Canada's big banks admit they overcharged customers — what went wrong?
RBC latest bank to get slapped with penalty and multi-million dollar refunds for overcharging clients
On Tuesday, Royal Bank was the last of Canada's five big banks to get slapped with a multi-million dollar penalty for charging customers excess fees for investment products like mutual funds. In some cases, clients were unknowingly overcharged for more than a decade.
The bank will reimburse affected customers $21.8 million worth of investment fees and pay $975,000 to the Ontario Securities Commission (OSC) to cover the investigation and other charges.
Every [big] bank was doing it.— Robb Engen, financial adviser
"We sincerely regret these errors. When we became aware of them, we quickly notified the OSC and took immediate steps to ensure clients would be reimbursed," said RBC in a statement.
The bank joins eight other major financial firms including BMO, Scotiabank, TD and CIBC which in recent years have all been hit with similar penalties for overcharging investor clients.
In all cases, the banks paid back the money and the OSC approved no-contest settlements, finding no evidence of dishonest conduct. But one critic says the fact every big bank has now admitted to overcharging customers shows there's something broken with the banking investment industry.
"Every [big] bank was doing it. It's not like this is a one-off," says Robb Engen, a financial adviser and recognized critic of the banking industry, who lives in Lethbridge, Alta.
He says the lack of oversight of investment services could result in bank employees overcharging their investor clients to increase profits.
"The incentives are in place for them to do this," says Engen who is also a financial writer.
Bank confessions
The outpouring of confessions from the big banks began with TD in 2014. The bank came forward following allegations by OSC staff that there were "inadequacies" in TD investment services' systems of controls and supervision.
According to the OSC, those inadequacies "resulted in clients paying excess fees, which were not detected or corrected in a timely manner." The problem had been going on for more than a decade.
In a no-contest settlement, TD agreed to pay more than $13.5 million to clients who were hit with excess fees.
Following the TD case, Scotiabank, BMO, CIBC and finally RBC all came forward to state they too had discovered that certain clients were paying excess fees, that once again were not detected or corrected in a timely manner.
Engen says it may be no accident that all the big banks were overcharging customers.
He says the banks would never condone intentional overcharging. However, he claims that lack of oversight and the fact that investment advisers work in a fee-based industry could lay the temptation for employees to dole out excess charges to customers.
"The incentives are all aligned to the industry and how to make the most money from an investor's portfolio. And it's really sad to see," says Engen.
In January, new rules came into effect forcing investment firms and advisers to provide more clarity about the client fees attached to mutual funds. But critics like Engen claim the rules don't go far enough.
He says the banks need to provide more oversight and Canada needs to ban mutual fund "trailer fees," which are essentially commissions paid to advisers when they sign up investors.
"Starting with banning embedded commissions will help break that cycle of misaligned incentives," says Engen.
Just sloppiness?
But other industry experts believe the overcharging was indeed an accident. Carleton University business professor Ian Lee chalks it up to "sloppiness."
He suggests the OSC'S discovery of problems at TD prompted the other big banks to examine their practices to see if they were inadvertently doing anything wrong.
At least they're coming clean.- Glen Rankin, financial adviser
"I don't think there was any kind of attempt to defraud the public," says Lee, who spent a decade working in the banking industry in the 1970s and 1980s.
"It's much more a case where nobody did any internal due diligence and said, 'What on earth are we doing this for?' And finally somebody did and said, 'Oh my god, we're screwing up big time.'"
Lee adds that with better technologies and greater scrutiny of bank practices by everyone from regulators to the media, the big banks were motivated to examine their practices and self-report any problems.
"That internal due diligence check was what caught it," he says.
Financial adviser Glen Rankin also wants to give the benefit of the doubt. He says it's a good sign that, following TD's case, the rest of the big players came forward about their own problems with excess fees.
"At least they're coming clean and showing that they have good intentions and they're trying to fix the problem, not hide the problem," says Rankin, with Assante Wealth Management in Truro, N.S.
Banks respond ... or don't
CBC News asked all the big banks for comment about overcharging clients. Only RBC and TD responded, and TD only offered already-publicized facts about its OSC case.
We also asked the financial lobbying group the Canadian Bankers Association for comment. It referred us to two industry associations: the Investment Funds Institute of Canada (IFIC) and the Investment Industry Association of Canada (IIAC).
The IFIC told CBC News that it doesn't comment on enforcement actions and believes that investors are well protected by current securities regulations.
The IIAC said it did not have enough information to comment and referred us to the Canadian Bankers Association.
Canada's big banks are currently under review by the Financial Consumer Agency of Canada. The move follows a CBC investigation that has uncovered reports of troubling sales practices at Canada's major financial institutions.
The consumer watchdog is concerned with reports that bank employees are pushing, and sometimes signing customers up for financial products without their expressed consent, in order to meet their own sales targets.
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