FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, October 16, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone.

As you know, in accordance with its mandate under Standing Order 108(2), the committee resumes study of the report of the task force on the future of the Canadian financial services sector.

This morning we have the pleasure to have with us representatives from the Canadian Association of Retired Persons, Newcourt Credit Group, and Canadian Fraternal Association. Later on in the morning we will have the Committee on Monetary and Economic Reform, Credit Union Central of Ontario, Davis Webb Schulze & Moon, International Molecular Reactor Power Co. Inc., and Trust Companies Association of Canada.

Welcome, everyone. I think you all know how this committee operates. You'll have approximately five to seven minutes to make your presentation; thereafter we will engage in a question and answer session.

We would like to take this opportunity to welcome, from the Canadian Association of Retired Persons, Mr. Bill Gleberzon, assistant executive director. Welcome back.

Mr. Bill Gleberzon (Assistant Executive Director, Canadian Association of Retired Persons): Thank you. It's good to be back. I appreciate you inviting us back this morning, this time to speak about the so-called MacKay report.

I want to begin by noting that our president, Lillian Morgenthau, expresses her apologies for not being able to attend this morning.

I think yesterday I spoke about what CARP is all about, but I see there are a few people on the committee who weren't here yesterday. So if you don't mind, I'll briefly let them know that CARP is the largest national association of mature Canadians, with 370,000 members in every province and territory. Our members are 50 years and older; the average age is 62. We're a non-profit organization that receives no funding from any level of government, to ensure our independence. We are non-partisan. Our mandate is to express the concerns of mature Canadians, and our mission is to provide practical recommendations for the concerns we raise, rather than just carping about them.

The brief that has been presented to you raises a number of important issues, some of those in reaction to the issues contained in the MacKay report, and others that we have added. We've provided an executive summary at the beginning of the report to make it that much easier for you to get through it.

What I'd like to do in the time allotted is to touch briefly on some of the 23 items we've raised in the executive summary of recommendations. I'd like to begin by complimenting the authors of the MacKay report for the depth, clarity, and comprehensiveness of the report, in particular their development of an integrated vision of the future for Canada's financial services sector. We have questions about that vision. Nevertheless, we applaud the context it provides to understand the rationale and direction in the report. It's very helpful.

I'll be pleased to elaborate on our concerns with the details of the integrated vision of the future during our discussions later.

Other than noting very briefly at this point that we don't think the recommendations in the report to increase competition in the financial services sector will work and therefore we oppose the current 10% ownership rule, we oppose reducing the amounts of capitalization to establish new financial institutions in Canada, and we oppose introducing a 10-year tax holiday for them, all of which are recommended in the report.

Although the MacKay committee doesn't deal with the immediate issue of the proposed bank mergers, we feel you cannot discuss the report without reference to those proposed mergers.

In that regard, CARP endorses Mr. Martin's suggestion that separate, open, public hearings should be held on the proposed bank mergers, and that the public hearings should include consumer organizations like CARP, because consumers are going to be very directly impacted by those bank mergers.

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We also believe that the framework for merger review delineated in the MacKay report should be followed as a guideline for the approval process for the currently proposed mergers. I think there are very good suggestions in that framework.

CARP generally supports the recommendations in the report to empower consumers. In our brief we have presented a number of recommendations to enhance and extend that empowerment, such as increasing—although we know this runs counter to what's going on today—the number of tellers in branches as a safeguard against frauds and scams directed at seniors, and reviving the idea that was presented by Mr. Gallaway, that of a consumer advocacy board, which we think should be attached to the Office of the Superintendent of Financial Institutions. Among other things, it would provide consumers with comparative information on the service charges of financial institutions so they can do better comparative shopping. These are only two of the recommendations we make on this particular issue.

We are extremely concerned about the current wave, having nothing to do with proposed bank mergers, of branch closures, which have a negative impact on rural areas, small towns, and particularly the poorer sections of urban areas. We believe curtailing physical accessibility to financial institutions will make extending financial services to low-income and poor Canadians, as recommended in the report, that much more difficult—for example, by making it more expensive for them to get there because of transportation.

We recommend that liberalizing lending policies for small businesses should be legislated if necessary, since other efforts seem to have failed to achieve this goal, according to the report itself. We oppose allowing banks either to sell life insurance or to lease cars because we believe these developments will decrease competition, increase concentration, and widen the possibilities for coercive tied selling, which, we agree with the report, should be prevented, by legislation if necessary.

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We've recommended the creation of a national securities exchange commission—I know this idea is being discussed, and we think it's a very good idea—to strengthen the stock market and mutual fund sectors.

We also recommend that any and all remaining interprovincial barriers to investment, trade, and commerce should be removed as quickly as possible. Since CARP has the largest web site for mature Canadians in our country, we fully endorse the report's recommendations on the regulation of financial services provided on the Internet.

These are some of the recommendations in the report. I trust that I've given you a flavour of the kinds of issues, concerns, and recommendations in our brief, and I would welcome the opportunity to expand on them during the discussion period.

Thank you very much.

The Chairman: Thank you very much, Mr. Gleberzon.

We now move to Newcourt Credit Group, Mr. David Banks, chairman, and Mr. John Sadler. Welcome.

Mr. David Banks (Chairman, Newcourt Credit Group): Yes, thank you very much.

Ladies, gentlemen, and distinguished members, on behalf of Newcourt I'd like to thank you for inviting us to be able to present to you and allowing us to do that this morning.

First of all, I'd like to commend the people who prepared and wrote the report. We also agree it was clear, readable, and beautifully written. In addition, it's organic—there were few hard edges. So it could grow with this debate, and I think that's an excellent feature in the report. We liked it.

Sadly, in one sense it was eclipsed a bit by the mergers, which are on centre stage, and perhaps even more so by the financial crisis that has dominated the front pages of the business sections of newspapers.

We'd also like to commend the MacKay task force for looking outside the box in their review of financial services. Their recognition of the importance of niche institutions to ensure a dynamic and competitive choice for consumers will go a long way in shaping the debate as we go forward, and we commend that.

I also want to strongly support the task force's approach to regulation of financial institutions in recognizing—and I quote—“the regulatory environment should allow for different degrees and types of regulations”. As the report points out, asset-based lenders such as Newcourt Credit Group, because they do not take deposits from individuals, are not regulated institutions.

As we were contemplating our remarks for this committee, we thought it would be a useful exercise to look at the experience Newcourt has had to determine if there were any practical lessons that could be learned in encouraging the entry and growth of other alternative or niche players in Canada.

We're very proud that Newcourt is a homegrown alternative to the traditional institutions. It is a significant provider of financing to Canadian commercial clients of all sizes. We have 600,000 customers, and they're particularly small and medium-sized companies.

I think what is unique about Newcourt is the fact that we have taken that base and achieved international scale in a highly competitive and very rough global market. Today, Newcourt is the world's second largest asset finance company, with over $34 billion in assets that are under management or owned. And we have the capability to service global asset financing needs for some of North America's largest and most successful manufacturers, like Dell Computers and Lucent Technologies, and we've extended that even to Japanese multinationals like Yamaha, and done it very competitively.

The establishment and growth of Newcourt was, I believe, a function of two factors. First, there was an opportunity to fill a gap in the commercial asset finance market that was not well served by the traditional commercial banks. Newcourt does much of its financing through relationships with equipment manufacturers and distributors. We provide what we call sales aid finance or sales financing for the purchase of equipment, which includes assessing credit, providing capital, and managing loans. The manufacturers in essence are our branch network. We currently have over 300 relationships with manufacturers of equipment ranging from trucks, computers, printing presses, airplanes, and trains, and with developers of infrastructure like highways and power plants.

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The second reason behind Newcourt's existence, and perhaps the most important one in this debate, is the life insurance companies that were seeking at that time to diversify their portfolios. This was a particularly acute time for them, with the collapse of the commercial real estate market in the 1980s and the wish to diversify away from real estate assets.

Commercial asset-backed loans matched their investment requirements vis-à-vis term, credit quality, and yield. Newcourt provided a very efficient means for the whole-life industry to invest in these assets without having to build up the skills and infrastructure to provide direct lending. You could say that Newcourt began as a conduit through which the whole-life industry gained access to the commercial and corporate lending market.

Based on Newcourt's experience, we would argue that an important condition of the growth of new niche players in Canada is to ensure that there exists a competitive market, with alternative non-bank sources of funds for new entrants to access in order to finance their lending activities. We think this is fairly critical.

As a world-leading financial institution, today Newcourt has access to a variety of funding sources, both domestic and international, including financing on our own balance sheet. But I would argue that had there not been a strong independent whole-life industry in Canada at the time Newcourt was developing, we might not exist today.

What do the implications of the MacKay report mean for the process we're currently engaged in? On the MacKay task force recommendations, of course, the big question on everybody's minds is the bank mergers. First of all, we regard the Canadian banking system as being excellent. We have a high regard for Canada's commercial banks. Let me also say outright that we support the bank mergers. We support them because we believe in free markets and we believe that size is important in today's global financial markets. In many respects we wish it weren't so, but it is.

Newcourt has achieved its own scale through a number of strategic acquisitions, culminating with the acquisition of AT&T Capital Canada Inc. earlier this year. The economies that come from that merger and our ability to compete globally can be used to demonstrate the importance of size in today's markets. The costs of IT, operations, and processing are simply too great, and size allows you to distribute that over a wider base.

From another perspective, I believe the mergers will finally compel the Canadian banks to begin to look outside the Canadian domestic market for their growth. They'll be better able to respond to global competition and ironically even able to better serve their Canadian customers.

A second issue I want to address is the concentration in financial services. This is an issue I believe the MacKay report perhaps did not give the attention it deserves, particularly in recognizing the effect their recommendations may have on increasing concentration. Most of the debate on concentration to date has focused on banking assets. We would argue that the area of financial services is really more broad than just banking. It's really about access to funds for individuals, companies, and financial institutions.

As we move forward, we believe the minister and the public policy makers should be concerned if the commercial banks, rather than expanding globally to meet their global competitors head on, propose to continue their expansion domestically by, for example, taking over control of the top five life insurance companies. That would be a concern.

Please don't misinterpret my statements. I'm not saying government should not permit banks to distribute insurance products through their branches or disallow bank ownership of insurance companies. We're just concerned about the effect of too much concentration.

Our concern is in the potential for greater concentration and the elimination thereby of competition at the level of accessing funds, which would limit the ability of new competitors to enter the market and the creation of second-tier institutions. If at the end of the day the only place a non-bank company can go to fund itself for its lending activities is to the Canadian banks, we will constrain the growth of new alternative competition to the banks.

We therefore recommend that in consideration of future mergers and the formation of financial conglomerates there be included a test of concentration at a variety of levels, including access to funds for potential new entrants and niche financial institutions. This is particularly true and poignant if some of the Canadian banks were to be acquired by foreign banking interests.

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An issue similar to concentration is funds cost. Because of the access to retail deposits, banks have a cost advantage. In our business money is our raw material, and banks have the ability to provide services more cheaply because of their low funds cost because of their access to deposits. This is a competitive advantage, which should be also considered in terms of reviewing concentration and the ability to concentrate financial assets.

Newcourt strongly agrees with the MacKay task force's approach to regulation and its observation that niche players and the tier-two institutions are a very important part of competition and provide a real choice to consumers in the Canadian financial services industry. We believe the task force's vision for the future of Canada's financial services is a good reflection of where the industry is and should be going. That's an excellent platform for debate.

In summary, we do not wish to be regulated and don't feel it would be appropriate if we were. Two, we support the bank mergers. Three, we have some concerns about concentration and the banks' access to cheaper funds. Finally, we would all lament any impairment or loss of Canada's whole-life industry.

I thank you very much.

The Chairman: Thank you very much, Mr. Banks.

Now we'll move to the Canadian Fraternal Association, Mr. Ralf Hensel and Mr. Richard May. Welcome.

Mr. Richard May (Vice-President, Canadian Fraternal Association): Thank you very much. Good morning. We appreciate the opportunity to appear before the House of Commons finance committee in response to the report of the task force on the future of the Canadian financial services sector.

My name is Richard May. I am the vice-president of the Canadian Fraternal Association for this our 108th year. This is a voluntary position. I am employed by the Lutheran Life Insurance Society of Canada as vice-president and actuary.

With me this morning is Ralf Hensel. Ralf serves as chairman of the Canadian Fraternal Association's legislative committee and is employed as senior counsel for the Independent Order of Foresters.

The Canadian Fraternal Association represents 20 of the largest Canadian and foreign fraternal benefit societies operating in Canada. The member societies of the CFA protect thousands of Canadian families, with more than $8.5 billion of life insurance, and administer $1.5 billion of assets in Canada and $10 billion worldwide. A list of our members and basic data is attached to our written submission.

Today we're prepared to give you our preliminary reactions to the task force report and to respond to your queries. We are in the process of preparing a formal brief on our findings, which we anticipate distributing by approximately mid-November.

Our initial reaction to the task force report is to recognize what a fine piece of work it is. For the first time it provides Canadians with a comprehensive vision for the future of the financial services sector. Many of the issues identified in the report have been under fierce debate within the financial services industry for some time.

The task force report and its focus upon meeting the needs of the Canadian people has presented legislators and regulators with a current and concise approach to resolving these important issues. With this excellent road map in hand, we believe there will never be a better opportunity to take decisive and visionary action. Quoting from the report,

The changes are inexorable and we cannot ignore them or pretend they do not exist. For financial institutions, their customers and public policy, reliance on the status quo is no option.

The task force introduced the concept of community accountability. However, it is worth noting that fraternal benefit societies are owned by and operated for the benefit of their members. Each fraternal's mission is to address the financial and fraternal needs of the particular community it serves. Indeed it seems the entire concept of community accountability endorses the basic and historic principles of fraternal benefit societies.

Membership in a fraternal society delivers more than financial services alone. Members also join for the social, cultural and community benefits that our societies offer. The lodges, camps, branches and courts of our societies bring members together to carry out good works for their communities and share in fellowship. Conducting these activities requires that members be contacted and encouraged to participate. Accordingly, some sharing and cross-purpose application of basic personal data is necessary to effectively operate and manage these community-beneficial programs.

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We strongly support the protection of privacy of individuals' confidential information, and the prevention of coercive tied selling. However, the crafting of legislation to deal with these issues must also be sensitive to legitimate applications that are in the best interest of individuals and Canadians at large. We believe these distinctions are generally recognized by legislators and regulators. However, it is important for us to highlight the difference. An oversight could inadvertently eliminate a legitimate and beneficial application of this information.

Additionally, we were heartened by the consistent support for a financial services environment that fosters and cultivates smaller financial institutions in Canada and promotes the development of successful niche players. Key among the observations of the task force is the recognition that a one-size-fits-all regulatory regime should be revised for smaller or niche institutions, commensurate with their size and the nature of their business activities, and not determined by requirements designed for large multi-service financial conglomerates.

It is perhaps inevitable that much of the attention created by the task force report will be garnered by those aspects that impact upon the largest financial institutions. We hope and trust that developments that address the needs of smaller member-based organizations will not be overlooked.

It is within this context that we were somewhat disappointed by the task force report. While fraternal benefit societies epitomize the characteristics the task force would like to see financial institutions adopt, the report failed to identify the role of fraternals in the financial sector and their potential contribution to the changing financial services landscape.

We make this point because we are unclear about the intentions of the task force respecting fraternal benefit societies. Since most CFA members societies are governed by the Insurance Companies Act, we presume the changes recommended for life insurance companies are also intended to apply equally to fraternal organizations.

We hope oversights such as this do not continue and the unique characteristics of membership in our fraternal benefit societies currently enjoyed by approximately 500,000 Canadians will be acknowledged as legislative changes are considered. We may be able to play a role working with legislators and regulators in formulating an environment that will help nurture the development of smaller niche-type players.

Federal and provincial governments have been hearing appeals from the financial services industry for a fairer tax regime. The task force supports the industry's longstanding contention that the taxes on capital are unwarranted and potentially damaging to the public interest. The accumulation of capital is an essential ingredient in preserving the safety of members' and policy holders' financial interests.

The imposition of the capital taxes penalizes those institutions whose operating principles call for higher levels of capital for the protection of their consumers. We endorse the task force recommendation to eliminate the special capital taxes, and look to legislators to take action in this area.

Mr. Chairman and honoured members of this committee, I would like to repeat that the Canadian Fraternal Association generally supports the report of the task force on the future of the Canadian financial services sector. The members of the task force have done a remarkable job in a very short time period.

Even from our preliminary review of their work, it is clear that the interests of Canadians will be well served by implementation of many of the report's 124 recommendations. We believe fraternal benefit societies have an important role to play in this context, and an important contribution to make in the development of any new legislation and regulation.

We are committed to helping develop a more competitive financial services sector for the benefit of all Canadians.

Thank you.

The Chairman: Thank you very much, Mr. May and Mr. Hensel.

We'll now move to the question and answer session. We will begin with Mr. Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): After reading the MacKay report, everyone argues that consumers and businesses, including small businesses, need continued access to credit, that everyone should be able to work under conditions of reasonable competition and that jobs threatened by the mergers ought not to be eliminated.

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There is considerable discussion about the four large banks that intend to merge. What suggestions do you have for the authors of the MacKay report and the federal government in connection with other financial stakeholders or financial institutions that do not want to get involved in the merger process? How cen we be fair to all of them?

[English]

The Chairman: Mr. Sadler.

Mr. John Sadler (Executive Vice-President, Corporate Affairs, Newcourt Credit Group): Thank you, Mr. Chairman.

Recognizing that mergers and acquisitions are a natural part of any commercial activity, the recommendation we would make that I think the minister could consider is that these matters be taken on a case-by-case basis rather than dealing with them as a precedent-setting initiative, that each one of these transactions needs to be judged on the basis of its individual merits rather than trying to establish a broad template that says this, as a class, is a good or a bad thing, a better solution. It's really to look at each transaction on a case-by-case basis.

The Chairman: Would anybody like to comment? No?

Go ahead.

[Translation]

Mr. Odina Desrochers: That's all, thank you. I'll yield the floor to Mr. Brison.

[English]

The Chairman: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman. And thank you for your presentations this morning.

I had a question for CARP. I believe you were opposed to new financial institutions or to reducing the barriers for the new banks. I'd appreciate some feedback from you on that, because one of the areas of the MacKay task force that I felt had significant potential was reducing the capital requirements to provide greater competition and more banks. And in fact I see that as a potential growth area for the financial services sector that would improve competition and services for consumers.

Mr. Bill Gleberzon: Our point is that the banking services in Canada have developed differently from how they have in say the United States. We've taken a much more stringent approach, especially to capital accumulation, and we're very concerned that if we lower that threshold we're going to invite potentially unsound institutions.

The real issue, as far as consumers are concerned, the type of people we represent, is around the deposit-taking institutions. That's where the difficulty is. I would assume the customers of Newcourt are not the individual small depositor, the bulk of consumers and people who belong to our association. Those are the kinds of people who would go to these new banks that are envisaged in the MacKay report, assuming that they're allowed to take deposits. Therefore, we're very concerned that any new banks, especially foreign banks, shouldn't be treated too kindly simply because most of them have deep pockets anyway. Therefore, why should we go out of our way to make it easier for them to come into Canada if they already have a very strong financial base outside of the country? But it's really lowering the threshold of that level that's insured, that individual depositors can feel very assured that the banks aren't going to fold.

I think it's in the report, or I read in one of the comments on it, that in Canada since 1923 there's been one bank that's failed. In the United States there have been 17,000.

Mr. Scott Brison: If the new bank had the same level of deposit insurance, say a $60,000 guarantee on their deposits, from your members' perspective they would be covered. What I'm concerned about is that the lack of access to capital has traditionally been an impediment to growth in the Canadian economy, particularly for the small and medium enterprise sector, and we're just trying to find ways whereby we would improve access to capital. And foreign banks and perhaps these new banks might be an opportunity.

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I'd appreciate any feedback from Newcourt or from the Canadian Fraternal Association. I'd like to get some feedback on the new bank provisions and how you people feel about them.

Mr. David Banks: We certainly agree that greater competition will serve smaller business. There's no question about that. I can also at the same time sympathize, because where we believe the regulatory focus should be is on deposit-taking institutions.

You have two kinds of pressures on a bank: one, to make sure that those deposits are well administered and that you look after consumers' interests; but also, on the other side of the balance sheet, to make sure that you have as much competition as possible. I think one of the new things that the Newcourt success has demonstrated is that non-bank financial institutions can get in between that market and provide a very competitive access to capital, because most of our customers really are small businesses with very little consumer exposure at all.

I don't know, John, if you'd like to add a comment to that.

Mr. John Sadler: No, except to simply restate that at the end of the day the issue turns on the fiduciary responsibility of the deposit-taking institution, and the challenge that you have with the small deposit-based institution is that it does not have the capital capacity to withstand adversity in the marketplace. Provided your regulatory structure can take care of that, then there's really nothing wrong with having a lot of smaller deposit-based institutions.

Someone commented on the propensity for financial institutions in the U.S. marketplace to fail. The fact is they currently have over 10,000 regulated financial institutions there, so it's a very diverse marketplace. Ours is somewhat more homogeneous.

Mr. Richard May: My reading of the task force report looking at bank mergers was basically if it makes sense from the independent review study, by all means, proceed and allow it to take place. But reading between the words in the document, I felt that there was an underlying presumption that maybe some institutions get bigger but let's make the whole environment larger as a whole, so that while the merged institution itself might be bigger than it was before, it might occupy a smaller share in total of the entire market. Hence I read so much in there about new financial institutions and strengthening smaller and niche-type organizations so that the big share might actually become a smaller share of the total market.

As I've reflected upon that since the report came out, it seems to me to be the vision, but I don't see how that's to be encouraged, that the smaller players can grow in influence. I'm looking for whether there might be support in that too.

Mr. Scott Brison: I guess the access to the payment system today means a lot more than it did a few years ago. The technology has driven that in a lot of ways. Access to an ATM network for a small branch today means that if there were a bank in Windsor, Nova Scotia, the Bank of Windsor, if I dealt with that bank I could be in Toronto or Frankfurt, or wherever, and effectively be serviced by that bank.

Some of the proposals we've heard from people have suggested that perhaps with these new banks we could increase the areas they can participate in. For instance, perhaps we would let the new banks participate in auto leasing and insurance brokering and hold back on the large banks, the schedule I banks, for a period of time, thus creating a niche that could be very profitable, and really create some incentives for them to do things like capital tax holidays and foreign access to payment systems. Do you have any ideas on other things we could do to make sure that in fact there's some take-up on this, that there are some new banks that start up? I really think Canadians would be well served by having some increased level of competition at the grassroots level.

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The Chairman: Mr. Gleberzon.

Mr. Bill Gleberzon: I wasn't going to respond directly to what you said, I was just going to add something. I don't think you have to go any further than the report itself: they point out that of the 44 foreign banks in Canada, only one, the Hongkong Bank, engages in deposit taking; the others have done that through choice because it's not where they see their market.

So the real question is if the larger banks merge and if their primary focus increasingly becomes international business, then who's going to fill the void at the grass roots? Therefore—I guess it couples with the question you've asked—how do you create inducements for foreign banks to move into those areas where voids have been created, and will they bother to move into rural areas and small towns? Is that where their interest lies? That means not only do you give them access to the payment system, but to deposit flow.

Mr. Scott Brison: Do you think the banks that are doing business in small-town Canada now aren't making money doing that?

Mr. Bill Gleberzon: I'm sure they are.

Mr. Scott Brison: But if they're able to make money, I think there's a market solution to this, in that they would continue to pursue those activities because there is money to be made there.

Mr. Bill Gleberzon: But we do know that more and more of them are closing up the branches in the small towns. So in a sense there's money to be made, but probably not for three or four different banks. That's really the issue.

Mr. John Sadler: Mr. Chairman, from Newcourt's perspective, if I understand the question correctly, it's abolut some of the suggestions we could make that would enable a greater supply of lending activity into the marketplace. If you think of the financial services industry and the banking industry, take a look at Newcourt: what you see is an institution that is in the lending business without being in the deposit-taking business. And if you want to separate the risk associated with smaller financial institutions being in the marketplace and taking deposits from the lending activity of those institutions, Newcourt is perhaps a model you might want to look at.

There are ways in which you can be in the lending business without having to be in the deposit-taking business. We supply ourselves with capital from the securities market, the capital markets through securitization, through any number of mechanisms, but we're not in the deposit-taking business. I think, intellectually, you have to start thinking about those functions of financial services as not always being advocated into the same institution. If you start taking apart the component parts of the financial institution, there are ways to develop specialization within the disciplines, and Newcourt has done that as an originator of financial assets.

