Canadian banks slow to pass on rate cuts (2)

The banks used to pass along rate cuts by the Bank of Canada right away. But lately, they’ve been dragging their feet. I wrote about this last October.

Central banks are slashing interest rates to encourage banks to do more lending. When banks come up with excuses why they can’t pass along the full rate cut, the whole exercise is counter-productive.

This week, a couple of Manulife One mortgage customers told me they’re furious at what they think is deceptive advertising. Dan sent me his email correspondence with Manulife.

Bottom line is Manulife sold M1 to all clients, including us, as a “prime rate” product, and your marketing materials, advertising, and advisors presented it as such. You have conveniently changed your practices due to market conditions.

Until October 2008, M1 rate at prime.

From October to December 2008, M1 rate at prime plus 0.5%.

After Dec. 9, 2008, M1 rate at prime plus 0.75%.

There is absolutely no protection for an M1 customer. Manulife can, and is obviously prepared to, set the rate wherever you see fit.

To state that the M1 rate is “not linked in any way” to prime is an outright lie. The M1 rate followed prime from the time you introduced the program!!

Dan was responding to an email from a customer service rep who said the following:

It’s a common misperception that the Bank of Canada supplies the funds for Canada’s banks to lend out. The Bank of Canada rate is used within the banking industry for a number of purposes but funds are not actually available from the Bank of Canada at that rate.

A bank uses the deposits it receives to fund loans and mortgages. With the Bank of Canada’s recent efforts to lower borrowing rates, enormous pressure has been placed on banks regarding rate setting decisions in light of the squeeze between what they pay out for deposits and what they charge for loans and mortgages.

Once credit conditions do ease, it is true Manulife One rate will most likly have a closer relationship to Prime, although it is not linked in any way. Bank Of Canada officially announced yesterday that Canada is now in recession, clearly the market conditions are not improving and as a result rate changes are occurring as they are.

Since customers were pushing hard for rate cuts, Manulife One had to post a notice at its log-in page, explaining why this wasn’t going to happen.

As of October 10, 2008, we were unable to reduce the Manulife One Base Rate in unison with the Manulife Bank Prime Rate. We want to ensure that all Manulife Bank customers understand that the Manulife One Base Rate is no longer at the same level as the Manulife Bank Prime Rate. The Manulife One Base Rate is a distinct rate of interest, separate from the Manulife Bank Prime Rate and is based on competitive conditions in the marketplace, cost of funding Manulife One accounts, and the overall value of the product.

And here’s Dan’s response:

Bottom line is you have misled your customers and engaged in a “bait and switch” practice here. The Manulife One program was sold as following prime and ALWAYS did from the time it started. Your decision here puts Manulife in the same light the big banks that will “nickel and dime” or rip customers off wherever possible. If the rate drops again at next B of C meeting, and M1 stays the same, we will looking to move our business elsewhere.

Borrowers are a captive market, since they can’t move their mortgages elsewhere until the renewal date. Manulife One customers are even more tightly bound, since they do all their banking there and use the float in their accounts to pay off their mortgages more quickly.

All-in-one plans, such as those offered by Manulife and Canadian Tire Bank, offer flexibility and savings. But there’s a drawback: your mortgage has no finite term. It never expires, unless you or the bank decides to end it, and then you pay discharge fees.

You can find lots of discussion about Manulife One here at the Red Flag Deals forum. The product was introduced in 1999.

What will it take to get Canadian banks to pass on the central bank’s rate cuts to borrowers? If you have any suggestions, please let me know.

Author: Ellen Roseman

Consumer advocate and personal finance author and instructor.

7 thoughts on “Canadian banks slow to pass on rate cuts (2)”

  1. I know of a few online petitions protesting it, but I doubt they’ll have much sway over the banks.

    Unfortunately, the banks have many people over a barrel right now. Mortgages are harder to qualify for now, so taking your business elsewhere can be difficult. I know I’ll be taking some of my savings to a credit union and I’ll be telling TD why.

