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Big Banks Profit From Subsidies and Government Inaction on Gouging and Financial Consumer Empowerment

Comprehensive Audits, and New Financial Consumer Watchdog Groups Needed For Effective Bank and Financial Services Industry Accountability

"It is essential, for deterrence, to have strong penalties that we know will be enforced."

Prime Minister Stephen Harper
CTV National News, February 26, 2009

Tuesday, December 8, 2009

OTTAWA - Today, as the last of Canada's big six banks reported their new record profits totalling $14.34 billion, the Canadian Community Reinvestment Coalition (CCRC - Canada’s largest and leading bank accountability coalition) called on the federal Conservatives and opposition parties to implement measures that will actually protect financial consumers from gouging and arbitrary cutting of credit, loans and services by banks and other companies.

Recently, Finance Minister Jim Flaherty has proposed only a voluntary, loophole filled draft code of conduct covering business relations between retail companies and credit card and debit card companies.

And three of the eight credit-card regulations proposed in July by the Conservatives change only credit-card-disclosure requirements, another proposal only addresses consumer consent for increasing a credit limit, and another only limits debt collection practices in one way. 

None of these five proposed regulations will do anything to prevent gouging, nor does the Conservatives' Task Force on Financial Literacy (which is redundant given the existence of the 8-year-old Financial Consumer Agency of Canada (FCAC) among other federal and provincial financial education agencies).

And while the other three proposed credit-card regulations (a 21-day interest-free period (which doesn't come into effect until September 2010), a restriction on one fee, and payment allocation requirements) will protect a few customers from a few charges, none of the proposals will decrease the already excessive credit card interest rates (which are especially galling given the Bank of Canada's prime lending rate has dropped to its lowest level ever), nor the extra interest rate and fee hikes the banks and other companies have unilaterally imposed in the past year, nor their overcharging for various credit card and other banking services.

And none of the Conservatives' proposals will hold the banks accountable for cutting off credit for people and businesses that have made their payments consistently for years and are very creditworthy.

The Conservatives' so-called "Economic Action Plan" offered huge, public-funded subsidies to the big banks of more than $200 billion, but the Conservatives (just as past Liberal governments did) continue to fail to require the banks to do anything in return, especially to ensure the banks charge fair prices and treat all customers fairly.

To their credit, both the federal NDP (also here) and the federal Liberals have proposed in recent months more effective gouging-protection measures, but unfortunately they have not worked together and with other MPs to pass a bill imposing these measures on the big banks and other credit card issuers, nor have they proposed an industry-wide audit which is needed to determine whether banks are treating all customers fairly and what are actual fair prices for all banking services, nor have they proposed any effective financial consumer empowerment initiatives such as creating the watchdog groups using the low-cost method proposed by the CCRC.

Beyond the record-high gap between the prime rate and credit card interest rates, and the regular practice of continuing to charge interest on the full amount of a credit card debt even if most of the debt has been paid off, see for examples of other gouging and excessive profits the following:

"The Conservatives' proposed credit card and debit card codes and regulations are too little, too late to protect financial consumers from gouging by the big banks and other companies," said Duff Conacher, Coordinator of Democracy Watch and Chairperson of the CCRC.

"To help the Canadian economy overall, and to ensure the big banks serve everyone fairly at fair prices, the federal government must stop protecting the banks from accountability and instead facilitate the creation of consumer watchdog groups, and require independent audits to determine if the banks are reaping excessive profits through gouging interest rates and fees, and the arbitrary cutting of some customers' and communities' credit and services," said Conacher.

"Every dollar of excessive profit for the banks, and every person and business the banks unjustifiably cut off from credit, costs the Canadian economy because it means that the banks are overcharging for their essential services and loans, and choking off spending and job creation," said Conacher.

Every survey done in the past decade has shown 90 percent of Canadians believe access to banking services and credit is essential for functioning in society.

The Canadian Community Reinvestment Coalition (CCRC), established in 1997 and made up of 100 citizen groups from across Canada with a collective membership of more than three million citizens, called on federal Finance Minister Jim Flaherty to work with opposition parties for effective bank and financial institution accountability by:

  • as recommended by the federal MacKay Task Force and House and Senate committees in 1998, requiring banks and other financial institutions to facilitate the creation of consumer watchdog groups by enclosing an appeal pamphlet for the groups in their mailings to customers and individual investors -- To see details about this proposal, click here;
  • requiring banks to prove through an independent audit (that goes back at least 10 years) that their credit card and other consumer and small- and medium-sized business loan interest rates and fees do not amount to gouging, with a public report on the extent of gouging issued by the Financial Consumer Agency of Canada (FCAC) -- To see details about this proposal, click here;
  • empowering the Competition Bureau to, as has been done in the U.S. for 20 years, evaluate and publicly report on the number of business loans applied for, approved, rejected and called for specific categories of business borrowers, and the level of competition in basic banking services, across the country -- To see details about how the U.S. has required for more than 20 years, click here.

Financial service industry customers and investors are currently gouged with extra charges that companies in the industry use to pay their more than $200 million annual costs for industry advocacy efforts (advertising, lobbying, political donations and gifts).  The most effective way for the federal government to balance the marketplace is to implement the pamphlet method to give customers and investors an easy way to fund their own advocacy watchdog groups.

