The FCAC & The Canadian Banking “Scandal”: how could they not see it coming?

The fundamental weakness of current regulation is that it relies primarily on effective consent by consumers, effective disclosure by banks and education by regulators. In order for all three layers of regulation to work we rely on banks’ commitment to good ethical conduct with respect to service processes. Take away ethics and integrity and over emphasise aggressive sales targets and the frame in which regulators depend on to protect consumers disappears. Is it not ridiculous that the largest fine the FCAC can impose on a bank for the breaches we appear to be seeing is a $500,000 fine?

From 2006’s, “The New Science of Sales Force Productivity”:

“They can get much more out of their entire sales force by using a hard-nosed, scientific approach to sales force effectiveness.…in a few years, they will almost certainly be standard operating procedure for any company that hopes to compete effectively in the global marketplace.”

“When we studied the results of a systematic sales force effectiveness program launched in several branches of a large Korean financial services provider, we found that the branches experienced a 44% rise in weekly sales volume, compared with a 6% decline in other branches. The top quartile of customer-service reps increased their product sales by 6%, the second quartile by 59%, the third quartile by 77%, and the bottom quartile by an astonishing 149%. “

Lucie Tedesco, Annual Consumer Session, Ottawa, March 30, 2017:

 Much like the organizations you represent, FCAC is focused on consumer protection. The financial marketplace is constantly evolving, and we have to stay in step with that evolution—and evolve ourselves. We are only as effective as we are prepared for emerging challenges and opportunities.

Take an industry where relationships have been built on trust, decades of trust, where these relationships have a natural point of sale advantage, where the regulator trusts the industry to treat clients fairly and whose main lever of regulation is education and mandated disclosure.

Add to this mix a highly concentrated banking sector, where most individuals already hold an account and where the route to revenue growth lies in selling successively more and more services and products each year.

And then add aggressive management of those sales targets.

Canada needs to scrap its over reliance on education and disclosure and the “tick the box exercise” that is consent and take heed of the changes to the competitive landscape and the well recorded weaknesses of an over reliance on disclosure as a regulatory tool.

Forget educating the public, the FCAC needs to educate itself as to the realities of both the industry and regulation of that industry.

Go Public’s Investigation

In March CBC’s Go Public investigative team reported on a burgeoning crisis in Canadian retail banking. Reports strongly suggested many bank employees (both high street and call centre) had come under intense pressure, especially over the last few years, to sell increasing amounts of products and services to customers; the only way to reach sales targets (lose your job or sell) was to, inter alia, cross sell/sell/up sell less appropriate higher cost products/services instead of, at times, more appropriate lower fee/cost alternatives.

CBC’s reports suggests banks have likely breached “voluntary codes of conduct”, for what they may be worth, and possibly Bank Act regulations (the lightly termed “consumer provisions” in the FCAC Act) with regard to consent and disclosure. A list of some CBC articles is noted below:

‘I will do anything I can to make my goal’: TD teller says customers pay price for ‘unrealistic’ sales targets

‘We do it because our jobs are at stake’: TD bank employees admit to breaking the law for fear of being fired

‘Sell to them or you will lose your job’: Call centre employees for big banks reveal upsell pressures

Go Public’s reports were corroborated by a large volume of feedback from retail banking employees and, from what I can gather, consumers. While the CBC reports were primarily focused on TD, feedback suggests the practise runs throughout the banking industry. This pretty much reflects feedback from the US in response to the Wells Fargo revelations:

From a September 2016 CNN article; Nearly a dozen current and former employees at large and regional banks such as Bank of America (BAC), Citizens Bank, PNC (PNC), SunTrust (STI), and Fifth Third (FITB) tell CNNMoney that a sales obsession pervades their banks. They say they too are under immense pressure to get customers to open multiple accounts.

