institutional level or by regulation. The Working Group should consider the feasibility of developing model forms for routine transactions, as has been done in other countries, and of establishing basic standards of document readability and comprehensibility.

59) Leaders of financial institutions should make increased disclosure and transparency high, visible corporate priorities, and should ensure that adequate resources are available to ensure best practices, including participation in the multipartite process described in Recommendation 58. Institutions should set milestones and benchmarks against which to assess their progress, should monitor it by periodic user testing programs, and should report progress in their annual Community Accountability Statements described in Recommendation 99.

60) Whenever governments review financial institutions or market conduct legislation on an ongoing basis, they should take all appropriate steps to improve disclosure and transparency. To that end, they should remove or reduce regulatory requirements that prevent the use of clear language, and should give positive reinforcement in law to the results reached by the multipartite Working Group.

61) Market conduct regulators, at both the federal and provincial levels, should audit financial institutions on a regular basis for best practices in respect of transparency and disclosure in transaction documents, in light of the benchmarking conclusions arising from the activities of the Working Group. OSFI should have this responsibility at the federal level.

62) To provide more adequate disclosure, fees and commissions paid to employees or third parties in respect of any financial services transaction should be required to be clearly disclosed before the transaction is entered into.

63) There should be a statutory prohibition on contract terms that permit the unilateral amendment of financial services consumer contracts by financial institutions.

 

Views of Witnesses

Few witnesses commented on these recommendations. Of those who did, all shared the Task Force’s objectives and felt that disclosure and transparency must be significantly improved. The Canadian Association of Retired Persons (CARP), for example, recommended that "all financial documents should be written in clear, plain, simple and straightforward language, appropriate to the general reading level of Canadians, using big type and short sentences." (Lillian Morgenthau, November 4, 1998)

The Consumers' Association argued that consumers should be represented on any group that would be established to ensure user-friendly documents.

 

Conclusions

The Committee strongly supports measures that would improve disclosure and transparency in the financial services sector. Improved disclosure and transparency will benefit both consumers and financial institutions. This is a win-win situation for all concerned.

Consumers will benefit from improved disclosure because they will have the necessary information to make informed decisions. This will make it easier to comparison shop for financial services and products. Consumers will also benefit from improved transparency. Consumers will save time reading, their understanding will improve and they are likely to have fewer complaints.

By improving disclosure and transparency, financial institutions will save money. There will be fewer misunderstandings on the part of consumers as well as fewer complaints and inquiries. Less staff-time will be spent solving problems.

Indeed, financial institutions that make significant improvements in disclosure and transparency may have a competitive advantage over those that do not simply because they will be perceived to be more consumer oriented.

With respect to the disclosure and transparency audits recommended by the Task Force, (recommendation 61), the Canadian Life and Health Insurance Association advised the Committee that provinces such as Ontario are already undertaking market conduct audits. For this reason, the CLHIA suggested that recommendation may not be necessary.

The Committee strongly supports recommendations 57–63 of the Task Force relating to disclosure and transparency except with respect to the requirement to report progress in community accountability statements.

The Committee urges financial institutions to immediately begin to improve disclosure and transparency of financial services contracts, marketing documents, and documents that report information to consumers such as account statements, mutual fund statements and statements of investments.

 

4. Protection of Personal Privacy

Background

The privacy of personal information is an important issue for consumers. How personal information stored on computerised data bases is used is a matter of concern to may individuals. Consumers want to know what kind of information will be collected, how the information will be used, what information will be given to third parties, how the information will be protected and the extent to which they have control over the use and release of the information.

The Task Force points out that the privacy protection regimes in place in most industrialised countries are based on principles adopted by the Organisation for Economic Co-operation and Development. Most financial industry associations in Canada have adopted codes of conduct based on these principles. (Task Force Report, p. 128)

The Canadian Standards Association (CSA) developed the CSA Model Code setting out 10 privacy principles. The principles cover issues such as: accountability, identifying the purpose for which the information is collected, consent, limiting collection to the required purpose, accuracy, safeguards, openness, access, and challenging compliance. (Task Force Report, Background Paper #3, pp. 40-41)

The Canadian Bankers Association, Insurance Bureau of Canada , Canadian Life and Health Insurance Association and the Trust Companies Association of Canada all have privacy codes. Credit Union Central of Canada has developed a model code that will come into force in 1998. The protection of privacy under these codes is voluntary and based on industry self-regulation.

The Task Force notes that privacy rights in the public sector (that is, the privacy rights of individuals in relation to governments) are protected by law. Most governments in Canada now have privacy laws and privacy commissioners. In Quebec, legislation also extends the protection of privacy rights to individuals dealing with private sector firms. The federal government has enacted a limited privacy framework for banks and federally regulated insurance and trust companies. This legislation, however, does not impose any standards on the institutions; it requires them to take reasonable precautions to ensure that their records are accurate and protected, and to establish procedures restricting the use of confidential information. (Task Force Report, pp. 128-129)

The Task Force felt that there was considerable variation in the actual operation of privacy regimes of the various financial services sectors. However, there was not a lot of evidence that the current privacy regime in the financial services sector is working badly.

The Task Force strongly supports federal legislation that would establish standards for the collection, use and protection of personal information. The Task Force proposes that the financial services sector should be required to develop binding codes consistent with legislated minimum standards. Medical information would be subject to special protection including a prohibition on the same employees being involved in insurance sales and credit granting, strict segregation of information collected for insurance and credit purposes, and an absolute ban on insurance companies sharing medical information with deposit-taking institutions.

 

Task Force Recommendations

64) The Task Force supports the announced intention of the Government to legislate a comprehensive privacy regime applicable to all commercial enterprises. With respect to financial institutions, the Task Force recommends that the legislation be based on the premise that privacy of personal information is a fundamental right. The legislation should prescribe Basic Minimum Privacy Standards.

65)The Basic Minimum Privacy Standards should include the following requirements:

(a) The customer should be able to specify the relationship the customer seeks with the financial institution and information collected should be specific to that relationship.

