Our podcast, Torys in 10, features quick, candid conversations with our lawyers on issues affecting your business: critical changes in the law, deal trends, market and industry developments and more.
In this episode, Brigitte Goulard and Eli Monas sit down and discuss some pertinent international developments in the financial consumer protection space and unpack what Canada could learn from these developments. Brigitte and Eli touch on topics such as market conduct issues, the OECD’s voluntary principles around financial consumer protection, and how the new consumer protection provisions of Canada’s Bank Act align with these principles. Listen in to get all the details from Brigitte and Eli.
A full episode transcript follows.
Eli Monas: Hi, I’m Eli Monas, a Senior Associate at Torys LLP in the Financial Institutions group.
Brigitte Goulard: Hello, Iv Brigitte Goulard, I’m the co-head of the Consumer Protection unit here at Torys. And prior to that I was the Deputy Commissioner of the Financial Consumer Agency.
EM: And we’re here to talk to you today about some international developments in the consumer protection regime around the world, which may be applicable to Canada. And so with that I will start and I will ask some questions for Brigitte. So Brigitte, financial market conduct issues have garnered lots of attention over the last few years, not only in Canada but also internationally. Can you share with us your thoughts on what is happening internationally and what lessons are Canadian banks can learn from the events and other jurisdictions?
BG (00:57): Thank you for that question Eli, that is a very good question because there has been lots of happening internationally, particularly since the 2008 crisis where international organizations have turned their minds to see what they could do to help countries. And one of those organization is actually the group of G20 countries who mandated the OECD to develop some principles to assist the G20 countries as the developed principles to help them with their financial consumer protection issues. So those principles were developed by the OECD and are now in application and countries across the world now are looking at those principles to help them develop their own legislative frameworks. Principles include things such as oversight bodies, making sure oversight bodies have the authority and the resources, a fair treatment of people, proper disclosures, improvement in financial education and so on.
EM (02:00): As the title suggests, the principles are very high level. Isnvvt that difficult for G20 countries to understand how they should in fact be applied?
BG (02:07): Yes, they are very high level and they did that with a purpose because these principles are actually voluntary and each country has to apply them the way they see fit in their countries. However, to assist the countries in the application of the principles, there was a guide that was developed and this guide provides tools such as best practices, guidelines, policy guidance, in support of the implementation of the principles. I think this would be a very useful tool for banks who were thinking about how they would like to apply the principles within their own organization.
EM (02:40): So, are you suggesting that the new consumer protection provisions of the Bank Act in Canada that received Royal Assent sent in December but are not yet enforced, are lined with the g20 principles?
BG (02:49): Yes, they are aligned with the G20 principles. However, it’s important to remember, as I just mentioned, that the principles are exactly principles and they’re not meant to be strict requirements and they were written in a way that each country can apply them within their own jurisdiction, the way they see fit. That being said, yes, the recent Bank Act amendments are in fact aligned. For example, one of the principles in the G20 principles is that the remuneration structure for staff has to be designed to encourage responsible business conduct, fair treatment of consumers, and to avoid conflicts of interests. The new Bank Act provisions now require remuneration to not interfere with the policies and procedures that are designed to ensure that products and services sold to consumers are appropriate and take into consideration their needs and financial circumstances. That is just one of the examples of how the G20 principles were in fact incorporated in the new Bank Act.
EM (03:55): So will it be challenging for banks to review the compensation structures to comply with this provision?
BG (04:00): Yes, it will be very challenging and for a couple of reasons. The first reason is that the principles regarding or the legislative requirements regarding compensation does not only apply to bank staff that sell the products, but also applies to all of this staff within the bank, including the executives that don’t necessarily have line responsibilities for selling products. It also, on top of that applies, to third parties who are selling a bank product. So for example some of those kiosks that you might see in an airport selling credit cards might be subject to those remuneration provisions. So the bank has a fairly big task in front of them to review all of those remuneration structures to ensure that they comply with the Bank Act.
EM (04:50): Could the work done internationally on this issue be helpful?