As we look further into the regulatory frame and the business imperative that courses through the banking industry, these reports are unsurprising: bank regulation in Canada, in terms of consumer protection, focuses a) on consent (signature) and disclosure via the “consumer provisions” of the Bank Act and b) on education via the FCAC (although it appears the FCAC is the one that needs educating).

As noted in the 2015/16 FCAC Annual report

“OUR MANDATE IS TO PROTECT CANADIAN FINANCIAL CONSUMERS: We do this by promoting and ensuring compliance with federal financial sector legislation, and by empowering consumers through financial literacy. “

In point of fact, consent need not be informed or willing to pass Bank Act provisions, and mere disclosure of information does not imply that the sales process itself has integrity.

We have to assess the sales/advice process itself to determine whether customers are being treated fairly. With tough sales targets and management pressure to meet targets, the risks of impairment in the sales/advice process is high, and hence we have to doubt the credibility of regulatory oversight that emphasises “consent” and disclosure alone.  Education is unlikely to be the best rod to address errant behaviour.

The academic literature on the effectiveness of disclosure, as a regulatory tool, is also substantial:

From “The Use and Misuse of Disclosure as a Regulatory System”, 2007 “Disclosure is a “soft” form of intervention that does not directly mandate change in the underlying behavior….the adoption of less intrusive disclosure schemes by regulators may reflect increased influence by regulated parties on agency rulemaking”

From “What Future for Disclosure as a Regulatory Technique? Lessons from the Global Financial Crisis and Beyond”; “modern financial regulation stretched the disclosure paradigm and reliance on self-regulation way beyond its original realm of issuer disclosure and prevention of market abuse to financial services consumer (retail investor) protection and even prudential regulation with mixed results”

From “Effective Disclosures in Financial Decision Making”: Disclosure, particularly disclosure used in isolation, may not provide sufficient support in helping investors make more informed decisions….Given that many consumers have low levels of financial capability, disclosure is likely to be most effective when used in conjunction with other policy tools.”

Moreover, if we only require consent and disclosure to pass regulatory standards with respect to sales, then firms may also feel less restrained with respect to increasing the pressure on employees to sell.

The frame in which the consumer is held to be responsible is one that is satisfied by disclosure, education and consent. How wide is the frame and how much leeway do firms have with respect to pressure applied at the point of sale? Judging by what is happening one would believe that regulatory consensus suggests the leeway is indeed intended to be wide.  Is this sensible in the light of the revelations?

Banks are actually, and oddly, allowed to impose pressure on “a person to obtain a product or service”, according to section 459.1 of the Bank Act. They are just not allowed to apply “undue pressure”, and the FCAC, a regulator that supposedly fills the consumer protection role, does not appear to regulate or review bank processes and algorithms governing sales targets – I certainly see no specific references to such.

Indeed, the FCAC’s 2016 annual report, blissfully unaware of the storm to come, in what could clearly be framed as famous last words, stated: “This year, the Financial Consumer Agency of Canada (FCAC) continued to solidify itself as Canada’s financial consumer watchdog–ready for any challenge on the road ahead.”.

The impact of reportedly extreme sales targets is an increasingly billowing narrative and one the Federal Government would do well to face head on. As with regulation of financial services (securities, insurance etc) in general, Canada lags well behind global standards and developments.

While many may seem content to point out that Wells Fargo was in the US, that mis-selling of payment protection insurance was a UK problem (Canadian banks are notably also selling payment protection), the rise of aggressive sales targets has in fact been a global phenomenon, as has the growing awareness of their impact.

Sales of payment protection insurance has a lot of marketing presence behind it. As of 2009, based on one survey, circa 25% of Canadians had payment protection insurance on their credit cards. One wonders what the market penetration is today. I also note that there is a developing class action in Canada.

What is central to all incidences of misspelling are the systemic flaws: it is the system that is the environment. Canada should learn from the mistakes of others and act now with respect to concerns raised by bank staff.