The Chairman: Mr. May, would you like to add anything?

Mr. Richard May: Yes, I would. I heard you refer to the tax holiday for new financial institutions, and I would say that—

Mr. Scott Brison: New banks.

Mr. Richard May: New banks. I think we have many smaller financial institutions in Canada, and why should they be put at a competitive disadvantage to new players to the market in a situation where they too are looking for growth? I think, again, as I mentioned earlier, the expansion of the market as a whole for the smaller players to start to take up a larger share of the entire market is, to me, an underlying function of what the task force was trying to realize.

While it didn't specifically say so in the task force report, I think if there's a thought of some capital tax relief there for new institutions, I would like to encourage thinking of that applying to smaller institutions as well.

The Chairman: Thank you, Mr. May. Thank you, Mr. Brison.

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chair.

One of the things the task force made very clear in its report was that Parliament cannot legislate a vibrancy; that a government simply can create an environment that encourages the entrepreneurial and innovative spirit. Do you believe there are recommendations in the task force itself that would help create this environment? Does the report go too far in terms of recommending new forms of regulation? Would they merely add to the regulatory burden and cost to consumers? If we were to look at the MacKay task force recommendations in their entirety, would the regulatory burden be heavier than it currently? And how would this affect institutions' competitiveness?

The Chairman: Mr. May.

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Mr. Richard May: I'd love to answer that question, Karen. Thank you.

If you look at the list of fraternal societies at the back of our submission, and certainly look in particular at their asset size and their membership base, there are a few larger organizations within that, small by most financial institution standards perhaps, but still large for fraternals. There are many very, very small organizations, and the regulatory compliance is very much a struggle for them. The obligations to continue to be able to operate and do the many things they have done is becoming more and more onerous.

I think in our formal remarks earlier we talked about regulatory regime and rules of the game, the one-size-fits-all concept. I've often thought of an analogy that I think fits pretty well; that is, when we think in terms of safety for boating, a lifeboat on an ocean liner makes a tremendous amount of sense, but if you install lifeboats on canoes, they'll swamp.

I think we have to be very sensitive to what we're trying to deal with in the way of regulation, and make sure that it fits while at the same time providing safety.

I am pleased to say that with the work we have done with OSFI and the Department of Finance on regulatory issues for fraternals, I think there is a sensitivity to the size of the organizations and their ability to comply and yet still provide a framework within which they can provide safety to the financial resources of their members.

It is an important issue. I think one tends to get very much focused on what larger institutions can do and the types of resources and the types of risks they face. Not everybody is in that environment, and it is very appropriate to think in terms of different regimes for different organizations.

The Chairman: Mr. Sadler.

Mr. John Sadler: Thank you, Mr. Chairman.

Thank you for the question. It's very insightful.

Let me begin by saying that it is perhaps misleading to suggest that Newcourt is an unregulated company. Of course we're subject to the same measures of regulation as any other commercial enterprise operating in this country. In addition to that, as a publicly traded company we are, of course, subject to the rules of the Ontario Securities Commission and the marketplace.

Certainly there is a burden associated with the cost of regulation. One of the advantages that Newcourt has is the fact that we're not a deposit-taking institution and therefore we don't bear the costs of that regulation. However, the other side of the coin is that neither do we have access to the funding sources that regulated institutions have access to—the deposit base at the banks, for example. They are able to raise money at the street level at a rate that is significantly below the cost that Newcourt would have, to raise money on a commercial paper market or in the medium-term note market.

But I do want to share with you a quote that I think is appropriate in that context. It comes from Alan Greenspan, the chairman of the U.S. Federal Reserve Board. He made this quote about a year ago before a committee similar to this one. He said:

I have no doubt that the costs of regulation are large, too large in my judgment. But no bank has turned in its charter in order to operate without banking regulation, which would require that it also do without deposit insurance or access to the discount window or payment system. To do so would require both higher deposit costs and higher capital.

So in the case of the regulated financial services industry, it is a quid pro quo. The cost of regulation is high, but there is a benefit associated with that for those institutions that choose to be in that business.

Mrs. Karen Redman: Thank you.

The Chairman: Mr. Discepola.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

On the “widely held” rule, there's a recommendation in the MacKay task force that we should increase that to 20% under certain conditions, ministerial approval, and that no one should own more than 45% of any class of shares.

I'd like to know from the witnesses if they agree with that proposal, if they believe insurance companies should also be subject to the same ownership regime, and if they see any potential benefits for shareholders or consumers on such a concentration in large institutions.

• 0855

Mr. John Sadler: I should just comment that Newcourt is a company that has publicly appeared in the marketplace. We have several significant shareholders. In fact, the Canadian Imperial Bank of Commerce has an equity interest in the company along with the foreign financial institution Nomura, which holds about 11% of our equity. Other than that, the company is reasonably widely held in terms of its equity, but there's no rule or regulation that says that must be the case.

One of the issues that arises when you enforce widely held ownership is that it effectively makes it very difficult for any institution to come in and take over that institution that is dictated to be widely held. One of the consequences that occurs when you have enforced widely held ownership is that the behaviour and activity of that widely held institution is never really subject to the disciplines of the equity market. The equity market is a very tough taskmaster. It will punish you. If your costs get out of line, there will be mechanisms for someone to come in and say that they can do a better job of running that company. Then they'll make an offer to take it over.

When you enforce widely held ownership, you disable the force of the market in that way. In some cases, that's a justifiable cost. Certainly in a case of financial services, in certain cases that's a justifiable cost.

Mr. Nick Discepola: Mr. Banks, in your presentation you stated that size is important. You referred to information technology as one area that's—I think you used this as a code phrase—distributed over a wider base. Is that code for making greater profits because of the efficiencies of economies of scale?

I'm puzzled, because you're sort of sending very mixed signals. You say that you agree with the mergers. You feel that the banks should be allowed to merge because of economies of scale, because of size. Why is it okay for two banks to merge but not a bank and a life insurance company?

Mr. David Banks: I tried to make it clear that if a bank did want to merge with the life insurance industry, we wouldn't have an objection to that.

Mr. Nick Discepola: But you had a test. You said “concentration”.

Mr. David Banks: That's correct.

Mr. Nick Discepola: So why is it that this test should never be applied to two banks merging? It's okay if two banks merging have 67% of any market, but shouldn't we apply that test of concentration...? Is it just in the case of a bank merging with another life insurance company that we should apply this test?

Mr. David Banks: I think that's when you get into a broader definition of financial services whereby you have the advantage in one sector. A commercial bank does have an advantage in terms of its funds cost, which I tried to describe as raw materials. If it uses that advantage to go into another sector, I think at some point there's a rule of reason when somebody says if that was carried to its extreme, we might lose the whole-life industry; if it happened one or two times, it's not a problem.

Mr. Nick Discepola: Do you think the report would be as clear, beautiful, or organic if they had made the recommendation that life insurance companies and banks should also merge?

Mr. David Banks: No. I felt the report was responsible in that respect.

Mr. Nick Discepola: Okay, thank you.

The Chairman: Thank you, Mr. Discepola. Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman, and thank you, gentlemen.

I have a few questions for Newcourt and one for CARP if time permits.

Mr. Banks and Mr. Sadler, Canadian chartered banks often describe the increasing competition from the monoline or niche players. GE capital, for example, with its asset-based lending, is a strong niche player that is creating more competition and stress for Canadian chartered banks.

I'm just wondering, in terms of market share, how you track that. How are you doing against the major banks? I know you're dealing mostly with large transactions, but have you made any penetration in the small and medium enterprise market? Do you have any data on that to suggest that you're doing a lot of business with small and medium-sized enterprises? Let's define small ones as having 100 employees and $5 million in sales, while medium ones have 500 employees and $50 million in sales. Do you have business in that area at all?

• 0900

Mr. David Banks: Actually, that's the majority of our business. More than 85% of our business is what you describe as small businesses.

While we serve Dell, Lucent, Yamaha, and Western Star, we're actually financing their customers. We have 600,000 customers, and almost all of them are small to medium-sized businesses. The average transaction size is probably about $15,000. While we do very large transactions—those get into the newspapers—it's the more methodical, smaller-focused companies that we're really there to serve.

Mr. Roy Cullen: Thank you.

In terms of market share, do you track that? How are you doing against the major banks?

Mr. David Banks: Well, market share is a little complicated because people don't report that segment or sector. We can look at our growth rate compared to those of the commercial banks. In that sector, we grow faster than they do. We certainly monitor ourselves against our competitors, like GE Capital, as well, and I think our growth rate compares favourably to theirs.

Mr. Roy Cullen: Thank you.

Mr. Banks, you said you generally support the bank mergers. Let's take the Bank of Montreal and the Royal Bank, for example. If you thought that their strategy was not necessarily to amalgamate to grow internationally but to consolidate their domestic business strength, would that alter your view on the bank mergers at all?

Mr. David Banks: No. I don't think it would. I think we'd prefer, obviously, to see them with a more global focus. Ironically, I think they'll bring some skills back home that will apply very well in this market to larger Canadian companies.

Mr. Roy Cullen: I thought I heard you say that if their intent to merge is to grow internationally, then in your view that would keep them away from consolidating and perhaps concentrating in the domestic market. Maybe you could clarify your view on that. If the bank strategy is to consolidate their domestic business... In fact, that's what I've heard most recently from them. They don't necessarily want to grow internationally but just consolidate their domestic business. So you're saying that wouldn't change your view of—

Mr. David Banks: No, it wouldn't. As a free market institution, quite frankly, we wouldn't shrink from the competition if they totally focus domestically.

We would hope that they would also look internationally. It's a bit complex, but by opening the door to competition and inviting the foreign banks in, they have to think of them as competitors as well. I think they need to be able to compete with them head on.

I believe that's one of the arguments John Cleghorn used, and I think quite rightly so. We believe this competition will force a keener ability to supply funds and corporate financial advice to the larger Canadian companies. If at the same time they also try to consolidate their position domestically and compete with us more seriously, so be it.

Mr. Roy Cullen: When I met with Mr. Cleghorn, Mr. Barrett, and colleagues, I was expecting to hear a strategy that was designed to help them grow internationally. I heard more of a strategy designed to consolidate their domestic business. I heard perhaps slightly differing views from Mr. Cleghorn and Mr. Barrett, perhaps because the Bank of Montreal has been involved in the U.S. and the timing of their international expansion might be a little later than Mr. Cleghorn's.

Maybe I'll just switch gears, if I may. Consider capital cost allowance and the leasing business. I know you have a certain vested interest in capital cost allowance as it relates to leased assets, but say we put it in the context of leasing automobiles. That has come up on a number of occasions in the context of the bank mergers and what banks should or shouldn't be doing.

Here's how I understand it. Say you're leasing a car and you have some kind of residual value option, lease-to-buy option, or whatever you want to call it. I know they're different, but say there's some kind of option for you to buy it at a certain point in the lease. Right now, as I understand it, if it's Ford Motor or GMAC credit, they will provide the financing.

• 0905

Is it correct that they take advantage of the capital cost allowance? Does the intermediary, like the dealer, take any capital cost allowance, or the actual person who owns or operates the vehicle? How it is structured today, is that the right way? Who should benefit from the capital cost allowance, in your view?

Mr. David Banks: I think ultimately the consumer should, and the way the market works, I believe they actually do. If you look at the Ford Motor Credit and General Motors Acceptance Corporation, what they have behind them, as manufacturers who just have to keep producing cars because they have vast numbers of employees who are unionized and they need to keep them at work, usually translates into a very tough competitor.

In the automotive leasing business, it's fiercely competitive. At the end of the day, that degree of competition has inured to the benefit of the consumer. I think when there is a capital allowance, it gets factored into the cost, but again, the competition is so fierce that you push that down to the consumer.

Mr. Roy Cullen: In the case, then, of an auto lease like that, today who claims the capital cost allowance? Is it Ford Motor Credit, is it the Ford dealer, or is it the person who is actually leasing the car?

Mr. David Banks: It's ultimately the owner, at the end of the day, but it reflects in lower lease costs. The consumer is the ultimate beneficiary, and the way most of those leases are designed, I think they hope the option to buy will be exercised and the person will own the car.

It's a fiercely competitive market, and it's a good example of where competition has forced the prices down to paper-thin margins. If somebody thinks they're going to take that capital allowance and stick it in their back pocket, they'll be uncompetitive.

Mr. Roy Cullen: Okay, thank you.

The question of stability of the financial services sector has come up, of course, in the context of the banks merging. I must say, I've watched the growth of Newcourt, and it's quite spectacular and I think it's an incredible community success story, but it was a little spooky not too long ago when we read in the papers that there might be some cashflow problems at Newcourt or there was some financing or assets that were spun off, and so on. I wonder if you could comment on that.

In the context of stability of the financial services sector, in Canada we have a small population, so we tend to be more concentrated. But when a company like Newcourt gets in the press as having some challenges in terms of their liquidity—if that's how I understood it—what does that mean if we allow banks to merge and suddenly we have two or three huge banks and a few smaller ones? Could you comment on that?

Mr. David Banks: Happily. I feel like I've aged about 15 years in the past week and a half.

To be honest, in the market environment, as the IMF said in their communication, this is the worst financial crisis the world has faced since World War II, and it has a different dimension: the way information is communicated. You know instantaneously when Indonesia defaults on a loan; you just don't know quite what that means.

I heard a lovely comment last week, to take into consideration that the whole Indonesian banking system isn't as big as the Royal Bank of Canada. So you have to put into some context some of the issues you're facing, and it's hard to do. I think the entire market is jittery.

A couple of weeks ago we got hit with a spate of rumours, and those rumours were particularly poisonous. If you're in the public markets, it's a vulnerability. Also, if you're a success story, people are always wondering, gosh, is that company as good as the press makes it out to be? There's a lot of pent-up emotion, and when those rumours came out, I was astonished at how they reverberated.

To perhaps take the most ridiculous one, a journalist in Toronto called up and said “I know that Steve Hudson has been fired”. I said, “Well, he hasn't”. She said, “You would say that, wouldn't you”. I simply couldn't convince her.

I was reminded of when Paul McCartney was rumoured to be dead, and he appeared on television. The supporters of the theory immediately said that's not Paul McCartney.

In any event, we had rumours ranging from that to the fact that we hadn't funded. And it was interesting that the day the rumours came out, we funded $1.4 billion of commercial paper. We had rumours that we couldn't get our securitizations away. The previous two weeks we'd done $935 million in securitizations.

• 0910

We had rumours that we were suffering illiquidity in the market. In truth, the next day in Canada, based upon those rumours, we did have trouble in the commercial paper market and we had to draw our bank lines. So the rumours did have a cost.

One of the rumours you referenced is that we were having to sell assets. We had determined at the beginning of this year, after the acquisition of AT&T Capital, that there were eight businesses we felt we needed to get out of. Ironically, one of them, because the competition was so fierce and because of the exposure to residual values, was in the automotive leasing business. It's pretty tough to make money there.

In any event, we have sold eight businesses. The last one that we sold closed just about the time that all of these rumours were in the market, and there was the feeling that we had somehow or another rushed to respond to the problems that we were supposedly having in the capital markets by selling assets. In truth, that hadn't happened. We had been working for about six months. We thought we had closed that transaction in August, and the deal fell away. We were delighted to get it out. I think the people who bought the assets, our asset back-lending division, were delighted to have it, and I wish them well, from Prudential. But for us it was too risky an exposure.

So yes, I'd love to comment on this pretty tough period of time for us. It just exposed the vulnerability that anybody in the public market has to short-sellers.

The Chairman: Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

There was a comment, Mr. Banks, that you had made in your remarks, and it's somewhat along the lines of Mr. Discepola. You initially started by saying that Newcourt in some part really grew out of the need for the whole-life insurance industry wanting to diversify their portfolio, given that the commercial real estate markets had gone into a downturn, and had there not been a strong whole-life industry you might not have existed today. Then you go on to say that you support the bank mergers, and one of the reasons you support the bank mergers is the possibility that if you don't have a bank merger and you don't have them focusing globally, they may turn around and buy up a life insurance industry or a life insurance company, concentrate that market, and then cut off essentially some source of capital. Can you just comment on that? Am I reading that right?

Mr. David Banks: Yes, you are. I hope the point is not too complicated, but what we tried to say is within the banking sector of the financial services market, we do not have a problem with the free market solution to the competition that's happening on the global stage.

Like it or not, the grouping—the Citicorp group, with Travelers—is now a trillion-dollar bank, and quite frankly the advantages they have in funding are in Nations Bank and Bank of America. These people will affect Bank of Montreal and Royal Bank of Canada on a world stage.

Within the banking market, we absolutely have no problem, nor do we have a problem conceptually in reaching out across the commercial banking sector in the financial services market to buy an insurance company. I think the point we're trying to make is that at some point, a rule of reason should apply, that there would be too much concentration.

In addition to that point, we were saying that we were aided by a strong whole-life industry. They've been very supportive to Newcourt, and they've been a great customer, as indeed the banks have. But quite frankly, we would lament the loss of that industry or the impairment of it. So if too many acquisitions occurred, too many assets were lost, or too much competition was taken away, I'd be distressed.

Mr. Tony Valeri: I guess the other issue that's going on out there is the demutualization issue. I think Manulife was out there asking for a five-year sort of moratorium on the demutualized companies, so that you don't have this possible acquisition of these companies. Are you then saying that you're also supportive of a five-year moratorium on them as well?

Mr. David Banks: John, would you prefer to...

Mr. John Sadler: As I understand the moratorium, it would be to prohibit the acquisition of those demutualized companies during that period. Again, I think that speaks to the point of ensuring that you've got diversity in the financial services industry—that is, you've got different types of financial services players, which do not all end up conglomerated under the ownership of the banking sector.

Our ambition would be to have a very strong and vibrant banking sector. If that involves some mergers between banking institutions, that's fine and well and good, particularly if it enables them to be more effective competitors on a global scale. At the same time, we think it's very healthy to have a separate life insurance industry that is vibrant and growing, and to the extent that such a moratorium would work toward ensuring that, we think it would be a good thing.

• 0915

Mr. Tony Valeri: I guess part of the challenge I'm trying to sort out in my own mind is that a lot of the discussion about the actual merger itself would be that there would be a phenomenal concentration domestically and not really a lot of bang for your buck globally. At least there's a lot of talk of it. But the real effect would be domestic concentration. Yet your argument is to allow the mergers so that there would not be as much concentration domestically outside of the banking sector.

Mr. John Sadler: Yes. As we see it, concentration within the banking industry is like saying if you walk into the ice cream store and if you've got six flavours of vanilla on the shelf and the next day you walk in and there are three flavours of vanilla, so what? Really, so what? But if you end up with the life insurance industry going to zero because it ends up being owned totally by the banking industry, that is a form of concentration that has very serious consequences, because it takes out of play a form of funding and financing that is very different from the types of financing a bank provides.

Mr. Tony Valeri: You're coming at it from your perspective. I guess the challenge we face is we have to come at it from the public perspective. The fact that there were six choices of vanilla prior to the merger and now there are three is very important to the public. It may not be important to you, because your source of funding is coming from somewhere else. That's my point.

My point is that in your presentation you've really, in my mind, reinforced the support of a merger to protect, in essence, your business because of a cut-off, possibly, of a source of capital, versus the challenge the committee faces and the questions we're asking to try to ensure that there is a competitive marketplace domestically and to talk a bit about the future of the financial services sector and the whole merger process. I just want to be clear in my mind that that's where you were coming from.

Mr. David Banks: I must say that I don't envy having to balance some of these issues. And I do agree that they need to be balanced. If you're sitting in a small town, you need to be sure that you're going to have access to banking services that are competitive. You need to be sure your deposits are protected. It's not easy.

At the same time, I think in looking at the finance industry totally, you've got to balance issues across different sector lines. Within the commercial banking market, you want the Canadian banks to be as competitive as they can be. In addition, you want to make sure that they don't disappear and you want to make sure they're robust and strong. I think there's hardly a board room at any of these banks where they haven't debated just these issues. How do you do that? How do you supply capital throughout the country?

I guess what we are trying to say is that within the sector, that's a solution the banks must decide themselves, under your supervision. We have no complaint. We support the bank mergers if that's what they deem they need to do to be competitive. We also wouldn't object if in your wisdom or in the wisdom of the people who are going to judge these mergers they look on a case-by-case basis and make a decision about how the services that are provided throughout the country have to be insured and that there are strings attached to those mergers. That's an issue we're not in a position to comment on.

Mr. Tony Valeri: Okay.

Mr. David Banks: Could I just add one more point?

Mr. Tony Valeri: Sure.

Mr. David Banks: I think it really gets to the heart of what you're asking.

To us, if there's a gap in the market, that's what we try to find. If we can get out... There are a lot of products. We serve Yamaha, but if you walk into a Yamaha dealer you don't see the name Newcourt. You think you're dealing with that dealer, wherever. I don't remember how many retail outlets they have throughout Canada, but they're all over the place. If you want to buy a motorcycle and you go in, we adjudicate the credit, we supply the funds, we write the lease, but you never see us. We're behind Yamaha. You think you're dealing with that local dealer. And they love it. The dealers absolutely adore that. That is a free market response to a need and making sure that you've got a distributed service. No matter where that dealer is, Regina or Toronto, we make him competitive and we make him look good to his customer. That kind of market opportunity... Competitive niche players will eventually find that.

I'm sorry. I just wanted to add a comment. I didn't mean to interrupt you.

Mr. Tony Valeri: Sure.

• 0920

The comment you made about you're not opposed to the actual mergers themselves, but you need to look at them on a case-by-case basis to see if in fact the balance is in there... The informal doctrine that big shall not buy big—in essence, you're saying that there may be some exceptions to that. If we drop that doctrine, which is essentially there now, in your comments you're saying that there may be some exceptions to that. You may want to drop the doctrine that big shall not buy big, but there may be some exceptions to that rule. You have to look at that on a case-by-case basis.

Mr. David Banks: Yes. I think I've seen my own personal—forget Newcourt's point of view—my own personal view change in looking at what Nations Bank has done in the United States. They're now the largest commercial bank in America. But you go through the states where they've acquired small banks, and local business people tell you they're better served. They find a more competitive, more cheaply priced product that's serving them.

Finding out how to meet that balance is something... I'd be loath to try to comment on what the commercial banks ought to do, except to say that we have no objection to their merger. We support that, if that's what they deem is in their best interest. Yet we understand the complexity of trying to supervise that process so that the many different constituent parts all have to be heard.

Mr. Tony Valeri: MacKay actually also talked about a merger review process. Can I get some comments on that? Is it too onerous? Is it adequate, in your mind? Is there a role for the public in this merger review process? Who should be conducting it? Can I just get some general comments on the process he's outlined?

Mr. David Banks: I would make one comment and ask John to reply to how the process might work, at least our opinion.

I thought it was a wise comment, because it did say these things... It's not emotion. There's an awful lot of intellectual and good analytical consideration that needs to be applied to these, and there are a lot of constituents who have to be heard from. How that process is going to unfold I'm not sure I'm competent to comment on.

The Chairman: Mr. Sadler.

Mr. John Sadler: I would like to address that, but also come back to a point you made earlier about our self-interest and comments that we've made there.

With respect to process, you're dealing with commercial enterprises that have a business to run. Your challenge is a significant one in trying to overlay onto that public policy decision-making, which is very legitimate and also very complex. Where those two things meet is the challenge you face. I'm not sure I can offer an awful lot of guidance, other than I think you do need to find ways to make it efficient.

These are commercial transactions. The longer they are protracted, the more uncertainty that exists in that market. It's very competitive. You will see people leaving those institutions going to work for U.S.-based institutions. They'll leave Canada to go and work in the financial services. And that's a shame. If that happens, it's a real shame, because you've got a period of uncertainty during which two institutions are trying to get together. Having just done it ourselves, with the acquisition of AT&T Capital, there's a lot of work to be done. The sooner they can get at that work, the more efficiency you're going to get out of the combination of those two enterprises.

At the other end of the scale are the issues you have to deal with, which are public policy concerns, which are very legitimate. The only recommendation I can make is that you try to do it efficiently.

With respect to Newcourt's self-interest on the question of the life insurance industry, we now, as I think David has pointed out, are very well diversified in terms of our funding sources. We continue to tap into the life insurance industry for funding. They buy securitization products from us; they buy syndication products from us.

