INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, September 23, 1998

• 1537

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): Order, please, pursuant to Standing Order 108(2), a study of the guidelines for mergers. I'd like to apologize for being a few minutes late. I had a liaison committee meeting that was still waiting for a quorum when I left.

That being said, I'd like to welcome the Competition Bureau witnesses who are before us today.

Just to let the rest of the members know, as the steering committee agreed, we have asked the Competition Bureau representatives to come before us today to explain the guidelines to us and to answer questions.

We're not here to discuss the MacKay task force or bank mergers per se, other than how they relate to the guidelines. We're here to discuss how the guidelines were determined and why. I assume that the presentation will answer some of those questions in advance.

With us we have: Mr. Raymond Pierce, assistant deputy director, mergers branch; Mr. Gwillym Allen, assistant deputy director, economic policy and enforcement; and Mr. Denis Corriveau, commerce officer.

Mr. Pierce is going to begin.

Mr. Raymond Pierce (Assistant Deputy Director, Mergers Branch, Competition Bureau, Department of Industry): Thank you very much, Madam Chair. The Competition Bureau appreciates this opportunity to appear before the committee and explain in more detail the process by which we are reviewing these two proposed transactions.

We've left a couple of documents with you, one being the merger enforcement guidelines as applied to bank mergers. The other is the slide deck which we intend to walk people through in order to explain our merger enforcement guidelines and how they apply to bank mergers in particular.

For some time the bureau has had merger enforcement guidelines that apply to all merger transactions. Because of the importance to the Canadian economy of mergers among schedule I banks, we wanted to make sure we got it right, so we decided to put our merger enforcement guidelines out for consultation in regard to how they would apply to mergers among schedule I banks. The result is this document, which we released in July of this year and which the task force did comment on. They endorsed our approach, as did the lengthy consultations we went through.

Perhaps I could just make a few comments before we go through the slide deck in more detail.

What I propose, Madam Chair, is that we walk you through the slide deck, which will probably take 20 to 30 minutes, so that there is some broad overview you have the benefit of before asking questions. Is that okay?

The Chair: Okay, Mr. Pierce.

Mr. Raymond Pierce: Just by way of introduction before we get into the slide deck, I should mention that the Competition Act is framework economic legislation that creates a regime of investigation and prohibition against certain restraints on trade. That includes mergers, which lessen competition substantially.

• 1540

We don't have the authority to allow or disallow mergers, nor do we engage in allowing or disallowing applications for mergers. We're not a regulatory body in any sense. We review transactions to determine their impact on competition. If at the end of the day we believe that a substantial lessening of competition is likely to occur as a result of a particular transaction, at that point we would refer the matter to the Competition Tribunal.

As I said before, we have no regulatory authority under the act to compel parties or companies to charge any particular price or to set the terms and conditions on any other element of competition in the market.

The only person who can make a decision with respect to whether or not the transaction goes to the Competition Tribunal is the director of investigation research. He is the statutory officer appointed under the Competition Act to oversee its enforcement and administration. As I'll explain later, under our act there is a role for the Minister of Finance with respect to mergers among federal financial institutions.

With that brief introduction, I will start walking you through the slides. In terms of background, the genesis for these merger enforcement guidelines as applied to bank mergers began last November in our submission to the MacKay task force. In that submission, we attached as an annex a draft of our merger enforcement guidelines as applied to bank mergers and flagged that we would be doing extensive consultation on those guidelines in the future.

Of course, in the interim, before we got our consultations going, on January 23 the Royal Bank and the Bank of Montreal announced their proposed transaction. At that point, we did commence our review of that transaction.

We began public consultations on the draft guidelines in earnest at the end of February and that essentially involved inviting over 600 parties to submit written comments to us. There was a broad cross-section of consumer groups, unions, industry groups and members of the bar involved in interpreting the Competition Act. In the interim before we received most of those comments, the CIBC and the TD announced their transaction. Again we began to review that transaction immediately.

We received something in the order of 40 to 50 written briefs on the merger enforcement guidelines and in May and June we followed that up with meetings in Montreal, Ottawa and Toronto to discuss those submissions in more detail. On July 15, we released the final version of this document.

To put that in context, we're anticipating that in December of this year we'll be in a position to provide both the four merging parties and the Minister of Finance with our conclusions on both of these proposed transactions.

In terms of the overall broad approval process, there are really three players at the federal level. Our role is strictly limited to looking at the competition issues, i.e., will these transactions result in substantial lessening of or prevention of competition? There is also OSFI, of course, which looks at safety and soundness and prudential issues. And the Minister of Finance, of course, looks at a broad range of public interest issues and holds ultimate authority for approving the transactions.

As I mentioned earlier, under the merger provisions there is an interface with the Minister of Finance. I simply point this out for completeness so that you understand the circumstances. If the minister were to certify that any particular transaction was in the best interests of the financial system, at that point the director in the Competition Tribunal would be taken out of the process. Obviously that hasn't happened, but I just mention that for completeness.

Let me talk a little bit about the purpose of the Competition Act. In broad terms, its role is to preserve and promote competition in the Canadian economy because competition is seen to lead to a number of tangible benefits. In particular, the act carves out a role for assuring that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy. It also has the role of providing consumers with competitive prices and product choices and just generally fostering an efficient market economy.

• 1545

In terms of our review process there are three broad stages. They're not always mutually exclusive. The first phase is information gathering, and in a sense we've largely finished the first phase. This phase involves acquiring considerable information from the merging parties themselves, particularly in the case of these proposed transactions which are extremely complex—and large—for us to evaluate. We talk to competitors, suppliers and customers in the marketplace, and in this case we have talked to a number of associations that represent various customers. It's obviously not possible to talk to all consumers, including the business groups.

We talk to industry experts and academics and we hire industry experts and economists to assist us in providing expert advice on the file and, of course, to the extent that it's necessary, we'll talk to other regulatory bodies involved in reviewing the transaction.

The second stage is the detailed analytical work, which is the stage we're in right now. It's an intensive stage. It's one that involves taking the information we have and applying the merger enforcement guidelines we've drafted to the circumstances in order to determine whether or not we think there will be a substantial lessening of competition.

A number of bureau staff are involved in this exercise and we've probably hired more outside expertise on this file than on any other merger file that I can recall. To ensure that we're getting it right, we've hired industry experts who've worked in the banking sector and who know the markets in question along with industrial organization economists and other economists familiar with financial markets.

Our review is focused primarily on four major lines of business. We're looking at personal banking, SME financing and credit cards, as well as the securities industry on investment banking.

The next phase, of course, is the decision-making phase. Obviously we're not there yet, but that one's coming very shortly.

As I mentioned earlier, the acid test for us under the legislation is whether or not there will be a substantial lessening of or prevention of competition. What that means in practical terms is this: do we think that either of these merged companies would have the ability, post-merger, to increase prices and sustain those price increases? Or would they have the ability to negatively impact on any other important element of competition, such as the quality or the level of service they provide to consumers? And when I say “consumers”, I'm talking about individuals as well as business consumers.

Our timeframe for making that kind of assessment is two years. If we believe that the merged parties would have the ability to do that and that those increased prices would not be competed away, by either new or existing sources of competition within a two-year timeframe, then we conclude that there will be a substantial lessening of competition. By the way, that two-year timeframe doesn't begin until the transaction is closed.

In broad terms, there are four main elements to our review process. Two elements are market definition and the calculation of market shares and concentration levels. We then look at a number of key competition or qualitative factors that impact on our assessment. And if the parties present us with an efficiencies argument or an efficiencies claim we're also obliged to consider that. Let me focus on each one of those in turn.

Market definition is really the starting point for our analysis. It's a very important part of our analysis because we're trying to determine whether or not these transactions will have any economic impact in terms of the ability to exercise market power, to increase prices, etc.

A market has two dimensions, a product dimension and a geographic dimension. The basic principle that we're trying to determine here is whether in the face of a price increase—if that were to occur—purchasers would have access to other reasonable substitutes to which they believe they could turn in the face of those price increases. That's essentially what we're looking at when we define markets. It's based on the principle of whether there are close substitutes. Can they turn to other competitors, other suppliers of the product, outside their normal market area? It has both a geographic and a product element to it.

