By: Dr. Gail Henderson, Assistant Professor at Queen’s University Faculty of Law
It used to be a popular saying that Canadian banks are boring – in a good way. Boring got the Canadian banking system through the global financial crisis relatively unscathed. But the growing scandal emerging from a CBC ‘Go Public’ story is anything but boring, and in a very bad way.
The story is eerily reminiscent of the recent revelation that employees of US banking giant Wells Fargo were creating accounts for customers without their knowledge. The fallout for Wells Fargo included the resignation of its CEO and Chairman.
The illegal conduct employees have reported to the CBC so far includes tied selling and making changes to customer accounts without their consent, both of which are prohibited by the Bank Act, a statute which generates too little attention from Canadian legal academics, let alone the mainstream press, notwithstanding the importance of the institutions that it regulates. Proposed changes to the Bank Act included in budget implementation legislation which would have created a consolidated consumer protection framework within the Act were shelved after a Senate review of the provisions raised the concern that some of the changes could actually weaken existing protections under the Act. A broader review of federal financial regulation is ongoing. The federal government has a clear opportunity, therefore, to consider more fundamental changes informed by the recently announced FCAC review of the banks’ business practices in light of the allegations.
In addition to allegations of illegal conduct are allegations that financial advisors in bank branches are under pressure to sell products that are not in customers’ best interests. Such conduct may be contrary to the bank’s internal ethical guidelines, but is not illegal. The Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives has recommended to the Ontario Minister of Finance that all financial advisors and financial planners should be subject to a statutory best interests standard.
There is a bigger story here as well. Banks play a central role in facilitating other economic activity, which makes them fundamentally different from non-banks. Banks are not only for-profit businesses, they are essential social institutions. The economy falters when they do, as the global financial crisis reminded us. Trust in these institutions is a necessary and essential component of financial stability. Trust is also central to Canadians’ retirement security. The banks not only help Canadians invest for their retirement, but bank stocks also make up a significant component of the investment portfolios of many Canadians. Canada’s banking system is highly concentrated: the “big six”, five of which have been implicated in the scandal so far, accounting for more than 90% of all bank assets. As a result, each of these six institutions on its own has a key role to play in advancing and protecting the public interest.
Ultimately, the buck stops at the top, with the board of directors, and a scandal such as this should raise questions as to whether bank governance in Canada is sufficient to protect the public interest in how banks conduct their business.
Dr Gail Henderson is Assistant Professor at Queen’s University Faculty of Law. Her research interests include corporate law, corporate governance, corporate social responsibility, securities regulation and the regulation of financial institutions. Prior to pursuing graduate studies at the University of Toronto, Dr Henderson served as law clerk to The Honourable Louise Charron of the Supreme Court of Canada and practiced commercial litigation and environmental and municipal law at Osler, Hoskin & Harcourt LLP in Toronto.