BG (04:54): Yes, absolutely. And that is one thing that I try to tell our bank series that they’re not alone, they’re not the first one to look at these issues. This issue has been looked by in many countries and just to give you some examples, Ireland has published a guideline on variable remuneration arrangements for sales staff; the Financial Stability Board has published a paper focused on sound compensation practices; and one paper that is extremely helpful—although it’s also over 700 pages so it is a bit of a brick to read—the Australian banking report on sales practices has some very interesting comments regarding remuneration practices. They provide some, I would say detailed, information on what banks should look at when not only they design remuneration strategy, but also when the implement it.
EM (05:52): So you’ve mentioned the Australian banking Royal Commission reports, if I recall, that report is pretty harsh in its denunciation of the Australian banking industry. I don’t believe the same situation exists here. Am I correct?
BG (06:04): Yes. The Royal Commission report depicted a banking system that was mostly focused on greed. Some people I know had some fun just counting the number of times “greed” was mentioned in that paper. Our federal market conduct regulator here in Canada, the Financial Consumer Agency of Canada did not arrive at the same conclusion when they did its own report on bank sales practices. The FCC concluded in its report that although there are some drivers that might lead to mis-selling, it did not find any evidence of widespread mis-selling during the review. However, the FCC report did recommend that banks ensure financial and nonfinancial compensation strategies should motivate employees of the bank to work in the interest of consumers. That recommendation was actually followed up by the department of finance when they drafted the Bank Act as now they is, as I’ve mentioned previously, a section regarding compensation in the Bank Act.
EM (07:14): If you would recommend that our financial institutions read one international paper or report to assist them in their market conduct obligations, what would it be?
BG (07:22): Hmm, that is a difficult question as there are so many relevant and important papers out there. You’ll find papers that focus on policy issues, you’ll find papers that are very specific on one issue, whether itvs remuneration or sales practices. But I think from my perspective, the most helpful paper for our banks would be the U.K.’s Five Conduct Question program. This was a program developed by the U.K. to prompt and support their own banking system into improving their conduct in a systemic manner. And this also allowed the firms to challenge themselves and to informally benchmark their own efforts across the industry. This paper provides the prompts for our own banking sector as they turned their attention on the type of changes they wish to make in their own institutions.
So just to give you a couple of examples of questions that are part of that program, the first one would be what proactive steps have you taken to identify the conduct risk inherit in your own business? How do you encourage the individuals who work in the front, middle, or back office control and support functions to feel and be responsible for managing the conduct of their business? And actually, if I can say one word about that one sentence, one of the things that we found when I was at the Financial Consumer Agency of Canada as its Deputy Commissioner in their sales review, is that often people think about selling of products as only including sales staff, when in fact the whole issue of conduct risks includes much broader scope of people. This particular question actually addresses not only the front people who sell, but as well the middle management and the back office and the control and support functions that assist in consumer protection. Which is why those types of questions are very important to be asked within the industry. So, I would certainly encourage our banks to have a thorough look at the five question programs and the various reports that are issued almost on an annual basis by the U.K. as they look at these questions.
EM (09:29): Thanks Bridgette. Well, I have one final question. Do you think the Canadian regulators expectations have changed in light of international events in that space?
BG (09:35): Yes, absolutely. Canada is very involved on the international scene. For example, the commissioner, the Financial Consumer Agency of Canada is the chair of FinCoNet, the regulators body of international organizations. The Department of Finance actually sits on the G20 task force on financial consumer protection, so it is impossible that Canada would not be very impacted by what is happening internationally.
But I think the most important influencer on FCAC expectations will actually be the Bank Act provisions, which will require banks to do a lot more for financial consumer protection than they have done in the past. In light of what is happening internationally and in light of Canada’s role on the international scene, obviously the financial consumer protection space in Canada is entering into a new phase, which will require a more rigorous application of financial consumer provisions and will require the bags to look more closely at what they’re doing in terms of financial consumer protection and get ready for the new changes that are about to come.
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