FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, March 14, 2001

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call the meeting to order and welcome everyone here this afternoon.

As you know, the order of the day is Bill C-8, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions.

Before I go to the witness list, I'd like to welcome the members from the Forum for Young Canadians who are visiting Ottawa. We certainly count on you to guide the future of Canada, so welcome to Parliament Hill. I hope that during your stay you'll have some great experiences learning about Parliament.

I guess this is the first time you've come to see how a committee functions. You are quite fortunate, because we have some excellent witnesses around the table today to deal with a very important piece of legislation. Welcome.

We have representatives from the Canadian Institute of Chartered Accountants, T-Base Research & Communications Inc., the Canadian Retail Hardware Association, and the Canadian Federation of Independent Business. Many of you have appeared before the committee before, so you know how this functions. You usually get five to seven minutes to make your presentation. Thereafter we engage in a question-and-answer session. Of course, I have the flexibility to go up to ten minutes, but try to keep it as brief as possible.

We will begin with the Canadian Institute of Chartered Accountants: Graeme K. Rutledge, chair, Financial Institutions Reform Study Group; and Tricia O'Malley, chair, Accounting Standards Board. Welcome.

Mr. Graeme K. Rutledge (Chair, Financial Institutions Reform Study Group, Canadian Institute of Chartered Accountants): Thank you very much. Thank you, Mr. Chairman and members of the House of Commons finance committee.

As the chairman has indicated, I am chair of the CICA's Financial Institutions Reform Study Group. With me on my left is Tricia O'Malley. Tricia is chair of the Accounting Standards Board of the Canadian Institute of Chartered Accountants. Miss O'Malley will address our concern regarding accounting principles and auditing standards for holding companies.

I will speak to a number of other concerns that stem from the fact that certain provisions of Bill C-8 have been inappropriately taken straight from existing financial institutions legislation. We believe that in its current form Bill C-8 will not permit holding companies to operate in non-regulated areas on the same footing as companies incorporated under the Canada Business Corporations Act.

I will now turn it over to Tricia O'Malley.

Ms. Tricia O'Malley (Chair, Accounting Standards Board, Canadian Institute of Chartered Accountants): Thanks, Graeme.

The existing financial institutions legislation provides the Office of the Superintendent of Financial Institutions, which I'll refer to as OSFI, with the power to mandate accounting principles and auditing standards for federally regulated financial institutions. This power allows the superintendent not only to prescribe how Canadian generally accepted accounting principles, which are often referred to as GAAP, and generally accepted auditing standards, which are known as GAAS, should be applied, but also to override the accounting principles and auditing standards followed by Canadian companies.

OSFI has used this override power rarely, but when the power was exercised, it was applied to and at the request of individual institutions, not to the industry as a whole. This resulted in a lack of comparability of financial statements among regulated financial institutions.

When OSFI overrode GAAP in accounting for the provision for loan losses of certain banks, the resulting financial statements were not well received in the marketplace precisely because of this lack of comparability. They were criticized by financial analysts and business commentators alike. Major institutional investors, such as members of the Pension Investment Association of Canada, were particularly harsh in their criticisms. The U.S. Securities and Exchange Commission has made it clear it will only accept financial statements where the accounting is in accordance with generally accepted accounting principles.

In Canada, acceptance of statements that override GAAP requires an exemption from the securities acts in some provinces as well. Clearly, securities regulators believe stakeholders are poorly served when financial statements are not prepared in accordance with GAAP.

In introducing the holding company regime, the Department of Finance stated that the holding company option will provide financial services providers with greater choice and flexibility with respect to how they structure their operations and will also allow them to compete more effectively in the global marked by giving them new latitude for raising capital and embarking on strategic alliances.

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Under the holding company regime, the interests of depositors and policyholders relate to the financial statements of the operating bank or insurance company subsidiary. Other stakeholders, such as individual shareholders, institutional investors, securities regulators, and financial analysts, will focus on the consolidated financial statements of the holding company.

In order to facilitate global competitiveness, it is imperative that the consolidated financial statements be prepared using accounting principles and auditing standards that are accepted in capital markets around the world.

Bill C-8, however, extends OSFI's override to the holding company regime. We are concerned that if Bill C-8 provides this override, the government will not meet its objective of allowing Canadian institutions to compete for capital abroad.

If OSFI applies the override to major Canadian holding companies with U.S. listings, they will lose their access to U.S. capital markets. Thus, applying the override to these institutions must be considered essentially academic, leaving it to be used only with respect to purely domestic or private institutions. This perpetuates the problem I outlined before, that the use of the override impedes comparability even within the regulated financial institution sector. In addition, there is the risk that in the future Canadian securities regulators may not accept financial statements that do not adhere to GAAP and GAAS.

Rather than being given the ability to override GAAP and GAAS, OSFI can, we believe, continue to receive information to make decisions relative to capital adequacy through the provision of separate reporting.

Requiring holding companies to follow GAAP and GAAS would, in our view, provide the following benefits:

First, both regulated and unregulated holding companies will receive similar auditor's reports with respect to their consolidated financial statements for reporting to shareholders.

Second, securities regulators and individual and institutional investors will be better able to compare the financial statements of different companies.

Finally, Canadian financial institution groups will have greater access to foreign capital because the consolidated financial statements of holding companies will be prepared in accordance with recognized accounting standards and will be accompanied by a standard auditor's report.

In a world where those who set accounting and auditing standard are working hard to remove differences among domestic standards to facilitate the functioning of global capital markets, providing to a domestic regulator the ability to override those standards appears to be a significant anomaly.

Accordingly, we recommend that Bill C-8 be amended to remove the OSFI override of GAAP and GAAS for bank and insurance holding companies.

I'll now turn the presentation back to Mr. Rutledge.

Mr. Graeme Rutledge: Thank you, Tricia.

I would like to highlight some provisions, Mr. Chairman, that we believe have been inappropriately imported from existing financial institution legislation. I would note that our written brief provides references as to the particular paragraphs we are recommending be amended or deleted.

First, with respect to holding company audit committee responsibilities, Bill C-8 sets out duties of an audit committee for holding companies that are identical to those of an audit committee of a bank or an insurance company.

We do not believe that the duties of the audit committee of non-operating holding companies should be identical to those of an operating bank or insurance company. Holding companies should be subject to the same corporate governance regime, whether they fall under the CBCA or financial institutional legislation.

Under the CBCA, holding companies follow best-practice guidelines for audit committees. When publicly listed, these companies are also required to follow the requirements of the securities regulators and the listing requirements of the stock exchanges. Similar requirements as those contained in section 171 of the Canada Business Corporations Act should, in our view, replace those currently contained in Bill C-8.

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There is, however, one provision relating to audit committees in Bill C-8 that we would like to see retained, the one that requires audit committees to comprise at least three members, none of whom may be officers or employees of the holding company or any of its subsidiaries. These independence provisions are in fact stronger than the requirements under the CBCA.

Second, dealing with the appointment of auditors of bank holding companies, we believe there's a serious anomaly contained in Bill C-8 with regard to appointing auditors of bank holding companies. The existing Bank Act allows a bank to appoint two auditors. However, Bill C-8 will allow a holding company to appoint only one auditor, while further stipulating that the very same auditor be the auditor of each of its subsidiaries. This means that a bank with two auditors would have to switch to one auditor in the event that it becomes a holding company subsidiary. While we support the concept of a single auditor at the holding company level, we believe that it was not the intention of Bill C-8 to discontinue the ability of a bank to have two auditors.

Bill C-8 also includes specific qualification requirements for the auditors of bank and insurance holding companies, which differ from those required of the auditors of a holding company under the CBCA. We believe these, too, should be deleted.

There are three other issues I'd like to bring to your attention that I believe should be addressed within Bill C-8: one, reporting the well-being transactions to the audit committee of a financial institution. Existing financial institutions legislation requires that an auditor report transactions that adversely affect the well-being of the financial institution to the officers and that audit committees review such transactions brought to their attention by the auditor or officers. However, there is no requirement for the auditor to report such transactions directly to the audit committee. While this is what invariably happens in practice, we believe that such a requirement reflects sound corporate governance and should be contained in Bill C-8.

With regard to financial statements, Bill C-8 contains provisions prescribing the contents of the annual financial statements of a holding company. Existing provisions similarly prescribe the content of the annual statements of financial institutions. In each case the legislation refers to annual financial statements as including a “statement of changes in financial position”. Recent amendments to generally accepted accounting principles have replaced this term with “statement of cash flows”, and this new term, in our view, should be used in Bill C-8.

With regard to independence of auditors, Bill S-11, legislation to modernize the Canada Business Corporations Act, was recently introduced in the Senate. That bill proposes to amend the definition of independence of auditors. We understand that the intent of this amendment is to accommodate incorporated forms of organization for professional services firms. However, these changes have not been included in Bill C-8, and we believe that the independence provisions in both pieces of legislation should be the same.

Modified proportionate liability, the last issue I'd like to comment on, also relates to Bill S-11 with regard to the issue of joint and several liability. By way of background, the current liability regime penalizes defendants, such as professional advisers, who are perceived to be insured and solvent regardless of their degree of fault. Following extensive hearings, the Senate banking committee concluded that the current system could have a negative effect on the availability of audit services and the effective operation of capital markets. The Senate banking committee recommended that the CBCA and financial institutions legislation be amended to address these concerns.

Bill S-11 responds to the threat of joint and several liability by establishing a regime of modified proportionate liability under the CBCA. This bill will generally make liability proportional to the degree of fault. We believe that financial institutions legislation should be amended at the earliest opportunity to reflect these changes.

That completes my opening remarks, Mr. Chairman, and we'll be pleased to answer any questions at the appropriate time.

The Chair: Thank you, Mr. Rutledge and Ms. O'Malley.

We'll now hear from T-Base Research & Communications Inc., Sharlyn Ayotte and Leonard J. Fowler. Welcome.

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Ms. Sharlyn Ayotte (President and Chief Executive Officer, T-Base Research & Communications Inc.): Thank you very much for the invitation to participate and to offer another perspective as it pertains to Bill C-8.

When I come here, I always bring a bit of entertainment. I listen to my own speech because I can't see, and sometimes my computer breaks down. This time I've decided to avoid all of those issues and simply speak from my head and my heart as it pertains to issues around access to the Canadian financial services sector.

