4 Empowering and Protecting Consumers of Financial Services
Highlights The government is acting to provide better protection for consumers of financial services with:
- Measures to improve access to financial services regardless of income or place of residence, including a standard low-cost account and a process to govern branch closures.
- A Financial Consumer Agency to strengthen oversight of consumer protection measures and expand consumer education activities.
- An independent Canadian Financial Services Ombudsman.
- Measures to prevent coercive tied selling and improve the information consumers receive when purchasing services or making investments.
- Public Accountability Statements for financial institutions to report on their contributions to the Canadian economy and society.
- More and better statistics on and analysis of small and medium-sized business financing to provide a better understanding of their needs.
Consumers benefit from a strong, healthy financial services sector. Confidence in the soundness of financial institutions allows consumers and businesses to transact their daily business efficiently and at relatively low cost. Strong competition is also a fundamental requirement for consumers to be well served, but strong competition alone is not sufficient to provide a satisfactory balance between consumers and providers of financial services.
Given that financial services are a necessity of everyday life and that consumers and financial institutions do not have the same information, understanding or bargaining power, it is critical that consumers be treated fairly in their dealings with financial institutions.
Task Force Finding The Task Force concluded: "The current framework for consumer protection is not as effective as it should be in reducing the information and power imbalance between institutions and consumers."
Task Force on the Future of the Canadian Financial Services Sector, Change, Challenge, Opportunity: Report of the Task Force, September 1998, p. 15.
It is the responsibility of both financial institutions and the government to establish the conditions that create a marketplace of well-informed consumers and a sufficient number of competitive suppliers. Adequate information and range of choice, backed by strong regulatory oversight and an effective redress process, will ensure a relative balance of power between the consumer and the provider and justify consumer confidence in their financial institutions. This, in turn, will deliver the best results for consumers, firms and the economy as a whole.
Financial institutions and the government share the responsibility to help create the conditions for a marketplace of well-informed consumers and competitive suppliers
The Task Force also recognized Canadians' high expectations that financial institutions respond to community needs. It concluded that these high expectations are justified and that financial institutions would be well served to view them as legitimate.
This chapter describes measures being taken by the government to empower consumers and promote greater public accountability of financial institutions. The government will take steps to promote access to financial services, including legislating access to bank accounts, requiring banks to offer a standard low-cost account, introducing a process to manage branch closures, and encouraging greater accessibility of branch services for seniors and the disabled.
The government will also be involved in the establishment of two new agencies to promote consumer interests in the financial sector. First, the government will create a new federal agency – the Financial Consumer Agency – to strengthen oversight of new and existing consumer protection measures and expand consumer education activities. Second, to ensure fair and impartial complaints resolution for consumers, the government will work with financial institutions to launch the Canadian Financial Services Ombudsman.
In addition, the government proposes a number of measures to promote good business practices, including initiatives to enhance transparency and disclosure, improve privacy protection and prevent coercive tied selling. Finally, to encourage greater accountability, financial institutions will be required to report on their contributions to the Canadian economy and society, and the government will introduce a comprehensive regime to collect and analyze data on debt and equity financing to small and medium-sized businesses.
Improving Access to Financial Services
Many Canadians lack access to basic financial services, and many others are not able to access services in a way that meets their needs
The overwhelming majority of Canadians have access to a wide range of financial services from a variety of providers. Nevertheless, a significant number of Canadians either do not have access to basic financial services or are not able to access services in a manner that adequately meets their needs. Low-income Canadians sometimes find financial institutions reluctant to serve them.
The change from personal to electronic service delivery leaves behind those consumers who do not feel comfortable with or cannot use the new technology, and who seek a level of face-to-face service that is becoming less and less available. Promoting equitable access for the less well-off, for seniors and for people with disabilities is an important public policy objective.
Measures to promote access
Banks will be required to open an account for anyone with certain basic identification. Banks will be required to offer and publicize a standard low-cost account. Federal deposit-taking institutions will be required to provide at least four months' notice of a branch closure, except in rural communities with only one branch, where six months' notice will be required. Federal deposit-taking institutions will be encouraged to improve the accessibility of service for seniors and people with disabilities. Access to Basic Banking Services
Ensuring that all Canadians have access to basic financial services is an issue of fundamental significance to the government. Consumer research conducted over the past few years indicates that as many as 650,000 adults do not have a transaction account with a financial institution.1 Yet having an account is increasingly important as cashless transactions become the norm. Without an account to make electronic payments or write cheques, an individual's ability to participate in the economic mainstream is restricted.
