Finance Committee on June 7th, 2017

[The Chair, Liberal, Wayne Easter]

I call the meeting to order.

Pursuant to Standing Order 108(2), we'll continue our study of consumer protection and oversight in relation to schedule I banks.

Today, we have with us, as an individual, Sally Watson. Members have copies of her remarks, which have been translated.

Also as an individual, we have Mr. Elford, who has remarks, but they haven't been distributed to committee members because we don't have them translated yet.

On the phone, from the Small Investor Protection Association, we have Stan Buell. He'll say hello when he comes on.

We will start with Ms. Watson.

Welcome. I believe some members have told you what the procedure is. You'll make an opening statement and then we'll go back and forth with questions. The floor is yours.

[Sally Watson, As an Individual]

Thank you.

I would like to thank the chair for providing me with this opportunity to speak on such an important matter.

I was first hired by the CIBC in 1974 as a teller in Hamilton, Ontario. I was there for one year before I accepted a position at Scotiabank in 1975, also as a teller.

Tellers were historically paid at a bit above minimum wage by all banks. Let it be clear that I only worked for these two banks, but I had so many acquaintances throughout the bank system that I can comfortably state that the practices we are discussing here were pervasive throughout all the major banks.

I was an excellent teller. I never had a single unresolved difference and my customers, who were also my neighbours, found me friendly and approachable. Eventually, I became the head teller, the commercial teller, and the bulk teller. I was then moved to the back office, as an accounting clerk. The bank justified paying back office staff less money because they had no customer contact, thereby making it a less stressful job.

For the first four years of my employment, I was classified as part-time, even though I worked 40 hours per week. At that time, the branch that I worked at was open for extended hours, which meant until 8 p.m. on Thursdays and 6 p.m. on Fridays. I started at 9 a.m. every day and worked all extended hours. No overtime was ever paid. There was no such thing.

[The Chair, Liberal, Wayne Easter]

Ms. Watson, I'll just cut in for a minute. I believe Mr. Buell just came on the phone.

I'll just tell you that we can hear you, Mr. Buell. I hope you can hear us. We have two individual witnesses first, then we'll turn to you and all the members will be able to hear you.

[Stan Buell, Founder and President, Small Investor Protection Association]

That's very good. I hear you loud and clear.

[The Chair, Liberal, Wayne Easter]

That's good. Thank you, Stan.

Go ahead, Ms. Watson.

[Sally Watson]

We were given a supper allowance of $5. I received no benefits, as I was classified as part-time. After several years of attempting to be reclassified as full-time, I finally went to the federal labour board, who contacted my manager, and I was subsequently made full-time. I was never quite sure if it was worth it, as I was labelled a troublemaker from that point on.

It is often standard practice at all banks for the staff to “volunteer” to make RSP calls during the months of January and February. Anyone who didn't offer to stay after hours to make these calls faced having a note put in their personnel file stating that they were not a team player. Payment for making these calls three times a week until 8 p.m. was a slice of pizza, eaten at your desk, and a can of pop.

I remained working at the same branch for 20 years. At that time we were totally convinced that we owed the bank for giving us employment, and we were unlikely to ever get jobs anywhere else. I suppose it was almost a case of Stockholm Syndrome, in which you become convinced that your very existence relies on the people who control you.

I eventually transferred to the Ontario central accounting unit in downtown Hamilton to escape an abusive supervisor, and things began to improve. For one thing, there were no sales goals.

Sales goals were an insidious thing for all branch employees. The number of cross-sells, upsells, and referrals for large credit products that were required in order to get an acceptable rating on your annual performance report was staggering. It simply wasn't attainable in the course of normal working hours; hence, more unpaid overtime, but that's another story.

I congratulate the women who came forward from both the CIBC and Scotiabank and successfully pursued class action lawsuits that at least resulted in some of their colleagues getting the lost wages that they deserved. Sadly, hundreds of employees were not in those numbers of the defined class, and they were left behind and will likely never be compensated for all the hours they worked.

The pressure to achieve sales goals did more than coerce staff into working for nothing. It also urged them to sell products to customers that they had no need for. Raising credit card limits, urging people to take out car loans, RSP loans, open a line of credit, or be approved for overdraft protection were commonplace. The one that disturbed me the most was approving people for much larger mortgages than they could afford—anything to raise the profit of the bank, whether the consumer could afford the product or not.