I've also brought my business colleague with me, who will read our opening statement.

With regard to the Canadian financial services sector, as a business woman who happens to be blind, I encounter numerous difficulties in conducting my financial business because the services offered by the financial services institutions are not designed to be accessible to people who do not communicate using conventional methods.

Although legislation exists to push gently the organizations into providing accessible services, the response has been slow. Consequently, what we're seeing is that somewhere in the neighbourhood of 40% of the adult Canadian population is unable to use the financial services system because either the electronic delivery systems are not accessible or the banking systems are delivering their services over the Internet, which is not always available to people with low literacy skills or to people who have disabilities.

Len Fowler will address the issue as we see it, and we welcome questions. Thank you.

Mr. Leonard J. Fowler, Jr. (Chair and Chief Operating Officer, T-Base Research & Communications Inc.): The issue is, what measures can the Government of Canada take to ensure that financial services and information provided to Canadians by the financial services sector are accessible to all?

I'm not going to read the entire brief, by the way.

Legislative and policy framework: the Government of Canada publicly endorses the right of all citizens to have equal access to essential services through the Canadian Charter of Rights and Freedoms and the Canadian Human Rights Act. Omnibus Bill C-78 and the 1998 S-5 amendment to the Canadian Human Rights Act address the equitable delivery of services to the public, with particular reference to people with disabilities.

The Internet, electronic commerce, and technology: the Internet has gained public acceptance faster than any other communication medium in history. Radio reached 50 million people in 39 years, television reached that same audience in 12 years, and the Internet has surpassed it in only four years.

Internet technology has brought about a massive global revolution and restructuring of the way business is conducted. E-commerce activities that are enabled by advanced online information networking include government services, banking services and financial transactions, retail product marketing and service delivery, research and information retrieval, and more.

What are the problems? The deployment of technology in all areas of service provision is creating a widening gap between people who have access to technology and electronic networks and those who do not. This is known as the digital divide.

The Government of Canada is committed to making the Internet and e-commerce technology broadly available to Canadians in the mainstream through initiatives such as the Connecting Canadians program and Access CA, but it is not and will never be truly accessible to all citizens unless we make a commitment to break down the systemic barriers that exclude some citizens. If Internet technology is to become a mainstream provider of essential services and significant social, economic, and cultural benefits to Canadians, accessibility issues must be addressed and resolved.

Although Canadian consumer advocacy organizations representing seniors and people with disabilities on issues such as human rights, literacy, anti-poverty, etc., are constantly challenging financial institutions serving Canadians to make their systems and services accessible, progress is disappointingly slow.

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The process supporting human rights in Canada depends on the individual complaint resolution process to bring moral suasion, coupled with competitive advantage, to bear for removing inequities in service delivery within the financial services sector. Although the world's first audio banking machine was developed and produced in Canada, by Canadians, there are fewer than 20 now providing service in Canada. If Canadian technology developers are world leaders in creating accessible banking technology and accessible electronic delivery systems, why is the financial industry in Canada lagging in the deployment of accessible technologies and services?

The success of implementing talking bank machines in the U.S. is due primarily to enforcement of legislation, the Americans with Disabilities Act, 1990, to ensure that all citizens are served equitably. In Canada, as in the U.S., there is existing legislation that can be called upon to ensure the equitable delivery of services, the Canadian Human Rights Act. The significant difference is that in the U.S. legislation requiring the provision of accessible services is proactively enforced, but in Canada it is not. As well, Canadian financial institutions are waiting for standards to be provided. This is a process that appears to have encountered a series of roadblocks in the Canadian standards development process.

Because there are no Canadian financial industry accessibility standards and accessibility is not considered a priority in the market economy, clients with disabilities are disadvantaged and are likely to remain so until regulatory requirements are amended. The foregoing clearly demonstrates that the combined moral suasion and competition approach is bankrupt when it comes to the deployment of equitable services in the Canadian financial services sector.

Recommendations: The electronic systems used to deliver information and services in Canada must be designed to accommodate the accessibility requirements of all Canadians to reflect our diverse information and communication needs. Our government must make it mandatory for financial institutions permitted to provide services to Canadians to do so equitably.

(1) We request that the Governor in Council, cabinet, take full advantage of its considerable power under the Human Rights Act to direct the government to develop strategies to address systemic barriers and resolve inequities affecting the equitable delivery of financial products and services in Canada.

(2) Enforce Canada's existing human rights legislation pertaining to the provision of goods and services by requiring the full compliance of all providers of financial services in electronic commerce in Canada.

(3) Amend the Bank Act and all other relevant legislation pertaining to the regulation of the financial services sector to ensure the equitable delivery of services and associated information is guaranteed and provided by all federally regulated financial organizations operating in Canada. As well, the Government of Canada should encourage legislators to follow the lead to include equitable service delivery compliance criteria and regulations governing financial services sector organizations under provincial and territorial jurisdiction and encourage all self-regulating financial industry associations to incorporate equitable service delivery criteria into their regulations and codes of conduct.

(4) Ensure that the Canadian Standards Association produces comprehensive accessibility criteria for Internet technology applications and electronic service delivery systems in Canada, and mandate compliance to those standards in the financial services sector.

(5) Develop and provide a best-practices model for accessible electronic service delivery for use by financial services sector to assist them in providing equitable services to the Canadian public.

(6) Promote and provide the HRDC publication Guidelines and Specifications for Providing Information in Multiple Formats to all financial service providers operating in Canada.

(7) Provide Canadian consumers the financial services with adequate recourse provisions within the context of the federal government's proposed Financial Consumer Agency of Canada.

(8) Demonstrate the government's commitment to equity for all in service delivery by making all information relating to the financial services sector public consultation process accessible to Canadians with disabilities.

Thank you.

The Chair: Thank you, Ms. Ayotte and Mr. Fowler.

We'll now hear from the Canadian Retail Hardware Association: the president, Robert Elliott; and the director of membership and legislative affairs, Linda Nolet. Welcome.

Mr. Robert Elliott (President, Canadian Retail Hardware Association): Thank you, Mr. Chairman. And thank you as well for the invitation that's been provided to the Canadian Retail Hardware Association to appear before the Standing Committee this afternoon.

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For the record, my name is Bob Elliott. I'm here today in my position as president of the Canadian Retail Hardware Association. I'm also pleased to introduce my colleague, Linda Nolet, who is our association's director of membership and legislative affairs.

The members of our association are 1,800 hardware, home centre, and building supply retail stores across Canada. Total sales for these companies were in the $14-billion range last year and our members provided employment for some 45,000 Canadians. Those impressive statistics, however, mask the fact that our members are overwhelmingly small and medium-sized companies. The demographics of our membership become clearer when I tell you that the average sales of our 1,800 members last year were about $7.5 million and each member store had, on average, some 25 employees.

The branches of Canada's chartered banks and the stores of our member companies share an important characteristic: both of them provide important services to the neighbourhoods they serve in larger towns and cities and to the entire community in smaller towns and villages, and particularly in rural areas. Indeed, it is probably no exaggeration to suggest that the degree of vibrancy of rural communities is a reflection of whether or not they have a local bank branch and a hardware store.

It is this fact that has motivated the Canadian Retail Hardware Association to prepare its submission and seek an opportunity to discuss its contents with the standing committee. When each of you read our brief, I'm sure you noted that it has not been prepared from the perspective of a financial institution, but rather from that of customers who regard such institutions as important adjuncts to their own businesses. You've also probably noticed that our submission deals primarily with those sections of Bill C-8 that establish the Financial Consumer Agency of Canada and that propose amendments to the Bank Act. The reason for that focus is that, at the present time and for at least the near-term future, our members in many parts of Canada will continue to rely almost exclusively on the local branches of Canada's chartered banks to address their financial requirements. Granted that in Quebec and certain parts of western Canada the credit union movement provides local financial services, but that does not diminish the critical importance of branch banking in the eyes of most of our members.

A final point that you will have noted when you read our submission is that it does not constitute a major frontal attack on the very concept of Bill C-8. Rather, we have focused on a limited number of concerns that we believe will make legislation that we largely support even better. It is possible to condense the contents of our submission into one thought: the CRHA supports measures that will improve competition in the financial services sector and provide additional protection for individuals and small businesses in their relations with much larger and more powerful financial institutions. The balance of my remarks will focus on these two issues.

An important feature of Bill C-8 is the degree to which it addresses the need for greater competition in the financial services sector. In particular, the Canadian Retail Hardware Association believes that the creation of three classes of banks, depending on the size of their equity, the provision for a single national service identity for credit unions, and improved access to the payment system are all positive steps that will increase competition.

Our members are concerned, however, that this much-needed element of greater competition will not materialize overnight. Media reports, including an article in yesterday's Globe and Mail, have already indicated that certain bank executives are saying that proclamation of Bill C-8 into law will likely be followed by new merger initiatives on the part of the already existing chartered banks. In other words, the shorter-term implication of Bill C-8 could easily be less competition, rather than more. For this reason, our submission recommends that the bill be amended to provide that no bank mergers be approved until three years following the date on which Bill C-8 comes into force.

The background paper that accompanies Bill C-8 describes merger review guidelines that will supposedly apply in the event proposals to merge banks or bank holding companies with equity in excess of $5 billion are forthcoming after passage of Bill C-8. The Canadian Retail Hardware Association supports these guidelines without reservation. We are concerned, however, that they do not appear to have the force of law; therefore, our submission strongly recommends that the bill be amended to state clearly that banks seeking to merge would be obliged to produce a public interest impact assessment that would form part of the basis for a public review of the merger proposal by this standing committee.

Turning to the protection element of our submission, the Canadian Retail Hardware Association regards establishment of the Financial Consumer Agency of Canada as an important feature of Bill C-8. With respect to the responsibilities of the agency, we are operating on the assumption that the consumer provisions referred to in the bill apply both to individual consumers and to business consumers, and in particular to small-business consumers of banking services. We are concerned with what we regard as overly weak provisions with respect to proposed branch closures. At present the bill merely calls for the provision of notice of a closure. In fact, under certain circumstances it even states that no closure notice is required.

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If notice is given and the affected community is sufficiently upset, the bill then provides for the convening of a meeting. However, Bill C-8 does not require that such a meeting be held. The bill only provides that the commissioner of the Financial Consumer Agency may establish rules for convening a meeting and for its conduct. Our brief recommends that notice be required in all cases, and that closures not be permitted where acceptable alternative services are not available.

