Preface
On November 3, 2014, I drove a woman for whom I advocate named Linda Chamberlain to two payday lending outfits. She was taking cash advances from one to pay the other after maxing out a credit card which she used for cash advances to pay for food and non-insured medical supplies. She is 65 and suffers from a variety of mental and physical illnesses.
In one month, she had racked up credit card and fees of $238, $93 for going over a credit limit, $105 in payday lender fees and the rest in interest at 19.7%. She needed $60 that morning for medical supplies and food.
Inside the second of the two payday lenders, we carefully counted out the $605 she needed to pay off a debt of $500 from two weeks before. We got our receipt and began to turn away when the ‘teller’ said with a very genuine smile “OK, how much do you need this time? You are eligible for another $500.” I said “no – that will be alright… no more loans”. The teller looked mildly surprised and I said “don’t people just pay off their loan and leave?”
She said breezily “yeah, it does happen … I remember a guy who just left after paying off his balance”.
I had a long discussion with Linda as to what she would have to do to get things under control. I called her friends. We talked about the incredible power imbalances she faced.
As I left Linda that day to shop for groceries, she turned to me and said “You should write this up and use my name”. I said I would do exactly that.
Introduction
The financial literacy movement is a good thing. It is especially good for disadvantaged groups who have the most to gain from understanding our public facing financial institutions in Canada. Financial literacy means having the knowledge, skills and confidence to make responsible financial decisions.
But financial literacy as a movement ‘locates’ the problem of poor financial decision-making with the individual as opposed to our financial infrastructure and governments.
Individuals have little power in comparison to large financial institutions and their stud products are subject to what governments can and will regulate. Low income people who comprise priority groups for financial literacy have the least power of all.
It is possible to look at this state of affairs as a power imbalance – between low income people vs financial institutions and the governments that regulate them.
There are five elements of this power imbalance that relate to the poor:
1. A power imbalance in onus: the onus in most public facing financial dealings is placed on the low income consumer not only to understand complex financial transactions but to inform, be informed, pay, and behave in their own best interests. When there are financial troubles like inability to pay, the onus on the low income consumer always increases and the attendant costs to the consumer increases by the greatest amount.
Key examples: right of offset; insufficient funds (NSF), credit card balance limit fees
2. A power imbalance in products: the worst, most toxic products for low income people are those that are marketed the hardest with the most intrusive tactics with the least information coupled with the greatest degree of complexity. They are often the products with the highest profit margins.
Key Examples: Balance protection, accident and no-medical life insurance, pre-paid credit cards with up-front fees.
3. A power imbalance in advice: while good advice is available to the well to do, the financial advice available to low income people – who often benefit from a complicated web of benefit programs is almost non-existent.
The good advice that is available to those with low income most often receives ‘bake-sale’ funding and is held together through ‘chicken wire and glue’ networks delivered by poorly paid advisors in underfunded or non-funded community agencies, storefronts and church basements. Meanwhile, bad advice to low income people is lavishly funded by financial institutions.
While mainstream financial institutions largely choose to remain willfully ignorant of the financial benefits available to low income people, they frequently dispense flawed advice to purchase high profit instruments that are financially ruinous to the poor. Moreover, financial predators outside of the mainstream pedal questionable products to those who understand the system the least, gambling that they will be easily misled.
Key Examples: RRSP’s to low income near aged; high MER mutual funds, get rich quick schemes
4. A power imbalance in expertise: The reality is that there is almost no formal education and no curricula supporting the good advice that could be given to low income people; that is, the advice that would be in their interest. There is little reason that a financial advisor would learn what low income people require as there is little or no remuneration within the system to compensate it.
Key Examples: failure of financial advisors to recommend early CPP and TFSA’s over RRSP’s.
5. A power imbalance in advertising and media availability: Good products for those with low income suffer from almost non-existent media coverage (Rob Carrick, Ellen Roseman and Preet Banerjee are exceptions) while bad products like no-medical life insurance enjoy ‘carpet-bombing’ advertising budgets. The simple reality is that low payout, high profit products can sustain massive advertising budgets.
Key examples: High MER mutual funds and no-medical life insurance
If the five elements of this power balance were redressed and low income people became even marginally financially literate, most if not all of the above named products in the key examples above would virtually disappear as the small sliver of the population that could actually benefit from them would be insufficient to sustain their markets.
However, the size and complexity of the financial maze in Canada is growing at a much faster rate than the reach of the financial literacy tools designed to navigate it.
