FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, March 31, 1998

• 0905

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call this meeting to order.

As you know, the order of reference is pursuant to Standing Order l08(2), a study of the tied selling provisions in the Bank Act.

I'd like to welcome everyone this morning. This morning we have the pleasure to have with us, from the Office of the Superintendent of Financial Institutions: John Thompson, deputy superintendent, policy sector; and André Girard, manager, external communication and media relations.

As you know, you have approximately 10 to 15 minutes to make your presentation, and thereafter we will proceed to a question and answer session. Welcome.

Mr. John Thompson (Deputy Superintendent, Policy Sector, Office of the Superintendent of Financial Institutions): Thank you very much, Mr. Chairman. We actually have no prepared comments to make, but if it's okay with you, I'll give you a few minutes of an introduction as to what OSFI does and how our work relates to the issue before this committee.

OSFI's primary mandate is set out in the legislation, which is to look after the safety and soundness of the financial institutions that fall under federal regulation. This includes all of the banks that operate in Canada, both the schedule I and schedule II banks. It includes a number of the trust companies, most of which are owned by banks these days. It includes most of the life insurance companies that operate in Canada, and it includes perhaps half, if not more than half, of the property and casualty insurance companies that operate in Canada.

In addition, we supervise federally regulated pension plans, those pension plans that are involved with employers in cross-border trade, particularly the railways, the airlines, the harbours, interprovincial trucking, and so on.

The subject we're dealing with today on tied selling relates specifically to the issue of banking, so I will concentrate my comments really on what we do in the area of banking, if that's satisfactory, rather than the other areas.

In the course of carrying out our supervision of banks, we receive from the banks financial statements, which we have filed with us and which we analyse and assess for the financial strength of the institutions, and we carry out on-site examinations at least once a year in each one of the banks.

Resulting from that examination, we prepare a report to the management and the board of the bank, identifying areas where we think they can either improve their internal controls, improve their management of the risks within the institution, or indeed, to raise the standards of their practice to be more in line with the best practices of the peer group of institutions.

We do what we refer to as a risk-based examination. Basically, we try to key in on those areas within the bank that are most risky, that is, are the ones that are most likely to cause a financial problem with the bank, in our view. We do not have the resources, nor do we necessarily have the experience, to look at all aspects of the bank when we look at the financial institution itself.

Our banks in Canada are very complex. There are many subsidiaries within the banks. In many cases, they operate in several countries, and our mandate under the Bank Act is to supervise the bank on a consolidated basis. So we supervise all the entities that fall under the bank, not just their Canadian operations. This is the standard for supervisors around the world in banking, that the supervisor in the home jurisdiction looks after the safety and soundness aspects of the financial institution on behalf, really, of all of the supervisors in the territories and jurisdictions in which the bank operates.

Therefore, we tend to look at operations in the United States, the U.K. and other jurisdictions. We tend to look at different parts of the bank than the banking entity itself, because we never know where the key issue might be when you're looking at a financial institution.

Our focus, as I've said, has been and is under the legislation on the safety and soundness parts of the activities of the bank. We focus really on the financial strength, on the capital position, on its access to capital markets, its ability to raise money, the strength of its earnings, and the core underlying profitable blocks of business within the bank itself to assess, in our view, whether the bank is able to sustain this level of earnings into the future. The earnings, of course, are the most reliable source of capital growth in the future.

• 0910

There are some aspects of the Bank Act that relate to what I would term market conduct issues, and what we're talking about here, tied selling, is a market conduct issue. We do have some responsibilities in that area, but our primary focus, as I've said, is on assessing the financial strength and putting our resources on those key issues in assessing the financial strength that might be a threat to the ongoing viability of the banks.

We do, under the OSFI act, have a mechanism for reporting to Parliament in our annual report each year on the complaints that we receive from the public on the financial institutions we supervise. The provision that is in front of you does include a reference to a specific reporting as a part of that annual report back to Parliament.

By the research that our staff has done in the area of tied selling, over the past 12 months we have received in access of 4,000 questions, complaints or queries on the banks specifically. Of those 4,000, 24 have related to the tied selling issue in banks. Some of those 24 in fact would have, if we really looked at it critically, fallen into the exception clause, in the words that you're looking at in the legislation, as being the permitted forms of linkages of selling one product linked to another one.

We have not actually identified how many of those complaints would actually have met the test of being a coercive or an undue pressure type of a sale, but we did identify 24 of them that did fall into that category.

Mr. Chairman, that's by way of introduction. If there are any questions or comments that you would like me to develop from that, by all means, I'd be glad to do it.

The Chairman: Thank you very much, Mr. Thompson.

We'll just move on to the question and answer session. We'll start with Mr. Schmidt or Mr. Solberg. Who's it going be?

Mr. Monte Solberg (Medicine Hat, Ref.): I just have one brief question. Then, Werner, if you want to ask questions, that's fine.

When you receive these complaints, how do you handle them? What happens to them and what recourse do you have with the banks when you receive those types of complaints?

Mr. John Thompson: Our practice is, on any complaint, whether it's in this subject area or any other subject area, to deal directly with the bank itself, and with the bank's ombudsman if in fact we can't get satisfaction. If the complainant is still unsatisfied, we would deal with the banking ombudsman, from whom I believe you had evidence yesterday. We have in fact from time to time passed complaints on to the banking ombudsman if the individual was not satisfied.

In the final analysis, if this forms a part of the law and it says that banks cannot do tied selling, there are other provisions in the law that give OSFI or the superintendent the power to force action, effectively, to give an order that they are to remedy their ways and their behaviours. If in fact that is not done at all, then we can resort to the courts.

Mr. Monte Solberg: Right now, in certain areas, in handling complaints the banks largely use self-regulation. Is it your experience that the self-regulation mostly works?

• 0915

Mr. John Thompson: Our experience is that self-regulation mostly works. I don't want to make this sound egotistical, but if the superintendent tells a bank that he's not happy with their behaviour and he'd like them to change, that is usually all that is required to get the bank to remedy their ways. There aren't a lot of financial institutions that want to get their regulator upset.

Mr. Monte Solberg: Werner, go ahead. Do you have a question?

Mr. Werner Schmidt (Kelowna, Ref.): I do have a question, and it has to do with the range of financial institutions that OSFI regulates. Does this include the investment dealers group?

Mr. John Thompson: That is not supervised by us. That falls under provincial legislation. We do have memorandums of understanding to work together with the securities commissions to deal with the investment dealers.

Mr. Werner Schmidt: Does the same thing apply to the trust companies?

Mr. John Thompson: Federal trust companies we supervise directly ourselves. Provincial trust companies we supervise—well, we don't actually supervise them; the province does, but we do have access to the supervisors in the provinces, and in some cases we act for CDIC to carry out examinations of provincial trust companies.

Mr. Werner Schmidt: What do you do if there's a conflict between your supervision of one group of financial institutions and another one?

Mr. John Thompson: That's an excellent question. I can't give you a definitive answer without knowing exactly the circumstances.

In some circumstances we have negotiated an arrangement between the two financial institutions that sort of remedies the problem in one institution without unduly hurting another institution. In other cases we have encouraged the sale of a troubled institution, where the other financial institution in the group actually could not afford to solve a financial problem without unduly hurting itself.

Mr. Werner Schmidt: This whole business of tied selling comes out of exactly that kind of a conflict, where one financial institution insists and makes a condition the purchase of another product from itself in order for the client to get a loan.

If this other institution, which could be under your supervision and in some cases is, is the victim, if you will, of this bank's requirement—this condition that they move an RRSP, for example, or other assets from another financial institution to this particular institution as a condition of obtaining a loan, either here or vice versa; both could do this—what do you do in this case?

Mr. John Thompson: If it's within a group of companies that are a related group of companies, I was going to say that it would be unlikely that we would get a complaint from any linkages and related groups—

Mr. Werner Schmidt: Oh, sure. Of course not.

Mr. John Thompson: In an unrelated group of companies we would treat that the same way as we would treat a complaint. We would go to the institution where the request to move the money was made and ask them to remedy that situation. We would then follow that trail down.

I can't give you a definitive answer on what we would do, unless we knew exactly what the circumstances were and whether it was a repetitive action.

Mr. Werner Schmidt: Sure.

Would proclamation of section 459.1, which was in Bill C-82 in the last session, make your job easier in dealing with these kinds of conflicts?

Mr. John Thompson: I'm sorry, I can't cite exactly what was in that particular clause. You'll refresh my memory.

Mr. Werner Schmidt: It's 459.1. It says:

459.1(1) 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.

That's the clear paragraph. There are two that have been called interpretive paragraphs that follow, but let's restrict our discussion to the first one. Would proclamation of that clause help you?

• 0920

Mr. John Thompson: This is not a safety and soundness issue we're talking about here. This is a market conduct issue.

Mr. Werner Schmidt: That's right, it is.

Mr. John Thompson: It is an important market conduct issue. We don't typically go looking for market conduct issues. We deal with them when they are presented to us. So this would give us some legal authorities, when we receive complaints, for dealing with them, because in fact the legislation would be quite clear that this is a prohibited way of doing business, so long as words like “undue pressure” and “coercion” are properly and clearly defined.

Mr. Werner Schmidt: To summarize, then, the answer would be yes, it would help you, but clearly the regulations would have to define “undue” and terms of that sort.

Mr. John Thompson: Right.

Mr. Werner Schmidt: But the clause itself would help you in your work.

Mr. John Thompson: In dealing with the very few complaints we have received, it would help us.

Mr. Werner Schmidt: Thank you.

The Chairman: Thank you, Mr. Schmidt. Thank you, Mr. Solberg.

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. Is tied selling, in your estimation, something that is wrong and undesirable to have as part of the banking system?

Mr. John Thompson: If you want my own personal view, to the extent there is undue pressure associated with linking the sale of one product to the sale of another product, I think it is wrong.

There are individuals who believe it is a very difficult issue to try to define and make distinctions between tied selling and preferred customer treatment within a selling program. Individuals would probably draw the line between an encouragement or an incentive to do business with a particular institution, and undue pressure at different points, depending on your own personal preferences as to whether you are a shopper for services, an advice seeker, or any of those sorts of personal preferences.

My own personal view is when you're at the extreme end—

The Chairman: Excuse me for a second. When you say “in my personal view-”-

Mr. John Thompson: I'm speaking for myself.

The Chairman: You're not speaking for OSFI.

Mr. John Thompson: That's right. I was asked, and that's why I said it was my own personal view.

The Chairman: Okay. We'd be interested in what OSFI as an institution believes.

Mr. John Thompson: We believe that tied selling is not correct.

Mrs. Karen Redman: If I may, just continuing on that vein, we haven't heard anybody say they think tied selling is a good idea. Obviously, part of it's perception and part of it's reality. But you made a comment that you had only 24 tied selling complaints, and you then went on to mention the test of being tied or coercive sales. What is the test in OSFI's estimation?

Mr. John Thompson: We don't have a definition of that.

Mrs. Karen Redman: So when you made that comment, was it made by whoever was dealing with that case? Does OSFI have a definition of tied selling?

Mr. John Thompson: We were actually using the complainant's definition, whatever that definition might have been. If they felt it was tied selling, coercive selling or undue pressure, that's how we categorized it. We did not apply our own standards.

Mrs. Karen Redman: So by the complainant's own standard, when it was investigated it didn't fit that standard; therefore, that's how you decided it really wasn't tied selling.

Mr. John Thompson: No. I'm saying the individual who complained said in their view they were subjected to tied selling, undue pressure, or any of those sorts of categories.

What I said earlier was if we had applied the two clauses, which follow immediately behind the clause that was cited a few moments ago, that allow linkage of sales of one product with another, some of the complaints we received actually might have fallen in that category if we had looked at it critically. But we didn't; we stuck with their definition. If they thought they were subjected to undue pressure, then that's the way we categorized the complaint.