We are also concerned about the accountability of Canada's chartered banks. The bill provides that banks with equity in excess of $1 billion be required to produce an annual statement describing the contribution of the bank and its affiliates to the Canadian economy and society. Our brief urges that Bill C-8 be amended to require that this annual statement oblige banks to report specifically on the manner in which they address the needs of the small-business community.

Finally, we have recommended that Bill C-8 should not become effective until the office of the Canadian financial services ombudsman has been established. This was an important part of the recommendations of the task force on the future of the Canadian financial services sector, and it has also been addressed positively by this standing committee.

The backgrounder to Bill C-8 states that the federal government will continue to work with the provinces and non-bank financial institutions to achieve means to this end. The Canadian Retail Hardware Association interprets this statement to mean that the Canadian financial services ombudsman will probably not be established and operational prior to passage of Bill C-8. The ombudsman is a significant element of the protection package sought by the CRHA, and we have therefore recommended that Bill C-8 not be proclaimed into law until such time as the ombudsman's office is functioning. We do not believe that working with the provinces is likely to lead to the rapid establishment of this office.

I would like to thank you for your attention and the opportunity to be here. I look forward to discussing our submission and to any questions you might have. Thank you.

The Chair: Thank you, Mr. Elliott.

We'll now hear from the Canadian Federation of Independent Business, senior vice-president Brien Gray and the president, Catherine Swift. Welcome.

Ms. Catherine Swift (President, Canadian Federation of Independent Business): Thank you very much, Mr. Chairman. It's a pleasure, as always, to appear before you on this very important piece of legislation.

In the package we circulated, in addition to a statement to the committee, we have also included quite a comprehensive study based on a survey we conducted among our small and medium-sized business members last year, entitled “Banking on Entrepreneurship”. It contains quite a rich database of information on the whole relationship between the financial services providers in Canada and Canadian small and medium-sized businesses. We'll be addressing some elements of it today, but I certainly hope you will have a more comprehensive look at it when you get a chance, because it really does contain, I think, a lot of very interesting information on this whole issue.

Our key messages today—we'll be presenting them fairly briefly—are the great importance of competition among financial services providers for the small and medium-sized business community. This piece of legislation is just a beginning. I'm sure, since the whole issue of financial sector reform has been discussed for at least two decades, and quite intensively over the past few years, there's probably a temptation to think that once this legislation is past, it's done. We'd like to say it's really just a start. Although we certainly are very much in agreement with the thrust of the bill and many of its specific provisions, our comments on the need for measurement and follow-up echo what our colleagues in the hardware sector, with whom we share many members in common, have to say. This provides the promise, but the follow-up has to be there as well in the provision of a variety of financial services to all consumers, not simply small businesses.

We naturally believe that one of the goals of any such reform has to be to enhance entrepreneurial opportunity and the competitive environment for small businesses in Canada, given the central importance of this sector—small and medium-sized firms represent almost half of our national GDP and over 80% of the net new job creation in the country. So obviously it's a key sector.

Preserving and enhancing an entrepreneurial culture in Canada is very important to growth and jobs in our evolving economy. Naturally, our perspective from the CFIB on Bill C-8 is focused on how the proposed reforms will enhance competition in financial services and enable the small-business sector to continue and enhance its strong performance in the economy.

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I'd just like to briefly touch on the fact that over the years the CFIB has done a lot of research on the relationship between financial services providers and small business. We have certainly found many trends that have not varied much.

Certainly there is the dominance of the major chartered banks in Canada. The level of dissatisfaction among our members with the services provided remains stubbornly high, although there is some element of the satisfaction levels improving when economic conditions are better. That's not surprising, and it certainly has been demonstrated in our research. We have also seen absolute lending levels be very slow to reach their pre-recession levels of back about twelve years ago.

Issues such as account manager turnover have been bugbears for decades for small businesses. That simply isn't an issue treated at all seriously by the banks.

Certainly being a young and growing small business seems to be a liability when it comes to obtaining credit. Issues like service charges also remain a serious concern, and so on.

We've also seen a number of positive trends. We certainly would like to compliment this committee, your colleagues in the industry committee, the MacKay task force, and others who we think have come up with some very constructive suggestions over the last few years as to means of helping to improve the financing climate.

We have better data now than we did, and we believe that should be continued and enhanced. What's very important to understanding what's happening is if we can all agree on the data on which we're basing our analyses.

Also, we have seen a growing recognition among financial institutions themselves that lending to the small-business community requires some unique skills and also represents a significant business opportunity, and a very profitable one for those institutions themselves.

I'd just like to touch on some of the highlights of our bank survey results. As I mentioned earlier, there's an enormous amount of data there that we won't belabour today, but some of the more interesting results are relevant to this committee. We have found it very alarming, for example, that small, young, and relatively high-growth businesses—those businesses that we very much hope are going to provide our growth in the future economic environment—are telling us they have the greatest difficulty in obtaining financing. We found, for example, that the underfinanced position of less established firms with strong revenue growth was 31% in this particular survey, compared to 21% for all firms that were surveyed in this particular sample last year.

Account manager turnover, as I mentioned earlier, remains a very serious problem for small businesses. This is an issue that is totally controllable by the banks, and something over which the small-business consumer has absolutely no influence. With some of the data, for example, we found that where there was one account manager over the previous three-year period, about 7% of loans were rejected. For a comparable business when there were more than four account managers over the three-year period, that rate of rejection more than tripled, to 23%. There's clearly a very negative relationship here between loan rejection and the incidence of account manager turnover, and it's something the banks could certainly do something about.

We found that just over 10% of businesses that had applied for credit were turned down. Of course we certainly agree that not every applicant should be granted a loan, a line of credit, or whatever form it takes. But of those 10%, we found about 12% were not told why the credit had been turned down. This is a clear violation of the obligations of financial institutions under the code of conduct that was put in place by Parliament some years ago, in I believe it was 1993.

Something else we hear from members—and we have heard this for quite some time now—is that, generally speaking, we have seen lower demand for lending. This is rather surprising. In the context of a growing economy, you would expect the reverse to happen. Comments that we hear from members lead us to believe many small businesses would rather forgo an opportunity for growth or expansion if it means taking on debt or adding to their existing debt to a financial institution.

Just briefly, the whole banking landscape has of course changed very dramatically in Canada over the last decade or so. We have seen, for example, significant closures in branches of various institutions, notably the large chartered banks.

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We've also seen—seemingly as an intentional, strategic move—some institutions moving right out of the small and medium-sized business lending market to leave it to others. We find this trend very disturbing, given the privileges that have been accorded to our large financial institutions over the years, and we feel that one thing that could require particular scrutiny in the post-Bill C-8 environment is to have a much more comprehensive analysis of what's happening in the bank closure area. Right now there is no database that seems to be consistent or comprehensive with regard to what has happened in this area over the last few years, and certainly we have no expectation that anything would happen differently in the future unless there's some action on the part of this committee and others to ensure that takes place.

Also, of course, through most of the 1990s we've had a good economy. So if we see the banking sector generally withdrawing from lending to small and medium-sized firms in good times, what can we expect to happen in more difficult economic times? Surely we would not be likely to see a better situation.

Naturally, we are quite concerned right now as we see slowing in the economy. So far we do not see a tightening of credit on any significant basis, and we certainly hope that continues. Nevertheless, given the overreaction that we saw by many financial institutions back in the early 1990s in cutting off a lot of small businesses that should not have been cut off, we're being very vigilant. I think it would be incumbent upon us all to pay close attention to that issue in future.

We also, of course, see the service charge environment, particularly in the last year or so, having some pretty significant increases, once again both for small businesses and consumers generally. So that's another area that's been cranked up in the last little while.

Overall, our survey results show that none of the major institutions—none of the five major chartered banks in particular—had performances that were at or near the top across a range of service criteria. For example, in our particular survey we did find the highest performers were the credit unions.

I would now ask Brien Gray to speak specifically to some of the elements of Bill C-8.

Mr. Brien G. Gray (Senior Vice-President, Policy and Provincial Affairs, Canadian Federation of Independent Business): Thank you, Catherine.

Mr. Chair, members of the committee, when we approach the legislation itself, you will recall that during the merger year—what began as the MacKay task force year and turned into the merger year—we were directed by our membership consistently to take a position that the need in the marketplace was for more competition, not less, and that anything that could be put in place to meet that goal was to be welcomed.

Beyond that, we felt that it was important to hold off on any mergers or strategic partnerships that would reduce competition until the so-called new entrants would come into the market in a way that they were there, up, viable, sustainable, and in most parts of the country serving the men and women who run small businesses throughout this country.

Now, as we look at Bill C-8, I'd like to talk briefly about four components. The first of these are competition and financial data. I'd like to talk a little bit about consumer protection, and I'd also like to talk a little bit about the merger process itself.

Bill C-8, among other things, sets new rules intended to make it somewhat easier for the new banks to be formed, for Canada's smaller banks to attract new ownership partners, and for foreign banks to operate in Canada. It also seeks to give more flexibility to the credit union movement to become a more important competitor in the small-business marketplace.

The key test is whether or not the new package will enhance in real terms the competition for, provision of, and access to full services for Canada's small businesses. Over the past year the federal government has in fact reduced competition in the marketplace through its approval of the TD-Canada Trust takeover. With respect to the various forms of competition envisaged under the bill, new bank formation will be extremely difficult in a competitive environment dominated by the big five.

Canada does not have a 200-year history of community banks as the United States has, and you cannot import that framework overnight. Allowing the Laurentian Banks, the National Banks, and Canadian Western Banks more latitude on ownership may help get them more capital and form strategic partnerships to be more competitive. Foreign banks will not be entering our market in a meaningful way, and certainly not at the retail level. Canada's entire market is smaller than the California market. It is dominated by five to six very large banks located throughout our geography, and the costs of entry to compete for our members' business—that's full-service business—would be prohibitive. The foreign banks will come, but largely to service consumers or service business niche markets, essentially in the urban centres.

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It's understandable that the government would look to credit unions as a possible alternative source of financial products and services to the small-business market. Historically in Quebec, the Caisses Populaires Desjardins competitive presence has pushed the banks to elevate their performance and satisfaction scores of all financial institutions in the SME market in that province.