    When things improve, and they will eventually, I’ll certainly be looking elsewhere to do my banking. Don’t know where, because one seems to be as bad as the other.

    This argument they have about the increased cost of borrowing doesn’t hold much water if prime is coming down, does it? I’m not sure they’re related, but the Libor rate has been coming down as well. I see it as yet another cash grab by the banks. Seems to me that putting more money in the hands of homeowners will do more for the economy than putting it in the banks’ coffers.

    For example: the extra $100 bucks they’re getting me for every month means less grocery shopping or waiting to buy the pair of glasses I need.

  2. How odd to find 15 comments on your previous post (New cellphone of PDA not working?) and none here. How telling. The lack of response helps explain why lenders feel comfortable hindering the Bank of Canada’s efforts to help our economy.

  3. As an old and ex-banker it is not surprising to see the same issues continue to come up. The banks/trust companies have used the “prime but not prime” switch before, typically with secured lines of credit. In short they leave themselves the option of fattening up spreads whenever they choose to. To me the real issue is the fact these products are sold at the branch/agent level as “prime” which leaves the consumer shocked when the truth becomes apparent.In fact poor staff training, misleading broker explanations, and deceptive marketing result in the consumer being deliberately mislead to make a sale. Most people will never notice they are not getting prime because it is not obvious unless you check it.

  4. There ought to be a law that will force the banks to follow the interest rates set by Bank of Canada, either up or down effective the day after the rates are announced.

    The latest drop of 0.75% by Bank of Canada on Dec. 9, 2008, trickled down to us as a cut of 0.50%. Prime at all the major banks should be 3% and not 3.5%, beginning Dec. 10, 2008, with no questions asked and no excuses given by the banks.

    How can consumers get such a law put into effect?

  5. I am not familiar with “M1” product, but the bank’s practice seems unfair. So are other banks’ practices.

    Few years back, when I asked for a lower rate on my renewed mortgage, my bank said they “already did their best”. When I warned that I would move my mortgage to its competitor for 0.15% lower, it hastily offered to match it.

    Most businesses are too big to care for the small customers. They’re doing it for the money.
    Case in point: Ellen’s “What were they thinking?” blog.

    If you can, contact your MPP and get the message to the Finance minister. After all, the purpose of the government bailout package to the financial industry is to give them room to lend. What they did was just the opposite! Shame on them.

    If you can, take your business elsewhere and let them know loud and clear.

  6. An unsecured personal line of credit based on our house was taken out at prime plus 2.5%. Now the banks are adding on another 1%.

    I had always thought that the only way it would increase would be an increase of the prime rate. Evidently in the fine print it says they may increase it as they see fit. They also pass insurance which is 1% or more. I wonder how may people are aware of this.

    Once you take money out of the lines of credit, you are at their mercy. At this time when people are struggling to survive, the banks raise the rates.

    Their reason for increasing rates is that we may continue to offer you the convenient competitive priced credit you have come to expect (taken from the letter sent to me). YA YA

  7. The problem Carney is facing is structural in the Canadian banking system. We have one of the best banking systems in the world, but that is because we have a small number of very large Schedule I banks and a handful of highly restricted Shedule II banks.

    Carney may have rates held at 1% for the past couple of years- but people are still holding mortgages at around 5%, they are usually getting savings account rates of 0.25%, 1 year GICs real return is less than inflation at 1.5%, and credit card and revolving credit rates are still north of 15% and as high as 24% in some cases.

    It’s kind of ironic… When BoC rates were holding steady at 3.25%; savings accounts still only paid 0.25%, mortgages were around 5.5%, credit cards were still between 15-20%, and 1 year GICs were barely pushing over 2%.

