A Federal Court case has brought to light a now-banned practice known as “account churning” among Canadian bank employees incentivized by commission-based pay.
Evidence emerged during a recent case about the misconduct that involved bank employees engaging in excessive trading to generate fees, as first covered by Blacklock’s Reporter on Feb. 29. Account churning came under scrutiny after Parliament passed legislation to prohibit the practice in 2018.
Lawyers for the Royal Bank of Canada in court described the actions as “fundamentally dishonest and contrary to the Royal Bank’s Code of Conduct.” The gravity of the misconduct was documented in records filed that were linked to a 2018 dismissal of a high-earning financial planner.
The woman, a licensed mutual fund manager, was found to have engaged in a pattern of unauthorized transactions. She converted existing client investments into cash only to reinvest them, generating substantial fees and commissions.
Justice Simon Fothergill in court condemned the financial planner’s actions as “serious and fundamental,” underscoring the breach of trust that justified her immediate termination.
The court wrote that the planner had made unauthorized transactions “over a hundred times with many clients,” leading to significant risks for those clients and over $98,000 in fees and commissions.
The case sheds light on broader issues within the banking industry including the pressures that commission-based compensation places on ethical standards.
Parliament had in 2018 passed Bill C-86, the Budget Implementation Act, to address these concerns by banning bank policies that tie employees’ compensation to sales quotas.
The legislative action was in response to a 2017 investigation by the Commons Finance Committee that documented aggressive sales practices by branch managers.
The agency had hired a “mystery shopping firm” to visit over 700 banks across the country to inquire about chequing accounts and credit cards and to report on the mystery shoppers’ experiences.
The report said that the shoppers indicated receiving inappropriate recommendations in 15 percent of interactions involving chequing accounts and 20 percent of interactions involving credit cards.
This included offering premium credit cards to mystery shoppers, products that require minimum income and have relatively high annual fees, without proper verification of appropriateness. Some 28 percent of credit card recommendations were for such cards, while 80 percent of the mystery shoppers offered these cards weren’t asked about their income.
The guideline stresses the role of senior leadership in fostering an ethical banking culture and the importance of aligning incentive structures with expected behaviours.
Financial institutions “should design and implement compensation frameworks and incentive plans to encourage expected behaviour and discourage undesired behaviours at all levels, including senior management, material risk takers and staff,” said the guideline.
