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Consumers of financial products and services: New issues brought to light by University research

Today, consumer protection law extends far beyond what was originally provided for in Québec’s Consumer Protection Act (CPA), which covers protection against misleading practices and sets out frameworks for credit contracts, distance contracts, and contracts entered into by itinerant merchants. Consumers are now protected by laws that target many other needs, especially regarding securities and insurance. The aim of this text is to highlight the conditions for protecting consumers who have been encouraged to acquire such products. This is the goal of Hub 22 of the ADAJ (Accessing law and justice) research project.

Who are these consumers?

People who purchase financial products are often called investors. However, the majority purchase such products to save money for the future, for tax advantages or to minimize risk. On the sociological level, the notion of “financial product” needs to be redefined in accordance with consumers’ real aims and not with an abstract, universal notion.

An Autorité des marchés financiers (AMF) survey (The AMF Financial Awareness Index) of 1503 respondents revealed the extent of what is covered by protection for consumers of financial products. It found that 59% of Quebecers had personal or joint registered retirement savings plans (RRSPs) and 55% had tax free savings accounts (TFSAs). 84% of Quebecers had car insurance, 83%, home insurance and 72%, life insurance. However, when it came to what could really be called investments, the AMF Financial Awareness Index  showed that only 29% of Quebecers had investment certificates, 17%, savings bonds and 24%, stocks.

This nonetheless means that the great majority of Quebecers are classified as consumers of financial products and services.

Why are these consumers vulnerable?

The constant growth in the financial products market requires us to examine the role played by the intermediaries involved in purchasing and selling these financial products and, by extension, the nature of such products.

At some point, each of us will need a professional to help us choose and optimize our assets (whether investments or savings) or to acquire insurance products. Since consumers are not always able to identify their risk coverage needs on their own or to see their way through the complexity of the financial products on the market, they often have to follow the recommendations of their advisors (investment advisors, financial planners, portfolio managers, insurance representatives, etc.), whose functions may go beyond simple advice.

To play their roles, such advisors require complete knowledge of the products available and of the financial capacities of the consumers. It is not easy for consumers to assess the quality of the services provided by financial advisors, especially in the case of insurance products. There is often a long time between when the contract is entered into and when the service is delivered. Consumers lean on their advisors’ recommendations and have faith that their advisors’ practices are sound.The AMF Financial Awareness Index revealed that 51% of Quebecers used an advisor or financial institution as a source of financial information. The nature of the relationship and the respective expectations of these stakeholders (the professionals and the consumers) are therefore crucial. The relationship must be founded on trust and transparency. On the one hand, consumers provide highly personal information and expect professionals to offer products that meet their needs. On the other, it is often difficult for professionals to assess consumers’ real understanding of the products being purchased and to ensure that consumers have provided complete personal information. In the event of error or fraud, the consequences are sometimes very heavy for consumers. Whom can they look to if there is a conflict or complaint?

Consumer protection through research?

The aim of ADAJ research Hub 22 is to carry out empirical and multidisciplinary research on the experiences of consumers of financial products and services: their perceptions, expectations, experience, real knowledge of the mechanisms governing the financial market, their understanding of investor protection mechanisms, their awareness of trends in excessive risk-taking, etc. These issues have to be studied in the context of intermediation relations. More specifically, Hub 22 researchers are studying stakeholders’ real practices, since those practices are essential components of financial literacy.

Hub 22 is concerned with the protection of consumers of financial products and services. Its goal is to evaluate how the interaction of all the stakeholders in the financial market (regulators, consumers, advisors and industry players) influences consumers’ observable behaviour and the protection of consumers’ rights. This research is conducted in collaboration with stakeholders in the financial market, in particular, the Autorité des marchés financiers, the Investment Industry Regulatory Organization of Canada, the Chambre de la sécurité financière, the Chambre de l’assurance de dommages, consumer associations (notably Option consommateurs, the Union des consommateurs and the Coalition des associations de consommateurs du Québec), the Financial Markets Administrative Tribunal, Éducaloi and also many financial institutions and insurance companies.

The upcoming issues of Option consommateurs magazine will report on the various stages and conclusions of Hub 22’s work. This should provide us with a better understanding of the conditions for protecting the rights of consumers of financial products.

Maya Cachecho and Pierre Noreau