Consumer protection in the digital era

“All banking customer groups now prefer digital channels”, concludes the October 2019 McKinsey report, “Inflection point: Seven transformative shifts in US retail banking”.

Rising consumer expectations for digital banking convenience is requiring banks and financial technology companies (fintechs) to explore ways to improve customer service in the digital era. However, one of the biggest stumbling blocks to achieving this goal is legislation, and particularly, consumer protection requirements which are mainly based on disclosure obligations. Banks and fintechs focused on digitally engaging with consumers would benefit from understanding the legislative frameworks governing consumer protection, and the impediments they may represent to innovation.

As noted by authors Thomas A. Durkin and Gregory Elliehausen, “The common element of the federal government’s consumer-protection measures for financial services in the United States is the requirement that institutions disclose designated information to consumers in specified formats at required times. Disclosures are so central to the purpose of some financial consumer protections that we might properly call them “information protections”.¹

Although referring to the US legislative regime, the authors’ statement could just as well apply to the Canadian landscape where disclosure is the cornerstone of consumer protection. Unfortunately, disclosure, and especially prescriptive requirements, do not encourage innovative, digitally-friendly consumer interactions.

Even international best practices in consumer protection fail to recognize the need for—and advantages of—flexibility in the digital age. The G20/OECD guidance on effective approaches to implementing the G20 High Level Principles on Financial Consumer Protection does not adequately recognize the growth of the digital distribution platform in financial services.² The use of terms such as “documentation”, “material”, “information leaflets” and “glossaries” present a dated picture of how financial institutions disseminate information. In addition, several of the G20/OECD recommended approaches emphasize the use of standardized forms as useful tools to achieve the transfer of essential information: “Standardized forms with essential information are used to reflect the nature, key features, risks and costs of the products and services offered, how such products and services may be paid for and the key information of the financial services provider, so that the consumer can easily compare products and providers”.

Although the Canadian federal government looked to the OECD’s latest guidance when revising its financial consumer protection legislative framework, many of the new proposed provisions would not be considered digital-friendly.

The G20/OECD’s recommendation that information for complex products be shared via standardized forms is even more difficult to achieve in a digital format: “Enhanced disclosure requirements are established for more complex products that highlight specific costs and risks involved for the consumer. These requirements include the provision of a clear, concise and easily understandable standardized form that contains information enabling the consumer to comprehend the key features and risks of the product and is prepared in a format that facilitates comparison with other products”.

Active internationally, and a member of the OECD Task Force on Financial Consumer Protection, it is not surprising that the Canadian federal government looked to the OECD’s principles and guidance when revising its financial consumer protection legislative framework. Introduced in December 2018 (but not yet in force), the Bank Act amendments consolidated the various existing consumer provisions therein and introduced several new requirements. However, many of the new Bank Act consumer protection provisions would not be considered digitally-friendly.

For example, the new consumer protection framework includes a general catch-all provision requiring banks to disclose a product’s or service’s features, the list of charges and penalties, and the particulars of a person’s rights and obligations in respect of the product or service.³ In addition, the bank must provide the customer with a copy of the bank’s complaint management procedures, the name of its external complaint body and the Financial Consumer Agency of Canada’s contact information. It is unreasonable to expect a customer to read this amount of information, particularly if he or she is reviewing it on a telephone or a smart phone.⁴

In Bank 4.0: Banking Everywhere, Never at a Bank, authors Brett King and Jo Ann Barefoot make the case for a complete overhaul of the regulatory model, “We need to create a whole new model for the digital age, in order to both to regulate digital-markets and to deploy new technology in the regulatory process”.⁵

Unfortunately, the new Bank Act consumer protection framework fails to achieve this objective, and banks and fintechs alike that wish to operate in the banking sector will need to comply with regulatory requirements that are digitally unfriendly for the foreseeable future.

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¹ “The Impact of Public Policy on Consumer”, edited by Thomas A. Durkin and Michael E. Staten Credit, chapter 5, Disclosure as a Consumer Protection, authored by Thomas A. Durkin and Gregory Elliehausen.

² “Update Report on the work to Support the Implementation of the G20 High-Level Principles on Financial Consumer Protection”, G20/OECD Task Force on Financial Consumer Protection, September 2013.

³ Section 627.59 of the Bank Act (new provision not yet in force). This provision applies to all products and services for which there are no other disclosure specific provisions in the Act.

⁴ Under the Canadian framework, the External Complaint Body is the independent OmbudService with whom the bank must register to deal with customer complaints.

⁵ The book Bank 4.0: Banking Everywhere, Never at a Bank was authored by Brett King but the chapter 2, The Regulator’s Dilemma was co-authored by Brett King and Jo Ann Barefoot.