The large securities dealers are owned by the big banks which account for two thirds of the value of all securities issued (excluding a tiny portion of new funds provided to start-ups by angel financiers). “The Investment Industry Regulatory Organization of Canada regulates 177 investment dealers and several exchan- ges.”125Compensation schemes also extend to customers of investment dealers and mutual fund administrators. However, regulators believe consumers“know”these investments are risky, so protection is restricted to specific risks due toinsolvency of the investmentfirm. Insolvency payments for failed securitiesfirms are handled by the Canadian Investor Protection Fund (CIPF), while the Mutual Fund Dealers Association is backed by the Investor Protection Corporation (IPC). Both institu- tions have coverage limits of C$1 million for systemic risks to all general accounts.
Protection is based onnumberof shares held so any decline in a share’s value is not compensated. Investor losses that do not result in official insolvency of the seller are not compensated. This puts a remarkably shortsighted focus on prudential matters and shows complete disregard for the importance of market malpractices. The independent group defending investor rights in Canada is the Canadian Foundation for Advancement of Investor Rights (C-FAIR).126 It has foundfirms that do not belong to either compensation plan. C-Fair has been seeking a rule requiring all investmentfirms to be members of an industry organization with an insolvency plan
that protects clients. Quebec’s regulation is superior: complaints can be directed to Autoritédes Marches Financière for disputeson fraud or selling tacticsrelated to insurance,financial planning, mutual funds and claims adjustment.127
6 Current Issues: The Consumer Interest in Innovation in Financial Services
Evidence on Canada’s experience shows several triumphs with prudential regu- lation and many tribulations with complementary policies for market conduct.
There are two very powerful reasons for intelligent efforts to bring consumer protection against malevolent selling practices up to the level of prudential care.
This is a rare time in the history of consumer protection infinancial services when disruptive technology gives two system-changing challenges and opportunities.
Both will determine the success or failure of the future of the sector.
Thefirst is the fact that digital technology has provided a leap in the capability of those who would deceive. As Joseph Stiglitz has observed, “Much of recent innovation has led to products that make cheating the public easier. The implica- tions are complex and profound.”128From the point of view of consumer protec- tion,fintech is a sword with two very sharp edges. Fintech offers web-based search methods that can efficiently offer information never available before: information on truly new financial offerings, on prices, and, importantly, on experience-based quality. It offers gains from cost reduction in the creation and distribution of financial services. Yet there is a second edge that can cut painfully. Fake products, fake ratings and fake identities are sure to be huge problems. Why? The Willy Sutton principle. Asked Why do you rob banks? Willy famously said,“Because that’s where the money is.” The most aggressive abuses of technology will be deployed in thefinancial services sector for the same reason. Cyber risks will be higher than expected. It is generally correct to say thatfirst mover advantage goes to those deploying deception…and policy is obliged torespondto problems rather than anticipating them. Sound policies for consumer protection will give rewards to firms with the best offerings, not to scam artists. Quality is front and centre, including “… a redress system which is up to best international practice to give consumers and institutions an edge with superiorfinancial products.”129Regulatory paralysis is one enemy. A solution incorporates innovative security through the application of digital technology—including big data, pattern recognition, and artificial intelligence.
In Canada, the Ministry of Finance has a working group on Fintech which has a broad base of representation.130This breadth may alleviate the expected difficulty identified by the Competition Bureau as the “unintentional entrenchment of incumbentfirms”.131It is natural for existingfirms to exaggerate the prudential risk from any innovation that disturbs the status quo. On the opposite side, too many experts wear rose-coloured glasses that see all innovation as positive. Neither of
these positions is helpful. What is needed is evidence-based regulation thatreduces rewards for harmful innovations and makes it easier for positive innovations to enter the financial market—and soon. This will help consumers (and every firm usingfinancial services) while it will, at the same time, reward precisely thosefirms with superior offerings. Success will facilitate exports of financial services, improving wellbeing elsewhere.