• 1550

Let me just say that in terms of defining product markets—in the popular press at least—there is a lot of discussion among the banks about what the appropriate definition of the market is and what that share is. We do our own analysis, from our perspective. Typically we disaggregate as much as possible in order to drill down into each of the markets, look at each of the services that are offered by the banks and ask this kind of question: if prices for those particular services were to rise post-merger, would there be substitutes to which consumers and other purchasers could turn?

In terms of the banking-specific issues we're looking at in terms of a definition of the market, of course there are questions about the impact that electronic banking may have on markets, i.e., is it expanding the geographic market to the extent that others not otherwise able to participate in the market are now able to compete and offer services in Canada?

For example, there is ING. ING is a relatively new entrant. It is taking deposits to a certain extent and is competing with traditional banks. Wells Fargo is also offering, on an electronic basis or a direct mail basis, a certain amount of credit to small businesses, basically on a credit card basis. That's one issue, and it's an important issue for us because it may very well impact on who we determine is or is not in the relevant market in terms of providing competition.

Another issue for us is whether or not consumers purchase their products—their banking services or financial services—in groupings. What I'm thinking of in particular is that when you look at the small business sector, for example, quite often you see things bundled. Small businesses take out an operating line of credit or an operating loan and, in many cases, because the banks like to monitor the terms and conditions of the loan and the risks associated with it, quite often they like to see the transaction account at the same bank so they can see the cash flow going through it.

The issue for us is whether products in fact have to be supplied on that group basis. Again, it may limit the number of competitors that are in a particular part of the market and able to offer competition.

As well, you'll see predefined geographic areas in the merger enforcement guidelines. Because we're dealing with such a vast number of products and geographic markets in which the banks operate, we've been looking for a way to expedite our analysis.

We do have data from the Canadian Bankers Association on an FSA basis. By the way, when I refer to an “FSA” I'm referring to a “forward sorting area”, the first three digits of a postal code. The Canadian Bankers Association collects data from its members on an FSA basis. We have it and are supplementing it with data from others in the market.

We propose to run our market share and concentration levels on those particular areas to see whether or not there are areas we can just take out of the analysis right away, on either a geographic or product basis. That's something we're doing right now. We don't have concrete results. We have some results, but we still have a ways to go in terms of doing that analysis.

In terms of market shares and concentration, under the guidelines there are two important thresholds. The first is 35%, which refers to the post-merger market share that would be held by the two firms. For example, are there any markets in which the Royal and the Bank of Montreal—or the other two parties—would hold more than 35% of the product market in a particular area? If so, then we do a detailed review.

There is also another important threshold. It refers to the general level of concentration of market and is a 65% threshold.

• 1555

This second threshold is one which refers to the general level of concentration or, as we call it in the bureau, the “four-firm concentration ratio”. We calculate the post-merger share of the market accounted for by the four largest firms in a particular market. If it's over 65% and if the merging parties have more than 10% in that particular market, it then—again—triggers a detailed review on our part. I should point out that market shares and concentration levels alone are not determinative of finding a substantial lessening of competition.

In fact, a provision in the Competition Act specifically says that we can't proceed to the Competition Tribunal solely on the basis of market shares or concentration levels. That gets us into looking at a number of other qualitative factors, which I'll touch on in a second.

But in terms of market shares, the significance of the 65% threshold is whether or not we think that the industry is more likely to engage in what we call “co-ordinated behaviour” post-merger. Quite often what's observed in industries that are highly concentrated is that rather than competing vigorously, companies adopt a policy, either explicitly or implicitly, of co-operating rather than competing with their competitors.

Again, concentration levels are a necessary but not a sufficient condition for that to occur. There are other structural features in the market that also bear on whether or not co-ordinated behaviour or interdependence is likely to occur in a specific industry. But those are issues that we're looking at in the context of these bank transactions as well.

The third step is what we've called “key competition factors”. Again, these factors are laid out in the legislation. I'm not going to go into these in very much detail. They relate to the nature, the level and degree of foreign competition in any particular market. How significant are the barriers to entry? Is the market easy to enter for those outside the market? In which case, it's quite likely that it's not possible for firms to sustain a price increase in a given market.

And what's the effectiveness of the remaining competition? We do something of a stock-taking exercise to see who is left in the market, how significant they are and whether or not we think they're viable and sustainable competitors.

And what's the nature of change and innovation in the market? This brings us back to some of the issues that we talked about earlier in terms of electronic banking. Is technological change in the market occurring at such a pace that we would expect others to penetrate the market, not by bricks-and-mortar entry strategy but by an electronic banking strategy?

In terms of assessing many of these issues, particularly the barriers issue and the foreign competition issues, it's important to keep in mind that not only are there regulatory issues associated with this industry, but even absent those kinds of regulatory issues—because foreign firms, of course, are prevented to a certain extent from fully competing with Canadian banks on a level playing field—we also look at the business case. What are the economics of the industry? And even absent those regulatory barriers that may exist, would you still expect competition and new entry to occur? Is there a business case for it to occur? What are the economic features associated with entry, absent those regulatory framework issues?

We also made it clear in publishing these enforcement guidelines that we would be reviewing these two transactions on a simultaneous basis. We're not looking at them in lock-step fashion. When we look into a market, we're trying to determine how a market is going to evolve over the next couple of years.

For that reason, we have to factor in other transactions that may be occurring in the marketplace, which obviously brings us to taking the second transaction into account. So when we're looking at this transaction, the second transaction that was announced—the one between CIBC and TD—is also factored into our analysis.

• 1600

Finally, the fourth major element is efficiencies. The act specifically recognizes that transactions may be both anti-competitive and efficiency-enhancing. When the efficiencies outweigh the anti-competitive effect, the act specifically decides in favour of allowing a transaction. It is a defence to an otherwise anti-competitive merger.

However, this is by no means a slam dunk. The onus is clearly on the parties to establish that the efficiency gains are real and tangible. By that I mean that we look for real cost savings, real resource savings, which can be allocated elsewhere in the economy. The efficiencies have to be more or less specific to the transaction in question.

If they make an efficiency claim and we say that we think they could achieve that particular efficiency in another fashion like, for example, a joint venture—and there are lots of other banks engaging in similar joint ventures—that particular efficiency claim would be deducted from the transaction.

We also consulted during the MEGs process on whether cost savings would have to be passed on to consumers in order for those efficiency claims to count for the transaction. There was no clear consensus on that issue. In fact, we saw some problems with a body like the Competition Tribunal attempting to enforce that kind of provision. Because of those two particular issues, no change was made to the enforcement guidelines.

So we look at efficiencies in a very broad cost-benefit analysis. If there's a net benefit to the economy, regardless of who that benefit may go to, the law says the transaction will proceed.

Madam Chair, that's everything.

The Chair: Thank you very much. It was very thorough.

For members who came in after we began, let me just remind you of what I said at the beginning of this meeting. The industry committee has an oversight responsibility for the operations of the Competition Bureau and a legislative oversight responsibility for the Competition Act. That's why the Competition Bureau is here today to explain the guidelines. We've asked them to detail the process by which they came to those guidelines—as Mr. Pierce has done—along with the procedures that were followed and to explain both what guidelines they're going to follow and the limitations of what they can do under the Competition Act.

Again, I ask you to keep that in mind in regard to why they're here and what we're doing. We're not here to discuss the MacKay task force.

Mr. Pankiw, do you have any questions?

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): Thank you for covering that again, since I was late getting here. I had to stay in the House on a point of order for a question the parliamentary secretary hasn't answered for seven months.

The Chair: We appreciate that explanation, Mr. Pankiw.

Some hon. members: Oh, oh.

Mr. Jim Pankiw: Mr. Pierce, what are the regulatory barriers? What services are ING and Wells Fargo currently prevented from providing?