Mrs. Karen Redman: If I may ask just one final question, there seems to be a real schism between the perceived pervasive nature of tied selling in the banking business and what we're hearing in the reports. Do you have an explanation or any view? Has your organization given any thought to why they don't seem to be meshing?

Mr. John Thompson: Do you mean why the perception is that there's a lot of tied selling going on and yet there aren't very many complaints?

Mrs. Karen Redman: Yes.

• 0925

Mr. John Thompson: No, I can't give you an answer for that. We have not assessed that or studied that particular issue.

Mrs. Karen Redman: Okay.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): I guess some of my questions are related to Mrs. Redman's.

You were saying some of the 24 complaints—I take it that's in a year—would be allowable incidents if we go ahead with this. Is there some way you can give us some description of these 24 complaints and actually do the analysis of which ones would have fallen in? Is that unreasonable to ask?

Mr. John Thompson: We probably don't actually have enough detail in our records to go back on that, because the nature of the dealing with the complaint is we capture the information over the telephone or in the letter that is actually given to us.

Ms. Paddy Torsney: Right.

Mr. John Thompson: We would then pass that information on to the institution against whom the complaint has been levied to deal with it. So we may not have captured enough information to actually assess it. We have not carried out an investigation ourselves per se. We have really acted as a conduit to try to get the complaint resolved by the affected individual.

Ms. Paddy Torsney: So your sense is that some of the 24 complaints, and it couldn't in fact be all of the 24....

Mr. John Thompson: No, I don't think so.

Ms. Paddy Torsney: Why are you sure about that? Some of them of them were extremely coercive.

Mr. John Thompson: No, I don't think any were in the extremely coercive category. But the kinds of complaints we have are the kinds we've read about in the newspapers.

Ms. Paddy Torsney: Okay.

Mr. John Thompson: So they fall in that category, and some of them are clear that there was a bit of pressure publicly put on the individual to move their RSP money over in order to get a mortgage, for example. But in other circumstances, it was less clear that there was any pressure put on the individual at all, or in fact, that the linkage of the two products might have actually fallen into the exceptions, getting a preferred rate on one instrument for being effectively a preferred customer—

Ms. Paddy Torsney: Right.

Mr. John Thompson: —of the institution. Some individuals interpret that as linking the sale of one product with another. Other individuals might link that as being treated as a preferred customer. It's that distinction we'd have a tough time drawing, without having a lot more information than we have.

But in the first category, that is, entering into a loan at all and then please send your RSP money over, I think that is a clear violation.

Ms. Paddy Torsney: But what's the remedy for those incidents? Six months later when somebody finally figures out to write to you or to the ombudsman, what's an appropriate remedy? What's the point? The bank gets their hands slapped and the manager is re-trained and....

Mr. John Thompson: The remedy is to fix behaviour for the future so that it doesn't happen again, or at least as often again, if it is in fact a practice and a procedure that's taking place. It's difficult to see what the remedy might be for an individual who has already entered into one of these arrangements, having felt that they were under undue pressure, or in fact what the remedy might be if they felt that they were under undue pressure and then didn't enter into an arrangement. It's very difficult to see what the remedy might be in either circumstance.

Ms. Paddy Torsney: You raised the issue that who knows how many other incidents there are, because some people may have just agreed to the tied selling and feel quite happy about the situation, or they don't have too much of a feeling about the situation. Is it really an issue that people need to know their rights and need to be better educated consumers about how to approach and deal and feel empowered when they go to a bank?

Mr. John Thompson: That in fact may go a long way toward remedying the kinds of issues we're talking about.

One of the things I don't think the public is as aware of as they might be is that a lot of banking services today are available on a negotiated basis. You can in fact today negotiate mortgage rates. You can negotiate a variety of rates that you might get from a bank. And in those circumstances it's understandable that the person on the other side of the table might say, I'll give you something if you give me something, that type of thing. And to what extent is that going on and being confused in the mix of issues that we're talking about here? I think some of this does come down to the public understanding of what is actually going on, because the business of banking is changing in the country.

• 0930

Ms. Paddy Torsney: And what do you say about the CAIFA case? Were you here last night for the CAIFA presentation?

Mr. John Thompson: No. I'm sorry, I wasn't here.

Ms. Paddy Torsney: Those individuals seem to think this stuff goes on all the time. Do you have any opinion about that?

Mr. John Thompson: I can't comment.

The Chairman: You said you saw 24 cases; how many were cross-selling instead of tied selling?

Mr. John Thompson: How would you draw that distinction?

The Chairman: If I went to a bank manager and he said to me that in order for me to get a loan I would have to purchase these products, then that to me is tied selling. If the bank manager said to me you qualify for this particular loan and after that we deal with other products, then that to me is fine because everything is above board. It's pretty clear.

In the first instance I'm being pressured because if I don't do something then I won't be able to access basically the loan or credit.

Mr. John Thompson: If I can put my words into what you've just said, the first category would be an ultimatum that you can't do business with me unless.... And the other one is if you do business with me then I'm going to open up other services to you. It's more of an opportunity. Some of the words that have been reported to us do include the word “forced” and the bank refusing to do certain things.

So I would say on the list I have—and I don't have a list of all 24; they're really trying to identify the range of issues that we have here—maybe a third of them use those sorts of words. One of them deals with...the word “RSP” appears probably in a quarter. The bank wanted the RSP money to do something else, either a mortgage or credit card or something. So those sorts of issues and the word “forced” would probably be associated with a third to a quarter of the ones that we've received.

The Chairman: Sorry, Mrs. Redman.

Mrs. Karen Redman: I'd like to ask a supplementary, because you made the comment that banks, when they hear from the office of the superintendent saying you're not happy with this, will straighten up and fly right and it's self-regulating. And I take that in the context of the fact that banking is being done differently and the fact that people who work at banks have been asked to look at the broad range of services and they're not looking at the silos and that you have to have X,Y and Z to get a mortgage, and it's not all cut and dried.

So I realize there are a whole bunch of grey areas, and I think this is why we're having these meetings, because if it was a really simple issue it would be easily dealt with. And when you hear from people, it's the perception of the vulnerability of people going in, hat in hand, saying, I need this small business loan, I need this extension of my credit, or I need additional credit because my business needs to expand. This is the kind of area that I think we need to deal with, the perception of the person.

If I'm sitting on the banker's side of the table, it may be as simple as saying this would be a good thing to do, and then I may be thinking in my mind I'm being very expansive and looking at the full range of needs. But Suzie business person on the other side is saying, I really need this loan, and if the subliminal message is that I'd better get my RRSP money over here, what option do I have since I really need this loan? And put that on the backdrop of rural Canada, which may have one banking institution, so I can't easily go down the street and shop the offer that this banker's giving me because I really don't have a lot of options.

• 0935

So if we're looking at trying to be fair to everybody, but certainly to protect the rights of the consumer...to me that's at the heart of this issue. And your answer is?

Mr. John Thompson: You're correct. And in fact what you've said is really consistent with what we've done in collecting our information. If the individual felt that he was being subjected to undue pressure or coercion, enough to comment to us, then that was what we effectively used as a definition of tied selling, not whether it passed our tests or in fact a legalistic test, but whether the individual felt that this was what in fact happened.

What I was saying earlier is that there may be a subset of those individuals who, even though they feel they've been subjected to pressure, would not in fact pass the legal test of being subjected to undue pressure. And it may be that we would be expecting—I'm picking a number here because we obviously don't have that test—six or eight of those a year.

The Chairman: Thank you, Ms. Redman. Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

I want to follow up on what Karen said, but in a different way, and that is that with respect to small-town Canada. Possibly only 15% or 20% of the population is small-town Canada, and then you have the other percentage. And the loans are usually smaller in small-town Canada, much smaller than you find in 80% of Canada, which, a minute ago, Mr. OSFI...and I'll ask a question to Mr. OSFI.

The Chairman: Mr. OSFI?

Some hon. members: Oh, oh!

A voice: Mr. Thompson.

Mr. Gary Pillitteri: I know. He was speaking earlier for himself or for OSFI. And I'll ask the question of OSFI.

A minute ago you said that banking is changing and you're negotiating back and forth. Now, what you're giving me as far as what I'm giving you.... Having the game played the same is, with the insurance companies or other lending institutions, when they offer a package of two or three things together, or the bank offering the same thing. Unless there is a personal loan, you would really not hear any complaints. If you had any complaints from the other side offering a package in which there are two or three different things, but since no demand loan was involved...but you're having complaints about the other side offering two or three products as a package of products for sale. Or are those complaints only about strictly loans and banks?

Mr. John Thompson: A couple of our complaints here have in fact dealt with credit cards, with an individual wanting a credit card from a particular institution and the institution saying that if they had the RRSP money with that institution, then they would consider their application for a credit card. So we do get other packages.

Ms. Paddy Torsney: A credit card is a loan, though.

Mr. Gary Pillitteri: It's not all banks, then.

Mr. John Thompson: That was a bank.

Mr. Gary Pillitteri: It's a bank.

So those are the only complaints that you have. You haven't had any complaints of, let's say, an insurance company selling a package of three different products, and saying, “But if you had this, we could give you that at a better rate, and if you had that, we could give you this one at a better rate.” You've had no complaints?

Mr. John Thompson: We've had one insurance tied selling claim. I don't have the details on that. The individual thought he was being subjected to a tied selling situation.

Mr. Gary Pillitteri: But since there are few people...what percentage of people would you say is actually borrowing or trying to make this a deal, selling a package from insurance companies versus banks? What is the percentage trying to do this?

Mr. John Thompson: I couldn't guess at that. I would really have to guess to give you an answer to that. I don't know.

Mr. Gary Pillitteri: So in other words, if you're saying you had one complaint that involved an insurance company and it's just possibly having 100 people...and here where they have 10,000 people, you have 24 complaints, so it would almost be the same.

• 0940

Mr. John Thompson: In the statistics we published a year or so ago, we had probably twice as many inquiries or complaints registered against the banks than we had against insurance companies. Relatively speaking, the one complaint of tied selling on insurance is actually a lower incidence than the 24 complaints against the banks, if I can answer it that way.

Mr. Gary Pillitteri: Thank you.

The Chairman: I have a couple of questions, if I may.

Some people, including Mr. Clark—you're probably aware of the case—stated that we should establish kind of a dual system with respect to tied selling and that we have a system of self-regulation, with the federal legislative stick in the background. How practical is such a suggestion?

Mr. John Thompson: I'm sorry, I'm not familiar with the details of the suggestion, to be honest. Is it with us being really just the stick behind it, the enforcer?

The Chairman: That's right.

Mr. John Thompson: That's effectively what we are in this legislation.

The Chairman: That's if this is acted upon, if the recommendation is made.

Mr. John Thompson: That's effectively what it is. We're the recipient and the conduit for complaints from unsatisfied customers. We would deal with the bank's own ombudsman to get it resolved. If that wasn't resolved satisfactory, we would go to the banking ombudsman. If we still couldn't get satisfaction and it was a repetitive behaviour that was going on, we would have to treat that very seriously. So we do have a stick to enforce remedial action.

The Chairman: If section 459.1 is enacted, whose job will it be to enforce this section? Will it be yours?

Mr. John Thompson: Yes, it would be. In fact, our job is to enforce all of the sections of the act.

The Chairman: Can you explain this to me: Earlier you said that you've actually sent some of the complaints back to the bank ombudsman. Is that correct?

Mr. John Thompson: The bank's own ombudsman?

The Chairman: Yes.

Mr. John Thompson: We sent it back to the institutions themselves, and in many cases, that's the last we've heard of it.

The Chairman: So they dealt with it.

Mr. John Thompson: We presume it got resolved to the satisfaction of the customer.

The Chairman: So you'd be like an extra step, right?

Mr. John Thompson: Yes.

The Chairman: By the way, how many people know you exist?

Mr. John Thompson: All the banks know.