In 2013 the UK’s Parliamentary Commission on Banking Standards noted a number of issues with UK banking standards that echoes those uncovered by CBC’s Go Public:

  • Poorly constructed incentive schemes & poor sales practices.
  • Staff facing pressure, performance management and risk of dismissal.
  • A wider set of activities that has changed the nature of the service.
  • Absence of any sense of duty towards the customer.
  • Regulatory failure/misplaced sense of security.

Are Canadian consumers best interests being met, or is the driving interest that of the bank’s employees and shareholders?

CBC’s reports strongly suggest that the first two points lie at the heart of the current furore: in order to meet targets employees have had to sell products that, they felt, consumers clearly did not need, and were forced to misrepresent them or mislead consumers over them, or even in some instances to effect changes to accounts and services without the client’s consent.

Many of the accounts of employee action smack of desperation, of chaos, of a culture that is out of control and injurious to employees, clients and institutions alike. These comments reflected those being made in the US, the UK and a number of European countries, so there is a clear pattern to these practises.

Management collusion?

Stories of high pressure management tactics and collusion to get employees to sell also appear rife if we refer to a large body of anecdotal evidence: staff appeared to be under constant threat of losing their jobs, of being “coached” to improve their performance, of being forced to sell irrespective and of being ignored by the chain of management.

It would be interesting to note how staff concerns were dealt with, whether regulators were aware of such, whether they accepted management rebuttal of concerns, if there were any. It would also be interesting to note which of the bank regulators is responsible for monitoring this type of data, if at all.

It is the organised nature of the problems raised by recent claims, the strong resonance of systemic intent, that makes it hard to believe that senior management were unaware.

Sales targets of the type reported are both top down and bottom up: senior management will have had to OK the incentive schemes; middle management would have been instructed to enforce them, develop them, monitor them; the software systems that pick up the sales opportunities would have been hard coded and expenditure for their development would likewise have been subject to management deliberation. This does not appear to be a rogue sub culture within the Canadian banking system; it is too well organised and enforced.

Is regulatory culture encouraging deviance?

One other point that is worth making: business culture is also influenced by regulatory culture. If a strategy of raising share of wallet and increasing the number of products/services sold per customer, as well as tied selling initiatives (with point of sale advantage), have all passed regulatory muster over the years, then each successive turn of the screw is also likely tacitly accepted in advance. There is a de facto linear/exponential equation here that is implied in the actions of the banks.

I see no regulatory capability with respect to treating customers’ fairly and of being aware of the boundaries and stresses of the dynamic.

Wells Fargo

Looking back at the Wells Fargo claims in the US (1, 2, 3, 4, 5, 6, 7) we can see similarities with claims currently being made by Canadian bank employees and there are also lessons from the Wells Fargo scandal: apparently Wells Fargo had been aware since 2009 of problems and in a 2010 employee satisfaction survey, issues were raised with respect to the bank’s sales targets. Despite the well flagged issues associated with sales targets in the banking industry, globally, certain Canadian banks still seem strongly attached to them. In the UK concerns with the selling of PPI were also, according to a number of accounts, raised years before concerns were made generally public.

Canada’s regulators

While banking has become ever more focused on maximising returns per account, regulators have remained focused on the assumption that banks operate ethically, that regulations governing consumer protections are sufficient and that the missing link in consumer protection is that of education.

In the FCAC’s 2015/2016 annual report, they made the following claim:

In 2015-16, we worked closely with FRFEs (Federally Regulated Financial Entities) to ensure their products, policies and practices comply with legislation, voluntary codes of conduct and public commitments.

We are reporting strong market conduct among FRFEs again this year, with no major or systemic concerns.

Concerns over the banking business model have been raised for some time, and clues as to the role of more sophisticated, and possibly abusive, sales strategies have all been in plain sight. Yet, the stresses and strains in the system have to all intents and purposes been viewed as proper and appropriate.

Again we have, between the lines, confirmation of a regulatory vacuum, a habitat in which banks are allowed to stretch for profit under the auspices that whatever passes through consent, disclosure and education has integrity. This is a flawed and dangerous presumption.