Mr. Raymond Pierce: At present, Wells Fargo is providing essentially a credit card or line of credit, which goes up to approximately $100,000, at interest rates that are prime plus x%, which probably exceeds the interest rates being charged by banks for that particular type of line of credit. For example, Wells Fargo is not in the business of taking deposits. They have no ability to do that at present. As I understand it, they have virtually no physical presence in the Canadian market.

Mr. Jim Pankiw: Does ING take deposits?

Mr. Raymond Pierce: ING does take deposits.

Mr. Jim Pankiw: So there's nothing preventing that.

Mr. Raymond Pierce: There are regulatory issues that would have to be sorted out with OSFI and the Department of Finance in order for that to occur.

Mr. Jim Pankiw: Have they cleared that with you?

• 1605

Mr. Raymond Pierce: No. They would not clear that with us.

The Chair: I think there's a misunderstanding here. The Competition Bureau deals with the competition aspects. Bank financing and regulations fall under the Bank Act. The Competition Bureau is not responsible for the administration of the Bank Act per se.

Mr. Raymond Pierce: The question is a relevant question in the sense of whether we expect them to enter other lines of business. Those are areas we would be covering with those particular competitors in order to determine whether or not we thought they were going to expand their presence in the Canadian market to any extent. From that perspective, I think your question is important if we flip it around when we ask that. That is a question that we're asking not only those two potential competitors, but others as well.

Mr. Jim Pankiw: What I'm really getting at is that with technology emerging at the rapid pace that it is, the banking industry could be on the verge of or maybe is already starting on a revolution. Traditional ways of banking just aren't the same.

Is it even going to be possible to prevent this in the future? For example, what if I say I'm banking with some bank over the Internet and doing everything that way? Do you see where I'm going with this?

Mr. Raymond Pierce: I think you have to distinguish between channels of delivery and who is providing those services. It is possible to bank over the Internet or to engage in telephone banking, and we have Interac and debit cards. There are a lot of electronic forms of banking or transaction services at present.

The question we ask is not so much about the channel of delivery, although that's important. We ask, “Who is providing the service?” We ask, “Who is the producer of those services?” It's also a question of the timing with which those changes will occur. For example, what do we expect will happen in the next two years? There are different points of view on how quickly that technology is going to find its way into the banking sector.

Mr. Jim Pankiw: Ultimately that's what I'm wondering about. Are the guidelines based on the current situation or are you projecting what you expect to happen?

Mr. Raymond Pierce: No. It's very much forward-looking in terms of us asking about what we expect to happen, particularly in the next two years. Where will Wells Fargo be in two years? Will they increase their presence in the Canadian market? And will they do that electronically or through non-traditional means, through non-bricks-and-mortar means? So yes, that's a relevant issue for us right now.

Mr. Jim Pankiw: And as much as possible your guidelines have tried to incorporate that?

Mr. Raymond Pierce: Absolutely.

The Chair: Thank you very much, Mr. Pankiw.

Mr. Ianno.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Thank you. I want to ask just a couple of questions.

When you were dealing with the groupings, you indicated that some groupings work well together, such as a loan for a small business and the bank wanting the transaction account also. How do you deal with that, taking into account Wells Fargo? You're trying to compare apples to apples.

Mr. Raymond Pierce: It's still a question we're asking ourselves: is that an appropriate product market definition? If it is and transaction services are part of that grouping, it would mean that Wells Fargo isn't really part of that market unless it intends to somehow enter and offer transaction services, in all likelihood at a local level, because in most cases a lot of that business is very much locally driven.

Mr. Tony Ianno: Thank you.

Can you by any chance describe a situation when you're dealing with the 35%, 65% and 10% where it's almost absolute that the answer could be no because it doesn't meet the Competition Bureau's— I'm trying to get away from the grey zone you're dealing with and go to the absolute no.

We know that the potential yes happens when efficiency gains are enough, and even though there are anti-competitive measures, a yes may be warranted because it's better for the economy, etc. And we also know that even if it's above the 35% or the 65% or the 10%, the answer may still be yes if you feel that the market is still capable of having competitive factors in play.

Mr. Raymond Pierce: That's right.

Mr. Tony Ianno: When can you see the answer being no? I'm not talking about a grey or very grey area but about an area where almost absolutely the answer is no.

Mr. Raymond Pierce: There is a lot of interplay among the market shares, the concentration levels and the qualitative factors, those other factors we would look at in terms of foreign competition. But at the end of the day, we have to make a judgment on whether we believe the parties will have the ability to raise prices in the market or whether we think the industry as a whole is going to be less competitive.

• 1610

Mr. Tony Ianno: So in other words, if the 65% on four, and the others are 7% or 8% for credit unions and 7% for schedule II banks, and the BNS is 14%— In other words, if you have a big 70% or 65% or whatever the actual number is and you have three or four that equal 25%—

Mr. Raymond Pierce: Certainly the relative size of the competitors remaining in the market is an—

Mr. Tony Ianno: It's a fact.

Mr. Raymond Pierce: —important consideration. But it's difficult to give an unqualified answer to—

Mr. Tony Ianno: I'm trying to get as clear-cut on the no side so that it's almost just an example, nothing to do with the current situation, but just an example in which you would foresee that if it is A,B or C, it's automatically no. I want you to get as far away from the grey area as you can, at least so that we can understand how you would say no.

Mr. Raymond Pierce: Unfortunately the exercise is probably a bit more complicated than that. It really does come down to a case-by-case evaluation. It's not a mathematical exercise.

Mr. Tony Ianno: Okay, I'll let you escape.

Mr. Raymond Pierce: Just the market shares—

Mr. Tony Ianno: Okay.

Thank you very much, Madam Chair.

The Chair: Thank you, Mr. Ianno.

[Translation]

Go ahead, Mr. Rocheleau.

Mr. Yves Rocheleau (Trois-Rivières, BQ): Your submission presents a chronology of events. You state that in December 1998, the Competition Bureau will convey its findings to the merging parties as well as to the Minister of Finance. Given that the Standing Committee on Industry has oversight responsibility for the operations of the Competition Bureau, can we assume that it will also be apprised of your findings?

[English]

Mr. Raymond Pierce: The Minister of Finance indicated publicly last July when we released our merger enforcement guidelines that he would make our letter to him public. I assume he will do that shortly after he receives it. So yes, the public will know the results of our review.

[Translation]

Mr. Yves Rocheleau: Am I to understand then that as far as you're concerned, there is no need to inform the Standing Committee on Industry directly of your findings?

[English]

Mr. Raymond Pierce: We intend to send a letter to the four banks, the four parties to the proposed transactions, and the Minister of Finance will also receive that letter. We didn't propose to send it directly to the industry committee, but I'm sure that given the profile of these particular transactions that letter will be made publicly available by the Minister of Finance. I expect that its full contents will be publicly disseminated.

[Translation]

Mr. Yves Rocheleau: Given the scope and complexity of this issue, do you feel the Competition Bureau has the tools it needs to review fairly and accurately the merger plans of the four banks?

[English]

Mr. Raymond Pierce: Yes, I do. There's no question that these are very large and complex transactions for us, but we have a lot of expertise in terms of reviewing other major transactions. And as I mentioned earlier, we do supplement our own staff with outside expertise. For example, we have hired a number of economists and people who have worked in the industry, people who we consider to have a great deal of industry expertise. They're very much involved in this analysis. They're very much involved in providing opinions and assisting us. Again, that's to make sure that we have it right, that it's not just an academic exercise.

[Translation]

Mr. Yves Rocheleau: In a capitalist system, the business of banking is nevertheless quite different from the operations of sugar producers or the oil or tobacco industry, where competition between manufacturers is the norm. Banks, on the other hand, handle monetary operations, the key component of our capitalist economy. Are you as comfortable dealing with the banking industry as you are with other more tangible sectors?

[English]

Mr. Raymond Pierce: I agree that it's certainly different from a manufacturing sector. Again, we do have considerable expertise in looking at transactions in the service industries in general, which is generally where this one falls.

• 1615

But you're quite right. This is a very important industry. And that's exactly why we engaged in this exercise. We wanted to make sure that our analytical framework was right, and based on our public consultations as well as the MacKay task force, which has endorsed our approach, we think we have it right.