The Chairman: This is an industry and consumer issue. It's a quite serious one.

Mr. John Thompson: It is a real issue.

The Chairman: You're not that well known, are you?

Mr. John Thompson: I wouldn't think so. Anyone who is familiar with the financial press would probably know who we are. Anyone who is familiar with the banking and insurance business in this country would probably know who we are. The average person on the street probably does not know who we are. Even if you described what we did for a living, they probably still wouldn't know who we were.

The Chairman: So would you say that the bank ombudsman is better known that you?

Mr. John Thompson: I think as a concept they may well be.

The Chairman: Okay. Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): I think the banking ombudsman received its profile from the industry committee, if I'm not mistaken. That's probably why he's better known than OSFI.

You mentioned a few seconds ago that you would be responsible for enforcing this particular section if it were enacted. Given that, I would think you would also want to ensure that the course of selling and undue pressure were certainly quite clearly defined. How would you define them? How could you help us define them?

Mr. John Thompson: Right off the top of my head, I would say that's a very difficult issue. We would have to spend a great deal of time on that.

Mr. Tony Valeri: That is really why we're here.

Mr. John Thompson: I don't know how you define that, to be honest.

Mr. Tony Valeri: Have you any idea at all to help this committee define these terms? That is essentially why you are here. That's really what we're struggling with, and I would hope, given your experience, you would be able to at least provide this committee with some indication of how you would help us define those two terms.

• 0945

Mr. John Thompson: We have not as an organization tried to define these terms. We have presumed we would work with the Department of Finance and other officials to put a definition in the regulations. We have not tried to come up with a definition ourselves.

Mr. Tony Valeri: Could you come back to this committee and provide us with some insight into the work you're doing at some point?

Mr. John Thompson: As I said, we're not doing any work at the moment to try to define these terms. If this legislation were enacted, the regulations would become a very important part of the enforcement. For that, we would work very closely with the Department of Finance to actually come up with those definitions, but we haven't attempted that body of work at the moment.

The Chairman: I will go to Mr. Schmidt.

Mr. Werner Schmidt: Thank you. On part of the answer you gave us just a moment ago, are you the final court of appeal to the bank ombudsman?

Mr. John Thompson: I think the answer to that question is no, although I would not want to say I'm an expert on it. The banking ombudsman is here in the room and he would probably be able to answer that question.

Mr. Werner Schmidt: That's a very interesting answer, because it seems to me you've given the exact opposite answer now from what you gave to our chairman just a moment ago. There seems to be a contradiction here. Perhaps you can clarify.

Maybe there isn't a contradiction, but if I can recall what you said, if the bank ombudsman doesn't deal with the issue, it goes to the Canadian Bankers Association ombudsman, and if it isn't satisfied there it would come to you. That sort of sequence would suggest you at least perform the role of the final court of appeal.

On the other hand, when you were asked whether you were the final court of appeal, you said you were not. So the question really exists in my mind as to where this thing is ultimately resolved. If it can't be resolved at the local bank level or at the overall ombudsman level and you're not the overriding authority, where does this thing end?

Mr. John Thompson: That's actually a very good question. Our thinking on this particular piece of legislation was that we would enforce remedial action on the part of the bank to change its behaviour if there was a pattern of behaviour, not necessarily on a single violation.

Mr. Werner Schmidt: Okay.

Mr. John Thompson: The banking ombudsman would be more specifically attuned to the issue of each and every complaint that had been registered with the ombudsman.

On the final court of appeal question, if you're talking about a case-by-case basis—

Mr. Werner Schmidt: Yes, I am.

Mr. John Thompson: —I think you're talking about the banking ombudsman. If you're talking about a change in behaviour on the part of the bank, then I think we have a role in that particular function. Our role would be to change behaviour in the future. The banking ombudsman's role would be to remedy a problem already in existence.

Mr. Werner Schmidt: If a problem were not resolved at the senior, if you like, ombudsman level, what would be the redress for damage that had resulted from that particular abuse, let's say, of a provision like tied selling?

Mr. John Thompson: I presume you would have access to the courts.

Mr. Werner Schmidt: Okay.

The Chairman: Thank you, Mr. Schmidt. So you're saying if a consumer at the end of the day is not pleased, he or she would have to go to court.

Mr. John Thompson: In the same sense, if we wanted to change a bank's behaviour and it refused to change that behaviour and there was a pattern of that behaviour being repeated over and over again, we would have to go to the courts to enforce it if it did not comply with our order.

The Chairman: Explain something to me. You have referred some cases to the bank ombudsman, and your role, as you define it, is to “change behaviour”. When did the first case you dealt with of tied selling happen?

Mr. John Thompson: Do we know?

Mr. André Girard (Manager, External Communications and Media Relations, Policy Initiatives and Communications Division, Policy Sector, Office of the Superintendent of Financial Institutions): We just have the data for the last year.

Mr. John Thompson: We don't actually have a specific case.

The Chairman: Was it before last year? Did you have a case before last year?

Mr. John Thompson: I think we started collecting information on tied selling specifically last year.

The Chairman: Yet you have a problem defining what coercion is, or at least you use the customer's definition of it.

Mr. John Thompson: We use their definition, whatever their definition was. We didn't ask them to define it. If they said they were subjected to tied selling, pressure sales, or any of those sorts of things, we put it in this category.

• 0950

The Chairman: In your role as saying the institution's going to change behaviour, how do you measure that? How successful have you been in the past year?

Mr. John Thompson: In this particular area?

The Chairman: Yes.

Mr. John Thompson: None of these complaints have come back to us, after they've gone either to the bank or the banking ombudsman, as being unsatisfactorily resolved. I presume the customer was either satisfied with the outcome or that they had their hearing in the appropriate offices, or whatever.

If in fact there was a pattern of abuse of this kind of legislation, during our annual examinations we do have the ability to look at what is going on and how the bank is controlling this sort of activity within the bank. Our first action would be to make sure they had internal controls to police their own staff, to make sure they were complying with the law. If they did not have those controls in place, or if their stated practice was to be in violation, that's when we would take action.

The Chairman: Let me ask you a question. All this has happened without section 459.1, is that correct?

Mr. John Thompson: Yes.

The Chairman: None of those customers have come back to you.

Mr. John Thompson: No.

The Chairman: Have you followed up with them?

Mr. John Thompson: No.

The Chairman: You have not. And because they didn't come back to you, you figure they must be satisfied. That is sort of a natural human reaction, is that right?

Mr. André Girard: We do get copies of the correspondence between the banks and the customers—we're cc'd on all of this material—so there is a way for us to track how the process is going.

Mr. John Thompson: They're supposed to inform us how they've resolved the issue.

The Chairman: If you have the best interest of the customer or the client at heart—there's no reason why you shouldn't—and all these people are not coming back to you, then the question you have to ask yourself is why is section 459.1 necessary.

In essence, what you're telling me is that as long as you're there and people know you're there—I don't think people know you're there, by the way, I'm convinced of that.

Mr. John Thompson: I would agree.

The Chairman: So you need to get yourself better known to the consumer. Then I guess you're obviously relying on the banks to deal with this issue internally.

Mr. John Thompson: Yes, we are.

The Chairman: But you're happy with that system, then.

Mr. John Thompson: Well, yes.

The Chairman: Yet you're telling me that we should act on section 459.1.

Mr. John Thompson: No. You asked me whether this would be a useful tool. It would help us to resolve a few of the situations. If they could not be resolved through the normal course of actions, it would give us one extra tool to deal with an institution that was in violation of this kind of activity.

The Chairman: Which cases were you not able to deal with because you didn't have this?

Mr. John Thompson: None, so far.

The Chairman: None. So up to now, you're saying you can work within the existing framework.

Mr. John Thompson: The ombudsman system seems to deal with these sorts of issues quite reasonably.

The Chairman: Thank you.

I'm going to go to Ms. Torsney.

Ms. Paddy Torsney: The people who know about you, you've commented, are the people who are pretty conversant in financial issues and what have you. Yet 24 of them thought they had been coerced. Doesn't that concern you, that there's a whole whack of people who don't even know about you, haven't written to you, who have either been coerced or don't even know they've been coerced?

Mr. John Thompson: One of the comments that is part of our data collection is who actually called us or contacted us on behalf of the client. Was it the client himself or herself, or was it somebody else?

Ms. Paddy Torsney: Okay.

Mr. John Thompson: Probably half the calls we got in this particular area are from people who are calling on behalf of a client.

Ms. Paddy Torsney: What kind of people?

Mr. John Thompson: It might be a broker, an insurance agent, an accountant or someone like that. But it is somebody who probably is knowledgeable about the role that OSFI actually plays in this area.

Ms. Paddy Torsney: You want to change behaviour but you don't know how the cases are resolved.

• 0955

Mr. John Thompson: Except that we have received notice from the banks, in their communications back to the customer, on how they've resolved it. But we have not followed up with the customer to find out if they were happy with that resolution.

Ms. Paddy Torsney: So how are you changing behaviour?

Mr. John Thompson: At the moment, we're not effectively changing behaviour.

Ms. Paddy Torsney: Don't you think there's a certain number of people you've never heard back from who felt exhausted? They'd gone to OSFI, they had been redirected back to the ombudsman, they had been through the.... Well, apparently they hadn't been to the one ombudsman, because he's only had one complaint. But these people have gone through the process and figure there's probably nobody else. They have felt there was no point in going back to you. You've already dealt with them and you've passed them on to somebody else.

I'm a little concerned that there really is no resolution. There is the bank telling you how it has been resolved, but you have no idea whether in fact those 23 cases are still out there.

You say that when you do the review of the banks you bring up these cases. Is that if they're not resolved or if they are resolved?

Mr. John Thompson: We do that if this is an issue within the bank, in our view. In any area where there's a violation of the legislation that is brought to our attention, we would see what their institution is doing to remedy that kind of thing. This piece of legislation would be in that category. So if we were aware of repetitive behaviour, or misbehaviour, in this particular area, then we would see what the bank was doing about controlling it to make sure they're in compliance with the legislation. It's basically a compliance issue.

Ms. Paddy Torsney: Okay. I'm wondering which banks make up the 23.

Mr. John Thompson: I don't know. I would presume it's evenly spread. It usually is.

Ms. Paddy Torsney: But you don't know how they're resolved and you need this legislation to bring it forward in their reviews. You don't know how to resolve it.

Mr. John Thompson: Well, no. This would give us one extra step or one extra hammer that we don't have. But we've not found ourselves having to apply this kind of mechanism to date.

Ms. Paddy Torsney: Okay.

Mr. John Thompson: It would clearly make it a violation of the law to do this, and that would give other sections of the legislation enforcement powers. Without it, we have moral suasion. In any event, so far that moral suasion has worked.

Ms. Paddy Torsney: You think it works, but you don't know.

Mr. John Thompson: We wouldn't know. If it was law, we wouldn't know either.

The Chairman: I have one question to follow up on something Ms. Torsney said.

In reference to your role to change behaviour, because I think that's very important, if tied selling is going on, it's wrong. That behaviour is wrong. There's no question about that. I think everybody agrees. But you said that your role is to change behaviour. Then another question was asked about your role and you said you're not doing that yet. What do you mean you're not doing that yet, if that's your role? Is it because the number is only 24 and out of those there are very few? I mean, what's it going to take for you to direct banks to change their behaviour?

Mr. John Thompson: We would need evidence that these sorts of issues are not just one-off or rare occurrences, that there's evidence of a pattern of misbehaviour. That's what we would go after to change behaviour, if there were a pattern of behaviour with an institution, not just an enthusiastic person in the branch trying to better the performance of their particular operation. That kind of enthusiasm could lead to the kind of situation we're talking about and is more of a one-off situation than a pattern of behaviour.

But if it were a pattern of behaviour, that's where we could influence change.

The Chairman: You obviously think—

Mr. John Thompson: With this legislation or not, we could do that.