The second problem is rooted in the reality that digital financial services are international, while traditional consumer protection has been national or sub-national. In the digital era, financial consumer protection absolutely must be trans-national, hence the urgency of evidence-based decision-making with an international perspective. This explains the importance of an International Academy of Financial Consumers IAFICO) connecting international research to consumer protection policy.132
Cooperative liaisons among national agencies for consumer protection are direct and useful responses to the new digital reality. Major consumer protection networks include: Consumers International www.consumersinternational.org; BEUC: the European Consumer Organization http://www.beuc.eu/; the American Council of Consumer Interests www.consumerinterests.org; the OECD Committee on Consumer Policywww.oecd.org/sti/consumer; ISO—COPOLCOwww.iso.org/iso/
copolco; and the International Consumer Protection Enforcement Networkwww.
icpen.org. Of special promise is the International Financial Consumer Protection Organization (FinCoNet), founded in 2013 by national financial consumer pro- tection agencies, has 24 full member countries. www.finconet.org. FinCoNet can accelerate policy-sharing, including best practices. It is currently led by Lucie Tedesco Commissioner of Canada’s FCAC. Thus far, FinCoNet has facilitated vital input fromfinal users, particularly on mis-selling.133
In any country with limited competition in its financial sector there is great promise in disruption from new sources of financial services. The arrival of potential competition in Canada has motivated small improvements in customer satisfaction. New entrants offering financial technology (fintech firms) can be a breath of fresh air. Markets with oligopolistic behaviour—and high switching costs
—do not provide incentives to move consumers to superior sellers. An extra policy is essential: publicly available satisfaction measures. Financial firms now make private use of customer satisfaction benchmarks, a sharp change from two decades ago.134However, this is confidential information collected for thefinancial insti- tution by one of a half dozen private surveyfirms.Consumers do not get statisti- cally reliable broad-based information on quality. Information shared on web sites is notoriously easy to degrade135 so reliable sources are crucial. With optimal regulation, the market will offer better prices, fewerfinancial lemons, and positive new services. The goal is to provide appropriate incentives for prudential decisions, but only when that facilitates policies to enhance consumer success.
In general, there is solid evidence showing triumph withprudentialregulation in Canada’s financial services sector. Market conduct regulation is a source of tribulation. The lag is especially challenging if real progress is to be made with innovative (positively disruptive)financial services.
Notes
1. A financial consumer is one covered by the consumer provisions of the Financial Consumer Agency of Canada Actof 2001 (henceforth referred to as FCAC Act) as defined in Secttion 2, paragraph (a) to paragraph (e) of theAct.
The FCAC glossary does not define a consumer, nor does it define afinancial consumer.
2. An Act to provide“a legislative framework that enables banks to compete effec- tively and be resilient in a rapidly evolving marketplace, considering the rights and interests of depositors and other consumers of banking services, contributes to stability and public confidence in thefinancial system and is important to the strength and security of the national economy.”Bank Act S.C. 1991, c. 46. Act current to 2017-05-23 and last amended on 2017-04-01.http://lois.justice.gc.ca/
eng/acts/B-1.01/FullText.html.
3. An Act to revise and amend the law governing cooperative credit associations Cooperative Credit Associations Act (S.C. 1991, c. 48). Act current to 2017-05-23 and last amended on 2017-01-15.http://lois.justice.gc.ca/eng/acts/
C-41.01/index.html.
4. An Act respecting insurance companies and fraternal benefit societies.
Insurance Companies Act (S.C. 1991, c. 47). Act current to 2017-05-23 and last amended on 2017-01-15.http://lois.justice.gc.ca/eng/acts/I-11.8/index.html.
5. An Act to revise and amend the law governing federal trust and loan com- panies. Trust and Loan Companies Act (S.C. 1991, c. 45). Act current to 2017-05-23 and last amended on 2017-01-15.http://lois.justice.gc.ca/eng/acts/
T-19.8/index.html.
6. Investment Canada Act. An Act “…to provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security’. Act current to 2017-05-23 and last amended on 2015-04-24.
7. Robert R. Kerton, 1995. “A Consumer Test for Financial Regulation in Canada,”Policy Options/ Options Politiques, Institute for Research on Public Policy, 16 (5), June.
8. Canada, Competition Bureau, 2017.Competition Bureau of Canada FinTech Market Study—Update; p. 10.file:///C:/Users/Robert/AppData/Local/Microsoft/
Windows/INetCache/Content.Outlook/RQN6RD5P/EN%20Presentation%
20Competition%20Bureau%20Market%20Study%20-%2025%20July%
202017%20(002).pdf Ottawa.
