In early 2017, following media allegations that Canadian banks were using high-pressure tactics and practices to sell a broad range of products and services to Canadian customers, the Financial Consumer Agency of Canada (FCAC) began a review of domestic retail sales practices of Canada’s six largest banks. The review took place between May and November 2017 and involved a significant effort on the part of these banks and the FCAC.
On March 20, 2018, the FCAC released its report, Domestic Bank Retail Sales Practices Review (Report), in which it ultimately concluded that there was no widespread mis-selling in Canada, justifying comments made by bank chief executive officers in 2017 that the reports of aggressive sales practices were largely unsubstantiated. The FCAC also noted that consumers carry out millions of successful transactions every day in Canada without incident and that banks and their employees generally strive to comply with market conduct obligations.
In the Report, the FCAC defined mis-selling as: the sale 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 where consumers are provided with incomplete, unclear or misleading information.
While the FCAC did not uncover a widespread mis-selling issue in Canada, it did identify five key findings that, in its opinion, suggested that there are sales practices risks in retail banking:
- Sales Culture: Retail banking culture is predominantly focused on selling products and services, increasing the risk that consumers’ interests are not always given the appropriate priority.
- Performance Management: Performance management programs, including financial and non-financial incentives, sales targets and scorecards, may increase the risk of mis-selling and breaching market conduct obligations.
- Higher Risk Sales Channels, Practices and Products: Certain products, business practices and distribution channels present a higher sales practices risk.
- Governance of Sales Practices: Governance frameworks do not manage sales practices risk effectively.
- Controls for Sales Practices: Controls to mitigate the risks associated with sales practices are underdeveloped.
The FCAC also identified several measures that, in its opinion, banks could undertake to improve management of sales practices risk and thereby strengthen consumer protection:
- Prioritize financial consumer protection, fairness and product suitability
- Establish a formal sales practices governance framework that clearly defines roles and responsibilities to ensure all elements of sales practices risk are effectively managed, including the effective monitoring and reporting of mis-selling and market conduct obligations
- Improve their oversight, management and reporting of consumer complaints
- Ensure financial and non-financial incentives motivate employees to work in the interest of consumers
- Ensure internal controls adequately address sales practices risk, particularly for the practices, products and channels that pose a greater risk of mis-selling and breaching market conduct obligations
- Ensure human resources and second and third lines of defence, including compliance, risk management and audit, are resourced adequately to improve their oversight of sales practices risk.
The Report indicated that in some cases, banks were already beginning to implement some of these measures.
For its own part, the FCAC stated that it will be increasing its resources and enhancing its consumer education materials. The FCAC also noted that it will be implementing its supervision framework, currently anticipated to be rolled out over 2018. For more information on the supervision framework, please see our May 2017 Blakes Bulletin: Financial Consumer Agency of Canada Publishes New Supervision Framework.
As a next step, the FCAC has confirmed that it will be taking enforcement action, where appropriate, in respect of alleged breaches of market conduct obligations uncovered in the review. In addition, based on interview clips provided by the FCAC Commissioner, the media is reporting that the FCAC intends to “cascade” down its review to other federally regulated institutions, such as smaller banks, federal credit unions and federal trust companies. However, no formal announcement has been made at this time.
The FCAC also noted that the Report has been provided to the Minister of Finance to inform policy development in the context of FCAC’s mandate, and therefore it may be used by the Department of Finance as it continues its ongoing review of the legislative and regulatory framework of the federal financial institution sector in Canada.
Further details regarding the five key findings in the FCAC’s Report are below.
- SALES CULTURE
The FCAC found that retail banking culture in Canada is increasingly focused on selling products and services, which is not surprising given that banks are businesses that strive to maximize shareholder value. The FCAC noted that this is in part due to a shift away from the traditional in-person transaction/service model to a data-driven model that encourages front-line staff to sell products and services to consumers.
However, the FCAC found that the retail banking culture has begun to shift away from sales results, moving instead towards customer satisfaction and loyalty measures. The FCAC remarked that these measures may motivate employees to gain a greater understanding of consumer needs and financial goals, although it was too early to assess whether the measures would, in the FCAC’s view, sufficiently mitigate the risks of mis-selling and breaching market conduct obligations.
