The Ombudsman for Banking Services and Investments (OBSI) is responsible for managing conflicts and complaints between Canadian banks and their customers and banks. Following a recent rash of customer complaints, the OBSI has commenced a formal review of banking sales practices.
What’s brought all this on? And is it easy to fix? (Hint: No. Regulation alone can’t do it. You need to be on your guard to ensure you get good service.)
CBC news reports stir up further customer anger
Aggressive upselling was the primary CBC News discovery, in a feature on today’s banking practices.
CBC quoted several TD employees who said they were pressured to meet unrealistic sales targets. Not surprisingly, that reporting stimulated a further raft of complaints to OBSI.
But there are less obvious activities – grey areas – that all consumers should be wary of when dealing with their bank. Let’s talk about a few.
Grey area 1: “Almost” tied selling
Tied selling occurs when a financial institution attempts to coerce you into buying one of their products as a condition of getting another, say a loan or a mortgage. As an example, your account manager cannot say: “We’ll give you this loan or mortgage if you transfer your RSP over to the bank.”
Tied selling is illegal in Canada.
Do Canadian banks do it? Almost certainly, no. They’d get caught, and the repercussions wouldn’t be pretty.
What many clients have described to me over the years is a close cousin to tied selling. The bank employee says “Yes, we can give you a mortgage! But I can get negotiate a better rate if you transfer over your RSP.”
Is that coercion? Is that tied selling?
What do you think?
And what would you think, if you knew it was a common practice? What would that tell you?
What to do: Call their bluff. It’s a competitive market. Let your bank know that if they don’t offer you their best, you will take your business elsewhere. Be prepared to put your money where your mouth is. It’s a digital world now, it’s easy to move your allegiance for any given bank product.
Grey area 2: Conflicts of interest
Bank employees are paid to serve and sell. They’re typically incented to serve and sell. And rated and promoted on how well they serve and sell. When banks hire, the job descriptions make the sales focus crystal clear.
Any bank employee would be foolish to tell you if a competitor has a better, or more cost-effective product. That isn’t their obligation. They’d not only be failing to meet the documented goals of their role, they’d be asking for trouble.
Typically, bank employees see their primary obligation as to their employers, who set ever-increasing sales targets for them. Compensation is base salary plus bonuses for sales results.
Even in the brokerage arms of the banks, there is a financial incentive for advisors to recommend proprietary wealth management solutions vs third-party products. Is this to the customer’s advantage? Or the bank’s?
What to do: Shop around. Ideally, get your advice from an independent advisor at a firm that does not have proprietary products. Work with a mortgage broker. If you can’t find an independent solution, demand that the bank advisor be fully transparent regarding fees. Not only what you pay, but how they are compensated for proprietary vs non-proprietary products.
Grey area 3: Just plain bad advice
Tax Free Savings accounts (TFSAs) were created in 2009. Canadians lined up at the banks to open their new TFSA accounts. It was a no-brainer. Or so it seemed.
The banks opened thousands of TFSAs. Typically, tellers and account managers did not ask those customers whether they had any outstanding credit card debt.
But what if you have credit card debt with an interest rate in the (stratospheric) area of 19%? And instead of paying that down, you put money into a TFSA account paying you 1% interest? Not a good plan!
Now, think about it from the bank’s standpoint. If they issued that credit card:
- They're collecting 19.99%* interest on your outstanding balance. They profit more if you do not pay it down.
- Better yet, they pay you 0.90%** interest on your TFSA and then take your savings and lend it out to borrowers at much higher rates.
It’s a win/win for them. But for you?
What to do: Consistently increase your financial literacy over time, to protect yourself from bad financial advice. Read a financial article or two per week, or subscribe to an independent newsletter. You’ll find out about the latest financial practices, and forewarned is forearmed. While you build your knowledge, get your cash flow optimization advice from an independent financial planner who has no vested interest in what you do with your hard-earned money.
Grey area 4: Over-lending
Over-lending has been a problem for a long time. But as interest rates continued to decline and the housing market heated up, from my standpoint, it became increasingly problematic.
We would develop a financial plan for a client and give them guidance in terms of how big a mortgage they could carry. Of course, the plan would consider their other expenses and obligations, as well as their future expenses (e.g. child-rearing costs). They would then go to the bank, and the bank would approve them for a mortgage materially larger than was prudent.
Why the difference of opinion?
The approval criteria for lending at the banks have historically been that you could qualify for a mortgage well outside what would make sense for you, because it wasn't their concern whether or not you can fund your children’s education, put money into your retirement account, build an emergency fund, or have money for unexpected expenses. That isn’t a part of the calculation.
Their objective is to lend as much as they possibly can. And lucky banks, they have your house as security, and in most cases, CMHC insurance, so if you ran into financial difficulty and couldn't pay, they were covered. Heads they win, tails you lose.
The Canadian government has had to take action a couple of times over the last few years to enforce a tightening of lending qualifications. The banks are being forced to do the right thing, forced to lend more responsibly. The Federal Government is now considering taking further action, which you can read about here.
Canadians are proud of their banks. Following the financial crisis, Canada’s banking system was the envy of the developed world.
But just because they compare well relatively, it doesn’t mean they are your personal pal and mentor, carefully looking out for your best interests. It doesn’t mean that they are different than any business that is trying to maximize its revenue and profitability.
It doesn’t mean they can’t do better. And so can you.
This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.