9. Jurisdictional complexity explains the special need for the Financial Consumer Agency of Canada. The FCAC helpsfinancial consumers by reducing search difficulties (simplifying language in contracts, for example) and by directing web-using consumers to the correct redress agencies.
10. Competition Act (R.S.C. 1985, c C-34). Act current to 2017-05-23 and last amended on 2015-03-09. http://lois.justice.gc.ca/eng/acts/C-34/page-1.
html#h-1One of the key purposes of the Act is“… to provide consumers with competitive prices and product choices.”
11. Financial quality is central to the mission of the International Academy of Financial Consumers (IAFICO); “Financial development, in fact, is more associated with quality improvement than with quantity growth infinancial services.”Hongjoo Jung, 2017.International Review of Financial Consumers;
Vol. 2; p.i. file:///C:/Users/Robert/AppData/Local/Microsoft/Windows/
INetCache/Content.Outlook/RQN6RD5P/IRFC%20Vol.2%20No.1.
12. Conference Board in Canada, 2016.An Engine for Growth. 2016 Report Card on Canada and Toronto’s Financial Services Sector. http://www.tfsa.ca/
storage/reports/EngineforGrowthFinancialServicesStateoftheSector2016.PDF.
“Toronto is one of the largest financial centres in North America and ranks 10th on the Global Financial Centres Index, while Montréal and Vancouver rank in the top 25. Canada, Department of Finance, 2016.Supporting a Strong and Growing Economy: Ottawa; p. 9. https://www.fin.gc.ca/activty/consult/
ssge-sefc-eng.pdf.
13. The Toronto Real Estate Board, with nearly 40,000 agents is a case study with more sellers than would be needed with open information on listings.
“Competition Bureau Sues Canada’s Largest Real Estate Board for denying services over the Internet”.http://www.competitionbureau.gc.ca/eic/site/cb-bc.
nsf/eng/03781.html.
14. OECD, 2014. Update Report on the Work to Support the Implementation of the G20 High Level Principles on Financial Consumer Protection; G20/
OECD Task Force on Financial Consumer Protection Principles; P.6 and principles 4, 6 and 9). OECDhttp://www.oecd.org/daf/fin/financial-education/
G20EffectiveApproachesFCP.pdf.
15. Statistics Canada, Canada Yearbook 2011; Business performance and own- ership; Ottawa. https://www.fin.gc.ca/activty/consult/ssge-sefc-eng.pdf. The insurance sector has the best record of success in meeting international competition with exports.
16. The Bank Act wasfirst passed in 1871, amended to allow federal credit unions in 1991, and is now reviewed everyfive years. The 2017 Bank Act (S.C. 1991, c. 46).is athttp://lois.justice.gc.ca/eng/acts/B-1.01/FullText.html.
17. PWC, 2016.Embracing the Fintech movement; Perspectives on the Canadian Banking Industry; pp. 32–33. https://www.pwc.com/ca/en/banking-capital- markets/publications/5056-01-canadian-banks-2016.pdf.
18. Canada, Department of Finance, 2016. Supporting a Strong and Growing Economy: Ottawa; p. 11.https://www.fin.gc.ca/activty/consult/ssge-sefc-eng.pdf.
19. CIBC site at https://www.cibc.com/en/about-cibc/investor-relations/share- information/common-share-information/common-dividends.html.
20. Canada, Ministry of Finance, 2016. Supporting a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future; A Consultation Document for the Review of the Federal Financial Services Sector; April 26, 2016, p. 11.
21. Export Development Corporation (EDC) 2017. Exportwise;http://exportwise.
ca/how-canadas-financial-institutions-pave-way-global-export-success/.
22. Charles Gibney, Sami Bibi and Bruno Lévesque, 2014. Banking fees in Canada; FCAC, Ottawa; June. https://www.canada.ca/content/dam/canada/
financial-consumer-agency/migration/eng/resources/researchsurveys/
documents/bankingfees-fraisbancaires-eng.pdfTheir research follows research by J. Allen, & Walter Engert, 2007.“Efficiency and Competition in Canadian Banking”.Bank of Canada Review, 33–45.
23. Claudio Eggert, 2012. A Strategy Analysis of the“Big Five”Canadian Banks.
http://dtpr.lib.athabascau.ca/action/download.php?filename=mba-12/open/
eggertclaudioProject.pdf.