So the statement we were making about the degree to which the life insurance industry is important as a separate source of funds independent from the banking industry is a statement about the initiatives that were recommended in the MacKay report to try to foster more development of additional new financial institutions. In order for that to happen, you've got to have a source of funding for those institutions, whether it's the equity markets, debt markets, or the life insurance industry, the kind of private placement funding that we have funded or that they have provided to us.

So it was not pure self-interest that I was speaking from there. I was just making a comment about the important role that an independent life insurance industry played in Newcourt's genesis.

The Chairman: Thank you very much, Mr. Valeri.

Mr. Gleberzon, you have a...

• 0925

Mr. Bill Gleberzon: I just wanted to say, you asked about the process, and as I said in our comments and as we say in our paper, we support that. We hope it's applied. Now the exact details and contours have to be massaged, but that aside, we think it should be applied because of the nature of the Canadian banking sector, which is so different from say the American one, which is the one we always compare it with because it's there. I mean, we've heard there are 10,000 deposit-taking institutions in the United States. Well how many are there in Canada? Of course we have a smaller base, but even if you use a 10% rule, there are probably still not as many using that kind of function.

The mergers that are being contemplated have a centrality and a magnitude to have an impact on the Canadian domestic market that I don't think can be compared, taking all things into consideration, to a similar event in the United States. When you take Nations Bank, it grew to be the largest by buying up all the small ones. The Canadian banking system did that years ago, and now we have a banking system that relatively and comparatively speaking is far more concentrated than the American one.

So I think we have to take time. I understand that uncertainty is the worst thing for any kind of enterprise and any kind of market, but because of the potential impact of what those mergers will mean on the domestic scene, we have to take time. We have to use some kind of process such as MacKay contemplates. And consumers have to be involved, because while it's true the niches will be filled by players like Newcourt, there is a question of whether the deposit-taking niche will be filled by similar kinds of institutions. At this point in time anyway, the answer seems to be no, because as I said of the 44 foreign banks, for example, only one of them engages in deposit-taking, although they all can.

The Chairman: I have a question. As you know, the MacKay task force is very much a report that speaks to the future of the financial services sector. I have found over the last few weeks that many of the witnesses are actually talking to us about the pressing condition of the financial services sector. I'd like perhaps to speak a little bit more about what your vision for the future of the entire sector is.

MacKay clearly outlines the three major sources for change—basically globalization, technology, and demography—as being the issues that are really pushing this change. His answer really lies very much in the establishment of a more entrepreneurial-based financial services sector.

I also sense the debate is really polarized between people who believe in the brick and mortar economy and those individuals who are fascinated by the entire technological revolution. Quite frankly, I think we see we may be in the middle of this paradigm shift. That having been said, what do you think the financial services sector will look like or should look like in the next 15 years? We are talking about the future.

Mr. David Banks: I wish I had a crystal ball that could do that. The pressures... Just to pick up a couple of the pieces that you raised, when you think of information technology, we've seen what that can do to lower cost. I don't think we've really hit stride yet, because I don't think we've explored the perimeter of what IT can actually do in terms of processing—back-office processing. I think we've all been fascinated intellectually with what's happening on the Internet, but for the most part that hasn't yet realized its potential. You probably could sit in the research and development part of a commercial bank and wonder what you could do in terms of being able to communicate mortgage rates and deposit rates and actually collect those electronically throughout a country or province. How that's going to be realized, I simply don't know.

What we are seeing, however, is that the time dimension between conceptualization of a really good idea and getting it out on the market is becoming shorter and shorter.

• 0930

We ourselves are in applied technology. I gave you the example of Yamaha. You never see Newcourt. People don't even know it's an application of Newcourt, and it's done in combination with the Bank of Montreal. It's a very clever way of packaging a financial service on an information technology product and actually putting it to work for a local dealer. And we don't actually distribute it, we service it. It's distributed by Yamaha, but they love it. It got an award. It's the first time that Yamaha has ever given an award of excellence to anything other than a combustion engine.

So I guess the short answer is that in trying to hypothesize the impact of IT in even five years, there's a set of probabilities that are quite broad in terms of putting them around how that is going to be applied.

In terms of trading that off against bricks and mortar, I don't care how good information technology is, people like to go in and deal with people, so bricks and mortar are always going to play a role. I think that's one thing the commercial banks in the main in Canada are very good at. I don't think anyone in this oversight should lose sight of the fact that retail banking in Canada is very good in terms of the quality of service. I've lived in Hong Kong and Tokyo, I lived in London for nineteen years, and I've travelled quite widely in Europe. This is a very good banking system. Don't lose sight of that. You're talking about a retail deposit collection system that is really very good, and the services should never be forgotten in terms of how good they are. But a lot of people, particularly out in the regions perhaps, aren't as attuned to the use of computers and information technology, and that bricks and mortar system isn't going to go away. There's a need for it. Even if you take a fifteen-year period, I don't see that disappearing.

John, you might like to add something.

Mr. John Sadler: Perhaps I can pick up on the globalization comment, Mr. Chairman.

Financial services, at the end of day, is a service business. It follows the customer. The customer in Newcourt's case would be a company like Western Star Trucks, a great Canadian company in Kelowna, B.C., and one of the world-class manufacturers of heavy-duty trucks. What Newcourt has done is follow the requirements of companies like Western Star to service their global customer financing needs. We now finance Western Star Trucks in Australia, in Europe, and in the United States, as well as in Canada.

If you're looking for directions for change in the financial services industry, keep in mind that it is a service business and it's going to follow wherever the customers are going. There's a great propensity for globalization in financial services, but it's being driven by what is happening in the manufacturing sector. It's being driven by what is happening with the customers of the financial services industry.

At the same time that this is occurring, we can't lose sight of the fact—and I know you wouldn't lose sight of the fact—that there is a domestic financial services requirement as well. Trying to find a balance between the ambitions of the financial services companies to do what they want do and should be doing for their Canadian customers on a global scale, such as Western Star, and what they need to do for their customers around the corner is a difficult question. I do see globalization in that scale being a significant driving force in change, though.

The Chairman: Would you agree with this? Can you just comment on the statement you made that you can't predict the future?

Mr. David Banks: I said I would be loath to try to predict the future in fifteen years. I wish I had a crystal ball that was that clear.

The Chairman: As Canadians and as parliamentarians, we can certainly help shape the future, isn't that correct?

Mr. David Banks: That's correct.

Could I pick up on one comment that John made? I think it's an important one because it also gets at the heart of one aspect of the bank mergers: like it or not, this is a global financial world. I think people wish it weren't so. They wish the problems in Indonesia and Japan and China wouldn't affect an economy domestically. If people believe that, it's an illusion. It's an illusion that we wish would not exist.

The ability to react to global changes, whether they happen in Malaysia or Afghanistan, is going to affect domestic markets. The changes are going to affect prices of commodities, and money is a commodity. I think the relative standing of different communities reflects itself in a foreign exchange market that is so sophisticated and so global. It's a 24-hour-a-day, seven-day market. I don't know what the numbers are, but two years ago they were at $300 billion a day. It's a market that no single country can try to control.

• 0935

There's an aspect to globalization that however much we wish we could build a wall against it, we can't. We absolutely can't. With things that involve technology, changes in financial patterns and economic patterns in different countries are going to affect other countries. If you're a commodity-driven economy or a commodity-affected economy—and almost every major country in the world is—you have to pay attention to it. Unfortunately, finance is about as fungible an international commodity as there is. Therefore, the global market scale is something that even Newcourt, with its more narrow product line than that of a commercial bank, has to concern itself with.

I'm sorry, you were going to ask another question as well.

The Chairman: No, I'm going to let Mr. Gleberzon answer, and I'll get back to you.

Mr. Bill Gleberzon: Thank you. I was going to answer that question in a different way.

I think you yourself have given the answer to your question, and that is the decision that parliamentarians make on the proposed mergers. There are at least three different scenarios that you could introduce. The future will have one course if you approve the mergers, a second course if you don't approve the mergers, and a third course if you don't approve the mergers but go ahead with what you do decide. For example, as we understand it, there is the Australian model. It has put a moratorium on bank mergers for about ten years, to allow other kinds of proposals—like those we see in the MacKay report—to take effect.

We had some conversations with the Canadian Federation of Independent Business, a small-business group. Their argument was that it's argued in the MacKay report that if the mergers occur, any void created can be made up by allowing foreign banks to be introduced, by expanding the credit union system, by upgrading the trust companies, etc. All of that is really a leap of faith. It's assuming that if you permit that, it will happen. But if you read the concluding paragraphs of the MacKay report, even they argue that it may not happen. It all depends on the leadership and all these kinds of buzzwords.

I think the real answer to your question is to go back to the origin of the question, which is what you are going to decide in the first place. If you have bank mergers and things work out the way MacKay suggests, then that may be the future. But that's also assuming that everything else works out the way they say. There's no guarantee that they will.

If you don't allow the bank mergers, how are you going to do that? Are you going to adopt something like the Australian model, or are you just going to let things develop as they normally would, given all of the other forces that we're faced with in a world in which, as you've heard, you cannot ignore what's going on beyond our borders?

So I think you have to decide what those three scenarios are as your starting point, along with maybe three or four others. You can then figure out where your future is going to be.

The Chairman: So what is it going to look like?

Mr. Bill Gleberzon: Well, I don't know. What answer are you going to come up with? You said it. It's up to parliamentarians to shape the environment, so I think it all depends on whatever answer you do come up with. There are certain givens, obviously—globalization and the impact of external factors. As we know, what's happening in Indonesia has an impact, and what's happening in Brazil is going to have an impact. But the question is what we are going to do in Canada, and that depends on the answer you come up with.

The Chairman: Let me ask you a question, Mr. Gleberzon. When you appear in front of a committee that is studying the future of the financial services sector, what do you think we're going to be talking about?

Mr. Bill Gleberzon: I would hope what you're looking for is to get the best advice you can in order to come up with a decision that you'll put forward to the rest of Parliament. That's what I'm assuming.

What we're saying as an organization is that we have real concerns that the future envisioned in the MacKay report might not work. Although a lot of those elements are in place currently, they're not working.

For example, to repeat what I've said before, if you permit the banks to merge and their focus really is on globalization, what organizations are going to fill the void that will be created and is being created currently in rural areas, small towns, and the poorer sections of the urban areas? We don't have an answer to that question, but we are actually hoping to do more research to come up with some kind of answer to those particular questions.

• 0940

From the point of view of an organization like ours, we think it's just as important to raise the questions, to provide answers where we can and as best we can, and to admit there are some questions we don't have an answer for but will try to get. That's what I see as the role of this committee.

The Chairman: I think that's the issue. One of the challenges we face is the fact that many people who appear in front of us have engaged very much in turf protection. They're in business and they want to protect whatever they've established over the years. But that limits debate quite a bit. We never seem to be moving beyond that particular issue, and that creates a problem for us.

We look to Canadians to help us paint that picture of the future, if we are going to take the word “future” seriously. To date, though, people have basically been stating their opinions about the present and how they would fix and tinker with things in the present. They do not look at important issues like the impact of technology ten or fifteen years down the road, or globalization, or the commitments we may have internationally through the WTO and others, or what is happening particularly globally, which is extremely important. I think those are some of the things we want to have answered.

Quite frankly, we're not even looking at the two proposed mergers. We're looking at mergers as a legitimate business practice, and we'd like to have comments on that issue. I'd like to know from you, for example, if you think consolidation in the financial services sector—and I'm just talking about banks—is a good thing or a bad thing. Does it enhance the entrepreneurial vision of MacKay or not? These are issues we need answers to.

Mr. Bill Gleberzon: I guess the question is whether you're talking about entrepreneurs on the terms of what the word really means—someone who undertakes the development of business—or whether you're talking about them as consumers. From a consumer's point of view, I think it's a fair statement to say it's a given in the marketplace that concentration is not a good thing. I'm sure open to debate on that issue, but the more competition there is, the better for the consumer.

If we look at what's happened in deregulation in other areas, we know what will happen in this sector. Industries that have become deregulated end up with greater concentration simply because a few companies can buy up more and more companies. That seems to be how it goes in the American airline business, the movie business, or whatever business you want to look at where deregulation occurred.

From a consumer's point of view, if you just take the question of technology, we get a lot of letters from the current generation of seniors, who are extremely uncomfortable using ATMs, even to the extent of just withdrawing money. They very much prefer to do all their banking with a human being. The question is whether this is a generational issue. That is, when this current generation of seniors is replaced by the baby-boomers, will we see that particular issue disappear, or will it remain? Will the baby-boomers be far more comfortable using technology as they grow older, and therefore not feel that need to deal with humans to the same extent? I don't know the answer to that question, by the way.

The Chairman: That's exactly the problem with this debate.

Mr. Bill Gleberzon: I know it is, but no one knows the answer.

The Chairman: People think it has to be an either/or proposition, but it doesn't. You could have seniors and people who want to access branches, and you could have people who want to access technology. You can't deny that. It's the same as saying we have illiterate people in our society, so we therefore shouldn't publish books to read. That doesn't make sense.

Mr. Bill Gleberzon: I agree with what you're saying, but I don't think the banks do. The banks are doing everything possible to increasingly discourage face-to-face banking through the decisions they've made. For example, they've cut down the number of tellers available, thus increasing lines and waiting periods. In effect, they are saying to people that if they want efficiency, they should use the machine and not wait in line.

• 0945

As I said, we would very much like to see more tellers, and for a variety of reasons. The banks, however, aren't listening to what consumers are saying. They're looking at their bottom line and are working out how much they get on a per-foot basis by having a branch here as opposed to there.

The question is, what can you do about it? If that's the business decision, how does public policy shape that business decision? The next question is whether or not it should. These are the kinds of issues that may really have, in practical terms, no answer.

If you're looking at the future, it's the old story: before you know where you're going, you have to know where you're starting. If we think the future of the financial services sector of Canada as far as the depositor and the consumer is concerned is going to be enhanced by allowing the mergers and by introducing the vision of the MacKay committee, it backs up, because that's going to give us one set of futures. We are very concerned that it won't happen.

We believe that if you allow increased competition through more foreign banks coming into Canada, they will cherry-pick where they're going to go. They'll go into the niche, they'll go into wholesaling, they'll go into where they feel they can get the best bang for their dollar. Why shouldn't they? Deposit-taking may not be the best place. Furthermore, will the current banks easily permit other institutions to have access to deposit-taking? For example, if banks are permitted to sell whole-life insurance, will the banks easily permit the insurance companies to have access to deposit-taking or direct access to the payment system?

Mr. Nick Discepola: If they pay for it.

Mr. Bill Gleberzon: Perhaps they will if the insurance companies pay for it, but I don't know. The thing is, I don't think they'll give that up easily. Those are the kinds of balances you have to deal with.

The Chairman: Mr. Gleberzon, just for the record, whatever system we come up with, I think it has to be world-class. In that, I also include consumer protection and consumer choice. And yes, we are concerned about concentration of power.

Let me ask you one simple question: Do you think globalization is a reality?

Mr. Bill Gleberzon: Of course.

The Chairman: Do you think technological advancement is a reality? Do you think it relates to the financial services sector? Going back to the Roman Empire, we have moved from the coin to the bill to the credit card to the debit card to the smart card. Isn't that something that is quite certain?

Mr. Bill Gleberzon: Yes, but as we've heard from Newcourt, the point to all of this is that it's not all that information, it's what you make of it. Globalization is occurring, and IT is developing a prodigious base. A lot of people have all that information. They have to sort it all out and try to make sense of it. If possible, they have to make sense of it almost as quickly as they get it, because the minute they've gotten it they have a whole new batch of information.

So, sure, these are realities. The real question is how we deal with them. There are some people who are reluctant not to accept the reality—you can't do otherwise—but to know how to deal with it. I don't want to belabour the point, but for example really only about 10% of the current generation of seniors are using the Internet or computers. That's why I'm asking if this is just a generational thing that will change once the baby boomers get older.

In basic answer to your question, of course I accept all that. I have no choice, because that's the reality. The questions are how to deal with that reality, what sense you make out of it, and how do you shape it.

The Chairman: Mr. May, and then we'll go to Mrs. Redman.

Mr. Richard May: Thank you. To pick up on a number of things I've been hearing, I'll add some thoughts that I can't say are necessarily those of the CFA, but they are my own as I sit here.

In our organization, we introduced electronic funds transfer some time ago for our annuity payment policy holders, and that's great. Money goes directly into their accounts for their monthly annuity payments. There's less hassle and they're sure it's there. There are no problems with postal strikes and so on. There's a lot of reliability, and it's a lot cheaper for us in terms of processing too. There are advantages all the way around.

But we also have a sizable number of policy holders who just really want that cheque each month. It doesn't matter whether they just want to see the piece of paper or whether they want to go in and talk to their bank, they want that cheque. To me, that is a fairly simple thing; it's not advanced technology. But if we start looking at the use of PCs, the Internet, and who knows what developments over the next ten or fifteen years, I don't think a sizeable chunk of the Canadian population is going to embrace that. A good chunk will, but there's going to be a portion of the population that's not going to accept that particularly well. How are those people going to be served?

• 0950

I think the idea of specialization, where some organizations will focus on the technologically advanced end, is great, and there will be others that can work with those who are less inclined to accept that type of an environment.

Unfortunately, again looking at the electronic funds transfer thing as just a very simplistic example, it is a lot cheaper to process the annuity payments by electronic means, rather than issuing the cheques. So there's a competitive situation that develops there as well, and I'm concerned in the sense that for the Canadian public who want to follow the less technologically advanced avenue, how can institutions, organizations, members of the public support the system that's trying to compete with the technological end of it as well? That I think is really the challenge.

The Chairman: Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chair.

I'd like to pick up on a theme that you actually started, and that is, I do believe that the government will help shape what the financial sector looks like in the next millennium. But I would also contend that the future is here, and that a vast majority of Canadians really don't realize the inroads of foreign banks into our culture. As well, Mr. Banks was talking about Newcourt and the fact that we may not really know who we're dealing with, and frankly a lot of consumers probably don't care.

One of the things that struck me as I went through the MacKay task force, and certainly as I've been educated by the witnesses we've heard across Canada, is that I think there is a disquiet among Canadians over the sovereignty of money. And Mr. Banks made the comment, in regard to the international forces, that as much as we'd like to protect Canada against them, we probably aren't in a position to do that. I think that's one of the undebated issues that underlies whether we let foreign banks in and whether we let banks merge. When does the face of Canada in the global market diverge from what is good for Canadians, and how do we strike that balance as a committee and a government?

I don't have the answers to those questions, but it strikes me that it's part of what is bothering Canadians, as well as the technology, and whether or not they have the comfort or the discomfort. Those things are happening anyway, and it's this globalization. Can we protect what we perceive as Canadian? It's the government that gives bank charters, it's the government that regulates this, and we have an obligation to protect what's in their best interest. I think that's part of this whole conversation, even though it's not particularly being articulated.

The Chairman: Go ahead.

Mr. David Banks: That's very well put. I think there's been an elegance to the preface that you all have put to us, that we perhaps haven't responded back to as precisely.

I went to a conference at the Harvard Business School last year, and it was about this very thing. The basic thesis was that the rate of change is accelerating. And they had for everybody who participated in this a copy of Alvin Toffler's Future Shock and also a little bottle of Tylenol with it. There's no question, I think you're wrestling with some very difficult issues, and you can't stop the change. You're right, the future is here, and the next dimension of the future is God knows how quickly behind it. That's true in IT. I think we're learning to...

I fancy myself, personally, as being very good. I use the Internet. I know two or three different kinds of computer programs, and I use my computer every day—I travel with it. And my son can run circles around me. I think the willingness and ability is an age thing. Some people who I know, even in our own organization, wouldn't touch a computer—they're frightened of it. And that's a reality you have to balance too. But it's there, and there are some wonderful applications. You just heard one about the transfer of annuity payments. We see it in our business where you can apply it, you can really make it work for your customers and yourself.

Globalization, as painful and almost imponderable as it is to contemplate, is a reality. It's a reality that I think the big commercial banks are trying to put into the public domain. It's hard to debate it. But they have to compete with these people, even if the competition is just in Canada, just on the main street in Toronto, where they're competing with a Chase or a Citicorp group. They're applying money rates; they're applying technology; they're applying a cost-based management structure that's global. And I think the Canadian banks are saying they don't want to be put at a competitive disadvantage.

• 0955

As a general principle, we think that in exploiting that change there are some rules one can apply to it. One is that in the main, competition will get you a better solution. Quite frankly, we would not have evolved as fast as we have if there weren't competition. We look at GE Capital and we keep our eye on them. They're very good, and if we pause in the way we develop products and the way we develop services, those guys will eat us up. I think, in the main, competition is absolutely a good objective, and I think the MacKay report embraced that in an intelligent way.

We believe that focused, limited regulation is a fact of reality. I think the points we were trying to make, particularly in regard to the whole-life industry, were about balance. It would be very interesting, for instance, to just assume that with the potentiality of the computing age and IT advancement we're not going to need bricks and mortar in 10 years or 15 years. That's probably not so. In addition, if you carried any of the arguments we've made to their extreme, you might argue that what we're saying is you don't need a whole-life industry. But we're saying you do, and that it would be lamentable if they disappeared.

That kind of focused regulation in the way you administer it is not easy—and it's necessary.

The Chairman: Is there any further comment? No? So that was the final question.

On behalf of the committee I'd like to thank our very interesting panel. I guess we will have to learn to co-exist with the two realities. I think striking the balance, Mr. Banks, as you correctly noted, is going to be the challenge this committee is going to face. But as I said earlier, we need to define that future a little bit better. I hope I can count on your cooperation in the future to make it happen.

We're going to suspend for approximately five minutes so that the clerk can set up for the next panel.

• 0957

• 1006

The Chairman: I'd like to call the meeting back to order and ask the members of Parliament who sit on this committee to kindly come forward.

We have the pleasure to have with us representatives from the Committee on Monetary and Economic Reform, Credit Union Central of Ontario, Davis Webb Schulze and Moon, and Trust Companies Association of Canada.

We will begin this session with a presentation by Mr. William Krehm. Welcome. Or should I say welcome back.

Mr. William Krehm (Chairman, Committee on Monetary and Economic Reform): Thank you.

Actually, my submission, somewhat dated, took the form of the lead article in our monthly newsletter, entitled “The task force report—a virtuous evasion”. That is not to belittle the effort of the task force under its second chairman.

The original working paper was a disgrace. Its message was that in order to permit the Royal Bank to catch up with the largest banks of the world—it had sunk from position 12 to 57, if I remember rightly—the mergers had to be adopted. It omitted to say that the five or six largest banks in the world, which happen to be Japanese, lost the bulk of and sometimes more than their total capital in speculation and have been on the public pogey in Tokyo for the last seven or eight years. I'm glad our prime minister caught up with that some months after the working paper was delivered.

There is much in the task force report that is commendable—for example, to have an ombudsman paid and appointed by the government, rather than by the banks. That should be elementary. That's to be applauded, etc. But this is not just a matter of maintaining employment by the banks. That's a very worthy consideration, but to limit it to that would be to trivialize the entire issue.

One has to know the record of our banking industry and the frequency with which it has had to be bailed out at the taxpayers' expense in order to judge what the future of the financial industry is. There is a most intriguing technology of communications and information, but let us not confuse that with the purpose and in whose interest it is applied.

I will tell you, when our humble little newsletter gets a cheque for $35 from somebody, a subscriber in Italy, or a $100 contribution drawn on a British bank, we can't cash it on this side of the water, because the cost would equal its nominal value. So much for one-stage services.

• 1010

The important thing is what are we authorizing? Our banks operate under a franchise. The term is not popular any more, but it is to create money. That is called seigniorage. Until well after the Second World War, the proportion used to be 10% of its deposits—which, for the banking system as a whole, equalled the credit they created because it took the form of deposits that had to be backed by 10% in legal tender left with the Bank of Canada, which earned the banks no interest. That has been whittled down over three decades or so to under 4% by 1991, when the Bank Act was amended to phase out those reserves over a three-year period.

The multiplier, the amount of credit the bank system creates in relation to the legal tender in its possession, is tabulated for you on page 2. In 1946 it used to be just over 11:1. It has gone up like a rocket since the reserves were phased out; it is currently 358:1. But that's the beginning of the tale, because parallel to that, the deregulation of what banks could use with the credit they created and the deposits they took in has been liberalized—practically abolished.

If you read your Globe and Mail this morning, you will see the Bank of Commerce has lost substantially, to the point where it's creating difficulties about the proposed merger with the Toronto Dominion Bank. But that's the beginning. It will take months and perhaps a couple of years before the losses of our banks, with the money they created—the money they printed... You know, when you're talking of the Bank of Canada lending money to the Government of Canada, the term is they are “printing money”.

