Is your bank ripping you off? Would you even know?
The lack of transparency from financial institutions ought to worry individual investors
A major bank spent 14 years overcharging its customers more than $73 million. But the bigger story here is that no one noticed. CIBC reported itself to the Ontario Securities Commission and has agreed to pay the money back and the bank will also pay $3 million to the OSC to help with its mandate of protecting investors.
But critics say the incident speaks to a distinct lack of either laws or regulators to protect investors. If CIBC hadn't turned itself in, the problem could have gone on for years more.
Tim Paziuk says regular investors are simply outmatched by the financial services industry. Paziuk, a veteran of the financial services industry, now works as a financial planner and tireless advocate for reform in this sector.
Know the rules in the game of money
"When it comes to money, they're playing a game they don't know how to play," he says of most regular Canadians trying to invest. "They don't know what the rules are."
The CIBC settlement is by no means an anomaly. In July, Scotiabank reached a similar deal with the OSC, agreeing to pay back nearly $20 million in fees that should never have been charged. In February, mutual fund giant CI Investments Inc. said it would return more than $156 million to clients. That was, by far, the largest amount of investor compensation since the regulator introduced no-contest settlements.
The CEO of Wells Fargo was forced to resign after it was revealed that employees had fraudulently signed customers up for accounts without their knowledge. The U.S. bank, the world's second largest by market capitalization, was hit with a $185-million settlement charge in a case that is still unfolding.
One common denominator is that customers could have pored over their statements month after month — and even the most financially literate would have had a hard time finding those extra fees.
'Absolutely impossible' to understand statements
"It's absolutely impossible and it doesn't matter if it's an average person or anyone else," says Paziuk. "The way things are set up in Canada right now, it's virtually impossible."
Paziuk says this is an issue that's lingered long enough. He says Canada needs a two-pronged response: First, better legislation forcing more transparency; second better financial literacy, mandated from a far earlier age.
"We should be teaching it in grade school for sure," he says.
Almost everyone in Canada gets their financial education from sales people- Tim Paziuk, financial planner
Paziuk says a federal government report in 2009 found a concerning level of financial illiteracy in this country. The financial services industry stepped up to fill the void, in a move Paziuk says has led to even more problems.
"So look at it this way," he says. "Almost everyone in Canada gets their financial education from sales people."
He says politicians should force the industry into more transparency and more disclosure. This summer the financial services industry introduced new rules called the Client Relationship Model which encourages more disclosure. Paziuk calls it nonsense.
Disclosure, transparency and fairness
He says the person selling you a product now has to disclose what they're getting paid. And the company they work for has to disclose what they're being paid. "But the actual manufacturers do not have to disclose how much money they're taking out of your account. It's ridiculous."
David Chilton, author of The Wealthy Barber books, has spent a career beating the drum of financial literacy and accountability. He's sold millions of books telling individuals to look out for themselves, to play a long game and be patient.
"Everyone I know in the financial industry admits, when off the record, that more transparency around performance and fees is needed," he says. "Investing is tough enough — it's time to turn the lights on."
Change is needed, now
The argument is pretty simple and its lessons apply in almost every other imaginable scenario. If you buy a product, you should know what it costs. When you get a bill, it should make sense. Sure, CIBC self-reported its issue to the OSC. But it let that mistake persist for 14 years. And the OSC, mandated to protect investors, didn't catch it either.
In the United States, the Securities and Exchange Commission offers millions of dollars to whistleblowers. It investigates financial institutions for this sort of thing and still comes up short. In the Wells Fargo debacle, a former bank employee filed a whistleblower complaint to the SEC in 2011 and still has not been interviewed.
So, the problem is widespread. It has a real impact on millions of people and their pocketbooks, but above all else, cases like these undermine faith in the system and the belief that system is fair to all.
Individual investors can study all they want. Until politicians take up the file and force change, that faith will continue to be eroded.