24. Canadian Federation for Independent Business, 2016. “Smallest businesses face biggest barriers getting bankfinancing”; Toronto, October 4.http://www.
cfib-fcei.ca/english/article/8761-smallest-businesses-face-biggest-barriers- getting-bank-financing.html The Canadian Federation of Independent Business has regularly sought policies that will provide increased competition and lower bank charges.http://www.cfib-fcei.ca/english/article/8761-smallest- businesses-face-biggest-barriers-getting-bank-financing.html.
25. Power Financial Corporation, 2003. Submission to Minister of Finance Future Structure of The Canadian Financial Services Industry. Submission in Response to Finance Canada’s Large Bank Mergers in Canada. http://www.
fin.gc.ca/consultresp/mergersrespns_16-eng.asp.
26. Charles Gibney, Sami Bibi and Bruno Lévesque, 2014. Banking fees in Canada; FCAC, Ottawa; June. https://www.canada.ca/content/dam/canada/
financial-consumer-agency/migration/eng/resources/researchsurveys/
documents/bankingfees-fraisbancaires-eng.pdf.
27. Evidence on price changes must be collected on a difficult fee-by-fee basis, then compared to fees elsewhere. The study by the FCAC by Charles Gibney, Sami Bibi and Bruno Lévesque, found that bank fee increases on chequing plans have been moderate, whereas the charges associated with variable fees have increased significantly.
28. Canadian Institute for Health Information 2016. National Health Expenditure Trends, 1975–2016; Ottawa https://secure.cihi.ca/free_products/NHEX- Trends-Narrative-Report_2016_EN.pdf.
29. CLHIA Submission to the House of Commons Committee on Finance on the 2018 Federal Budget; n.d. https://www.clhia.ca/domino/html/clhia/clhia_lp4w_lnd_
webstation.nsf/page/7D3362512245CD2985258172004B085B/$file/2018%
20Federal%20Budget%20Submission%20August%204%202017.pdf.
30. Export Development Corporation (EDC) 2017. Exportwise;http://exportwise.
ca/industry-without-borders-canada-fintech-companies-need-export-ready/.
31. See IBC FACT, 2016 and the OSFI website.
32. American Customer Satisfaction Index, 2017. http://www.theacsi.org/index.
php?option=com_content&view=article&id=149&catid=&Itemid=214&i=
Property+and+Casualty+Insurance.
33. Bank of Canada 2016. Financial System Review; Ottawa http://www.
bankofcanada.ca/wp-content/uploads/2016/06/fsr-june2016.pdfp. 11.
34. The FCAC website lowers the consumer’s search cost by providing infor- mation on specific sections, on codes of conduct and on public commitments by most of these types of institutions (see http://www.fcac-acfc.gc.ca/Eng/
forIndustry/regulatedEntities/Pages/home-accueil.aspx).
35. Union des consommateurs, 2014.ôObservations d’Union des consommateurs sur le document de consultation: Cadre de protection des consommateurs de produits et services financiers du Canadaằ https://www.fin.gc.ca/consultresp/
fcpf-cpcpsf/116-fcpf-cpcpsf.pdf. Consumers Council of Canada, 2014.
Submission to Finance Canada re: Canada’s Financial Consumer Protection Framework.https://www.fin.gc.ca/consultresp/fcpf-cpcpsf/082-fcpf-cpcpsf.pdf.
36. OECD, 2014. Update Report on the Work to Support the Implementation of the G20 High Level Principles on Financial Consumer Protection; G20/
OECD Task Force on Financial Consumer Protection Principles. Especially principles 4, 6 and 9). OECDhttp://www.oecd.org/daf/fin/financial-education/
G20EffectiveApproachesFCP.pdf.
37. Canada, Office of the Superintendent of Financial Institutions, 2017. http://
www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/default.aspx.
38. This is no surprise because“OSFI’s mandate is focused exclusively on protecting the savings of depositors and policyholders.…” International Monetary Fund 2014. IMF Country Report 14/29 Canada, Financial Sector Stability Assessment;
https://www.imf.org/external/pubs/ft/scr/2014/cr1429.pdf; p. 24. Lack of atten- tion to consumer empowerment reduces consumer success and directly lowers the efficiency of financial markets. “According to the survey by the World Economic Forum, Canada has the world’s best banking system.” The Best Banking Systems in the World;finweb.comhttps://www.finweb.com/banking- credit/the-bestbanking-systems-in-the-world.html. The word “best” clearly applies to prudential matters, not necessarily to overall consumer protection.