I can clearly remember the day when my husband and I went to get a pre-approved mortgage from the bank so that we could go house hunting. I was appalled at the amount they were willing to lend us, even though we had understated my husband's income. I saw the big smile on his face. When we got outside, I gave him the bad news that we could actually only handle a mortgage half that size and that he would have to lower his expectations. I also told him that there were going to be a lot of rough times ahead for a lot of people who were overburdening themselves with huge mortgages they might not be able to handle. That was in 1999.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Ms. Watson.

Turning to Mr. Elford, the floor is yours.

[Larry Elford, Independent Financial Industry Analyst, As an Individual]

Thank you very much, sir. I'm grateful to this committee for allowing the opportunity for my voice to be heard.

I began working in the financial industry in Canada in 1984. By the 1990s, most of the investment firms in Canada had been purchased by the big banks. I worked inside those financial firms for 20 years and I participated in one of the first investment offices to be housed inside a Royal Bank branch at that time. I'm well versed in the sales practices and incentives for employees and the codes of conduct and regulatory systems.

Before I get into my presentation, I must first tell you why I believe this topic is of utmost importance to Canadians and could be important to listeners.

The reason I believe this topic is important is that systemic cheating and short-changing of Canadians by financial institutions costs Canada as much money as the cost of all criminal acts in the country combined. Those are criminal acts measured by the Government of Canada and Statistics Canada. If this belief of mine were found to be true, then the topic you are charged with hearing is far more important to Canada than we could ever imagine.

To begin, point number one is that nobody whom I knew in the financial industry went into that business with the intention to harm clients or to violate them financially. Point number two is, I know that I did not go into the financial industry in order to do financial harm to my clients, nor did I expect that to be the case.

I also know that I did not join a top Canadian financial institution with the understanding that they would require me to harm my clients financially in any way. I did not enter the field with the understanding that any bank would do harm to me as an employee if I refused to do harm to my clients financially, if I refused to step outside the rules, which required that I deal honestly, fairly, and in good faith with my clients. I did not expect to be harmed by my bank if I refused to do so.

Last, if I could get around the first two, I did not enter the financial industry in Canada to stand by silently while 70% or 80% of my sales associates made themselves richer by harming their clients financially.

All those things took place and take place today in the financial industry to make financial firms richer. They take place in secret and are invisible on the radar of all current attempts to regulate and protect Canadians from these harms.

I've worked in a bank branch environment; however, my background was on the investment industry side. Starting in the early 1990s, Canada's largest banks purchased 90% of the investment brokerage firms in the country. The banking industry thus also owns the largest portion of the investment industry in Canada. That is important, because my truck driver friend in Taber tells me that we're not talking about rich people; we're talking about every single person who works, saves, and hopes to invest to retire some day—every person in Canada.

When my firm was taken over, we had 1,000 investment sales persons. They were legally licensed as salespersons under the law up until 2009. The bank had between 12,000 and 15,000 account managers. I don't know what their licence was. That's a different area. What I've discovered is that the bank objective was to force those 12,000 to 15,000 account managers to step out of their old role of helping people and become licensed as salespersons and begin the process of pushing clients into bank investment products. The profits could soar if we could get all of our clients to go into bank investment products.

In 2007, the University of Toronto's Rotman School of Management did pension studies led by Canada's foremost expert, Dr. Keith Ambachtsheer. They found that clever marketing and not necessarily good financial advice was gouging Canadians, not serving Canadians—and I'm talking about the gouge only—by $25 billion a year. That was in 2007. the $25 billion was the benefit to the dealers and the harm to investors at that time. His calculation was that 3.8% was how much more retail investors were paying for financial products than they needed to be paying when compared with professional investors or institutions.

If I update Dr. Ambachtsheer's numbers to 2017, I can easily estimate $40 billion to $50 billion per year in financial harm to investors. This number is from the abuse of market dominance that allows banks and their dealers to control the market to the extent that they can deceive and harm Canadians.

I repeat, I'm not talking about a fair fee, a 1% fee to manage money. I'm talking about an overcharge, or an excessive fee that clients know nothing about, so that they're getting added costs without added value.

This mutual funds example from the Rotman School of Management is only on one investment product, mutual funds, and is one marketing tactic out of hundreds. There are easily another dozen methods of harming Canadians that allow the financial harm to Canada to exceed the harm from all other crime in the land. A study on demonstrating that is under way, and the results so far support the premise.

Your first question as a committee might be, “But, Larry, shouldn't our regulators require Canadian financial institutions to deal with clients only in a manner that is fair, honest, and in good faith?” That's what they'll tell you next week when they come here, and the answer to that is obviously, yes, it should, but in practice, no, it doesn't.

