Thursday 9 March 2006

The pros and cons of private enterprise

As a child of two teachers in the UK in the 70s I grew up with a kind of inbuilt assumption that almost every business or service was ultimately provided by the government. To some extent that was true then, of course, and throughout the 80s I was firmly in the anti-Thatcher camp: selling off our nation's infrastructure to the highest bidder. In reality business has been there all along providing most of the things we need (and much that we don't). On top of that, there's all that other business that provides things businesses need to do business - which has been the source of my living for the past 15 years. I had grown comfortable with that and no longer really thought about it very much, although there was still a part of me that clung on to that socialist view that maybe some things are better off in government hands. But then I moved to British Columbia.
Don't get me wrong - I love living in Canada for all sorts of reasons but there are two particular things that really piss me off. Both are related to the financial services industry. One is an example of why public ownership is a Bad Thing, and one is an example of why private enterprise is not always the ideal solution.
Canadians like their cars: not as much as Americans, but when you live in a country as spread out as Canada they do take on an extra significance. The consequences of this are numerous, including lower driving ages in some provinces. In BC it has resulted in the granting of a monopoly on basic motor vehicle insurance to a crown corporation, owned by the provincial government, the Insurance Corporation of British Columbia.
On the surface the idea sounds great to a closet pinko like me - single insurance rates, based directly on driving record not age, gender or other factors that commercial insurance companies use. On top of all that, they also make ICBC responsible for road safety and driver licensing. This is supposed to give them an incentive to help people drive better in the hope that it will reduce the level of claims and therefore premiums.
In practice, it kinda sucks. We arrived from the UK last year and inherited an 11-year-old Volvo 850 sedan. The value of this thing is probably no more than $6,000. It's a real family car. Insurance, including a modest amount of loss cover, was over $2,500. In the UK, the last insurance bill for our 3-year old Citroen (worth around £8,000) was under £200.
The real stinger was the no-claims bonus. Because I had company cars in the UK I have not actually held insurance for several years, but L had over 10 years of claim-free driving. In the UK, and even in Australia when we moved over there, all you have to do is call up, tell them you're entitled to no-claims from your current insurer and they give you the discount up front. You then just send a confirmation from your current insurer that you've racked up the appropriate number of years. Nice, simple, user-friendly.
Imagine our surprise, then, when the 'broker' who sold us our insurance told us the procedure for getting no-claims discount from ICBC. You have to get a letter from every insurer you've had over the period you're claiming for. This letter must state the dates of the insurance period exactly. You must then send the original letters (not faxes or photocopies), together with a processing fee of $25 to some bunch of pen-pushers in North Vancouver who may, at their discretion, allow a reduction in rate and send a refund. We had to contact around 5 insurance companies, in Australia and the UK. In several cases we no longer had any records of the policies we'd held with them. In one case, they no longer had any record of us as a customer. At least one of them was prevented by their IT systems from sending letters to overseas addresses, so we had to settle for faxes. In the end, we bundled up everything we had and sent it off. They allowed us one year of discount - 10%. Despite the fact that our last insurer confirmed in writing that L had 6 years of no-claims discount.
So why is it that ICBC see the need to put you through a hell of paperwork and actually charge you $25 for offering what insurance companies anywhere else offer so freely? It is because they are a monopoly. Competition is what makes insurance companies in the UK and Australia so willing to offer no-claims discounts. Competition is what keeps the insurance premiums down. The ICBC as a state-run bureaucratic monopoly has no incentive to recognise any of these things because we have no choice but to go to them.
But just having an unrestricted market does not guarantee effective competition. The other thing that pisses me off about Canada is the banking system. I opened an account with a large international bank that just happens to be UK-based, partly because we bank with them in the UK and they made it easy for us to open an account here. The first choice I had to make was which fee package to opt for. Although this is now an alien concept to most Brits, where banking has been pretty much free for as long as I've had a chequebook, we did have a brush with fee-based banking when living in Australia. That doesn't mean I like it, though.
I opted for a package that gave us various benefits, like free chequebooks, and also offered 'free' ATM withdrawals from any bank's ATMs. This seemed like a good idea because although this bank is multinational, they aren't enormously well established outside of areas with significant ethnic Chinese populations. So I went happily on my way, L and I both withdrawing cash from RBC, BMO, TD and other ATMs happy in the knowledge that it would cost us nothing. But not so...
When we got our first statement it showed a charge of $1.25 for all these transactions. This charge was on top of the $1.50 or so added to the amount of the withdrawal by the bank whose ATM we used. Those from our own bank were indeed free. I called the bank and asked why these free transactions were costing $1.25. They had no good answer and refunded the fees.
The next statement had the same fees, and the next. In the end, it turned out that the fee was not for using the ATM itself, but a "network fee" for using the network, or something. They refunded it again and since then I have tried to avoid using non-HSBC ATMs. Whenever I do, though, this fee still comes up. Now, if anyone ever reads this and has an HSBC account in Canada perhaps they could tell me how much they get charged for non-HSBC ATM withdrawals. Either way, the promise of "Free non-HSBC withdrawals" is clearly false and misleading.
But aside from the injustice of misleading advertising, this is again symptomatic of bad competition. The fact that you can be charged $1.50 by one bank, $1.25 by a network and, presumably, $1.25 by your own bank just to withdraw your own money suggests that at some level the banks in Canada are colluding to keep these fees rolling in. On top of all that, remember that one of the big drivers for installing ATMs and encouraging their use was to reduce their costs in handling transactions by avoiding the need for tellers. Again, compared to the system in the UK where there is much more competition, apparently less government intervention and protection of the industry, banks are able to offer fee-free banking and still turn in obscene profits.
Right, I've got that off my chest so now I can go back to just enjoying the mountains, the ocean and the hockey.

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