39. Ibid; p. 24. The central players in preventing merger were the Minister of Finance and the Competition Bureau.
40. For example, a report on 2009 profits of RBC noted a contribution from Canadian customers:“……the bank’s overall profits would have risen from 2008 were it not for a $1 billion goodwill impairment that stems from the declining value of the bank’s US business.The Globe and Mail, Feb 9, 2010 Report on Business; p. B9.
41. Elizabeth Warren, 2008.“Product Safety Regulation as a Model for Financial Services Regulation,”Journal of Consumer Affairs; 42:3; pp. 452–60.
42. George A. Akerlof and Robert J. Shiller, 2015. Phishing for Phools: The Economics of Manipulation and Deception; Princeton University Press.
43. https://www.imf.org/external/pubs/ft/scr/2014/cr1429.pdf. Benchmarks of the resilience of thefinancial system for comparable countries shift over time but from 2005 to 2017, market perceptions of banking system resilience reveal Canada at the top when compared with the measures for the U.S., the Euro area, Australia or the U.K. Cameron MacDonald, Maarten R.C. van Oordt,
2017. Financial System Review; Bank of Canada; p. 33. http://www.
bankofcanada.ca/wp-content/uploads/2017/06/fsr-june2017.pdf.
44. “There are some large credit unions regulated at the provincial level that require the provincial supervisors to have the capacity, on a standalone basis, to effectively supervise them and for the respective provinces to have thefiscal resources to backstop depositors and resolve any nonviable ones in an orderly fashion. Because of the wide dispersion of supervisory talent across the pro- vinces, however, it can be challenging for all provincial supervisors, on a standalone basis, to acquire the breadth, depth of experience, and supervisory capacity needed for the task.” International Monetary Fund, 2014. IMF Country Report 14/29 Canada, Financial Sector Stability Assessment; p. 24.
http://www.osfi-bsif.gc.ca/Eng/Docs/ar-ra/1516/eng/p2-eng.html.
45. Payments Canada, 2017 andhttps://en.wikipedia.org/wiki/Payments_Canada 46. Financial Consumer Agency of Canada, 2017.“Cheque hold periods and access
to funds.”https://www.canada.ca/en/financial-consumer-agency/services/rights- responsibilities/rights-banking/cheque-hold-access-funds.html#toc0. Payments Canada has had, since 2001, expert user representation via a formal 20-person Advisory Council but that has not tipped the balance toward system efficiency or consumer protection.https://www.payments.ca/about-us/how-we-collaborate/
stakeholder-advisory-council.
47. pwc Canada, 2017. Canadian Banks 2017# Bankovation; “Pain Points for 2017” B McFarland and D.A. Kazarian at https://www.pwc.com/ca/en/
industries/banking-capital-markets/canadian-banks-2017.html.
48. Payments Canada. Bank of Canada and R3, 2017. Distributed Ledger Technology for Domestic Interbank Payments Settlement https://www.
payments.ca/sites/default/files/29-Sep-17/jasper_report_eng.pdf.
49. Ibid.
50. Maureen Gillis and Alexandru Trusca, 2017. “Not There Yet”: Bank of Canada Experiments with Blockchain Wholesale Payment System; Cyberlex;
June 19. http://www.canadiancybersecuritylaw.com/2017/06/not-there-yet- bank-of-canada-experiments-with-blockchain-wholesale-payment-system/.
51. Complexity may simply be an inevitable part of financial products and this may seriously reduce the promise that“financial literacy”can solve the search problem. OECD research identified 14 different components of a mortgage application. OECD, 2009. Financial Literacy and Consumer Protection:
Overlooked Aspects of the Crisis,OECDRecommendation on Good Practices on Financial Education and Awareness Relating to Credit; June; p. 18.
Andrew Kormylo conducted research where he asked Canadian bank cus- tomers to identify the components of banking service. Francophone banking service consumers in Quebec offered, (unprompted) 20 different characteristics from their own experience. The result of prompting by the interviewer (based on different services suggested by other consumers in the sample) led to respondents identifying 32 different components. A. Kormylo, MA,
“Consumer Satisfaction with Banking: The Concept of Quality in the Service Sector,”University of Waterloo, 1991.