The Chairman: So you obviously think it's not there yet. You don't think this is an industry-wide practice.

Mr. John Thompson: I don't think there's rampant misbehaviour.

The Chairman: Okay.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

We recognize there's not an official policy at any of the major banks advocating tied selling. There may be incentives at the branch level for people to engage in these practices. I know that as a member of Parliament I do get calls from constituents. It could be argued that they're anecdotal, but there are still enough of them that the practice may be occurring.

• 1000

But have you looked at tied selling in the context of globalization? And have you looked at tied selling from the perspective of what Canadian banks are exposed to in terms of foreign competition now, be it Wells Fargo or ING Bank, who are effectively cherry-picking particular lucrative areas that were previously the exclusive domain of Canadian banks? I think you might find that globalization and competition probably have more ability to self-regulate this activity than any government body.

Secondly, if you also look at tied selling in almost every industry, not just financial institutions...do you ever look at something like GMAC? To my immediate left is someone who's spent some time in the automobile industry as well, and arguably, GMAC has used tied selling as well, with car financing.

It's very difficult to regulate this. What is tied selling and what is relationship selling? I must say I'm disappointed that more effort hasn't been put into defining these two, because it's very easy for politicians to stick their collective chests out and proclaim that this is fundamentally wrong, but first of all, before we declare it fundamentally wrong, maybe we should define what it is.

The Chairman: I did already. You weren't here.

Some hon. members: Oh, oh!

Mr. Scott Brison: Based on what I've heard, it hasn't been defined. The question has been asked since I've been here. The fact is that it is very difficult to define. It is occurring and I don't know how you can police it, but have you looked at the globalization side of it and how it's impacted Canadian banking, effectively providing better services in particular areas?

Mr. John Thompson: We haven't actually looked at it analytically in that sense. What we're dealing with here is a provision in the Bank Act itself; we're not dealing with a provision in the Insurance Companies Act or any of the other acts that we supervise, where the same sorts of issues may actually exist. This is a provision in the Bank Act itself, so it's not even going into the Trust and Loan Companies Act or the Insurance Companies Act.

But you're quite correct: this is not a problem that's unique to banking.

Mr. Scott Brison: Thank you.

The Chairman: Thank you, Mr. Brison.

That concludes the questioning, unless Mr. Casey has a question.

Mr. Bill Casey (Cumberland—Colchester, PC): Let me see...do I have a question?

The Chairman: I guess you don't.

Some hon. members: Oh, oh!

Mr. Bill Casey: I guess I don't.

The Chairman: Mr. Thompson and Monsieur Girard, thank you very much. I think you've been quite helpful. We'll probably come back to you for some further questioning on this issue. It's an issue that's not black and white, obviously. There are a lot of grey areas that we have to analyse as a committee. Thank you very much.

Mr. John Thompson: Thank you.

Mr. André Girard: You're welcome.

The Chairman: We will suspend for approximately two and a half minutes.

• 1004

• 1011

The Chairman: I'd like to call the meeting to order and take this opportunity to welcome representatives from the Canadian Bankers Association. We have with us Alan Young, vice-president, policy division; Ms. Anne Lamont, vice-president, external and government affairs; Kelly Shaughnessy, senior vice-president, CIBC; and Brian Haier, senior vice-president, retail branch banking, Toronto Dominion Bank.

Welcome, everyone. You probably know how this committee operates. You have approximately ten to fifteen minutes for your presentation and thereafter we will engage in a question and answer session. You may begin.

Mr. Alan Young (Vice-President, Policy Division, Canadian Bankers Association): Thank you, Mr. Chairman. We have distributed through the clerk a copy of my opening remarks this morning in our “Building a Better Understanding” portfolio.

The CBA is pleased to have the opportunity to address the members of this committee on this important issue of tied selling, and we'd like to thank you for your invitation to be here today. We also look forward to receiving your questions at the end of my brief remarks.

We understand this committee has been asked to recommend whether or not section 459.1 of the Bank Act dealing with tied selling should be proclaimed.

Our message today is simple. It has two parts. First, we believe the issue of coercive tied selling has been and can continue to be best dealt with by responsible self-regulation. Second, if members of this committee do not agree with us that self-regulation is appropriate and this particular section is required, we believe the same provision should apply to all federally regulated financial institutions that provide loans to consumers.

As your predecessors on this committee noted last year, and as you may be finding yourselves, the issue of tied selling can be complicated. Two very simple examples demonstrate part of this complexity.

In the first example, a customer comes into a bank branch looking for a residential mortgage. Her lending officer says the bank would be delighted to provide her with a mortgage at a rate of x percent. The officer goes on to say if the customer would agree to take out a credit card, the bank would take half a percentage point off the mortgage rate. That is not coercive tied selling.

In the second example, the same customer seeks the same mortgage at the same branch. The lending officer indicates that the customer qualifies for the mortgage at x rate of interest, but says the customer cannot get that mortgage unless she also takes out a credit card. That is an example of coercive tied selling because the customer could not acquire the mortgage unless she also took the credit card.

In our first example, there is a clear customer benefit. The customer could still obtain the mortgage, whether or not she took the credit card, but if she voluntarily agreed to take out the credit card, she would receive a beneficial rate on the mortgage. This sort of customer benefit has been recognized by the Competition Bureau, which said in its submission last fall to the task force on the future of the financial services sector:

At some stage in the process of providing a customer with these products, the financial institution must incur the cost of assessing the credit worthiness of the customer. Once an institution has incurred this cost for the provision of one product, it need not incur it again to provide the same customer with other credit-related products. By bundling a group of such products together, the institution provides these services at a lower cost to the consumer than if each product had to be purchased separately.

The Competition Bureau goes on to say:

The Competition Bureau would therefore recommend against an outright ban on tying in any market unless it is clear that the only motivation for a tie is to foreclose competition.

Your predecessors on this committee made a similar point in 1996 when they said in their report on the federal government's financial institutions white paper that non-coercive cross-selling may result in savings to customers who often find package sales attractive. This sort of customer benefit was also recognized in the hearings before the finance committee last year on Bill C-82, which dealt in part with the issue of tied selling.

• 1015

A representative of the Independent Investment Dealers Association at that hearing last year, Mr. Robert Schultz of Midland Walwyn, said it was appropriate that a customer who brought more business to a specific financial institution should get a better rate. As he concluded, “To me, that's cross-selling, not coercion. People can make the choice.” And we agree. Whether it's a happy meal at McDonald's or a price break on your mortgage, if it's bundled with other products, consumers want the innovations and cost benefits that come from relationship pricing, cross-selling and product packages. Our challenge and yours is to ensure that the steps that are taken on this matter do not prevent consumers from obtaining these financial benefits. Therein lies some of the complexity of this issue.

The issue is complex in other areas as well. There are instances, for example, where it is legitimate, indeed necessary, to link products or services together. Banks are responsible for safeguarding their customers' savings. Therefore, banks must ensure that each request for credit is assessed against the individual's ability to carry and repay the debt. In some instances, a borrower may be asked to obtain a transaction or operating account with the bank, refrain from taking on additional debt, or provide adequate security as a condition for being granted the loan or credit.

Our statement on tied selling, copies of which you all have received, makes it very clear that any such requirements must be only for the purposes of managing credit risk and must be consistent with the level of risk being undertaken. This is good, prudent credit management.

It's also a practice that's clearly recognized by the Competition Act, which provides in section 77 an exemption that allows financial institutions in the business of lending money to engage in beneficial tied selling for the purpose of better securing loans made by that institution. It's also recognized in section 459.1 of the Bank Act, the section under review today.

As you know, in April 1997 the then chair of this committee, the Honourable Jim Peterson, urged all financial institutions to adopt a code of conduct on tied selling. While we believe that real, legitimate occurrences of tied selling have been rare, we took up the chairman's challenge. After extensive discussions among Canada's banks, we were the first industry and remain the only industry in the financial services sector to adopt and publish a statement on tied selling.

We have publicly called on other parts of the financial services industry to follow our lead and to adopt a tied selling code of conduct and complaint handling mechanism. We are hopeful that members of this committee will support our challenge to the rest of the industry. The statement we have adopted sets out the bank's commitment, our pledge that no bank will impose undo pressure on or coerce a customer to obtain a product or service from anyone, including the bank and any of its subsidiaries and affiliates, as a condition for obtaining a loan from the bank.

We've intentionally modelled our statement on section 459.1 to ensure that it met with what we understand to be Parliament's objectives in that section. The statement is supported by Canada's banks and sets out a clear commitment to educate bank staff to deal with the issue. It's been made available to customers and bank branches across Canada. It's on bank websites, it's on the CBA website.

The banks are monitoring customer feedback and are reinforcing sales training to ensure that their employees understand the commitment we have made. And if there are complaints—and as we've heard over the last day and a half, there are—banks have established an ombudsman process to investigate and address customer complaints, including tied selling.

Information regarding the individual bank ombudsmen and the Canadian bank ombudsman is also available through the branches and we're working to increase awareness of this dispute resolution process. Canada's banks encourage any customer who has a concern with the bank's selling practices to raise these issues at their branch and, if they're not resolved there, to make use of the bank ombudsman process. The process is there and it works. If there are complaints, customers have clear and effective recourse at no cost to them.

It is our view that a self-regulatory approach is the most effective means of addressing tied selling in the rapidly changing financial services marketplace.

• 1020

We agree with what the then chair of this committee said last year:

we urge all financial institutions over the next year to adopt their own codes of conduct to look at this issue, to educate their employees and their customers. We would urge that, at least in the case of banks, if there are complaints from customers or persons affected indirectly by tied-selling, that they can go to the bank ombudsman or to the industry ombudsman.

Mr. Peterson went on to say:

it is my wish, after some reflection on that matter, that there will not be a problem and if there is a problem the institutions themselves will have regulated it and looked after it. I would much prefer to see, evolving out of this process, a regime of self-regulation.

The chairman of the committee concluded by saying:

to proscribe it [that is coercive tied selling] by law could lead to an incredible amount of legislation, timely and costly as the courts endeavour to sort out whether particular activities are coercive tied selling.

We think that is exactly the right approach, and that is why we have put in place a self-regulatory regime with a means of handling consumer concerns through the ombudsman system. In our view, legislation should be the last resort, after industry efforts to address the issue have been properly tried and found wanting.

One concern we have is that legislation and the jurisprudence emerging from it in this complex area could inhibit competition, stifle innovation and constrain the ability of financial institutions to offer beneficial arrangements to their consumers. Dealing with potential tied selling through legislation, with the attendant need to deal with a new government regulatory body or OSFI and potentially the courts, would make the matter potentially more complex, cumbersome and costly for the consumer.

The standard we should be looking for is an effective, simple and inexpensive system for addressing the relatively few cases that arise. We believe we have that with our statement on tied selling and our self-regulatory system.

Canada's banks believe the self-regulatory system called for last year by this committee should be allowed to work. But whatever this committee decides, we urge you to recommend that it apply equally to all federally regulated financial institutions offering loans to consumers. All companies that offer more than one product or service have the potential for engaging in coercive tied selling. It is self-serving and disingenuous to suggest that only banks might be susceptible to engaging in this activity.

Not to apply the same legislative provision to all other federal institutions would create different consumer protection rules for different sectors of the marketplace that offer a similar range of products and services. Bank customers could look to the law, but not customers of other institutions. A two-tiered approach to consumer protection is not a rational outcome, and quite frankly, not to do so would be to place unfair competitive restrictions on one part of the sector only.

We are aware that there were some views expressed at the hearings last year that constitutional considerations led the federal government to limit the tied-selling provision to the Bank Act only. With respect, our view is that this position does not withstand scrutiny. The federal government is fully able to legislate in this area in respect of federal trust companies, federal insurance companies, and federal cooperative credit associations. Indeed, the existing subsection 416(5) of the federal Trust and Loan Companies Act and subsection 381(5) of the federal Co-operative Credit Associations Act prohibit the exercise of pressure on a borrower to place insurance for the security of deposit-taking institutions.