Perhaps the FCAC needs educating over sales processes

In “The New Science of Sales Force Productivity”, a Harvard Business Review article of September 2006,

“Companies that follow a scientific approach take a much different course. They focus above all on increasing individual salesperson productivity…they have learned to use four levers that make productivity increases both predictable and manageable.

Targeted offerings: “… companies pursuing a scientific approach boost productivity by…systematically” dividing “their customers according to factors such as potential value of the account, share of wallet, vertical market, type of product, and type of sale.”

Optimized automation, tools, and procedures: “…Merely setting such goals, however, is not enough. Supporting them with management processes, selling materials, and automated tools for measuring leading indicators and results is what makes outcomes more predictable.”

Performance management: “Every successful company we studied measures inputs—a rep’s pipeline, time spent prospecting, or specific sales calls completed—as well as outputs, thereby helping the reps stay on top of the process. “If you’re not looking at the in-process measures and you’re simply looking at the results,” says McDermott, “you’re missing the most important element, which is the future.”

Sales force deployment: “How a company goes to market—how it organizes and deploys not just its reps but its sales, support, marketing, and delivery resources—is a critical part of the sales process….Having access to detailed information about the behavior and profitability of customer segments and microsegments allows sales executives to decide how best to deploy these different resources….Several years ago, sales executives at Cisco set a goal of reducing reps’ nonselling time by a few hours a week and charged the IT department with making it happen. The improvement led to several hundred million dollars in additional revenue.”

“All four of the levers help increase sales force productivity. What’s most interesting, however, is that they seem to have the greatest effect on lower-ranked performers and so narrow the gap between top performers and everyone else. When we studied the results of a systematic sales force effectiveness program launched in several branches of a large Korean financial services provider, we found that the branches experienced a 44% rise in weekly sales volume, compared with a 6% decline in other branches. The top quartile of customer-service reps increased their product sales by 6%, the second quartile by 59%, the third quartile by 77%, and the bottom quartile by an astonishing 149%. “

So much of what determines what an investor consents to is determined outside of consent and the disclosure that is mandated to go with it. The processes that define how a product or service is sold are more important. As such the sales process, its structure, design, algorithms and decision rules need to be part of financial services regulation.

The industry is changing

One of the responsibilities of the FCAC, under objects 2(e), is to

· (f) monitor and evaluate trends and emerging issues that may have an impact on consumers of financial products and services; and

Are the sales pressures likely to ease any time soon? Not if you believe reports on the state of banking and the rising competitive pressures posed by maturing markets and digitisation:

From Mckinsey’s January 2017 report: “A brave new world for global banking

“Banks must adapt to the reality of a macroeconomic environment that offers a number of risks and limited upside potential. Along with stagnating growth, banks face enormous challenges to digest the wave of post financial-crisis regulation…Meanwhile the pressures of digitization, which boosts competition and compresses margins, are growing.”

“…On the positive front, a number of banks are teaming up with fintech and digital firms, using big data and analytics to sharpen risk assessment and drive revenue growth.”

PWC’s paper “When the Growing Gets Tough: How Retail Banks Can Thrive in a Disruptive, Mobile, Regulated World” raised similar issues and pointed to a number of imperatives that should have informed regulators like the FCAC as to the direction of regulatory issues within banking.

The report pointed out that most consumers already have a bank account and the opportunities to grow client base and increase share of wallet were limited.

So how do banks grow?

Acquisitions (not likely in Canada’s highly concentrated market place), gain market share from competitors (banks customers are notoriously sticky – tend not to change providers). The other option is to sell more to existing customers – “Persuade customers to buy additional products and services.”

“A 2011 retail banking survey conducted by PwC indicated that while the average consumer has 6.1 financial products, only about half of them are with the customers’ primary financial institution. According to the survey, there is significant opportunity for banks to service a greater share of their customers’ financial needs.”