In February 1997, at the request of the government, the major banks committed to improving access to basic services for low-income individuals, including a commitment to reduce identification requirements for opening accounts and cashing federal government cheques. Canada Trust agreed to adopt the same policies in January 1998. The government now intends to introduce legislation covering the key elements of this agreement.
Banks will be required to open accounts and cash federal government cheques for any individual who meets certain basic identification requirements, provided there is no reason to suspect fraudulent activity. In addition, neither employment nor a minimum deposit will be required to open an account.
The government also acknowledges the concerns expressed by consumer groups regarding "hold" periods on deposited cheques, which effectively delay the availability of deposited funds until a cheque has cleared. Evidence presented to the Task Force suggested that, in particular, hold periods placed on government cheques are often excessive and constitute a barrier to access.
The Canadian Payments Association is working towards the establishment of end-to-end time frames for the clearing and settlement of cheques. These rules should effectively establish acceptable upper limits on cheque hold periods.
In addition, the government will introduce regulations to require banks to clearly disclose their hold policies to customers.
The government will closely monitor practices regarding holds to ensure that they are reasonable.
Access to a Standard Low-Cost AccountA key component of improving access to basic financial services for Canadians is ensuring that such services are affordable. Most major deposit-taking institutions already offer "no-frills" accounts, but consumer groups have expressed concerns about the cost of even these accounts and the difficulty of comparing them across institutions.
In addition, consumer groups have noted that many of the low-cost accounts currently offered require account holders to conduct their transactions largely through electronic service channels such as automated banking machines (ABMs). This has raised concerns about whether such accounts meet the needs of some low-income individuals, the elderly, or Canadians with disabilities, for whom such technology may pose a difficulty.
Banks will be required to offer a standard low-cost account
Given the importance of ensuring that all Canadians can obtain affordable basic banking services, the government intends to introduce legislation requiring banks to offer a standard low-cost account.
This standard low-cost account will differ from the "no-frills" accounts already offered by financial institutions because the basket of services will include a certain number of non-electronic transactions, such as cheques and in-branch transactions. This will provide account holders with some flexibility in choosing how to conduct their banking transactions. The details of the account will be specified in regulation.
At this time, the government contemplates that the standard account will provide 12 transactions for a nominal fee of $3.00 to $4.00 a month. While the account will be available to the general public, the government believes that it will be of particular benefit to low-income individuals.
To ensure that customers are aware of this product, banks will be required to prominently post information about the standard account in every branch.
The government believes that providing a standard low-cost account is an important element of improving access to basic financial services. It is hoped that this initiative, combined with legislating access to accounts, will encourage many individuals who do not have bank accounts to move into the financial mainstream.
The government will also require major federal deposit-taking institutions to report publicly on initiatives that they undertake to facilitate access to financial services for low-income individuals. This will be done through annual Public Accountability Statements that institutions will be required to publish (see section below.) For instance, the Public Accountability Statements might provide examples of activities institutions undertake to educate community groups on account-opening procedures and standard low-cost accounts.
Access to Branch Services
Technological innovation, competitive forces, the population decline in many rural and inner-city areas, the relative decline in deposits as a savings vehicle and the increasing popularity of electronic service delivery channels have created pressures for financial institutions to rationalize their branch networks. This has been achieved by closing branches and reducing operating hours and in-branch services. Such rationalization can have a significant impact on certain groups in society, including small businesses, rural Canadians, low-income individuals, seniors and people with disabilities.
Branch Closures
The closure of a branch of a deposit-taking institution can have varying impacts on customers. It can range from the mild inconvenience of having to switch to a nearby branch of the same institution in urban areas, to the complete loss of service when the last branch closes in a small town. Some stakeholders have recommended that government approval should be required for branch closures and, in certain cases, that the government should prohibit banks from closing branches. The government believes that such measures would impose unwarranted constraints on financial institutions' ability to pursue efficiencies and adapt to change.
Deposit-taking institutions will be required to provide notice of a branch closure
However, to facilitate adjustment to branch closures, a formal closure process is desirable. Currently, a federal deposit-taking institution wishing to close a branch is only obliged to inform customers of the location to which their accounts have been transferred.