Last year Bill C-82, which amended the Bank Act, also amended the federal Insurance Companies Act and the federal Trust and Loan Companies Act regarding the cost of borrowing disclosure to consumers and governing the collection, use and disclosure of customer information. The federal government has already asserted its constitutional authority to protect customers of federal financial institutions.

In this regard, we agree fully with the then chairman of this committee last year when he said that:

I am concerned that all our financial institutions, if they are brought into a regime of tied-selling, will not be under the same regime. I'm not sure that consumers always differentiate between a bank, a trust company, a loan company, or even necessarily an insurance company or a co-op. I think we owe it to them as federal regulators and as provincial regulators to have a regime which is harmonized and which is consistent.

• 1025

Establishing and maintaining a strong relationship of trust and confidence with customers is the a cornerstone of successful banking in this country. Canada's banks respect the personal choice of each and every client. Historically, Canada's banks have successfully guarded against selling practices that could be regarded as coercive. Self-regulation has worked, and the banking industry believes that responsible self-regulation can continue to effectively protect the interests of its customers.

Thank you very much. We look forward to your questions.

The Chairman: Thank you very much, Mr. Young.

We'll begin with Mr. Solberg, followed by Mr. Schmidt.

Mr. Monte Solberg: Thank you very much, Mr. Chairman, and welcome to the CBA.

I guess my first question has to do with the allegations made—they're not even allegations any more, I guess—by Mr. Clark with respect to his experience with the Royal Bank. Given the fact that the industry has been self-regulating with respect to tied selling at least for probably a year, why would something like what happened to Mr. Clark happen? How do you respond to people who would say, “Well, self-regulation obviously didn't work insofar as at least it didn't prevent it”, although I know you would respond that certainly the banks responded to it. I wonder how you would respond to that.

Mr. Alan Young: I'll address it just initially, and then ask Ms. Lamont.

My reaction to the case of Mr. Clark is that it's a perfect demonstration that self-regulation does work. We don't have a section in the Bank Act dealing with this particular situation. Through a self-regulatory system, Mr. Clark, as I understand, had his case heard and was satisfied.

Ms. Anne Lamont (Canadian Bankers Association): I guess I'd just like to reiterate that, and I don't want to get into the individual circumstances of Mr. Clark's situation. However, I think that on an ongoing basis for many years, we've been dealing with training in terms of sales practices with our front-line people, and clearly, with 55,000 employees, we have the appropriate policies in place. But there may be opportunities where someone goes beyond the line in terms of using certain language that doesn't necessarily fall within our guidelines.

However, to reiterate Mr. Young's point, this is clearly a situation where Mr. Clark did write to the chairman, and he responded. I happened to notice that Mr. Clark left a package of materials with you yesterday, which includes a letter back to our chairman saying that the situation had been resolved to his complete satisfaction and he remains a client at the bank.

I would like to take the opportunity to say that what this particular instance with Mr. Clark did, though, was also clearly raise the level of awareness within our own organization. We took it as an opportunity to reinforce it with all of our sales staff. We have a national sales call bi-weekly where we do our touchstones—we touch base with every senior sales manager across the country—and we took the opportunity to raise the issue about tied selling.

Our chairman had sent out a letter as part of the self-regulatory process at the end of January, reinforcing our commitment to treating our customers in a certain way—with respect and appropriate behaviours—and as you know, we also incorporated the tied selling into a “Straight Talk” brochure for our customers. We took that opportunity of the Clark situation to reinforce that through our whole organization.

Mr. Monte Solberg: Switching gears, you mentioned that you believe that the rule should apply to all financial institutions if it gets down to that—if indeed this section is proclaimed. Do you have any reason to believe that other financial institutions are currently engaging in tied selling?

Mr. Alan Young: As I said in my opening remarks, it's clear that any organization that offers more than one product has the potential to engage in that activity.

Speaking for me personally, have I had an experience? Yes, I've had an experience with beneficial selling. When I renewed my auto insurance last year, I was told by my insurer that if I brought my house insurance over to that company, I would receive a 5% reduction in my auto insurance. That's an advantage to me, so of course I took advantage of that opportunity.

Mr. Monte Solberg: I guess the final question I have is this. Mr. Clark described his vision of self-regulation. It would be self-regulation, but with a sort of a federal statute at the end of it. If the banks didn't fall in line or financial institutions didn't fall in line and abide by the spirit of the discussion that we've had over the last little while about tied selling, ultimately there would be recourse through the federal government. I wonder how that aligns with your vision of what constitutes self-regulation.

• 1030

Mr. Alan Young: With respect, I think that if there is a statutory provision, then there is no self-regulation. The two aren't consistent.

The Chairman: Thank you, Mr. Solberg.

Mr. Shaughnessy.

Mr. Kelly Shaughnessy (Canadian Bankers Association): I would just like to add to that.

I came in during the OSFI appearance. Even if this regulation is not proclaimed, we'll be told that if OSFI drops in and says we have a problem in this or that respect, then we in the banks will pay an awful lot of attention, I can assure you of that.

So while it doesn't have to be proclaimed in the act itself, I don't think there's any bank chairman in this country who would not pay attention to the Office of the Superintendent of Financial Institutions coming in and saying you've got a problem here so you better straighten it out.

So I don't think you need it proclaimed in the act. I think there's enough moral suasion from your industry's regulator such that you do have to pay attention to him or her.

The Chairman: Thank you, Mr. Shaughnessy.

Mr. Schmidt.

Mr. Werner Schmidt: Thank you, Mr. Chairman.

Thank you for appearing before the committee. I think you're the people who are really on the carpet, I suppose, in one sense, because you're the focus of all this attention right now.

I like the way you made the comment that it should be extended to all financial institutions. I think it's only fair. I personally like that.

I'd like to ask you, if you could, to explain, in terms of what you said here this morning and in terms of the letter I got from Mr. Protti, the content of this particular document. I'm sure you all have a copy of it because you gave each of us a copy here this morning.

It has to do with the management of credit risk. Within this, in terms of the language that's used, I wonder whether this language doesn't sort of suggest that, yes, you are in the tied selling business.

There's no question with a lot of this. I'm reading under “Managing Credit Risk”:

Banks have an obligation to manage credit risk prudently;

—I think we all agree—

all customers benefit....

—I'm skipping down—

Accordingly, for the purpose of managing credit risk, banks may impose certain requirements on borrowers,

—this is to assure adequate security, which I think we all agree with—

as a condition of extending credit.

Now consider the example:

For example, a bank may require a borrower to obtain a product or service, such as a transaction

—this could be anything—

or operating account,

—this is pretty clear—

or refrain from taking on additional debt,

—this goes back to the security, if you like—

as a condition of granting a loan.

So there are three parts to this as possible conditions to granting a loan.

In addition, a bank may require that a product or service obtained by a borrower from a particular person as security for a loan meet with the bank's approval.

Now it's this particular specification of a particular person that seems to me clearly ties it to you or to some other institution, or some other financial institution. Given the ownership now of the banks, trust companies, investment dealers, and the whole business of the financial institutions, you really own the four pillars. These used to be very separate, but they are now really subsumed as subsidiaries of your respective banks.

Doesn't this now clearly indicate that not only is it possible for you to do tied selling but that in fact, under certain circumstances, you would or could require it as a condition? Isn't that what this is?

Mr. Alan Young: If I can just correct one thing, then I'll ask Kelly to respond to the question.

In the statement, you mention transaction or operating account. The word “transaction” is intended to be modified by “account”. So it's a transaction account or operating account as a transaction.

Kelly, could you maybe address the specifics?

Mr. Kelly Shaughnessy: Maybe I could help in addressing the particular risk management. I'll deal with a couple of things. As for the transaction account or the operating account, from time to time a bank may insist that the operating borrowers....

Just to back up here, these would invariably be commercial borrowers, such as small businesses, medium businesses, and large corporates. You would insist that the platform they used to deliver that operating loan be the transaction account. For instance, in our bank, virtually all of our operating loans are done by way of an overdraft. So if you don't have the transaction account, you can't deliver it. Some of our competitors deliver small business loans, the smaller ones up to $35,000 or $50,000, off their Visa platform, so it's the delivery platform, and I don't really think it's tied selling.

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The other area where you would insist on having the transaction account in your institution is when you've taken security for the loan. For instance, you would want the accounts receivable or the inventory. The only way, Mr. Chairman, that you can monitor your security is to see the funds flowing through the account, such as whether the customer is collecting his or her accounts receivable, things of that nature. They have to be deposited into the bank because they've been pledged to the bank as security for the loan.

With respect to the phrase, “particular person”, I don't believe there's any intent in this document to insist that you buy life insurance, for instance, from a bank-owned subsidiary. I think the intent of that is that if life insurance is required to secure your loan, it has to come from a life insurer, a life insurer that is creditworthy, that will be there in the end. The only intent in that particular phrase is to make sure that the security, in this case, or the other product, is provided by a supplier who would be there in case of need.

Mr. Werner Schmidt: I appreciate the explanation on the first part on the transaction account. That's a given. At least, I certainly understand it. That's not a problem at all.

But it is this “particular person” which does make a difference, because it's exactly that language that is used in other legislation, which clearly indicates that specifying “a particular person” means any corporation or any individual that provides a particular service. That is clearly the intent here. It may not be the intent that you require, that the insurance company be a subsidiary of the bank. That may be, but the point is that this statement does not exclude that. It includes that.

And that's the point that I think suggests to me that it's up to the individual to decide whether he will or won't choose his own subsidiary.

It's pretty clear to me that if the employee of the bank is going to be loyal to the bank and is going to have promotions and salary determined in part by that loyalty and how many more accounts and RRSPs he or she can bring in, he or she would clearly specify “a particular person”, which would be to bring it in back to the bank.

Mr. Kelly Shaughnessy: I, once again, would have to go back to the intent of that phrase. Ms. Lamont, I believe, worked on it and that is not the intent of the phrase, so if the wording is—

Mr. Werner Schmidt: We're not dealing with intent here. We're dealing with what it says. Who's going to run this?

How many employees are there in the banking industry? Are there 25,000?

Mr. Alan Young: About 200,000.

Mr. Werner Schmidt: Okay, so it's 200,000. So multiply it by 10, which really makes the problem that much bigger. How many of those 225,000 employees can read this and say “the intent is this”?

Ms. Anne Lamont: Just for a point of clarification as well, there's another section within the Bank Act, subsection 416(5)—and I don't have the exact wording in front of me—which makes specific reference to the point that when we do in fact ask for that kind of product to support another product, i.e., insurance on a loan, the approval should not be unreasonably withheld. So there was recognition that there be other providers. It wouldn't necessarily be our own.

Mr. Werner Schmidt: That is correct, but it's limited to insurance. It does not apply to any other product. It's very specific and limited to that. I think that's the whole question before this committee. Because the banks now not only do banking business, but insurance business and trust business and investment business, and deal extensively in derivatives, for example, because they do that, they now have the opportunity not only to demand that, but to specify it.

Ms. Anne Lamont: Clearly it was our intent in the development of the statement that when we made reference to that, it would be tied in with the aspect that if somebody else...and it is the idea of being a credible provider, that we would know in the case of insurance or something else that it would not be unreasonably withheld in terms of any kind of other product.

Mr. Werner Schmidt: With all due respect, Mr. Chairman, I would suggest that there's a lot of cleaning up that needs to be done on this wording if that's really the intent.

Why don't you say what the intent is?

The Chairman: What would you like them to say? I'm unclear on this.

Mr. Werner Schmidt: I'd like them to say that they cannot specify “a particular person”. They cannot do that. That's what's missing here. It says very clearly “from a particular person, a security”, which means they can specify a particular trust company or a particular mortgage company or a particular insurance company to provide certain kinds—or a mutual fund company, if you will, or an RRSP company—that they can specify. You see, that's the point.