- PERFORMANCE MANAGEMENT
Financial and Non-Financial Incentives
The FCAC found that employees’ behaviour toward consumers was influenced more by financial and non-financial incentives than by the “tone from the top” communications they received from senior management to “sell the right way”. Employees’ salaries are typically comprised of both a fixed base salary and variable incentive pay. The FCAC determined that for the majority of front-line employees, their fixed base salary comprised the bulk of their compensation. Despite this, employees were motivated to achieve strong sales results because they believed doing so provided more opportunity for non-financial incentives, such as small-value gift cards, peer recognition forums, all-expenses-paid trips and holidays, but also because strong sales results were viewed as a key consideration for career development opportunities and promotions.
However, the FCAC noted that when properly designed, non-financial incentives may promote good sales practices and behaviours, and that opportunities exist for banks to significantly enhance the design, monitoring and oversight of non-financial rewards programs.
The FCAC determined that banks employ different types of sales targets to motivate employees to sell, some of which, such as product-specific targets that must be met within a certain time period, can increase the risk of mis-selling. Banks also tend to assign greater value to more profitable and complex financial products and services, which may also increase the risk of mis-selling. However, most banks strive to calibrate the sales targets so that approximately two-thirds of front-line employees reach them and the FCAC found that banks are introducing new types of targets to mitigate the risk. For instance, as part of the shift toward more customer-centric strategies, the FCAC found that a number of banks have introduced, or are testing, activity-based targets (which recognize sales-related activities even if the consumer does not purchase a product or service) to complement sales targets. The FCAC noted that product-neutral sales targets (e.g., setting targets encompassing all credit cards, versus targets for just premium cards) could greatly mitigate the risk of mis-selling.
Scorecards are used by banks to manage and inform the calculation of variable compensation to employees. The FCAC determined that in recent years, banks have placed greater emphasis on customer satisfaction when assessing employee performance, which has encouraged the development of new metrics for front-line employees. While the banks pointed to these balanced scorecards as a key control to mitigate the risk of mis-selling, the FCAC found that the metrics used to assess an employee’s sales results tended to be significantly more robust than those used to assess other areas of performance, suggesting there remains room for improvement in how scorecards are used to mitigate the risk of mis-selling.
- HIGHER RISK SALES CHANNELS, PRACTICES AND PRODUCTS
In its review, the FCAC identified a higher risk of mis-selling and market conduct breaches in areas involving mobile mortgage specialists (MMS), cross-selling, creditor insurance products and third-party sellers.
Mobile Mortgage Specialists
MMS sell mortgages independently from the branch channel, going out in the community to meet clients and business contacts. The FCAC found that the mobility and lower supervision levels presented a higher risk to consumers. In addition, MMS compensation is 100 per cent variable, which may discourage MMS from making reasonable efforts to assess and take into account a consumer’s needs and financial goals.
The FCAC noted that most banks use, albeit to a limited extent, compensation penalties to retroactively claw back commissions earned by MMS if certain events occur (e.g., incomplete mortgage paperwork or a high number of defaulting mortgages). The FCAC found that currently, these claw-backs are primarily used as a control to mitigate credit risk, but suggested that they could be used to mitigate the sales practices risk associated with MMS.
The Report stated that there are benefits to cross-selling, including that consumers can be made aware of useful products and services. The FCAC found that in general, banks have controls in place to mitigate the risk of mis-selling and market conduct breaches associated with cross-selling, such as failure to obtain express consent for new products or services, but found that improvements could be made. The FCAC suggested that data analytics could be used to monitor the rates of unused or cancelled products, which may indicate mis-selling.
Creditor Insurance Products
The FCAC identified various risks associated with creditor insurance. First, the FCAC found that there is a risk that consumers and front-line staff at banks may not adequately understand creditor insurance, the exclusions to the coverage or the claims adjudication process. Additionally, because bank employees are often encouraged to cross-sell and generally apply more pressure when selling creditor insurance, compared to other banking products and services, the FCAC determined that employees may mistakenly or deliberately imply that creditor insurance is sold as part of the credit product or that credit approval is contingent on the purchase. Finally, because of product-specific sales targets for creditor insurance, the FCAC indicated that there is an increased likelihood that sales staff may push a specific product that does not meet the consumer’s needs.