Regulators need to widen the scope of regulation

What PWC then suggested should also have informed our regulators of the need to widen the scope of regulation from the transaction to the wider advice process:

“To capture a greater share of wallet, banks must evolve beyond “pushing” products to understanding and delivering on customers’ financial needs. Leading institutions are adopting a new customer-centric model to replace outdated product-centric models.

Today, many banks focus on selling products rather than gaining a holistic view of the customer’s financial situation. The traditional banking model is organization-centric and structured around internal product groups.

In our view, banks should focus on gaining their customers’ trust by identifying and addressing customers’ overall financial goals, then deliver products and services to help achieve those goals. Each customer should be assigned an advocate within the bank whose job is to identify and manage the customer’s long-term financial goals and guide the person to relevant products and services. For instance, financial planning might be the core product on which the relationship is built, particularly for the “mass affluent” market segment.”

It appears that Canada’s banks have ramped up the sales process and the incentives without raising at the same time the standard of care implicit in PWC’s own analysis. Likewise a failure to address these long emerging issues by regulators is also a de facto breach of their own duties of care as regulators.

Clearly banks are ramping up the sales process and the technology behind the process, yet have failed to adequately address the customer service and advice behind the process. If we pressurise the point of sale then the time and space in which the consumer can assess a recommendation is likewise constrained. This further weakens the regulatory frame.

A Bain and Company report, “What Great Looks Like in Banking Sales Practices”, makes a number of points that resonate strongly with respect to the issues raised by Go Public’s investigation:

“Frontline employees, once thought of primarily as salespeople peddling products, are becoming counselors who dispense advice and explain options. This new approach requires a large-scale transformation in the way banks hire, train, supervise, reward, promote and, when necessary, discipline their employees”

“Banks should be wary of tying too much of an employee’s compensation directly to sales volume at the expense of customer satisfaction. Another risky practice: contests that reward individuals or teams of employees with prizes for hitting or exceeding sales goals. Such incentives can encourage overselling, particularly as a promotional cycle reaches its conclusion—for example, at the end of the quarter. “

“When sales targets are overly ambitious, when the pressure from management to achieve them is too high and when the rewards for reaching them are too attractive, employees can be tempted to resort to unsound workarounds, even to the point of opening accounts without a customer’s consent”

The role of the bank teller/manager has changed and with the change in role so should the responsibilities and accountabilities. Processes for determining the suitability of advice should be part of regulation.

It is the lack of any visible focus on the process side, the side which institutions determine how and why they sell to clients that is of concern here. If all the FCAC does is to tick the box that consent has been agreed and that disclosure of terms and costs has been passed, then abusive sales practices are unlikely to be picked up. That the FCAC does not appear to be picking up accusations with respect to obviation of consent is a concern and one wonders what exactly the FCAC does in its reviews.

How should the FCAC respond?

A PWC article, Sales Practises: OCC Exams and Beyond discusses a number of things that the US regulators are doing in the light of the Wells Fargo scandal and it clearly intimates that sales culture at US banks is an issue and that regulators will be looking at sales processes

“ U.S. regulators, led by the Office of the Comptroller of the Currency (OCC), are starting to examine sales practices at large and mid-size banks… examiners will likely expect the sales practices risk management program to consider misleading statements made to encourage customers to consent to a new product or service….expectations around sales culture at banks will only rise. “

“Regulators will, at a minimum, expect the following: a tone at the top that makes revenue-generation secondary to complying with customer protection laws and their underlying principles; compensation and other incentive plans that do not encourage illegal activity or other harmful behaviors; and employee rewards and punishments to reinforce a positive culture message throughout the organization…Finally, this increased focus on sales practices will force banks to alter their revenue generation strategies….. “

“Regulators will expect banks to have established a data driven, unified, and well documented enterprise-wide sales practice risk management program that pays special attention to sales targets and employee incentives.”

“For institutions whose incentive programs increase the possibility of risky sales practices, regulatory expectations will also include an appropriately designed surveillance system that can identify and issue alerts for accounts exhibiting suspicious patterns.”