A regulator should require financial institutions to deal fairly, honestly, and in good faith as is required by rules, the laws, and the codes of conduct of every industry member who will speak to you, but as I said, they don't. I have not yet met a regulator who was not picked and paid by the very financial institutions who pay the regulators salaries. The regulators have their hands on the wheel and are paid by the industry they are charged with policing. I repeat, they are paid by the industry they are charged with policing. As no one can serve two masters, they have a record of ignoring the public interest when their job security is at stake. Regulators' job security is every bit as much at stake as bank employees' job security can be, and regulatory employees thus face ethical double binds similar to those placed on bank or financial system employees.

Regulatory capture by paycheques that are only funded by those who are being regulated is a highly unskilful and suspect system. It is not professional. It almost seems designed to fail, and if it does, then it is a huge success to the industry by being a failure to Canadian investors.

[The Chair, Liberal, Wayne Easter]

If I could, and I really hate to do this, but I know you're only about halfway through. We try to hold the comments to five minutes, and we're at eight, so if you could highlight.... The problem is, we need time to get to questions. If you could, please sum up as quickly as you can, but don't miss your key points.

[Larry Elford]

I'll speed it up.

I'll sum up with a quote from David Dodge, the former governor of the Bank of Canada in 2005, who suggested that there is a perception in international financial circles that Canadian markets are the “Wild West”, and that it hurts Canadian companies when they try to raise money abroad. As he said, “This is a very common refrain that we hear when we visit markets in New York or in Boston or in London or in Europe, a perception that somehow this is kind of a little bit more like a Wild West up here in terms of the degree to which rules and regulations are enforced.”

I'll only add to that with a thank you for listening to me. The Wild West applies to the regulatory system of retail investors and affects retail investors, much to the detriment of society.

Thank you for your time.

[The Chair, Liberal, Wayne Easter]

Thank you, Larry.

There is another point you might want to draw out later in answer to a question, and that relates to your point on investment victims. You can think about that in the meantime.

Turning to the phone now, we have Mr. Buell, with the Small Investor Protection Association. Mr. Buell, the floor is yours. Please try to hold it to about five or six minutes, if you could.

[Stan Buell]

Good afternoon. I will be brief.

SIPA, or the Small Investor Protection Association, is incorporated as a national non-profit organization. We are fortunate to have the support of many volunteers who devote their time and energy to our work as we try to raise awareness among Canadians.

Three decades ago I lost my life savings due to fraud and wrongdoing by a major financial institution. Like most Canadians, I trusted them to look after my best interests. The impact was devastating and life-altering. It was another 10 years before I suspected anything wrong was done. I investigated for six months. What I found was distressing. It was not unusual. It was commonplace. I found that my adviser had been disciplined and fined several times. I tracked down a half-dozen of his victims. All had received the same treatment. He had been doing the same things for 15 years.

One of his victims had died during the legal process. Who knows how many were victimized? When I spoke with his widow, Shirley, I knew I must do something to try to help other Canadians. She is the reason SIPA was founded in 1998. Shirley and her husband had operated a family business for 25 years. He contracted terminal cancer. The business and the house were sold, and the proceeds and all of their savings were placed in the care of this adviser. About $1 million in total she trusted to him. It seemed enough to support a senior widow. Three years later, she was called into their office to hear them explain that her money was gone. They were sorry, but they could do nothing.

Since founding SIPA, I've talked with many hundreds of victims. Their stories are all quite similar: lives are ruined, health is harmed, families are broken up, many talk of committing suicide, and some do.

The CBC Go Public TV and radio programs over the last two months have raised public awareness more than SIPA has been able to do in two decades. There's a new awareness that is building. Any government inquiry must talk to the victims to hear the truth.

It is not the bank teller upselling or being pushed to meet sales targets that is the major issue, but it is indicative of the culture and attitude of the financial institutions that extends to their financial advisers, who are motivated by sales targets and the need to generate commissions to satisfy the commission grid. The soothing words of codes of ethics and regulators' rules and guidelines do little to save Canadians from harm. Self-regulation in this industry does little to protect Canadian consumers. Rather, it adds to the deception that encourages Canadians to place their trust in the financial institutions.

SIPA has issued a series of reports that reveal some of the facets of strategic insidious deception. Members of the committee are urged to peruse some of these reports. However, it is most important that you talk with many witnesses—CBC's Go Public has heard from thousands—and then try to reconcile what you're hearing from the industry and what you hear from Canadian citizens.

