Emerging Trends in Financial Services and Products:
Why Financial Capability is Important for Canadians

Notes for Speech by William G. (Bill) Knight Commissioner, Financial Consumer Agency of Canada to Canadian Conference of Credit Union Executives

Vancouver, May 2, 2006

Good morning. It's my pleasure to be here today as you examine the concept of Innovative Leadership. I see that you have invited some excellent speakers to talk about that exciting topic. I know that this conference is always a highlight of the year for Credit Union Central of Canada. And Veronica Feldcamp always does a fabulous job of putting everything together.

It is a pleasure to be among you. I am here today in a new role, that of the first commissioner of the Financial Consumer Agency of Canada. It is our job to engage in two closely linked activities. We regulate market conduct in the financial services sector. And we engage in the education of financial consumers.

My tasks at the FCAC involve a significant responsibility, and I find the job rewarding. I know that credit unions are leaders in CSR, and that consumer education is something near and dear to your hearts.

You have asked me to talk about emerging issues related to the delivery of financial services. Anyone talking about "emerging issues" had better do so with some humility. Predicting the future is a dangerous game. I don't own a crystal ball. I don't read tea-leaves, and I don't read palms. So I won't pretend to be a fortune-teller today, but I will talk about three things.

First, about financial consumers and their expectations. We at the FCAC are learning a lot about this through the many calls that we receive, and through some of research that we have done.

Secondly, I will talk about some of the emerging trends that I see occurring in the financial services universe. These observations are based both on our own experience at the FCAC, and on my own reading of what is occurring in society.

Thirdly, I want to talk to you about a big idea – a concept called financial capability. By that I mean the ability of consumers to make informed financial decisions. We — the financial services industry (people like you), government (people like me), non-governmental organizations — have not done a good enough job of fostering this important ability. I believe that enhanced financial capability will have a dramatic impact on the lives of Canadians. It's a big idea that should be on the radar screen, and it will be.

So, I want to talk about today's reality for financial consumers, but also to consider the challenges and opportunities of tomorrow.

I think a hockey analogy will be useful here and it's appropriate, too. Some of us are pretty well glued to the Stanley Cup playoffs, which are occurring right now – although not in Vancouver because the Canucks didn't make the cut this year.  

Wayne Gretzky is quite possibly the greatest hockey player ever to lace on a pair of skates. He once described his great success as a player in the following way: "I skate to where the puck is going to be, not where it's been."

I think that this analogy is a good one to use when talking about emerging issues in financial services. We, like Wayne Gretzky, want to skate to where the puck is going to be, not where it's been.

There's an old saying that where you stand on issues depends upon where you sit. I sit as the commissioner of the FCAC, and it is my job to protect financial consumers. I want to provide you with a bit of background about our agency.

Our origins date back to a federal task force called the Future of the Canadian Financial Services Sector. It was appointed in 1996, and is commonly known as the "MacKay Task Force" because its chair was a Regina lawyer named Harold MacKay.

After two years of study and public hearings, MacKay concluded that, 1) there was a lack of competition among financial institutions; and 2) that there was an information and a power imbalance between financial institutions and their customers.

McKay wrote that a vigorous financial system works best in an environment that encourages competition. He also said that empowered and well-informed consumers are central to the healthy performance of the marketplace.

McKay made three key recommendations in his report to government. They were as follows:

• More competition in the financial services marketplace;

• More protection for consumers enshrined in legislation; and

• A redress mechanism for consumer complaints.

Mackay's report led directly to the legislation that created FCAC in 2001. We are an independent organization and a small one – with only 40 people, all in Ottawa – but we have a broad and ambitious mandate.

We engage in two closely linked activities: consumer protection, and consumer education.

The government has provided us with the mandate and tools to ensure compliance with consumer protection laws – at least those laws that apply to federally regulated financial services. That makes us a regulator of market conduct.

