Finance Committee on May 28th, 2018

[The Chair, Liberal, Wayne Easter]

I call the meeting to order. Pursuant to Standing Order 108(2), we are conducting a study of consumer protection and oversight in relation to schedule I banks.

As members may recall, we heard from the Financial Consumer Agency of Canada previously, but we said that after they finished their report we would invite them back. That is the purpose of this meeting.

With us we have Ms. Tedesco, commissioner, executive services. We also have Mr. Bilodeau, director, supervision and promotion. Both of these witnesses are with the Financial Consumer Agency of Canada.

Welcome. The floor is yours.

[Lucie Tedesco, Commissioner, Executive Services, Financial Consumer Agency of Canada]

Good afternoon, Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me once again to lend my voice to your study on consumer protection and oversight in relation to schedule I banks.

With me today is my colleague, as Mr. Chair indicated, Mr. Richard Bilodeau, who is the managing director of the agency's supervision and promotions branch. We are both very pleased to be here today to answer your questions on FCAC's report published in March entitled “Domestic Bank Retail Sales Practices Review”. The report details the findings of our latest industry review.

I must say that this review was the most significant supervisory initiative we have ever undertaken at the agency since we were created in 2001. For nine months a dedicated team of staff under Richard's direction worked diligently towards achieving the review's objective, which was to identify and understand the drivers of sales conduct, which could increase the risk of mis-selling to consumers and breaching market conduct obligations. The scope of this research covered the banks' sales targets and incentive programs and the controls banks have in place to mitigate these risks associated with sales practices.

The FCAC reviewed more than 4,500 complaints related to sales practices to gain a better understanding of the issues consumers experience when acquiring bank products and services. We reviewed over 100,000 pages of bank documents on matters ranging from training, performance and sales management, to compliance, risk management and internal audit.

And we interviewed more than 600 bank employees, including 200 from 30 branches. Our sample included board chairs and directors, senior management, middle management and frontline customer service representatives in call centres and branches.

The key findings as set out in our report are as follows: Retail banking culture is focused predominantly on selling products and services, increasing the risks that consumers' interests may not always be given the appropriate priority. The design of banks' financial and non-financial incentives, sales targets, and scorecards may increase the risk of mis-selling and breaching market conduct obligations. Certain products, business practices, and distribution channels present higher-risk sales practices. Governance frameworks do not manage sales practice risk effectively. Finally, controls that mitigate the risks associated with sales practices are underdeveloped.

The report does not address potential breaches of consumer provisions of the Bank Act and its regulations. If potential breaches were identified during the course of our review, the allegations are currently being investigated separately as part of our normal enforcement process.

While we did not uncover evidence of widespread mis-selling, we did find that the risk of mis-selling and breaching market conduct obligations existed across all six banks. We identified a number of areas that banks must improve upon to better protect consumers.

For example, we expect the messages of consumer centricity disseminated by bank leaders to be better aligned with bank programs and their underlying infrastructure. We want to see them design compensation programs that encourage employees to work in the interest of their customers rather than perhaps the interests of sales targets, and we would like them to align their control and governance framework measures accordingly.

Going forward, the agency will monitor their progress on these and other recommendations. Although our report on the industry review has been released, our work continues. We will soon provide an institution-specific report to each of the six banks, and we will work to ensure that the necessary changes to mitigate the risks identified in the report are implemented. We are also planning a mystery shopping exercise to enhance our understanding of how the risk drivers we identified during our review may materialize.

Rounding out my introductory remarks, I will say that, as a result of the industry review, FCAC now has a deeper understanding of the context within which the financial institutions we regulate are operating. With this, we will enhance our supervisory capacity to be more proactive and to oversee organizations with increased rigour and skill.

To illustrate this commitment, we are currently preparing to implement a modernized supervision framework, which was informed by this review. In addition, we are increasing our supervision bench strength and enhancing our information for consumers about financial products and their rights and responsibilities.

I expect some of you have questions that will allow me to elaborate on these and other implications of our industry review. Mr. Bilodeau and I would be pleased to address them, at the chair's discretion.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Ms. Tedesco.

We'll start with Mr. Sorbara for seven minutes, please.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Welcome, Ms. Tedesco and Mr. Bilodeau.

For my first question, I want to have you elaborate on this. Did the FCAC receive the sufficient resources and the necessary co-operation from the schedule I banks?

[Lucie Tedesco]

I remember answering a question whether we felt we had enough resources left here at exactly this time when we were here before this committee. I'm happy to say, yes, we had the right number of resources, but it was close. Our staff was engaged, and some of our staff members are here with us today. They were engaged in many, many hours of overtime and burned the midnight oil working on this review. As I said, it was the most significant review we've ever done, and we did it without any consulting services, but it was tough.

What was the other part of your question, Mr. Sorbara?

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Did you have the full co-operation of the schedule I banks?

[Lucie Tedesco]

Yes, we did. In fact, I spoke to each CEO, and each CEO gave me his word that we would get full co-operation. Their staff provided all of the documentation and were very responsive to the documentation and interviews we were requesting.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

In your opening remarks, you highlighted the fact that each bank will receive its own assessment.

[Lucie Tedesco]

Yes.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Will that be made public?