The FCAC identified a number of controls that banks have implemented to mitigate the risk of mis-selling and promote compliance with market conduct obligations, including scripts and cues, training and claw-backs. In fact, the FCAC found that claw-backs are more widely used to control the mis-selling of creditor insurance than they are for other banking products and services. Nevertheless, the Report notes that the banks’ current controls could be strengthened, specifically that banks could improve oversight and training of employees to ensure they follow scripts and clearly explain terms and conditions, and could better analyze cancellation data to monitor and identify sales practices risk.
The FCAC found that most banks in Canada have outsourced the sale of certain products like credit cards to third parties, and that the third-party sales model, combined with limited oversight from banks, may lead to an increased risk of mis-selling by third parties. As an example, the Report notes that ambitious and product-specific sales targets may encourage third-party sales staff to use high-pressure tactics to sell credit products to consumers without reasonably assessing their suitability for consumers. In addition, the circumstances under which third parties interact with consumers may affect the way consumer consent is obtained, since consumers are often busy and distracted when interacting with third-party sellers. However, the FCAC found that some banks are currently rethinking their use of third-party sellers and have taken steps to enhance their oversight of third-party sellers.
- GOVERNANCE OF SALES PRACTICES
The FCAC emphasized that the quality of a bank’s corporate governance practices is an important factor in maintaining consumer and market confidence. As such, it identified the following opportunities to strengthen bank governance of sales practices going forward:
- Develop governance frameworks that specifically address the management of sales practices risk
- Establish clear mandates, roles and responsibilities for oversight of sales practices
- Set clear expectations for reporting on sales practices risk to allow for a more informed and holistic perspective of the risks
- Facilitate more effective oversight of bank controls with respect to sales practices and market conduct obligations.
The Report noted that some banks have begun developing and implementing frameworks to manage sales practices risk, but that at the time of the review, this work was in its early stages.
- CONTROLS FOR SALES PRACTICES
Banks rely on their organizational culture as a key control for mitigating mis-selling and as a means to ensure that appropriate messaging flows from senior management down to front-line staff. However, the FCAC found that communication from senior management about appropriate sales techniques did not always cascade down to the front line in a consistent manner. In particular, the Report noted that the tone from senior management consistently focused on the consumer, but that messaging from middle management to front-line staff may instead focus on results and volume.
Three Lines of Defence
The FCAC reviewed the banks’ three lines of defence and identified various controls that are being used at each stage, as well as ways to improve such controls.
At the operational management level (first line of defence), the FCAC identified concerns regarding the tools and resources available to branch managers to manage risks, finding that branch managers have a limited line of sight into interactions between consumers and employees. This ultimately results in the managers receiving insufficient reporting on areas that could help detect mis-selling and market conduct breaches. The FCAC also found that although there was more oversight in the telephone channels due to the number of calls recorded in call centres, only a small number of these calls were reviewed for quality assurance purposes. Given these concerns, the FCAC emphasized the importance of finding opportunities to improve quality assurance in call centres and identification of mis-selling by branch managers, including reviewing a higher number and larger proportion of calls, implementing risk-based call selection for such review, and improving reporting lines at branches.
With respect to compliance and risk management (second line of defence), the FCAC found that compliance and risk management oversight of consumer protection was underdeveloped in comparison with oversight afforded to other areas of the bank. The FCAC also found that compliance reports to boards could be improved to include root-cause analyses of trends and issues and the status of action plans related to sales practices.
Finally, with respect to internal audit (third line of defence), the FCAC emphasized the importance of having internal audit review and assess the degree to which bank culture mitigates sales practices risk.
The FCAC also reviewed how banks deal with consumer complaints. It found that currently, banks resolve approximately 90 to 95 per cent of consumer complaints at the first point of contact as part of providing good customer service, but these complaints are generally not logged. Further, there are limited resources to monitor escalated complaints and ensure they are classified correctly. As noted in the Report, this makes it difficult to determine whether the small number of escalated complaints is representative of the broader consumer experience. Nevertheless, the FCAC found that most banks recognize the need to improve their line of sight into customer complaints and are exploring solutions to enhance the data received from employees who routinely handle and resolve complaints.