And much of our work involves consumer education. That's the second part of our mandate. We provide consumers with information respecting their rights when dealing with federally regulated financial institutions.

Allow me to provide one brief example. We have guides and tools and a website telling people that banks have to cash their government of Canada cheques, whether or not they are a customer of the institution. And the cheque must be cashed free of charge.

I should mention that many of our print and website materials are written in plain language. You in credit unions know all about plain language because you have been providing it in your literature for years.

We at FCAC hear directly from financial consumers all the time. We have a call centre and it's a busy one. We have a website that attracts a lot of traffic. T he information we collect in this way is an incredible resource. It is a window on what is happening out there in the financial services universe.

I want to talk briefly about the calls we get and the expectations of the consumers making those calls.

The FCAC came into being in October 2001. This is what has happened in the past four and a half years: we have received 1.7 million visits to our website, and that number has been rising dramatically. In 2005-2006, we received 765,000 visits. That's up from 458,000 in the previous year. And that is an increase of 67 per cent.

Now, on to our telephone call centre. Since October 2001, we have received more than 105,000 inquiries and complaints. That breaks down as follows: 76,000 inquiries and 26,000 complaints. And about 2,600 of those complaints were what we call self-reported. That means they had escalated to a point where a financial institution actually reported them in its complaint handling process.

You will no doubt want to know about credit unions in all of this. I can tell you that we received about 1,600 enquiries and complaints pertaining to credit unions. These were divided almost evenly, 800 inquiries and 800 complaints. And most people were calling about accounts or loans.

The questions and complaints that consumers have cover the full range of financial services. H ere are the top five categories of complaints regarding the conduct of financial institutions:

• Refusal to open accounts.

• Fees charged on accounts.

• Credit cards – non-disclosure when issued.

• Credit cards again – the lack of a monthly statement.

• Penalty clauses on mortgages.

So, those are some of the numbers. But I also want to give you a picture of reality as described by the thousands of people who call us. I want also to talk about their expectations.

People are busy. We hear a lot about the pressures of work-life balance in our society. It is entirely common for single parents in some families, and both spouses in other families, to be in the workplace. Younger families have their children to get to and from the day care, and school, and the soccer field. People in middle age may have both adolescent children and aging parents to care for. In all cases, time and energy are at a premium.

And in today's financial services marketplace, we expect a lot from these same people. Consumers are faced with a dizzying array of choices. Many people are struggling with the vast amount of marketing information available to them on financial products. The complexity of products such as credit cards, mortgages, and lines of credit are the source of many of the questions and complaints that we receive.

And sometimes it's more than a matter of complexity. Sometimes the financial institutions in question are not living up to their responsibilities.

Allow me to provide a few examples.

The Government of Canada has new regulations that set out the circumstances under which a bank can refuse to set up an account for an individual. Consumers cannot be refused an account based on a poor credit history, or their being unemployed. Generally, if they have proper identification, they can open an account.

Yet, in the information that I provided earlier regarding the complaints we receive, you will notice that accounts are still being denied to people. The FCAC is working to increase consumer awareness of their rights and bank awareness of their obligation to consumers. The mystery shopping we've done shows that the situation has improved.

Example number two:

In 2003–04, the Agency began reviewing bank mortgage documents to determine whether the mortgage prepayment penalty clauses were clear and accurate. As a result of the review, last year several banks took steps to ensure that their mortgage penalty clauses use clear language and include all the information needed by borrowers to determine such costs. Through our work with the industry in this area, consumers now receive much clearer disclosure information.

I should mention that we are also using our consumer education mandate to help consumers in what is a complex market. In addition to helping to clarify mortgage documents, FCAC is active in helping consumers with other common products, such as bank accounts and credit cards. As we know, it is often difficult for people to compare various credit cards with long lists of possible features. In 2005, we at FCAC released a new web-based interactive tool for credit cards. It allows consumers to move through a series of questions to assist them in outlining their specific needs. The tool then gives the consumer a list of options from the over 200 credit cards in our database. The tool narrows the list down to only those credit cards that meet the needs outlined by the consumer.

