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Brace yourself for some unusual fees from your bank

Globe and Mail Update

We're going to have to keep a close eye on the big banks this recession because weird and nasty stuff is starting to happen.

A couple of reader complaints have come in over the past few days about a notice received from Toronto-Dominion Bank concerning lines of credit. Get this: TD intends to introduce an annual $35 inactivity fee on April 30 for people who have unsecured lines of credit, but don't use them.

Talk about a stimulus for spending in tough times. If you have no outstanding balance on your credit line and don't do a transaction over a span of 360 consecutive days, you have to pay your bank a fee.

“Unbelievable,” said Laurie Campbell, executive director of Credit Canada, a non-profit Toronto-based charitable group that helps people with credit problems (creditcanada.com). “It's ludicrous because every creditor right now is experiencing higher writeoffs. I would think that those individuals who are managing their finances well are not the banks' biggest worry.”

It's not just the $35 inactivity fee that's new for people who hold a TD unsecured line of credit, which differs from a home-equity credit line in that it's not secured by your home and thus has a higher interest rate. TD says that starting March 9, it will boost borrowing costs by introducing a higher markup over its prime lending rate.

“The interest rate increases reflect the continued rise in the cost of lending and will help us continue to offer convenient access to funds at a very competitive rate,” TD spokeswoman Kelly Hechler said in an e-mail. As for the inactivity fee, she said there's a cost to maintaining credit lines that go unused.

Yes, we've been hearing the old “it's costing us more, so it's going to cost you more” story a lot lately from Canadian banks. No doubt, the banks are also trying to protect themselves from defaults on consumer and business lending, and from declines in revenue from their hard-hit investment divisions. It all adds up to some unwelcome forms of bank behaviour.

“We've seen really strange things happening lately, a number of little anomalies,” Ms. Campbell said.

One example she cited is a policy by a credit card issuer of bumping up your interest rate by five percentage points if you miss two consecutive minimum payments. Other credit card companies are just flat out raising rates, or cutting spending limits. “I'm very concerned about what appears to be an effort to find fees in areas that were traditionally taboo,” Ms. Campbell said.

Charging more to customers is one way for banks to cope with today's financial environment, while another is to sell more product. That's the impression left by an ad that Royal Bank of Canada's insurance arm placed in last Tuesday's edition of a daily news roundup e-mail sent by the Advisor.ca website.

To get the full flavour of the ad, you have to understand that the audience for this e-mail is financial people, including many investment advisers. “RBC guaranteed investment funds,” the ad's headline says. “It's like having the good leads. The Glengarry leads.”

Seen the play or movie Glengarry Glen Ross? It features a group of profane, ethically bankrupt real estate salesmen who are told to operate with the motto “ABC – always be closing.” In the play, the Glengarry leads are for a new subdivision and considered to be pure gold.

The RBC ad keeps running with this theme of treating customers as prey. “We all know it's about making the sale,” says a line they must surely be cringing at over at RBC headquarters. “This RRSP season your clients may be hesitant. So you need something that will reassure them.”

That's where RBC guaranteed investment funds come in. They're segregated funds – mutual funds with expensive capital guarantees – and on the whole they're a dumb thing to buy now that the stock markets are down around 40 per cent from their peaks last year and much more likely to rise sharply than plunge.

But that's off point. What's of interest here is that RBC let its hunger to sell product get out of hand. The bank knows it, too.

Spokeswoman Katherine Gay said yesterday that the ad is being pulled. “It was a well-intentioned attempt to get advisers' attention in a crowded market place,” she said. “We're not planning to run it again.”

RBC's a class outfit on the whole, but these are weird times for our banks. They've been hurt by a global financial crisis in which they were involved in a peripheral but not insignificant way, and now they're trying to protect their businesses against a recession.

Be on guard, bank clients. Trust, but verify. And, please, forward any letters you receive about new bank fees and lending practices to me. I'll make sure they get the attention they deserve.

A primer for dealing with your bank

Problem:

Banks and other financial companies are introducing new fees and raising interest rates.

Cause:

Banks say they're paying more to raise the funds they lend out, and they're worried about loan losses in the recession.

Example:

Toronto-Dominion Bank has introduced a $35 inactivity fee for people who don't use their unsecured lines of credit over a year.

Response:

New fees and charges mean new reasons to look at other big banks, alternative and online banks and credit unions.

Reminder:

You're not married to your bank. It's okay to play the field.

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