With Canada’s big banks reporting a total of more than $16 billion dollars in losses and writedowns in 2008 mainly because of their irresponsibly risky investments, these measures are needed more than ever to stop the banks from hiking rates and fees, and cut lending and services, to recoup their self-inflicted losses.

"No corporation has a right to gouge or unjustifiably cut services, especially when providing an essential service such as banking or trying to recoup self-inflicted losses like the banks are suffering from, but the Conservative government is continuing the negligence of past federal governments by subsidizing the big banks and other financial institutions with hundreds of billions of taxpayer dollars while failing to effectively require them to maintain loans to creditworthy customers and serve everyone fairly and well at fair prices," said Conacher.

"The best thing the federal government can do to help the Canadian economy overall is to ensure effective, ongoing financial services industry accountability by requiring banks to prove their loan and investment interest rates and charges are fair, by auditing bank lending and competition levels in communities across Canada and, as recommended by the 1998 MacKay Task Force and House and Senate committees, by requiring financial and investment companies to distribute a pamphlet in their mailings to customers and investors that invites them to join a citizen watchdog group to watch over the financial industry and federal government," said Conacher.  "At little or no cost to the federal government or the financial services industry, consumers and investors across Canada can be given a very easy way to band together to help and protect themselves through forming and funding their own watchdog groups."

The CCRC proposes first that the federal government empower and mandate the Financial Consumer Agency of Canada (FCAC) to examine for at least the past 10 years, and annually in the future, the levels of profit of the credit card and basic consumer and small business loan divisions of the banks and other federally regulated companies, as well as profits from basic banking service charges.
The FCAC would keep key company information confidential, reporting only the profit margin for these divisions of each company.  If the FCAC found excessive profits (above the corporate average of 15-20 percent), the public would know, and likely that pressure alone would cause interest rates and service charges to drop.  (To see details about this proposal, click here)

Second, the federal government must order the Competition Bureau to audit the lending records of the banks (by tracking number of applications, number of approvals/rejections, and number of called loans in all consumer and small and medium-sized business loan categories), and to evaluate the actual level of basic banking service competition in communities across Canada, for the past 10 years.
Third, the federal government must require the banks and other federally regulated financial institutions to enclose twice each year in their mailings to customers a one-page pamphlet that invites them to join a financial consumer watchdog group.  The federal government must also do the same for all federally incorporated companies, requiring them to enclose a one-page pamphlet in their annual mailing to individual shareholders that invites them to join an investor watchdog group.  This method has been used successfully in four states in the U.S. to form broad-based, self-sustaining watchdog groups for utilities. (To see details about this proposal, click here)

In addition to having the Financial Consumer Agency of Canada (FCAC) examine profit levels for credit cards and service charges for the past decade and annually in the future (To see details about this proposal, click here), and the Competition Bureau examine lending records and competition levels across Canada for the past decade and annually in the future (To see details about the U.S. requires this under the Community Reinvestment Act (CRA), click here -- To see details about the $4.5 trillion in reinvestments that have resulted from the CRA since 1977 (in a PDF-format document), click here -- To see the CCRC's position paper describing how this bank accountability system should work, click here), the federal government should finally actually regulate Canada’s banks and investment companies through the following actions:

  • If the FCAC study shows gouging in the past decade, require banks to refund customers;
  • If the Competition Bureau shows lack of competition in any community, require banks to open branches or subsidize credit unions opening branches; 
  • Require banks to provide detailed information on loans, investments and services to customers, require corrective action and deny mergers and takeovers if banks are not meeting customer needs, as in the U.S. 
  • Every government in Canada contracts money-handling and credit card business to the banks, and should award contracts based on which bank serves the most people well;
  • Facilitate the creation of a Financial Consumer Organization (FCO)  and an Individual Investor Organization (IIO) to help consumers by requiring banks and other financial institutions to enclose an FCO or IIO pamphlet in their mailings to customers, inviting people to join the watchdog groups (To see the CCRC's position paper describing the FCO proposal in detail, click here -- NOTE: Creating such an organization using the pamphlet method was recommended by the Task Force on the Future of the Canadian Financial Services Sector recommended in its September 1998 Report (See Recommendation #56(b) on page 208 of the Report), and the House of Commons and Senate committees that reviewed the report endorsed the recommendation); 
  • Require banks to give customers access to their money as soon as a cheque clears (as 98 percent of cheques in Canada clear in one day), and;
  • Increase the maximum penalty for violating the Bank Act to $50 million (currently, the maximum penalty is $200,000, much too low to encourage compliance), and require the FCAC to disclose the name of violators in every case.
According to Fortune magazine’s 2007 Global 500 report (based on FY 2006 annual reports), Canada’s big five banks were all within the top 35 banks in the world in terms of profits as a percentage of revenues, and profits as a percentage of assets (before their irresponsible investing led to billions of dollars of losses and writedowns in the past two years).

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For more information contact:
Duff Conacher, Coordinator of Democracy Watch
Chairperson of the CCRC
Tel: (613) 789-5753 

To see the CCRC's analysis of the flaws in Bill C-37, which changed the Bank Act and other federal financial institution laws in April 2007, click here

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Canadian Community Reinvestment Coalition
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Tel: (613) 789-5753
Fax: (613) 241-4758
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