The credit card tool is an example of the kind of reference that consumers are telling us they need. We know from the consumers who call us that they want and expect information they can find easily and information they can understand and use. The ability to understand a document is a key component to consumer protection – and if that document is to be understood, it must be clear.

Plain language is an absolute necessity if consumers are going to be able to make better-informed decisions. At FCAC we've been working towards implementing our own plain language culture. It's not easy, and it's not a change that can happen over night. We've sent our staff on specialized training, and we've put together an editorial board of plain language experts who review many of our newest publications. Right now we're working with MasterCard on a project to make credit card disclosure documents clearer for readers with lower literacy levels. We've asked experts to take a look at the documents and suggest improvements. I expect we'll be able to complete the project by this summer. As a result, more consumers should be able to read and understand the terms and conditions of their credit card, helping them to make informed decisions.

I believe that the onus of responsibility for clear communication resides with the vendor. But, I am also concerned about the amount of information confronting harried and busy consumers. What we have here is often a mismatch between some of the most sophisticated marketing departments in the economy, and people who lack the time, and in some cases the ability, to decode the information that they are receiving.

This leads me to some of the emerging trends in the financial consumer marketplace. I will mention just a few. These observations arise from our experience with the consumers who contact us at FCAC, but it goes beyond that to my own observations about the financial services industry.

Consumer debt: Consumer debt in Canada has increased to record levels. Between 1982 and 2001, debt per capita doubled, it is suggested that this is a result of easier access to credit cards and new mortgages. Statistics Canada data shows us that the average household debt in 2002 was equal to 121 per cent of disposable income.

Savings: A related trend shows that individuals and families are saving less. In 2001, almost half of Canadian households were spending more than their pre-tax income. Where in 1990 households were saving 13% of their disposable income, they are now saving –0.2% — or less than nothing.

Payday Loans: We are seeing an increased reliance on payday loan companies. There are more than 1,200 payday lenders in Canada and that number is increasing. Many of them provide short-term, single-payment loans at interest rates that consume 30 to 50 per cent of the individual's next pay cheque.

Government programs tied to our tax system make it increasingly difficult for some Canadians to access them. I am thinking here of programs such as the Old Age Supplement and the Guaranteed Income Supplement.

Pensions: We are seeing reduced pension and retirement coverage. Canadians are now expected to hold several jobs during their working lifetime. Their employers are taking less responsibility for pensions than they once did. A growing number of people have to plan and invest for their own retirement.

Retirement Savings: An estimated 38 per cent of adult Canadians say their income and investments will be inadequate or barely adequate to maintain their standard of living in retirement.

Literacy: Something that disturbs me greatly is the level of illiteracy in our country. I said earlier that many people are busy and they don't always take time to read the fine print on financial documents. But sadly, there is a group of people who can't read that fine print, because their reading skills are simply not good enough.

Statistics Canada tells us that 42% of the Canadian population reads at or below a grade school level – which is considered a Level 2 literacy. Most information in the financial marketplace, however, is written at a Level 3 literacy level or above.

All of these trends are disturbing and they lead us to ask what we might do about them. And that leads me, finally, to financial capability.

Briefly defined, financial capability means that individuals possess financial knowledge and financial behaviours – knowledge and behaviours that enable people to make informed financial decisions.

The ability to make informed financial decisions, to act with confidence in financial matters, and to find advice and help when needed – all have a profound effect on the lives of individuals and families. It means being able to create a personal or family budget; to choose the appropriate bank accounts and credit cards; and the capability extends to financial planning for higher education, home ownership, and retirement.

Financial capability is a necessary skill for all citizens who want to participate fully in Canadian society. For example, people today need financial capability to be able to navigate increasingly complex government programs such as Employment Insurance, the Old Age Supplement or social assistance. They may not receive the full benefit from government services if they lack that capability.