    The crux of the problem is that Canada’s banks collude; there’s only six of them. The BoC can slash rates to fire-sale proportions and if the banks collude and dont pass on the rate changes they profit massively. Think about it : if RBC can borrow hundreds of billions at an overnight rate of 1% from the BoC, and then make a spread of 4% on mortgages, as much as 20% on credit cards, and they can borrow from their depositholders at meek rates like 0.25% and pay only a spread of half a precentage point on GICs, they are currently in the business of just ensuring that they keep enough capital in reserve to meet the required ratio to borrow even more money from the BoC.

    When rates were at 6% my credit card was at the same rate as they are when rates are at 1%. There is a reason why Canadian banks are posting huge profits and have recovered from the recession (along with oil companies) and everyone else is struggling.

    I look at my own situation. The rates the bank borrows from the BoC fell by 80%. My credit card rate didnt budge. The economy nosedived. During a nosediving economy, the prudent Mr. Carney was trying to assist me with my debt burden so I didn’t default. The bank didn’t care. When I struggled and asked the bank to switch my rate option to a low rate option, they refused, locked my bank account and pushed me into collections within a few months, and closed my account – so they could write it off and get their tax bump. They trashed my credit in the process despite me making over $1800 in payments on a $2500 card over the course of a year. In reality, all the banks wanted to do was write my debt off in the books so they could borrow more money from the BoC and use it against secured debt (mortgages) because the spreads are so attractive.

    I am no fan of Jack Layton or the NDP; but some form of government regulation on credit card and mortgage debt is absolutely neccesary in this country. When rates fall from 3.5 to 3 to 2, to 1 at the BoC and the big six banks blink and eye and reduce rates by 0.25% the problem is that the BoC is easing monetary policy but the banks are writing their own and thumbing their nose at him.

    During the recession we should have seen credit card rates fall by as much as 9% with a rate cut like that from 4.25% to 1% (in most countries credit card rates are calculated based on the rating of the borrower multiplied by a multiple of the overnight rate, so a 70% drop in rates may be only 3 points but that could mean a 9-12% drop in credit card rates). We should have seen government insured mortgages (insured by CMHC, a government insurer for the banks) fall to 2%; the bank is making a 1% spread and their risk is mitigated by the government.

    However we saw none of the sort. We saw credit card rates actually rise during the recession, mortgage rates baerly bump, and deposit account rates were so insignificant already anyways that the banks didnt even change them. GIC rates fell to be only slightly higher than the BoC rate, not because of competition but rather because the banks need deposits in order to meet their reserve requirements so they can borrow as much money as possible from the BoC at these fire sale rates.

    The finance ministry and BoC has to sit down with the big six banks and lay it out to them like this. “You guys are making lots of profits. We have the best banking system in the world. You have the best playing field of any of your peers in any other country. We are the government, and we are the Bank of Canada. If you dont start playing ball and letting our monetary policy flow through to Canadians, we’re going to let HSBC, UBS, and Credit Suisse, Bank of America and other huge international players come in and kick the crap out of you with full Schedule I access. Now lets see your credit rates track our monetary policy, or this legislation is going to pass within the quarter. Play ball.”

    You have to find it odd that some of the most profitable banks per employee in the world will close your credit card account and literally trick you into beleiving that it’s still a live account while they charge you overlimit, late payment fees, 20% interest, then if you call them up and offer to pay it all off but you want your card services restored somehow cant and want you to reapply for credit – the credit that they themselves trashed – all because they WANT to write off your debt so they can use their reserve requirements for a more stable arbitrage (the BoC rate v. their mortage rate).

    Carney is doing a bang up job. His policy just isnt getting through to Canadians because the big six have just colluded to keep their rates roughly the same and increse their profits on the arbitrage trade. Call in UBS or Credit Suisse or Bank of America and beleive me, in order to gain market share, they will have no problem passing along credit card rates of 8%, mortgage rates of 1.5%, GIC rates of 3% (to increase their capital reserves), savings rates of 3%.

    Unfortunately Harper and Flaherty are stooges. They are bought and paid for by oil and finance companies, so they are not about to do anything other than stay the course.

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