[Translation]

Mr. Yves Rocheleau: Thank you.

Mr. Denis Corriveau (Commerce Officer, Competition Bureau): If I could just add to that, there is no question that banking is a highly complex industry, one that is not perhaps as tangible as other sectors. However, as Mr. Pierce said, I know of no other matter to which we have allocated so many resources, both internally and externally. Among the experts that we have retained are people who have worked in the financial services sector for many years and who are really in a position to give us the industry's pulse. We truly have the expertise on board to examine this highly complex issue.

Mr. Yves Rocheleau: Thank you.

[English]

The Chair: Thank you.

[Translation]

Thank you very much, Mr. Rocheleau.

[English]

Mr. Shepherd, please.

Mr. Alex Shepherd (Durham, Lib.): Thank you. I'm just trying to get my head around the fourth and last element, and if I look at what you're doing, I see that you're looking at geographical areas. Obviously you're going to find places in this country where a merger is going to reduce two banks to one, so it's clear that for those people, assuming they're geographically distant from other competing financial institutions, their product selection is going to be reduced, by definition.

It seems that what you're saying is that even though that is the case in some geographical areas, it can be offset by what you determine to be economic efficiencies of the merged institutions. You go on to say that these savings do not have to be passed on to the consumer.

So the absurdity of what you're saying is that it doesn't matter if the merger ends up reducing somebody's choice as long as the bottom line of the bank has been made better. You're saying it's okay.

Is that the definition?

Mr. Raymond Pierce: In broad terms, yes. As I said before, we look at it in a very broad cost-benefit analysis. And if there's a net benefit to the economy, the law doesn't require that those savings be passed on to any particular party.

Mr. Alex Shepherd: You say there's a net benefit to the economy, but one person's benefit is often someone else's loss. So if the benefit is in reduced wage costs or whatever the case may be, in reality somebody lost a job. If I can just get through what it is you're saying, as long as people are losing their jobs and the bottom lines of the banks are better, it's okay that you don't have consumer choice in your area.

Mr. Raymond Pierce: We're looking strictly at the impact on competition. I think a lot of those other issues that you're raising are public interest issues, which presumably the Minister of Finance can take into consideration, whether or not he approves the transaction.

Looking at it strictly from the efficiencies perspective, that's right. If we're presented with the argument that it's possible to produce the same output with fewer resources, that's recognized as an economic efficiency because resources are presumably being released to other, more productive uses in the economy, notwithstanding the disruption that's obviously caused.

Mr. Alex Shepherd: What is the importance of competition to an economy in the first place? I thought the object of the exercise was that we're all better off because we have a competitive economy, but in this case what you're saying is that the shareholders are the ones who would be better off, not everybody in the economy.

Mr. Raymond Pierce: No. I'm not saying that any particular group is better off or worse off. I don't know how those efficiency savings would be distributed in the economy. I haven't made any value judgments about that. I should say that we've never seen a case where an efficiency claim has offset a finding of a substantial lessening of competition.

Mr. Alex Shepherd: But how do you answer the people in Port Perry, Ontario, or Biggar, Saskatchewan, where they no longer have a choice, and you tell them that's okay because the Royal Bank and the Bank of Montreal are making more money this year?

• 1620

Mr. Raymond Pierce: Specifically, the purpose of the act is not to encourage competition as an end in itself, but to encourage it for the efficient market economy that it creates. That's the stated purpose of the act and its main goal.

Mr. Alex Shepherd: Let me get on to another line of questioning.

If you're entering these markets and looking at the way it is today in regard to small and medium-sized businesses, a lot of small and medium-sized business operators will say there isn't any choice today. If I go to my bank for a loan, invariably it has a 30-day call provision. It doesn't matter if I need it for equipment or for whatever the case may be.

In other words, the choices that exist relevant to the term of a loan are short-term. That's already a restriction in choice. In my mind, that's already a restrictive economy you're going into. All you're really saying is that it isn't any more restrictive, but the reality is that it doesn't promote competition.

Mr. Raymond Pierce: If that were to be what we conclude is a distinct, relevant product market, we would look at it to determine whether or not the transactions were going to impact on competition in that market. If we found, as in your example, that there were two banks in a particular area engaged in competition in providing those loans and we thought that post-merger it would be reduced to one and the bank would then have the ability to make the terms and conditions of those loans more onerous, we may well conclude that there is a substantial lessening of competition with respect to that.

Mr. Alex Shepherd: Yes, but my point was that in reality there wasn't product choice before you looked at it and so by definition it didn't have any change afterwards.

Mr. Raymond Pierce: After the merger.

Mr. Alex Shepherd: But if your concern is competition, you should in fact be trying to find ways in which these institutions can provide more competitive products.

Mr. Raymond Pierce: Our mandate is to look at at the impact of the transactions in terms of how it affects the competitive environment.

I understand what you're saying. We have no mandate, though, in an area where there is perhaps a lack of competition to begin with. We have no regulatory authority to force a bank into that market to provide a particular service. That's outside our mandate.

The Chair: Thank you very much, Mr. Shepherd.

Mr. Solomon, please.

Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): Thank you, Madam Chair.

The bureau has often approved mergers and takeovers in the past based on what you define as “undertakings”, as long as they are provided by the director. Could you give us an example of what an undertaking has been, whether or not there is an example in your experience when an undertaking was provided and withdrawn or retracted, and what happened after that?

Mr. Raymond Pierce: By and large, the bureau has actually abandoned the policy of accepting undertakings to resolve a substantial lessening of competition. For some years, our policy has been to proceed to the Competition Tribunal to have those undertakings enshrined in what we call a “consent order”.

In other words, we identify substantial lessening of competition, bring that to the party's attention, and they agree. And if we can agree on a remedy, we take that remedy before the Competition Tribunal and it orders an enforceable order by which the terms of the order—I wouldn't call them undertakings at that point—can be enforced.

Our experience with undertakings in the early years in enforcement of the merger provisions of the act was exactly that. The parties would try to invent ways to find a way to remove themselves from the undertakings and the obligations that they had.

Mr. John Solomon: Is that what happened with Ultramar when they took over the Atlantic division of Texaco? They had promised to keep the refinery open.

Mr. Raymond Pierce: Yes, there was an undertaking.

Mr. John Solomon: There were undertakings and then there was a material change, and once the material change was approved by the director, they were allowed to close the refinery just three or four years later.

Mr. Raymond Pierce: That's right.

Mr. John Solomon: So you can now do this with an order from the tribunal?

Mr. Raymond Pierce: We proceed to the Competition Tribunal in those circumstances.

Mr. John Solomon: The next question I have pertains to letters which I, as a member of Parliament, have received from the president of the Royal Bank, John Cleghorn, the president of the Bank of Montreal, Matthew Barrett, and one of the prairie vice-presidents of the Royal Bank. They clearly state that if the mergers are allowed to proceed, there will be no loss of jobs in Saskatchewan and there will be no loss of competition in terms of smaller communities continuing to be served by the branches; if there are two in one town, they'll have one but they'll still have the number of employees and the service there.

• 1625

My question is this: if they were to take these undertakings or these letters to the tribunal, would this be enforceable? And if so, how?

Mr. Raymond Pierce: Some of those issues clearly fall outside our mandate. Our mandate is simply to identify whether or not there's a substantial lessening of competition. If there is a lessening of competition, we would sit down with the parties and attempt to arrive at some sort of remedy.

Some of the issues you raised in terms of whether or not they would guarantee levels of employment are not issues the tribunal has any authority to opine on and issue an order with respect to. The authority of the tribunal extends only to remedying a substantial lessening of competition. So clearly, some of those issues are outside our mandate.

Mr. John Solomon: With respect to the guidelines, then, if these letters were taken before Federal Court, notarized or affirmed and provided to the Competition Bureau for consideration during the merger considerations, would they be of any assistance in allowing the mergers to proceed?

Mr. Raymond Pierce: The first thing we'd have to do is to identify whether or not there is a problem. If there is a problem, there is the process which we have elaborated on in our guidelines. Once the Minister of Finance has opined and made his views known on any other potential public interest concerns, we would then sit down with the parties and attempt to see whether or not it is possible to negotiate a remedy. That remedy may or may not go before the Competition Tribunal.

