Ontario Credit Unions and Caisses Populaires: 2017 Market Conduct Review

Transcription

1 Ontario Credit Unions and Caisses Populaires: 2017 Market Conduct Review

2 Table of Contents Table of Contents... 2 Executive Summary... 3 Background... 4 Methodology... 4 Key Findings... 5 Mission, value and culture... 5 Policies, procedures and practices... 5 Monitoring and reporting... 7 Compensation structure... 8 Employee training... 9 Product disclosures Complaint handling process Recommended Best Practices CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 2

3 Executive Summary This report presents the findings of the Financial Services Commission of Ontario s (FSCO) 2017 market conduct review of credit unions and caisses populaires (collectively referred to as credit unions). FSCO s review objective was to evaluate the adequacy of credit unions controls, policies and procedures to prevent mis-selling (sale of a product/service that is misleading, negligent, or unnecessary) of financial services and products, and to assess if members are being treated fairly. Through a mandatory questionnaire, FSCO gathered information from all Ontario credit unions about market conduct principles, policies, and procedures, with a strong focus on sales practices. Below are the report s key conclusions: Incentive or commission programs potentially expose the majority of members to a higher risk of mis-selling: FSCO s analysis revealed that 40 per cent of credit unions representing approximately 80 per cent of total assets, or $45.5 billion use commission or incentive structures to compensate employees, which may lead to a higher risk of misselling. Most credit unions with commission or incentive structures have adequate controls to prevent mis-selling: Eighty-nine per cent of credit unions using commission or incentive compensation structures have controls to mitigate the risk of mis-selling, by including both qualitative and quantitative metrics in employee compensation. Other controls used include reporting and monitoring practices, whistleblower policies, and specific policies and procedures for selling retail products and/or services. However, FSCO did find some credit unions had inadequate controls. Lack of formalized processes, procedures, and controls especially related to market conduct: Credit unions believe their industry model is inherently member-centric. This has lead to an overreliance on the co-operative nature of credit unions. Across the industry, formal documentation of processes, procedures and controls are lacking, and where these do exist, there is often no emphasis on controls over market conduct practices. Underdeveloped complaint handling policies: Despite clearly defined regulatory requirements for complaint handling, 34 per cent of credit unions do not have a formal complaint handling policy in place, and about one third do not include complaints as a regular standing item at board meetings. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 3

4 FSCO encourages credit unions to use the findings in this report as a benchmark against their own policies and procedures, and to compare their current practices and procedures to FSCO s expectations regarding market conduct as well as industry best practices. FSCO also advises credit unions to develop policies and procedures to address any gaps this report identifies. The section Recommended Best Practices provides a detailed list of areas for improvement identified through this review, as well as best practices to help close existing gaps. Background FSCO s mandate is to provide regulatory services that protect the public interest and enhance public confidence in the sectors it regulates. FSCO is responsible for overseeing the compliance of Ontario credit unions and caisse populaires with the Credit Unions and Caisses Populaires Act, 1994 (CUCPA) and regulations, supervising certain activities and monitoring their conduct. FSCO works with stakeholders to support a stable financial services industry and protect the interests of financial services consumers. FSCO led this market conduct review to determine if credit unions have adequate controls, policies and procedures to prevent mis-selling of financial services and products, and to ensure their members are being treated fairly. FSCO gathered information from the credit union sector under Section 225 of the CUCPA to conduct its review. Methodology In August 2017, FSCO consulted with industry stakeholders to develop a mandatory questionnaire that was sent to credit unions in September The response rate was 100 per cent. The questionnaire asked about policies, procedures and practices related to the sale of financial services products and services provided by credit unions. Companies were asked to focus on the current state, rather than a target state. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 4

5 FSCO took into account the size, risk profile, scope and complexity of the various credit unions in its analysis, and categorized credit unions based on membership: Large: over 25,000 members (12 credit unions) Medium: between 4,500 and 25,000 members (46 credit unions) Small: under 4,500 members (38 credit unions) The findings in this report reflect the responses provided by the credit unions. Key Findings Mission, value and culture FSCO recognizes that credit unions believe that fair treatment of their members is fundamental to their business. While many indicated they do not formalize fair treatment in a process or policy, most believed that it is ensured through their one member, one vote model, or is embedded in their corporate culture and values. Some credit unions have incorporated fair treatment of members into their governance framework, their mission statement, through ongoing market conduct training, and/or their code of conduct. While the majority of credit unions indicated they have a code of conduct in place, these codes of conduct typically do not specifically address market conduct practices. Overall, credit unions have taken an informal approach to assessing their market conduct. Some respondents rely on their whistleblower or complaints polices for this purpose. Others take a more proactive approach, performing a reputational risk analysis or business case analysis when introducing a new product. FSCO recommends that credit unions consider performing an extensive market conduct review on their entire business, in particular before a new product is introduced to members. Policies, procedures and practices Respondents were asked to describe their governance framework as it relates to market conduct practices for financial services and products. A significant majority of credit unions indicated their governance framework did not take market conduct into consideration. Others indicated their board oversees ethical conduct of its employees, such as requiring all employees to sign a code of conduct each year. Many have adopted a formal policy within their governance framework for monitoring market conduct - this is the benchmark standard. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 5