“The enterprise-wide sales practices risk management program should be well documented, starting with a corporate values statement and extending to policies and procedures for reporting and escalating sales practice concerns to senior management and the Board. Regulators will particularly want to see documentation of employee performance rating processes (including sales targets) and other employee incentives such as gifts, accolades, or promotions. They will expect regular review of these factors and written risk assessments when such processes change”

Federal versus provincial regulation

What may help push changes in regulation through at a faster pace is the fact that Banking regulation is decided at the Federal level. We do not have the provincial quagmire of Securities Commission fiefdoms and provincial legislative differences standing in the way of much needed consumer protection initiatives.

However, the counterpoint is that Federal Government regulation of banking is lacking in transparency. The regulators charged with reviewing banking practises are the same regulators that signed the industry off with glowing reports of market conduct, the same regulators that have missed key global trends with respect to the changing nature of banking and the impact of tough sales targets on conduct.

The FCAC, the Act and Voluntary codes of conduct

I have personally found the FCAC site and its reports largely uninformative with respect to what the regulator is or is not doing.

The FCAC Act states that the objects of the FCAC include the supervision of financial institutions and to determine whether the institutions are in compliance with the consumer provisions applicable to them. As I noted previously, the consumer provisions in the Banking Act deal largely with consent and disclosure, rely heavily on consumer education and the implicit assumption that banks will act ethically with respect to their sales processes.

Regulation of consent and disclosure, as discussed, does not deal with the process behind the sales process or the decision rules and algorithms behind the sales process, nor does it address increasingly predatory sales practises.

So then to the promotion and adoption of voluntary codes of conduct “designed to protect the interests of consumers” and the monitoring of their implementation; how effective are the voluntary codes of conduct and just how are they worded? Let us look at TD’s.

TD code of conduct

The following are excerpts from TD’s Code of Conduct and Ethics for Employees and Directors:

“The TD shield is synonymous with trust – a reputation built up over decades and one we can all point to with pride. Safeguarding this reputation is the responsibility of every TD employee and is key to our continued growth as an organization.”

Emphasising trust in relationships concerning financial interactions implies that you can trust the advice and the suasion. If employees are under pressure to sell and to ignore client’s best interests, the promotion of the relationship as one based on trust should be of concern to the FCAC and the Federal government.  Sales targets are conflicts of interest. 

“TD is committed to conducting its affairs to the highest standards of ethics, integrity, honesty, fairness and professionalism – in every respect, without exception, and at all times”

Again: these are promises made to the public, to its customers that the services and products they are being sold are predicated on the highest possible standards.

It is critical that the FCAC report back on sales target practices within the banks.  How much have they increased over the years? How do they monitor, incentivize and implement the targets? How have sales targets been achieved for a given client profile: for example low income earners and payment protection insurance.

“Every employee and director of TD is expected and required to assess every business decision and every action on behalf of the organization in light of whether it is right, legal and fair and within our risk appetite”

What is “right, legal and fair and within our risk appetite” is not a standard of care per se for the client.

What is legal?

As long as a client has consented and as long as the required disclosure has passed, the bank has satisfied its legal requirements. And, with respect to tied sales, as long as the bank has not applied undue pressure, likewise a sale is legal.

What is fair?

The UK’s FCA, when it discussed Fair Treatment of Customers states that “All firms must be able to show consistently that fair treatment of customers is at the heart of their business model….Above all, customers expect financial services and products that meet their needs from firms they trust.”

I would hope that the type of sales pressure that has been unearthed by CBC’s Go Public would not be considered fair treatment of customers. Indeed, can aggressive sales targets be applied in any relationship which is portrayed as one of trust and where fair treatment is implied?

Critically there does not appear to be any supporting standard of care made by the FCAC, as per the UK FCA’s that would help support regulation of conduct beyond the narrow scope of consent and disclosure. If there is no monitoring of fairness within sales’ processes and no guidance with respect to expectations, then there is a regulatory vacuum and one the banks seem to have legally filled.