(b) The financial institution should specify what information may be sought from third parties, in accordance with the relationship sought by the customer.

(c) Customer consent to the collection, use or disclosure of information should be express and not implied, and the customer should be able to revoke or alter consent at a subsequent time.

(d) Target marketing should be subject to the customer’s express agreement in writing.

(e) The customer should have access to the customer’s personal information files and the right to require the correction of erroneous data.

 

66) Federally regulated financial institutions, either individually or through industry associations, should be required to develop an acceptable, legally binding privacy code, building upon the CSA Model Code and incorporating the Basic Minimum Privacy Standards. Provisions of the codes should expand the Basic Minimum Privacy Standards when appropriate. OSFI should have the responsibility to certify the codes of federally regulated financial institutions and to ensure that compliance is audited.

67) Medical information should receive special protection in the privacy regime. In particular:

(a) The same employee of a financial institution should not be engaged in both insurance sales and credit granting functions.

(b) There should be strict segregation within institutions of information collected for insurance and credit purposes.

(c) An insurance company should not be allowed to share medical information with a deposit-taking institution, whether or not it is affiliated, even with customer consent.

68) Consumers should have redress in respect of privacy matters to the financial services sector Ombudsman and, in addition, should have appropriate civil remedies, including punitive damages.

69) The federal government should work with provincial governments with the objective of ensuring that there is harmonised privacy legislation applicable to all regulated and unregulated providers of financial services in their dealings with individuals and small businesses. Provincial governments, where they have not already done so, should legislate a privacy regime which incorporates the Basic Minimum Privacy Standards.

 

Views of Witnesses

Many witnesses supported measures that would protect the privacy of personal information by the financial services sector. Among these were: Consumers’ Association of Canada, Canadian Community Reinvestment Coalition, Canadian Fraternal Association, Great-West Life Assurance Company, Canadian Life and Health Insurance Association, Canadian Association of Insurance and Financial Advisors, Canadian Association of Retired Persons, National Council of Women of Canada and the Mouvement des caisses Desjardins.

The Mouvement Desjardins stated that the protection of personal information has always been a concern.

Consumers must feel that they are protected against any abusive or unjustified use of information about them by their financial institution or by any other business.

In this regard, the rules about consent in the matter of information exchange should of course meet minimum standards and the consumers' expectations, but on the other hand they should not entail overly high administrative expenses for the financial institutions. (Claude Béland, October 23, 1998)

The Mouvement Desjardins took the position that institutions under federal jurisdiction should comply with the relevant laws in the territories where they do business. In Quebec, for example, they should comply with the Civil Code of Quebec and with Bill 68.

To avoid any interpretation problems, there should a clear clause to this end in any future bill by the government or the federal parliament.

In addition, since the regulated financial institutions are not the only ones that can sell financial products, all provinces should adopt regulations regarding the protection of private life that would apply to all businesses, whatever the nature of their activities, and the regulations should be harmonised among the provinces. (Claude Béland, October 23, 1998)

The Canadian Association of Retired Persons (CARP) felt that personal privacy has already been substantially eroded. CARP supported the Task Force’s proposals on the grounds that "whatever can be done to shore-up personal privacy, should be done".

CARP favoured the recommendations that would require consumers to give direct consent to the use of personal information, agrees that personal data should be collected separately for each new, different or related transaction rather than shared by written consent and supported legislated punitive penalties for violations of the ban on the transfer of personal data to different divisions of a financial institution.

The Canadian Bankers’ Association (CBA) preferred its self-regulatory approach to protecting personal privacy to a legislated solution. The CBA firmly believes that the self-regulatory approach can work and that the banking sector has demonstrated its on-going commitment to protecting privacy.

The industry has demonstrated — particularly vis-à-vis some of our competitors in the financial services — that we can move aggressively, and have moved aggressively, through self-regulation to put in place a privacy code that meets and exceeds, in most respects, the CSA model code that was proposed. We have had that code up and running for a couple of years now. We have educated our people with respect to how it should operate, and it is indeed operating.

On the specifics of the privacy issue, we have demonstrated that a self-regulatory approach can work. That is true as well with respect to tied selling, where we were the only ones that responded to the government's question to develop a code of conduct on tied selling. Furthermore, we are the only players in the financial services industry to have a consumer redress mechanism in place. The task force made it quite clear that it was a good model to build on. In fact, they regretted the fact that other players in the financial services industries were not participants in it.

Basically, we are an industry that has demonstrated that the self-regulatory approach is in place and is working. We should be given the opportunity to make that system work. (Raymond Protti, September 29, 1998)

 

Conclusions

The Committee has long been concerned with the protecting the privacy of personal information.

The Committee recognises that much has been done by the financial services sector to develop privacy codes. The self-regulatory approach adopted by the industry appears to be working relatively well. However, the Committee is of the view that federal legislation is needed to ensure privacy standards.

The Committee endorses the Basic Minimum Privacy Standards set out in the recommendations and the adoption of the CSA Model Code as the basis for regulation. The Committee also supports the concept of legally binding privacy codes whether developed by individual financial institutions or industry associations. Finally, the Committee supports the development of appropriate civil remedies for violation of the established privacy standards.

 

5. Coercive Tied Selling

A. Prohibition on Coercive Tied Selling

Background

Tied selling takes place when a product is offered to a consumer on condition that the consumer purchases another one. Tied selling is widespread in the marketplace and often benefits consumers. For example, in the financial services sector, a bank may offer a lower rate of interest on a loan if another product or service is purchased, or products or services may be bundled into a package for a certain fee. Beneficial or acceptable types of tied selling are usually referred to as "cross- selling"; "bundling," "incentive pricing" or "relationship selling".

Public concern about tied selling relates to practices that are considered to be coercive. Most of the concern centres on a customer’s credit relationship with a financial institution. Stories are told about customers being threatened with the cancellation of a line of credit or the denial of an increase in their available credit unless RRSPs or other assets are transferred to an institution.