The government will require federal deposit-taking institutions to provide four months' notice of branch closures to customers. Institutions will also be required to post notice of the closing date in the affected branch.
The government recognizes that four months' notice may be insufficient for many rural communities, which are often served by only one deposit-taking institution. In such cases, the closure of a branch results in a complete loss of service. These communities need more time to explore possible options for maintaining financial services in the community.
Rural communities need time to explore options when a bank branch closure results in a complete loss of service
Therefore, in rural areas where there are no other financial institutions within a 10-kilometre radius of the branch being closed, federal deposit-taking institutions will be required to provide six months' notice of closures.
This would include notice to customers, local authorities and local newspapers, as well as notice of the closing date posted in the branch.
This will give community residents and leaders a better opportunity to engage the institution closing the branch in discussions on possible alternative service delivery with that institution. It would also allow a community to approach other financial services providers.
The government expects that deposit-taking institutions will respond positively to requests by affected customers and community leaders to hold discussions on branch closures. However, given the particularly negative impact that a branch closure could have on a small town or low-income inner-city area with only one branch of a deposit-taking institution, the government wants to ensure that, in such situations, consumer and community leaders' requests for meetings are met.
The government will introduce regulations providing the new Financial Consumer Agency (described below) with the discretion to convene a consultation if there are concerns that such a rural or inner-city closure is taking place with insufficient consultation.
To promote greater accountability with respect to branch closures, large federal deposit-taking institutions will be required to report publicly on branch openings and closings in their Public Accountability Statements (see section below.)
Access to In-Branch Services for Seniors and People With Disabilities
Reductions in the operating hours of deposit-taking institutions and the availability of face-to-face services are issues of concern to many consumers, particularly seniors. Despite the growing popularity of electronic banking channels and the efforts of deposit-taking institutions to educate consumers on the advantages of these service channels, many seniors are not comfortable with using these new technologies and prefer to deal with an employee. That is why the government has included a certain number of traditional non-electronic transactions as a feature of the standard low-cost account described above.
Some stakeholders have recommended regulating branch operating hours and staff levels. The government believes that regulation in this area could serve to hasten the closure of some branches, which would leave many towns and urban neighbourhoods worse off. It could also cause institutions to alter their plans for the opening of new branches or service points.
The government wants federal deposit-taking institutions to be wheelchair accessible
Concerns have also been expressed by some consumer groups that deposit-taking institutions are not adequately meeting the needs of people with disabilities. For example, not all branches are accessible to individuals in wheelchairs.
Federal and provincial human rights legislation provides a framework for promoting access to facilities and services for disabled persons. Many branches of deposit-taking institutions have taken steps to provide better access to facilities, such as providing ABMs with features like lower keyboards or Braille keypads, or providing sitting areas or lower counters for seniors and people with limited mobility. Moreover, when renovating branches, deposit-taking institutions are incorporating accessibility features that meet or exceed the Canadian Standards Association's voluntary standards.
In addition, deposit-taking institutions are making efforts to provide products and services that accommodate the needs of their customers with disabilities. For example, they are offering large print cheques or bank statements printed in Braille. The availability of electronic service channels, such as telephone and Internet banking, also makes financial services more accessible to persons with disabilities. Despite the very significant and commendable progress made in this area, there is still room for improvement.
The government wants federal deposit-taking institutions to place a high priority on ensuring that all their branches are wheelchair accessible, particularly when no nearby branches of the same institution are accessible. Progress in this area will be monitored before the next review of financial sector legislation.
To promote greater accountability and raise public awareness, the government will require major deposit-taking institutions to report publicly on initiatives to improve accessibility for seniors and people with disabilities in their Public Accountability Statements described below.
The Availability of Micro-Credit
Micro-credit generally refers to small loans made to low-income individuals to sustain self-employment or to start up very small businesses. Although there is no standard definition of micro-credit, in practice, such loans are quite small, amounting to a few thousand dollars.
There are a number of micro-credit programs in Canada offered by dedicated micro-credit providers, most of which are sponsored by private organizations. The government also participates in the micro-credit market, offering micro-financing through some federal government programs and institutions, including Human Resources Development Canada, the Business Development Bank of Canada and the regional development agencies.
