This report presents the findings of the Financial Consumer Agency of Canada’s (FCAC) review of the domestic retail sales practices of Canada’s six largest banks.
FCAC found that retail banking culture encourages employees to sell products and services, and rewards them for sales success. This sharp focus on sales can increase the risk of mis-selling and breaching market conduct obligations. The controls banks have put in place to effectively monitor, identify and mitigate these risks are insufficient.
FCAC examined the drivers of sales practices risk, including banks’ sales targets and incentive programs. It also assessed the controls in place to mitigate these risks. The review focused on two categories of sales practices risk: the potential for breaches of market conduct obligations and mis-selling.
FCAC defines mis-selling as sales of financial products or services that are unsuitable for the consumer; sales that are made without taking reasonable account of the consumer’s financial goals, needs and circumstances; and sales in which consumers are provided with incomplete, unclear or misleading information.
Scope of the review
The review examined the retail banking distribution channels where there is interaction between consumers and bank employees, including branches, call centres, mobile mortgage specialists and third-party sellers.
FCAC reviewed more than 4,500 complaints related to sales practices to gain a better understanding of the issues consumers experience when acquiring bank products and services. FCAC reviewed more than 100,000 pages of bank documents, including those related to training, performance and sales management, compliance, risk management and internal audit. FCAC interviewed more than 600 bank employees, including board chairs and directors, senior management, middle management and frontline customer service representatives.
Alleged breaches of market conduct obligations are being investigated separately and FCAC will take enforcement action where appropriate.
FCAC’s review resulted in five key findings:
1. Retail banking culture is predominantly focussed on selling products and services, increasing the risk that consumers’ interests are not always given the appropriate priority.
The focus on sales has been facilitated by technological innovation, which has made banking more convenient for consumers and enabled banks to transform branches into “stores” dedicated to providing advice and selling products. This shift increases the risk banks will place sales ahead of their customers’ interests.
2. Financial and non-financial incentives, sales targets and scorecards may increase the risk of mis-selling and breaches of market conduct obligations.
Bank performance management programs play a significant role in shaping the way bank employees behave toward consumers. Employees believe strong sales results provide more opportunity to earn incentives and rewards.
3. Certain products, business practices and distribution channels present higher sales practices risk.
The system of incentives and rewards is more developed than the controls for mobile mortgage specialists, cross-selling, creditor insurance products and third-party sellers.
4. Governance frameworks do not manage sales practices risk effectively.
Banks generally have robust corporate governance practices. However, measures to reduce the risks associated with mis-selling should be improved.
5. Controls to mitigate the risks associated with sales practices are underdeveloped.
Areas such as compliance, risk management, audit and human resources have opportunities to improve the oversight of sales practices and their related risks.
Opportunities to improve consumer protection
To improve their management of sales practices risk, banks should prioritize financial consumer protection, fairness and product suitability. They should ensure financial and non-financial incentives motivate employees to work in the interest of consumers. Banks should also ensure that their internal controls adequately address sales practices risk, particularly for the practices, products and channels that pose higher risks to consumers.
FCAC will implement a modernized supervision framework that will allow the Agency to proactively ensure banks have implemented the appropriate frameworks, policies, procedures and processes to mitigate sales practices risk. FCAC will also increase its resources for supervisory and enforcement functions.
FCAC will enhance its consumer education materials to raise consumer awareness about financial products and services, and inform consumers of their rights and responsibilities and of the importance of asking the right questions, particularly when purchasing financial products.
What consumers should know
Consumers should know that banks are required to comply with federal laws, regulations and their own codes of conduct and voluntary commitments, all of which are intended to protect consumers. FCAC is responsible for enforcing bank compliance with these market conduct obligations.
Given the risks identified in this report, FCAC suggests consumers ask questions, seek objective advice and take time to make decisions about products and services. More tips for consumers on how to use banking services are available at canada.ca/money.