The Task Force rightly points out that it is difficult to define what constitutes acceptable tied selling and unacceptable tied selling. Individuals may react in different ways when presented with identical circumstances.

The federal Competition Act contains provisions governing tied selling. Under subsection section 77(1), tied selling is defined as:

(a)any practice whereby a supplier of a product, as a condition of supplying the product (the "tying" product) to a customer, requires that customer to:

i ) acquire any other product from the supplier or the supplier's nominee, or

ii) refrain from using or distributing, in conjunction with the tying product, another product that is not of a brand or manufacturer designated by the supplier or the nominee; and

(b) any practice whereby a supplier of a product induces a customer to meet a condition set out in subparagraph (a) i) or ii) by offering to supply the tying product to the customer on more favourable terms or conditions if the customer agrees to meet the condition set out in either of those subparagraphs.

Tied selling is not, per se, a violation of the Competition Act. In order for tied selling to have taken place, the Competition Tribunal must find that

• it is being engaged in by a major supplier or is widespread in a market;
• it is likely to impede entry or expansion of a firm, or sales of a product in the market, or have some other exclusionary effect; and
• it lessens competition substantially, or is likely to do so.

The Tribunal cannot make an order when a practice:

• is engaged in by a person in the business of lending money for the purpose of better securing loans made by that person and is reasonably necessary for the purpose;
• occurs as a result of a reasonable technological relationship; or
• is necessary for a reasonable period in order to facilitate entry of a new supplier or product.

The Bank Act also contains a provision that prohibits banks from putting undue pressure on or coercing a person into obtain a product or service from a bank as a condition of obtaining a loan.

Section 459.1, which was recently proclaimed into force, targets one of the most important aspects of a person’s relationship with a bank — the granting or denying of credit. It states the following:

459.1 (1) Restriction on tied selling. — A bank shall not impose undue pressure on, or coerce, a person to obtain a product or service from a particular person, including the bank and any of its affiliates, as a condition for obtaining a loan from the bank.

(2) Favourable loan tied to other sale. — For greater certainty, a bank may offer to make a loan to a person on more favourable terms or conditions than the bank would otherwise offer to a borrower, where the more favourable terms and conditions are offered on the condition that the person obtain another product or service from any particular person.

(3) Favourable other sale tied to loan. — For greater certainty, a bank or one of its affiliates may offer a product or service to a person on more favourable terms or conditions than the bank or affiliate would otherwise offer, where the more favourable terms and conditions are offered on the condition that the person obtain a loan from the bank.

(4) Bank approval. — A bank may require that a product or service obtained by a borrower from a particular person as security for a loan from the bank meet with the bank's approval. That approval shall not be unreasonably withheld.

(5) Regulations. — The Governor in Council may make regulations

(a) specifying types of conduct or transactions that shall be considered undue pressure or coercion for the purpose of subsection (1); and

(b) specifying types of conduct or transactions that shall be considered not to be undue pressure or coercion for the purpose of subsection (1).

At the provincial level, most statutes governing the sale of insurance prohibit a seller from coercing a buyer to purchase insurance. In addition, the codes of conduct governing insurance agents and brokers also generally prohibit the use of coercion. Tied selling is also specifically addressed in provincial regulation.

Industry organisations have issues statements or guidelines respecting tied selling. In early 1998, the Canadian Bankers Association issued its Statement on Tied Selling. The Statement applies to all retail and small business customers. It specifically addresses the management of credit risk and states in part:

Any requirements imposed for the purpose of managing credit risk will be consistent with the level of risk being undertaken, and will be for the sole purpose of managing that credit risk.

The Statement confirms that the senior management of each bank is committed to, and is responsible for, upholding the Statement, and it lists the means the banks will use, including staff training, customer information, complaints and redress mechanisms, and audit procedures.

The Canadian Life and Health Insurance Association adopted Guidelines on Screening Life Agents for Suitability and on Reporting Unsuitability, effective January 1, 1998. They require reporting of coercion or tied selling to the appropriate insurance regulator. (Brief to the Committee, pp. 39-40)

The Task Force was of the view that tied selling may increase.

In the Task Force’s view, concern about, and consideration of, tied selling is justified, given conditions in today's marketplace. Tied selling is likely to become more frequent as more institutions become conglomerates selling multiple products and as networking arrangements increase. While this does not necessarily imply an increase in coercive tied selling, the potential for coercive practices will grow. . (Task Force Report, Background Report #3, p. 56)

Moreover, the Task Force pointed out that section 459.1, covers situations where a loan is the tying product. This provision would not apply if the tying product were a credit card or credit insurance. Furthermore, the provision does not apply to all federal financial institutions. The Task Force felt that the provision should be expanded to include insurance and other credit products sold by the institution.

The Task Force also suggests that there should be additional statutory authority to designate, by regulations, other products or services to which the coercive tied selling provisions would apply.

 

Task Force Recommendations

70) Because of the inequality of information and bargaining power between financial institutions and their customers, financial services legislation in all jurisdictions should unequivocally enshrine the freedom of financial services customers from coercion in their dealings with financial institutions.

71) There should be a specific legislative ban on coercive tied selling by banks and other financial institutions. With that aim, section 459.1 of the Bank Act should be proclaimed with amendments to broaden its scope to include all credit products, insurance and such other products or services as might be prescribed by regulation. Similar legislation should be applicable to all federally regulated financial institutions. As contemplated in section 459.1, regulations should be passed to further elaborate on the statutory terms "undue pressure" and "coercion."

 

Views of Witnesses

The Committee received a wide range of views on the issue of tied selling. The one common element running throughout many of these submissions was that coercive tied selling should be prohibited. Most felt that the Task Force was correct to recommend the prohibition of coercive tied selling by other financial institutions and not just banks.