The government recognizes the valuable contribution made by private sector micro-credit programs in assisting individuals, unable to access credit from other sources, to find the small amounts of capital needed to become more self-reliant. It will play a role in facilitating the sharing of information on and among micro-credit companies in Canada. Such information has been compiled by the Entrepreneurship and Small Business Office of Industry Canada and is available on the Strategis Web site. The Office will continue to work with micro-credit providers to build upon this information.
The government shares the Task Force's belief that there is scope for the productive expansion of existing micro-credit programs and the support of new programs, consistent with the need to keep their local, community-based focus. It acknowledges that financial institutions themselves have made substantial efforts to assist privately sponsored micro-credit programs. The government encourages financial institutions to continue to explore partnerships and other means of working with micro-credit providers.
Improving Oversight and Consumer Awareness – the Financial Consumer Agency
The government is introducing a number of measures to improve the relationship between consumers and financial services providers. For these to be successful, the presence of an effective oversight regime is essential.
A new Financial Consumer Agency is being established to oversee consumer interests
At present, various parts of the federal government are involved in oversight of the financial sector, including the Office of the Superintendent of Financial Institutions (OSFI), the Department of Finance, Industry Canada and the Canada Deposit Insurance Corporation. In addition to monitoring compliance with regulation and self-regulation, these departments and agencies also play a limited role in assisting consumers who have questions about the financial sector and in providing information on certain financial products and services, such as credit cards and service charge packages on accounts at deposit-taking institutions.
Consumer groups have expressed a desire for better protection in their dealings with financial institutions. In response, the government will consolidate and strengthen existing oversight activities currently dispersed among various federal entities.
The government will establish a Financial Consumer Agency (FCA) that will report to the Minister of Finance.
The FCA will enforce the consumer-oriented provisions of the federal financial institution statutes, work that is currently done by OSFI. This will serve to ensure that consumers, in their day-to-day dealings with financial institutions, fully benefit from the consumer protection measures that the government provides for in legislation. The FCA will have the authority to impose penalties on financial institutions for systematic non-compliance with these measures.
The FCA will also monitor and report on industry self-regulatory initiatives. From time to time, the government has worked in conjunction with the industry to develop self-regulatory codes and practices. The government believes that these initiatives need to be monitored more vigilantly by an independent oversight body to ensure they are meeting the consumer protection objectives of both government and industry.
Beyond these compliance activities, the FCA will undertake to promote greater consumer awareness of the financial system. To this end, it will play a central role in consumer education.
It will also provide one-window access to consumers seeking information about financial services by publicizing its role in consumer protection, responding to consumer enquiries, and properly directing consumers with complaints and enquiries about financial services to other responsible bodies.
Further, the FCA will play a role in initiatives undertaken to improve transparency and disclosure of information about financial products, as discussed in the section on transparency and disclosure below.
To ensure that the structure of the FCA best meets the needs of Canadian consumers of financial services, the government will seek consumer group input on the establishment of the Agency. Going forward, the FCA will regularly consult with consumer groups and financial institutions to promote a consumer-responsive oversight regime.
The government believes that the FCA will play a meaningful role in ensuring a balanced relationship between consumers and financial institutions.
Financial Consumer Agency Responsibilities
Administer consumer-oriented provisions of federal financial institution legislation (effective enforcement regime) Monitor and report on industry self-regulatory initiatives (compliance audits, mystery shopping) Provide a single consumer information window (1-800 number to respond to and direct consumer enquiries, Web site) Improve consumer education (consumer financial literacy) Consult with consumers and financial institutions (consultation on effectiveness of consumer protection framework) Effective Redress – A Canadian Financial Services Ombudsman
As discussed above, the focus of the new Financial Consumer Agency will be on ensuring that financial institutions respect their various consumer-related obligations and on informing the public about financial services. Its main objective will be to ensure the rights of consumers as a group are respected. Therefore, while the FCA will provide information and referral services to individual consumers, it will not offer redress services for individual consumer complaints against specific financial services providers.
Given the complexity of a comprehensive complaints resolution scheme, the government believes a separate, dedicated institution is necessary to handle individual consumer complaints.
The banking and life insurance sectors currently provide consumer redress mechanisms. Since 1996, the Canadian Banking Ombudsman has been helping to resolve complaints from small businesses about bank services. Its mandate was expanded in 1997 to encompass personal banking complaints. In 1998, the Canadian Life and Health Insurance Association introduced an Ombudservice to provide informal conciliation for consumers with a complaint about a life insurance company.