The credit union movement in western Canada also serves the sector well, while it is largely a non-factor in Ontario and Atlantic Canada.

For these reasons credit unions are being looked to and may well prove to be a legitimate competitive alternative outside of Quebec, but this assumes many things and will take time to develop.

They have to overcome their independent streak, which impedes strategic partnerships and mergers. They will have to convince their members, largely deposit-making consumers, to move support to the SME market, and they will have to develop a small-business lending expertise.

The assumptions are critical to the chances of success of the credit union sections of the reform package. The government, through these measures, has provided manoeuvring flexibility to the credit union movement, and it is now incumbent upon the movement to begin to act.

With regard to the merger process, the government has laid out a comprehensive framework for the new merger review process, as opposed to the rather odd, ad hoc process that we witnessed in 1998 and 1999. It is vital that there be a full and comprehensive review of any proposed mergers that sets out clearly the pros and cons of such a merger, not just for the institutions involved but, most importantly, where the costs to the economy and the SME sector are set out clearly.

CFIB is supportive of the intent to put in place a full set of checks and balances for any future reviews, including a regulatory review, a Competition Bureau review, and the PIIA review, which would include criteria to ensure full service to Canada's small-business sector.

CFIB insists that this process not simply become a blueprint by which the banks would get pre-approved or arranged hoops in place for however long necessary in order to gain that acceptance.

With regard to the small-business financing data, this issue may be seen by some as less glamorous than the other issues in the package, but from our perspective it is vital for the small business firms and operators. CFIB has argued for years that there is a need to collect more and more relevant statistics from the supply side as well as from the demand side on the financing needs of small business in Canada.

From our perspective, the collection of such meaningful data will result in a win-win-win situation. Small firms dealing with financial institutions will be better informed in selecting products and services. Governments will have more accurate information upon which to base their policy decisions, and the financial institutions themselves will be in a better position to improve performance based on accurate market research.

Another issue with regard to financial data and the gathering of statistics has to do with the gathering of data on full-service branch outlets serving small business across Canada, and I refer a little bit to what our colleagues in the hardware association had to say. In this way, we can monitor in an objective way how well or poorly communities are being served by financial institutions. This is particularly important in view of the number of branch closures in recent years.

Finally, with regard to consumer protection, the new rules on consumer protection as they apply to individuals and small business are welcomed. For years, members have expressed frustration at the run-around they were given in pursuing legitimate grievances—from the bank to OFSI to the finance department to their MP to their ministers to the ombudsperson, etc. The Financial Consumer Agency of Canada's mandate to enforce a customer-oriented provision of the federal financial institution statutes and monitor the industry's self-regulatory initiatives designed to protect the interest of small business is a welcome step. This agency will need teeth to be effective.

It should be stated as well that the protection apparatus will remain imperfect because the complaint protection system does not appear to cover the arbitrariness of credit decisions.

Finally, another aspect of consumer protection relates to the dissemination of information. As more and more financial institutions are moving to a form of credit scoring, a method of assessing creditworthiness of the client applicant, it is important for the consumer to be fully informed on how such a system would operate. CFIB believes that the client or customer should be provided with information as to the elements that go into their score, how they can access the information, and how they might improve their scores. In this way, they would presumably become more creditworthy and improve their chances of gaining access to credit on better terms and conditions.

Catherine.

Ms. Catherine Swift: Just to conclude very briefly, we certainly congratulate this committee, the industry committee, and the MacKay task force for the work that's been done here.

Through this process, which has culminated in this particular piece of legislation, the government has set the table to permit change to take place in the financial services sector, but positive change is by no means guaranteed merely by the passage of this legislation. Significant follow-up, gathering data, analysing it and monitoring the situation is going to be required to ensure that the results we would all like to see are indeed achieved.

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We believe we're entering a period of sustained and sustainable entrepreneurially driven growth and opportunity. We encourage all players in the financial services industry to act on the opportunities provided by the new legislation. They can build new approaches, innovations, alliances, and strategic partnerships to better serve Canada's unique and vital small-business sector.

In a highly entrepreneurial world economy, we can't afford the luxury of underserving this vital sector in terms of financial services. Canada needs the jobs, the growth, the creativity and the regional diversification that comes with the SME sector. We very much hope this will be achievable, in part through the results of this legislation.

Thank you.

The Chair: Thank you very much, Ms. Swift, Mr. Gray.

We will now proceed to the question-and-answer session. It will be a six-minute round. By that I mean there will be six minutes for every member of the party present, so you'll get twelve minutes.

Mr. Ken Epp (Elk Island, CA): Or we get six minutes each.

The Chair: Six minutes each. You can consolidate if you like.

Mr. Ken Epp: Thank you very much.

Thank you all for being here. Once again, it's been an enlightening experience to hear your perspectives.

I'd like to ask these questions in the order of your presentations. I hope to get through all my questions, so I would appreciate it if you could be relatively brief in your responses.

First, to the accountants: You indicated that you had some problem with the Superintendent of Financial Institutions being able to override the accounting standards for holding companies. Since you're very knowledgeable in this and we're learning from you, I would ask you, do accounting standards in this country apply to banks, insurance companies, and so on, as much as they do to other businesses? Is there a need for flexibility because of the fact that in some instances such standards just don't apply to these financial institutions? Is that true, or am I way off base there?

Ms. Tricia O'Malley: I think it's fair to say that when the override was originally put into the legislation, in the original Bank Act, it was the result of a slight discomfort, perhaps, with the move. In fact that was the legislation that moved financial institutions within GAAP. Up until that time, the accounting they followed was specified in its entirety by the Inspector General of Banks.

At that time, it was agreed that it made sense for banks and insurance companies to follow the same rules as everybody else. That way, investors were able to make sensible comparisons between the results of different kinds of entities.

Mr. Ken Epp: So is the answer to your question that the rules for the GAAP and the GAAS are totally applicable to the banks—and that these rules should simply apply, and that should be the standard? Is that what you're saying?

Ms. Tricia O'Malley: I think it's important to understand that the rules we develop undergo the same kind of due process as your legislative process. All our proposals are first put out for comment. We consult extensively with the industry and with OSFI before those standards are finalized. If there are any concerns, they can be dealt with through that process.

It's intended that the override be used only rarely, and in fact so it has been. Given the fact that it's been used so rarely in perhaps a ten-year period, I guess our conclusion is that it's probably not necessary—certainly not at the holding company level.

Mr. Ken Epp: Thank you. I have other questions, but I need to move on because of my limited time.

To Ms. Ayotte, thank you again for being here and giving your point of view. What do you think is the probability of your actually being successful in getting the kind of accessibility you'd like for youself and other people who have special needs and require greater accessibility? What do you think your chances are of getting that? And is it appropriate to put it into a bill like Bill C-8, or should it be handled in some other way?

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Mr. Sharlyn Ayotte: If there's a wall in here that's made of bricks and I have lots of time to bash my head against it, that's about how fast this thing will work.

Accessibility criteria should be part of absolutely everything government does, whether it's in legislative reform, policy development, program design and delivery, service design and delivery, technology design and implementation. What's happening now as a business person and as a citizen is that I spend my time and my energy creating wealth. I pay corporate and personal taxes for all other people to have access to services I can't use, and that in my mind isn't appropriate.

Mr. Ken Epp: I can see where you'd be frustrated. But I'm thinking, for example, of some of the bank branches out in my riding, out in the rural part there. Very frankly, if there is a person, for example, who's visually impaired, they can walk into the bank branch in this location and somebody will walk through their banking process with them and so on. Is it really necessary to legislate sort of the one-size-fits-all solution to this, which would greatly increase the cost and would not necessarily meet a local need?

Mr. Sharlyn Ayotte: I think it's as necessary as it was to develop the Canadian Human Rights Act and the Canadian Charter of Rights and Freedoms. It's about what we stand for as Canadians. We say we reflect and respect the diversity that is our country and then we look at things like disability and literacy as something there is one of. Well, we're all Canadians, and that's 40% of our population. It's not a small piece any more.

Mr. Ken Epp: Okay. Thank you.

Mr. Sharlyn Ayotte: Thank you.

Mr. Ken Epp: Quickly to the Canadian Federation of Independent Business, one of the things you have said is that there is lack of capital available for small business, and you indicated that perhaps we are missing some opportunities for growth in our economy as a whole because of the fact that many entrepreneurs just simply can't get the capital. How would you propose to address that in a bill like Bill C-8? Would you say that every bank must provide certain percentages of loans that are applied to them? I really don't know how you're going to solve the problem. I recognize your frustration and what you're expressing on behalf of your members, but how do you do that?

Ms. Catherine Swift: I don't think you specifically address those kinds of issues in a bill like Bill C-8. But I think Bill C-8 facilitates some of the monitoring, some of the agencies that are set up after the fact to see what's going on to require better data, to require a better analysis, to look at issues like account manager turnover and does it have to be. We talk to the institutions too, believe me. We hit all targets as much as possible. I think it's the follow-through that matters.

The grains are there in Bill C-8 to permit some of these things to happen, but the follow-through has to be there as well. Moral suasion is very important, I think, for financial institutions. We've seen it be successful in the past. But I think the important thing is it has to be consistent. It can't just be a shot across the bow every five years or something like that. That is not going to be effective. But ongoing monitoring, ongoing publicization of data... We're doing what we can from our standpoint to educate our members better to point them toward institutions that are likely to be more able to deal with it.

I think one point we've brought up before this committee before and we can't omit this time either is that debt financing is not the only source. An inability of firms to retain earnings because they're being taxed to death is another means by which... Equity financing, retained earnings within the firm are also hugely important sources of capital.

I know that's not Bill C-8 per se either, but it does comes within the ambit of this committee in other venues. So that's something that also should be stated.

Mr. Ken Epp: Very well put, and we certainly agree.

Mr. Chairman, my watch says I've exceeded my time, even if yours doesn't.

The Chair: Mr. Peschisolido, do you want to give your time to Mr. Epp?

Mr. Joe Peschisolido (Richmond, CA): Sure. Go ahead.

Mr. Ken Epp: Okay. Great. Oh, he is a nice guy.