But with respect to some of the issues that you're referring to in terms of employment and some of the other public interest issues, the parties would have to negotiate with the Minister of Finance.

Mr. John Solomon: I was referring to branches, not just employees. Do the branches fall outside your mandate with respect to the criteria and the guidelines?

Mr. Raymond Pierce: Branches do not, in the sense that if we feel that at the end of the day in order to preserve competition it may be necessary to sell some branches, then that's clearly something that would fall within our mandate and potentially within the mandate of the tribunal.

Mr. John Solomon: Earlier you made some reference to a number of briefs you received. Are those in the public domain? Would they be available to our committee?

Mr. Gwillym Allen (Assistant Deputy Director, Economic Policy and Enforcement, Competition Bureau, Department of Industry): The briefs that we received on the consultation process are all available on the Internet.

Mr. John Solomon: Thank you.

The Chair: Are you finished, Mr. Solomon?

Mr. John Solomon: I'll pass for now. Thank you.

The Chair: Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thanks, Madam Chair.

I'd like to follow up on Mr. Solomon's question. I too received one of those letters from the Bank of Montreal and the Royal Bank in which they were committing to maintain branch service and also indicating that they won't be reducing employment levels.

Mr. Pierce, you mentioned that the sort of public service aspect isn't involved in your mandate, but under the Competition Act is it not illegal for companies to be discussing their market plans and coming to conclusions about how they may be able to perform in the future? That's the question I have about this letter in particular. How are they able to do this if they should not be talking to each other about how they conduct their business?

You can correct me if I'm wrong, but as a corollary to that, there's been an awful lot of demand from members of the public, who want to know what the impact of the mergers would be. Therefore, if it is not possible under the terms of the Competition Act for the banks who were planning to merge to sit down and compare their market share or market strategies with each other and try to determine how the future would look post-merger, would the Competition Bureau be willing to perhaps look at a special dispensation to allow them to do that?

Mr. Raymond Pierce: It's really a question of the level of detail. I think what you may be referring to is the public interest impact assessment, which is suggested in the MacKay report.

In our reading of the MacKay report, it seems to us that sort of public interest assessment would follow any kind of concerns that we might identify with the proposed transactions, as well as any which the minister might identify in terms of other public interest issues.

• 1630

They would then come back and negotiate with us, and if it is possible to arrive at some sort of remedy for those issues, the parties will then produce this public impact assessment. At least that's the way we read it. Again, it's a question of level of detail. These are major transactions. The banks are exchanging a lot of information right now, so it's a question of how much detail they have to exchange and whether they have to exchange detailed, competitively sensitive business plans in order to do that.

The Chair: Thank you, Mr. Murray.

Let me just remind the committee that I'd prefer not to discuss the MacKay task force. I'd prefer to stick to the issues of the guidelines of the Competition Bureau, what their mandate is and how far they can go in their role. I don't want to get into other details of the MacKay task force.

Mr. Ian Murray: Neither did I. I was interested in the Competition Bureau's—

The Chair: I understand. I just wanted to remind members of that.

Mr. Ian Murray: Looking at competition again, generally mergers take place on a national basis. We've talked a lot about competition within individual communities and obviously we have communities where there are no banking services, where there may be just an ATM or one bank. You also talked about the thresholds of service, the 35% rule.

Mr. Raymond Pierce: Yes.

Mr. Ian Murray: Please tell me if I understand this correctly. If we had a post-merger situation where one bank had more than the allowable threshold in that community, is it possible that we could have a perverse situation where a bank could be forced to close a branch or divest itself of a branch in order to lessen the amount of business they had in that community?

Mr. Raymond Pierce: I'll use an extreme example. If there were a community that had only a Royal and a Bank of Montreal and we came to the conclusion there was going to be a substantial lessening of competition in that particular area, we then might well tell them to divest one of those branches to another competitor that would come in and continue to provide competition in that particular area.

But there is no allowable or disallowable market share threshold. The market share thresholds are there only to trigger a more detailed review to determine whether or not there will be a substantial lessening of competition.

As I said before, it's not a mathematical exercise that we engage in. Obviously there is interplay among market share, concentration ratios and the other factors, and those have an important bearing on how we review a transaction.

But I think the answer to your question is yes: we may well say that they should divest themselves of one of the branches.

Mr. Ian Murray: Thanks very much.

The Chair: Thanks very much, Mr. Murray.

Mr. Pankiw.

Mr. Jim Pankiw: In your response to that question from Mr. Shepherd, I'm confused about what you were saying. You're saying that efficiencies are paramount to competition. I don't understand how you are measuring that or what exactly you mean.

Mr. Raymond Pierce: Competition generates efficiencies. Competition is not an end in itself; it's merely a vehicle by which we generate a more efficient market economy, a dynamic market economy. The law specifically recognizes that in the case of a transaction where the efficiencies outweigh the anti-competitive factor, the transaction is allowed to proceed.

Mr. Jim Pankiw: Can you repeat that?

Mr. Raymond Pierce: The law specifically recognizes that in those cases where there are both an anti-competitive impact and efficiency-enhancing aspects of the transaction and where those efficiencies are greater than and outweigh the anti-competitive impact, the transaction is permitted to proceed under the law. In other words, the act is basically saying that efficiency is the goal of the act, an efficient, dynamic market economy.

Mr. Jim Pankiw: I just can't help but feel that there's a slight paradox there—

Mr. Tony Ianno: Welcome.

Mr. Jim Pankiw: —maybe not on a global perspective, but if we dissect things. In the example of the one town—I think that's what Mr. Shepherd was saying—where there are two banks, you have less competition but improved efficiency.

Mr. Raymond Pierce: You may have improved efficiency. It's not a question of the parties walking in and slamming down a few papers on the bureau's desk. We dissect those efficiencies very carefully. We look at them to determine whether or not they could be or would be realized in another fashion.

• 1635

Mr. Jim Pankiw: Let me put it this way: I think we can all foresee that in reducing the number of branches while supplying the same customer base that the two did, you are going to need a lot less infrastructure. Surely the motive in these banks wanting to merge is to improve their efficiency. In my view, that's probably what's motivating them. There's no question that there will be improved efficiency, but the problem that is creating for some people is the question of whether that will decrease competition. To me, if you increase efficiency you can very much as a consequence decrease competitiveness, but you're saying the opposite.

The Chair: The goal of the Competition Act is to increase efficiency at all costs. I believe that's what Mr. Pierce is saying.

Mr. Jim Pankiw: But he's saying that increased competition is tied to increased efficiency.

The Chair: No—

Mr. Jim Pankiw: You're not saying that?

The Chair: Thank you, Mr. Pankiw. Mr. Allen has the answer.

Mr. Gwillym Allen: Let me see if I can answer the question. The presumption is that usually markets work more efficiently in situations under which they are competitive. There are circumstances in which firms that merge can merge for efficient reasons. Those efficiencies will allow them to save on costs and they may have a short-term effect on the competitive environment.

In those situations, the Competition Act requires that we do a balancing and determine whether the loss to some consumers from the fact that there has been a reduction in some competition, which is usually reflected in some higher prices, is offset by a gain to other Canadians in terms of more cost-efficient use of Canadian resources. If the Canadian economy gains overall from that exercise, then the law says that the decision of the Competition Tribunal is that the merger should be allowed to go ahead.

Mr. Jim Pankiw: That does make sense to a certain extent, but how do you measure that?

Mr. Gwillym Allen: How do we measure efficiencies?

Mr. Jim Pankiw: The whole thing. You're saying that you're looking at the mergers of these banks, which are going to increase efficiencies probably everywhere in Canada. But in some cases it will decrease competition, and in some cases to a much lesser extent. So you're somehow going to measure one against the other and see if the decreased competition is significant enough to justify you saying that these efficiencies aren't warranted. How is that measured?

Mr. Gwillym Allen: It's actually whether the gain in efficiencies justifies any loss to consumers.