An independent, dedicated body is necessary to handle individual consumer complaints
The Task Force and several stakeholders have called for a legislated financial services ombudsman. However, many consumer groups have expressed concerns that this would result in a legalistic and non-consumer-friendly approach to dispute resolution. They have told the government that they are supportive of an industry-run ombudsman scheme like the Canadian Banking Ombudsman model, but with certain enhancements. Specifically, they would prefer a single ombudsman office for customers of all financial institutions to improve the visibility of redress services and thereby facilitate access for consumers. In addition, they believe that the ideal ombudsman scheme would have a high degree of independence from the industry and would be perceived by consumers as such.
In response, the government will work with financial institutions to establish the Canadian Financial Services Ombudsman (CFSO). It will be designed to accept all financial institutions and be incorporated as a not-for-profit corporation, funded by its members.
The government will require banks to join the CFSO. Other federally incorporated financial institutions will be required to be members of a third-party dispute resolution system. These institutions, as well as provincially incorporated financial services providers, will be eligible to join the CFSO if they wish to do so.
The CFSO will operate independently of any financial institution, with a Board of Directors that has a majority of non-financial institution representatives. Specifically, the Board of Directors will have eight independent directors and four directors appointed by the member financial institutions. The term of appointment for directors will be three years. The Board will appoint the Ombudsman and approve the CFSO's annual budget.
The Minister of Finance will play a key role in setting up the CFSO and will have an ongoing role in ensuring the independent operation of the organization. However, the Minister of Finance will not be involved in the day-to-day operations of the CFSO.
In particular, the Minister of Finance will approve the organization's letters patent and by-laws and any amendments to them, including its mandate and terms of reference. Further, the Minister of Finance will initially appoint all of the independent directors. Thereafter, a process will be established for the Minister of Finance and the incumbent independent directors to select new independent directors.
The CFSO will have the power to recommend awards to aggrieved customers. While the recommendations will not be binding on the customer or the financial institutions, if an institution does not comply with a recommendation, the Ombudsman will publicize the fact, naming the institution. Accordingly, the government fully expects that financial institutions will comply with the CFSO's recommendations.
In addition, the CFSO will provide an annual report to the Minister of Finance and the public on the number of complaints it receives, the results of its involvement and the time it takes to address complaints.
While resolving consumer and small-business complaints, the CFSO may deal with matters that are governed by the federal financial institution statutes. In order to ensure that the FCA is aware of any systematic violations of the safeguards provided to consumers under federal financial institution legislation, there will be close communication between the FCA and the CFSO.
Promoting Good Business Practices and AccountabilityTransparency and Disclosure
The transparency and disclosure of financial service sales documents and contracts affect consumers' ability to understand the nature of the contract they are entering into, and therefore their ability to negotiate and defend their interests.
Disclosure determines what information is provided to the consumer, whereas transparency is concerned with the clarity of that information. The higher the level of transparency and disclosure, the easier it is for consumers to comparison shop for financial services and to benefit from a competitive financial services marketplace.
The level of transparency and disclosure in many financial service consumer contracts and marketing documents in Canada falls short of what Canadian consumers have a right to expect and what industry is capable of delivering.
The federal government will hold discussions with the provinces and the industry to work towards enhancing transparency and disclosure of financial service sales documents and contracts. This work would include developing model contracts and benchmarking best practices for financial institutions to adopt. The federal government will also amend the federal financial institution statutes to provide for regulation-making authority governing disclosure.
This will permit the government to respond in areas where a need for improved disclosure is identified as new products and services emerge in the marketplace.
At this time, the government intends to regulate the disclosure of the risks associated with index-linked deposit products offered by federal deposit-taking institutions.
These products are more complex than traditional interest-paying savings vehicles because their rate of return is tied to a stock market index. Although the client's principal is guaranteed, they may not understand the risk that they may obtain no return on their investment.
Personal Privacy
In today's environment, where new information technology permits easier access to personal data, the government recognizes the importance to consumers of knowing why information is collected and how it will be used and stored. Consent is key if information is to be used for a new purpose or disclosed to third parties. The government also understands that consumers want access to information concerning them and rights of recourse if information is misused.