Training low income people to become financially literate begs the question of why there are so many toxic products in the first place.
The priority groups all of which tend to be over-represented by low income people are not ‘affluent people who just don’t happen to have any money’. They mostly live in a ‘parallel universe’ where products that are advantageous to the well-to do simply don’t apply to them.
Key Example: RRSPs -no tax deduction if no taxes paid, no tax refund, fully deducted from social assistance, and they reduce Old age supplements in retirement.
But all the financial literacy in the world will not reduce or eliminate what is known as the ‘endorsement effect’ where low income people with low financial literacy believe that products that are freely and lavishly advertised with little adverse publicity are ‘endorsed’ by the media, governments, and the public. Much more can be done as evidenced by the anti-smoking movement.
What do cigarettes have to do with financial literacy?
The power imbalance
Approximately 50 years ago, medical evidence began to show conclusively that tobacco use was hazardous to our health. Over the next five decades, a relentlessly pervasive and powerful movement changed the landscape in which tobacco products were consumed. Much of the power imbalance that was decidedly in favour of ‘big tobacco’ was reversed.
Although tobacco products did not become illegal, the power imbalance that was firmly on the side of big tobacco completely changed. It took 50 years but it did change.
The analogue
Cigarettes are uniformly bad for us but as a society, we still allow them to be sold. It took us a long time to understand just how bad they were. Many financial products are just as toxic and it is taking us a long time to understand this. No medical life insurance, balance protection, and high MER mutual funds are financially toxic. Pre-paid charge cards with high fees are financially toxic.
Financial literacy is in its infancy and arguably in the same place the anti-smoking movement was 50 years ago. It may take another 50 years to get financial literacy to the place that the anti-smoking movement is today.
Let’s look at the five elements of the power imbalance that we just looked at for financial literacy.
1. The power imbalance of onus: the onus is still on consumers to refrain from smoking and to get help if they do. But sales of cigarettes are restricted. They must not be in plain sight. They cannot be sold to children and there is an onus on the industry to tell us just how bad cigarettes are for our health. The cost of cigarettes is very high. Where and when cigarettes can be smoked is highly regulated.
2. The power imbalance in products: Cigarettes continue to morph. Flavoured tobacco, e-cigarettes, cigarillos, cool cigars. Just like the financial industry, new seductive products abound. But the anti-smoking movement and government regulation continues to be strong. Every new product is carefully evaluated and intrusive regulation is never far behind.
3.The power imbalance in advice: Here is where everything has changed. All the advice is negative. No one seriously champions smoking. We are light years from telling a poor 60 year old that they should (categorically) not buy an RRSP. We are light years from telling a poor 60 year-old who is working that they should always take early CPP.
At one time we would say that someone who smokes may not get cancer or COPD and that someone close to them may not be harmed by second hand smoke. We don’t say these things anymore.
4. The power imbalance in expertise: Another game changer. For years, the tobacco companies said that there was no conclusive evidence that smoking caused cancer. Many smoked and did not get cancer. The experts all agree now. For financial literacy and the toxic products, this is many years away.
5.The power imbalance in advertising and media availability: Yet another sea change –another game changer. The sports endorsements stopped. No magazine advertising, no television, no radio. The media tap was turned off but more importantly, the tobacco industry was forced to turn on itself and publish pictures of dying lungs and anti-smoking bumper stickers.
Imagine if payday lenders were forced to put government health warnings on their products and show pictures of homeless people on their brochures. How about pictures of people being evicted? Or pictures of stacks of cash lost to high MER mutual funds? Or the money lost to balance protection schemes?
The cigarette analogue works because tobacco was thought to be a glamourous product that did not cause any harm that was later discovered to be harmful. Toxic financial products are much the same.
What do casino card counters have to do with financial literacy?
The power imbalance
Casino card counters can sway the odds in their favour when playing 21 (blackjack). Normally the odds are in favour of ‘the house’ but card counters can slowly move the odds in their favour and win enormous amounts of money. When discovered, ‘the house’ excludes the counters.
The card counter analogy is often used to describe the credit and liquidity crisis that was in part responsible for the Great Recession of 2008-09. The financial card counters introduced new sub-prime mortgage products (Collateralized Debt Obligations or CDOs) and insured them through other new products (Credit Default Swaps or CDS). When the house of cards came down when the market for CDOs dried up, the card counters protested and said they wanted to continue to play even though they ‘brought down the house’.