Mr. Jim Pankiw: Okay. So how would that be measured?

Mr. Raymond Pierce: Can I just make a comment before Gwill answers that question? I don't think we should make any presumption here about what the gains in efficiency may be or what the substantial lessening of competition is until we've had an opportunity to examine it.

In any case, as I tried to point out earlier, I think your question is quite valid, but we're talking about something that is on one extreme because we've never had a case where we've found a substantial lessening of competition that was outweighed by the efficiency gains. That's never occurred.

Mr. Jim Pankiw: I'm sorry, but can you repeat that?

Mr. Raymond Pierce: We've never had a case where we've found a substantial lessening of competition that was outweighed by efficiency gains. In other words, the kind of scenario that you're talking about has never occurred up to this point under the act.

Mr. Jim Pankiw: I'm not really talking about any scenario. I'm just wondering what your approach is and how you determine that.

The Chair: Thank you very much, Mr. Pankiw.

• 1640

[Translation]

Go ahead, Ms. Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): I missed the first part of your presentation. You may have covered one of the points that I want to discuss. In your submission, you state that the test is the substantial lessening or prevention of competition, higher prices and lower quality of service within a two-year time frame. If you have already covered these points, then I apologize. Can you explain to us why you prefer a two-year time frame rather than something else?

[English]

Mr. Raymond Pierce: The two-year period is adopted from our general merger enforcement guidelines, which apply to all transactions. We consulted on those guidelines to determine whether or not those guidelines were appropriate for mergers within this particular industry, and the two-year timeframe was out there for consultation if people wanted to raise it as an issue. Nobody suggested that it was inappropriate.

I think the thing you have to appreciate is that merger review is difficult because you're looking out into the future to determine how markets are going to evolve, and that's particularly difficult when you have a lot of change and innovation such as we have in these markets.

We don't feel that we can really look much further than two years ahead to determine whether or not there will be a substantial lessening of competition. And by that we mean the ability to raise prices that wouldn't be competed away by others in the market. We feel that if that can occur for two years it's significant enough to qualify as what we would term a “substantial lessening of competition” and we would become concerned about it.

Ms. Marlene Jennings: I have another question. You consulted a lot of different parties and received a lot of different briefs in order to determine your guidelines and the criteria you're going to use in order to look at the proposed mergers. On one of your sheets you say you consulted the clients, including the SME associations and the consumers. Have you had any feedback from those two groups since you've determined what the criteria are and what the guidelines are? Are they pleased with what you said you're going to use in order to be able to evaluate?

[Translation]

Mr. Denis Corriveau: As you said, we consulted with groups representing consumers and SMEs. They expressed their views in briefs which are available on our WebSite. These consultations also helped us to identify individuals from these various groups who possessed information that could prove useful to us in our review of these two merger proposals. I can't tell you anything more. I can't disclose the names of those who provide us with information, but—

Ms. Marlene Jennings: Perhaps I didn't make myself clear. Suppose I appear before a committee that is examining an issue and that must come up with criteria for evaluation purposes. I have an opinion as to the criteria, the process and so forth. I table a brief, issue my opinion and so forth. Once the process is completed, the organization decides which criteria will be used for the purposes of its evaluation and for making its findings. As an individual who has made her views known, am I satisfied with the process? In other words, are the associations representing SMEs and consumers pleased with the outcome of your consultation process?

Mr. Denis Corriveau: I can tell you that we haven't received any comments to the effect that the final guidelines respecting the application of bank merger legislation contain elements that are objectionable to consumer groups or associations representing SMEs.

• 1645

Based on what these groups told us during the consultation process, the minor changes made to the guidelines are in line—

Ms. Marlene Jennings: With their recommendations?

Mr. Denis Corriveau: That's correct.

Ms. Marlene Jennings: Thank you.

[English]

The Chair: Thank you very much, Mrs. Jennings.

[Translation]

Do you have another question, Mr. Rocheleau?

Mr. Yves Rocheleau: We can assume that as you go about your work, you will try to take into account the interests of clients, employees, shareholders and consumers in general. Objectively, what should we expect when you release your findings in December to the merging parties and to the Finance Minister? What will you be stating in your letter to them? Are you going to discuss concepts such as efficiency which, one can assume, can relate either to business operations or to competition? How will these concepts be presented? Can you give us a hint?

[English]

Mr. Raymond Pierce: I don't think we've thought a lot about the contents of the letter that will be going to the parties and the Minister of Finance, and we won't, obviously, until we arrive at some conclusion.

But in broad terms, obviously we won't be disclosing confidential information in the letter because it will be made public, and competitively sensitive information being disclosed isn't in the commercial or competitive interests of the banks. We don't want that in itself to be a vehicle for a lessening of competition.

To the extent that we're presented with efficiency claims by the parties, those will be addressed. In very broad terms it will be known what our conclusions are with respect to each of the product lines that we're looking at and, in broad terms, with respect to the geographic areas that will be affected. We've called it a letter rather than a report, but I expect it will be fairly detailed given the size of the transactions and the volume of information that we've had to sift through.

[Translation]

Mr. Yves Rocheleau: I have another question. How do you respond to comments from an important organization such as the Canadian Federation of Independent Business that in the event of a merger, these two banks would control at least 70 per cent of the Canadian market? The small-business sector maintains that bigger is not necessarily better and that more concentration in the banking sector would mean fewer financial options for small businesses?

How do you respond to pointed comments like these from people who work hard and represent important players in the Canadian economy, namely SMEs?

[English]

Mr. Raymond Pierce: The potential impact of these transactions on the small and medium-sized business sector is something that we identified very early in the exercise. We're taking it extremely seriously. We have spoken to representatives of the small business sector. We know their concerns and we're looking at these issues very carefully to determine whether or not these transactions will impact negatively on the small and medium-sized business sector, which for us is very important because that's one of the prime drivers of prosperity in the Canadian economy. We take that seriously. That issue, the impact on the small and medium-sized business sector, will be addressed in our report.

The Chair: Thank you very much.

Mr. Ianno, do you have a brief question?

Mr. Tony Ianno: Yes, thank you. I want to clarify something just to make sure I understand it. The ultimate goal of the Competition Act is to find a way to improve efficiency. It really should be called the “efficiency act”, not the Competition Act, the way that I understood it, but not to full exclusion, because there is no case that substantial lessening of competition is outweighed by efficiency in that statement that you made. I understand that.

• 1650

One of the questions that I will ask is this: have there been situations in the last ten years where you actually said no to anything with this Competition Act where such was the case?

But before I get to that, I would like to give you a hypothetical with that in mind. If lessening—

The Chair: Mr. Ianno, can I ask you to be brief? We are anticipating a vote.

Mr. Tony Ianno: Yes.

Hypothetically, the lessening of competition is, I guess, a loss for the consumer, and increased efficiency is a benefit to the banks. If you have five banks merging, which would be the ultimate in increasing efficiency for the banks, would that be considered for a no answer in terms of the Competition Act?

Mr. Raymond Pierce: Again, we would follow exactly the same analytical process: would the lessening of competition be outweighed by the efficiencies? It's exactly the same analytical framework that we'd use.

I don't know if I would call it the “efficiency act”. Competition does benefit consumers. If you read the purpose clause of the act, you see that it's there to promote an efficient market economy and to ensure that consumers have access to competitive products and prices. And it's there to ensure that SMEs, for example, have what it calls “a fair and equitable opportunity” to participate in the economy. Competition produces those benefits.

It's just that when we get to the point where we're faced with a transaction where you have a substantial lessening of competition and an anti-competitive impact on the one hand and efficiencies on the other hand, you need some mechanism in order to decide.

So what's the appropriate trade-off? The law says that when you come to that juncture—and we don't get there very often—let's find in favour of efficiencies, because there is a real resource saving to the economy.

The Chair: Thank you.

Mr. Solomon, you had another question?

Mr. John Solomon: Yes, thank you.

Listening to this makes one conclude that the fewer the number of banks or companies in a market and the more the number of efficiencies really equals less competition for consumers, particularly in rural Canada. The efficiencies are obviously going to be for the shareholders, the largest of whom, by the way, are the CEOs. The four CEOs stand to make around a quarter of a billion dollars on their shares. That's just a minor point.