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If they say specifying a requirement to have certain kinds of security that must come from a registered group of insurance companies, that's fine. That means any life insurance company that's registered and accepted and bona fide can offer a policy. Great. That's not a problem. But to specify that you have to buy this from Manufacturers Life...that's the issue. Or if you have to buy it from such and such auto company, which they own, that's the point.

The Chairman: Thank you, Mr. Schmidt.

Mr. Brison, do you have a question?

Mr. Scott Brison: In terms of self-regulatory policy, recognizing that there's no official policy of the banks to engage obviously in tied selling and in fact there's an official policy not to, there are incentives. You know what I mean. Effectively there is a sales organization that is incentived to maximize sales and maximize profits. When that exists, with that carrot there, there will be people engaging in practices at a grassroots level that may not be consistent with a bank's overall policies.

Recognizing that there is a carrot, what are the sticks within Canadian banks in terms of your self-regulatory policy? How would you sanction somebody who engages in these policies? What is your official policy to prevent that from occurring? It will occur if there is, in any way, shape or form, an incentive.

Mr. Brian Haier (Canadian Bankers Association): On the issue of incentives—and I speak to our bank in particular; in general, the comments apply to all of the industry—the majority of our employees in our branches today rely 98% on their base salary. There is very little incentive that applies to a direct sale of a product.

Each job is different. We do have sales forces that concentrate on selling a particular product, and those people clearly are treated differently from a person who may be linked to a branch. But the payment of compensation to these people depends not only on individual performance but also on things like the team's performance in a branch, or in a region, or in a larger geographic area. In general terms, it's not specific. We'd use the term “direct drive”. There is no direct-drive commission paid to an individual person from the sale of a mortgage that results in x dollars in their pocket. That doesn't happen.

Customer service is a big component of our incentive programs that are paid out at year-end. Our challenge, quite frankly, is to make the line of sight from the individual employee up to the big bank a lot more clear for them. So there is no movement to have direct-drive competition in the general workforce.

Mr. Scott Brison: What about promotions? Would an individual who maximized profit numbers for a particular branch, and potentially by engaging in...? I'm not saying this is necessarily occurring, but I used to run a sales organization and I know people want to maximize their numbers, not simply because of their paycheques but also for promotions. They also want the prestige of being a top performer or whatever. There is an incentive. It may not be in a direct monetary or immediate sense, but there certainly is an incentive from a career advancement perspective.

My question again is what disciplinary procedure has the bank established to deal with people who have unequivocally participated in tied selling?

Mr. Brian Haier: As to any disciplinary procedure, if there were an example of tied selling, speaking for our organization, we would handle it in terms of the way we handle all disciplinary issues. It may start with sitting down with the employee. It may work its way up to letters of reprimand. You may get into issues of suspension, depending on the performance of the employee historically, depending on their tenure with the bank, depending on the severity of the incident.

So I think, however we would handle disciplinary action, in the case of tied selling it would be consistent with the overall policy of how we would handle any other kind of disciplinary issue.

Mr. Scott Brison: And as you mentioned, the individual.

So if you had a really great performer, who maybe got caught—right?—they may not be dealt with as severely as some slumpy, dumpy guy who happens to make a mistake or something.

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Mr. Brian Haier: It's hard to generalize. I spent nine years in a human resources function with our bank. Just when you think you have every single case before you, there's a small little wrinkle in a case that makes you take a different approach to it. We would apply discipline that's consistent, based upon the things I outlined.

Mr. Scott Brison: Philosophically, I'm in support of self-regulation, typically versus government-imposed regulation, but within the Canadian banking industry I'd suggest there needs to be a stronger and consistently known and implemented policy relative to something as specific as tied selling.

Mr. Brian Haier: On that particular point, the tied selling statements, or our commitment to tied selling and our own codes, are only three months old. Further, there are 221,000 people who interact with customers every day. While we all spend a lot of money and put a lot of effort into giving the tools necessary for salespeople to do an effective job, it takes time to get the message out to 221,000 people and to deliver it consistently with the millions of transactions the banking industry does monthly.

Mr. Scott Brison: You're looking for a year, then, or for an opportunity to effectively implement these policies.

Mr. Brian Haier: When it comes to self-regulation, we have to be consistent. We have to be credible. I think it's fair to say that if, after a period of time, we don't have the credibility that we can self-regulate, then at some point in time down the road you may have to look at legislation. But after three months of having the code in place, and based on the commitments made last year to the committee, we've lived up to the commitments made at that time.

So we've done our best to put them through the system. Three months down the road seems a little premature in an industry that employs 220,000 people.

Mr. Scott Brison: One last thing, Mr. Chairman.

Let me give you one example of not necessarily tied selling but, I would suggest, egregious policy.

I know of a group of brokers that split off from a major brokerage firm when the banks bought them. When they split off and started their own brokerage firm, it was made clear to them.... Actually, they started to deal with one of the chartered banks that had not yet purchased a brokerage firm. When that bank did buy a brokerage firm, their lending relationship with that bank was altered significantly. There was pressure from the local manager for the brokers to look seriously at joining one of the major brokerage houses that was owned by a bank. That's not necessarily tied selling, but I think in some ways it's worse than that.

The example I cite is one I'm fairly close to, because my father was one of those individuals. He worked for one of the banks in the 1930s and made a resolution not to work for a bank again. When the bank bought the brokerage firm he worked for, he went off with a few other ones and started his own company.

That does occur sometimes. There sometimes is pressure on the brokerage industry, or on independent brokers, from the banks. That's another policy I think we should probably look at as well.

The Chairman: Thank you, Mr. Brison.

Any comments from the panel?

Ms. Anne Lamont: The only anecdotal evidence I would give, though, relative to independent investment dealers at the moment, is that they've done extremely well. They don't seem to have been hurt by the changing structure of the financial services industry.

Mr. Scott Brison: Definitely.

The Chairman: There's no question about the fact that you're all doing very well.

Mr. Casey.

Mr. Bill Casey: Thank you.

Welcome to our little group. I think your testimony is perfect. To me, it confirms the problem, and the problem, I think, is communication.

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Yesterday, a former bank employee testified that the atmosphere in the banks has changed dramatically over the years, and there is much more pressure to sell and to tie sell. We heard from a chartered accountant who deals with customers on his own experience. We had a bank client and financial advisers. All said there is a big problem, yet you're saying this tied selling is a very insignificant problem. I think that defines the problem, and it's a lack of communication.

As luck would have it this morning, I went back to my office and this letter was sitting on my desk. It's from a lawyer in my town and it said:

I really should be directing this letter to Michael Lauber that is mentioned as the Canadian banking ombudsman, but I do not have an accurate address for him.

He goes through a series of problems he has had with his customers—and this man is a very highly principled, consumer-oriented, super-quality lawyer who deals with a lot of estate planning and things like that. He refers in this letter to a lady who was dealing with a bank's financial adviser, and that financial adviser put pressure on her to change her will and make the bank's affiliated trust company the sole executor of the estate. The lady had no intention of appointing a bank-associated trust company, but was under considerable pressure to do so.

So there's another example, and I would be glad to give you this letter. I hope you will deal with it. I hope you will call or write the lawyer.

In my own experience as a financial adviser, I have run into tied selling, as I put it, retroactively. When someone goes to the bank and says—and I have specific examples—“I want to move my RRSP because I want to change my investment objectives and your bank doesn't do what I want to do.” and it says “Well, that's no problem, but where are you going to get your mortgage when it comes due?” they don't do it. They're scared and intimidated, just by that comment.

Another example is the owner of a small business who had his line of credit and capital loans with the bank, went to the bank, all excited. He was going to change his RRSPs and his investing objectives. The bank manager said, “That's great, but where are you going to get your line of credit for your business”? So he didn't do it.

So this is the kind of thing that happens, and I think it's pervasive, from my point of view and experience. It's not an isolated incident. I believe the banks are probably sincere in saying they don't want to do it, but there is a lack of communication between those in senior management who say “We have a policy that prevents tied selling”, and the people at the retail level who deal with customers.

I believe there's a lot of pressure put on those people to do whatever it takes to get the accounts and keep the accounts, and that results in those comments being made to your customers.

You're in a special relationship with your customers because those two customers I mentioned can't go somewhere else. If it were their car dealer, or clothing store, they could go somewhere else. But you hold their mortgages, their credit cards and their lines of credit, and they can't go somewhere else. They didn't contact the bank, they didn't complain to you and they didn't complain to the ombudsman. They just went away hurt and can't do what they want to do with their own money.

So I have a little challenge for you. If you're really sincere in improving your relationships with customers and establishing a line of communication so you really hear the complaints, it's my understanding the association is going to spend $20 million to improve your image in the eyes of consumers. Why don't you give a million dollars of that to Michael Lauber, the ombudsman, to advertise his services so your customers will know there's somebody they can go to? Even the lawyer who deals in these things doesn't know where Michael Lauber is, or what his address is. So give him a million dollars to advertise his services, and then change the rules so a client can go to him directly and instead of going to the bank first.

The rules now say clients have to go to the bank first before they can even talk to him. That screens out most people, because the two people I just mentioned wouldn't walk in and complain to you or your management and wouldn't go in and complain to the bank. So I think you have to change the rules on that to help people really feel there is somebody they can talk to, and make sure the world knows about them.

I don't have any idea how many transactions you do in the run of a year, but it must be something in the order of billions and billions, and for the investigator to have 96 investigations is just not sensible. There is something wrong.

Mr. Young, you said your system is there and it works. It doesn't work, or you would have more than 96 investigations. Even if you did everything perfectly, doing billions and billions, thousands of millions of transactions, and I don't know how many accounts you have but it must be a hundred million accounts, to have 96 complaints and 96 investigations means the system doesn't work.

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Anyway, my question is, will you give him $1 million to advertise his services, and will you allow customers to go to him directly, without going back to the bank where they were already offended?

Mr. Alan Young: There are several parts to your question, Mr. Casey, and I'd like to address a couple of them. I'll ask my colleagues on the panel to address others.

If I can start at the back, I think you have a presumption that we have millions and millions of unhappy customers. I would suggest to you that there is another explanation, and that is that we have millions and millions of happy customers.

You ask about the letter, and I would like to receive a copy and take it up—

Mr. Bill Casey: I'll give everybody a copy of the letter. I just got it.

Mr. Alan Young: What it demonstrates to me is that we have a process in place where self-regulation can be made to work. We will take a look at that letter.

You asked a specific question about the $20 million campaign. A small portion of the dollars that are being spent over the next three to five years is devoted to television advertising—a very small portion. The majority of it is tied to—I shouldn't have used the word “tied”—is associated with educating consumers, educating customers. You and your colleagues and everybody across the country will be seeing in the next few days the next phase of our campaign to help educate consumers about our services and about financial services generally. So I think that, at least in part, we will be responding to your challenge to us.

Mr. Bill Casey: My question wasn't answered, though. Will you specifically advertise the ombudsman's service, and will you encourage people to go to him directly?

Mr. Alan Young: Let me say, about advertising the ombudsman, that I will go back to my colleagues at the Bankers Association and raise this issue. I think it's a valid point.

We have been taking steps ourselves to raise the profile of the ombudsman. Our association has partnered with 40 or 50 industry associations like the chambers of commerce, law societies and so on, to send them pamphlets, to prepare articles about the ombudsman process, to advertise in their industry magazines about the ombudsman process.

Mr. Lauber in his testimony yesterday said that he today or yesterday is sending out 50,000 brochures to the Canadian Federation of Independent Business.

So steps are being taken to raise the profile of the ombudsman.

Mr. Brian Haier: I'd like to deal with a few of your points. Earlier in your statement you said that one of the witnesses who appeared yesterday talked about increased pressure, or pressure to tie sell.

Mr. Bill Casey: Yes, a former employee of the bank.

