Banks need to be more accountable

(This editorial, co-authored by Duff Conacher and Aaron Freeman, Founding Directors of Democracy Watch, appeared in The Globe and Mail, Saturday, January 6, 1996 on page B7)

It's difficult to garner public sympathy when you are a coddled industry earning record billions in profits while eliminating thousands of staff and charging consumers ever-increasing fees. But Canada's big six banks are doing their best.

The big six argue that the public should be grateful for the contributions that record bank profits bring, since banks pay their workers, suppliers, shareholders and taxes, and donate to charities.

But since most other large businesses in Canada also do these things, this argument only serves to shift attention away from the issue of bank accountability.

Banks rely heavily on the public and government. The deposits of over 20 million Canadians make up 95 percent of the banks' capital base; federal laws guard Canadian banks from foreign competition; and taxpayers have paid billions in loans in the past decade to the Canadian Deposit Insurance Corp. to bail out financial institutions which have failed through overexposure to risky real-estate ventures.

With this reliance on the public purse comes responsibility, and Canadians have a right to know more about what banks are doing with depositors' money.

While we know how much more money banks made on fees this year, we know little about how much it costs them to provide various services. Some commentators have suggested that banks charge customers 30 times the actual cost for some services. If true, customers may be charged 60 cents for a transaction that only costs the bank two cents, resulting in an enormous profit margin for the bank. After all, banks don't have to pay "automatic tellers" and customers do most of the work by punching the machine's buttons.

The question of profit margins is key to determining if banks are gouging consumers in order to subsidize speculative ventures that are of little benefit to the Canadian economy. Bank executives claim that they cannot determine what specific services cost them. But if the banks don't know what their service operations cost, how do they know what to charge consumers?

And the banks' claim that fees are lower than in the U.S., and cost less than other household services, also does not answer the key question of what it costs Canadians banks to serve Canadian customers, and is as absurd as saying that apples are better than oranges because they cost less.

Bankers also say there is plenty of competition and consumers can just shop around. Unfortunately, based on statements they have made, government officials seem to agree.

But the "buyer beware" attitude is inadequate. Banks offer roughly 500 products and services, many named and priced in different ways. As a 1987 parliamentary committee report concluded, the variety of methods banks use to calculate credit card interest rates, for example, means that there is "little benefit from wide choice."

And there is not much information available to help you choose. The Quebec consumer magazine Protegez Vous published a survey of eight financial institutions in January 1995. While the survey showed that the annual cost of 30 services ranged from $39.60 at the National Bank up to $249.60 at the Bank of Nova Scotia, these results were out of date a few months later when many banks changed their fees.

As in the U.S., Canada's banks should be required to disclose their profitability in areas such as service fees and credit card operations, and if profits from one division are being used to subsidize losses in another. For example, did the Bank of Nova Scotia's 1995 fee revenue subsidize its $145 million loss on its investment in an ailing Mexican bank?

To help ensure consumers have meaningful choice in the marketplace and can hold banks accountable, Ottawa should also facilitate the creation of an independent, non-profit Financial Consumer Association (FCA). The FCA could be established at little cost to government, taxpayers or the banks by requiring financial institutions to include a one-page flyer in the bank statement, credit card bill, and insurance premium statement envelopes they mail to customers. The flyer would invite people to join the FCA, which would be directed by a member-elected board, for an annual membership fee of $10-15. With even a modest response from Canada's 20 million financial consumers, the FCA would have ample resources to provide comparative price surveys and a 1-800 service line, and to advocate for consumer interests.

Canada's banks are not government agencies, but nor are they government charities. They play the major role in providing essential consumer services, largely because they enjoy quite charitable government protections. In exchange, banks should face requirements to help balance the marketplace and ensure they provide their services at a reasonable cost.