Madam Chair, there have been suggestions and actual recommendations that the Competition Bureau is not equipped with respect to resources or to guidelines that are adequate to deal with the merger. As a matter of fact, there has been a recommendation that the Competition Bureau's guidelines should be extended and that there should be additional resources provided to it in view of the changing circumstances in our financial institutions.

How do you feel about that sort of issue, Mr. Pierce?

Mr. Raymond Pierce: Frankly, I haven't heard the criticism that our guidelines are not adequate to deal with the analytics.

Mr. John Solomon: It was in the MacKay report.

Mr. Raymond Pierce: I believe the MacKay report endorsed the analytical framework that we have here.

Mr. John Solomon: But they said that you need more resources. They recommended more resources.

Mr. Raymond Pierce: We think we have sufficient resources to handle this job. As I said before, we have a great number of outside experts working on this file, probably more than on any other file we've encountered in the bureau—and not just merger files, but any file.

As well, we're devoting some of the best resources that we have available internally. They are very experienced people. For example, we have people who are familiar with the small business sector working on the file. We have people who are very experienced in terms of examining transactions across a number of industries. I think we're more than adequately equipped to do the job and come to the right conclusions.

Mr. John Solomon: I have one final question.

With respect to the mergers, would these be the same guidelines as you might be using or might have used if requested to study, for example, the concentration of ownership in the media or the concentration of ownership in the oil and gas industry?

I think the best example I can use here is one from Saskatchewan. In the last five years in Saskatchewan we've seen the market share of independent retailers of gasoline be reduced from 21% to 8% because of mergers, some allegations of predatory pricing and reasons other than just going out of business.

• 1655

We've seen the market share of independent retail gas station orders drop 60%. They've lost 60% of their own market share in Saskatchewan. If this were raised with the Competition Bureau, would you use the same criteria with respect to them?

Mr. Raymond Pierce: We would only use these criteria in the case of assessing the implications of a merger, a transaction between two companies.

There are other provisions of the act—you mentioned predatory pricing, for example—that prohibit predatory pricing as a criminal offence. It may well be those provisions that would come into play at that time.

The Chair: Thank you.

Mr. Peric, Mr. Bellemare and Mr. Shepherd have questions, but before I continue, just in case there are other people who want to come back to this, let me point out, Mr. Pierce, that you've referred to predefined geographic areas a few times and you've talked about the FSA, the forward sorting area. You talked about how you could tell them to divest themselves of a branch. Are you talking about a certain area? When you talk about the different areas in the guidelines, do you mean areas within an FSA? I'm just trying to get clarification on how you're going to determine what that geographic area is.

Mr. Raymond Pierce: These are two different issues. The FSA, or the forward sorting area—the first three digits of the postal code—is simply an analytic convenience because the data is collected by the Canadian Bankers Association that way, on a branch level basis. We have a program that Statistics Canada has developed to map this data and to calculate market shares and concentration ratios based on a particular FSA.

So if we find that the products for which we run those concentration and market share thresholds are below the thresholds, then in all likelihood we can say we don't think there's going to be a problem with that particular area, because we've taken a very conservative and narrow view of the market in most cases. It's simply an analytic convenience to remove from the analysis those areas and those products where we don't think we have an issue.

I think the issue on divestiture was a hypothetical one, and an FSA may or may not approximate a true geographic area.

The Chair: I just want to have this clarified for the record. I'm not familiar with how the post office determines what the FSAs are, but I do know what they are in my area. I know that in my area you're talking about a very large geographic region with sometimes a small population base. Those regions may have more than one branch from the same bank within them, and I'm concerned about whether you're putting enough in the analysis. Are you taking into account square kilometres or strictly population? How are you going to analyse this?

Mr. Raymond Pierce: There are a number of ways to slice and dice the data with this program Statistics Canada has developed.

For example, an FSA may underestimate the extent of competition in a particular geographic area. There may be two or three competitors sitting right outside an FSA that aren't captured by our analysis. We do have to exercise some discretion and judgment in terms of how we use it.

But what we've said in the guidelines is that if we run those market share and concentration levels on a particular FSA and they're below those levels, then in all likelihood there's not going to be a problem in that particular area.

But you're quite right when you say it may not approximate a true geographic market. In densely populated urban areas they're going to be quite small and in less densely populated areas, the rural areas, they're going to be much larger.

The Chair: I'm actually thinking of the opposite situation. That's the situation where you'll find two branches of one of the proposed merger partners within the same FSA, which won't depict the actual area it surrounds.

Mr. Raymond Pierce: Then we can aggregate out by aggregating the FSAs.

The Chair: I personally don't think that using the postal code FSAs is the best way to determine this when I hear what you're saying and I look at the circumstances a number of people have gone through, but I'll leave it at that and go back to the questions.

Mr. Gwillym Allen: May I just add a point?

In regard to your scenario, first of all, if the same bank had two branches in your FSA, we would count it as one competitor as opposed to two. And if your FSA was extremely large, that would maybe cause us to take a second look at it to determine whether or not that FSA does indeed reflect the competitive environment in your area.

• 1700

As Ray pointed out, these are thresholds. These are pure guidelines to be used to try to facilitate the analysis. If there are situations like your hypothetical situation, where the FSA is extremely large, that may signal to us to take a second look at it to ensure that the FSA does reflect a true market and does have some reflection of the competitive environment there.

The Chair: Thank you. I appreciate that.

Mr. Peric.

Mr. Janko Peric (Cambridge, Lib.): Mr. Pierce, those are guidelines for how to get there. You've mentioned some organizations and groups today, but the majority of average Canadians are not aware of this.

We know from present experience that the four major oil companies are controlling over 85% of the market, so there is the competition.

Let's say the minister decides to go ahead with this merger. On the day after that decision, will you have strong enough tools and proper tools? And will you act immediately when it's necessary to make sure that John MacDonald in Wawa or Thompson or Yellowknife will be heard and will be served promptly? Will there be enough competition?

Mr. Raymond Pierce: If I understand your question correctly, hopefully we don't get to the position where anybody in any particular community has to worry about that, because we will have come to a conclusion that there's either sufficient competition remaining in the community in any particular area or that there is a substantial lessening of competition that needs to be remedied in some fashion. As we talked about earlier, that gets us into potential remedies, which—hypothetically at this point, because we haven't arrived at a conclusion—means that maybe there is a branch divestiture in Wawa, to use your example, where competition is maintained, so he doesn't have to worry about it.

Mr. Janko Peric: I'm not happy with that. I'm not satisfied with that because today we have experience with other industries where there is no competition. The four majors are squeezing them out, and you, as the Competition Bureau—not the “efficiency bureau”—have no tools to go after them in order to protect Canadian customers.

Mr. Raymond Pierce: I think we have sufficient tools. I don't know if you're talking about a scenario where there is a merger or if you're talking about another particular—

Mr. Janko Peric: The day after.

Mr. Raymond Pierce: The day after a merger?

Mr. Janko Peric: The day after a merger. It doesn't matter what industry it is. We don't have to talk about the financial industry.

Mr. Raymond Pierce: If they're engaged in that kind of anti-competitive activity on the day after the merger occurs, then it means that we haven't come to the right decision on the merger in the first place.

Mr. Janko Peric: So we have had a bad experience with the oil industry.

Mr. Raymond Pierce: Perhaps, but there are adequate tools in the act to address those issues.

Mr. Janko Peric: Are there? I'm surprised, because we hear from the Competition Bureau that they don't have the tools, that they went out and investigated and gave up halfway through because they didn't have any evidence. And we know that.

Mr. Raymond Pierce: You're referring to the current amendments which are presently before Parliament. I was referring to the merger provisions in particular. In respect to the merger provisions, we think the provisions are very sound. We think we can do an adequate job.

For example, we just reviewed a transaction involving a proposal where Petro-Canada wanted to buy Ultramar. We came to the conclusion that the transaction would result in a substantial lessening of competition and we said no. On the merger front, we think we have sufficient tools.

