As a debt restructuring specialist, I spend all my days working with and for Canadian consumer debtors facing insolvency.
When you approach insolvency, you are basically seeking to negotiate with your creditors to relieve or eliminate your debt, and our job is to help our clients understand this process and make the best decisions possible within a stressful, complex system. Canada’s existing insolvency regime purports to view the negotiating parties as equals. But let’s take a moment here to look at who “sits across the table” from our clients during an insolvency proceeding.
Who are “The Creditors” in Insolvency Proceedings?
Credit is what makes our economy go around. Taking on debt is what allows us to go to college or university, buy homes, start businesses and so on. It is why nearly three-quarters— of all Canadians are indebted to a creditor. When you seek out the source of all this debt, mortgages are the #1 source of debt accumulation (40% of Canadians have a mortgage), closely followed credit cards (held by 29% of Canadians), vehicle loans or leases (28%), personal lines of credit (20%), HELOCS (13%) and student loans (11%). The greatest proportion of these financial products are sold to Canadians by our six largest banks.
In Canada’s finance marketplace, who protects consumers?
Despite inviting advertisements that suggest it’s all about you, banks are indeed businesses. To make money, they need to sell you their products, and the more products you buy, the more money they make. The Financial Consumer Agency of Canada was established in 2001 by the federal government to strengthen oversight of consumer issues and expand consumer education in the financial sector. This followed the publication of a Government of Canada Task Force report on the Future of the Canadian Financial Services Sector, which 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.”
Just a few years later, in 2008, the world plunged into the most severe economic recession since the 1930’s, precipitated by the near collapse of the global banking industry. Canada was spared the worst, but in the years immediately following, the Federal government was keen to shore up Canada’s points of economic weakness and build greater confidence in the nation’s financial sector. At the time, then Finance Minister Jim Flaherty launched yet another Task Force, to examine the state of Canadians’ financial literacy. That Task Force returned with a familiar story.
In its report, entitled Canadians and Their Money, it was noted that “[D]espite the abundance of products and marketing materials offered by financial institutions, much of what exists is too complex for the average consumer to understand, and is not expressed in clear, plain language”.
In a partial response to this report, amendments to the Financial Consumer Agency of Canada Act were made in 2010, further enhancing and strengthening the role of the FCAC.
Everything was going so well until…
In 2017 CBC’s Go Public launched a explosive industry-wide investigation into stories told by employees of Canada’s big banks, effectively exposing how bank employees were pressured to, “upsell, trick and even lie to bank customers to meet unrealistic sales targets and keep their jobs.” Despite efforts to downplay or deny by bank CEOs and politicians alike, the average Canadians’ experiences with the banking industry pressed the government to respond. Tasking the FCAC to conduct its own investigation into these accusations, its report was released in the Spring of 2018. The leading headline of the report was that the FCAC could find no evidence of “widespread mis-selling,” which was defined as the sale of financial products or services to customers that can be unsuitable, made without taking consumers’ needs into “reasonable” account, or involve incomplete or misleading information. More than one observer said the findings of the Domestic Bank Retail Sales Practices Review (Report), failed to pass the “smell test” however.
For example, the Canadian Foundation for the Advancement of Investor Rights said of the report: “The FCAC’s central finding from its investigation is that the predominant focus in retail banking is on the selling of products and services rather than appropriately prioritizing the interests of financial consumers.”
Somewhat predictably at this point, “sweeping” legislative changes followed, and on April 30, 2020, amendments to the Financial Consumer Agency of Canada Act and certain amendments to the Bank Act related to a new federal financial consumer protection framework (Bill C-86) came into force. Along with this latest legislation, additional provisions were made, intended to once again further strengthen the role and increase the powers of the FCAC, giving them an expanded capacity to monitor, investigate and penalize financial institutions to promote better compliance to financial consumer protection legislation. Not insignificantly, however, in carrying out its consumer protection mandate, the FCAC must now also, “take into account a bank’s need to effectively manage its business”.
The pandemic has hurt Canadians in more ways than one, and the effects will likely be felt for years to come. It also laid bare many fractures in our society and economy. Consumer debt was already a closely watched issue before the pandemic hit. Canadians have the highest household debt levels of all G7 countries. Moreover, Statistics Canada numbers show the debt picture is uneven across different income groups. The lowest 20 per cent had a debt to income ratio of 281.7 per cent at the end of 2019, meaning they owed almost $3 for every dollar they had on hand to spend. Those in the top 20 per cent, meanwhile, owed just $1.38 for every dollar of disposable income they had.
As the pandemic took hold, the Federal government and the major banks moved swiftly to avoid a mass wave of defaults and insolvencies. For example, more than 796,000 households opted to skip or defer a mortgage payment, representing around 16 per cent of mortgages in bank portfolios, according to the Canadian Bankers Association. That being said, in December 2020, Equifax found “total consumer debt rose 3.8 per cent to $2.041 trillion in the third-quarter of 2020 compared to the same period last year.” Around 12% of new credit products taken out in the third quarter were by those who already have some form of deferral on their file.
Canadian banks turned higher-than expected profits last year. Average and low-income Canadians became even more indebted.
Despite decades of attempted reform, I would argue that the power imbalance between creditors and consumer debtors in Canada has never been greater.
By Reg Rocha, President & CEO
4 Pillars Consulting