[Lucie Tedesco]

No, it will not be made public.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Okay, thank you.

Within your opening remarks, you used the word “modern” or “modernization” of the rules that FCAC pertains to. Obviously, there are many things happening within fintech. Can you give us a broad outline or direction where we should be going in that respect to protect consumers from practices that may not be beneficial to their long-term interests?

[Lucie Tedesco]

Certainly, our new supervision framework will enable us to be more proactive, more transparent, and more predictable as a supervisor. It is risk-based. We're certainly counting on the fact that we will have what we call some risk profiles for each financial institution we oversee. We will put most of our efforts on those institutions that present the highest risk.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

If I can interrupt, I do have one more question.

In reading the report, it seems to me that one of the conclusions, or the main conclusion I read, is that there are no systemic practices going on that are wrong, if I can use that type of term, in terms of sales practices, but that controls—or governance, which is a term I like to use—need to be strengthened.

I look at the report and say, okay, there are some good things happening because there aren't bad things happening, but at the same time, we need to be vigilant and to boost controls in respect to some sales practices, for example, with variable mortgage specialists, as they're called, who may just be compensated on a variable basis.

Is the way I'm looking at it correct? That's not for my own use, but is that what a reader of this report should discern?

[Lucie Tedesco]

I'm sorry again. I'm having difficulty hearing, Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

It's just in terms of the report highlighting that there are no systemic mis-practices going on in sales practices by the banks, but controls—governance—need to be beefed up. Is that correct?

[Lucie Tedesco]

Yes, that's correct.

During the course of the review, we did identify certain risks to consumers and ways to address those risks, but we did not find any evidence of a widespread problem with mis-selling or breaches of market conduct obligations. That doesn't mean we didn't find that risks existed across all six banks, and that doesn't mean we didn't find incidences of potential market conduct violations, which, if we did find—and I understand we did find some—we are currently investigating, and they are following our normal enforcement procedure.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I have one final question. In terms of this study and the standards that are in place currently, how do we compare to what banks in the United States, the U.K., or the European Union face in terms of the robustness of the protections that are in place for consumers?

[Lucie Tedesco]

In terms of comparing ourselves to our international peers, I would say that their consumer protection frameworks have probably evolved a little faster than ours, but the government is currently, I understand, consulting on a new consumer protection framework. That framework, which will evolve where the market has been and will presumably allow us to evolve with market changes, will certainly help to bring us to the same level of consumer protection.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Ms. Tedesco and Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Ms. Tedesco, thank you for coming here today and for the work you do for Canadians.

I have to say, Ms. Tedesco, that I'm a little disappointed in your report. Again, many Canadians have the feeling—and we heard them at this committee—that there are not sufficient structures in place. The report rightly says that there are different cultures among different schedule I banks. There are also some issues in terms of cross-selling that could be looked at.

More or less, when I read your report, Ms. Tedesco, the recommendations here, under “Conclusions and a look forward”, really are just that: there are no actual solid recommendations that you've made to solve this issue. As a parliamentarian, I would imagine that the entire committee would like to put some teeth into recommendations that the government can either give your agency or put into greater oversight for consumer protections. This report seems to package this as being an issue, but not a big issue, and that “we're looking at it”.

Could you inform me about what concrete steps you and your organization plan on taking in response in the coming days?

[Lucie Tedesco]

Sure. The report does outline a number of opportunities for us specifically to strengthen our oversight of banks' sales practices risk. In terms of this review and the next steps, what follows from what we've already done, we have the institution-specific reports that will be going out to them, and we'll be working to make sure that the recommendations that are in those institution-specific reports are implemented. We will also be doing a mystery shopping exercise this year to see if we can validate some of our findings. Then we will be cascading our review down to small and medium-sized banks.

Internally at the FCAC, I mentioned our new supervision framework, which will allow us to zero in on the banks that present more risk to consumers, and guide our efforts towards those financial institutions. We will also be increasing our bench strength in supervision and enforcement, and we will be enhancing our consumer education materials as well so they're aware of their rights and responsibilities and are able to make informed decisions about whether or not to buy certain products. We will continue to investigate those potential violations of the consumer provisions under the Bank Act.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Ms. Tedesco, it sounds from your answer that this has been more about a review of the FCAC rather than the review of the issues that were raised by Canadians and the people who worked in many of these banks who raised the alarm bells around these issues.

[Lucie Tedesco]

I think your question was as to what the FCAC will do in the coming weeks. That takes care of our part, but we very much expect the banks to implement all of the things that we have raised in our report. That includes redesigning or taking a fresh look at their compensation and performance management programs to make sure that they motivate employees to work in the interests of consumers rather than the interests of a sale.

We're also looking at having them provide their senior management and boards of directors with more information on market conduct risk, a more comprehensive and holistic view of their sales practices and risks so they're able to make the right decisions. We're also looking at them to improve the monitoring of the complaints and the reporting of their complaints. Typically, they don't capture first-level complaints. I'm not sure what the percentage is, but it's probably 95% of complaints that are resolved at the first level. None of that information is captured. We think it ought to be captured because we think it's rich in information in terms of pointing to emerging issues and trends.

These are some of the expectations that we have of the banks.