When is consumer protection not?
Many people are unaware that “coercive tied selling” is illegal in Canada (another name for this is forced selling).
According to the Financial Consumer Agency of Canada, “This means that banks are not allowed to unduly pressure or coerce you into a product or service from their affiliates as a condition for obtaining another product or service from them.”
“For example, if you apply for a mortgage at a bank, the institution cannot make you buy another product or service as a condition for obtaining the mortgage.”
They can require that you obtain life or fire insurance to cover the mortgage, but they can’t force you to buy it from them.
On the surface, this may look like a reasonable way to protect consumers from greedy banks, but how does it work in the real world?
A client of mine went to her bank to see about getting a line of credit (LOC) for some home renovations. She’s a physician, has worked for over 25 years, has a spotless credit history, no debts, and a significant net worth. Regardless of why she wanted an LOC she was told she could have a $100,000 LOC at prime +1% if she secured it with her house. Now that by itself was interesting because she has more than $100,000 in term deposits at that bank and her house is worth 10 times that amount. She questioned the rate of prime +1% (as did I) and was told that the bank could probably do better with the rate if she agreed to move more of her assets to the bank.
Is this “coercive tied selling”, or is it what the banks call “bundling”?
According to the banks, bundling of services are often combined to give consumers better prices, incentives or more favourable terms. Therefore (according to the banks), bundling financial services and products is for your benefit so that you can take advantage of package prices that are less than the sum of the individual items. Really?
Let me see if I understand how this works. I’ll give you a $100,000 LOC and reduce the rate to prime (that saves you 1% if you do, in fact, use it) and then I’ll pay you 1% less on your terms deposit or charge you 2% on the mutual fund we’re going to sell you when you move additional assets to us.
When I first heard from this client about her bank encounter, my immediate thought was: if it walks like a duck, sounds like a duck and looks like a duck, it’s probably, you guessed it, a duck.
It appears to me that there’s an extremely fine line between coercive tied selling and bundling. In her case she found it almost amusing how fast they changed their tune when she asked them, “Are you trying to blackmail me?” She said it took only a matter of minutes for the bank to give her an LOC at prime without further security when she mentioned the word blackmail.
Blackmail is such a nasty term. Just to take the edge off of it, why don’t we call it bundling?