The problem is that policy makers and service providers often assume that everyone can make important financial decisions on their own. Or they at least assume that people have access to resources allowing them to make wise decisions. But research in countries belonging to the OECD, not to mention some preliminary Canadian data, does not support these optimistic assumptions.

Financial capability is a concept that is influencing policy and decision- makers in the United States and Britain. And it is a concept that we are starting to pay more attention to in Canada as well.

Those who lack financial capability may face increased exposure to predatory practices, such as those offered by payday loans and pawnshops. They may not be able to see the long-term impact of the decisions they make today. They may well be handicapped in establishing a credit history, getting a good deal on a mortgage, or using registered savings vehicles for retirement. In short, this lack of access to government and financial services leads to both financial and social exclusion.

Let me give you an example:

It is my view that low interest rates have driven the sub-prime market to levels not seen before. The sub-prime market is made up of people who do not qualify for the lowest interest rates. Suddenly, with sub-prime lending, consumers who could not have considered purchases, such as a house, are able to do so. So some institutions line up to offer higher priced mortgages. Interest rates are low – but what if they increase? Can a consumer whose financial capabilities are low really evaluate the risks involved?

Let's put it another way. Informed consumers can protect themselves by asking the right questions – but how do we provide people with those questions? What do consumers need? And whose responsibility is it to help them navigate all this financial information?  I certainly believe it is my responsibility as the commissioner of FCAC, which has a mandate to protect and inform financial consumers. And I believe it is a task that falls to credit unions, too, as responsible financial institutions.

But I admit readily that FCAC does not have the resources to ensure that all Canadian consumers possess financial capability. We have a mandate to provide consumer education, but we can't do it alone.

So where do we go from here? I want to tell you about a symposium that we held in June 2005. It was called Canadians and their Money: A National Symposium on Financial Capability.

We were one of the organizers and patrons of the event. Another of the groups involved is called the Social and Enterprise Development Innovations — SEDI for short. Some of you will be familiar with SEDI because they developed the Learn$ave program that several credit unions bought for use by their members.

The third group involved was the Policy Research Institute, or PRI for short. The conference actually arose from research that SEDI undertook on behalf of PRI. That research examined the linkage between financial capability on the one hand, and poverty and exclusion on the other.

We pulled together about 150 people – people from government and community groups, scholars and social policy experts. They were from Canada, and from the United States and Europe. We wanted to assess the relevance of financial capability for social policy, for consumer protection and for financial services in Canada. We learned a lot from each other in those two days.

I learned, for example, that only one in five Canadians is confident in her financial knowledge and abilities. I also learned that two-thirds of Canadians are functionally illiterate when it comes to investment knowledge.  

The consensus arising from our meeting was that the financial information, training, and advice that we have available is not adequate to meet the needs of many Canadians, especially disadvantaged Canadians.

It became obvious, as well, that there are big gaps in research and practice. Nobody has a good snapshot of the financial capability possessed by Canadians. We know that we have a problem, but we can't describe it adequately.

Statistics Canada, for example, collects and analyzes information about household finances. But the agency does not collect information about financial capability. We need surveys that evaluate the skills that people must have if they are to possess financial capability.

Some community-based organizations have gained important insights into the dynamics of financial capability — but again, there are many gaps in the information.

In the United States, the Federal Reserve Bank collects some of the necessary information. In Britain, the Financial Services Authority has developed some effective survey instruments, and it is also testing delivery approaches through pilot projects.

I came away from our symposium convinced that governments, financial institutions, and community organizations should put their heads together and find a way to increase financial capability in our country. This is a critical set of life skills for all of us. The goal, then, should be to ensure that all Canadians have access to adequate financial information, education, and advice.

Several recommendations came out of the symposium.

