By Tom Bradley

When I was working at Richardson Greenshields in the 80’s, my partners and I watched as all of our big competitors got bought up by the banks – Gundy went to CIBC, DS to Royal, McLeod to Scotia and Nesbitt to BMO. As one of the largest independents left standing, we thought RichGreen was positioned perfectly to lead future underwritings of bank bonds and shares. After all, the banks wouldn’t want their deals being led by their archrivals.

I can’t remember if we led any deals or not, because it moved pretty quickly to where the bank club was comfortable doing each other’s deals after all – I scratch your back, you scratch mine. That was disappointing for us but it was their prerogative. Today, however, the banks lead their own deals, which is the biggest conflict of interest I can possibly imagine. Think about it – I am buying a newly-issued security and the underwriter of the deal – the firm that is charged with objectively doing due diligence on my behalf – is the same company. Issuer and investment banker are one in the same. It is inconceivable to me that our regulators allow this to happen.

I bring this up now because there are two items in the paper today that reinforce just how far we have slipped back in guarding against ‘conflicts of interest’ in the financial services industry. One is a column in the Report on Business by Boyd Erman which talks about the TMX Group (Toronto Stock Exchange) and how it is doing against new competitors. The most formidable of those competitors is Alpha, which is owned by the banks. Boyd’s piece points out that the new competition has forced the TMX to lower some of its fees, which is good, but again it is inconceivable that a trade I give my broker is done on its own exchange. I am not saying the banks are acting against my best interests, but they do have a vested interest in the long-term of making sure they put lots of volume through their own profit center.

The other story reminds us that the banking oligopoly can and does abuse its privilege from time to time. The lead story in the ROB is about the ABCP debacle (asset-back commercial paper). The regulators and banks are negotiating fines related to the banks dumping ABCP on unsuspecting clients before the market closed down. It is alleged that they cleaned out their inventory with the knowledge that things were coming apart.

Canadians are lucky. We have good, profitable banks. It beats the alternative any day. And we want them to be able to operate efficiently and compete on the world stage. But when we’re greasing the skids for them, we need to have some checks and balances. We need to spend less time and resources trying to keep them out of business areas they will be good at, and more on monitoring and regulating areas of potential conflict that arise from their broad range of services.