Well, what do the people who say that believe the commercial banks do? The only difference is that when the Bank of Canada creates money by lending money to the government, let's say by taking in Canadian government bonds, the interest paid on those bonds reverts to its sole shareholder, which happens to be the Government of Canada. So in effect it's a nigh interest-free loan.

Now, that sort of credit cannot be extended indefinitely; that would be inflationary. But as long as there are unemployed resources in this country... That is the way the Second World War was financed, at interest rates of 2.5%, which in 1943 or 1944 was actually reduced to 1.5%.

This is what has happened. On page 2 you will see a table that from Bank of Canada review statistics tabulates the ratio of total assets or liability—and by a formalism of double-entry bookkeeping they are identical—the ratio of that to the legal tender in the possession of the banks. I mentioned it has risen from 11:1 to 358:1. This does not include the derivatives the banks have in their possession, are committed to. You can check with OSFI, the Office of the Superintendent of Financial Institutions, as I have, and you will learn that the bulk of those derivatives with which the bank gambles are off their balance sheets.

• 1015

What has overtaken the world, the so-called Asiatic flu, did not stem from Asia; it came from Basel, Switzerland, the Bank for International Settlements, which for 40 years has tried to remake the banking systems of the world in its own image. The Bank for International Settlements was established in 1930 as a purely technical agency of central banks, not of governments—it's a different culture—to deal with the transfer payments...

I'll just take a half minute, if I may.

The Chairman: This will be followed by a question and answer period, so you can—

Mr. William Krehm: Very good.

In short, our banks have been taken away from the path laid out and that is still in the Bank of Canada Act. In its preamble you will read that the banks, to the extent that they can do this through monetary policy, must minimize—that's not the exact word—fluctuations in trade, commerce, prices, and the exchange rate, not zero inflation alone.

Thank you.

The Chairman: Thank you very much, Mr. Krehm.

We'll now hear from the Credit Union Central of Ontario, Jonathan Guss, president and CEO. He's joined by Laurie Stephens.

Welcome.

Mr. Jonathan Guss (President and Chief Executive Officer, Credit Union Central of Ontario): Thank you, Mr. Chair.

We're happy to be here this morning to take the opportunity to give you our perspective on the MacKay task force report. We appreciate that you've taken on this task for the government.

I promise to try to keep my remarks brief. I always have a lot more to say that I don't, but there is more detail in our submission that we passed in to you today. I'm simply going to touch on a couple of highlights.

First of all, we think MacKay was terrific, a very impressive report, a massive piece of work. It provides compelling evidence that our sector is changing. We all knew the banking sector was changing, but they have really laid it out in a very thoughtful way, showing what the implications will be.

We think the challenge for governments is to shape that competitive environment. The report, as other witnesses have said, encourages competition. They've kind of said let a thousand flowers bloom, but you still have to shape it and make sure it works.

Of course credit unions are provincially regulated. My central is provincially established but federally regulated, and our Canadian central is also federally regulated. So you do have a major influence on how we make our decisions and how we get our jobs done in our industry.

Credit unions were encouraged by the task force report. It gave a strong vote of confidence to credit unions. We were mentioned throughout the report and right up front as a very viable alternative with terrific potential to improve the market for financial services.

We also appreciated the specific recommendations for credit unions and centrals that would give us more flexibility in how we deliver to our credit unions and through our credit unions to Canadians. Our view is that the government should be taking it very seriously.

It's a very balanced report. It's almost calibrated in the way it sets out what needs to be done to give a balance to all the sectors. Our view is that it should be adopted in the main, as presented.

• 1020

There is a complication for us. I mentioned how we are provincial and partly federal. Obviously, for it to work for us the provincial and federal governments have to get together. That harmonization is critical to us in finding a way to persuade the provincial governments that this is an excellent report with good recommendations. It was a courageous report, in that it was the federal government that asked for it, but it gave advice to both levels of government. I think they were courageous, but we need to work with both levels of government to make sure you work together to deliver. That's really my first message: federal-provincial relations are critical for us to make this work, and we need your cooperation and the provinces'.

I can give you an example of that in insurance, where they've said it's time to let insurance companies get into the CPA, into the clearing system, basically into taking deposits. We think that's good for competition. We think the insurance companies will bring a lot to the table that way, or potentially could. They've also said banks and credit unions should be able to deliver, finally, insurance products to their members. We think this will make that industry much more competitive and that we can do a great job of doing that, but obviously we need the province to agree and to act in a timely fashion.

I think I should make one other point, and then I'll turn it over to the next group.

Credit unions across the country are taking a real hard look at how they deliver services. We're really looking at our system's structure. Our strength is relationships with our customers. We call them members, but they're also owners, so if we make money the money goes back to the people who have used the services. The task force report acknowledged that we're already involved in this exercise of reviewing our structure and how we govern ourselves and deliver services.

We are very diverse. Every credit union manager is what I would call a maverick. These are people who probably didn't want to work for the banks, or worked for the banks and didn't like it and wanted more independence in the way they operated their financial institutions. So for us not every credit union is going to come to the same conclusion about how we want to be governed or how we want to govern ourselves.

In Ontario we are coming to the end of a month-long series of regional meetings. We've talked to our 309 credit union members by going to 15 cities, sitting down with people and really hashing out how we should be operating. It's been very interesting. I think it's important for you as members of this committee to understand that whatever structure emerges for credit unions, member ownership and member governance and community governance is important. And that's where MacKay was so strong in our favour. You need governance of financial institutions in the communities so they'll stay.

Let me give you a quick example on this front. If you're running a major bank that operates across the country, or any major financial institution that operates across the country, you want to put your money to work where it will give you the highest return. That's very rational, logical, and it's a good thing. It's driven by the profit motive. If you're running a branch in Thunder Bay and you're running a branch in Calgary and you discover you can only earn 6% return on assets in Thunder Bay but you can return 15% on assets in Calgary, you will move the money from Thunder Bay to Calgary. It makes sense. But if you're running a credit union that is governed in Thunder Bay and draws all its deposits from Thunder Bay, when the economy gets bad, you stay there. You don't move the money across the country. You're happy with your 6%. You have to be profitable and you have to build retained earnings and capital, but you don't move the money out of the community. That really gives us a distinct edge. That's the meaning of community governance. It's an example of how community governance works.

I want to say that credit unions and their members value that ability to make decisions on how they will operate locally. Some of the options that are being discussed by our national system, and the options that MacKay gives us, allow us to create co-op banks—and that's very good. We're having that debate. Some credit unions may want to take advantage of it, and I don't knock it at all, but I do have to tell you, speaking for Ontario, that the vast majority of our credit unions do not support the co-op bank model because of the threat to community governance. It's possible that it would undermine community governance, and therefore my credit unions, with one or two exceptions out of 309, are saying they don't want to become a nation-wide cooperative bank.

• 1025

So you should be very aware of that as you hear from other credit unions across the country. We're prepared to see some credit unions go that way. We'll work with them, but you should be aware of how the system views that option.

On that note I'll end my opening remarks. I've taken quite a bit of time, but I'll be pleased to answer questions later in the morning.

The Chairman: Thank you very much, Mr. Guss.

Now we'll hear from the Trust Companies Association of Canada, Gerald Soloway, chairman; Joseph Chertkow, director of legislation and policy; and William Harker. Welcome.

Mr. Gerald Soloway (Chairman, Trust Companies Association of Canada): Thank you, Mr. Chairman.

My name is Gerald Soloway. I'm the chairman of the Trust Companies Association. I'm also president and CEO of Home Savings & Loan Corporation, a regulated institution.

I'm accompanied today by William Harker, who is chairman of Trimark Trust and a vice-chairman of the Trust Companies Association, and Mr. Joseph Chertkow, who is the director of legislation and policy for the Trust Companies Association.

The Trust Companies Association is a representative group of small, independent deposit-taking institutions. Our members can be characterized as niche players from the standpoint of the retail and financial business services they provide and by virtue of their focus on communities across Canada.

The loan and trust sector has undergone dramatic change in the last decade. A key difference in our industry is the fact that bank ownership of trust companies has been permitted since the 1992 federal reform. Having survived the industry consolidation over the past decade and the very deep recession in property values in the early 1990s, our members are convinced there is an important economic role to be played by the second tier of independent Canadian financial institutions. This is an entrepreneurial sector. It's been responsible for many of the innovations in customer service now taken for granted in the Canadian marketplace.

Our industry has also had a key role in building on long-term personal relationships to assist consumers and small business owners in planning their financial futures. As Canada's population continues to age, there will be a major focus on financial services.

Two of the main themes in the MacKay task report are enhancing competition and competitiveness, and improving the regulatory framework. Our members are keenly interested in what the report says on these themes and what the government's response will be. We are therefore very pleased with the task force vision for Canada's financial services sector. The report says there should be several large and many smaller national and regional successful Canadian-controlled financial institutions, with strong competitive positions in the domestic markets they serve. This will be particularly important in light of the proposed bank mega-mergers.

The critical question we put to the committee is what kind of framework and policies will be put into place by the federal government to encourage additional sources of competition. One possible source is foreign institutions. However, we do not believe there is very much evidence at this stage that a large number of foreign banks will be encouraged to come to Canada by changes in foreign bank entry policy. We believe some will come to Canada, but not many. However, we do believe the only real source of retail competition must come from Canada's domestic institutions, including the smaller trust companies and the credit unions with their community and regional focus.

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The issues your committee will be facing include what kinds of policies can be implemented to create an environment in which members of the second tier can become better competitors, and what kinds of incentives can be put in place for the benefit of the second-tier institutions and their customers.

As a starting point, we believe the rules should not be structured to favour large over small institutions. I want to mention a recent regulatory initiative, which is CDIC's proposal that is to start on April 30, 1999, for a risk-related premium regime for all deposit taking insurance in Canada.

We believe that instead of encouraging a strong second tier, it could go the other way. It could harm the interests of smaller companies by making them less competitive. We believe the proposed system will operate to assign the smaller institutions a higher risk rating, and this will impose a financial hardship. It's difficult to make profits if you are penalized under the system, and the higher premium, which we believe will fall mainly on smaller companies, will erode already shrinking margins. We believe it's a dangerous experiment. We've proposed to CDIC a pilot test for two years before this kind of plan is implemented. Its value today as any kind of useful risk management device should be seriously questioned in Ottawa.

Leaving that aside, the main issue is what approaches can be taken to encourage a vital second tier of Canadian financial institutions. Let me turn for a moment to some of the relevant recommendations in the MacKay report. A number of the recommendations are directed at making it easier for new financial institutions to start up. MacKay recommended lowering the tax burden with the recommendation and the recognition that capital taxes, not income taxes, are a significant barrier to entry for smaller institutions. But why limit a ten-year holiday for capital tax to new institutions? We would suggest both existing and new members of this sector need this kind of support. We believe the government needs to go further and eliminate capital taxes for smaller institutions, both new and existing.

Secondly, the task force recommends a new mandate for OSFI, supporting a more entrepreneurial and innovative approach to financial services regulation. It refers to changing the supervisory culture. The task force also recommends that regulators be revised from a one-shoe-fits-all policy. We are pleased to see the direction taken here by the MacKay report and look forward to the recommendations by MacKay coming into force.

However, we believe the task force does not go far enough. We would also recommend the Auditor General be retained to identify the range of reporting and compliance obligations, which is very extensive, that currently applies to small institutions, and we recommend simplifying the system.

We also recommend that a new small institutions division be established within OSFI, to be staffed by persons with specific expertise and experience with smaller institutions. That is how the supervisory culture can change.

The task force recommends eliminating regulatory overlap at the federal level. OSFI should be the sole regulator. The overlapping mandate of CDIC should be repealed. We have advocated this direction for years and strongly support MacKay's recommendation in this area.

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The task force makes a number of recommendations to encourage the cooperative sector. These include chartering and continuing as new cooperative banks. We support the recognition of Canada's credit unions as a major part of the second tier and their implementation of the recommendations as drafted. We believe the new powers that are proposed to be granted to credit unions, where appropriate—and I say where appropriate because they won't all be—should be extended to the trust company sector as well.

We stress that in the interests of enhancing domestic competition Canada's small entrepreneurial institutions should be given the same kind of incentives as those being proposed for the cooperative sector. In other words, why not a level playing field with the credit unions? This should include the opportunity to convert trust companies into community banks. The right to charter or continue as a community bank should be clearly recognized for all present and future trust companies.

In conclusion, we support the task force vision for the financial services sector. We urge the government to come forward with its vision. We believe it is in the interests of Canadians for that vision to include a dynamic and competitive second tier of independent financial institutions.

We thank you for giving us this opportunity to comment on the MacKay report.

The Chairman: Thank you very much, Mr. Soloway.

We'll now hear from Mr. Christopher Moon, from Davis Webb Schulze & Moon. Welcome.

Mr. Christopher Moon (Barrister and Solicitor, Davis Webb Schulze & Moon): Thank you, Mr. Chairman and members of the committee.

I certainly appreciate the opportunity to appear today. I'm a corporate lawyer with the firm of Davis Webb Schulze & Moon in Brampton, where I've practised corporate and commercial law for about 25 years. The Davis name is well known in the world of politics and government, but I don't regard this as a political presentation, nor is it a presentation by our law firm. Rather, I am personally mindful of the consequences of the decisions Parliament must make, and I believe I have some points for your consideration.

I'm also on the executive of the business law section of the Canadian Bar Association and have served as a director of the Brampton Board of Trade, so my perspective today to you is that of someone involved in business, primarily independent businesses, and as someone who has had a long-standing relationship with the banking community on the street.

I will speak about three subjects in the MacKay report, which I support the broad thrust of very much, as do the other speakers. Those areas are small business lending, privacy and consumer issues, and competitiveness and bank mergers.

The section in the report on Canadians' expectations on corporate conduct acknowledges that small business lending is a continual matter of public debate, and it's often an area of criticism of the banks for not financing business start-ups. I've spent many years dealing on both sides of that issue. I have seen the difficulties that arise when banks curtail credit seemingly unilaterally or do not want to finance a particular start-up enterprise. On the other hand, I have represented most of the major banks on business lending programs, including small business lending under the government guaranteed business improvement loan program. I have processed the security and advances on many hundreds of small business loans in the past three years alone.

The small business loan program is a significant boon to small business and permits many enterprises to start up and others to grow. However, I also see many of them fail. When our firm goes in to liquidate the assets, in almost all cases there's a considerable loss. Without this program the banks would be placed in an almost completely untenable position on lending to these small businesses.

The one concrete recommendation on small business financing that MacKay makes to directly help small business is that lenders should be prepared to make available more innovative financing packages with appropriate pricing for high-risk borrowers who may now be denied financing. In my experience this is a somewhat naive statement, as in most high-risk cases there is no appropriate pricing that will cover the loss ratio and cost of administration. If as a public policy issue we want to continue to finance these types of loans—I think we should want to do that—we're going to need continued government participation in the risk through programs like the business improvement loan program. To excoriate the banks for not taking on these loans is really not credible.

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On privacy and consumer issues, I personally concur with and strongly support all the recommendations on empowering consumers. The banks are in a tremendous position of power and influence over their customers, and should be kept to strict accountability on how they use or abuse that power. The report recognizes that this power base is twofold: one aspect is confidential personal information and the other is credit.

On privacy, I personally would go further than the report. No customer should get a call from a life insurance sales representative using information from the credit department. Conversely, the credit department should not get any health or medical information from the insurance group, even within the same bank. I would recommend that banks be specifically legislated from disclosing financial, personal, or medical information gained as part of selling any one product or service to any other branch or division. Nor should they even use this for marketing the products or services of any other branch or division without the prior consent of the customer.

A thornier issue that has to be dealt with is one that's obviously a very timely issue for the MacKay report. This is the question of competitiveness and merger policy. On this issue, I suggest to you that MacKay is substantially on target, but the bias is toward the overregulation of banks on mergers. Although the report states that it's important for public policy to not put unnecessary constraints in the way of business decisions, it goes on to recommend a detailed public interest review process for mergers. The Minister of Finance would have the ability to extract binding undertakings and to deny a merger if there are public interest issues that suggest he should do so. This is in addition to a competition review under the Competition Act and a safety review by the Superintendent of Financial Institutions.

I suggest to you that if a bank merger can pass competition and safety reviews, the public can be assured that their money is safe and that competitiveness in the financial sector will remain. Those are legitimate, hard economic public interest tests. To go beyond that and have a general public interest review process, I submit, is not necessary or warranted. Healthy competition will assure that consumers receive good financial services.

To require more public commitments from two Canadian banks that wish to grow by merger than from one that grows internally or a foreign bank is prejudicial to smaller Canadian banks or even larger ones, and it's not justifiable. The MacKay report itself recognizes that at the end of the day, it's the leadership of the bank and the shareholders of the institutions involved who have the responsibility for determining what strategy is best for each institution.

Despite this picture of the competitive and dynamic future that the MacKay report paints, its recommendation on mergers seems to be based on an earlier era of thinking, such that the Canadian banks can be regulated in their business combinations without material consequence to their ability to compete. In a deregulated, competitive, and fast-growing world, this conclusion, I suggest, is untenable and potentially counterproductive for achieving the stated goal of a strong Canadian bank presence.

As well, it seems to me that the recommendation for a public interest review process on mergers implies that Canadian banks would be subject to a different and more onerous set of rules than those for foreign institutions or other non-banks, such as provincially incorporated asset-based lenders and insurance companies. Unless these rules apply to all participants in the marketplace, regulating Canadian bank mergers and requiring potentially non-economic and costly public interest undertakings can only diminish the ability of the banks to compete efficiently and profitably against the others. Canadian banks would be at a comparative disadvantage with foreigners and non-banks.

If undertakings are to be permitted under these circumstances, then I suggest that they should be of a limited duration and scope.

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The recommendation that the minister should have the power to deny a merger because public interest issues suggest he should is a test that's too low and arbitrary. I would submit to you that there should be compelling evidence of a material clear and present harm that will be suffered by the broad Canadian public before the minister should have the power to interfere with the decision of two banks to merge. The thrust of the policy should be to favour business freedom with public protection, not public interference in business decisions.

The definition of the term “public interest” should also recognize that the freedom of business choices for Canadian banks in a globally competitive marketplace is itself in the public interest. Businesses, including banks, need certainty to make decisions and move forward.

A vaguely defined policy, as set out in the report, creates uncertainty. It impedes decision-making and the ability to act decisively to create or exploit business opportunities.

Mr. Chairman, to conclude on that point, I would submit to you that to achieve maximum benefits to bank customers, Canada, and the banks, any regulation to be imposed on mergers should be equally applicable to all participants in the banking marketplace, including the review of mergers by foreign entities who are banking in the Canadian marketplace.

The imposition of undertakings or conditions on Canadian bank mergers should be the exception rather than the rule. These should not be required unless there is a material clear and present harm that will be suffered by the broad Canadian public. These undertakings should be of limited scope and duration. Also, public interest should be defined to recognize that permitting freedom of action by banks and businesses to make themselves competitive is itself a desirable public interest goal.

Thank you. I'd be happy to take any questions later.

The Chairman: Thank you very much, Mr. Moon.

We'll move to the question and answer session, beginning with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman. Gentlemen, thank you for your presentations.

I have a few questions. My first one will be to Mr. Guss.

On one of the pages of your presentation you say, “for that reason we wholeheartedly support recommendations that call for”—this is the first one—“financial institutions to have a community focus and be held accountable to their communities”. Exactly what do you mean by that? I would imagine that as part of good business practice, financial institutions would want to have a good corporate image and a good corporate-community relationship as a general rule. Are you suggesting that we try to regulate some sort of a community involvement? What exactly do you mean by that?

Mr. Jonathan Guss: Okay. Let me be clear. I think you should do as little by regulation as you can—

Mr. Dick Harris: Right.

Mr. Jonathan Guss: —but you can set some rules that give organizations incentives to be accountable to their communities.

One of the reasons we don't think you should regulate that is because we do it so naturally by the way we are established, incorporated, and governed. I keep coming back to the word “governance”. The governance of credit unions is such that we naturally are accountable to the communities in which we operate. We're very proud of that.

So we support the recommendation of MacKay that financial institutions must be accountable to the community. So we'll stand up with them and say we're there and we do it well. Leave it to the others to figure out how they want to do it. We're getting good market share based on that community governance.

Mr. Dick Harris: What do you think the MacKay report, in your vision, means by financial institutions being accountable to their communities? What does that say to you?

Mr. Jonathan Guss: I gave the example earlier of how organizations that span the country or the globe will move money to the place where it will get them the highest rate of return.

So I think if you are operating in a community for years making a 10%, 15%, or 20% return on equity, you really owe something to the community. When the economy there turns bad, you shouldn't pull out. You have to be rational. You have to use common sense. You have to make sure you're profitable, but for a difference of three or four percentage points on return on equity, you shouldn't move out. Our credit unions, of course, stay.

So I would look at other institutions and ask why they're closing branches. They can still make money in those communities with those branches. I don't think you can regulate that they have to stay. They should have the sense and the values that would keep them there.

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Mr. Dick Harris: So you're talking more encouragement—

Mr. Jonathan Guss: That's right.

Mr. Dick Harris: —and influence than regulation. That's fine, thank you.

Mr. Moon, I appreciated your presentation, particularly the portion where you talk about how a lender should be prepared to make available more innovative financing with appropriate pricing for high-risk borrowers. I agree with you that this is a fairly naive statement. I don't think that we can regulate banks in certain lending practices. We cannot tell them who they should lend money to by regulation. Rather, I think we should be creating an opportunity for people who have more expertise and interest in high-risk lending to establish and fill that void from micro-lending up to the lower levels of small business lending for start-up and expansion.

Do you have a comment on that observation?

Mr. Christopher Moon: Although I didn't mention it, it is in my notes that I think Matthew Barrett himself of the Bank of Montreal came up with a proposal to establish a new bank for small business. That actually came out before the MacKay report was released. I think this is innovative thinking. He didn't say he's prepared to lose money, however. I think innovative thinking is one thing, but suggesting that the banks should be taking on high risk without appropriate pricing to cover it off does not work.

Mr. Dick Harris: I remember I asked him a question about that and he responded that he was somewhere in the neighbourhood of $100 million in loans. I said, “Well, Mr. Barrett, I think we're talking about from $500 to $5,000 in micro-lending.” I think he realized that we were encouraging him to somehow fit into their plan on micro-lending if it was at all possible.

I have one more question, Mr. Moon. I think we're talking about the public commitment. You mentioned in one of your pages:

To require more public commitments of two Canadian banks who wish to grow by merger, than of one that grows internally or than of a foreign bank, is prejudicial to smaller Canadian banks and not justifiable.

I tend to agree with that. I would suggest—and see what you think of this—that the public commitment that would be part of any merger proposal might possibly be limited to, as part of the merger proposal, a mitigation plan for downsizing of branches and in effect employees.

Do you think that's about as much as we can ask of banks as far as public commitment goes—to make part of their merger proposal package, if they acknowledge there's going to be downsizing, exactly what kind of mitigation plan they have to lessen the effects of that?

Mr. Christopher Moon: Two points arise from that, in my mind. The first one is, and I think you have emphasized it, that we shouldn't leap upon the opportunity of a merger process to hammer out concessions from two particular banks, perhaps to their detriment in the marketplace, compared with others who don't have to give those concessions, such as foreigners and non-regulated banks.

As far as the types of things that you wish to do are concerned, it may well be that one of the objects of the merger is to reduce the cost ratio. And as I understand from reading some of the background papers, this is a considerable issue for the banks, which is to reduce their cost of doing business. Since people are one of the major costs, one must assume that people are going to part of that process. As Mr. Barrett said in another paper I filed, they can reduce costs by growing or shrinking their overhead.

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I think to ask a bank how it intends to deal with those is an appropriate thing to do, and to have them be very thoughtful about it is an appropriate thing to do. To ultimately say to them, which I think the report suggests by the minister, to deny the merger if he's not happy with what is said, I don't think is appropriate.

Mr. Dick Harris: Thank you, Mr. Moon.

I have one more question, if I may, to Mr. Soloway. I want some clarification, if I can, sir. On page 4, you talk about the opportunity to convert trust companies into community banks. I deal with a trust company, and as far as I'm concerned, it's my bank. I make deposits. I can get pretty well any service there that I can from a chartered bank or a tier one bank. What would be the difference between a trust such as I deal with now and it becoming a community bank?