Mr. Brian Haier: What's going on in banks is that historically we've existed to do transactions. Because of changing demographics, increasingly our customers want us to provide them with advice. That's something that is brand new to us. We have always been asked to give advice, but historically we've stayed away from it.

We used to try speaking on behalf of our bank. If a customer was having a mortgage interview, and the customer behind closed doors said, “Tell me what to do. Should I take five-year or take three-year?”, our stance was stay away from that issue and let the customer decide.

Now, with increased competition from whether it be monoline competitors like MBNA, who are just doing credit cards, or Wells Fargo, which someone talked about, or ING, which has half a billion dollars on deposit already and is clearly going after another market, we have to change the way we do business. We are clearly moving from a transaction environment to an advice environment as a direct response to that competitive threat.

Some people in the banks who were used to responding to transactions, and who we're asking to be a little more proactive, decide to leave. While that's disappointing, I think that's reality.

On the second point about how the ombudsman isn't working, at our bank we do 10 million transactions a month in our branches. Those are people who go to a teller and make a deposit, a withdrawal, or a bill payment, and that's paling in comparison to what's being done electronically.

Last year, of the complaints that we were able to track, we got 14,000. That's more than 70 complaints a day. So when we hear numbers like 26 people weren't satisfied, or that people may be reluctant to speak up, there are clearly a number of cases in our bank—14,000 of them last year—where dissatisfaction with the level of service was expressed. We have a commitment and standards inside to respond to those kinds of issues, and we do our best.

• 1100

Of the 14,000, approximately 400—a little less than 400, it was 370—ended up in the ombudsman position. So there is a fair amount of communication and interaction that goes on. You know, at 70 a day and one complaint a day going to the ombudsman, that's a fair amount of communication with “dissatisfied customers” to attempt to resolve the situation

Mr. Bill Casey: He said he had 606 complaints for the year and you had 370. That's more than your share. Anyway, we won't get into that.

Mr. Brian Haier: No, that's going from the bank.

Mr. Alan Young: That's going from the bank.

Mr. Bill Casey: I get you now.

Mr. Brian Haier: The 368 are bank ombudsman. I could not speak to how many our bank represented in the industry total.

Mr. Bill Casey: Let's go back to the principle here. Considering the things that have happened and the testimony here, do you think there is a lack of communication between senior management and what actually goes on in the branch offices and what is being said? That is what we're being told and that's my experience. Do you agree with that or disagree with it?

Mr. Brian Haier: I disagree with it. If anything, there's too much communication. The average branch employee—

Mr. Bill Casey: Not communication, understanding.

Mr. Brian Haier: —that we try to communicate with to talk about changes in products, changes in services, different kinds of campaigns, new product launches as well as industry codes...it's admittedly tough for them to deal with all of that. But whether you want to make cultural change in the bank and take it from a transaction culture to a sales culture, or you want to introduce a new code on tied selling or privacy or whatever the case may be, it takes a long time. It takes us, I'd say, a minimum of three years before the employees actually understand that this message is not going to change.

In terms of too much communication, I think we're doing a lot. But it can always improve. We can always do more. It's more a question of sifting it and simplifying it for that teller on the line doing those 10 million transactions.

Mr. Bill Casey: Back to my question—

The Chairman: This is your final question.

Mr. Bill Casey: Would the Toronto-Dominion Bank support changing the ombudsman rules to allow complaints to go directly to the ombudsman? Would you support advertising his services? I ask that because I didn't know about them. This lawyer didn't know he existed, I didn't know he existed. Well, the lawyer knew he existed but didn't know where to get him. We don't know. So there's a problem with that system in making him visible. Would you support a move to spend money to promote his availability and allow customers to go direct?

Mr. Brian Haier: I think anything that impacts the industry we would want to deal with at an industry level. At this point we're doing a lot to publicize the role of the ombudsman. We're making him available on the web page, etc. But I think that's an issue we'd have to consult over and think about.

We are not afraid of allowing a complaint to go the ombudsman. Obviously, we want to resolve it in the customer's interest before it gets there, but it's not something we're scared of.

Mr. Bill Casey: But the rule is it can't go to the ombudsman.

Mr. Brian Haier: I know.

Mr. Bill Casey: Would you support a change in that?

The Chairman: Thank you, Mr. Casey.

Mr. Alan Young: Mr. Casey, that's because, as Mr. Haier indicated in his testimony, at his particular bank they're getting about 70 complaints a day and very few of those actually get up to Mr. Lauber's office. They're dealt with at the local level, either at the branch level or within the bank ombudsman system. So the process is—

The Chairman: Thank you. Go ahead.

Ms. Anne Lamont: I think it is important to stress, though, that all of the banks do have what I will refer to as an escalating complaint handling process internally. Clearly, as already mentioned by my colleagues, our preference first and foremost is that if there is that comfort level between a customer and the branch at the branch level, we'd like to get it resolved.

A number of different organizations have other elements and stages in which complaints will be looked at. Certainly, we are an organization that, quite frankly, encourages our customers to bring complaints forward because we want to look at systemic problems and be able to address them ourselves. But I would say that, right now, an individual who is aware of the industry ombudsman...the industry ombudsman still has to refer it back to the individual bank to be able to find out the complete aspect of the particular transaction or the problem. I would say that currently people do have the ability to go to the CBO, even though the CBO may return it and ask for it to be dealt with by the internal process. But that doesn't necessarily mean he's let it go.

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Mr. Kelly Shaughnessy: Mr. Chairman, I was working with the industry committee of the House of Commons when we brought in the ombudsman. The ideal world, for me, would be for Mr. Lauber to get no complaints, not one a year. The rule isn't that it goes to the bank as such, the rule is that it has to pass through the individual bank's ombudsman's office.

I'd love you to, perhaps, ask the respective ombudsmen of the various banks to come here and testify before you. They're a very impressive group of individuals. I asked our ombudsman, Milt MacLean—we were the first bank with one—how many times he has made a recommendation that the bank was wrong and the bank should change its decision and the bank did not act on that recommendation. He stared me in the eye and said “Never!” The bank has always gone along with his recommendation if he felt the bank had done something that was not in the customer's best interest.

Therefore, the ideal situation for me would be for Mike never ever to receive a complaint because they would be dealt with at the ombudsman's office. I figure every time he gets one, we fail. I feel fairly strongly about this. It was discussed at some length at industry committee level when we brought the CBO in.

The Chairman: Thank you.

I want to piggyback on what Mr. Casey said before I go on to the next questioner.

As a sort of resolution dispute mechanism, Mr. Casey, it would be like every single case in this country going to the Supreme Court of Canada rather than being dealt with in district and provincial courts and making your way up.

Mr. Bill Casey: It's different altogether.

The Chairman: But I think the option ought to be made available to the customer if he or she would like to go there. At the end of the day, it seems to me we simply want to resolve the issue for the customer.

Mr. Bill Casey: I know my time is up, but may I respond to that?

The Chairman: Sure.

Mr. Bill Casey: It is completely different, because the people who are offended or feel done in by the bank don't want to go back to the bank and complain to them, and you're not getting them. Here's a bunch of examples. In my examples—

Ms. Paddy Torsney: He told us 70 people a day call his bank, so they obviously want to go back to the bank and complain.

Mr. Bill Casey: Did you say 1 billion transactions a day?

Mr. Brian Haier: No, I said 10 million transactions a month.

The Chairman: Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you, Mr. Chairman. I have a comment and then a question.

Maybe Ms. Lamont might want to respond to the first observation. I believe you, in the case of Mr. Clark, identified that as an example in which self-regulation worked and worked very well. But I would submit that the reason it worked well is that Mr. Clark blew the whistle on you and, in fact, went to the media. His particular case got a lot of public exposure and, because of that, the bank was perhaps embarrassed into trying to resolve that particular case.

I think this leads a reasonable person to question how many situations are out there, like Mr. Clark's, where this particular individual, because of his resourcefulness and audacity, called the media and said “Look, you ought to have a look into this. There's some really nasty stuff going on behind the scenes.” I would submit self-regulation had nothing to do with that, actually.

I have a second question, and perhaps other panel members might want to address it. I was interested to read the other day that the Canadian Bankers Association is opposing the legislation being brought forward by Mr. Harris' government. I believe Mr. Eves, the Minister of Finance, has tabled some recent legislation in Ontario barring tied selling.

You've made quite an eloquent statement, Mr. Young, in terms of your defence of why you think it should be self-regulated. Why did the Canadian Bankers Association and under what conditions did your organization oppose this recent legislation in Ontario? That is my observation. Perhaps someone would comment on that.

Ms. Lamont, perhaps you would care to comment on the first observation, then others might explain to committee members why you're actively engaged in trying to oppose Mr. Eves' bill on tied selling.

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Ms. Anne Lamont: I have just a couple of comments about your first question. I don't know the actual details of dates and whatever, but I do know that Mr. Clark wrote to our chairman, and I will say that any complaint letter we get that goes to the chairman is acted on in particular in a very direct fashion. It had already started to go through our system in terms of being dealt with. We have an internal mechanism called our “solution centre”, as well as our ombudsman, and that process was already in place at the time the correspondence was shared by the media. That's my understanding.

To go back to my point that I made earlier, there's no question that when there was extra attention being brought to the case of Mr. Clark we were able to use that as an opportunity to highlight our concerns and our interest in making sure that this kind of behaviour doesn't happen. As I say, we conducted a cross-country sales call. We do this on a regular basis, but we took the opportunity to put the tied selling issue on the agenda of our national sales call.

As I say, on the one hand, I think the process would have been dealt with as it was dealt with, but the fact that it got extra coverage gave us an opportunity to use that to reinforce even more strongly within our own organization what the appropriate policies and practices should be.

Mr. Kelly Shaughnessy: I would just like to reinforce what Ms. Lamont said. I've no idea of the circumstances around Mr. Clark's complaint. But most certainly in our organization, any complaint that gets escalated to an executive is dealt with immediately. The letter is acknowledged immediately and then a separate department tracks that. If it is serious in that there is an obvious disconnect between the client and the bank, it will go directly to our ombudsman's office. These things are dealt with very seriously, and with respect to anybody who takes the trouble to write to our president or our chairman, it's our corporate value that the person has to be responded to immediately, and then the situation has to be resolved without delay.

Mr. David Iftody: Can somebody respond to my second question about the opposition to the Ontario—

Mr. Alan Young: Sure, I'd be happy to do that. I am, I guess, pleased to say that in fact we're being models of consistency. With respect to the Ontario government, we responded to their request for our comments on their proposal by saying that self-regulation is the most appropriate way to deal with this issue. And we are being consistent in that approach before you today. We believe that a system of self-regulation should be allowed to work, and only if it's found sadly wanting should legislation be used. We are being consistent.

This was also the position that the Canadian Bankers Association took in our rather lengthy submission to the MacKay task force, that as much as possible self-regulation should be allowed to work. So we are consistent.

With respect to a particular concern with the legislation that you're referring to, our principal concern after the general issue of self-regulation is that it does not differentiate between tied selling and beneficial cross-selling, where the customer can get a benefit, as we noted in our remarks today. That was our main point of concern.

The Chairman: Any other questions?

Mr. David Iftody: Just as a final observation, I think it is obvious that from a conceptual point of view, trying to find some sufficient guidelines for the committee or for the industry with respect to selling practices is admittedly difficult. I would only say, however, that with respect to this—and I think that it is perhaps something for you to consider in your own marketing plans—the whole question of the fiduciary responsibility of the bank comes into play and raises some very obvious and sensitive questions.

When you have that fiduciary responsibility there, how do you...and in what other context, Canadian context, do you have a fiduciary responsibility that is exercised by the banks, in this case, but is also reviewed by the banks? In other words, who's checking on that fiduciary responsibility to make sure that it's exercised properly?