Then I go to the Canadian Retail Hardware Association. I have a really interesting question for you. You've indicated also that you're concerned that, for example, many of your members are local people. Being an MP in a rural riding, I can sure relate to that. I drive into my little towns where there's one bank, one hardware store, and one grocery store, and sometimes there are two, and these people depend very much on the availability of local financial institutions for them to do their banking and obviously to apply for loans and things like that.

• 1635

You're stating in essence that you think this Bill C-8 should be amended. You're saying that more than just a notice of closure is required; you almost imply that you would like to have Bill C-8 say the banks must stay open in some of these little towns whether they make money or not. So my question to you is would you apply that same criterion to people who sell hardware? Because all the farmers locally need hardware, and so do the people, the residents, in these little towns. It's a great inconvenience for them to have to drive to Edmonton a hundred kilometres away when their little town has a hardware store. So would you provide that same criterion to your hardware people and say you may not close even after you've given notice that you can't make money any more?

Mr. Robert Elliott: First of all, I would dispute the fact that we said banks shouldn't be allowed to close. I don't think that's what we were saying in the brief or in my comments. I think what we said, and I'll reiterate this, is that where there are no reasonable alternative services available there should be some opportunity for the community to have their say in the matter. The decision is going to be made somewhere else at that point in time, but the community should be consulted in cases where no alternative services are available.

Under those circumstances, we hope that whatever body is making the decision in that case will make a fair decision. All we can ask for is that our members and consumers at large be given an opportunity to have their say in it.

Mr. Ken Epp: Bill C-8 provides that if a bank is contemplating a closure of a branch they have to give notice, and there are different regimes of notice provided in the bill. Are you suggesting that this should be amended? For example, you said there should be no bank mergers for at least three years. I wrote down that you said—and I don't know if this is a quotation or whether it's just my paraphrase of what you said—that you need more than just notices for closures. Are you suggesting that Bill C-8 should say that before a bank branch is allowed to close there must be some other comparable or parallel or replacement or servicability available? Are you suggesting this? What specifically do you want Bill C-8 to do? How would you specifically amend what Bill C-8 now has in order to meet your goals?

Mr. Robert Elliott: Number one is that notice should be required in all cases.

Mr. Ken Epp: It is.

Mr. Robert Elliott: Our understanding is that there are certain examples where a notice of closure is not required.

Mr. Ken Epp: We'll have to check that.

Mr. Robert Elliott: If I'm mistaken on that then I apologize as well, but our recommendation was based on that assumption. If that's not the case, then, as I said, we would change that. But the number one thing is that notice be required in all cases if it's not already being done.

And yes, closures should not be permitted where acceptable alternative services are not available. The definition of acceptable alternative services could be very broad, and I don't have specific examples of what those might be. Again, I think there are people out there who have more knowledge of those kinds of things than perhaps I do. But at the same time, I think that offer should be there for the community when those services are being taken away from them entirely.

Mr. Ken Epp: Thank you very much.

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

We'll move to Mr. McCallum. You have 12 minutes, or you can share them with Ms. Bennett or Ms. Barnes.

Mr. John McCallum (Markham, Lib.): Mr. Chair, I'll need far less than 12 minutes. Thank you.

As I said yesterday, this is now my second time on this side of the table rather than that side. I've spoken with Catherine Swift several times before but in a different capacity. I'm not here to defend the banks or to attack them, as I said yesterday.

My first question is to Ms. Swift. I sympathize with a lot of what you said. In thinking specifically about this bill, I might have missed something, but I didn't hear one specific way in which you wanted this bill to be changed. You talked a lot about the need to follow up and collect more data and various other things, but is there any change that you are advocating in this bill?

• 1640

Ms. Catherine Swift: No, there isn't. We believe that a lot of the threads of the MacKay report, which we've had input into several times and supported, were incorporated, or the essential elements were incorporated, into the proposed legislation. So we don't, but our key message is that obviously passing the legislation is a first step. That's all.

No, we don't see the need for any substantive changes in the bill itself, but rather for the need to follow up in this committee. And we note that some recent testimony to the industry committee from some of the financial institutions, just a week or so ago, was also germane. But in terms of the legislative change, no. We support the thrust of the bill.

Mr. John McCallum: I guess the reason for my question is that the first task of this group is to make recommendations—

Ms. Catherine Swift: Right.

Mr. John McCallum: —on this specific bill. So you're not suggesting we do anything different.

Ms. Catherine Swift: No, not at this stage of the game.

Mr. John McCallum: My second question is in a similar vein for Ms. Ayotte and Mr. Fowler. When I was at the Royal Bank we had a conference on this very issue about access. I'm not saying we were in any way exemplary, but I do remember hearing reports about it and attending a part of it.

I believe I'm very sympathetic to your objectives, but again my question is similar to my earlier question: whether the means of achieving your objectives, with which I agree, are to change this bill. Again, I didn't hear anything specific about how you would want this bill to be changed. I heard you say three things: that the Governor in Council or the cabinet should cause studies to be done; that we should enforce existing human rights legislation more proactively; and that compliance should be mandated in various ways.

Maybe I missed something, but is there any specific amendment to this bill that you are proposing or suggesting in order to achieve your objectives?

Ms. Sharlyn Ayotte: I would propose within the context of this bill that accessibility become a mandatory criterion in the establishment of the Financial Consumer Agency so that everyone who is affected by financial services will have an opportunity to comment, will have some form of redress.

The accessibility dimension just needs to be there so people are cognizant of how these decisions impact massive portions of our population.

Mr. John McCallum: Okay.

Ms. Sharlyn Ayotte: Thank you.

Mr. John McCallum: Thank you. Those are all my questions. Thank you very much.

The Chair: Thank you, Mr. McCallum.

Dr. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chair. My question, which follows up on Mr. McCallum's question, is also for the T-Base witnesses.

Would you like some wording that was around accessibility in the bill? Or is it in the regulations that you would be suggesting that there be accessibility standards or everything available in multiple format, the universal design, web-based solutions, the kinds of things that I think probably could end up in the regulations? But you want some reference to accessibility in the formation of the Financial Consumer Agency—

Ms. Sharlyn Ayotte: Absolutely.

Ms. Carolyn Bennett: And there was a reference to the Canadian Standards Association in your brief. Is that to do with mainly banking machines that you would...

Mr. Leonard Fowler: The specific reference was around banking machines, yes.

Ms. Carolyn Bennett: Do you think that—

Mr. Leonard Fowler: Some day they should establish them.

Ms. Carolyn Bennett: Because when we had the Interac people before us, obviously there are all the new generic ones and there are different ways of going about this and some of them are small-business people who run those. You eventually would like all banking machines to be mandated to have audio capacity.

Mr. Leonard Fowler: To be accessible.

Ms. Carolyn Bennett: To be accessible in whatever way.

Ms. Sharlyn Ayotte: If it's built into the design of the systems. Part of the problem we run into is we keep thinking we have to fix the people so that we can use the systems, and what we need to do is actually look at how we develop the criteria for developing technologies so that accessibility becomes inherent in the outcome of the technology or product so it doesn't become a hard issue.

• 1645

When I went through the information on the establishment of the act, I found reference to accessibility. However, it's seen from the perspective of accessibility to electronic networks. I think this just needs to be broadened to reflect the very broad diversity in the requirements of Canadians as to the establishment of criteria in regulations.

Ms. Carolyn Bennett: Maybe we can deal with... If there were a specific change that we could make, maybe we could even have a little look with with the disability committee.

Ms. Sharlyn Ayotte: Yes. Thank you.

The Chair: Thank you, Dr. Bennett.

Mrs. Barnes.

Mrs. Sue Barnes (London West, Lib.): Thank you, Mr. Chair.

I offer my apologies to the witnesses and my colleagues for my lateness at the meeting today. I'm glad you all gave us some written reports, and I quickly got caught up.

Two things impressed me when I read them through. Turning first of all to your report, Ms. Swift, I'd say the ongoing work the federation does is excellent, and there are many challenges that can be met simultaneously with what we're trying to accomplish with this bill. In fact, even after this bill becomes law—as I hope it will—I think you will have some ongoing concerns, and there will always be need for improvement.

Mr. Elliott, what struck me... I think you've taken a very lonely stance in your recommendation three, where you recommend that the parts of Bill C-8 dealing with amalgamations of banks should be amended to provide that no bank amalgamation will be approved by the Minister of Finance for three years following the date on which the bill comes into force.

This has been a very long work in progress, extending back to different Parliaments and going back in fact to studies by various individuals and organizations. If anything, what I'm hearing from most of the organizations and from others making representations before this committee—not only in this session but in past sessions—is that we need this bill and that we need the procedures in place. We now have our guidelines.

I'd like to hear from you. I read your rationale. Your main concern is, as I understand it, decreased competition in the immediate future. I would like to know how you formulated the three-year time period, and then I would like some input from the other witnesses around the table, specifically Ms. Swift, as to whether or not they agree. I see by your comment in the press release you've kindly provided that you're not looking forward to major bank mergers. I think we have some major banks anxiously awaiting this bill, so I'd like to hear your reaction to recommendation three from Mr. Elliott.

Mr. Elliott, please go ahead. Thank you very much.

Mr. Robert Elliott: I'd be happy to. Thank you for the question.

I may feel lonely at this table, but I hope that after they hear the recommendation there will be others who fall in behind our suggestion.

Again, you're very correct in saying that our intent behind this recommendation is to make sure that competition remains at or increases over the levels at which it is today. We don't see decreased competition from this. Absolutely, one of the things we see coming from this once it's done is the big rush. Again, I'm referring to the Globe and Mail article, which describes another example of what seems likely to happen, that the banks are going to be rushing to put some mergers in place.

The three-year thing was, I'll admit, not one that was developed scientifically. I believe it's a cooling-off period we're looking for. I'm not sure what the best time period would be when it comes right down to it. I'm sure that if those who make the decision agree with the recommendation, they'll find a time period that's appropriate. It's simply to allow time for those other groups, either the credit unions or new banking entities that might enter the field of play, to get up and running. In the short term, we want to allow competition to remain at or be increased over its current levels.

Ms. Catherine Swift: Thank you.

We very much agree with the spirit of what is being recommended although we didn't put any kind of specific timeframe on it. Our major thrust is that hopefully we will see the bill geared toward creating a more competitive environment.

