Trust and conflicts of interest at Banks

The Financial Consumer Agency of Canada said consumers are being ripped off, when it issued its report on bank sales practices in March.  The  report got far too little attention.  In technocratic language it confirmed that virtually all of Canada’s banks pursue their own interests – not the interests of ordinary people.

The primary finding relates to the predominance of ‘sales cultures’.  “Retail banking culture is predominantly focused on selling products and services, increasing the risk that consumers’ interests are not always given the appropriate priority.”  The increased emphasis on sales and use of technological tactics are noted, “This shift increases the risk banks will place sales ahead of their customers’ interests.”  The cagey language belies the truth, these large financial institutions are built to extract revenues and profits from the ‘marketplace’ – to serve the interests of investors and executive management.

The agency chooses to use the polite term “sales practices risk”.  This is doublespeak.  In the industry it is well known as up selling and cross selling.  It is the risk that the consumer will be induced to buy, invest or subscribe for a service they do not need.

The report does not use the word ‘trust’ prominently, but it implies a betrayal of trust.  Banks and other financial institutions act in a fiduciary role, a trust role, when caring for deposits and other consumer services.  The report confirms that banks do not act in their depositors’ best interests, they pursue their own interests.  This is a damming conclusion.  But it should not come as a surprise.

Legislative and regulatory measures are intended to curb this very kind of behavior.  The potential for the general public to be ‘had’ by banks (and insurers) is supposed to be addressed by solvency requirements, prudential management requirements, and market conduct requirements.  These are failing Canadians, according to this report.

Governance Failure

The fourth finding reads, “Governance frameworks do not manage sales practices risk effectively.” The report calls for enhanced management efforts to ‘protect’ consumers, but avoids the crux of the problem. It does not call for major policy changes.

There is an inherent conflict of interests and the legislative superstructure enables the foxes, it gives them free access to the hen house.  It is unrealistic to assume they will ‘manage sales risk practices’ in the best interests of the flock. The policy positions of government, over time, have built a large closed club of banks, that now also own most of the securities firms in the country.  Canadian governments have boasted about the ‘strong’ banking sector.

As in the US, there ought to be greater public debate about breaking up some of these large enterprises, in the public interest.

But we should not be smug as credit unionists.  When CBC Marketplace raised this issue many large credit unions were also identified as using high pressure sales techniques.  Coast Capital and others were criticized for their ‘sales cultures’ and the big sales goals they pushed on to staff.  The consumer ownership model is proving itself to be weaker than it should be in this context.

Efforts need to be made to ensure responsible competition and good conduct.  Secondarily, improved financial literacy has to be pursued.  This polite report is simply not enough.

One thought on “Trust and conflicts of interest at Banks

  1. Major reform would entail restricting banks to their core business:

    William Mitchell is Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), University of Newcastle, NSW, Australia

    http://bilbo.economicoutlook.net/blog/?p=7299

    “My specific proposals for banking reform are dealt with in some detail in these blogs – Operational design arising from modern monetary theory – Asset bubbles and the conduct of banks – – Breaking up the banks.

    I start from the proposition that the only useful thing a bank should do is to facilitate a payments system and provide loans to credit-worthy customers. Attention should always be focused on what is a reasonable credit risk. In that regard, the banks:

    should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit.

    should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.

    should be prevented from having “off-balance sheet” assets, such as finance company arms which can evade regulation.

    should never be allowed to trade in credit default insurance. This is related to whom should price risk.

    should be restricted to the facilitation of loans and not engage in any other commercial activity.

    So this is not a full-reserve system. The government can always dampen demand for credit by increasing the price of reserves and/or raising taxes/cutting spending.

    The issue then is to examine what risk-taking behaviour is worth keeping as legal activity. I would ban all financial risk-taking behaviour that does not advance public purpose (which is most of it).

    I would legislate against derivatives trading other than that which can be shown to be beneficial to the stability of the real economy.”

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