“Directors of TD are also required to comply with the Code. Failure of a director to comply with the Code will be dealt with in accordance with the policies and procedures of the Board of Directors.”

If the stories we are hearing from CBC are indeed true, then it is hard to believe that management was unaware of sales targets and their implementation through the chain of command. Likewise the literature on the impact of sales targets is also well documented.

“A central component of TD’s mission is to be customer focused. Accordingly, whenever employees are servicing customers or providing advice or recommendations, we must deal fairly with our customers. As such, we must not allow our desire to increase our performance results to come before our focus on our customers”

All organisations that sell are customer focused. It is the standard of care taken with respect to that focus that is important. The statement does make the point that there is a desire to increase performance results but there is no reference in any other documentation as to how the conflict between performance targets and client interests are managed.  Anecdotally, there appears to have been quite firm management guidance to allow the desire to increase performance to come before the interests of the customer. If the stories are true, TD and other banks are in breach of their voluntary codes of conduct.

The FCAC will have to go deeper and detailed if it is to unearth the full scope of the conduct.

Does it have the resources, the expertise and the commitment to an objective standard to do so? Is the review envisaged by the FCAC up to the task?

Sales Targets – why are they dangerous?

If your revenue growth is naturally maturing (population growth is slowing/aging, most people have accounts and credit cards etc), there is a limit to how much you can grow your profits. Cutting costs, increasing productivity, taking clients from other providers, selling more products and services are a number of options.

In a competitive market place, where consumers are rationale and able to make informed decisions, and where the relationships are well defined, there is a limit to how much a company can extract profit from its operations.

But the market place is not necessarily competitive and consumers are not sufficiently rationale or knowledgeable to make the type of decisions that would limit a company’s ability to sell/extract ever higher levels of profit from their wallet.

Additionally, if relationships of trust are ill defined, or there is a lack of accountability in terms of enforcing the implied responsibilities of those relationships, there is a risk that companies will operate in ways that favour the firm as opposed to the customer.

It is worth noting the UK FCA’s market competition objectives: “An important point to consider here is that the FCA’s competition objective is not about any competition. It is about competition in the interests of consumers.”

In Canada regulation appears to be focused on “any competition” in the sense that as long as consent and disclosure have been satisfied the regulators are happy. They appear happy even though the represented relationship is one based on trust, where banks have point of sale advantage and where sales targets pre-empt consumer interests.

Why is the relationship important? If the consumer is relying on the advice of the bank to help them select services and products, and the relationship is portrayed as one of trust and expertise, then the process in which advice is given should be pre-eminent.

Unfortunately, sales targets designed to drive revenue growth for the bank conflict directly with advice processes that would help determine appropriate products and services.

The advice based process is like an equation with certain decision rules and assumptions:

Input the client’s financial position and other data and out comes a recommendation that may include doing nothing, or it may suggest a lower cost service or product.

If the equations keep on coming out with sales that are below your target, and your employers tells you to sell more or lose your job, or whatever carrot and stick is used, you are essentially telling your employees to override the equation.

Sales targets that conflict with the outputs from a reasonable sales/advice process may lead to one or more of 3 outcomes:

Corruption of process by which you make recommendations of service or products; this can involve doing away with any analysis or consideration of personal needs in order to go straight to the sale.   The target becomes the process.

Impairment in disclosure and/or misrepresentation of information – at the point of sale an organisation has a number of advantages. You can limit the time available to the customer, you can represent the information verbally in a different light or you can rely on the trust and suasion of the relationship to deemphasise the relevance of the disclosure. Or you can use disclosure to sell more without compunction, which is another way of saying the process is compromised.

False consent: forging signatures, pre-signed forms etc (endemic in the securities area from what I understand and still acknowledged as serious issue by regulators) etc. If sales targets are impossible to achieve even with corrupting the process, false consent is the only possible outcome other than accepting the consequence.