Clearly, if it's passed and we see pre-emptive mergers, that will prevent or inhibit competition from thriving in this sector. We don't know what the magic number is, but our recommendation would be to monitor the situation and to consider the competitive environment, which changes as we know through all manner of different... It changes through business cycles, it changes...

• 1650

We do see some offshore players in the market now. We don't see them as huge players in the small-business market by any stretch, but in three years will we have a different kind of environment from what we have today? We probably will, but to what extent we're not sure.

I guess this is why we didn't specify a particular number, but our sentiments are very much with our colleagues in the hardware industry. That is to say, to leap right into some kind of merger is against the spirit of this legislation. We do need some type of period, and I think we need to monitor what happens post-passage of the bill to see what will happen in the market and what new players will come in and take up the challenge in the small-business area and in other areas. But again, to put a number on that at this juncture is, I think, kind of difficult. But certainly, philosophically we're in agreement.

Mr. Brien Gray: If I may, I'll just add something.

The concern of the small-business sector in most parts of Canada outside the urban centres would be that you can't keep eliminating capacity in the system and then expect the small-business sector to continue performing its function in the economy in terms of massive job creation, community development, and economic diversification in those communities. These representatives are quite right. If you reduce the number of banks more and more, and we've got...

Before any of these merger talks took place, among our membership there were I think 13% that had only one choice of an institution in their community and up to 25% that had one other choice, that is, one or two choices. That was before all the closures we've seen in the past couple of years.

Our data also shows us that CIBC, which is a major bank in this country, has dropped by a third in its statistical share of our market in the past ten years. That hasn't happened by accident. That's been happening because they're withdrawing. You cannot take that kind of potential and that kind of capacity out of your financial services sector without having in place something that's going to replace it, at least in part.

What we've been saying is that we're not against mergers but that we sure would like to know that there's something that's out there—sustainable, viable, and operable—for these smaller firms and these consumers in the smaller communities. Otherwise, I can tell you that five or ten years down the road you're going to be hearing cries when you're back here—I hope you'll be here—facing the next round of testimony on changes to the financial institutions legislation. I can assure you of that.

Mrs. Sue Barnes: I'd like just one small supplemental, then.

Are you onside with the guidelines we've put in place for the mandatory hearings on potential mergers? The two houses of Parliament would, I would think, be the appropriate venue to raise the concerns you have.

Ms. Catherine Swift: Yes, we're very much onside. We agree of course with having as straightforward a process as possible. We're never advocates of overly intrusive and heavily regulatory regimes, but I think the financial services sector is a special case. It isn't like businesses selling hardware or bread. It is a highly regulated sector for good reason. Typically, it has also been—our large chartered banks in particular—very privileged over the years, and institutions have been granted monopoly status.

Somebody said earlier something about closing branches and about recommending to keep unprofitable branches open. I don't think there are any unprofitable branches. I think what they've done is close branches whose profitability did not meet the standards they had set. They were and still are closing very profitable branches, and some of the changes taking place in the financial services industry are of course...

All of us, as participants in the public policy process, have to be weighing these factors. They're obviously not exclusively Bill C-8 considerations, but some of them sure are.

What do we do in a financial world where different sectors look very profitable on a short-term basis? One notable sector right now is the whole area of wealth management. If we neglect key parts like our small business sector, what does that do in the long term? If financial decision-makers are intent on foreseeing what will happen in the next quarter... There are no easy answers to this one. We sure don't have the answer, but they're pretty serious considerations.

If we see big institutions like CIBC—as we have clearly seen—making strategic decisions to get out of the small-business lending market... That may well be in a short-term sense a good financial decision for that institution, but in the long term, what does that do to our country? These are big questions.

Mrs. Sue Barnes: Thank you very much.

The Chair: Thank you, Ms. Barnes.

[Translation]

Mrs. Picard.

Mrs. Pauline Picard (Drummond, BQ): It is my turn to thank all the witnesses for their very interesting presentations.

• 1655

I would like to ask just one question very briefly.

Mrs. Swift and Mr. Gray, from the Canadian Federation of Independent Business, I am a little surprised to see that you did not express a concern or turn your attention to the fact that for smaller banks which have not reached the $5 billion to this day—they are mainly concentrated in Quebec, for example the Banque Nationale and the Banque Laurentienne, presently hold the portfolio of the SMEs of the Quebec population—this Bill will allow a single individual to hold 65% of voting shares, so that this individual could take control of the money. It could be a foreigner, an American who, taking control over the bank, would move his headquarters to the States and from that time on, we would be under foreign control.

I am somewhat surprised that you did not talk about this. I am not sure I understood correctly but in your brief, you said there should be more flexibility. As far as I am concerned, I am not sure that more flexibility would protect Quebec consumers, especially those who are clients of the Banque Nationale and of the Banque Laurentienne, and I think that this would restrict competition enormously. So I wonder why you would agree to a difference between a smaller bank under $5 billion and major banks, where an individual is limited to 20% of voting shares.

Mr. Brien Gray: Thank you, Madam. It is true that we did not say anything about these things in the document. I must say that in Mr. Martin's letter, it was mentioned that he would take into account the Quebec Government concerns or Quebeckers' concerns regarding any situation concerning the Banque Nationale. So I am going to take Mr. Martin's word, when he says that he will protect Quebeckers' interests as well as those of people who deal with the Banque Nationale or any other small bank in Quebec, such as the Banque Laurentienne.

There is more flexibility for any bank, so that it can expand, make arrangements and be in a position to compete with other major chartered banks. If such restrictions had existed, we may not have known the Caisse populaire Desjardins, in Quebec, such as we know it today. It is a first-class financial institution which serves Quebec very well.

I do not necessarily see a merger of the Banque Nationale, in Quebec, since the process is in place which allows the public to have their say. I think that Mr. André Bérard himself welcomes proposals from other partners. It is not necessarily a controlling position but rather a partnership position. Partnerships aiming at promoting an institution's interests are a strong tradition in Quebec. It does not necessarily mean that these partnerships would only try to attract foreign investors.

[English]

The Chair: Mr. Brison. Maybe I'll go to Mr. Pillitteri.

It's nice to see a member of Parliament give up his seat.

Mr. Scott Brison (Kings—Hants, PC): I won't be doing that again, for sure.

Some hon. members: Oh, oh.

Mr. Scott Brison: Thank you, Mr. Chairman, and thank you to all the presenters today. Your interventions were important and valuable to us.

• 1700

One point I want to make—and I'd like to get some feedback on this—is that foreign competition is playing an increasing role in Canada in the area of banking. It's been referred to, I believe, by at least one of you in terms of the degree of cherry-picking going on, whether it's a Wells Fargo focusing on small business lending and getting pretty good results, or MBNA on the credit card business, or ING. There's quite a bit going on. They're picking the most lucrative parts of the business.

This legislation will provide a lot more flexibility in creating organic or domestic competition, whether it's with the credit unions or more foreign competition in Canada. At the same time, it increases the level of regulation on our Canadian banks and loosens the ownership rules. I have some concern that we might be exposing our Canadian banks to a lot of competitive forces, some of which are occurring through the domestic channels, some of which are foreign, increasing the levels of regulation. So we're handcuffing them in the face of that, and putting at risk the equity of seven million Canadians who own bank shares.

Is there a way we can juxtapose the interest of those bank shareholders, i.e., seven million Canadians—many of your members, in fact, with the CFIB, and I suspect the hardware owners as well—with rational public policy? It doesn't need to be a zero-sum game.

I used to be in small business myself. While it's frustrating sometimes dealing with a bank whose head office happens to be Toronto, I would think it is even more frustrating dealing with one whose head office happened to be in Chicago or Zurich or Boston or New York. So I'm concerned that we may be planting the seeds for a foreign-owned Canadian banking system, if we're not very careful in responding to perceptions, as opposed to the realities, of the current marketplace.

So I would like to get your feedback on that.

Ms. Catherine Swift: I have a couple of comments on that.

You mentioned Wells Fargo. I think we can mention a number of their players, ING, perhaps more on the consumer side than business, and there are others out there. Interestingly enough, I think you'll find these players are offering product lines that were not offered in Canada before their entry. On their entry, the Canadian banks have either duplicated services or, in some cases, actually allied themselves with some of these. Some of the Canadian chartered banks have allied themselves with Wells Fargo; that segment they're not willing to serve they will pass on to Wells Fargo.

So frankly, the Canadian institution... This is a concern, no question. Our members have a love-hate relationship with their banks—that's probably the best way to characterize it.

Mr. Scott Brison: And their politicians.

Ms. Catherine Swift: Politicians? Well, I wouldn't go that far.

Some hon. members: Oh, oh.

Ms. Catherine Swift: We won't get personal here.

They realize the importance of them. They would prefer to deal with a Canadian institution, for sure. So this is an important issue, no doubt about it.

To date, in any event, we have seen this kind of competition only spur our domestic institutions into doing a better job serving segments they weren't serving before, or in some cases, into allying themselves, maybe being more creative, sometimes learning how to do a certain type of financing they didn't have the in-house ability to do before.

There really shouldn't be any excuses, because our Canadian banks have huge advantages in Canada. If they can't compete with some of these guys who, as you say, have their head offices goodness knows where on the planet, shame on them, because they have a huge domestic advantage. They are unassailable on so many fronts because of their entrenched position, branch network, knowledge of the Canadian market, and so on.

Mr. Scott Brison: Assuming that branch networks in bricks and mortar are relevant—

Ms. Catherine Swift: Not exclusively bricks and mortar, though; even electronic networks and electronic—

Mr. Scott Brison: —because some of the cost base of having operations and call centres elsewhere and the rest... Some of the economies of scale and the technological advances and advantages may make some of those legacy advantages, if you will, less relevant.

• 1705

If you were to compare lending in Canada to small businesses, say ten years ago to today... I think what you were saying is that there has been a bit of an improvement over the past ten years in the Canadian, in small business—

Ms. Catherine Swift: It's been a mixed bag.

Mr. Brien Gray: Because of a lot of the work on the part of small business itself, organizations like ourselves and others that advocate for improvements, parliamentarians, both at the federal and provincial levels, task forces, there's been a much greater sensitivity and sensibilisation, as they say in French, concerning these kinds of issues and the importance of keeping track of and understanding them. I remember a time when there wasn't any public sharing of data, and I remember when the only data you could get were Bank of Canada statistics of loans, only a small business loan was anything under $200,000, and you wouldn't care whether it happened to be a loan to a subsidiary of GM.