Mr. Gerald Soloway: To a large extent, I think the number of powers that are available to a bank in terms of serving a community are much wider, such as issuing letters of credit. Mr. Harker will expand on this.

Mr. William Harker (Vice-Chairman, Trust Companies Association of Canada): I'll just add a couple of points to the letters of credit guarantees, but commercial lending is a big area that trust companies are restricted on. There's also the factor where if concessions in the way of encouragements or incentives are being made to small institutions or these community banks that are powers that perhaps large banks might not have, that could be an important differentiating factor as well.

But the commercial banking kinds of services are the main feature banks can do that trust companies cannot do.

Mr. Gerald Soloway: Just to amplify, there's a group of powers the banks can do that trust companies can't, and although thought of as their bank...if they're going to better service the community and compete in a given geographic area, the ability to convert to a bank would be welcomed.

Mr. Dick Harris: The opportunity to engage in commercial lending would probably be a big change, more opportunity?

Mr. Gerald Soloway: Yes.

Mr. Joseph Chertkow (Director, Legislation and Policy, Trust Companies Association of Canada): I would like to amplify on that answer. Two things pop to mind for me. First of all, banks are not faced with the same degree of overlapping provincial jurisdiction as this industry has faced for the last 25 years. That's the real value of the banking franchise.

Secondly, one that's extremely arcane but still embedded in the Bank Act is the fact that only a bank can use the term “banking.” So they have a monopoly on a common English word, and I think that's a value of the bank franchise. To the extent that it's perceived to have a benefit, I think there should be an availability to continue or to convert to a bank.

Mr. Dick Harris: Thank you.

I have just one final question, Mr. Chairman, to Mr. Krehm. It's an interesting proposal. If I understand, you're talking about the requirement of our lending institutions to get back more to a reserve system. This is a concept that has been talked about for decades, I guess. One of the opposing sides of it is that while it seems like a good idea, and it would be nice to have all our currency covered by gold reserves—

Mr. William Krehm: That has nothing to do with it.

Mr. Dick Harris: Okay. But requiring it to get that mode of reserve system, wouldn't this in fact raise the cost of operation of the financial institutions, which would ultimately be passed on to the consumers of their services? Wouldn't we end up paying a higher price for services?

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Mr. William Krehm: First of all, we had fractional reserve banking until the year 1994, and in the United States—since we talked about an equal playing field—the American banks still must put up 3% of their deposits with the Federal Reserve. The Bundesbank, which is the temple of monetarism, has 2% reserves. The advantage of that is the following: if you have an overheated economy, instead of trying to cool it by raising interest rates, you leave interest rates alone and cool the economy by raising the reserve requirement, which restrains credit. That does not please financial speculators who live on the ups and downs of interest rates, but it helps the community.

That answers your immediate question. It has nothing to do with gold.

Mr. Dick Harris: You talked about the Asian crisis. I think you basically said the Asian crisis was due to a decision made in—

Mr. William Krehm: The deregulation of banks.

Mr. Dick Harris: Right.

One Asian country that has survived the Asian flu in fact is Taiwan. When I asked the minister of finance there why his country's banking system has pretty well survived the Asian crisis, he said in his best general terms, “We don't make stupid loans in our country.” He said, “The fact is that in a lot of other Asian countries most of them are in trouble because they made very imprudent loans and their non-performing loan percentage has just shot sky high. Because we're much more prudent in our credit giving at our banks, our non-performing loans are minuscule compared to theirs.”

Mr. William Krehm: May I say a word on prudent loans?

Mr. Dick Harris: Sure.

Mr. William Krehm: This has bearing on the Asian crisis and the small business borrower in Canada.

When our mega-banks, even as they are, lose billions in their imprudent loans in countries that they know very little about, what happens? They call in the lines of credit of their small borrowers. That happens in every crisis. And that is why we should not talk about free-market, deregulated banks and let them get big in Asia without considering how that can affect small borrowers in Canada. Anybody who has been in business—and I was—can tell you that when the banks got into trouble, small businessmen had their lines of credit cancelled overnight because their bank had gotten into trouble at financing perhaps Campeau in the United States, who was collecting department stores.

Mr. Dick Harris: I can relate to that. I was in business in the 1980s out in B.C. I know exactly what you're talking about.

I didn't consider the lending they did to the Latin American countries and some of the third world country lending very prudent, though, when they lost themselves hundreds of—

Mr. William Krehm: I don't consider some of the lending in New York very prudent. I refer to the long-term capital hedge fund, where some of our smartest and biggest financial entrepreneurs... You cannot discuss the needs of domestic borrowers without considering what our banks are involved in on a globalized scale. Globalization of communications is a fact. But on the other hand, using it to gamble 24 hours a day with other people's money or with credit the banks can create, under licence from the Government of Canada, is a different thing.

Mr. Dick Harris: Thank you very much.

The Chairman: Thank you, Mr. Harris.

Mr. Brison.

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Mr. Scott Brison: Thank you, Mr. Chairman, and thank you all for your thoughtful interventions this morning.

Mr. Moon, you were speaking about small business lending and the Small Business Loans Act. Wells Fargo a year ago had about 10,000 customers in Canada. Now it has about 120,000 customers. They're doing prime plus 8% spreads on their lending. Knowing that, do you feel there's significant opportunity for private sector small business lending without government involvement, and we could perhaps reopen this? I'm thinking in terms of the provisions for new banks that Mackay has posited and the advantages for these new banks.

I would appreciate all of your comments on this. Are there things we can do from a regulatory perspective that can potentially get government out of the business of lending? I'm an Atlantic Canadian so I have a fairly jaundiced view of government lending to business, recognizing some of the benefits but also recognizing some of the negatives.

What can we do from a regulatory perspective to encourage other players in the financial services sector, be they foreign banks, these new banks, trust companies or credit unions, that could potentially turn this from a government-sponsored activity to a free market-driven activity that actually has the potential to increase or at least maintain access to credit for small business and, arguably, get government people, bureaucrats and politicians and the like out of the business of determining the credit risk of a small business venture?

Mr. Christopher Moon: I'm not a banker, so you should certainly take any comments I make subject to that. I do know however, even dealing with the Canadian chartered banks over the last three or four years, that the statistical analysis that's being performed on smaller lending is allowing them to make decisions on a statistical basis to lend to a particular profile or group without heavy security, recognizing there will be a particular loss ratio, as opposed to making a detailed analysis of each loan.

I know that's also being competitively driven by the cost of lending. Some of the banks are establishing low-cost lending programs of up to $50,000 or $75,000 almost on a credit card basis for small business. They are looking at the personal credit of the individual as opposed to the enterprise itself, recognizing that if the individual has a good credit history, they're likely to repay their loan.

My small knowledge is that this type of analysis is being used already to develop lending programs in Canada. Without direct knowledge, I would suspect that's the kind of analysis being done by Wells Fargo and others to create lending packages. But I can't comment on more than that.

Mr. Scott Brison: From my understanding, Wells Fargo is basically recognizing there's significant risk to these loans and is costing the loans accordingly. There was a time when banks did character lending, and that was a great time. They lost less money on character lending than they did on foreign lending during the 1980s. I'm talking about the high cost of borrowing, but I think there's still room for some character lending. If we make the provisions for the new banks advantageous—and perhaps for credit unions and trust companies—perhaps there is a way we can provide a one-up that can actually increase and improve access to capital in small towns without compromising the chartered banks.

Mr. William Krehm: May I say a word on that? As a matter of fact the Wall Street Journal just a few days ago published statistics that showed the soundest and most profitable banks in the United States were not the big boys but the middle-range banks that in essence still related to character, which the computer of course is blind to. Second, community banks that know their clients, live with them, and know who is to be trusted and who is not, do better.

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We made the suggestion to the task force that a new type of bank charter be offered. Perhaps some of the credit unions could be welcomed into this category, although their problem of course is that they are owned by their depositors, whereas banks need short-term assets they can cash in. Banks take deposits.

In this new bank charter, loans would be limited—I hope Mr. Barrett forgives me—to $1 million or $2 million. In return for a charter, which is an extremely valuable asset, such banks could be asked to establish branches in communities with populations less than 10,000, for example, that have been deprived of their banks by downsizing of the large banks. Now there are a lot of experienced banking personnel who don't have banking jobs because of the downsizing. You'd have no problem staffing a bank of that sort, and there would be a flock of unhappy clients of the large banks going to these small banks.

They would develop as community banks, stay there and be limited from growing big. The large banks are not very interested in that business anyway; they're off to the big things. If you participate in a loan of $100 billion that is syndicated, you only need one top executive to sign the commitment, but they don't know a great deal about those things. That can ricochet and affect the Taiwan banks too, you know. That's the beauty of a globalized economy with all barriers down. It's like a big ship with all cannons loose.

Mr. Scott Brison: Thank you very much.

The Chairman: Thank you.

Mr. Jonathan Guss: I want to come back to Wells Fargo. I think it's an excellent example and it proves to me that the challenge in this area is access and not price. One bit of advice for government is, when you are looking at a lending program, think in terms of incentives to create access to financing and don't be concerned about price.

Credit unions do a lot of small-business lending. In Ontario we have about $13.5 billion in assets and $2 billion of that, or 15%, is in small-business lending. When I say “small business” I mean truly micro and small business. We find that credit is readily available in Toronto. There's a lot of competition in Toronto and it's a lot easier to get a business loan here. When you move outside of Toronto to the suburbs it's much harder. When you look around, that's where trust companies and credit unions have grown the most and are most obvious competitors—outside of the city. It's because the banks are not as responsive there.

So I think we have to find incentives to bring the banks out there, and find incentives to help us access those markets as well.

Mr. Scott Brison: Thank you.

Thank you, Mr. Chairman. May I have two more questions?

The Chairman: Yes, you can, especially if they're good.

Mr. Scott Brison: They are always good. You're very good to me, Mr. Chairman.

I've asked this question about new banks to other witnesses because I really believe there's significant potential for new banks. In many ways, if we create the right set of advantages from a regulatory perspective, we can offset any fear that individuals may have about an increasingly monopolistic or oligopolistic system.

What are some of your ideas on the advantages that could be offered to new banks? I know Mr. MacKay has suggested a capital tax holiday. You've suggested something that would be non-discriminatory. One idea is that governments might actually look at getting out of the business of lending to businesses and there could be some specific encouragement or opportunity for high-risk lending plus high-cost lending, obviously.

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There is one thing that could be broached, and I broached this at the Halifax meeting with the auto leasing people and the insurance people. I asked, if the big banks aren't permitted to get into the insurance and auto leasing business, what about the new banks? They really did not have difficulty with the idea of these little $10-million banks getting into that business, because they didn't see it as being unfair competition.

Perhaps there could be favourable deposit insurance advantages, to alleviate the fear of small banks, and of course full access to the payment system. From a technology perspective, the idea that you could be banking with a little community bank in Nova Scotia and be in Toronto and get money from an ATM machine is very powerful. I think the technology has the potential, more than almost anything else, of increasing access for these small banks.

What are your ideas for things we can do that will really generate take-up, that will really encourage an entrepreneurial path for banks that level the playing field without government regulations that say banks can't do this or that?

Mr. William Harker: Perhaps I can begin. I think you've listed a large number of very good ideas. Access to the payment system is maybe not critical when you're just getting started, but as soon as you do get started your clients want those kinds of facilities you're talking about.

The CDIC premiums are an important factor. We've mentioned it before, but the current proposals will almost, by definition, hurt the small banks. If your risks are not diversified, you must be a higher risk, which is correct perhaps by definition, and that will hit the small institution. So at the very least, let's not penalize that small institution. Perhaps we can provide an incentive.

I think you're quite right that there's much more opportunity to see if there will be a negative impact on an industry group such as leasing. If it's allowed in small institutions first, we'll at least have lots of time to see it arise on a national basis. In summary, all of those are very good initiatives.

Mr. Gerald Soloway: Let me just add something, Mr. Brison. For a small regulated company—I just want to try to expand on this—there has to be a regulatory environment that encourages what you're saying. Ours is a small public company with close to $550 million in assets, but as companies go we're small. When we meet with both provincial regulators and the CDIC, which has our deposit insurance, if the environment is such that what you're doing is a little bit different and it's risky, no responsible company will undertake commercial lending unless the environment encourages it. In other words, I'm talking about a company like ours. I can tell you that every level of regulatory environment looks upon commercial lending as the death of the small companies.

The Canada Deposit Insurance Corporation has a very high responsibility. They allow all the small companies—and it's the same with the credit unions through a different source—to attract money from the public. The public gives us money. We pay a premium and our deposits are insured by a third party, which is in effect the federal government. As a result, there is a very high onus on the regulators that we don't fail so there isn't a corresponding charge on the public purse going back through CDIC, etc.

If in our regulatory environment the regulators all say to us, “Look, we don't like that. I don't care what's in the legislation, that's not an area we encourage you to go in as a small company”, you have to be a pretty unusual small company to go forward in that environment. So coinciding with what you're thinking, there not only has to be the legislative change, there has to be encouragement from the regulators that they want smaller companies to do this.

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Mr. Scott Brison: Perhaps the Small Business Loans Act, if we were to look at an evolutionary system, could apply to new banks whereby there could be a cooperative effort between the federal government and the new banks based on the premise that the new banks understand local business better. Again, it's an advantage. Perhaps there's something that could evolve here that would involve the Small Business Loans Act. Maybe that's something.

The Chairman: A final comment, Mr. Krehm.

Mr. William Krehm: I want to make a point. The previous speaker mentioned the risky climate and the secure climate. As long as you single out high interest rates as the only way of cooling the economy, you won't have a safe climate for small banks or mega-banks. The only difference between the two in that respect is that the mega-banks will be too big to fail. It's in every text on banking, by the way. It's an unwritten law. Now, the small banks and trust companies, of course, usually go under or are taken over.

The Chairman: Thank you, Mr. Krehm.

We'll have to move right along to Mr. Valeri, followed by Mr. Cullen and Mr. Discepola.

Mr. Tony Valeri: I just have a couple of questions for the co-ops. MacKay was really emphasizing an enhanced role for co-ops. You indicated that in Ontario, you weren't really going to go out there and start these community banks because of this bit of a burden in your mind in terms of some regulation on the accountability. You're already doing it and you feel you can do it better, so why go the community banking route?

I know the question's been asked in various forms, but I want to be more specific. Are there specific powers that co-ops are currently lacking that really limit your effectiveness in competing with banks? That's my first question.

Second, there's a fair bit of discrepancy when we look nationally at the credit unions. Look at how strong they are in Quebec. Look at VanCity in Vancouver. Then look at other smaller co-ops. There a real difference in terms of size. Is there any sort of common denominator, given the sizes and scopes, that we should be focusing on as a government that would help to create this type of national credit union type of banking sector?

Mr. Jonathan Guss: Thank you. That's a wonderful question. I think the first thing I should do is make sure there's no misunderstanding around what I said about community banks. When I said that credit unions in Ontario are not enamoured of the idea of a national cooperative bank, I was really saying that they don't want to become part of a national institution with branches across the country because they may lose their links to the community. I misled you: they're not against becoming community banks per se.

Mr. Tony Valeri: Okay.

Mr. Jonathan Guss: In other words, a credit union in Toronto called ABC Credit Union might well say, gee, we could use the bank powers under the federal act to become the ABC Community Bank, but we want to remain in Toronto governed by people in Toronto and have that close relationship with the members that comes from being community-governed.

So while there are a few credit unions that very much want to create a national cooperative bank, I'm just saying there are a lot that would rather become, if they became a bank at all, simply a community bank and keep the roots in the community. So that's number one.

We're having a wonderful debate about this very issue, and that's what we asked MacKay to do. We asked for getting a debate started in terms of whether or not to become a national cooperative bank.

There are some powers under the Bank Act—Mr. Soloway has expressed a few—that would help credit unions. One is that we are allowed to do commercial lending, but it's limited. There are credit unions that would like to get beyond those limits, and becoming a bank would help.

The flip side of that, of course, is that we've done our research too. The word “bank”, despite the proponents of banks, is a four-letter word.

We did research. We talked to 2,400 Canadians. We used Environics, which is a very good firm. They said that in Toronto being a bank is fine, but if you go anywhere else, you're probably better off being a credit union, even though people misunderstand what a credit union is. You should stay as credit unions and just get people to understand your brand name better. You don't have to be a member of a union. It's open to anybody in the community. It has a whole broad range of services, just like a bank. But don't call yourselves a bank.

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Now, why is that? Why is Toronto different? Well, in Toronto, 250,000 people work for banks, so it means everybody either works for a bank or has a mother, father, sister, brother, or child who works for a bank, so we love to hate the banks in Toronto. Everywhere else, when we hate the banks, we move. That's why credit unions and trust companies are so much stronger everywhere else.

You mentioned the geographic gaps. I've just addressed that. Say you live in Saskatchewan, where 30% of the market is credit unions, or in B.C., where 25% of the market is credit unions. The farther you are from Toronto and the farther you are from head office, where the decisions are taken, the more likely it is that you'll try an alternative. But if you're in Toronto, you're happy to stay with your bank. You'll go to complain locally and get some responsiveness.

I haven't answered all your questions, but I certainly hit a few things I wanted to say.

Mr. Tony Valeri: In terms of the common denominator, is there anything out there that would be a common denominator in the credit union structure that would help to encourage a national alternative to banking as we know it?

Mr. Jonathan Guss: Yes. We do have to streamline our decision-making. As I mentioned earlier, every credit union manager is a maverick who has a lot of independence because of the local governance. One of the things we need you to do is change an act called the Co-operative Credit Associations Act, the CCA Act, which is the act under which the centrals operate.

There's one central in every province except Quebec, where as you know they have their own system, Desjardins. We think the centrals should be looking at a merger to streamline our backroom decision-making across the country.

So basically I'm talking my way out of a job. I'm working very hard with the other central's CEOs to say we should create one national central and have it make the backroom decision for how it delivers services locally.

That act doesn't allow for us to merge. So there's no act under which we can be continued. A change to that act is essential.

The Chairman: Thank you, Mr. Valeri.

Mr. Tony Valeri: Yes, I do have further questions, Mr. Chairman. Thank you.

I just wanted to move to the merger review process. Mr. Moon, you essentially indicated that you felt the process that MacKay was proposing was somewhat onerous and in your mind probably not required. I'm going to ask the question, and I'd really like to hear some feedback from the other panellists as well.

I almost got a certain impression when I heard you speak. You said that as long as it works in the marketplace and market forces will come to bear, consumers shouldn't have a say because they'll be taken care of anyway.

MacKay said that all large mergers should be subject to the Bureau of Competition Policy, OSFI, and then this public review process. Also, he said the minister should retain some discretion on a case-by-case basis.

You feel this is unnecessary. That's essentially your position: consumers should not have a say in this process.

Mr. Christopher Moon: Essentially. Let me emphasize that if the public is protected, we shouldn't be leaping on the banks when they try to combine themselves to extract concessions that they wouldn't otherwise have to give if they simply grew.

Mr. Tony Valeri: So say from a purely technical perspective that the Bureau of Competition Policy comes out and says that on this particular line you exceed a 65-35 threshold so you have to close all those branches. Then in essence, you're saying that this is okay as long as you comply with that and the public interest is really not a concern that should be addressed at all given the history of the Bank Act and how the whole banking system has evolved in this country.

Mr. Christopher Moon: I have not been involved in this debate in any direct manner other than through my reading and talking to people, but when you have companies like ING coming in with branchless banking, or mbanx, our focus on the traditional forms of banking is natural. We're going to look at what we've always done. But to say to a business that it's obliged to continue doing what it has always done when it thinks it should do otherwise ultimately has to be counterproductive to the economy as a whole. Maybe the banks are making a wrong decision, but who should be making those decisions? Is it governments or the people who run the businesses?

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Mr. Tony Valeri: It's not the government that's making the decision. The purpose of the public review process is to allow the public to have a role in this. It's not government that's going to stand up on Monday morning and say to the banks, “You need to do this because this is the way we feel.”

I question your comment that the process is one that's not required. I might agree with you from one perspective if you were to say that governments should not just go out and say yea or nay. But what's been recommended here is a process to allow the public to participate in this. This goes on with the committee so that people can come forward and voice their opinions about it, as you have done this morning and as others will do. That's really what you're questioning, and that's what I find somewhat disturbing.

Mr. Christopher Moon: I appreciate that. I guess I said two things. One was that I think imposing the process on one particular type of business activity—a combination of two businesses—when you don't oppose it at other times is not appropriate.

Mr. Tony Valeri: It's being imposed on all mergers that are $5 billion or more in the financial services sector.

Mr. Christopher Moon: If the public is concerned—and I guess there is concern about how financial institutions operate in the community—perhaps there should be an annual review of their activities, whether or not they're merging.

Mr. Tony Valeri: That's actually another proposal within MacKay—that the ombudsman would provide such a review to Parliament or to the minister.

Mr. Christopher Moon: Really, the essence of my suggestion was to ask why we are picking on mergers as the time to do that.

Mr. Tony Valeri: I should just respond to that, because you are reminding me of something. Nobody is picking on mergers. Essentially, the banks had asked for this task force to prepare this report. The fact that mergers then appeared is not really the fault of the task force. The task force was not meant to comment on the mergers, but the banks decided to get involved in them before the task force reported. We find ourselves in this situation not because of the task force, but because banks decided to announce mergers before the task force reported on the future of the financial services sector.

Mr. Christopher Moon: I think I should also say that while I made that statement and believe it, I also am realistic enough to recognize that it's not going to happen. If there is going to be a process, I think the more relevant part of my remarks would be that the public interest test itself should be much narrower in scope than it is set out to be.

Mr. Tony Valeri: Can you help me with something? You made the comment that you have to find compelling evidence that it would harm the public interest. How do you define that in your mind?

Mr. Christopher Moon: Having never gone through the process, I guess I'm not entirely sure. It would certainly be a higher test than the somewhat vaguely worded proposals that are there, though. I suppose what I'm saying is that the banks shouldn't have to prove or establish that it's in the public interest that they merge. The test should be the opposite, that there is no material public harm that will occur by their merging. They should be free to do it unless someone is going to get hurt in a material manner.

Mr. Tony Valeri: Can I get some other comments on the actual merger process as MacKay has described it? He talks about the informal doctrine that big shall not buy big, and says that should be abandoned. Should there be any exceptions to that? Are the other members of the panel confident in the merger process? Is it too onerous? Should the public have a role to play in this process?

Mr. William Harker: I'll at least begin to respond.

I think any businessman would be concerned when it comes to any outside body telling him how to run his business. Just the concept of that makes it more difficult, so I think any businessman starts with that bias. In this particular case, I personally think the process is quite reasonable and quite normal, and I would encourage it to continue. However, let's be careful that whenever we impose a condition on telling a businessman how to run his business, we're going to get a by-product somewhere that we didn't expect, almost by definition. Let's be really sure we have only the minimum number of conditions put up.

The Chairman: Mr. Guss.

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Mr. Jonathan Guss: First of all, I think we have to admit that there is a public interest and that the review process was necessary. We appreciate how quickly the committees here and in the other place, the Senate, have gotten out to hear from the public.

From our perspective, we admit that it will open a competitive gap. It will be partly a short-term one while they go through the motions of getting together, but there is going to be turmoil in the sector and it will weaken service. I think we have to step into that.

The way we look at it, they are opening space in the market exactly where we operate. It's with people who are looking for quality service at a reasonable price, not with people who are looking for the lowest price. Those people will be served by ING, they'll be served by Wells Fargo, MBNA and the credit card market. Nor is it with the people who are looking for the broadest scope. That's why we think we're going to be able to take advantage of it, as will the smaller trust companies. We can step into that market because that's already our niche.

But we do have to admit that there's a public interest, and it does have to be taken care of in some way. That's why the approach of MacKay is so good. He's saying to make sure the thousand flowers do bloom.

The Chairman: Mr. Krehm, do you have a final comment?

Mr. William Krehm: Yes, I would like to warn against the idea that the government has been closing in on banks. I must remind you that it was not until the 1960s that our banks could invest in house mortgages. Since then, of course, they have gotten themselves into Indonesian bonds.

I must also warn you to not ignore the wild and insane leverage that our banks have obtained. It's 358:1 in terms of legal tender, and in areas that they are patently ignorant of. For example, the Bank of Nova Scotia bought itself controlling interest of, I believe, either a Venezuelan bank or a Mexican bank. The mergers cannot be discussed without looking into this leverage. The mergers cannot be approved unless the present situation of the banks is not carefully audited—and that present situation is going to deteriorate in coming weeks. Otherwise, the merger will become the cover-up for the next bailout of our banks.