The Canadian Association of Retired Persons supports a legislative prohibition on the practice. Credit Union Central of British Columbia noted that financial institutions in British Columbia, other than chartered banks, have been prohibited from tied selling since 1990. It stressed that there was a clear difference between cross selling and tied selling, noting that "the former is and must remain an acceptable business practice, one which can and should benefit consumers. The latter should be prohibited." (Wayne Nygren, October 28, 1998)

Much of the discussion before the Committee centred on the potential for coercive tied selling if insurance products were to be sold at bank branches and linked to applications for credit or other services or products. The Canadian Association of Mutual Insurance Companies feared

...that if insurance was sold in deposit-taking institutions’ branches, front-line personnel could direct customers to the insurance entity or section and present that entity or section as an extension of what is necessary to obtain a business loan or a mortgage transaction which require insurance on the life of the borrower or on property that the borrower offers as collateral.

While the lender would not openly require that the borrower purchase his or her insurance from the bank’s insurance company as a condition of issuing the loan, the customer could easily feel uncomfortable declining the lender’s suggestion to apply for the insurance within the premises of the financial institution. (Brief, October 22, 1998, p. 7)

In a similar vein, the Prince Edward Island Mutual Insurance Company was of the view that "the imbalance of power between the borrower and the five largest financial institutions indirectly forces the consumer to seriously consider the offer made by a lending institution." (Brief, October 1998, p.3)

The Commission des Valeurs Mobilières du Québec described the provisions of Quebec’s law pertaining to the distribution of financial products and service. It noted that the law goes further than simply prohibiting coercion by requiring specific information to be presented to clients, granting additional rights and making sure that certain procedures cannot be stipulated in insurance contracts. (Brief, October 23, 1998, p. 11)

The Canadian Bankers Association took a different view. The CBA felt that coercive tied selling could be successfully dealt with through self-regulation. In its submission to the Committee, the CBA pointed to its Statement of Tied Selling as evidence of the banking industry’s clear commitment to dealing with concerns about the practice.

The CBA went on to comment on two changes proposed by the Task Force. The first concerns the scope of section 459.1 of the Bank Act. Among other things, the Task Force recommends that section 459.1 of the Bank Act be amended to extend its application to all credit products and insurance products. The CBA pointed out that it already considers the reference to the word "loan" in its Statement on Tied Selling to extend to "all credit products offered by banks, including mortgages, credit cards and lines of credit". (Brief, p. 5) It therefore felt that the banking industry had already covered the Task Force’s recommendation.

The second important change proposed by the Task Force would be to extend the ban on coercive ties selling to other federally regulated financial institutions. The CBA maintains "if a legislated approach is to be adopted, it should apply, at a minimum , to all federally regulated financial institutions as well as those institutions seeking membership in the Canadian Payments Association." (Brief, pp. 4-5)

Both the CBA and the Bank of Nova Scotia suggested that instances of tied selling were rare. The latter maintained that there simply was no empirical evidence of its existence. The CEO of the Bank of Nova Scotia told the Committee that, last year, Scotiabank had two tied selling complaints, both of which had been reviewed independently and determined to have been unfounded. (Peter Godsoe, October 7, 1998)

 

Conclusions

The Committee’s approach to the issue of coercive tied selling is based upon the assumption that freedom from coercion must be an essential ingredient of any business-customer relationship. In the financial services sector, this is of particular importance because of the inequality of information and bargaining power between financial institutions and their customers.

It is the view of the Committee that coercion is not the norm in the Canadian financial services sector, but the Committee believes that the potential for coercion exists, particularly as the range of products and services offered by financial institutions expands.

The Committee supports recommendation 70 of the Task Force which calls on every jurisdiction take steps to unequivocally enshrine in financial services legislation, the freedom of financial services customers or prospective customers from coercion. The Committee also supports a specific legislated ban on coercive tied selling by all federally regulated financial institutions. The convergence of the four financial pillars and the growing similarity of the products and services offered by banks, trust companies and insurance companies argue for the application of any ban to all sectors.

The Committee agrees with broadening any proposed ban on coercive tied selling to include all credit products. The Committee notes that the Canadian Bankers Association has already done so in its industry Statement on Tied Selling.

The Committee is pleased that the Government recently proclaimed into force section 459.1 of the Bank Act. We see this section as a possible foundation for further legislative and regulatory initiatives on coercive tied selling.

While it supports a legislated approach, the Committee would like to issue a note of caution. Time and time again, witnesses told the Committee that, with many of the Task Force’s recommendations, the "devil is in the details". How one defines "coercion" will be critical. Coercion means different things to different people. The definition will have to be clear and precise not only for the purposes of enforcement, but for purposes of the Canadian Charter of Rights and Freedoms.

The Committee considers voluntary self-regulation critical to limiting coercive tied selling. Indeed, it may be the only way to ensure that financial institutions adopt best practices in the area. The Committee recognises the important progress made the Canadian Bankers Association and the Canadian Life and Health Insurance Association in the area of self-regulation. The Committee, however, questions whether it will be sufficient. The perception of inequality in the bargaining relationship between consumers and financial institutions is something that no voluntary code can adequately address.

 

B. Disclosure, Sales Practices and Remedies

Background

The Task Force expressed substantial concerns about the content and the timing of disclosure made to customers or prospective customers in the case of tied sales. According to the Task Force,

It is often not clear what is being tied, and what the costs are on a tied and stand-alone basis. It is often not clear whether the products or services are available on a stand alone basis. In the case of credit, it is often not clear how the tie relates to the security being requested for the loan. Sometimes the taking of security is simply a backdoor way of achieving a tie. (Task Force Report, Background Paper #3, p. 71)

The Task Force is of the view that Canadians do not have sufficient confidence in their freedom to make choices between the options offered to them. It goes on to suggest:

The most effective ways to limit coercive tied selling in the financial services sector in Canada are the implementation of "best" disclosure and sales practices by suppliers and intermediaries, and consumer participation and responsibility. All suppliers and intermediaries should ensure, as a matter of corporate governance, that every salesperson is trained in best practices designed to avoid coercion of any type, including coercive tied selling. (Task Force Report, Background Paper #3, p. 71)

The Task Force believes that one of the most effective ways to limit coercive tied selling in the financial services sector is to implement "best" disclosure and sales practices by suppliers and intermediaries.

