Make the banks and insurers tell us more

(This editorial, authored by Duff Conacher, Coordinator of Democracy Watch, appeared in The Globe and Mail, Tuesday, August 23, 1994 on page A17)

So it has happened again. Another financial institution, Confederation Life, has failed and each individual depositor and policyholder worries alone about their potential losses. Just add their losses onto the pile along with the $4.5 billion that taxpayers collectively (through the federal government) loaned to the Canadian Deposit Insurance Corporation (CDIC) in 1991-92 so that it could bail out the collapse of five of Canada's 10 largest trust companies.

In recent years, banks, trusts, and insurance companies seem to have almost perfected the art of shifting the costs of their mistaken real estate over-exposure to depositors, policyholders and taxpayers. Individually, we have suffered - our accounts frozen until the failed trust is dissolved or taken over; our policies frozen until they can be sold to a competitor; our service charges and credit card interest rates mysteriously increasing (to cover the cost of taking over a failed trust?). Now will our insurance premiums mysteriously rise to cover the cost of bailing out a failed competitor? Collectively we have suffered as taxpayers, bailing out the CDIC which is supposed to be the banks' own insurance company. And now insurance companies are requesting taxpayer funding of their own insurance fund, which has been depleted by two other large failures in recent years. Add to this toll the suffering of the thousands of people who have lost their jobs from these failures.

What should we do to remedy Canada's homemade version of a "savings and loans" crisis? We could do nothing and pretend that everything is fine which, from recent statements, seems to be the attitude of federal Industry Minister John Manley. Or we could follow the example of the C.D Howe Institute and CDIC Chair Grant Ruber and blame the victims. They both suggest that depositors should be blamed for the costs of failed trusts, because they should have known that their trust was poorly managed and had a high-risk loan portfolio. Joining the chorus is Michael Mackenzie, the retiring federal Superintendent of Financial Institutions, who says that policyholders should read their insurance company's annual statements "pretty carefully" and be cautious about which company they deal with because of financial troubles in the industry.

For several reasons these attitudes seem strange to me, especially coming from a Minister and regulators who are supposed to be protecting the public interest. First, it seems to me that something probably is wrong with Canada's financial services industry regulations when a 123-year old company with the word "confederation" in its name collapses. Second, as other commentators have pointed out, these companies only disclose the detailed information needed to judge their viability to the various superintendents of financial institutions across the country. Third, even with this information in hand, the superintendents have watched several financial institutions go down in flames in the past few years. If they couldn't judge the companies' investments with more foresight, how do they expect us to do it? Finally, and I'm only half- joking, why do they call themselves trusts and insurance companies if you can't trust them and they can't ensure even their own viability?

So, we're still left with the question - what do we do? Here are a few modest proposals:

• require financial institutions to disclose the number of loan applicants accepted and rejected for each size and type of business, so that their lending practices can be tracked much more closely by financial consumers and regulators to determine if big business and real estate companies get preferential treatment over small business and job-creating ventures;
• require that the majority of the directors of financial institutions be independent (ie. not an officer or employee; not a relative of an officer; not the lawyer, supplier or investment banker for the institution; and not a large borrower) so that individual depositors, policyholders and other stakeholders interests are represented, considered and protected; and
• require financial institutions to include a flyer with their bank statements, credit card bills and insurance premiums when they are mailed to customers; the flyer would invite customers to become fee-paying members of their own Financial Consumer Association which would act as a watchdog for their interests and provide them with detailed information on companies' services, prices and viability.

• require financial institutions to disclose their small business and consumer lending and insuring data categorized by race, gender, income level and neighbourhood of the loan or insurance applicant, so that we can track discrimination in lending and granting of insurance policies; and
• require them to reinvest in specific areas or groups if the lending or insuring information shows that they are discriminating against these areas or groups.

Canada's big six banks control 80 percent of small business financing and 65 percent of consumer lending, hold 54 percent of deposits, and control 45 percent of mortgage lending. Canada's big six insurance companies control 44 percent of individual and 45 percent of group insurance premiums. These 12 institutions have become, in effect, "public utilities" providing the essential services of access to capital and insurance for many Canadians.

Therefore, as with other public utilities, mechanisms are needed to ensure that they provide their service fairly to all Canadians, and in the broad public interest of all Canadians, not just the narrrow private interests of their directors, managers or shareholders. Mechanisms are also needed to help bank and insurance company customers band together to ensure that the collective power of these few financial institutions in the marketplace is matched by collective consumer power. Enacting the proposals outlined above would be a good place to start.