In short the process by which someone advises is replaced by the target.  The target becomes the process, the ethics, the analysis, the communication, the relationship, the imperative and the target is simple and easy to focus on.   

Where sales targets override advice based processes in relationships portrayed as “trust in us”, we have serious issues of service misrepresentation, breaches of common law standards of care as well as dubious regulation of the industry itself.

If you emphasis trust at the same time that you are emphasising sales targets, and achieving sales targets means impairing the process, you are knowingly leveraging unethical business practises.

Regulators can no longer focus on consent and disclosure in a dynamic which overrides the relevance of either. This is especially so when we realise that what were once salaried positions are now de facto performance based and transaction remunerated. Likewise, merely setting product sales targets per customer and increasing those each year, irrespective, are not goals that can help an organisation assess the value and rationale of its services and thus better plan and fund and develop its operations. We are of course venturing into other issues with respect to the nature of capitalism where the primary focus of capitalism is not overall market efficiency, but short term profit maximisation without consideration of the impact to the economic habitat. There are vast areas of concern that our government needs to start considering as part of its regulatory oversight objectives.

The academic literature on the consequences of goal setting is clear:

From “Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting”: We identify specific side effects associated with goal setting, including a narrow focus that neglects non-goal areas, a rise in unethical behavior, distorted risk preferences, corrosion of organizational culture, and reduced intrinsic motivation.

From “The Good, the Bad, and the Misguided: How Managers Inadvertently Encourage Deviant Behaviors“:

Research indicates that, aside from personality traits or environmental factors beyond managerial control, six triggers may inadvertently encourage otherwise honest employees to engage in production, property, or political deviance— and perhaps even instances of personal aggression.

These managerial triggers of deviant behavior include: 1) the compensation/reward structure; 2) social pressures to conform; 3) negative and untrusting attitudes; 4) ambiguity about job performance; 5) unfair treatment; and 6) violating employee trust. Experts on workplace deviance suggest that there is much that managers can do to ameliorate the triggers of workplace deviance. These strategies include building an ethical corporate climate, fostering relationships based upon mutual trust and respect, and implementing rules and reward systems based upon principles of equity and justice

Regulatory review/Summary

The Go Public Investigation of Canadian Banks raises some very serious issues with respect to sales targets, culture at all levels, regulation, regulators, complaint processes and the Federal Government’s own commitment to reform in this area.

The fundamental weakness of current regulation is that it relies primarily on effective consent by consumers, effective disclosure by banks and education by regulators. In order for all three layers of regulation to work we rely on banks’ commitment to good ethical conduct with respect to its service processes. Take away ethics and integrity and over emphasise aggressive sales targets and the frame in which regulators depend on to protect consumers disappears. Is it not ridiculous that the largest fine the FCAC can impose on a bank for the breaches we appear to be seeing is a $500,000 fine?

The roots of the crisis have likely been long in the making. Issues that are now becoming obvious in Canadian banking have been well reported for some time, in other international jurisdictions.

Regulation of banking services has always been distinct from that of securities/investment advice, but the reach of retail banking and the likely elevation of its service platform to include the “wider wallet” suggests that higher standards of care and greater regulatory oversight of its service processes are now needed.

Moreover, the intertwining of financial services relationships within Canadian banking, especially with respect to cross selling and cross subsidisation of services across the wider platform, suggests that a much deeper regulatory review is required.

How is this review going to proceed within a regulatory environment that has hitherto been insufficiently transparent? How hands off is regulation and will the review espouse similar principles of engagement? How detailed is the data that the FCAC apparently sifts through to identify issues and how will the review of banks, recently proposed, improve on this?

Is this also not the perfect time for a full review of the disparate regulation of financial services in Canada? The consultations currently on the table to introduce higher standards for securities advice and the consideration of the removal of embedded commissions from products assume a much higher level of significance.

Leave a Reply