Consumer privacy will be further protected in law
On October 1, 1998, the government introduced Bill C-54, the Personal Information and Electronic Documents Act. Part 1 of the Bill, The Protection of Personal Information in the Private Sector, is designed to protect the privacy of personal information that is collected, used or disclosed in the private sector. This legislation will ensure comprehensive and uniform privacy protection for all consumers by requiring organizations to establish and implement procedures to protect customer information.
With respect to consent, the proposals in Bill C-54 will require organizations to obtain "meaningful" customer consent for the collection, use and disclosure of personal information. Although organizations will have the flexibility to obtain consent either expressly or by implication (implied consent), they will be required to take into account the sensitivity of the information and the purposes for which it will be used in determining which form of consent is reasonable.
The legislation will provide a comprehensive oversight and redress regime that will allow consumers, including consumers of financial services, to challenge an organization's compliance with the law, and give the Privacy Commissioner powers to investigate organizations' practices and publicize findings. The Canadian Financial Services Ombudsman will refer specific complaints about privacy to the Privacy Commissioner. The Ombudsman will also keep the Commissioner informed of any more general concerns brought to his or her attention about the privacy practices of financial institutions.These measures will provide an incentive for financial institutions to seek express consent wherever possible. For the time being, this private-sector-wide approach should prove sufficient to protect the privacy of consumers in their dealings with financial institutions.
Coercive Tied Selling
Coercive tied selling occurs when a firm uses coercion to require a customer to buy one product as a condition of purchasing another one. Concerns have been raised that the special nature of the relationship between financial institutions and their customers renders customers particularly vulnerable to coercion.
In response to these concerns, since 1998, the Bank Act has prohibited a bank from coercing or imposing undue pressure on a customer to purchase another financial product from it as a condition for obtaining a loan.
The government believes that concerns about coercive tied selling are justified in light of conditions in today's marketplace. Therefore, the government will broaden the scope of the coercive tied selling provision.
Coercive tied selling of any product will be prohibited
It will be extended to prohibit a bank from coercing or imposing undue pressure on a customer to purchase a financial product from the bank as a condition of obtaining any other product, rather than just loans. In addition, the government will require banks to disclose to consumers the fact that coercive tied selling is illegal, prior to entering into a combination of financial transactions.
Business Powers
While the government is announcing today that it will be implementing measures to foster competition and promote consumer interests, it will take some time for these regimes to be fully effective.
Therefore, the government agrees with the House of Commons Standing Committee on Finance that these regimes should be given time to work before any changes can be considered to bank business powers in the areas of car leasing and insurance networking.
Public Accountability
Financial institutions play an important role in the communities they serve, but there is no commonly accepted way for them to report on their performance in order to provide a basis for discussion with the public on community needs and expectations.
Some community groups have recommended that the government introduce legislated community reinvestment requirements, similar to what exists in the United States under the Community Reinvestment Act. The government agrees with the Task Force and the parliamentary committees that such a regime is not warranted in Canada, but that other mechanisms could be used to promote accountability. The Task Force recommended that large financial institutions be required to report on their contributions to society in a manner that "would allow Canadians in all regions of the country served by the institutions to be able to relate the information to circumstances relevant to them."2
The government will require federal financial institutions with equity in excess of $1 billion to publish annual Public Accountability Statements.
The statement will describe an institution's contributions to the Canadian economy and society and will include:
- the national dollar amount of charitable donations and examples of philanthropic activities;
- employee volunteer activities;
- examples of funding provided to local government and voluntary agencies for community works;
- investments or partnerships in micro-credit programs;
- small-business financing initiatives such as venture capital programs, and dollar amounts of small business lending – broken down by loan size and reported by region;
- initiatives to improve access to banking services for low-income individuals, seniors and people with disabilities;
- the location of openings and closings of branches;
- the number of individuals employed; and
- taxes paid to federal, provincial and municipal governments.
Financial institutions will be required to make these statements available to the public, through their branches or Web sites, for example.
The government believes that the Public Accountability Statements, coupled with the other consumer-oriented measures outlined in this paper, will encourage financial institutions to be responsive to the needs of the communities they serve.
Financing Small and Medium-Sized Business
Small and medium-sized business is a major engine that drives economic prosperity and job creation
Ensuring that small and medium-sized enterprises (SMEs) have reliable access to capital is an issue of great importance for the government. The government is committed to creating an environment that is conducive to the creation and growth of small-business ventures because they will continue to be a major engine driving economic prosperity and job creation in Canada.