So I think the debate has gone a long way. As for the provision of debt capital—we talked earlier about equity capital, which is critically important for a small business—because of the greater sensibility about these issues, I think things have improved.

In the early part of the recession, it's clear from our data that the large charter banks in this country overreacted big time. Their senior management would, post-recession, admit that. I think that's why, legitimately, the industry committee is challenging bankers right now to say what they are going to do this time if we're going into a downturn. That's a legitimate question.

The bankers, however, are saying right now, “Our loan losses on small businesses are minimal, less than 1%, we don't see any tightening of credit coming along—that's good news.” Ten years ago the heads of most major banks wouldn't have been concerned even to talk about provision of debt capital to small business in this environment. That's huge progress.

Coming out of the recession, our observation was that lending levels came up and only about a year ago reached pre-recession levels. If you compare the similar time in the business cycle, late eighties to late nineties, they only came close to that toward the end of five years out of the recession—that's far too much of a lag time. So yes, it's improved, but it certainly should have improved, and we would look upon the financial institutions en masse to stay there and be there as friends in foul weather as well as fair.

Mr. Scott Brison: But in fairness, you did say only 10% of your members were turned down when they applied, and in fact there was a reduction in the number of them actually seeking lending—banks can't force people to take out loans.

Mr. Brien Gray: Absolutely, and we said in our public statement that the rejection rates are down. You've got to look at rejection rates in other ways as well, and that's what's in the report.

Mr. Scott Brison: Can I have a last question, Mr. Chair?

The Chair: Sorry, we have to move on.

Mr. Pillitteri, Mr. Cullen, and Mr. Epp are the three final questioners.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

I recall seeing most of you making presentations here a few years ago, year after year. Specifically, the last couple of years we were talking about bank mergers and the problems we would have encountered if we had allowed the bank mergers—of course, the same legislation was not in place, and therefore they should have never been allowed, and were not allowed—and the possibility that more competition should be brought in.

This said, and this legislation being put forward and having more competition, there's always the thought that in the United States you have so many mergers. Look what's going to happen to us—we're following suit, and so there will be no competition. But having often visited the States and travelled back and forth, I see just as many banks opening up as I see closings. So the competition is real. Individuals who might want to get into a certain specific market leave a void for another individual who's ready, an entrepreneur willing to go into opening up banks. The same thing happened in my industry, where 15 years ago it was more regulated. There were only about eight wineries, and actually it was a captive market. But even though the competition becomes more competitive, I see over a hundred today in Ontario alone.

• 1710

So why the fear? They say the entrepreneur will not provide the competition in making moneys available for the business people to have the entrepreneurial spirit in opening up banks. Do you think by having the five or seven large institutions, no more would come in place if they happen to have a merger, say, in three years?

I would say that once this legislation is in place, making it easier for someone to open up a bank, they will be waiting in line to have more competition, and more people would get in the business.

Mr. Robert Elliot: I agree, and I think we've said in our brief that ultimately this bill is good for competition in the financial services industry here in Canada.

The three-year period is strictly—as I've referred to it before, but I'm not sure that's the right term for it—a cooling-off period, a timeframe that would see the competition not lessened before the rest of the people who are thinking of it and will decide to get into the industry here in Canada have that opportunity to set themselves up in that regard.

Mr. Gary Pillitteri: The reason I ask that question is because our banking institutions had become so cold that, in a sense, there really was no relationship between the entrepreneur and the bank. It had become almost an institution you could not touch, whereas today I see in the United States the competition is so much greater that I could walk into a bank, one of these smaller banks opening up, and have that personal contact when I've not had it before here. That's maybe because they're ready to have that competition. We strangle it in order not to have competition and give them all this free run in Canada, and that has really stopped competition from coming in. So if I see what's happening south of the border or in other nations, this would be, by all means, far greater than anything to try to protect our own large institutions.

Mr. Robert Elliot: Again, I agree that this is good.

I'm not familiar with the regulations in the U.S. as to how they work there, but I do think perhaps the sheer numbers involved, using the 10% rule as our thought process with that, the fact that there are that many more people in the U.S. who are able to go out and open up the businesses and have that opportunity, may have an impact here. I think the fact that we have so many fewer people has a part to play in it.

The Chair: Thank you.

Miss Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): Thank you, Mr. Chair. I know the clock is marching on, so I'll be very brief.

When we look at the last round of bank mergers, which a number of us have raised today, there was a great deal of concern about the impact of reduced competition on small businesses. There was even talk of a beefed-up role for the Business Development Bank when it came to allowing foreign competition, and so on. One of the reasons for this concern obviously was that the market power of big banks already allows them to place tremendously onerous covenants on loans on small businesses. These covenants often cause companies to have little flexibility to change their business direction, and give the banks veto powers over many of their decisions.

Do you see this control of small businesses through bank covenants specifically as an increasing problem, and what remedies do you see in a free market?

Ms. Catherine Swift: I don't think it's an increasing problem, but I think it has always been a problem and continues to be a problem.

We were addressing earlier how lending has changed through the last decade or so, and there have certainly been improvements and sensitization, and so on. But one of the things that has been a deterioration is the whole... I don't know what you'd call it, maybe a mechanization of the lending process, this dependence that we alluded to a little bit but didn't get into in great detail, the whole reliance on credit scoring, when you remove decision-makers from those branches. And now we know that branch managers as they used to be, decision-makers in their communities, are no more.

• 1715

You talk about the U.S. system. It has had a long tradition of community banks. We don't have that in Canada; we don't have that history, although we very much would like to because we see the so-called community players, credit unions for example, having higher satisfaction levels among our members, and we know that's why. They are more in tune with that community.

So although it's not covenants per se, when you see more reliance on some of these mechanized, credit-scoring means of granting credit, in an instance where someone was previously known to their branch manager who knew they were a good credit risk although they might have fallen off on some kind of financial ratio by 0.2 or something, they will be spit out of the credit-scoring black box and put in the no pile, whereas previously they would have been in the yes pile.

So I don't know that it's the covenants you're talking about per se but the increased mechanization of the process that we find very worrisome. We know why they've done it: it's cheaper; you can get rid of humans; you can get rid of that subjective element that we believe is very important. In fact, these days it's kind of funny that we hear a lot of the institutions advertising relationship banking, but how do you have a relationship with a computer, with a credit-scoring model? We think it's probably dysfunctional relationship banking, unfortunately, in many instances. So I think this kind of trend is causing problems, and it's a growing problem, whereas the whole issue of the covenants and what not that are put on lending is still an issue but isn't getting any worse.

Ms. Albina Guarnieri: So you don't feel that the company should be subjected to simply making their payments back, that it should be limited? Covenants these days are expanded to so many other areas, right?

Ms. Catherine Swift: Yes.

Ms. Albina Guarnieri: So you're not recommending any specific restrictions when it comes to covenants for small businesses? You don't see a need?

Ms. Catherine Swift: We ultimately believe if there are other players that are competing out there in the marketplace you will accomplish these objectives, rather than having heavy-duty regulatory restrictions. We feel that is the ultimate solution.

When we hear about community reinvestment provisions or requiring banks to lend to a certain constituency, a small business or whatever, those things will be accomplished without accomplishing the overall objective of really expanding. The good credit risks or the established customers that the person knows will just get more money on the books or whatever. So I guess this is why we don't feel that's the best way to go about achieving the objectives.

Ms. Albina Guarnieri: Thank you.

The Chair: Thank you very much, Ms. Guarnieri.

Mr. Cullen, you have six minutes.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman, for that generosity.

Thank you, presenters. Sorry I missed the early part of the meeting.

I want to ask a question of Ms. Swift and Mr. Gray of the CFIB. On small-business taxation, the last time I checked we had the lowest small-business tax rate in the G-7.

Of course, there are different types of taxes. There are payroll taxes—and we're not doing too bad there either—and commodity-type taxes. There are personal income taxes, and we know we're trying to deal with that and did so in a pretty big way in Budget 2000 and the update. Maybe we can come back to that if we have time, but I'd like to go to the CICA.

In regard to Bill S-11, on the Canada Business Corporations Act, I think you can understand that the government wouldn't want to get too far ahead of that in terms of this legislation. One of my first private members' bills was directors' liability, the defence of due diligence, which finally has made it into the CBCA. Maybe I should know, but could you tell us where this bill is in the process? I think there was a concern of getting too far ahead of that before it was passed by Parliament.

Mr. Graeme Rutledge: Certainly. On that particular point, I understand Bill S-11 has had second reading.

Mr. Roy Cullen: In the Senate.

Mr. Graeme Rutledge: With regard to the recommendation we made in our brief, basically we clearly understand that you cannot get out in front of the amendments to the Canada Business Corporations Act. While it would be nice to have proportionate liability included in Bill C-8, we fully recognize that it's not practical within the timetable and priority setting. As was said very early on in today's session, there's a real need for the financial reform legislation to move forward, and we fully recognize that. We understand, however, that the government would, whenever it is practical in the near future, bring the proportionate liability legislation into financial institution legislation.

• 1720

Mr. Roy Cullen: Okay. Thank you. And you probably mentioned that, and I wasn't here, and I apologize.

I want to come to the GAAP and the GAAS. The GAAP argument I find more persuasive than the GAAS, if I can use that. Now, with regard to the GAAP, you cite the example where OSFI instructed certain banks to increase the loan provisions and write them off against retained earnings, bypassing the income statement. Now, it seems to me, for prudential reasons, they obviously felt they had a reason to increase the loan provisions, but wouldn't that be sort of an accommodating gesture to say, “We're not going to force you to take the hit on your income statement. Your practice is you follow GAAP. We're going to take it straight to retained earnings”? Why would that be a problem?

Mr. Graeme Rutledge: I'm going to ask Tricia O'Malley to continue with the discussion I started.

Ms. Tricia O'Malley: I guess the biggest concern that we have is that this particular override was used in three situations: two banks in one year and one in another. And it's quite clear from the reaction of the financial press and other investors that they found it very difficult to try to make investment decisions or comparisons of the performance of some banks that increased their loan-loss provisions, followed GAAP, and put it through income, and these other ones that took this other route at the direction of the Superintendent. And it seems odd, to us anyway, that a provision that our collective institutional memory says was by and large put into the legislation in the first place to deal with some concern about a systemic risk—where, for some reason, following GAAP was not going to be prudential for the entire financial institution system—is now being used on a selective basis for particular items as essentially a carrot for good behaviour, if I can put it that way. If you increase your loan-loss provisions the way we want you to, we'll let you put it to retained earnings, for example, instead of having to take a charge to your income statement.

