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Coercively SELLING TIED financial products such as RRSPs and bank loans illegal in Canada

WHAT DO YOU NEED TO KNOW?

The Bank Act of Canada requires banks to inform customers in plain language that coercive tied selling is illegal. To comply with the law, President's Choice Financial has created this article to explain: what coercive tied selling is, AND, what coercive tied selling is NOT. And how to Canadian consumers can get more information if you have any questions, complaints or concerns. 

WHAT IS COERCIVE TIED SELLING?

Coercive tied selling is illegal and is prohibited under Section 459.1 of the Bank Act. More specifically, it is against the law for a bank to "impose undue pressure on, or coerce, a person to obtain a product or service from a particular person, including the bank and any of its affiliates, as a condition for obtaining another product or service from the bank". You cannot be unduly pressured to buy a product or service that you don't want from a bank or one of its affiliates, to obtain another bank product or service. 

The following two examples will help to explain coercive tied selling and what is not allowed. Your bank's mortgage specialist tells you that you qualify for a home mortgage. However, you are also told that the bank will approve your mortgage only if you transfer your investments to the bank or its affiliates. You want the mortgage, but you do not want to move your investments.

You are advised that you qualify for a Registered Retirement Savings Plan (RRSP) loan. However, you are also told that the bank will approve the loan only if you use the money to buy the bank's mutual funds. You want the loan, but you want to invest the money elsewhere.

Both of the above practices are against the law. If you qualify for a product, a banking representative is not allowed to unduly pressure you into buying an unwanted product or service as a condition of obtaining the product you want.

WHAT IS NOT COERCIVE TIED SELLING? 

Some businesses look for tangible ways to show their interest in your business and appreciation for your loyalty. Sales practices, such as preferential pricing and bundling of products and services, offer potential and existing customers better prices or more favorable terms. 

These practices should not be confused with coercive tied selling, as defined by the Bank Act. Many of these practices will be familiar to you in your dealings with other businesses.

PREFERENTIAL PRICING

Preferential pricing means offering customers a better price or rate on all or part of their business. For example, a printer offers a lower price for each business card if you buy a thousand cards instead of a hundred. A shoe store offers a second pair of shoes at half price. Similarly, a bank may be able to offer you preferential pricing - a higher interest rate on investments or a lower interest rate on loans - if you use more of its products or services.

The following two examples will help to explain preferential pricing in banks.

After approving your application for a home mortgage, your bank's mortgage specialist tells you that this mortgage would be available at a lower interest rate if you transferred your investments to the bank or its affiliates.

After approving your application for an RRSP loan, you are offered a lower interest rate if you use the loan to buy the bank's mutual funds.

The above practices are acceptable. The approval of your mortgage and RRSP loan is not conditional on your taking another bank product or service. Rather you are offered preferential pricing to encourage you to give the bank more business.

BUNDLING OF PRODUCTS AND SERVICES 

Products or services are often combined to give consumers better prices, incentives or more favorable terms. By linking or bundling their products or services, businesses are often able to offer them to you at a lower combined price than if you bought each product on its own. For example, a fast-food chain advertises a meal combination that includes a hamburger, fries and a drink. The overall price is lower than if you bought the three items separately.

Similarly, banks may offer you bundled financial services or products so that you can take advantage of package prices that are less than the sum of the individual items.

The following example will help to explain the bundling of bank products and services.

You plan to open a bank account that charges you for individual transactions. You are offered a package of services that includes a comparable bank account, a credit card with no annual fee and a discount on purchasing traveler's cheques. The total price for the package is less than if you purchased each part of the package separately.

Bundling products in this way is permitted because you have the choice of buying the items individually or ina package.

RISK MANAGEMENT

o ensure the safety of their depositors, creditors and shareholders, banks must carefully manage the risk on the loans and credit cards they approve. The law, therefore, allows banks to impose certain requirements on borrowers as a condition for granting a loan - but only to the extent necessary for banks to manage their risk.

The following example will help to explain how banks manage such risk.

You apply for an operating loan for your business. To manage the risk associated with the loan, your bank requires your business to have an operating account with the bank as a condition for obtaining the loan.

The above example is legal and appropriate.

Having your business' operating account at the bank allows your bank to assess possible risks associated with your business' cash flow and manage the risk associated with the loan.

INDEPENDENT REVIEW OF COMPLAINT

If you believe that you have experienced coercive tied selling in any dealings with any Canadian bank or lending institution, you have a right to an independent review. 

As a Canadian banking customer, you may contact the Financial Consumer Agency of Canada (FCAC). The FCAC supervises federally regulated financial institutions to ensure they comply with federal consumer protection laws. The FCAC also helps educate consumers and monitors industry codes of conduct and public commitments designed to protect the interests of consumers. 

Federal consumer protection laws affect you in a number of ways. For example, financial institutions must provide you with information about their charges, interest rates and complaint handling procedures. 

For more information, you can reach the FCAC by:

telephone: 1-866- 461-3222
1-866 461-2232, en français
web site: www.fcac-acfc.gc.ca

If you have a regulatory complaint, you can contact the FCAC in writing at:

Financial Consumer Agency of Canada
6th Floor, Enterprise Building
427 Laurier Ave. West
Ottawa, Ontario K1R 1B9

The FCAC will determine whether the financial institution is in compliance. It will not, however, resolve individual consumer complaints.

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