Ottawa asks banks to cut fees to help borrowers struggling with higher mortgage costs

Open this photo in gallery:

Ottawa is asking Canada’s largest lenders to reduce banking fees and help borrowers cope with higher mortgage costs, as Canadians grapple with high inflation and mounting expenses.

Finance Minister Chrystia Freeland said during a news conference Tuesday that the federal government is pushing banks to comply with new guidelines intended to help financially stressed mortgage borrowers make their rising payments. She also announced that the government is instructing the Financial Consumer Agency of Canada (FCAC), the country’s financial consumer watchdog, to set an expectation that lenders will reduce the fees they charge for personal banking accounts and other services, including overdraft fees.

These are the latest in a series of recent federal measures aimed at the banking sector.

Over the past two years, Ottawa has made three tax changes that have required banks and insurers to pay billions of dollars to support government initiatives and pay down government debt. This drew rare public criticism from the Canadian Bankers Association. Meanwhile, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, has been hiking capital requirements, which has forced banks to set aside billions of dollars as a cushion against a potential economic downturn.

The measures announced Tuesday – designed to make banking more affordable as Canadians face rising costs – could mean banks will have to forgo a great deal of revenue they would otherwise generate from interest charges and retail banking fees.

‘We’re barely making it’: Eight Canadians reveal the pain of soaring mortgage costs

The mortgage guidelines Ms. Freeland referenced in her announcement were introduced by the FCAC in July. They set expectations for how banks should provide support for existing residential mortgage borrowers who are facing “severe” financial challenges.

The guidelines also outline processes for helping these borrowers adjust to higher costs by lengthening their amortization periods – the amounts of time they have to pay down their loans.

During quarterly earnings calls, executives from many of the Big Six banks have said that they are reaching out to customers facing rising mortgage payments to explore options for managing those costs. In recent third-quarter financial results, the share of the banks’ borrowers with amortizations greater than 30 years declined slightly from the first quarter. But three major Canadian banks disclosed that about 20 per cent of their residential mortgage borrowers are seeing their loan balances grow, because their monthly payments no longer cover all the interest they owe.

Ms. Freeland said she had met with the chief executives of the country’s biggest banks more than a week ago to discuss the FCAC guidelines. In the coming weeks, the government will be “closely monitoring” whether the banks have been complying with them, she said.

“I told them it is my firm expectation that they abide by our government’s mortgage guidelines as published by the Financial Consumer Agency of Canada,” she said. “Our objective is to protect Canadians by ensuring their financial institutions treat them fairly and provide them with the tailored mortgage relief they need.”

The government is also targeting retail banking fees. Ms. Freeland said Ottawa is instructing the FCAC to set an expectation that lenders provide personal banking accounts without fees, or at a relatively low cost. To tackle other charges – including those for online payments, debit transactions, overdrafts and e-transfers – the government has directed the FCAC to encourage banks to remove or reduce fees.

These types of fees are a significant source of revenue for banks, and in some cases they have thrust the institutions into the crosshairs of government scrutiny. In 2020, Toronto-Dominion Bank’s U.S. arm paid a multimillion-dollar settlement to the U.S. Consumer Financial Protection Bureau, which alleged the bank had charged customers fees for an optional overdraft service without their consent. Last year, the lender’s U.S. division eliminated overdraft charges of US$50 or less after competitors changed their own fee structures amid political pressure.

Canadian Bankers Association spokesperson Kiki Cloutier said in a statement that the country’s “competitive banking system provides good value, ready access and wide choice for consumers and small businesses.”

“Canada’s banks provide Canadians and small businesses access to the financial tools they need to manage their finances,” she said. “The banking sector understands that Canadians are feeling additional pressure on their budgets.”

For retail banking customers looking to escalate complaints about their banks, Ms. Freeland also announced that the federal government is designating the Ombudsman for Banking Services and Investments (OBSI) as the sole independent organization for managing consumer disputes in the sector. Currently, the banks can decide whether they resolve these disputes through OBSI or the ADR Chambers Banking Ombuds Office.

In 2020, the FCAC said in a report that having two external complaint bodies for the industry resulted in inefficiencies, and that consumers face delays when pursuing banking complaints.

“For too long banks have been able to choose who adjudicates complaints from Canadians,” Ms. Freeland said. “Canadians have asked for and deserve better. With an independent, transparent and not-for-profit ombudsperson, that is what they will receive.”

But OBSI still will not have the authority to order banks to abide by its decisions. After a one-year transition period, it will assume its new mandate in November, 2024.