The Chairman: Thank you, Mr. Krehm.

I'm going to give the following members a four-minute round: Ms. Redman, followed by Mr. Discepola and Mr. Cullen.

Mrs. Karen Redman: Thank you, Mr. Chairman.

One of the issues the MacKay task force deals with is consumer protection, and the recommendations are designed to enhance that. They include the independent ombudsman, stronger privacy protection via legislation, and enhanced prohibitions on coercive tied selling.

What we've heard from the banks to date is that self-regulation works really well, and that what they see happening for the banks they also want to see applied universally across the whole financial sector. Given the current system, do you believe self-regulation works well? Do we just need to look at stiffer regulations and greater policing of these issues if we do indeed give banks the opportunity to sell insurance and to engage in auto leasing? Or is there need for continued and increased vigilance with the current system as it is?

The Chairman: Mr. Soloway.

Mr. Gerald Soloway: First of all, our group agrees with the MacKay report recommendations. I don't think it can be left entirely to self-regulation. I think it's somewhat beyond human nature to expect five or six banks that control the majority of the deposits in the country to only do things that would be in the public interest. The suggestions you've raised, like putting real teeth into prohibitions on tied selling, are mandatory. Otherwise, I just don't believe the self-regulation would work.

Mr. Harker, do you any comments on that?

Mr. William Harker: I support that entirely.

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Mr. Gerald Soloway: Okay, so we support the recommendations and would be very pleased to see them go ahead as proposed. Don't leave it to self-regulation.

The Chairman: Mr. Guss.

Mr. Jonathan Guss: We agree. It's not a problem if you have community governance, because you are forced to respond to the people who own you. I hark back to my days working for the federal government, and maybe that's a bit unfair. But the banks in those days had a tendency to correct the one issue or the one problem if you came to them with a complaint, and then they'd go on with the practice. People who have come to us for loans often recount similar stories. They've had a problem fixed up one time, only to be hit again a year later with the same one. So I would say some kind of bank-financed ombudsman is probably necessary, someone who is somehow independent of the banks and other financial institutions.

Mrs. Karen Redman: If I could just get some clarification then, nobody is saying they have an objection to this regulatory system being applied to the entire financial sector. It doesn't just have to be banks, it's something that can apply across the board.

Mr. Jonathan Guss: What's sauce for the goose is sauce for the gander. I think we all have to be willing to live with it, yes.

Mr. Gerald Soloway: I would support the comments Mr. Guss has made.

The Chairman: Mr. Moon, do you support his comments too?

Mr. Christopher Moon: I think I was fairly strongly enthused with that.

The Chairman: Do you all support Mr. Guss? Yes?

Mr. Discepola.

Mr. Nick Discepola: Thank you, Chair.

I presume that what you gentlemen are referring to, then, is also the widely held rule. If we change that to 20% content, that should apply equally well.

Mr. Soloway, I would also presume that your recommendation on the ten-year holiday for capital tax shouldn't be just limited to small institutions, it should be applied to all banks. Is that what you're saying?

Mr. Gerald Soloway: No, I said small banks.

Mr. Nick Discepola: But if you're saying it should apply to everyone equitably and that we should level the playing field, then it's big and small.

I represent a small, rural riding in Quebec. Even though the caisse populaire movement is very strong, I'm really concerned. To use the analogy presented by Mr. Guss, I'd like to see a thousand flowers blooming, but those thousand flowers will be competing against five big sunflowers for air and water. I really am concerned about that. If I thought for the slightest moment that National Trust, for example, along with the cooperative movements and the foreign banks, would really be able to compete with these sunflowers, I'd have less reservation.

But you seem to be very strong on the MacKay report, Mr. Guss. You almost endorse it as a full package. When you opened your remarks, you were really saying we should go ahead quickly and implement them. I'm wondering if you think there are any adverse consequences in picking some recommendations and not others. Could you give me some examples of those? Are there any recommendations that should be acted upon quickly if the mergers are approved, such as insurance retailing or auto leasing? Which recommendations should be dealt with quickly? Which ones do we take our time with, and how much time should we take? Is it six months or is it six years? In addition to the recommendations regarding the distribution of insurance and auto leasing, are there others that may be more appropriately phased in over a longer period of time?

The Chairman: See if you can answer all that in two minutes. Who would like to start? Mr. Guss.

Mr. Jonathan Guss: I'll go first.

Just understand me on what I said about sauce for the goose and sauce for the gander. I was talking specifically about consumer protection. I think that should apply to all of the rules on tied selling, full disclosure of cost, privacy standards, and the industry ombudsman.

I definitely agree with you that to get the thousand flowers to bloom, you need capital tax holidays and you need tax treatment. Credit unions have different tax treatment. I wouldn't call it special. Under section 137 of the Income Tax Act, we do pay income tax. We just pay at the small business rate because, in our industry, we are small businesses and we don't have access to the capital market. I would say that any trust company that doesn't have access to the capital market, but that meets the same small business criteria as I do, should get the same treatment. That's something that's not in their report but could be added.

On insurance and on the changes to the CCA Act, which I mentioned before, we need those very quickly.

Mr. Nick Discepola: What about the MacKay package as a whole? Should we apply all 124 recommendations, or should we pick and choose? What are the consequences of picking and choosing?

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Mr. Jonathan Guss: It's hard to say. I could pick out seven that I like and that I'd really like to see for credit unions go through in six months, but they have so carefully balanced everything—the right word is calibrated—it's almost as if they've turned all the knobs to just the right place to make it go through in a balanced way.

So I'm a little bit reluctant to say do this first, do this later. But maybe some of the people from the MacKay commission should say, yes, you can sequence it in this way and it could still work. I have to admit it's beyond me.

Mr. Nick Discepola: So why do you endorse the recommendations prior to launch? While we do have some reservations about implementing some of them, should we phase the more priority ones in over time?

Mr. Jonathan Guss: No. I'm saying I'd like to see the whole thing at once, but I realize Parliament has to work in digestible bites, so somebody more wise than I am has to say here's how you should sequence it. But I still do not see the whole package.

Mr. Nick Discepola: What's a reasonable timeframe that we should be looking at?

Mr. Jonathan Guss: Six to eighteen months.

Mr. William Harker: If I could just add 30 seconds on top that, there are some recommendations that imply fundamental changes to the whole industry. I refer to the upcoming change in CDIC premiums, which we are very concerned about, access to the payment system—those kinds of things—the community bank concept. If we are going to go ahead with any of those initiatives, it will take the industry quite a while to get up to speed and prepare their plans. So some of them are fundamental and will affect the planning of institutions.

Others are not as fundamental in terms of planning purposes. For the ombudsman, everybody would say we don't need them, we are already in line, so there's no time to prepare for that, for example.

Mr. Nick Discepola: Mr. Moon, is the prospect of branch closures and the possibility of 20,000 or 30,000 job losses concern enough for parliamentarians to maybe have more inquiries into the process, or should we just let nature and market forces take their course?

Mr. Christopher Moon: I think those kinds of prospects are of deep concern to the communities and people involved. I think that on a broad national basis for the country we would be equally concerned to have our banks fall into a second position while a larger foreign competitor in a specific target area, another Home Depot of banking, came in and ousted them while they were trying to do this because they were non-competitive.

So I recognize that there's a public interest. I also recognize that there is a public cost to not allowing the banks to conduct their business as they see fit, to become strong and viable institutions in a different changing marketplace.

I think for each benefit there is a cost. Which one is going to outweigh the other is a public interest question, but it's not cost free to simply say that if there was a cost on jobs and dislocation that you can't do something. There is another cost.

Mr. Nick Discepola: Since you are a lawyer, I have one more small question. And I thank the chair for his indulgence.

On the privacy and consumer issues, you state that coercive tied selling should not be implemented or should be discouraged, obviously, even through legal means, as MacKay said, but you qualify yours that no products or service of any branch or division should be sold without the prior consent of the customer.

As a lawyer, what would your recommendations be? How would I prevent coercive tied selling? One of the conditions could be that in order for me to give you the loan you're going to have to consent for me to disclose or use some of the private information that we're trying to prevent them from using. So just that fact, without the prior consent, could in itself lead to the denial of a loan, because if I don't give my prior consent I may be denied a loan anyway.

Mr. Christopher Moon: The prior consent refers only to the marketing of services of another division in that paragraph, and that's the intention of the wording.

Mr. Nick Discepola: But do you understand what I'm saying? If I go in and I apply for a loan or a mortgage or anything and one of the requirements is that I give my personal endorsement for them to be able to use that information, I may be denied that mortgage or that loan.

Mr. Christopher Moon: That's what tied selling is all about.

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Mr. Nick Discepola: That's right. But you're saying that if I give my prior consent then it's okay for them to do it.

Mr. Christopher Moon: It's like on the job application form, sir. You're simply not permitted to ask certain questions.

Mr. Nick Discepola: But if you don't answer them, you don't get the job.

That's my four minutes, Chair. I think I used it.

The Chairman: Actually even more for this one.

Go ahead, Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chair. I'll try to stay within four minutes, but I can't make any promises either.

I have a question primarily focused at Mr. Guss and Mr. Soloway, but the other panellists may wish to comment as well. And if we have time, I'd like to touch on something with Mr. Krehm.

In the MacKay report, they suggest that federally regulated financial institutions should have the option of being organized as subsidiaries of regulated financial holding companies incorporated under a new financial holding companies act. Would you comment on why you think MacKay has recommended that, and whether you think it's a good proposition or not? Thirdly, how would the financial services sector develop into the future with or without that sort of initiative? Fourthly, would you comment on whether or not the future scenario would change, given that this was implemented, if the mergers that are presently in front of us were approved or were not approved—under different scenarios?

Basically, is it a good recommendation? How do you see it affecting the structure of the financial services sector into the future if it was implemented and depending on whether the mergers go forward as proposed now or do not?

Who would like to start with that, Mr. Guss or Mr. Soloway?

Mr. Jonathan Guss: I'll defer.

Mr. Gerald Soloway: Let me make a few comments.

Personally, as a group, we have not studied it very carefully, but the system that we've had in Canada—and I think it's the same system in the United States—that deposit-taking institutions are not owned by industrial companies, is a regulatory environment that I think has served both countries well. I'm a little leery going forward to say that—and nothing against them—but if any sort of large industrial companies decides they want to incorporate a subsidiary as a bank, I'm not sure that this system would work as well in Canada and the United States.

We have not done a lot of research on it. We've not thought a lot about it. You raised an interesting problem. I know it's very common in European countries to have industries and deposit-taking institutions inter-owned, but it's not been the background in Canada. It would be quite a departure. Quite frankly, I don't know of the constituency that is out there supporting that kind of change.

Mr. William Harker: In general, I certainly agree with that piece of it. There are other reasons than just the deposit-taking institution that might be a subsidiary of the holding company, and in principle those are good ways of managing disparate regulatory functions. When you allow a bank to sell insurance, do you allow the bank to sell insurance, or do you force the bank to have a different subsidiary that sells the insurance and then you regulate the insurance subsidiary separately from the bank one?

It could work in either direction. We should not merge industrial activities with deposit-taking activities. Perhaps it's a different matter with some other financial services components.

The Chairman: Mr. Guss.

Mr. Jonathan Guss: Yes, thank you.

The debate goes all the way back to the Liberal government before the Tories in 1984, and do you remember Barbara McDougall dealt with this as well in the mid-eighties?

First of all, forget the commercial interest for a second. The holding company does two things. It allows for strategic decision-making for a whole group of different kinds of financial institutions at the top. It could be very useful for an insurance company that wants to own a bank to enter the banking field, or to enter this field. Now that they're going to have access to the CPA clearing system, they may well use this.

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From a regulatory perspective, I think it's very important, because it gives the regulator one point where he can enter into a group of financial companies to oversee what they're doing and to force them to come up with more capital for those players in the group who may be weak.

I also think it's the same as the other extreme. It's the same as the community bank. It helps bring new players into the market—and I go back to Mr. Soloway's point. This will allow commercial interests to start banks, but allow them to do it in a way that gives the regulator some comfort that he will have access to the whole corporate group for capital purposes. I think that's why it's there.

Mr. Roy Cullen: So you think it would help to create a sort of secondary market and a more competitive environment in the financial services sector?

I wondered if, Mr. Soloway in particular, as you develop your position on this, or if you have any further thoughts, you could maybe send them to the committee. It's a fairly complex area, but in my view it's important. If we're going to try to ensure that we have a strong secondary industry and a strong competitive environment in the financial services sector, we need to look at what this does or doesn't do to promote that.

Mr. Gerald Soloway: We would be delighted to get something to you within the next week or so.

Mr. Roy Cullen: Okay. Thank you.

Mr. Krehm, on the notion of the bank reserve requirements, I have just two quick questions.

In terms of monetary policy—I find it complex at the best of times, but... Right now we have an instrument of monetary policy in terms of central bank interest rates. If the reserve requirement were reintroduced, (a) wouldn't that shrink the available money supply, and what would that do in terms of access to capital; and (b) if we don't have the right monetary instruments in place right now in terms of interest rate policy, what evidence is there that the money supply has not kept pace with the demand for money in Canada?

Mr. William Krehm: First of all, let me say this is not a new idea. This was practised using reserves—raising them, restricting credit in order to cool an overheated economy; or lowering them in order to encourage a stagnant economy. That was used for years. It was used under Roosevelt.

In 1939 the law required 5% reserves, but the Bank of Canada was asking for 10%. The first governor was cross-examined by your predecessor finance committee, and he said it was always done in England. It would restrict credit if you raised the reserve requirement without raising interest rates when you wanted to restrict credit. At present, you see, our banks are operating with a leverage of 358%.

Incidentally, the legal tender they have is needed for their operations. It's for their daily clearances of net cheque exchange and it is also to service their ATM machines. That is not collateral at all, and that is nothing that can be operated upon.

The removal of the reserve system—incidentally, it's happened in few of the great countries of the world; Canada was chosen as a guinea pig—has led to the churning of interest rates. And the churning of interest rates has brought on the international meltdown that we're going to hear more and more of.

Remember, in the last year and three months since the report of the task force was issued, we have become aware of a great deal more trouble out there. I assure you, the reports will continue coming in, and they will not be good ones.

The Chairman: Thank you.

Mr. William Krehm: We have to think of alternative ways of running the financial system.

The Chairman: Thank you very much, Mr. Krehm and everyone. It's been a very interesting panel—great material, great questions by the members.

I'd just like to leave you with a little bit of homework here. I'm very interested in the future direction of the financial services sector, in painting a picture for Canadians as to what the financial services sector will look like somewhere down the road, in the year 2010, 2015, or 2020. Can you perhaps put a couple of sheets together and send them back to us here, as the finance committee, and tell us where you see yourselves in the year 2010 as an industry or as an individual? This is so we can get a sense of what type of future we're looking at. That would be an exercise that I'm sure members of the committee would certainly appreciate. Of course, part and parcel of that is the impact of globalization, demography, technology, and so on.

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On behalf of the committee, thank you. You've been very helpful.

The meeting is suspended. We'll come back at 1 p.m.

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The Chairman: I'd like to call the meeting to order and welcome everyone here this afternoon.

For the 1 p.m. to 3 p.m. session, we're expecting the following organizations: Durham College; Fort York Small Business Association, and a Toronto small business; Guarantee Company of North America; Life Spin Women's Resource Centre, a local anti-poverty organization; and McArthur and Company Publishing Limited.

We will begin with the Fort York Small Business Association. Representing that organization is its chairman, who is also a member of provincial parliament, Rosario Marchese. Welcome.

Mr. Rosario Marchese (Chairman, Fort York Small Business Association): It's nice to be here, Mr. Chair.

I'm here with John Banka. I guess he'll have an opportunity to speak as well. Do we have a few moments or five minutes each? How does it work?

The Chairman: Yes, you could have five minutes each. After we hear everyone, we'll proceed to a question and answer session.

Mr. Rosario Marchese: Okay. It's good for us to have this opportunity because we have been dealing with issues of access to credit for a long, long time. In fact, that was one of the main reasons why Fort York Small Business Association sprung up. It wasn't to deal with other problems that small businesses might have or probably have. The main issue around which the original people got together was to deal with issues of access to capital for small business. That continues to be one of the most important issues to plague them. So I thought I would give that background as a way of indicating to you why we are here.

I personally don't have a great deal of expertise in this field other than the long years of experience I've had in exposure to it through the small business people who have come together to talk about these issues. In my capacity as a member of provincial parliament, we have been dealing with these issues very directly and indirectly as well.

The point we want to make is that the banking industry is very concentrated in this country. So we don't see the mergers of the banks as a positive thing for the general public or for small business.

Look at the banking industry in the U.S. They used to have 14,000 banks or so, possibly more. They now have 9,000 banks or so.

When you look at our banking system, one realizes that six chartered banks are not a lot of banks. It's as concentrated as you're going to get it. Mind you, the banks wanting to merge will make it even more concentrated than that. I just don't believe that's a good thing for the country.

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My view, and the view of small business people, is that positions will be lost. I have no doubt about that. The banks that want to merge are claiming that there will probably be few job losses. In fact, they claim there will be more job creation as a result.

They speak of job losses as losses through attrition, making it appear as if it won't be a big deal by way of job losses, but the point I make, and the point that many others have made as well, is that positions will be lost forever, which means more people will be unemployed. And in an economy that will go into, I suspect, a recession within a year or two, that can become a problem for the rest of us. I don't see an economy that's slowing down picking up the people whose jobs would be lost.

Branches would be closed, of course, and in many parts of Ontario, and I suspect Canada, that's a serious problem. And so we worry about that.

I have to tell you I'm not convinced, in spite of the opposition to the bank mergers, that those of us who oppose it are going to win this fight. I think it's a done deal, with all due respect, Mr. Chair. I really do believe that some of your people at the cabinet level have already made deals with the banks. I say that without knowing, but I say that as a politician who's had some experience in these matters.

But I think that if the opposition does continue to express itself in the way we've seen it, the government will have to review this seriously. And it's in the context of my belief that perhaps this is a done deal that I offer some suggestions in terms of things we should be fighting for, and this is that the ombudsman we have in place is, for small business, inadequate. It is an ombudsman or ombudsperson who is obviously paid and hired by the banks. We don't see that position as a neutral position, we see that as a problem. And we know that a lot of small business people who have argued for some objectivity here don't see that as an objective role, so we think it's a problem.

It was an important step, based on all the long years that we fought for someone who would represent the interests of small business, so we saw the banks moving in that regard as a positive sign, but I still view it as an inadequate thing.

The other thing many of us have lobbied for over the years is for a community reinvestment act. I'm sure many of you have heard about it. I know there was a private member's bill in the House—I'm not sure where it's at—that speaks to a community reinvestment act, but we certainly support it and see it as something that hopefully committee members will support as well.

That would guarantee more financial disclosure in terms of where the money is going from the banks. We have a difficult time understanding where the money is going, because we can never really see the details of that, so it's a problem. So the community reinvestment act would speak to fuller disclosure of where the money is going and to whom, but it also speaks to the fact that we see that more money should flow from banks to communities for economic development. And I think that in terms of the American experience we felt it was a positive thing. We believe banks have accepted it there, and it's something that should happen here.

The other matter we have been pushing for is a financial consumer association. We don't see strong consumer associations in Canada. The fact that they continue to be underfunded to the extent they are makes it impossible for these associations to represent the interests of consumers and the general public. And my view is that when we have an issue such as a bank merger we need a strong financial consumer association that will protect and defend the interests of consumers. In that regard we have lobbied over the years for a consumer association, and would obligate banks to send through their own mailings a mailing that would talk about this financial consumer association. We all hope that such an association would raise enough money through a membership fee that it would be able to have money for hiring lawyers and hiring people with expertise to be able to defend our interests. At the moment we don't have that.

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My third suggestion, which I believe is a critical part of this as well, is that we need to open up board membership of banks to people other than those who have a stake in it. In that regard, they should have representation from small business on those boards, and perhaps national seniors associations and the like. If we are stakeholders or shareholders, as some bankers say we are, then we argue that we should have participation at their table so that our interests are part of their interests as well.

I offer those suggestions, Mr. Chairman, as things this committee, or your members, might want to pursue as a way of saying to the banks that if this is going to happen, then these are some of the things we would want to put on the table.

The Chairman: Thank you, Mr. Marchese.

We'll now hear from Mr. Banka.

Mr. John Banka (Secretary-Treasurer, Toronto Small Business Support Organization): My name is John Banka and I represent the Toronto Small Business Support Organization. I'm the secretary-treasurer of that organization.

I agree with much with what Rosario just said, but I want to bring a different perspective to this.

I believe that if banks are allowed to merge, then we should be getting some concessions from it. Banks that don't merge can carry on business in much the same way as they are doing right now, but those that merge should be prepared to give up something. They claim they're going to have much greater efficiencies, economies of scale that provide them with some value that could be distributed back to the population at large.

I have a little bit of a shopping list here that I'd like to go over with you. For instance, I think they could provide lower credit card rates on a basic, no-frills card, maybe 5% above prime. In the past, they've been offering air miles. They've been offering to buy a vehicle, $500 a year, or whatever. Somebody is paying for all that, and I think a lot of it is coming out of 17% to 28% interest rates.

We are in favour of the community reinvestment act that Rosario just mentioned. Banks that merge should be required to introduce this form of lending.

We also think the banks should provide low-cost chequing accounts for the public.

Merged banks should be forced to maintain services to one-bank towns. The last bank left in a town can't leave town.

Disclosure of lending information statistics should be required by banks that merge so we can know how much they're lending to small businesses and in what amounts. Do they lend under the Small Business Loans Act or not? They claim they do, but right now we really have no way of verifying it.

Also, we have nothing against bank ownership itself being concentrated above the 10% limit that presently is placed on any one shareholder. We realize there are some risks involved in doing that, possibly with banks even getting involved with self-dealing to their subsidiaries or groups of companies. That can be handled in other ways. What I have here is a little bit of a novel suggestion to the committee.

I think the depositors should assume a greater amount of the risk by setting deposit-insured limits in an inverse proportion to the proportion of ownership. For a bank owned 100% by an individual, for example, there would be no insured deposits at all. This would put the onus on depositors to take a look at the banks and how they are held. I think this would provide a little bit more competition in the banking industry. At least I think it would be worth looking at this.

These comments I have here, which I have in writing and which unfortunately I did not bring a copy of here, were prepared for a deputation to the City of Toronto. I have the fax number for your clerk and I will be faxing in a copy to your clerk so that you will all be able to look at this in writing at a later date.

Thank you.

The Chairman: Thank you very much, Mr. Banka.

We'll now proceed to the Guarantee Company of North America, Jules R. Quenneville, president and CEO, and Robert Dempsey. Welcome.

Mr. Jules R. Quenneville (President and Chief Executive Officer, Guarantee Company of North America): I'm pleased to appear before the committee on behalf of the Guarantee Company of North America. My focus today will be on the task force's stated visions and broad themes as they apply to the property and casualty insurance industry and its consumers. Subsequently, I would like to have a further opportunity to submit written comments to the committee on other aspects of the report's recommendations or other issues that might arise as time evolves and we have more time to look at the documents and the various support documents prepared for the task force report.

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Our company, the Guarantee Company of North America, has been a property and casualty insurance company since its inception. We've been in business in Canada for 126 years. We have successfully competed with foreign insurers over the years and we continue to do so. We're a Canadian-controlled company. Currently we employ 244 people in seven Canadian cities from Vancouver to Halifax. Our product lines include property, automobile, liability, and guarantee insurance coverages.

The guarantee coverages are specialized coverages in the lines of surety and fidelity. We were the first company to offer fidelity coverage in North America. These specialized coverages, which are used in commercial transactions worldwide, were neither specifically addressed by the task force in its report, nor in the research papers prepared for the task force by Coopers & Lybrand on the property and casualty insurance business, nor by McKinsey in their review of financial services.

Today there are over 200 property and casualty insurance companies delivering a variety of property and casualty insurance products to the Canadian consumer. Players in this highly competitive market either respond to the needs of the consumer with product and delivery of service or they fall from favour in the marketplace. Unlike the banks, the life insurance companies, and other intermediaries addressed by the task force, we are not in the financial intermediation business. We are in the business of intermediating risk. Through property and casualty insurance and reinsurance, risk is transferred from the few policy holders who will endure losses to a network of insurers and reinsurers providing financial recovery for those losses.

