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Commercial practices of banks : the sale of credit insurance poses problems

by

Justine Montminy

March 22, 2018 11:30

Photo : Freepik

TheAgency of the financial consumer of Canada (FCAC) has published a report that the credit insurance among other products, business practices and sales channels, leads to an increased risk of mis-selling and breaches of the obligations relating to business practices.

Credit insurance is one of the products mentioned. Credit insurance » helps to pay the outstanding balances on credit products or to make monthly payments to repay a debt in certain circumstances that are predetermined, such as a job loss, a serious illness or a death «, defines the report.

The Agency has made a review of the sales practices of six major canadian banks (Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank). The report finds that the culture of retail banking services are primarily designed to sell products and services at the expense of the interests of consumers.

The risks to the consumer

The performance management programs could increase the risks of mis-selling and breaches of the obligations relating to business practices, says the Agency. According to his observations, the banks establish sales objectives for the credit insurance. In doing so, the risk that the vendors may offer this type of product only for the purpose of achieving their goal, without taking into account the needs of the consumer, increases.

The study puts forward that the bank employees are also encouraged to have recourse to techniques of cross-selling and bundles, more so than for other banking products and services. For example, a bank may allocate to its employees a certain percentage of the sale of credit insurance to reach on the total of sales of credit products.

The industry described credit insurance as a product «sold» rather than» bought «. Which means that people ask rarely questions about credit insurance and will not purchase it themselves, without an employee of the bank shall present to the product first.

«Use of inadequate controls»

The banks have use of message types to ensure that their employees convey the right information to consumers about credit insurance, recognises the Agency. Their goals are to limit the risk of selling pressure, while allowing employees to communicate important information to consumers and that the terms are explained in a clear manner. However, the RAC says that the monitoring of the proper use of message types is done more in call centers, since the calls are recorded. It is more difficult to control during meetings in the branches.

Poor understanding of the product

The question of the formation of credit insurance is being addressed through a voluntary code of conduct adopted by the banks. Signatories to the code commit themselves to train their employees and to take the necessary measures to ensure that the products are sold by representatives.

The Agency has found during its visits to the bank branches that the employees are not always well-informed of credit insurance products. It has happened on several occasions that the wrong information was communicated to customers. The report indicates that the training of front-line staff could be improved to avoid the risks.

Recovery of commission

Some banks recover the commission paid for the sale when the consumer cancels his / her insurance credit within 90 days of the sale, showed the study. This helps to reduce the risk of mis-selling by encouraging employees to make an effort adequate to evaluate the real needs of clients. According to the findings of the RAC, this practice is more commonly used in the sale of credit insurance than for other banking products and services.

Refocus its priorities around the consumer

To improve the management of risks related to the practices of the sale, the RAC attached to the report a number of recommendations. Among these, the Agency suggests to the banking institutions to give priority to the protection of consumers and the suitability of the products sold to them. She also believes that it should adopt a formal governance framework for sales practices and that internal controls take into account the risk they can cause.

The report was submitted to the minister of Finance so that it can guide the development of policy recommendations and measures proposed by the RAC. The mandate of the latter is to ensure that financial institutions under federal regulations comply with the consumer protection measures, in addition to promoting the financial education of consumers.

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