The Canadian government is cracking down on the sales practice known as "tied selling" within banks. A new law that went into effect October 1998 bans tied selling. The law is a result of a year-long review of financial services by a federal task force. The amendment to the Bank Act affects the majority of brokerage firms and mutual funds in Canada since most are under the control of the big banks.
"This is something long overdue. It is a disgraceful practice that has been damaging to consumers and free competition within the industry," says Tom Caldwell, president of Toronto-based Caldwell Securities.
The practice of tied selling, not to be confused with less-aggressive cross-selling techniques, typically involves the granting of credit, either via bank loans or margin loans at bank-owned brokerages. Consumers, the federal task force was told, are too often informed that credit lines could be increased only if more investment assets were held at a firm, typically through transfers of products like mutual funds.
The fine established by the new law for a violation is $100,000.
One problem, however, is that the banks and the bank-owned brokerages are very powerful in Canada and savvy enough to blur the lines between force and suggestion, Caldwell says.
Virtually all representatives from Canadian banks and their brokerage subsidiaries deny that any sort of coercive tied selling has ever taken place. The Royal Bank of Canada, for example, which owns RBC Dominion Securities, steadfastly denies through a spokesperson that any such practice was used.
However, one attorney who worked with the federal task force and asks for anonymity, says the investigation turned up numerous employees at banks who said they felt pressure to relocate customer fund assets to their bank.
The main worry at many banks and brokerages is that the law, coming at a time when further industry consolidation may be just down the road, will put a chill on cross-marketing programs. They also worry about additional legal review of cross-selling and marketing plans.
According to Matthew Barrett, president of the Bank of Montreal, the parent company of Nesbitt Burns Securities, the regulations are already causing confusion.
"If a waiter asks me if I would like dessert, I don't consider that tied selling," Barrett told the task force.
To which Caldwell replies: "This isn't about suggestions. It's more a question that the banks were telling consumers they can't eat anything unless they agreed ahead of time to order dessert and coffee."