The assessment of both the risks undertaken by the property and casualty insurer from its policy holders and the transfer of that risk to its reinsurance network is a risk management process. This process is highly specialized and requires experience, know-how, and a knowledge-based workforce. The insurance product indemnifies the consumer for losses that may occur going forward. The capital of the property and casualty companies is therefore held as security to pay the potential claims.

In banks the capital is held as security for the deposits made by consumers in the circumstance where loans fail. This same capital should not be put to double jeopardy as security for both credit risk and catastrophe risk. In the case of a major catastrophe, where businesses fail and property is damaged or destroyed, this capital will have a double call against it.

We put forward our position with respect to competitiveness through the Association of Canadian Insurers to the standing committee on banking in 1995; through our letter of November 7, 1997, to the task force; and again through the presentation of the Association of Canadian Insurers to the task force in November 1997. Our position, as set out in our letter, is as follows. Canadian insurers will not be the only losers. Canadian consumers will see prices rise and product offerings dwindle as the survivors seek to recoup their losses.

Banks have long thrived in a market with few competitors. Like most oligopolies, the banking industry has rarely distinguished itself as innovative or responsive to consumer needs. Innovation has tended to come from the credit union sector, which, for example, introduced automated teller machines, daily interest savings, flexible mortgage payments, and consumer loans. With banks exerting influence over a much less competitive insurance industry, consumers can expect fewer product offerings and higher prices in the long run.

We believe a number of the task force recommendations, under the guise of increased competitiveness, are putting forward protectionist policies that will further concentrate financial power in the hands of the banking industry. Canadian banks have been operating in an oligopoly, a state of limited competition between few sellers. The banks' self-stated inability to compete in global markets does not arise from their lack of growth in our limited Canadian marketplace. As in most oligopolies, the banking industry has not distinguished itself as innovative or responsive to consumer needs. The most recent deregulation exercise involving loan and trust companies and investment dealers has clearly concentrated competition further. Consolidation by banks has produced fewer players and more revenue for the bankers' oligopoly.

With respect to distribution, our company has consistently delivered its products through independent property and casualty brokers. We believe a broker increases the empowerment of the consumer through an objective, independent, professional assessment and an explanation of those product coverages required. We are concerned that the task force is advocating a policy that reduces competition in the distribution system by ignoring the independent broker network.

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We strongly support the position of the Insurance Brokers Association of Canada when they say the issue is not whether banks should be in the insurance business. They have had the power to enter the business since 1992. The real issue is whether banks should be given special privileges that will allow them to compete unfairly against other insurance providers, thus adding to their dominant position in the financial services sector.

Banks now exert an enormous amount of control over consumers. This control is likely to increase if banks have their way. If the government accepts the task force recommendations relating to property and casualty insurance, consumers will have less choice, inadequate service, and higher prices.

The impact on employment was not given any significant consideration in the task force report, whereas according to the brokers' association studies there are 60,000 jobs involved. The vast majority of these jobs are at the community level in virtually every rural and urban centre across Canada. Allowing the task force recommendations to be adopted will eliminate our present distribution system and severely impair our company's competitive ability and a vital part of our communication channel with our policy holders.

In conclusion, I would like to add that throughout our 126-year history, our company's steady growth, conservative underwriting, and financial stability have earned it the trust of its clients and the support of the international reinsurance community. It is this support and recognition that allows our company to continue to provide coverage for some of the largest clients and projects in Canada.

It is our goal to continue as a steadfast partner in the growth of Canada. For the benefit of all Canadians, we look to you to prevent further concentration of the financial services sector by the banking industry.

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Mr. Quenneville, Mr. Dempsey.

We will now hear from Self Employment Development Initiatives, Mr. Peter Nares, executive director; and Women and Rural Economic Development, Carol Rock, executive director. Welcome.

Mr. Peter Nares (Executive Director, Self Employment Development Initiatives): Thank you, Mr. Chairman.

My organization is a charitable organization that has been working since 1986 to assist low-income Canadians with self-employment as a self-sufficiency option. In our original submission to the task force we concentrated on two areas: access to credit, and assets and savings for low-income Canadians. We want to maintain that focus today in our presentation.

Just a quick comment on the report. As someone who works in the policy environment and has read many reports over many years, I must say we found this report to be one of the better ones. It was balanced, clear, and well written. I'd like to make note of that.

The issue of access to micro-credit was commented on in the report, and I'd like to speak briefly to that. As the report noted, access to micro-credit is an issue for low-income Canadians. The report also noted that some of the programs that have evolved to respond to that issue have proven their worth. The report goes on to comment on some recommendations with respect to how that particular sector of the economy can be further evolved.

I would like to say that we support all the recommendations in the task force document. I won't go through them again because I'm sure you're aware of them.

There is one item with respect to access to micro-credit where we would like to add to what was contained in the task force material, and that is the reality that successful micro-credit programming, in Canada, the United States, and developing countries, has proven to be most successful when linked to other forms of service such as small business management training and technical counselling. So it is our view that the task force recommendation with respect to micro-credit could be enhanced, something along the lines—and I'll read from our presentation.

The federal government, through HRDC and Industry Canada, should begin reviewing how to expand one of its current programs, which some of you may have heard of, called self-employment assistance, which has been incredibly successful across Canada, to people who have low incomes but do not qualify for employment insurance. I'm sure we could have a creative discussion about how the EI surplus could be used to support that.

Further, because it's clear that training and technical assistance do reduce risk from the point of view of business start-up and therefore reduce risk for lenders, it would not be inappropriate for financial institutions to be brought to the table and be involved in the discussion about how they too can provide some capital support for the delivery of this kind of program.

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The second item I'd like to talk about would be within the broad area of community investment and accountability that is also referred to by the task force. I'm going to speak about an item that we presented to the task force. They decided not to include it, so I'm going to re-raise it. It's the issue of savings and assets for low-income Canadians.

If we look at some of the issues that contribute to poverty in Canada, we have tended historically to concentrate on cash consumption and income transfers. We have not paid any attention to assets and savings, which for middle- and upper-middle-income Canadians are the bulwark against destitution, as we know.

In our view, there is a product idea that has come out of the United States recently that bears looking at in Canada. It's a product currently described as individual development accounts, which in effect are accelerated restricted-use deposits. With those, the community, the private sector and government take a role in matched contributions for deposits that are initiated by low-income Canadians. The goal of the deposits is established through an economic literacy process that defines the savings goals and the asset use that the savings will be used to invest in at the end of the day. The assets are the typical ones—home ownership, post-secondary education, capitalizing of business, and purchasing a job training or upgrading program.

Over the past year, we've spent eleven months researching this from both the policy and consumer perspectives. We were financed in that work by the Canadian Bankers Association and Human Resources Development Canada. We believe the results of that research warrant a pilot test of this particular product in Canada on a national basis, and we would so recommend to this committee that you consider supporting that recommendation. Again, the exact wording is contained in my presentation.

Thank you for your time.

The Chairman: Thank you very much, Mr. Nares.

Ms. Rock.

Ms. Carol Rock (Executive Director, Women and Rural Economic Development): Thank you for the opportunity to be here.

Women and Rural Economic Development, or WRED, is a non-profit community economic development organization that focuses on the participation of rural women in economic activities. We offer self-employment training, operate in a micro-loan fund, and act as a resource to local rural women's business networks. WRED operates in four regions of the province of Ontario, and has established 20 rural businesswomen's networks across the province. Over 500 women have gone through our programs since 1994, and they currently operate 400 businesses.

Recently, we have been focusing on rural youth and on the formation of businesses in organizational alliances. WRED has partnered with SEDI on several initiatives, and we endorse the position of and recommendations made by SEDI. Our remarks will deal with concerns specific to rural communities, and with the issue of access to credit by women.

The impact of bank consolidation in rural communities is uncertain. In the face of bank mergers, the American experience has often resulted in a reduction in lending to local businesses. Rural communities face the risk of losing services in many areas these days, including health, education, and now banking. New companies will not locate in underserviced communities.

Of particular concern to farmers and small businesses is whether or not decision-making authority will remain at the local level, and whether or not it would be reduced. Many family businesses are concerned that credit decisions will be moved to a centralized location, to be made by officers who are unfamiliar with farms, rural business and local community needs. As a result of this more centralized approach, funds are often withdrawn from the community, for use in loan or investment opportunities offering higher profits, lower risks, or market segments to which the merged bank officers give a higher priority. This action can lead to reduced local lending and, as a consequence, the weakening of the rural economy.

With regard to women's access to credit, the experience of our clientele—low-income rural women—is that they already have great difficulty in accessing credit. Their businesses are too small or too new, and often they have a lack of or a poor credit history.

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One of our clients had the experience of borrowing money in order to upgrade her kitchen to meet health department requirements for a catering business. Even though her business was well under way and her business plan showed a forecast for profit, she was asked to have her husband co-sign the loan. She paid off this $5,000 loan in less than a year, but when she requested documentation of proof of her credit history, she found the bank had made the loan in her husband's name only. Another client had a signed purchase order for product, but could not get the credit she needed to order stock. These kinds of experiences are commonplace to women entrepreneurs, especially in rural communities.

We recognize that there is no margin of profit when making micro-loans with a reasonable interest rate. We also concur with studies that loans by themselves are not enough. The clients must have technical assistance or training in order to use their credit wisely. To ensure that micro-entrepreneurs have the opportunity to develop sustainable businesses, we suggest partnerships between the banks and community-based agencies that are prepared to provide integrated loan and business development services.

We heartily endorse some of the recommendations in the task force report. We support the installation of new powers for credit unions to make them more effective, including the power to become or to form banks. We also agree with the recommendations about disclosure and transparency. We would like to imagine that CRA-type legislation would not be necessary in order to ensure that banks participate in community economic development. How else can we know that banks profiting from the businesses in rural communities will return a portion of that investment as responsible corporate citizens?

Thank you for your time.

The Chairman: Thank you very much, Ms. Rock.

We'll now here from LIFE*SPIN—Women's Resource Centre, and Mr. Andrew Bolter. Welcome.

Mr. Andrew Bolter (Director, Community Development Programs, LIFE*SPIN): Thank you. I'm sitting in for Ms. Katherine Turner, who unfortunately couldn't be here due to a family emergency.

The Oxford Dictionary defines “money” as a “means of payment given and accepted in buying and selling”. It defines “credit” as “permission to delay payment for goods and services until after they have been received; a system of payment in this manner; or a sum of money lent by a bank, loan, etc.”

Money and credit are tools created to facilitate interaction on an economic level, and they're extremely valuable tools. However, neither has any intrinsic value apart from what it can provide or how it can improve our lives. Conversely, there are aspects of our lives and interactions that are valued to an extent and in such a way as to make it very difficult for us to measure their worth in monetary terms. Our inability or unwillingness to quantify these values does not make them less important. However, it does make them less visible. We don't see them. LIFE*SPIN attempts to balance these issues in all of our work, and it's this perspective that we're bringing to our analysis of the report of the Task Force on the Future of the Canadian Financial Services Sector.

Just as a bit of background, LIFE*SPIN originated as a grassroots, community-based organization in 1989, when a group of sole-support mothers began to share information about local resources and advocate for each other. Incorporated in 1991 as a charitable, non-profit organization, LIFE*SPIN works within and is accountable to a community of interest. The focus of that community is the low-income population in London, Ontario.

We have a threefold strategy for addressing the impact of poverty. One is to provide access to information and interpretation of legislation for low-income Londoners so that they can make knowledgeable decisions and pursue courses of action appropriate to their situation. Secondly, we provide mediation and advocacy services for those individuals experiencing difficulty dealing with the other agencies and government bodies, people can't fend for themselves with the information we provide. And thirdly, we link poverty alleviation to broader economic and environmental goals in a long-term, comprehensive development strategy for community improvement and self-reliance, which is what we see as the essence of community economic development.

London, by the way, has a rate of child poverty that is higher than the provincial average, even though our income levels are among the highest. As a city, we have quite a contrast.

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We understand the solutions to the issues of poverty aren't found through mediation and advocacy, so what we are trying to do as an organization is reach out to the low-income community, recognizing that we can create many valuable partnerships within that community and within the other stakeholder communities, in order to create solutions to poverty issues. Through that process, we believe there's an empowerment of individuals and a mobilization of underutilized community resources. This is an essential part of the process. Unfortunately, local decision-makers often see the low-income community as little more than a source of information regarding the issues, and they don't invite them to the table in anything other than that capacity.

As is pointed out by Lucy Aldersand Melanie Conn in More than Dollars: A Study of Women's Community Economic Development in British Columbia:

In conventional economic development, decision-making and control rests with corporations and investors in conjunction with senior levels of government. In contrast, the essence of [community economic development] for many theorists and practitioners is the principle of community control. Community control is perceived as a necessary condition for resisting dependence on a single industry or outside investor, for using local resources or for implementing social accounting.

I'll just say briefly that LIFE*SPIN has been involved in different aspects of community development. We have peer loan circles, an emergency loan fund, and community development accounts. The latter are accounts whereby groups of low-income people can pool resources into an account that can be used in the future for certain needs that may crop up, whether that means replacing a refrigerator, getting veterinary treatment for a cat that needs it, or any other emergency that occurs from time to time. We're trying to steer it through the social assistance legislation so that this fund isn't deemed to be an asset that could impact on entitlement to this community.

We also have a community development loan association, which is developing the community loan fund. We operate a Good Food Network equivalent in Metro Toronto. It's called the Green Market Basket, and we feed over 4,000 individuals monthly through that program. And we're developing a community housing project for women with psychiatric support needs. So those are basically the kinds of areas we're focusing on.

Just to comment on the report of the task force, we're a member of the Canadian Community Reinvestment Coalition. I understand Duff Conacher made a submission to you. We're pleased to reinforce his positions, but we're not going to repeat them. We support wholeheartedly the position of the CCRC.

In addition, I have a few comments. As an organization, we look forward to the day that all businesses and institutions assess their value to society and their shareholders by evaluating their performance from a financial, social and environmental perspective. Historically, financial institutions have benefited from regulatory protections, and they also provide an essential service to Canadians. We're therefore heartened by the recommendation of the task force that reinforces the need for financial institutions to be diligent in honouring their commitments in terms of access to basic banking services. We're also pleased to see that the task force report emphasizes the need for empowering consumers, implementing strict and comprehensive disclosure and transparency rules, and enacting a comprehensive accountability system.

As long as private business believes the financial bottom line is the relevant measure of success, social and environmental costs of business operation are going to be borne by the community rather than the business. Increased community accountability by financial institutions will increase opportunities for consumers to affect the actions of financial institutions, and will provide additional resources within the communities for dealing with these less visible costs.

We request that community accountability statements be reviewed annually by the government, with public input; and that the government grade performance by institution, with these results to be readily available to individuals. We would also like to see full disclosure of community development applications by type, size and gender, along with information on the number approved and rejected.

It's important that information on community complaints and their resolutions be available as well. There's a danger that if this isn't required, the banks may attempt to meet requirements of community reinvestment simply through charitable giving and/or investment in micro-lending institutions alone. Traditional financial institutions are becoming comfortable with this type of community involvement—we agree that there's a need for these types of reinvestment—but there are also other needs. It's vital that the community input is there and is central to the process of performance evaluation. It would also encourage financial institutions to become involved in creative ways that are outside the traditional experience, ways that meet the community's own definition of “need”.

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We would also ask that tax incentives for investments in community development be considered. Such incentives would allow an investor to capture some part of the social benefit that accrues to the community in a more tangible way. In a world where many investors believe short-term profit is the only true answer as a measure of worth of an investment, such incentives may prove to be essential if more sustainable community development projects are to be undertaken. Communities require partners, not benefactors. Those partners must value both their own resources and those of the communities they work with.

Thank you for your attention to this submission, and for your commitment to the task that you've undertaken.

The Chairman: Thank you very much, Mr. Bolter.

We'll now hear from Kim McArthur, from McArthur & Company Publishing Limited.

Ms. Kim McArthur (President and Publisher, McArthur & Company Publishing Limited): Thank you for this opportunity to speak with you today. I will be very brief.

The recent release of the MacKay report and its positive suggestions for the future direction of Canadian financial institutions gave me occasion to think that some of my experiences in the Canadian publishing sector over the past fifteen years would be pertinent to your hearings. I don't come here armed with barrels of statistics or overheads, because I know you already have plenty of those. I do hope to give you some personal experience and insight from the publishing trenches, as it could apply to the proposed merger of the Royal Bank and the Bank of Montreal.

In 1987, I was hired by Little, Brown Boston to start a Canadian publishing subsidiary for them. Little, Brown Canada had been incorporated in 1953 by Jack McClelland, and thus was a grandfathered Canadian company. As you know, this was no small feat during the time of the Baie Comeau cultural policy. During the eleven years that I ran Little, Brown Canada, we enjoyed profits—some years higher than others—a high profile, and many best sellers by both Canadian and international authors.

It is interesting to note that Methuen, the company I left to found Little, Brown Canada, was sold two weeks later. This was my first brush with buyouts and consolidation, but not my last. In 1990, Time and Warner joined forces in the U.S. Eight years later—this spring—their worldwide consolidation strategy led them to close Little, Brown Canada, and to send all the books that we were distributing over to a Canadian distributor. The Canadian publishing program that Little, Brown Canada had was simply cut loose, it was closed. The authors got their rights back, however, and I was able to start a new Canadian publishing company this summer from the ashes of Little, Brown Canada.

You would think that any mention of a merger or consolidation would freeze me in my tracks, but actually this hasn't proven to be the case. The events actually relate to the MacKay report and the proposed bank mergers in a number of interesting ways. When we were at Little, Brown Canada, we felt that because we were competing well with other international firms, had bestsellers like Richard Ford and Jack Granatstein, and were making money for the Time Warner coffers, we would not be closed when consolidation came along. This was not a wise view, as it turned out.

As pointed out in the MacKay report, consolidation and making use of the economies of scale are in fact the way of the future. At the end of the day, the fact that we were the only incorporated Time Warner publishing company in Canada was not enough. It proved more cost-effective for Time Warner to have H.B. Fenn purchase the books from them and have Fenn worry about shipping, filling orders from Canadian customers, handling returns, and so on, as they had been doing for Warner.

At the end of the day, this has actually proven to be a boost for that one Canadian company, Fenn. And since I've now hired back all of my sales representatives and staff—it's about thirty people altogether—started a new Canadian company, and taken on the fifty authors I was publishing with Little, Brown, it has actually proven to be a boost in two directions. The Canadian company that now has all of Time Warner's business is going gangbusters, and after a rather sleepless summer, so are we. This was certainly not our original plan, but the good news is that neither company, Fenn or McArthur & Company, can be closed down summarily by an American conglomerate at this point—and I think that's something that might be of interest you.

Time Warner followed up on all of its undertakings from 1990 forward—for example, to stay in Canadian warehouses, to publish Canadian authors, to be good corporate citizens. If the banks are allowed to merge as a result of the MacKay report, could they not be asked to commit to a number of undertakings themselves? It has certainly proved effective with Time Warner and with another example I'll give you in a minute, Chapters.

The things that the banks have been talking about include no branch closings in any community where either bank is the only bank; no layoffs in communities where both banks have branches and no other bank does; increases in the number of staffed branches of all kinds to 3,000, which is an increase of 500; customers of the merged banks having access to 6,200 banking machines without paying an interbank fee, which would actually save about $30 million for Canadians; pledging $7 billion over the next five years to develop state-of-the-art technology, which the MacKay report says we all need; pledging $750 million for training skilled people to work at the merged entity; and raising the joint level of corporate donations to $250 million over the next five years.

• 1350

Of course, one of the pledges that banks have made that I am most interested in, along with other entrepreneurs, is their above commitment to increase their focus on small and medium businesses. Matthew Barrett has described their potential small business bank is a possible bank within a bank in the way that mbanx is. Small entrepreneurs such as me would love to see those pledges brought to fruition in a possible merger and possibly by means of undertaking.

It seems certain from reading the MacKay report that financial institutions must move forward and quickly in order to compete in the international marketplace. It's already proving difficult for Canadian banks to retain their present stature in the face of increasing competition from international payroll, credit card, and mutual fund companies, all of which are operating in Canada already without joining forces and using the increased capital and skill base to advantage.

I fear that without the mergers in Canada, American and other international financial institutions will in the future command much of the Canadian marketplace. To join forces at this point would not only enhance the stability of the Canadian institutions but also enable them to move forward as a much more powerful unit in North America and worldwide.

To give you one last example from the publishing sector, a few years ago Larry Stevenson, the head of Chapters now, brought all the publishers at the time into his boardroom to explain that a merger of Coles and SmithBooks stores in Canada into one entity would make that bookstore retailer, now known as Chapters, one of the top five in North America. He had the overheads, slides, charts, and everything to prove that, alone, SmithBooks and Coles were stumbling along. Superstores were being built in the states at a rate of 500 a year, and superstores had to come to Canada.

Unless SmithBooks and Coles got together... Look at what happened every time they opened one store. If SmithBooks opened a store, Coles would open across the street. They were basically just driving each other into the ground. He said that working alone and competing against each other was draining the resources of both national bookstore chains. Separately, they were barely in the top 15 in North America.

At that time, I authored a letter, signed by other foreign-owned and Canadian publishers, to Investment Canada to support that merger for many of the same reasons about which I asked to speak to you today. I truly think, as a Canadian, that it's better to merge and combine forces where necessary in order to compete internationally and still have a Canadian-owned option.

This has proven to be the case with the enormously successful Chapters. They have closed some of their duplicated mall stores, but they opened up 52 Chapters superstores across the country. They really have galvanized the Canadian book retailing industry, and it's been to the advantage of all of us. We sold a lot more books from our authors, both Canadian and international.

Meanwhile, in the U.K., it's worth noting that Borders, a U.S.-owned bookstore chain, has just opened its seventh superstore location. This could have happened in Canada, but Mr. Stevenson was farsighted enough to plan ahead, merge the Canadian bookstore chains, and bring on the superstores.

I think the banks should have the same option. As a Canadian, I would much prefer to continue dealing with Canadian financial institutions linked to our country's history than find myself forced to deal with a huge American financial institution in the future because separately our own banks have been lost in a wave of powerful foreign competition.

Thank you.

The Chairman: Thank you, Ms. McArthur.

That concludes the presentations.

Now we'll proceed to the question and answer session. I think we'll begin with Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman. I just have a brief question for Mr. Quenneville, I guess.

Thank you for your presentations.

On page 2, I'm interested in the part that says, “The capital of the property and casualty companies is therefore held as security to pay the potential claims”. This gives us an understanding of how your business works. Then you go on to say “In banks, the capital is held as security for the deposits...” and so on.

How are the banks doing it now? These are the banks that have bought insurance companies. Where is the capital to cover their risk coming from?

Mr. Jules Quenneville: I don't know the answer to your question about where their capital is. All I can tell you is that if they have a separate subsidiary and they are operating an insurance company and they're operating it the same as an insurance company would operate, then their capital would be in their balance sheet, they would have made reinsurance arrangements probably worldwide, and are in the risk transfer business, as we are. That is something we are accepting as being there in the marketplace, which we are competing with today and acknowledging.

• 1355

We would like to point out specifically that they should not be allowed to merge these operations into one entity and then confuse everyone in terms of where this capital is. As long as we have a separate subsidiary in banking and a separate subsidiary in insurance, as we do now, we know where that capital is if we take the trouble to get their publicly filed documents and whatever else so long as that regulatory regimen is maintained. I personally have not made the necessary public information request to find out.

Mr. Dick Harris: If the banks got into the insurance business and consolidated everything into their branches, would it be simply good business to do it the same way they're doing it now and spread the risk out through reinsurance companies? I seem to get the indication here that you're suggesting the bank would not reinsure their risk but would rather use their own capital and depositors' capital to ensure that risk.

Mr. Jules Quenneville: I think that is the direction in which the task force report goes in allowing bank branches to be in the insurance business. They will no longer be in the business of taking deposits and being financial intermediation businesses. They're now entering a different business and they're doing it from the same corporate vehicle as their financial intermediation business, which is suspect to say the least.

Mr. Dick Harris: I see. Is it through regulation that the capital of the property and casualty companies is held as security to pay potential claims? Is that regulated?

Mr. Jules Quenneville: In terms of the federal regulation, there is a minimum capital test that is necessary to be met by federally regulated insurance companies, and this is administered by OSFI.

Mr. Dick Harris: Could that regulation not be applied to a bank that consolidated their insurance sales into their...? I'm just asking these out of interest.