The financial card counters were excluded from the game but have since been allowed to re-enter. The house cannot exclude them. Yet there are new rules that make it harder for them to ‘bring down the house’.
The analogue
Payday lenders and no-medial insurance brokers are the card counters on the Canadian financial landscape. They play by different rules and they take away business from ‘the House’ of mainstream financial players. Unlike the real card counters of Las Vegas fame who are excluded from the gaming table, payday lenders are more like the financial card counters that have been allowed to re-enter the game on Wall Street.
The payday lenders are permitted to charge much higher interest rates than anyone else. They tell clients that they have “accounts” but their accounts are different in that the customer is just a name in a database. There is no right of offset. They offer the low income consumer 100% protection from the financial mainstream.
But payday lenders insist that clients have mainstream accounts before they play by their own set of different rules. Their products are toxic but like tobacco, they can legally sell their products to the public.
So let’s take another look at the five elements of the power imbalance that exists between payday lenders and their public. Will it be like cigarettes or will it be like financial literacy?
1.The power imbalance of onus: The card counter is kicked out on discovery and banned from the casino.
But the card counter of Wall Street and the payday lender is allowed to game the system with the onus placed 100% on the low income consumer. Not one single product in the payday lender store, from cheque cashing to payday loans to high fee charge cards to pawn broking services would ever be purchased by financially literate persons unless they were desperate. Desperation turns onus into necessity.
2.The power imbalance in products: All the products of the card counter are self-serving. In real life, the card counter is trying to walk away with the largest profit without breaking the bank. If he inadvertently breaks the bank, there are more banks to break. Their motives are selfish.
No payday lender products are in place to ‘help’ the consumer. They are in place to make money. Real card counters are stopped before they break the bank. Financial card counters are there to take the consumer to the breaking point but not to break him or her – just to keep them at the breaking point as long as they can.
3.The power imbalance in advice: Most mainstream advice argues against payday lenders but payday lenders also know when to hold back; they know when to relent. They need to hold their customers, not destroy them.
This is where their advice comes in. The brochures and pamphlets prepared by payday lenders are the best in the industry. They are accurate, well written, use clear language and provide good advice. They are miles better and much more relevant than any written material coming from any bank or any level of government.
Their written material fully understands the zero tolerance, immediate world of their customer who needs money now to pay off creditors who want their money (now) and will punish harshly for missed deadlines.
Government and mainstream advice counsels low income people to become people who don’t need immediate money and to stay away from punishing creditors. But that is like telling poor people not be poor. Mainstream advice is for people who are already getting out of poverty, not for those who are in its throes.
For the world of poverty, payday lenders have the best advice. Their flaw is that they then substitute themselves as the zero tolerance punishing creditor.
4. The power imbalance in expertise: Payday lenders know their customers. They exploit the colour palette of fast food that boasts immediate gratification with the illusion of individual choice: yellow, red, black, brown and white.
The ‘inside’ of the payday loan store is like a casino – very different from the outside. No clocks, pastel colours, cleverly arranged shiny products hanging from ersatz trees with bows and little tags noting that they are ‘for you’ (e.g. high fee prepaid credit cards).The payday lender understands their customers and knows how to market. They are unerringly pleasant to poorly dressed customers. They never scold. They never lecture. They understand ritual payment and re-lending but most of all they understand immediate gratification. They get ‘now’ in a mainstream world that is telling them ‘later’.
5. The power imbalance in advertising and media availability: “Wouldn’t you like to leave money for your loved ones? Of course you would. Call us today”
Payday lenders and especially no-medical insurance providers understand advertising and how to entice the financially illiterate by reframing unpleasant compulsion (the world of those in low income) with empowered choice.
For example, reverse mortgage firms remind the consumer that they never have to repay until they choose to move or sell. Most seniors who need money are going to be compelled to move at some point because they become infirm or cannot otherwise make it on their own. Few choose to sell yet the reverse mortgage provider frames the unpleasant compulsion as an empowered choice.
Payday lenders frame themselves as providing easy and fast empowered choice even though almost everyone passing through their doors is experiencing unpleasant and often zero-tolerance compulsion from others.
What does the Jian Ghomeshi firestorm have to do with financial literacy?
The power imbalance
Almost no time passed before media were asking why Ghomeshi’s victims did not come forward. Just as quickly, the answer was agreed by all to be the power imbalance between Mr. Ghomeshi and his victims. They stood to lose and he stood to gain. The courts put the onus on the woman. Public opinion sides with celebrity.