Among other things, the Task Force suggests that:

• financial institutions be required, by statute, to notify a customer entering into a transaction that coercive tied selling is prohibited by law;
• different components in a financial package be itemised and priced so that comparisons to stand-alone products and other combinations can be made by consumers; and
• coercive tied selling constitute an offence with appropriate remedies.

 

Task Force Recommendations

72) Prior to entering into any financial services contract for the sale of insurance or the granting of credit, suppliers and intermediaries should be required to provide the customer with a clearly written description of what constitutes coercive tied selling and advice that coercive tied selling is not legal. The Government should work with industry and consumer groups to develop a common, easily understood notification statement.

73) The legislation should provide appropriate remedies for breach of the prohibitions against coercive tied selling, which would include prosecution, and private recourse through the ombudsman and court systems. Civil remedies should include punitive damages.

74) Suppliers and intermediaries should be required to ensure that every salesperson is trained to avoid coercive sales practices, including coercive tied selling. Initiatives such as the Canadian Bankers Association Code should be pursued.

75)Financial institutions should endeavour to itemise and price separately the different components of a package of services offered to customers which, under reasonable business practices, might be priced and sold separately.

 

Views of Witnesses

Witnesses had differing views about these recommendations. Some opposed the recommendations because they believed they would amount to excessive and onerous regulation. They also questioned whether the recommendations would lead to a workable solution. Others felt that the recommendations were appropriate. Still others maintained that they would be insufficient to counteract pressure on consumers.

 

Conclusions

The Committee strongly supports the Task Force recommendations with respect to disclosure and remedies (recommendations 72, 73, and 75).

The Committee suggests the development of a four-pronged approach to addressing the concerns raised about coercive tied selling: This would include:

• the development of effective and enforceable legislation and regulations. The Committee was impressed with the depth of concern raised about enforcing laws in this area.
• comprehensive industry sponsored training programs. The Committee sees employee training as critical to avoiding coercive tied selling. The Committee therefore urges suppliers and intermediaries to establish programs to train salespeople to avoid coercive sales practices.
• disclosure to consumers:

i) as to whether a particular contract is covered by coercive tied selling legislation,

ii) that coercive tied selling is illegal,

iii) of the customers rights and remedies if coercion takes place, and

iv) where commercially reasonable, disclosure of the price of the different components of a package of products or services.

• the creation of coercive tied selling as an offence with appropriate civil remedies for violations including access to the ombudsman.

 

6. Financial Sector Ombudsman

Background

The way in which a financial institution handles complaints and deals with mistakes is important to consumers. Consumers want their complaints handled fairly, in a timely manner and through a clearly established process.

The Task Force concluded that consumers should have some form of direct redress available to them. In this regard, it was particularly interested in ombudsman systems. These systems are used in the financial services sector in a number of countries including the United Kingdom and Australia.

Having declared its orientation towards ombudsman systems, the Task Force went on to examine in detail the Canadian Banking Ombudsman (CBO), which was established in July 1996 by Canada’s chartered banks.

The CBO was set up as part of an effort by the banks to improve relations with small business customers. However, the mandate of the office was broadened to include personal banking customers in March 1997.

The CBO describes itself as "an independent organisation which investigates complaints from individuals and small businesses about financial services." (Michael Lauber, October 28, 1998) The CBO does not investigate complaints about the general pricing of bank products and services and the credit granting policies of banks or issues that have been or are before the courts.

The CBO is governed by a board of directors composed of five senior bank executives and six independent directors. The board is chaired by an independent director. The independent directors have special responsibilities, including controlling the size of the budget for the office, searching, for, interviewing and nominating their successors, and choosing an Ombudsman. In addition, an Ombudsman may not be dismissed without the unanimous approval of the independent directors. The board does not play any role in individual complaints. (Canadian Banking Ombudsman, Brief, p. 2)

Participation by the banks in the CBO is voluntary and at present 12 banks are members. The Ombudsman’s recommendations are not binding, although all have been complied with to date. The Ombudsman is required to publicly name any bank that does not comply with a recommendation. (Canadian Banking Ombudsman, Annual Report 1997, p.10)

In addition to the CBO, each participating bank has its own appointed ombudsman. A customer’s first recourse is to the ombudsman within the institution. The CBO will investigate after the bank ombudsman has completed a review.

The Task Force made a number of comments about the CBO.

First, the Task Force felt that it was "too early to assess how well the CBO is working." (Task Force Report, p. 137)

Second, visibility is low; only 20 per cent of consumers were aware that this redress option was available.

Third, the Task Force noted that the Ombudsman is working with member banks to increase awareness of the Office. The CBO is hoping to broaden its scope by inviting additional banks and other types of financial institutions to join. According to the Task Force, "there is no indication of whether or not this initiative will be successful." (Task Force Report, p. 137)

Fourth, the Task Force does not agree with the criticism levelled at the CBO that it is merely public relations exercise, without bank commitment. The Task Force was "impressed with the spirit behind, and the structure of, the CBO, and we believe that it compares well in most respects with similar initiatives in other countries and industries." (Task Force Report, pp. 137-138)

This being said, the Task Force saw two major problems with the structure of the CBO:

... because it is industry-sponsored, it is not perceived as independent, notwithstanding the changes in governance recently made; and it is not comprehensive since participation is voluntary. Even if member institutions cover most of the marketplace, some banking customers, as well as customers of other financial institutions, are left without access. (Task Force Report, p. 138)

The Task Force went on to recommend that:

• the federal government establish a single financial sector ombudsman office, and that membership be mandatory for all federally chartered financial institutions and their regulated subsidiaries. Furthermore, the office should be structured so that provincially chartered institutions could participate.
• the mandate of the office should be based on concepts of fairness and good practice; it would focus on improper administration of existing policies and approved practices of institutions. The ombudsman should not have the authority to second-guess an institution’s risk-management regime with respect to the granting of credit or the underwriting of insurance.
• the office should cover all sectors.
• the office should be "independent and perceived as such".

i) it should report to Parliament through the Minister of Finance,

ii) the Minister of Finance should have authority to appoint the board of directors,

iii) there should be a majority of independent directors,

iv) the Minister should approve the terms of reference of the ombudsman,

v) the board of directors should appoint the ombudsman,

vi) the office should be funded by member institutions, and

vii) the board should approve funding arrangements and the annual budget.

