On March 20th 2018, the Financial Consumer Agency of Canada (FCAC) released a report regarding the sales practices of Canada’s “big six” banks (BMO, Bank of Nova Scotia, CIBC, National Bank, RBC, and TD). The FCAC is the regulator responsible for overseeing consumer protection legislation, voluntary codes, and public commitments applicable to federally-regulated financial institutions such as banks. This report was prompted by two incidents reported in the Canadian media. First, in November 2016, it was reported that a bank was signing up customers for new products without their express consent. Then, in early 2017, media reports based on information from current and former bank employees suggested that banks were using high-pressure sales tactics to sell a broad range of products.
The FCAC report is focussed on “mis-selling” which it defines as sales of financial products and services which are unsuitable for the consumer, made without taking into account the consumer’s financial goals, needs and circumstances or where the consumer is provided with incomplete, unclear or misleading information. The report does not consider any alleged breaches of the legal obligations of banks as these are being investigated on a separate track. In preparing the report, the FCAC reviewed over 100,000 pages of documentation and 4,500 complaints, and interviewed over 400 bank employees (including directors and senior management) plus an additional 200 branch staff.
Overall, the FCAC found that mis-selling by the big six banks is not widespread. However, it did find that the banks’ cultures place a “sharp focus” on sales which can increase the risk of mis-selling and of breaching market conduct obligations, and, most notably, that the controls the banks have in place to monitor, identify and mitigate these risks are insufficient. The key findings of the report touched upon five areas: bank culture, employee performance management systems, higher risk products, governance frameworks, and risk mitigation controls.
On the issue of bank culture, the report noted that technology has allowed most transactions to be conducted through online or mobile channels which has enabled branches to be more like “stores” dedicated to providing advice and selling products. This creates a risk that banks will place sales ahead of customer interests.
The FCAC found that performance management programs such as financial and non-financial incentives, sales targets and scorecards play a significant role in shaping the way bank employees behave towards consumers. The report notes that compensation programs with variable pay as a significant component can lead to mis-selling as employees try to maximize their compensation.
The report states that certain products, practices and distribution channels present higher risks than others. In particular, the FCAC found that bank practices with respect to cross-selling new products to existing customers, their use of mobile mortgage specialists (who sell mortgages independently from the branch channel and often entirely compensated with variable pay), their sales practices with respect to creditor insurance and their use of third party sellers for some products (e.g. offering travel rewards credit cards at airport kiosks) were all much better developed than the associated controls to mitigate sales practice risks.
On the issue of governance frameworks with respect to sales practices, the FCAC found that the banks’ governance frameworks did not adequately address the management of sales practices risk, although it noted that some banks have now begun to make adjustments.
To mitigate sales practices risk, banks employ controls such as organizational culture, human resources, and the “three-lines-of-defence” model (operational management, compliance and risk management, and internal audit). The FCAC found that these controls have not kept pace with the increased focus on sales and advice in the banks’ branches and call centre channels.
The report is not binding on the banks, although the FCAC did provide it to the Minister of Finance in order to “inform policy development”. While the report notes that the banks are all in the process of improving their management of sales practices risk, it recommends that banks take the following steps to strengthen financial consumer protection:
- make financial consumer protection, fairness and product suitability a priority;
- establish formal governance frameworks for sales practices;
- improve oversight, management and reporting of consumer complaints;
- ensure employee incentives work in the interests of consumers;
- ensure internal controls adequately address sales practices risk, particularly for higher risk channels and practices; and
- ensure adequate human resources as well as compliance, risk management and audit resources are all in place to improve the oversight of sales practices risks.
In addition to the recommendations directed at the banks, the report states that the FCAC is also planning to make several changes of its own including implementing a modernized supervision framework, increasing its resources with respect to supervisory and enforcement functions, and enhancing its consumer education materials to raise consumer awareness of financial products and services, their rights and responsibilities with respect to those products, and the importance of asking the right questions.