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Secondly, given the recent changes in the banking industry in terms of consolidation with the mergers with the trust companies, and then also further consolidation within the banking industry, I would submit and argue that in the whole question of fiduciary responsibility, the question of choice—and many of you have used that word frequently in terms of describing the difference, that you want the customer to have the choice—that freedom of choice is the defining variable with respect to whether that coercion is there or not there. Or perhaps it's not coercion and there are different levels such as, as my colleague had suggested, a subliminal message saying, look, you're in the door and you'll receive this extended line of credit if these options are provided there.

We're getting into some very tricky areas. But I would also argue that as your industry moves towards consolidation, or you push it towards consolidation, those questions of fiduciary responsibility and the questions of choice become much more important and have to be guarded much more carefully as we deal with, in this particular instance, this legislative change with respect to tied or coercive selling.

So, Mr. Chairman, those are some of the comments. I hope you'll consider them in your own discussions, because most certainly these have to be discussed very openly, very candidly and very frankly with respect to consumer protection.

The Chairman: Thank you, Mr. Iftody.

Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chairman.

This is a very complex issue. I'm looking on page 6 of your submission, and the sentence says: “Legislation should be a last resort, after industry efforts to address the issue have been properly tried and found wanting”. I'd like some kind of context.

One of the things we keep coming back to in this whole issue is clear definitions and ones that are shared by all the players. So can you tell me in that statement what “properly trying” is and how we would measure if these self-regulatory initiatives are found wanting? How do we know when we get there? What are the yardsticks?

Mr. Alan Young: On the first instance, Mr. Haier said earlier that we are in the early stages, quite frankly, of rolling out our self-regulatory regime on tied selling, and we think that in order for it to be fairly judged by our customers and by members of this committee and the government, more time should be given to the process to allow it to unfold over the next while.

As to the point at which we go over the line and you'd determine that we have tripped over the line and legislation should be in place, it's very difficult obviously for us to define that. It's something that would be judgmental, a decision that members of this committee and the government would have to make based on the overwhelming testimony that you received from customers, from us, from others in the industry, from the CBO, from OSFI and so on.

So it's very difficult to make that judgment as to when the line is crossed. I appreciate the difficulty that you would have.

Mrs. Karen Redman: There are a lot of subtleties, a lot of nuance, and we heard from the superintendent of banks earlier that it's enough—and you've corroborated that with your testimony—to be told that the superintendent of banks is not happy with the way you're doing business and that banks will fall into line. And I would suggest that there may be a perceived coercion when the person on the banker's side of the desk may not see that.

One of the other criticisms or concerns that has come up is also that transactions be handled in a timely fashion. If people go along with the bundling or the cross-sales, if it's not strictly speaking tied sales in a transaction, they find their banking business, if they want to take their money and invest their RSP in an instrument outside of the bank, is not done in as timely a fashion. Those kinds of issues speak to me for the need for consumer protection and consistency as well.

I wonder if you'd comment on that.

Mr. Kelly Shaughnessy: I think in those types of conservations what we have to do is understand that a bank will not be profitable in the long term unless it establishes long-term and trusting relationships with its clients. So when we talked about incentive compensation and things of that nature, it has to be backed up by customer service too.

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In our organization, we have an incentive pool for employees in which every employee in the bank can participate at the end of the year. We will reduce that pool by 10% this year if we don't attain a given customer satisfaction target. We will increase it by 10% if we attain the second customer satisfaction target.

So I think that's a demonstration that when we're talking about compensation for employees, it is not only a sales-driven process, because if you do it transaction by transaction, you're probably going to lose the clients client by client in the long term, too. You have to have satisfied customer relationships.

I think in the case you cited, and I believe there was earlier testimony about RRSP transfers and things of that nature, most of those complaints come out because a person might walk into a bank, might walk into another vendor of mutual funds and RRSPs during that month of February to buy this year's RRSP contribution, and for one reason or another, whether it's a change in their portfolio or whatever, decide to move their RRSP to another institution. What they're doing is hitting the stream, the pipeline, at the busiest time of the year.

In the normal course, there should be no need for complaint on the transfer of RRSPs—not in the normal course. But in any event, there is no policy or practice within the banks to drag those types of things out. It would just relate in lousy customer satisfaction. You would lose the client in the long term, and that is not the way you make money and retain clients.

Mr. Brian Haier: I would like to make one other point on the RRSP transfer.

RRSP transfers are a manual system. I think we all have to realize that there are a lot of RRSP investments in mutual funds today, and 90% of the people who own mutual funds today have bought them since 1990. So this is not an industry that historically has had a lot of investment in technology, the result being some of the difficulty that customers face in that peak period. Although we try to make the campaign last from October 31 to March 1 and lengthen it out, the reality is, to Mr. Shaughnessy's point, the majority of customers come in to make their contribution in about the last 72 hours.

So that industry is faced with: first, historically it hasn't been around that long, and some of the instruments that are being transferred are relatively new, although they are common today; and secondly, we face a big crunch within a 72-hour period.

Mrs. Karen Redman: If I could, I would just go back to the customer. In the case that was cited—and I think it was yesterday morning—was the perception that because they had made a decision to move their business somewhere else, the response was that it would take an extra length of time.

The Chairman: Thank you, Mrs. Redman.

Mr. Ritz, did you want to ask a final question?

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman. Welcome, everyone, here this morning.

I wonder about one point that hasn't been brought up here this morning. As we see banks moving into the next millennium, as everybody else is doing, we're hearing talk of big giant mergers—Royal Bank and Bank of Montreal, and so on—and that's really a fly in the ointment of what you're talking about, self-regulation and so on. I'm speaking more to the effect on rural Canada, where we'll be down to one bank in a lot of communities when these mergers take place, or downsizing and so on.

In order to make that storefront viable, you're going to offer as much product out of that storefront as you possibly can. That's just good business. How do we safeguard those people in rural Canada, in the small communities and so on, so that they're not bombarded with tied selling in order to keep that unit viable out there?

The Chairman: Thank you, Mr. Ritz.

Mr. Kelly Shaughnessy: I guess I'll lead off.

The major concern in the proposed legislation and in this document is really in the lending field, and are we going to withhold credit from a client because that client will not bring other products and services over to us?

In regard to that field, I can say from my small business portfolio—the agriculture portfolio is part of my portfolio, too—on the lending side we're facing more and more competition on a daily basis. If you look at the Conference Board statistics—and I believe this is as applicable to rural Canada as it is to urban Canada—the specialized finance companies went in two years from an 8% market share to a 15% market share. Traditionally, we talk about the Newcourts of the world, we talk about the GE Capitals of the world. That includes the John Deeres of the world, too, and people of that nature.

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So any bank that goes into a community, with communication being what it is today, and says they're the only player in town and you therefore have to give them this, or act in a given manner, is going to be very foolish. Despite the fact that some rural communities today don't have digital telephone lines and things of that nature, it's all going to come in very short order as we approach the year 2000. They will have access to financial products and services, almost global access, going forward.

It comes down to one thing. If you want people to walk through your door, then I don't care if you're the only player in town; you have to provide the service. It has to be there.

The Chairman: A final question to Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you, Mr. Chairman.

First of all, I want to make it clear that I'm the only remaining member of the last finance committee, where we came up with the conclusions you made in your presentation.

Clearly, Mr. Casey, this is not tied selling. I think the banks are getting into businesses they were not in before, and are therefore finding some competition in areas they never had before.

My question is not really a question but something I want to state. Mr. Schmidt had asked a question in terms of his riding and tied selling. I can give you an example of tied selling.

Let's say I'm a businessman and I have a property on which you have a mortgage. I also have a line of credit. In 1992, 1991 and 1990, property values went down. You no longer have the collateral. The property's worth a lot less than your mortgage. My line of credit is out of the question, and is beyond what I'm worth. I come to you for an additional loan. I come to you to extend my demand loan operation.

I have other securities with another institution—that is, some bills, bonds, mutual funds, but not RSPs. If you say, well, bring those in to us and we will try to extend your line of credit, that is clearly tied selling. How do you secure yourself?

Those are the individuals I find you'll run into most of the time.

Mr. Kelly Shaughnessy: I can't discuss...I mean, I don't know if you're just using this as an example.

Mr. Gary Pillitteri: I'm using it as an example, because it has occurred many times in many places.

Mr. Kelly Shaughnessy: In that case—and I was in the risk management field through that period of time, which was the most difficult period of time certainly for central Canada—that is not tied selling. To my mind, that is risk management.

What is legally and technically happening is that the mortgage, a five-year mortgage or whatever, matures on a given date. The bank does have the right to renew it or not. If the security isn't there, through devaluation of the real estate or whatever, the bank does have the right to ask for its money back. If the customer needs more money and the security isn't there, I don't think the bank can exercise its fiduciary duty to its depositors and shareholders by granting additional money when obviously the collateral is under water.

Mr. Gary Pillitteri: Thank you.

The Chairman: On behalf of the committee, I would like to thank you very much for your contribution to these hearings. As you know, there are always two sides to the story, but we will look at this particular issue with a sense of fairness and equity to make sure we come up with an improvement to the current piece of legislation in front of us.

Before the members leave, I want permission to read into the record a letter I've received from Mr. R.B. Schultz, chairman and chief executive officer of Midland Walwyn.

Some hon. members: Agreed.

The Chairman: Thanks.

[Editor's Note: Letter provided by the chairman reads as follows:]

Strictly confidential

Ms. Carole Chafe, House of Commons Standing Committee on Finance, Rm. 538N, Centre Block, House of Commons, Ottawa, Ontario, K1A OA6

Dear Ms. Chafe:

Thank you for your kind invitation to appear before the Committee. Unfortunately, the notice period was so short that my colleagues in the non-bank-owned investment dealer community and I were unable to attend. However, in order to inform the Committee of our views, I have taken the liberty of submitting the following comments.

Parliament has passed Bill C-82, An Act to Amend the Bank Act. A section of that Bill, S. 459.1, defines and bans tied selling. The government has stated that it will proclaim this section on or before September 30, 1998, such that it will take effect at that time.

Some confusion exists over the nature of the government's commitment. Some believe that the government will proclaim Section 459(1) if your committee decides so. This is not the case. As the then Parliamentary Secretary to the Minister of Finance (Barry Campbell, MP) stated in the Finance Committee on April 7, 1997, "...a section on tied selling—I want to clarify—will be proclaimed on that date [Sept. 30/98], but it will reflect the recommendation of this committee..."

Therefore, non-bank-owned investment dealers welcome the Committee's deliberations regarding Section 459(1). We are confident that the government will fulfill its commitment to proclaim this section, which has been passed by the Parliament of Canada.

In the months since the bill passed, concern in the public and the media over tied selling seems to have grown. There are many reasons for this, most notably the proposed merger of two of Canada's large banks which has generated heightened concern over the power banks have over individual Canadians. In this context, we believe it is doubly important for the government to fulfill its commitment and proclaim the ban on tied selling.

The growing concern clearly indicates that a full ban is required. Much has been made of the prospect of industry self-regulation, coupled with the establishment of the federal ombudsman's office. However, we believe that these steps, while welcome, cannot assist the consumer without a legislative ban. The ombudsman system is very complex and legalistic. It is quite difficult to find the ombudsman's phone number in the Government of Canada telephone directory! Imagine how hard it is for the consumer.

Moreover, the steady stream of complaint, aired in the print and electronic media, shows that the practice is not going away. In fact, it will remain a problem until the government proclaims Section 459(1) into law.

In conclusion, I would ask the Committee to consider the signal it is sending. To abandon the ban on tied selling at this point would send a devastating message to consumers when concern over the power of banks in our society is at an all-time high. Dropping the ban would say to them, "you're on your own."

The alternative is clear, and compelling. This Committee should reflect upon this issue, explore its implications in depth, and recommend to the government that it proclaim the ban on tied selling forthwith.

Your truly,

(signed)

R.B. Schultz

The Chairman: The meeting is adjourned.