• each member financial institution should be required to make available an internal ombudsman as the first recourse for consumers.
• there should be no charge to consumers who use the system.
• decisions should not be binding.
• the ombudsman should have the right to make any recommendation public.
• government and institutions should work together to ensure the visibility of the new office.

The insurance industry has also adopted mechanisms to deal with complaints from consumers. Since 1973, the industry’s Consumer Assistance Centre has provided a complaints resolution service. Effective September 1, 1998, the Centre added an Ombudservice to provide additional facilitation for the resolution of more difficult cases.

 

Task Force Recommendations

76) Consumers of financial products and services should have improved means of private redress in the case of a dispute with a financial services provider, including a dispute arising from unfair or illegal market conduct practices.

77) Federal legislation should establish an Ombudsman office to which all federally regulated financial institutions and their subsidiaries would be required to belong.

78) The Ombudsman system should also be made available, on a voluntary basis, to provincially chartered and unregulated financial institutions. Provinces should require provincially regulated institutions to opt in to the Ombudsman system so that there would be a common redress system available to all Canadians, regardless of the financial institution with which they do business.

79) Each member financial institution should be required to make available an internal ombudsman who would be the first recourse for consumers.

80)The Ombudsman office should be structured in a way which will engender public confidence in its independence, mandate, accessibility and reliability, and which will be readily visible in the community. To that end:

(a) In respect of independence: The Ombudsman office should report to Parliament through the Minister of Finance. It should be under the management and direction of a board of directors, with representation from financial institutions, but with a majority of independent directors, all of whom would be appointed by the Minister of Finance. The board would appoint the Ombudsman, would approve funding arrangements, would recommend terms of reference of the Ombudsman for approval of the Minister, and would determine issues of policy.

(b) In respect of mandate: The mandate of the Ombudsman office should include all issues of fairness and maladministration by a financial institution, determined by reference to its legal obligations, good practice and the institution’s established policies and practices.

(c) In respect of accessibility: Individual and small business customers should be able to access the system. Other customers should have access at the discretion of the Ombudsman. Costs of the Ombudsman office should be borne by the industry members on an assessment basis determined by the board of directors and approved by the Minister.

(d) In respect of reliability: Disputes should be resolved in a cost- effective, informal environment, entailing mediation where appropriate, and with the Ombudsman having the power to issue a ruling where mediation fails. To ensure cost- effective and non- legalistic proceedings, the rulings should not be binding. Any ruling of the Ombudsman which is not complied with by an institution should be made public, with the name of the defaulting institution and with appropriate protections to ensure the privacy of the complainant. Should financial institutions act in a manner to frustrate or impede the effectiveness of the Ombudsman process, including any persistent failure to follow the Ombudsman’s recommendations, binding decisions should be considered.

(e) In respect of visibility: The existence and nature of the Ombudsman office, together with means of access to it, should be made widely known. Regulated financial institutions should be required to include information about the Ombudsman system, in an agreed format, in regular mailings to customers.

 

Views of Witnesses

Witnesses who commented on redress mechanisms focussed on the ombudsman model. A number of witnesses supported the Task Force’s model for an independent ombudsman but maintained that the ombudsman must have the power to make binding decisions. The Canadian Community Reinvestment Coalition, the Insurance Consumers Group, the National Council of Women of Canada and the Canadian Association of Retired Persons, for example, all argued for this authority.

CARP suggested the following process for a new ombudsman:

The Financial Sector Ombudsman should be appointed by and accountable to a Board of Directors, which, in turn, is appointed by and accountable to the federal government. The Board of Directors should include representatives from consumers’ organisations, large, medium and small business organisations, financial sector institutions and federal and provincial governments. The Ombudsman’s Office should be at arm’s length from the governments as well as any financial institution, although the Office should be funded by both the governments and financial institutions. The Ombudsman should issue an annual public report of activities. Consumer access to the Ombudsman should be free. The Ombudsman’s procedures should follow the model of non-judicial and neutral arbiter. Decisions of the Ombudsman should be binding, with an appeal system. The Financial Sector Ombudsman should be linked with a network of financial institutional ombudsmen, who should be appointed by the financial institutions or sectors they serve and would provide the first line of conflict resolution for consumers. (Lillian Morgenthau, November 4, 1998)

Professor Jean Roy who supported expanding the role of the Canadian Banking Ombudsman to cover all financial services, suggested that the role should be extended even further to cover the entire field from consumers protection. (Jean Roy, October 23, 1998)

The Canadian Bankers Association believes that the present Canadian Banking Ombudsman structure works well. It argued for a continuation of the present self-regulatory process. The CBA also felt that the present system could be adjusted to meet the concerns expressed in the Task Force’s report and the mandate of the CBO could be broadened to "encompass a full range of financial institutions dealing with consumers and small businesses". (Brief, p. 5)

The CBA was also concerned that a financial services ombudsman created by legislation would turn into a quasi-judicial tribunal.

There is an enormous tendency ... to let these institutions grow into something not originally intended by legislators. If we go to a quasi-judicial tribunal for consumer issues ... there will be lawyers lined up on both sides and the consumer ... will be caught between these two warring sides. (Raymond Protti, September 29, 1998)

Another witness felt that a bureaucratic ombudsman’s office would be expensive and probably not effective. (Raymond McFeeters, October 6, 1998)

The Canadian Banking Ombudsman was pleased that the Task Force endorsed the structure and operations of his office. The CBO Board disagreed with the statutory solution that would have the Minister of Finance appoint members of the board of directors and the Ombudsman to report to Parliament. The Board felt that this solution was being proposed to resolve a "perceived problem – not a real problem".