I think you're right in terms of some of the amendments that we currently have before Parliament. There are some investigatory tools that would be very useful.

Mr. Janko Peric: But can you reassure me today that eventually, the day afterwards or a year or five or ten years afterwards, if this happens, you will have sufficient tools to protect the Canadian consumer?

• 1705

Mr. Raymond Pierce: I think we have one of the most sophisticated anti-trust laws anywhere in the world, and we're prepared to enforce it if need be.

The Chair: Thank you very much, Mr. Peric.

Monsieur Bellemare, s'il vous plaît.

[Translation]

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): I have a very basic question about the process itself.

If I understand correctly, the Competition Bureau reports to Parliament, not to any one minister in particular.

[English]

Mr. Raymond Pierce: Under the provisions of the act the director of investigation and research reports to Parliament through the Minister of Industry.

[Translation]

Mr. Eugène Bellemare: Will your letter be addressed to the merging parties, with a copy to the minister, or vice-versa?

[English]

Mr. Raymond Pierce: That's a process question. Do we provide the letter to the Minister of Finance and copies to the parties or vice versa? The process we've outlined in terms of our interface with the minister doesn't talk about that specifically, but in any event, whether it's one way or the other, the minister will be fully informed, as will the parties.

Mr. Eugène Bellemare: No. The banks made a request. Did they make the request to you, by the way?

Mr. Raymond Pierce: A request for what?

[Translation]

Mr. Eugène Bellemare: For the mergers.

[English]

For the mergers.

Mr. Raymond Pierce: Yes, they did.

Mr. Eugène Bellemare: They did, to you. So will your response, whether negative, positive or qualified, be given to them, the banks, or with a copy to the minister, or is your response to the minister?

Mr. Raymond Pierce: Our response will be made simultaneously to both the minister and the parties. The letters that go to each will be absolutely identical in terms of the information in them.

Mr. Eugène Bellemare: You're answering the banks, but with respect to it being the same letter, the minister is not a bank so the wording cannot be exactly the same. You have to refer to the third person, and when you write to the minister about the banks you refer to the banks in the third person.

Mr. Raymond Pierce: Our ordinary process when companies approach us and we come to a conclusion is that we write a letter to them and explain in the letter what our conclusions are and why we've come to those conclusions.

Mr. Eugène Bellemare: To the companies?

Mr. Raymond Pierce: To the companies.

Mr. Eugène Bellemare: And the copy or a letter goes to the Minister of Finance or the Minister of Industry?

Mr. Raymond Pierce: Only in this case will a copy of that letter be going to the Minister of Finance.

Mr. Eugène Bellemare: So it's a copy of the letter.

The Chair: Clarification, Mr. Allen?

Mr. Gwillym Allen: This case is unique because the Minister of Finance has an authority to approve or disapprove any merger within the financial service sector, particularly for schedule I banks.

Therefore, when we write the letter to the parties informing them of our conclusion, the minister also requires that information because he has an ultimate override in that he can apply a public interest test. Plus, under the Competition Act, if he certifies the transaction as being in the best interests of the financial system regardless of what we say, he overrides it. And he has that right.

Therefore, all three have to be informed simultaneously and the process we laid out here is simply the steps we would follow in order to inform those three interested parties simultaneously.

Mr. Eugène Bellemare: Okay. In the letter, when you write to the banks saying, “yes, you can” or “no, you can't” or if there's a qualification, do you state that there's a time period—30 days, 60 days or 90 days—for the minister with respect to his right to override your decision?

• 1710

Mr. Raymond Pierce: No. We've not imposed any timeframe, nor can we. We have no authority to impose any timeframe on the Minister of Finance.

Mr. Eugène Bellemare: Okay. You then mentioned that you make a referral to the tribunal. Is this automatic or what? When do you go to the tribunal?

Mr. Raymond Pierce: No, it's not automatic. The process that we've outlined is the following.

We will simultaneously advise the parties and the Minister of Finance of our conclusions. The parties will then wait to determine whether the Minister of Finance has additional public interest concerns that he wishes to bring to their attention. He will opine on the transactions and give them a decision.

Mr. Eugène Bellemare: You mentioned the tribunal.

Mr. Raymond Pierce: The tribunal is not in this process at that point. It's strictly within the domain of the Minister of Finance. He has the authority.

Mr. Eugène Bellemare: To refer to the tribunal.

Mr. Raymond Pierce: It depends to a certain extent on whether or not there's— let me go through the process first, if I could, please.

The Minister of Finance will then bring whatever public interest concerns he has to the attention of the parties. If there's a possibility of negotiating a remedy, either on those public interest issues or the competition issues, the parties would come back and negotiate a remedy with us on the competition issues and presumably something with the Minister of Finance and the Department of Finance on the other public interest issues.

At that point, the remedy, the negotiated settlement, would obviously have to go back to the Minister of Finance for approval. It may or may not require going to the Competition Tribunal to have that remedy enshrined in an order—or not enshrined, as the Minister of Finance has the authority to determine whether or not to approve the transaction.

The Chair: I apologize, but we're going to have bells any second for the vote, and I'd like to get more questions in.

Mr. Jaffer.

Mr. Rahim Jaffer (Edmonton—Strathcona, Ref.): I have just a brief question. It may have been addressed earlier.

In light of the changes that are going to be happening and the Competition Bureau's responsibility with respect to foreign competition, I'm just curious about what sort of attitude or what sort of approach you will be taking when it comes to allowing foreign competition to have a level playing field with our banks in Canada. I know this is something that's been brought up continuously by constituents or by other people I've been talking to. What sort of approach are you going to take in trying to create a level playing field?

Mr. Raymond Pierce: We have no role in that regard. We have no regulatory or supervisory authority over whether competition by foreigners is allowed to happen or not. We do, though, attempt to take into account in our analysis whether or not we think that competition is likely to materialize in a greater way. If we believe that, we factor that into our analysis in terms of deciding whether or not we think there's going to be a substantial lessening of competition. It's one of the factors we would look at.

Mr. Rahim Jaffer: Would you make recommendations then, for instance, on what you think would allow a more level playing field or further competition between foreign banks?

Mr. Gwillym Allen: There is the possibility that we could do that. And we have done that, I believe, in at least one situation, where we found a merger would result in a substantial lessening of competition. As part of the remedy, we encouraged and obtained a reduction in the tariff—this was before free trade or just after the free trade agreement—and we had the tariff remission program sped up in order to open up the Canadian market to more competition and to alleviate the competition concerns that we had.

Mr. Rahim Jaffer: My concern was just simply with things like the 10% rule and other restrictions that are currently placed on foreign banks. What role would you play to change that if in fact it is advantageous?

Mr. Raymond Pierce: That report is the study of both the House finance and the Senate banking committees and there is an opportunity for input with respect to a wide range of views on how that should be handled and whether or not those recommendations should be accepted.

The Chair: Thank you.

The bells for the 5.30 p.m. vote are ringing.

Madam Jennings, you have one brief question.

Ms. Marlene Jennings: Very brief.

• 1715

I just want to make sure that I've understood you. You don't have any mandate to determine that there isn't sufficient competition, for instance, not even taking into account a prospective merger, that the way things are now there is not sufficient competition, either on the geographical level in certain areas of the country or in certain specific segments of the industry, like small and medium-sized businesses, that particular sector. You don't have that mandate? I just want to be clear about that.

Mr. Raymond Pierce: We do very much look at the state of competition in each of the product markets that we have identified. What I'm saying is that we have absolutely no mandate if we find an insufficient level of competition.

Ms. Marlene Jennings: Already.

Mr. Raymond Pierce: Already in a particular area if it isn't impacted by the transaction. We have no no regulatory authority to compel bank x to move into that area. That's what I'm saying.

Ms. Marlene Jennings: Thank you.

The Chair: Thank you.

I want to thank Mr. Pierce, Ms. Allen and Mr. Corriveau for a very detailed and thorough explanation of the guidelines today. It was very insightful, and we wish you well. It sounds like you have an enormous undertaking before you.

Mr. Raymond Pierce: Thank you.