Recognizing that there are provincial and federal regulatory jurisdictions, we believe it is essential that the Government of Canada establish a national consumer protection authority that will work with all the regulators, but have the power to order investigations and to pay restitution when it's found to be appropriate.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Buell.

I don't know whether you can see us or not, but so you understand the set-up here, there are five members of the governing party, three members of the official opposition, and one member of the third party, and we will rotate on questions.

We'll start our questions with a seven-minute round.

Mr. Ouellette.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Mr. Elford, thank you very much for coming here today. I very much appreciate it.

I was wondering if you could talk a little about payment of regulators. You mentioned regulators had their hands on the wheel. Could you actually say what regulators are being paid by schedule I banks? I was a little unclear on that. How does that work?

[Larry Elford]

I have to admit that my experience is totally on the investment side of the banking industry. As a result, I was licensed under the Canadian Securities Administrators, which is the umbrella organization of 13 provincial and territorial securities commissions. Those securities commissions are not government funded, they're funded by fees and payments by the investment industry. They're selected from members of the investment industry, and their salaries go as high as $700,000 at some of the various securities commissions across the country.

Beneath the Canadian securities administration, there is nothing left except for self-regulatory bodies, and those are fully industry self-paid, self-protected bodies. In my view, they provide a pretense of public protection, which is more of a facade, in my experience.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

You also mentioned the separation between banks and investment companies. Why is that important? Why do we need a separation between banks and investment companies?

[Larry Elford]

I don't know that we necessarily need a separation, but we need independent protection and independent eyesight on the behaviours that banks undertake with regard to investment customers because we're dealing with Canadians' life savings.

If the professor at the University of Toronto is correct that it's a 3.8% harvest or additional gouge of investor savings.... Canadians have $1 trillion in mutual funds. If the banks are allowed to take 3.8% from that, or even 2% if the numbers were too high, 2% cuts every Canadian's retirement in half. Two per cent compounded over a 35-year period cuts every Canadian's lifestyle in half during retirement. Dr. Ambachtsheer's numbers said that mutual fund costs in 2007 were 3.8% higher. It's draining society at the retirement level.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I have a question for both Mr. Buell and Ms. Watson.

Mr. Buell, you talked about culture. We've heard in the media about employees who sign up people for services they don't really need, perhaps extra banking accounts, but those are minor fees, $3 here, $3 there, maybe $30.

What is the impact on the culture within an institution, in your opinion? What type of culture does that create in the long term? What risks are there for that culture and for Canadian society if people aren't really following these regulations and rules in a good way?

[Sally Watson]

Is that for me?

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

For you and for Stan as well.

[The Chair, Liberal, Wayne Easter]

We'll start with Ms. Watson and then turn to Mr. Buell.

[Sally Watson]

What is the question exactly, in a nutshell? Do you want me to tell you how that affects the employees, that they have to sell all these products to scoop all these extra service charges?

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Yes, essentially. What's the impact overall? Not their health, but if you have to sell a product day in and day out, and you're just skirting the law a little bit—you sign someone up for something and no one can really verify it—what type of culture does that create within an institution or within a company?

[Sally Watson]

It's not great, because of this huge competitive thing. Everybody's trying to grab a new customer whenever they come in the door. You're forced to sell products to people.

You see the same customers every day, day in and day out. How many times can you sell that one person another product? You've just run out of things to sell them. When you do, you're in big trouble, because if you don't meet those sales goals of selling x number of accounts per month or per week, or sometimes even per day, you're in big trouble. You have things put in your file saying that you're not adequate, you're not up to the job, and you're not a team member. Eventually, when it comes time for your performance appraisal to be written, you get absolutely no raise. There is nothing. If you get no raise two or three times in a row, the next thing is the door.

It creates a lot of tension and a lot of pressure. In my very early bank days, when I worked for Scotiabank 40 years ago, I changed the coding on 100 bank accounts to be what they called Scotia 59er accounts. They were retirement accounts. They had extra perks for senior citizens. I got points for selling that account. All I did was go into the system and recode them all. It was something I felt I could do without feeling guilty, because it was a benefit to those people to have those accounts, but at the same time, I got points for selling all those new products.

That's the kind of thing I had to figure out, how to be able to this and still be able to sleep at night.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

If you were young doing that, and as you get older and you move up higher through the ranks in a large institution, does that impact the way people view their jobs?