The CBO was careful to point out to the Committee that it was not a watchdog or a regulator. The watchdog role is carried out by consumer organisations; the regulatory function by the government and industry self-regulatory bodies.

Noting that responsibility for financial institutions is shared between the federal and provincial governments, the CBO maintains that jurisdictional problems could arise if the federal government encourages provincially regulated institutions to participate in the proposed system.

The ability of the federal government to legislate participation of much more than the banks and Canada Trust is questionable. Further, any federal pressure to encourage voluntary participation of provincially regulated institutions may result in provincial retaliation by establishing their own ombudsman schemes.

We run the risk of having a multitude of schemes across Canada. That would be confusing to the consumer, and very expensive for the institutions to comply with all of the different processes and standards. (Canadian Banking Ombudsman, Brief, October 28, 1998, p. 6)

Finally, the CBO argued that a statutory model would likely be more formal and legalistic, possibly requiring the collection of evidence, legal representation, hearings and written decisions. This could lengthen proceedings and increase costs for all involved.

The CBO believes that a self-regulatory financial ombudsman has a greater chance of success than a statutory model.

 

Conclusions

The Committee has carefully reviewed the sections of the Task Force report dealing with redress, Chapter 6 of the Background Paper #3, and the Task Force’s recommendations that call for legislation to create an Ombudsman office covering all federally regulated financial institutions and their subsidiaries. The Committee has also carefully reviewed the testimony of the witnesses and submissions received on this issue.

The Committee supports the intent of the Task Force’s recommendations to create an independent, accessible cost-effective, broadly-based financial services ombudsman for individual and small business customers. However, the Committee believes that this goal can be, and to a large extent, has been achieved under the structure of the current Canadian Banking Ombudsman. The Committee therefore does not support the use of legislation in this area.

The Committee is of the view that the Task Force did not make a convincing case for the need to create a financial services ombudsman by legislation. It did not identify major shortcomings with the present structure. In fact, the Task Force states the following:

We are impressed with the spirit behind, and the structure of, the CBO, and we believe that it compares well in most respects with similar initiatives in other countries and industries." (Task Force Report, pp. 137-38)

The Task Force also clearly stated that it did not believe that the CBO was merely a public relations exercise by the banks without commitment.

The Task Force appears to rest its case for a legislative model on two factors: the first is a perception that the CBO is not independent because it is industry-sponsored, the other is its lack of comprehensiveness because participation is voluntary.

The Committee believes that the independence of the current Canadian Banking Ombudsman has been achieved by several recent changes to its structure. First, directors independent of the banking industry constitute a majority of the board of directors; six of the eleven directors are independent and the chair must be one of the independent directors. Second, the independent directors must unanimously approve the dismissal of the Ombudsman, recommend candidates for Ombudsman, nominate candidates for independent director and review and recommend the budget to the board. Third, the Ombudsman may not be a banker, nor closely related to a senior banker and does not seek advice of, or report to, the board on specific complaints. Fourth, the board is not involved in making decisions about complaints and there is no appeal to the board from decisions of the Ombudsman.

As to the question of the inclusiveness of the current structure, the Committee feels that little would be accomplished on this front by creating a new federal government agency. Indeed, the Committee is concerned that such an agency might make it difficult to obtain provincial agreement for the federal Ombudsman to act as the ombudsman for provincially regulated financial institutions such as credit unions, insurance companies and trust companies.

The Committee, however, supports the mandate of the Ombudsman being broadened to include all financial institutions. The Committee notes that, earlier in 1998, the CBO amended its by-laws to allow membership from almost all financial institutions including trusts, credit unions and specialised lenders.

The Committee agrees with the Task Force that that all federally regulated financial institutions should be required to come under the purview of the Ombudsman’s office. It is the Committee’s view that this requirement should be a condition of their federal charter. The board of directors of the ombudsman should reflect the fact that institutions other than banks will be covered. The Committee believes that the board membership should be increased to 15; consisting of five representatives from the financial services sector.

The Committee recognises that more work is needed with respect to toughening penalties for those who fail to respond to the Ombudsman’s rulings. The Committee notes, however, that, to date, all of the Ombudsman’s rulings have been respected.

The Committee is concerned that, by adopting a legislative approach, the informal processes now available to investigate and resolve consumer complaints, will evolve into a more legalistic, formal and costly procedure. One of the hallmarks of an ombudsman system is accessibility. The Committee fears that, over time, a legislated system will become a quasi-judicial forum with virtually all of the trappings of a court and the advantages inherent in the ombudsman system will be lost.

The Task Force recommends that the Ombudsman should report to Parliament through the Minister of Finance. Because the Committee rejects a legislated ombudsman’s office, we do not support this recommendation. However, the Committee urges the present ombudsman to appear annually before the both the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce to review its annual report with those committees.

The Committee would like to say a final word on the issue of binding decisions. The Task Force recommends that the decisions of the ombudsman be non-binding. The Committee agrees. A number of witnesses called for binding decision-making authority. The Committee, however, concurs with the arguments presented by the Task Force in support of its determination not to recommending binding decisions.

The Task Force stated that it was too early to assess how well the CBO is working. The Committee believes that the CBO should be given the time to demonstrate that it can work together with the financial services industry to create an effective financial services ombudsman.

 

Recommendation

The Committee therefore proposes that:

1. The federal government not legislate to establish a financial sector ombudsman.

2. Subject to the following, the operation and structure of the Canadian Banking Ombudsman be maintained as independent office

a) The mandate of the Ombudsman should be broadened to include all financial institutions. This could be accomplished by making such participation a condition of their federal license. The membership of the board of directors should be increased to 15; consisting of five industry representatives and ten independent directors.

b) The decisions of the ombudsman should continue to be non-binding.

c) The independence of the Ombudsman should be preserved by continuing to ensure that:

i) the board of directors contains a majority of independent directors,

ii) the independent directors must unanimously approve the dismissal of the Ombudsman, recommend candidates for Ombudsman, nominate candidates for independent director and review and recommend the budget to the board.

iii) the Ombudsman must not be related to a financial institution and cannot not seek advice of, or report to, the board on specific complaints.

