Grey matters: Raising red flags on banks’ alleged profits push


Consumer protection from Canadian regulators suffers egregious problems that can and must be fixed

The Folly of Rewarding A While Hoping for B is the name of a classic management paper by Steven Kerr, but it could just as easily apply to the recently alleged wrongdoings at banks across this country. Under current regulations, our government rewards banks for aggressively pursuing profits while hoping they’d put customers first instead.

Canadians deserve better.

Business managers have long understood that employee behaviour is driven by intrinsic and extrinsic rewards. This explains why executive compensation is tied to the share price and why good managers praise employees for work well done. Rewarding desired behaviour is the quickest way to get more of it. If companies reward undesirable behaviour, they’ll get more of that, too.

If true, the allegations emerging from the hearing into banks’ treatment of customers are neither unexpected nor surprising. In these hearings, current and former employees of Canada’s major banks have admitted to harming customers by, for example, signing them up for premium chequing accounts when cheaper ones would do; knowingly extending loans their customers will struggle to repay, or flogging GICs when their customers would be better off making mortgage prepayments instead

Publicly, the banks preach exemplary conduct to employees. Here is a pitch-perfect example from the Bank of Montreal’s 2016 Employee Code of Conduct: “Consider only the interests of our customers and provide them with the information needed to make financial decisions that are right for them.”

But if bank employees are told their jobs depend on selling services and products, it’s no wonder some might ignore such codes of conduct and focus on sales at all costs instead, even to the customers’ detriment.

That banks are alleged to have acted this way is disappointing, but hardly surprising. Like other for-profit companies, banks are constituted to make money for their shareholders, and make money they have assuredly done. Many Canadians have done very well by having bank stocks in their investment portfolios or ETFs.

It is not the banks, but their regulators, who have fallen down on the job. Effective regulation is required to ensure that banks do not abuse the interests of their customers in the pursuit of profit. Unfortunately, those mandated with protecting the Canadian public have repeatedly failed to do so.

Consumer protection in Canada suffers egregious problems that can and must be fixed. When it comes to regulatory power, Canada is a lightweight and processes for dispute resolution are fundamentally flawed.

Compare the arsenal of the Canadian regulator with that of its southern counterpart. When employees of U.S. bank Wells Fargo were found to have signed up customers for products without their permission, the bank was fined US$185 million. This is 370 times the $500,000 maximum that Canada’s regulator, the FCAC, can levy. Such a fine isn’t effective as a deterrent; it is simply a cost to the bank of doing business as usual.

The first of two major dispute resolution problems is that banks in Canada can choose to have disputes with customers settled by either the Ombudsmen for Banking Services and Investment or the ADR Chambers Banking Ombuds Office. Banks can simply switch arbitrators if they don’t like their rulings, meaning arbitrators who don’t favour banks put their own survival at risk.

Second is the conflict of interest in the banks’ employment of their own “ombudsperson” to settle disputes. Use of the title to describe a person paid by the bank is misleading. It can persuade consumers to settle without understanding the conflict of interest behind a proposal, or lose time that could be spent pursuing other forms of redress before their appeal window closes.

The Federal Finance Committee is holding hearings to determine what, if any, changes are required to banking regulation. Let’s hope they start by aligning rewards (and deterrents) with protection for customers rather than profits for banks.

For CARP’s full submission to the House of Commons Finance Committee see

Wanda Morris is the VP of Advocacy for CARP, a 300,000 member national, non-partisan, non-profit organization that advocates for financial security, improved health-care and freedom from ageism for Canadians as we age. Send questions to [email protected]. To join CARP or learn more, call 1-800-363-9736 or visit