The government acknowledges the concern that there is inadequate information on the financing needs of SMEs and the supply of financing available to them. More comprehensive information is needed for the development of effective public policy in this area.
Significant progress has been achieved in recent years regarding the collection of data on bank financing of SMEs. The Canadian Bankers Association (CBA) now publishes detailed quarterly statistics on the lending activities of the major banks, with a particular focus on SME lending. It has also sponsored an annual survey of SME perspectives and attitudes.
However, while banks are the dominant players in the SME finance market, they represent only about half of the debt financing supplied to SMEs. Several other industry groups, including the Canadian Venture Capital Association and the Canadian Finance and Leasing Association, also provide regular reports of their members' activities in financing SMEs. More information is needed regarding other suppliers and equity financing for SMEs to ensure that any gaps that exist in the market can be effectively addressed.
To this end, the government will undertake a comprehensive program of information collection and analysis to ensure that there is adequate information relating to the financing needs of SMEs for effective public policy development. Statistics Canada will be given the mandate to collect and publish data on the supply of debt and equity financing to SMEs.
The data collection program will build on the existing CBA banking data by expanding the scope and coverage to include all types of SME financing and all suppliers of SME financing. The government will determine the details of the information collection program in consultation with data providers and potential users in the community.
To expand the government's analytical capabilities, Industry Canada will be given the mandate to establish a dedicated SME Finance Group that would be responsible for analyzing the Statistics Canada data, conducting other surveys and undertaking continuing research on SME financing issues. Industry Canada will also report annually to the House Standing Committee on Industry regarding the state of SME financing in Canada.
There were also a number of Task Force recommendations directed toward financial institutions to enhance their relationship with SMEs. These include working to reduce turnover of account managers, decentralizing credit granting processes (including meaningful delegation to the local level) and striving to make credit available to higher-risk borrowers, with appropriate pricing and more innovative financing packages.
The government agrees that these issues are an important element of ensuring that SMEs have access to adequate financial resources, and it encourages financial institutions to implement these recommendations to the extent possible. There are other elements of this new framework that will assist SMEs to obtain capital, particularly foreign bank branches, stronger credit unions and new locally oriented banks.
These elements, combined with an improved redress mechanism for SMEs, will result in a better relationship between small business and the institutions that provide their financial services.
Financing Aboriginal Businesses
The Task Force acknowledged the special challenges often faced by Aboriginal enterprises in securing financing, and made recommendations towards improving access to capital for these enterprises. In particular, the Task Force endorsed the recommendation of the National Aboriginal Financing Task Force that, subject to the consensus of First Nations communities, the government should amend federal legislation to facilitate the provision of credit by financial institutions to Aboriginal individuals and institutions by allowing the use of on-reserve personal property as collateral.
Currently, section 89 of the Indian Act prohibits the seizure of on-reserve real and personal property by banks, thereby making it difficult for Aboriginal businesses located on reserves to offer collateral when seeking loans. Amending this section of the Act is a delicate matter, and the government and First Nations representatives have agreed that any future changes to the Act must be mutually agreed upon. Therefore, the government is not in a position to make unilateral amendments to the legislation.
Although there are no plans to amend the Indian Act at this time, the government is working with financial institutions to explore ways of operating within the current constraints. The CBA has established a working group to clarify issues relating to the regulatory framework for financing of Aboriginal communities and enterprises. This working group also includes government representatives.
Financial institutions are developing innovative and tailored financing programs that meet the needs of Aboriginal businesses
The government acknowledges the progress made in recent years to support the financing of Aboriginal businesses. A number of special financing institutions have emerged, including Aboriginal Capital Corporations, First Nations credit unions, and the First Nations Bank of Canada. Many of Canada's major financial institutions are also actively involved in the financing of Aboriginal business; some have established special business units dedicated to this purpose. The government encourages financial institutions to continue to develop innovative and tailored financing programs that meet the needs of these small businesses.