6 FSCO recommends credit unions design and implement policies and procedures that reinforce market conduct. For the majority of credit unions (58 per cent overall, 75 per cent of large credit unions), a senior officer within the institution is responsible for ensuring and assessing appropriate market conduct practices. However, many respondents were unclear about who held that responsibility or what it entailed. A small majority of credit unions (51 per cent) have specific policies and procedures in place related to retail product and/or service sales. However, a significant minority of large and medium credit unions still fail to meet this metric. It is important for credit unions to develop specific policies and procedures related to the selling of retail products and/or services to establish guidelines for employees to follow. Doing so enables the credit union to limit its exposure to mis-selling. Eighty per cent of credit unions have a mechanism in place for employees to report unethical behaviour without fear of reprisal or reprimand (e.g., whistleblower policy). Two-thirds of credit unions provide support such as coaching, self-assessment tools and checklists for employees to self-assess, evaluate and develop their conduct specifically for product and/or service sales to members. Most credit unions maintain a list of members who do not wish to be solicited, or give them the option to unsubscribe to a mailing list. Those without this capability are small, and indicated they are less likely to advertise directly to individual members. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 6

7 Monitoring and reporting Overall, 48 per cent of Ontario credit unions have specific measures in place to assess market conduct practices and fair treatment of members. However, large and medium credit unions were far more likely than small credit unions to have such measures. Many respondents indicated their monitoring processes are informal, ad hoc, or reactive. FSCO encourages all credit unions to develop policies and procedures that reinforce their commitment to market conduct, as recommended in the International Credit Union Regulator s Network (ICURN) Guiding Principles for Enhancing Governance of Cooperative Financial Institutions. FSCO also suggests credit unions implement a monitoring process to support compliance with these policies and procedures. Fifty-one per cent of credit unions senior management use reporting measures to monitor the selling practices of their employees. Size is a factor: nearly all large credit unions use this practice, while just under two thirds of medium credit unions and less than one-third of small credit unions use this practice. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 7

8 FSCO recommends all credit unions follow the ICURN Guiding Principles as they relate to audit and internal control, compliance monitoring and corporate governance. Compensation structure Among the 40 per cent of credit unions offering a commission or incentive structure as part of employee compensation, use is greatest among large credit unions (92 per cent). Use falls to 46 per cent for medium credit unions, while only 8 per cent of small credit unions use this structure. Together, this means the majority of credit union members are sold products and services on a commission or incentive basis. Incentives are typically combined into broader goal-oriented volume sales, as opposed to a straight commission arrangement for the sale of a specific product. Most credit unions offering a commission or incentive structure (89 per cent) apply both qualitative and quantitative variables (e.g., balanced scorecards, member satisfaction), 84 per cent use reporting measures/metrics to monitor employee selling practices (e.g., tracking sheets, performance appraisals, complaints reporting), and 66 per cent have specific policies/procedures related to retail product and/or service sales. FSCO recommends that all credit unions include qualitative factors as a core component of any commission or incentive structure, taking into account market conduct rather than rely solely on incentives oriented towards the sales of specific products or sales volumes. We also encourage credit union boards to actively oversee compensation design, operation and review, as noted in the ICURN Guiding Principles. Overall, 46 per cent of credit unions do not include market conduct-related criteria in their employee assessments. Responses did not vary based on the size of the credit union. This CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 8

9 represents a clear area of improvement for all credit unions regardless of size. Another 14 per cent did not consider market conduct-related criteria for employee assessments applicable. More importantly, virtually no credit unions currently advise their members about their compensation structure with respect to the sales of retail (non-wealth) products and/or services. Although not a requirement, the ICURN Guiding Principles recommend disclosure of relevant and useful information that supports the key areas of governance a position FSCO supports. Employee training The majority of credit unions (71 per cent) offer some kind of market conduct-related training to their employees. However, the level of training varies some offer more extensive training through courses, and others require employees to review and sign codes of conduct. The frequency of this training also differs, with some offering training on an annual basis and others performing training on an ad hoc basis when a new product or service is introduced, or when the employee is first hired. The types of training include in-house tutoring/mentoring by a manager or coach, and external online modules or courses administered by third parties. Some smaller credit unions indicated they do not often introduce new products or services, so training is usually limited to when an employee is hired. The majority of credit unions (66 per cent) provide at least some support or tools to their employees to self-assess, evaluate and develop their conduct specifically relating to the CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 9