Research: We need more research and we have to set out an agenda to achieve it. We want to know more about the current state of financial capability in Canada. And we have to explore the relationship between financial capability and basic literacy, financial inclusion and financial security.

Governments: Governments at all levels have an important role to play. They should not take sole responsibility for improving financial capability. But they should facilitate dialogue on the topic, support research and innovation, and integrate financial capability into policymaking and program delivery.

Private sector: There is role for the private sector, especially the financial sector. You should be expanding the amount of financial information, training and advice provided to client groups, especially groups that are traditionally underserved.

Community\voluntary sector: Finally, there is a crucial role here for the community and voluntary sector, because they are uniquely placed to reach out to the most disadvantaged citizens. It is those people who are most at risk when it comes to financial capability.

We have already taken some practical steps arising from our symposium. FCAC is working with SEDI to move the issue forward and create more awareness.

We have \worked with SEDI to prepare a database of institutions that provide financial capability training. I am delighted to see several credit unions on our list. I will recognize just one or two but I know many others are active.

• Van City is one example of a credit union that is supporting financial capability through its charitable giving to community organizations.

• Assinniboine Credit Union in Winnipeg also does work in partnership with SEED Winnipeg, particularly through advice and education for new entrepreneurs and recipients of its micro-loans. They've also been involved in the learn$ave project by offering several of the savings accounts.

• In Quebec, Caisse Desjardins has also been involved with learn$ave - again by offering low-cost savings accounts to participants.

• Last but not least, Metro Credit Union ran a pilot project with SEDI a few years ago. They contracted with SEDI to develop a new financial capability curriculum and deliver it to small groups of their clients, with a focus on low- income clients, which had very positive feedback.

I see credit unions playing a leading role in developing financial capability. You have a wealth of experience as financial institutions. You have a well-deserved reputation for responsiveness to customers. You have been incorporating plain language for years in the information accompanying your products and services. And perhaps most importantly, you have a broadly based and democratic structure that touches the lives of millions of Canadians. When your member credit unions decide to take something on, they get results. Who better than you to help improve the financial capability of Canadians?

I am convinced of the importance of enhancing financial capability. We have an admirable social safety net in Canada. That net has some holes in it, I know, but think about the importance of our health care system, employment insurance, public pensions, and the basic assistance available to people in need.

We have a safety net that is a testament to our humanity. But when it comes to financial capability, we leave people alone to sink or swim. We assume that all individuals have an equal capacity to make good financial decisions. But the reality is that many people do not have the tools they need to make those decisions in an increasingly complex financial universe.

We need a financial services safety net, and the beauty is that it is based on providing knowledge. It is based on life-long learning.

Increased financial capability can have a positive impact on priorities that we share as Canadians.

It will promote social inclusion – because people will be able to make better financial decisions and to build assets.

It will increase our country's economic efficiency – because people will make better consumer choices and create a more dynamic market for financial services.

It will increase the effectiveness of government programs – because a financially capable population will allow for a greater efficacy in program delivery. In fact, a financially capable population may actually result in a reduced need for certain government benefits.

You asked me today to talk about emerging issues related to the delivery of financial services. There are many issues out there, and I have outlined some them:

• Consumers who are harried and overwrought

• Increasing consumer debt

• Lower consumer savings

• A level of saving that is not adequate for retirement

• Persistently high levels of functional illiteracy

• A high level of financial illiteracy and capability.

Those are the problems. But I also come to you today with a big idea, and it is this: Many of the disturbing trends that I have outlined can be tackled by improving the financial capability of Canadians.

We can help people to develop the skills and confidence to be aware of financial opportunities.

We can help them to make informed financial choices.

We can show them where to look for help in making those choices

In all of this we will be taking effective action to improve their financial well-being. This benefits our entire economy.

This is a goal worth pursuing.

And credit unions are well positioned to help make it happen.

That, to quote Wayne Gretzky is where the puck is going to be. We should be there too.