So it's a question as to the appropriateness of why it's necessary for some institutions and not for others.

Mr. Roy Cullen: Okay. Thank you. That helps.

By the way, I think you're doing some good work on this pooling versus purchase. It's been a constraint for many of the Canadian companies, Canadian banks in particular, and, as I understand it, we're moving now more to the U.S., the ICPAC, and the SEC method, moving more to more of a goodwill-type purchase method. I guess what the financial institutions were looking for was a level playing field, and it sounds like that's happening. Could you just give us a brief update on where we're at with that?

Ms. Tricia O'Malley: Absolutely. That's my board's job. We're working jointly with our counterparts, the standard-setters in the U.S., and we hope to have a common North American standard by the end of June.

Mr. Roy Cullen: Okay.

Ms. Tricia O'Malley: And, basically, that does level the playing field. The U.S. standard will move, essentially, to where we've been for many years. And we're moving in a whole new direction in dealing with the goodwill problem, but the most important message is that, by June 30 this year, if everything goes the way we're hoping it will, we will have the same accounting standard for business combinations on both sides of the border.

Mr. Roy Cullen: Good. Thank you. I don't know if, Mr. Rutledge...

The Chair: Mr. Rutledge.

Mr. Graeme Rutledge: Mr. Rutledge is going to add a remark here, coming back to the question that you raised about the three banks and the loan-loss provisions. I think that's very appropriate when we're talking about levelling the playing field because what really happened as a result of those three banks was that there were many small investors who just did not understand what was the income, then, of these particular institutions that availed themselves of this particular accommodation, as you put it, from the Superintendent.

The press at the time raised a lot of articles as to how does an investor look at this? And I think what we're really talking about is levelling that playing field when it comes to generally accepted accounting principles.

Mr. Roy Cullen: Thank you.

The Chair: Ms. Swift.

Mr. Catherine Swift: When we look at taxation issues, we look at total tax burden. And, granted, it's all levels of government that at various stages come into play. And certainly, at the federal level we have seen some positive changes relatively recently in the corporate tax regime for small firms as well as personal income tax. Because, as I'm sure you all know, personal income tax is very important to small firms; in fact, that was our number one priority for a tax reduction target last year. And payroll tax is still a problem, CPP. In fact, payroll taxes went up this year in Canada federally, and there are provincial instances of it as well.

• 1725

Property tax—again, it's not your bailiwick per se, but all governments have some influence on what happens at other levels of government, and our property tax bill in Canada is actually the highest in the world. So in that area we are particularly beleaguered, and small firms do tend to pay a fair chunk of that. We are very active at the municipal level, too, to try to make some gains on that front.

I guess, obviously, our challenges are notably south of the border. Comparing ourselves to Switzerland or something is pleasant but irrelevant in the big picture, because of course they don't really matter. It is the U.S. that matters, and, I guess, when we see the plans of the recently elected—slowly elected but recently elected—U.S. government, on the tax front... Capital gains—again, we've seen improvements in Canada, but these things have just taken place over the last number of months.

So, no question, things are going in the right direction, but I think in the financing context it's always important to keep in mind the fact that we see, for example, incredibly attractive tax treatment of labour-sponsored venture capital funds. We've never figured that out. That's never been an advantage to our segment of the economy. Obviously, for things that are listed on the stock exchange, there are all kinds of tax advantages for that.

One of the things that we have tried to promote over the years, and will continue to, is why can't we put in place some properly legislated and regulated measures that would also help the non-listed segment of the marketplace, which is our sector, to encourage equity investment without having to be on a stock exchange in a labour-sponsored fund, or one of those formats?

So things are still going in the right direction, but I don't think we're finished yet in terms of our revamping of our taxation system in Canada.

The Chair: Thank you. We're finished, actually.

Ms. Catherine Swift: No. That's good to hear.

The Chair: Mr. Peschisolido.

Mr. Joe Peschisolido: I just want to follow up on a question that my colleague, Mr. Epp, asked earlier on to the CICA, and it's about the override provisions.

You mentioned that's an extraordinary measure. Whenever you have an override extraordinary measure, usually the positive side has to outweigh what will obviously be some certain negative elements to it. That's why it's an extraordinary event. Could you see some examples where a bank would receive this override approval and that it would be a net benefit overall?

Ms. Tricia O'Malley: I guess the discussion that I mentioned before in response to one of your colleagues is that when that provision was put into the legislation, it was envisioned originally for instances in which, for example, there was some provision in GAAP whose broad application to the financial-services industry was going to cause concerns about solvency or stability. The superintendent might say, gee, if we follow this kind of reporting, it's going to create the whole wrong impression about the industry as a whole and perhaps cause a run on the banks and bring the whole system down, so we want the override to ensure the soundness of the system.

In fact it has never been used for that. That, I guess, is our concern: that it's been used in a way that in fact makes it more difficult for investors and other security holders in financial institutions to understand what's really going on.

Also, to follow up on Ms. Swift's remark that what matters to our institutions by and large is what goes on south of the border—and the level playing field issue and business combinations are clear examples of that—basically that override can't be used now with respect to all the major banks that are listed in the U.S.

Mr. Joe Peschisolido: So the concern isn't that the override exists. You're concerned that there aren't clear criteria, that perhaps it could be abused and used in certain ways that would not deal with the intent of the override?

• 1730

Ms. Tricia O'Malley: That, and I guess our other concern is that we don't see any particular need for it—certainly at the holding company level. By statute, the financial institutions regulator has the ability to get whatever information it needs from those institutions to do its job of protecting the safety and soundness of the system. But investors in those holding companies have no ability to get information from the institutions, other than financial statements. They're essentially totally dependent on the general-purpose financial statements. Those statements may be different for regulated holding companies from the unregulated holding companies that hold financial institutions.

For example, until recently, IMASCO held Canada Trust. There would be no override for that holding company. There would be no override for Power Financial, which holds Great-West Life Insurance Company and Investors. But there would be an override for a regulated holding company. So if somebody is trying to make an investment decision between two financial services holding companies, that's trying to compare apples and oranges.

We think that override is absolutely not necessary at the holding company level.

Mr. Joe Peschisolido: Mr. Chairman, thank you.

The Chair: Mr. Epp.

Mr. Ken Epp: I'd like to follow up on one little idea I had.

To the business people, and I suppose also to the hardware sellers, you talked about accountability and about concern with protecting the consumer, the individual, the small-business person. But you didn't really express any great concern about the position of the ombudsman as provided for in Bill C-8.

Bill C-8 says there will be an ombudsman, but paid for by the banks. For me, that raises a bit of a problem. It seems to me that if the ombudsman is paid for by the banks, then the banks are really using that person as part of their defence line.

As members of Parliament, we hear some horror stories in our ridings of banks starting to lean on people. I think the banks have sometimes really abused their privileges by forcing people to sign releases in order to forgo foreclosure, and asking them to basically sign away any other rights—that type of thing. An ombudsman would be able to deal with that, but if the ombudsman is paid for by the banks, then that looks rather tainted.

Why didn't you bring that up, or is that really not a concern to you? Am I just imagining things?

Mr. Brien Gray: I'm glad you brought that up. The reason we didn't discuss it specifically within the ambit of this is that I think CFIB has been on record for a long time about the ombudsman. Perhaps it's an oversight with regard to your knowledge of our position, Mr. Epp.

I remember back in the mid-nineties when the whole idea of an ombudsman was first presented, when it sort of filtered out of the Department of Finance. In fact, ministers Martin and Manley asked me and Phil O'Brien, who were jointly chairing the small-business working committee at the time, “What do you think about having a government institution to service and protect small business and other consumers?”

The suggestion then was that would have a huge, monstrous apparatus to oversee all this, full of yet another legion of federal bureaucrats. The perception of our constituency has always been that we don't need a huge government apparatus in order to get performance in terms of providing these vital services. Our suggestion to the ministers at the time was that they give the industry itself the chance to prove that it could regulate itself and service its clientele with honesty, integrity, and fairness.

To be fair to Mr. Lauber and to the ombudsman service, I think he has done as good a job as he could have under the circumstances. I think the parameters for the ombudsman's office are still too restrictive. Most of the complaints we get in our organization have to do with the arbitrariness of credit decisions and the like.

• 1735

Although I don't think anybody should tell a financial institution when and when not to make credit decisions, I think there has to be a lot more ability for some suasion, some effort to bring seemingly arbitrary decisions back into line. In that respect, I would really welcome any efforts on Mr. Lauber's behalf. As I understand, he's now working with some of the provinces—we've got a mixed bag out there, because you cannot legislate this apparatus. We've got provincial jurisdiction and federal jurisdiction. So you can try to do it at the federal level, through very invasive legislation, but then you'll have trust companies and credit unions not under the auspices.

My preference would be for a board of directors not controlled by the banks, or by the insurance companies for that matter. There should be industry representation, in order for the industry to be responsive, but board membership ought to be dominated by people from the consumer sector.

The Chair: Further questions, Mr. Epp?

Mr. Ken Epp: Actually, Mr. Elliott...

Mr. Robert Elliott: Back to the organization in your question, and the issue of protection for consumers and particularly small businesses, we did mention in our submission that we supported setting up that position. We're pleased to see that this committee has also looked at it positively.

We think the provisions should be strengthened. We think the bill shouldn't be passed until the office is functioning, and able to provide that protection right from day one. I think that's going to be extremely important to the consumer.

Mr. Ken Epp: And you're not concerned about the fact that they're financed by the institutions themselves?

Mr. Robert Elliott: It's not an issue we have a major concern with at this stage of the game.

Mr. Ken Epp: Okay. Thank you.

The Chair: Thank you, Mr. Epp. Any further questions?

Seeing no further questions, on behalf of the committee I'd like to thank you very much. Some of you have provided us with some amendments, but basically the message I get from this panel is that the implementation and the follow-up on this bill is extremely important. We'll certainly keep that in mind. Thank you again.

The meeting is adjourned.