Other Benefits for the Consumer From the New Policy Framework
A more flexible and innovative financial services sector able to offer new products and services. Additional choice and competition from new entrants, the co-operative credit movement and the new participants in the payments system. A set of Canadian financial institutions that are regulated in order to maximize their ability to serve the public. Scope of Application of Consumer Measures
The measures that the government will take to strengthen consumer protection in the financial services marketplace will apply to most of the large financial institutions serving Canadians. However, the new federal requirements will not apply uniformly to all financial services providers because of the constitutional division of powers between the federal and provincial governments.
Constitutional jurisdiction over consumer protection in the financial services sector is shared between the federal and provincial governments
Constitutional jurisdiction over consumer protection in the financial services sector is shared between the federal and provincial governments, depending on the financial institution in question and the activity being carried on by the institution. The federal government has exclusive authority over banks and shares authority over federally incorporated trust and loan and insurance companies.
In general, provinces have the jurisdiction to regulate the day-to-day business activity of federally incorporated non-bank financial institutions. Other financial services providers, including provincially incorporated trust and loan and insurance companies, credit unions, mutual funds and securities dealers fall under provincial jurisdiction.
Scope of Application of Consumer Measures
1. Federally incorporated trust and loan companies represent 90 per cent of the assets of the trust and loan sector.
Consumer measures Banks Trust and loan companies1 (federal incorporated) Insurance companies2 (federally incorporated)
1. Compulsory membership in Canadian Financial Services Ombudsman or external dispute resolution scheme. Ö Ö Ö 2. Public Accountability Statements. Ö Ö Ö 3. Generic disclosure clause. Ö Ö Ö 4. Disclosure of risks related to return on index-linked deposits Ö Ö n/a 5. Branch closure notification Ö Ö n/a 6. Access to basic banking services for low-income individuals . Ö Ö 3 n/a 7. Standard basic account. Ö Ö3 n/a 8. Prohibition on coercive tied selling. Ö some provincial legislation4 some provincial legislation4 9. Comprehensive privacy legislation (Bill C-54) Ö Ö Ö
2. Federally incorporated insurance companies represent 90 per cent of the assets of the insurance sector.
3. The federal government will work with the federal trust industry to develop codes of best practice.
4. B.C.'s
Financial Institutions Act prohibits tied selling by trust and loan companies. Tied selling by insurance companies is prohibited in Quebec and B.C. Saskatchewan is considering an amendment to their Insurance Act to prohibit tied selling. Other provinces (Ontario, Manitoba, Nova Scotia, New Brunswick and Newfoundland) have provisions prohibiting coercive sales practices, but not tied selling specifically.
The above table shows how all of the new federal measures will apply to banks, and how most will apply to the 90 per cent of the trust and loan and insurance industry that is incorporated federally.
With respect to trust and loan companies, most measures will be applied, with the exception of measures 6, 7, and 8. However, the federal government will work with the trust industry to develop industry codes of best practice to ensure that consumers benefit from better access to basic banking services, standard low-cost accounts, and a prohibition on coercive tied selling practices where consumers are not already protected under provincial tied selling legislation.
For federally incorporated insurance companies, a number of measures will apply, including compulsory membership in an external dispute resolution mechanism, Public Accountability Statements and a generic disclosure clause.
A number of other measures will not be applicable as they are directed specifically at deposit-taking institutions. Given the constitutional division of powers, the prohibition on coercive tied selling will not be imposed on federal insurance companies and federal trust and loan companies. The insurance industry, however, has developed a guideline aimed at safeguarding consumers against this practice. In addition, several provinces have legislation prohibiting coercive tied selling by insurance companies.
The measures will not be applied to provincially incorporated institutions such as credit unions, mutual funds and securities dealers, nor provincially incorporated insurance companies and trust and loan companies, given provincial responsibility for these financial institutions.
However, as the Task Force noted, the fundamental interests and needs of consumers do not vary from jurisdiction to jurisdiction. Therefore, the federal government strongly urges provincial governments to adopt consumer oversight measures similar to those outlined in this paper where they do not already exist, and thus extend the benefits of the new consumer protection regime to customers of all financial institutions.
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1. Task Force on the Future of the Canadian Financial Services Sector, Change, Challenge, Opportunity: Canadians' Expectations and Corporate Conduct, Background Paper #4, September 1998, p. 22 (Adobe Acrobat format).2. Task Force on the Future of the Canadian Financial Services Sector, Change, Challenge, Opportunity: Canadians' Expectations and Corporate Conduct, Background Paper #4, September 1998, p. 47 (Adobe Acrobat format).
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