10 selling of products and/or services to members. However, 31 per cent of medium and 21 per cent of small credit unions do not meet this metric. FSCO recommends that credit unions regularly deliver and/or participate in training programs about ethics and integrity, specifically related to their own code of conduct or standards. Furthermore, FSCO encourages credit unions to incorporate continuous training programs to promote suitable advice to members. Product disclosures Product disclosure policies vary among credit unions. Most have formalized processes and procedures surrounding product disclosure, including making documentation available on the credit union's website and providing it directly to the client at time of sale through brochures or s. Some smaller credit unions rely on employees to communicate product details to the member through a product review. For credit unions that only provide verbal product disclosure, this is a clear area for improvement. Credit unions largely do not have a formalized process to respond to a member who claims they had been sold a product or service without sufficient information or without fully understanding the product. Some indicated their response would likely fall within their complaints handling policy. Most respondents said they would take an ad hoc approach, escalating the incident from the employee to higher levels as required. Several respondents felt this type of situation would be rare and would fundamentally conflict with the credit union model. FSCO recommends that credit unions take all reasonable steps to disclose information to members about product details and their rights and obligations both before and after the transaction is completed, as well as inform members of their rights and obligations. Complaint handling process All credit unions have a statutory requirement to designate an individual responsible for handling complaints. Approximately two-thirds of credit unions have a complaint handling policy in place, with large and medium credit unions more likely to have a formalized complaint handling process. This presents an opportunity for improvement and credit unions must implement complaint handling policies, if they have not already done so. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 10

11 A large proportion of credit unions are also missing an important opportunity to use complaints as a tool to improve their overall business model. While approximately two-thirds of credit unions have a formal or informal system for filtering complaint information to senior management, in others, senior management receives this information infrequently or does not get it at all. The CUCPA requires complaints be reported to the board at least once a year. Despite this statutory requirement, approximately one-third of credit unions reported that complaints reporting is not a standing item for their board of directors. However, a sizeable minority of these credit unions noted that complaints were infrequent or non-existent. In addition, approximately two-thirds of credit unions do not aggregate complaints as a way to identify negative selling trends or patterns. FSCO recommends that all credit unions collect and analyse complaint data to identify any systemic issues. CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 11

12 While 64 per cent of credit unions conduct member satisfaction surveys, larger credit unions are more likely to conduct surveys. FSCO recommends that all credit unions solicit feedback through member satisfaction surveys to help improve overall market conduct. Recommended Best Practices FSCO s credit union market conduct review has revealed a wide range of practices across the sector. The results and analysis of this report should be used by credit unions to identify and address gaps in their business. Later this year, FSCO will release further guidance about the fair treatment of consumers across the financial service sectors it regulates. Below are recommendations that credit unions can undertake for improvements in their governance and internal control regime as identified through the market conduct review. Mission, value and culture Formalize treating members fairly in codes of conduct, mission statements and governance frameworks Conduct market conduct reviews on entire business, especially while developing new products or promotions Ensure market conduct principles are incorporated into the credit union s business model FSCO recommends all credit unions follow the ICURN Guiding Principles as they relate to audit and internal control, compliance monitoring and corporate governance. Policies, procedures and practices Assign responsibility to a member of senior management to ensure appropriate market conduct across the credit union Adopt a formal policy within the governance framework for monitoring market conduct Develop formal policies and procedures related to retail product/service sales with an emphasis on market conduct Implement a system to monitor the selling practices of employees Implement a whistleblower policy Monitoring and reporting Establish a monitoring system and implement metrics to enable market conduct assessment Monitor the selling practices of employees to ensure members are receiving appropriate products/services Compensation structure Incorporate qualitative metrics into the compensation/incentive structure CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 12

13 Ensure performance assessment plans emphasize market conduct principles Employee training Incorporate market conduct (including ethics and integrity) training into standard employee training program Ensure employees are trained and knowledgeable about all products/services offered Give employees support/tools to improve conduct related to product/service sales Product disclosure Provide members with written documentation of detailed product information Ensure employees are trained on how to properly explain product information to clients Complaint handling process Create a formal complaint handling policy and communicate policy to members Incorporate complaints reporting into standing Board of Directors agenda item Use complaints reporting to identify potential market conduct issues Establish member satisfaction surveys as a core component of market conduct strategy CREDIT UNIONS AND CAISSES POPULAIRES: 2017 MARKET CONDUCT REVIEW 13