But in six or seven days, the power imbalance in favour of Mr. Ghomeshi utterly and completely reversed in favour of his victims. His defense of consent vaporized. It completely evaporated in a week. The anti-smoking movement must have been awed by the speed the power balance changed. That which took decades for others took a week for Mr. Ghomeshi.
Note: It is important to distinguish between what occurred in Mr. Ghomeshi’s case is not the case for sexual assault in general but many believe that it is important start for the change that is required.
The analogue
The important analogue here is that Mr. Ghomeshi’s case made public the importance of power imbalances and where they are located. In Mr. Ghomeshi’s instance, the victims believed (until everything changed) that the power imbalance did not favour them in obtaining redress.
It is a teachable moment for the financial literacy movement because the movement is based on empowering the victim to fight against financial institutions and governments that hold the balance of power over them. Until Mr. Ghomeshi was publicly disgraced, most people (and especially his victims) believed that they would not be able to obtain redress.
This is exactly the same dilemma that faces the financial literacy movement in that massive power imbalances rig the financial system in favour of an industry that games the low income consumer and governments that are only able to address a small sliver of the problems that face low income financial consumers.
Real redress will only occur when financially toxic products and practices are removed from the marketplace (or identified as toxic like cigarettes) and the power imbalance changed. Although not what he had in mind, Jian Ghomeshi gave us a textbook example of how imbalances occur and how they get redressed.
The blinding speed at which it happened was breathtaking. The fact that his defence of consent simply evaporated (at warp speed) was exhilarating.
Social movements across Canada will be studying this case closely. Financial fairness advocates will be trying to understand the nature of the event.
And at this writing, in the eyes of the law, Mr. Ghomeshi has done nothing wrong, has committed no crime, has not been charged with anything and yet his game is unalterably over. Let’s look at how Mr. Ghomeshi fares in the five elements of power imbalances.
1. The power imbalance of onus: The onus was on the women. Now it is on Mr. Ghomeshi. In court with the media’s help, the onus that is routinely placed on women in sexual assault cases can and will be redressed.
Could the same thing happen for someone who pays thousands in accumulated fees for a purchase of a few hundred dollars?
Could she get her money back?
2. The power imbalance in products: Mr. Ghomeshi’s product was his hosting and his celebrity. Most of the women became in enmeshed in the power imbalance of his products. With the change in the imbalance, they have all been released and they are all exonerated. The women who have come forward were believed and uniformly supported.
Could the same thing happen for someone who bought balance protection to insure them against becoming disabled or unemployed when they already suffered those hazards?
Could they get their money back?
3. The power imbalance in advice: Very little advice was available to the victims before the power imbalance changed. Now chiefs of police are standing up to support the women. Heads of Detectives are publicly announcing that there will be prime facie acceptance of their stories. Mr. Ghomeshi hinged his public defense on consent and the frame that values consent. Consent and the frame that values consent no longer resides on Planet Earth.
Could the same thing happen for low income people who have had every cent emptied from their bank accounts without their consent along with outsized fees and cancellation of their credit?
Could they get their money back?
4. The power imbalance in expertise: Advisers to Mr. Ghomeshi bailed from his corner as fast as they could. His only expertise remaining is legal and there is a massive legal establishment waiting to get at him from every possible angle.
Could the same thing happen for low income people who are advised at age 60 to buy RRSP’s or apply for CPP later ( at age 65) when it is irrevocably against their financial interest to do so?
Could they get their money back?
5. The power imbalance in advertising and media availability: The media turned 180 degrees on Mr. Ghomeshi. Their fawning accolades turned to ridicule and scorn inside of a week. His reputation was in tatters and his considerable talents made irrelevant.
Could the same thing happen for low income people whose bank advisors routinely provide advice that results in losses of thousands of dollars? Could they get their money back?
Postscript
I always enjoy having bank staff (often managers) come to my seminars that I hold for low income people in Toronto and elsewhere. Sometimes I have a little fun at the end and ask them publicly – in front of the low income audience – if they have balance protection on their own credit cards or whether they have ‘no-medical life insurance or bank issued accident insurance.
I have yet to see a hand go up.
November 9, 2014
This blog is my submission to the Financial Consumer Agency of Canada for inclusion in its consultation with Canadians on financial literacy for priority groups.