3. Each federally regulated financial institution should establish an internal ombudsman who would be the first recourse for consumers.

4. The Committee urges the CBO to appear annually before the both the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce to review its annual report with those committees.

 

7. Proficiency Standards for Intermediaries

Background

The Task Force notes that convergence of the four financial pillars is changing the nature of the licensing of intermediaries: where intermediaries were once licensed within one pillar, they are now being multi-licensed to sell a variety of products. (Task Force Report, p. 140)

The Task Force endorses and encourages provincial initiatives to implement the concept of a single regulator for market intermediaries, and as far as possible to harmonise the proficiency standards across all jurisdictions. It suggests that that adequate proficiency standards for financial intermediaries should include:

• a post-secondary educational requirement of a diploma in a relevant and approved program for new applicants;
• examination standards that reflect the role of market intermediaries, and the reliance placed upon their advice; and
• enhanced continuing education standards for all licensed individuals.

 

Task Force Recommendations

81) Because an effective marketplace requires both that consumers be informed and that salespersons be well equipped to provide sound advice, there should be more effective training of persons who deal with the public in the sale of financial services products, including both intermediaries and employees of financial services institutions.

82) Well-defined and adequate proficiency standards should be adopted for market intermediaries, including a post-secondary diploma for new entrants, adequate examination standards and enhanced continuing education requirements.

83) Proficiency standards should be harmonised to the greatest possible extent across jurisdictions.

84) Given marketplace characteristics and consumer interests, the Task Force supports the regulation of financial services market intermediaries under provincial jurisdiction by a single regulator in each province.

85) Licensing restrictions for intermediaries based on occupation should be removed. Provincial governments should remove restrictions mandating full-time employment and should enter into reciprocal licensing agreements relating to residence of intermediaries, with the objective of improving service and lowering costs to the consumer.

86) The Task Force supports provincial review of:

(a) the current exemptions from provincial licensing requirements to determine whether those who benefit from the exemptions do in fact have training and supervision which is equivalent to the standards proposed for licensed market intermediaries; and

(b) the status and training of market intermediaries who are not currently covered by any proficiency regime even though they deal with retail consumers.

 

Views of Witnesses

The Canadian Life and Health Insurance Association (CLHIA) commented on these recommendations. The CLHIA pointed out that many of the Task Force recommendations in the area of proficiency standards are already in effect in the industry. It felt that the standards for insurance intermediaries, for example, were very consistent in the common law provinces.

The CLHIA also indicated that there is a high degree of reciprocity with respect to residency requirements; all provinces except one will license non-resident agents. It cautioned against removing other licensing restrictions such as those relating to prohibited occupations and the full time requirement. (Brief, October 1998, p. 42)

 

Conclusions

The Committee makes no comments or recommendations on the training and licensing of intermediaries or proficiency standards for those performing an intermediary function. These are matters within provincial jurisdiction.

 

8. Consumers and Internet Providers of Financial Services to Canadians

Background

Technology now makes it possible for foreign firms to provide financial services to Canadian consumers without having to be physically present in Canada.

Commenting on the nature of technological change in the financial services sector, the Task Force pointed out that technological changes have been rapidly introduced and quickly accepted by consumers.

Personal computers (PCs), the Internet, PC and telephone banking, electronic mail, interactive voice response technology, and call centres have changed the face of banking and the purchase of financial products and services in ways that were unimaginable even five years ago. A consumer sitting at home in Canada with a computer can open a new bank account, access an existing account and carry out numerous transactions including transferring funds and bill payments, applying for a loan or mortgage, purchasing insurance, and trading securities. (Task Force Report, pp. 73-74)

Canada already has two Canadian-based "virtual" banks offering financial services to Canadians without a physical branch network and financial services can be offered to Canadians from any country and accessed over the Internet, by telephone or by mail.

The Task Force made note of a number of the problems that arise when financial services are provided by sources that are not physically present in Canada. These include uncertainties about the applicable law, which country's courts have jurisdiction, the place where the contract is made, and electronic and digital signatures.

The Task Force suggests that here are competing objectives at play in designing a regulatory framework for foreign providers of financial services that are not physically present in Canada. One is to ensure that Canadians can choose from a wide selection of financial services and products. Another is to have sufficient information available so that consumers can be informed about the various financial services providers. Yet another is to design a regulatory scheme for "virtual" providers that does not discourage the entry of new products and services.

The Task Force is of the view that this kind of activity can be satisfactorily regulated only by the development of internationally acceptable rules which will be enforced by the home jurisdiction regulator.

 

Task Force Recommendations

122) Industry Canada, as part of its deliberations to develop an appropriate framework for electronic commerce, should consider deeming Internet providers of financial services to have agreed to permit dispute resolution in Canadian courts and by the application of Canadian law, thereby providing Canadians who are wronged by such providers located outside Canada with a means of redress in Canada.

123) OSFI should actively participate in international discussions designed to develop an appropriate regulatory regime applicable to trans-border Internet providers of financial services so that Canadian law and regulatory practice, in a timely manner, incorporate international best practices to protect Canadian consumers.

 

Views of Witnesses

The Committee heard little evidence on issues and recommendations pertaining to the trans-border Internet providers of financial services. The Canadian Association of Retired Persons, however, which strongly endorsed the recommendations, agreed that electronic transactions involving Canadian should be deemed to fall under Canadian jurisdiction and law.

 

Conclusions

The Committee recognises that the question of electronic commerce in general and the provision of financial services via the Internet in particular, raise many issues. As Canadians increasingly access financial services from entities based outside Canada, consumer protection issues, for example, will take on greater importance. Indeed, matters such as the validity of signatures and the relevant law applicable to a contract, although relatively easy to establish under other circumstances, are much more uncertain in an electronic setting.

The Committee endorses the thrust of the recommendations 122 and 123. The Committee intends to conduct a study of electronic commerce. In this study, the Committee hopes to deal with many of the issues raised by the Task Force in connection with the provision of financial services over the Internet

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