Mr. Jules Quenneville: If that regulation were applied today to a banking conglomerate that included an insurance subsidiary, then it would be applied to that subsidiary. Once you start to apply it to a combined deposit-taking and insurance business, I think it becomes very difficult to determine what the proper capital levels should be and be able to demonstrate that those capital levels are maintained in the incorporated entity doing business.

Mr. Dick Harris: So you're saying it would be very difficult to monitor—

Mr. Jules Quenneville: If not impossible.

Mr. Dick Harris: Okay.

I have just one final question. I've been wanting to ask someone from the insurance industry this. I missed your presentation, but it didn't seem to give an opinion on the bank mergers. If it came to an either/or situation, would you accept the mergers if the banks stayed out of the insurance business?

Mr. Jules Quenneville: I would hope you're not suggesting we're trading—

Mr. Dick Harris: I know, but I just want to get your opinion. Let's say your industry were faced with a decision and your opinion would count in a decision. How would your industry feel about mergers? If the banks stayed out of the insurance business, could you support the mergers or a merger proposal?

Mr. Jules Quenneville: I didn't come here today prepared to talk about bank mergers.

Mr. Dick Harris: Okay, that's fine. Thank you, Mr. Chairman.

The Chairman: Thank you.

We're going to go back to a presentation because Mr. Gary Polonsky, president of Durham College, has just joined us. Perhaps you can make your presentation and then we'll revert to the question and answer session.

Welcome.

• 1400

Mr. Gary Polonsky (President, Durham College and University Centre): Thank you very much, Mr. Chair.

I should probably start by saying who I am and why I am here. I'm here because I was asked to be here by a bank, but they did not coach me in any way. In fact, I allowed that I might recommend something that they would rather I not, and they were entirely fine with that.

By way of 30 seconds of background, I have no expertise in this industry, so you may find the next 8 or 10 minutes drivel and I would even forgive you for coming to that conclusion. When they asked me to be here, I reminded them I had no expertise. But they said “Gary, you're well known, allegedly, at least between Toronto and Oshawa, as being a strategic thinker who is honest and runs a good shop.” I confess to being honest, but I'm humble about the rest of the stuff.

I am proud to be president of Durham College and University Centre. We take risks, we are growing very rapidly, we're solvent and we have an ISO banner across our campus. On the equality side, we offer guarantees to employers about the work of our graduates. We offer guarantees to applicants that not a single human being will ever be denied access due to financial hardship. We have some important centres of specialization and manufacturing in skills training. I'm not sure, having said that, why I was asked to do this, but I'm giving it my best shot.

Because I'm no expert, I tried to at least go to school on this. I did due diligence with the McKay report and spent a week ago last Tuesday with John Cleghorn, so at least I tried to make this less drivelly than it might otherwise have been.

I'm going to make three points and one recommendation. My first point is that I think one of the reasons in particular why life is so messy these days on the financial side is that the world has kind of run quickly into this whole aspect of global deregulation without any global policing mechanisms in place to see that the worst-case scenarios do not happen. There is no global regulatory mechanism now for stock exchanges, or you name it. As a result, some of the weaker links in the chain are now affecting the entire chain.

Because there is widespread corruption in places such as Japan and Indonesia as it relates to the banks, some businesses and some stock exchanges, and because everything is so transnational, North America and western Europe are suddenly affected by this in ways that 10 years ago they would not have been. All that of course has been helped along nicely by the little piece of silicon that was discovered in 1977. It's not that North Americans have always been angels. The U.S., for example, had their savings and loans fiasco and had to learn from that, but at least we can say we have a better track record than some of those other international parts of the world.

It doesn't seem as though the Don Johnstons and the IMFs of the world can bring some sense to this at a pace and in a way that is good for humankind overall. My first point, to simply repeat it, is that life is messy and Canadians would be naive to assume that everyone shares our values—not that our values are always angelic. But we're in for a very rough road in the short term and perhaps for the long term.

My second-last point is I think good predictions are therefore impossible to make. All organizations, individuals and families, as well as companies, have to try stuff, stay agile, treat all data as a friend and treat all feedback as a gift. It's not that people in positions of power are any dumber than their predecessors or any less well meaning; it's just so darn tough out there that I think we would all recognize that doing one's best is almost the best that one can do in many circumstances. No doubt you are getting people to your committee who are all over the map on virtually all subjects. They will have different experiences, different perspectives, and that's just the way it is.

• 1405

I want to just make my last point, which is that one trend that I do believe is here to stay is consumerism. I have just three very quick anecdotes.

I can tell you that while ten years ago, five years ago, maybe even three years ago, my students were somehow quite willing to take whatever my organization felt was appropriate, today that simply is not the case. Whether it's through dropping in or sending me a note or e-mailing me or phoning me at my home, they expect absolute top-drawer service, period, full-stop, and they want it tomorrow morning if not by this afternoon. Wherever there is a glitch, they are very quick to bring that to my attention. All of you have probably experienced a change in that kind of consumerist attitude in your own respective areas of life.

A second example I'll give you is from a particular student, who happens to be my five-year-old grandson. Last week when I visited him in Winnipeg, he told me that he really likes kindergarten, where he has just spent his first month, but he finds the music program “gag boring”. Well, I might have found the music program in kindergarten boring, but I took it. In his case, he's taking his Spice Girls and Backstreet Boys CDs to school to help educate the kindergarten teacher as to how she can be more customer driven when it comes to her music program.

A third example I will give you is that particular grandchild's father, who's vice-president of finance and administration of a major trucking company in western Canada. He just switched his banking business from the Royal to a bank that I hadn't even heard of until a month ago, called The Associates. I now know that The Associates is a big deal in the U.S. and world banking circles. I asked him why he did that, and he said “It's very simple; I got more money faster at the same rate.” So he crossed the street, and of course people are crossing the street all over the place in all kinds of industries, and there is simply absolutely nothing governments or anyone else can do about it.

I'll conclude, then, before making a recommendation, by confessing that somehow I'm not personally worried about this subject and I don't sense that many mainstream Canadians are, although certainly all kinds of people in industries that relate to this no doubt are very concerned. I guess they're not too concerned because if Cleghorn's and Barrett's decision doesn't work out they'll just cross the street, to use that analogy. Whether it's to another bank, a trustco, a credit union, Wells Fargo, The Associates, or Hongkong, there are now options available to people and we exercise those options.

I'll conclude with a recommendation, for what it's worth, which is that if they want to merge, let them merge, and the world will somehow take care of itself.

I just want to conclude with one addendum, as it does relate to my industry, and that's the issue of the potential fallout in jobs. There are allegations that tens of thousands of jobs will be lost, especially in and around this part of the country perhaps, if the merger goes forward. As we all know, supply and demand affects the unemployment situation as well as pretty well everything else, and Canadians today are very fortunate. Given the supply side of demographics and the demand side of a hot economy, one almost has to work at not getting a job these days if one has the appropriate set of skills. Our graduates from last spring, for example, enjoyed a success rate of over 95%.

I spent this morning with some people in the private sector, one president from a certain company who can hardly wait for some early retirements to occur in the banking community because she has a desperate need to hire people with those skill sets and she can't find those people in the marketplace today.

I just conclude again with my recommendation: if they want to merge, let them. Thank you.

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The Chairman: Thank you, Mr. Polonsky.

Now we'll go back to the question and answer session. Mr. Harris, you can ask a very brief question, because I have to go to Mr. Brison right after you.

Mr. Dick Harris: Thank you.

I just want to assure you, Mr. Quenneville, that I wasn't trying to put you on the spot, I was really asking it out of interest. I didn't mean to blindside you there in any way. I apologize if you felt that way.

Did you have a comment now or should we just let that one go?

Mr. Nick Discepola: Don't worry, he's still not going to vote Reform.

Mr. Dick Harris: That's all right.

I'll move on to Mr. Polonsky, then. I enjoyed your presentation, quite frankly, because I give a lot of credit to the Canadian people for being smart enough to go across the street if they're not happy with the service they're getting somewhere. I think the whole thing we want to accomplish in our financial services sector is more competition and more choices, in which case the consumer always wins. As long as we have regulatory changes that allow opportunity for more competition and more choices, then I think this country will get along just fine.

That's all I had.

The Chairman: Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman, and thanks to each of you for your thoughtful presentations.

The first question I had was for...is it Mr. Quenneville? I'm Brison right now, but I'm working on my French and it will be pronounced in French at some point.

[Translation]

I think I need another week of immersion courses.

[English]

One of the most difficult issues we have to deal with is both the insurance brokerage side of this issue and the auto leasing side of it, because there is significant opposition to the major chartered banks' participation in either of those areas. Recognizing that this is not a status quo situation and that everything is changing, if we do our jobs correctly the financial services sector, in a couple of years, will look completely different from what it looks like now, and in fact all the rules will be different.

If you and your competitors and insurance brokers, for instance, had full access to the payment system and could actually start up new banks with $10 million of capital, new banks that in fact had advantages that the big banks didn't have, where the deal was sweetened through the regulatory advantages, would you have difficulty or any interest in participating in that other financial sector, for instance in banking, given the opportunity, if there was a good deal?

Mr. Jules Quenneville: I would like to say that providing the regulatory capacity for people to enter businesses they aren't familiar with or businesses into which they have not made a free choice, we'll call it, to move their capital doesn't necessarily mean it creates a good business case. The kind of situation that has happened in the past when regulators have perhaps changed the rules to allow things to happen—they don't always happen. It's perhaps because when the case is put to the test in terms of possibility or return or the likelihood of success or the various things that have to come into the analysis, which were referred here to today by other speakers—the human capital, the know-how, the ability to be successful to begin with, the likelihood of success—those are very difficult things for an entrepreneur to bring together in a particular situation.

So personally I don't believe the simple removal of rules would create that situation.

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Mr. Scott Brison: You have a difficulty with the major banks, the class A banks, participating in the insurance brokerage end. What if one of the advantages provided to these new banks to start up was that they had access to the insurance brokerage side? I mean the new banks. I'm talking about the little community banks, not the major banks. I'm talking about the little ones with $10 million in capital. All Canadians would benefit from better access to capital. New banks may be one of the vehicles through which to achieve that public policy goal.

Would you be opposed to seeing that as one of the things new banks could participate in if the larger institutions were not able to?

Mr. Jules Quenneville: I think Mr. Dempsey would like to answer.

Mr. Robert Dempsey (Senior Vice-President, Guarantee Company of North America): One of the key issues of banks entering the insurance business is the present access to data that insurance companies are not allowed to have. A very quick and simple example is that in the automobile application in Ontario you are not allowed to know what the employment of the applicant is. Banks have that in their data systems from their consumer loans files. They have health information.

I realize you think there is a Chinese wall built within the banks for information not transferring from one sector to the other. We're highly suspicious that this is the reality.

So the playing field is not a level playing field. If you allow small banks to get into the same situation of offering insurance, they will have larger data banks on consumers than the present insurance industry is allowed to have. That's one of the areas where the playing field would not be level.

I go back to the comment about capital. We're concerned that the capital of banks would be extended for two different types of risk, catastrophe risk and financial risk. In the case of a calamity such as an earthquake, where not only properties are damaged but businesses go out of business and loans are called, there is only so much capacity and so much capital to rebuild the country. When that is exhausted, people look to the government to bail out, to declare emergencies, and the Canadian taxpayers' money goes to rebuilding the country.

It behoves the Government of Canada, I believe, to make sure you've got as much capacity coming into the country through foreign investment, foreign insurance companies, and foreign banks to be able to handle one of those calamities, if they ever exist. That's what our comment really was towards capital: don't allow the banks to double up on the extension of their capital through two kinds of risk.

Mr. Scott Brison: Your industry is a very profitable sector. There's nothing wrong with that, but it's a very profitable sector. The P and C side has 3% of the assets of the Canadian financial services industry and makes about 13% of the profits. It's the widest spread between assets and profits. It's a very profitable sector. I can understand other financial interests such as the banks wanting to get into it. I can also understand your trepidation about the big banks getting into it, but I guess I'm having a little difficulty understanding the concern with the smaller players.

Mr. Robert Dempsey: Well, the reality is that banks can now own insurance companies and can offer, through their separate corporations, insurance to the marketplace. That's a level playing field. It's when they use their branch systems to distribute the product and it's when they use their database to help them underwrite the product and underwrite the client that it is not fair and no longer competitive.

One of the reasons the banks have so much more capital than insurance companies is they've been under more protectionist regulations of the government to allow them to build that capital base. You're now deregulating, which is allowing them to take that capital out and compete against us, who have had to earn our capital through global competition.

• 1420

Mr. Scott Brison: I enjoyed your presentation on the parliamentary council for micro-credit. It's an issue we deal with on an ongoing basis. For me as an Atlantic Canadian MP, access to capital in small rural communities is extremely important.

I'd like to get your feedback on the success of Calmeadow. Typically, what is a reasonable spread, or what are the interest rates of micro-credit loans in Canada? Is it prime plus five? Is it prime plus eight? What is typically the spread? And what is the default rate on those types of loans?

The reason I'm asking this question is that the lending to higher-risk or smaller borrowers is changing quite dramatically. A year ago Wells Fargo had 10,000 customers in Canada. This year they have about 120,000 and they're lending at prime plus eight. Some of the foreign competition is actually seeing some opportunities to lend at these higher rates at higher risk. I was wondering where the micro-credit model fit in there.

Ms. Carol Rock: We looked at the Calmeadow model. The problem is that when you include the technical assistance, as well as organizing or helping to organize the peer circles and so on and providing support, it's a very costly way to go. So we developed a different model. We do individual loans. We process the applications and then we have partnerships in two cases with local credit unions. The credit union actually administers the loan. We've had about 30 loans to date and we've had two defaults.

As for the interest rate we charge or that the credit unions are charging, it is prime plus three.

Mr. Scott Brison: Plus three?

Ms. Carol Rock: They're not making money on this.

Mr. Scott Brison: Yes, that's difficult to sustain. I understand it's based—

Ms. Carol Rock: It's a community investment.

Mr. Scott Brison: Yes, absolutely, and it's sustained based on the altruism of the people involved, and that's commendable. But it's difficult to sustain that or to create a model that can be copied in a cookie-cutter approach in different communities without that profit motive, unfortunately.

Mr. Peter Nares: If I could just add a couple of comments to Carol's, there has been a long-standing question about micro-credit and whether the issue is access to that credit or the cost of that credit. I think time is telling us—I think it's your point—that it's very difficult to achieve financial self-sufficiency if in fact you're lending to the poor. So there's an outstanding question around that and there's been a lot of experimentation with different models.

One of the groups worth looking at in that regard is the business development centres or community futures development corporations. I don't know if you're familiar with that program. It's through Industry Canada. They were initially financed. They have a long-term self-sufficiency objective and they provide loans of up to $75,000 as lenders of last resort in rural and northern Canadian communities.

Their track record has actually been quite good. There is an argument that can be made that they're not lending to the poorest of the poor. In fact, the banks have actually started to move into that marketplace, so that these lenders of last resort are competing more actively with the banks now than they have in the past.

So on the issue of the spread, we developed a model with Bain & Company in Toronto that looked at Scotiabank being the wholesale supplier of capital, and looking for a retailer to break even on the lending—in other words, in a non-profit context—it would have to lend at approximately 14%. Then of course politically you're up into the usury kind of height.

So it's a really difficult challenge if your objective is financial self-sufficiency.

The Chairman: Thank you, Mr. Brison and Mr. Nares.

We'll now go to Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chairman. I'd like to ask my question of Mr. Marchese and Ms. McArthur.

Both of you dealt pretty well specifically with the issue of to merge or not to merge. Your opinion is that it's a fait accompli, and I would tell you that you must be basing that on information other than what I have.

• 1425

Ms. McArthur, you were talking about the fact that mergers, in your experience, haven't been bad. The McKay task force deals with an awful lot of recommendations, one of which is that mergers should be considered if they make business sense for specific banks in a generic way. But basically it talks about consumer protectionism, and it also talks about us demanding that our financial sector, in its broader sense, be entrepreneurial. It has built in many of the recommendations that look at collapsing the four pillars even further than they have been to date and looking at strengthening trust companies and credit unions, letting them have some of the abilities and accesses in insurance companies that banks now enjoy.

I'm just wondering how you would respond to the fact that we are demanding... And I would tell you it's a good thing for the Canadian consumer that our financial sector become more entrepreneurial.

Mr. Rosario Marchese: My personal belief is that the banks can become more effective or efficient in terms of what they do without merging. For me the merger is the central question. That's why I'm here today. I don't believe the merger is essential. I believe the financial sector is very concentrated. It can do what it wants within the existing powers the major banks have. If it needs some restructuring to make them more efficient, I think that can happen without the merger. That is my personal belief. I don't believe they will become more efficient, more effective, or better for consumers or the general public by merging.

Mrs. Karen Redman: I guess I'm asking you to focus on some of the other recommendations and the fact that we're not just asking to be more efficient. The question really is, what are we going to look like in the next millennium? On a very broad basis we're looking at the entire financial sector and we're asking all of the financial institutions to become more entrepreneurial, and that is to step outside of their current responsibilities and the regulations and bring in new ones.

My question is, when you look at the recommendations in their entirety in the MacKay task force report, do you feel that outside of the bank merger issues those recommendations will lead us to a new financial sector that's good for Canadians?

Mr. Rosario Marchese: That's a good question, Ms. Redman. I haven't read the report in its entirety, other than things I have gleaned from reading newspapers. I'm not sure I can be helpful to you in that regard, so I don't have a good answer for that.

Mrs. Karen Redman: I appreciate your candour.

I guess, Ms. McArthur, I would ask you the same question. I have to tell you that I really appreciate your illustration. I'm really glad to hear that publishing is alive and well in Canada.

I have a big Chapters that opened up in the next riding to mine. I look at my little independent bookseller and fear that they're not going to be there. I love that store. I know those people. I worry that the Chapters of the world... While it may make international sense, for me as an individual Canadian, where's that balance? To me, we're trying to achieve that in this financial question as well.

Ms. Kim McArthur: To use the Chapters example, if you keep going to your independent bookstore and supporting them, they're going to be fine. The best example is Richard Bachman of Different Drummer Books in Burlington. Both Chapters and Indigo opened mere blocks away from him. First his business went down, and then all his customers came back and his business has increased. Chapters has brought in people who have never been in bookstores. I think Chapters have provided tons of jobs, not only in retailing but in construction, and they have opened up the market. They are selling a lot more books now than the combination of independents and Smiths and Coles did.

In publishing we also have this other huge market, which is the Internet. Amazon.com is now selling billions of dollars of books over the Internet.

To relate it to the bank mergers, there's the possibility of the financial institutions going forward. They need this technology, and I think they need to merge to get a huge capital base to get this technology to even stay in the race internationally.

The example I was using about international credit card firms and The Associates, which Mr. Polonsky talked about... There are all these international firms in Canada. I think competition is great—it's the way of the future—and I think the recommendations in the MacKay report provide some really sound examples of what banks can do to expand and be entrepreneurial. But I think they need to merge to get the base from which to work, and I'm afraid that separately all these four banks will just fritter themselves away.

You could relate the trust companies to your independent bookstore. A lot of people, especially in Quebec, deal with nothing else but the trust companies, and that's great too. My father-in-law goes to his Ukrainian local trust company in Bloor West Village, and he'll never move. They'll be fine. They have their own thing to do.

But in terms of the leading edge or the cutting edge of international finance, I think the mergers are necessary, and I don't think they'll troop all over all the credit companies or the trust companies.

Mrs. Karen Redman: If I can just reiterate, what I'm hearing you say is that in the broadest sense you liked the recommendations as a grouping from the MacKay task force because they do provide that kind of entrepreneurial framework.

Ms. Kim McArthur: Well, they give some suggestions, and as someone else said—I think it was Peter—they are very balanced. It's a very sound report. It's not shrieking and panicking, which I've had plenty of opportunity to do over the last few years. There's just no point. This is what's going to happen in the future. What is the best way for us to deal with it?

Mrs. Karen Redman: Thank you.

The Chairman: Thank you.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

Mr. Quenneville, is your firm a member of the insurance advisory organization?

Mr. Robert Dempsey: Yes.

Mr. Paul Szabo: So they provide risk assessment, rating information, etc., for insurance risk.

Mr. Robert Dempsey: The insurance advisory organization is now combined with the Insurance Council of Canada. We've finally consolidated all the different services out there, all the members of these associations, all our insurance companies. We were sort of tripping over ourselves in all our different associations.

Mr. Paul Szabo: I know a little bit about it. I used to be the treasurer of IAO.

Mr. Robert Dempsey: A good organization.

Mr. Paul Szabo: A good organization.

Mr. Roy Cullen: Very sound financially.

Mr. Paul Szabo: I think it's important, because a lot of people don't realize that in fact every insurance company doesn't have this massive national rating or risk assessment function. But it also means that others can get into the insurance business without having a lot of advice-based people. They can buy that information and advice.

It seems to me there is an expertise available to the insurance industry and also to the banks so that they can pretty well have all the information you have and can compete. I gather that through the subsidiary system the banks are in fact doing quite well in the insurance industry. Is that your understanding?

Mr. Jules Quenneville: I think we acknowledge the fact that if a bank has an insurance subsidiary and that insurance subsidiary is in the marketplace, building its know-how and garnering its expertise, wherever it has to go to get that information, we have no quarrel with that. That is the proper way if you're going to have ways and means of having these people do what they do.

Mr. Paul Szabo: I think you have really been diplomatic in your position and you've used terminology like “disadvantaged” or “to give them competitive advantages”, etc. Most other people coming to us from your position have basically said it's tied selling. That is what is giving them the competitive edge.

You have sitting right next to you probably the first example of tied selling that's appeared before us.

Mr. Nick Discepola: The second.

Mr. Paul Szabo: Well, maybe this afternoon.

The chairman and CEO of the largest bank in Canada said “I want you to come here and talk in favour of mergers.” It wasn't “I will not give you that loan for the school unless you go.” It was just “I'm John Cleghorn. I'm chairman of the biggest bank in Canada, and it would be pretty helpful for me if you went out there.” These are the kinds of subtleties.

Coercive tied selling is illegal, but it is the influence or the pressure that comes, without being said or in fact having a paper trail, or any other trail.

• 1435

I think, to summarize your position, you're not afraid to compete with them, but if they have another book of business with a potential customer, it means there can be this linkage—it might be subtle or direct—and nobody will ever know.

Mr. Dempsey suggested a suspicion that even though there are restrictions on sharing of information between you and the banks, it may be pretty hard to police, or you're not so sure... And that's a valid point, because tied selling has never been acceptable. The banks will tell you they never promote it and they're against it, yet at the branch level it happens, and we've had people before us who've told us that. I think your concerns are well founded, but the banks are doing pretty well in the insurance industry already without the branch system, and I suspect they'll continue to do well.

My question to you—and Mr. Polonsky may want to answer—is if the banks were given authorization, as part of the recommendation, to provide insurance through the branch system, would you be supportive of insurance companies also having access to the payment system?

Mr. Jules Quenneville: I think that question was already asked earlier. When you say access to the payment system, can you ask me that as a unilaterally question instead of putting it as part of some kind of “Let's make a deal here” and having a condition? I don't think there is any middle ground on the question of whether banks should be allowed to sell property and casualty insurance through their branches. My answer is unequivocally no. There is no trade-off that can be made. You've just spent a few minutes elaborating very well on that subtle point of how you can get—

Mr. Paul Szabo: I didn't think it was subtle.

Mr. Jules Quenneville: As to the payment system, if you mean if the Guarantee Company of North America consumer who deals with us—we like to think of them as our customer—wants to pay their account at a bank machine, should they be allowed to do so, my answer is yes. I have no problem with that. As a matter of fact, I think there should be some capacity provided for convenience, for the consumer to be able to pay the bill that way.

As for the negotiation of the price, the explanation of the coverage, all of the things that go into the role that have to take place in one form or another in the explanation of the product, I think that should continue to be provided the way it is today.

Mr. Paul Szabo: You want to stay an insurance company. You're not interested in being a bank.

Mr. Jules Quenneville: That's correct.

Mr. Paul Szabo: Okay.

The Chairman: Perhaps Mr. Polonsky would like to make a comment about the comments.

Mr. Gary Polonsky: Yes, thank you, Mr. Chair.

I must have misspoken for anyone in the room to have inferred that a particular bank chair asked me to do this. Somebody else asked me to do this. Several weeks after that happened, I sought out several individuals to try to make my presentation as meaningful as I possibly could. My college, for example, doesn't deal with the Royal Bank; it deals with the Bank of Montreal.

I have just one last comment, if I may, while I have the mike. One of the other persons I sought out prior to coming here was the senior partner of one of the big six accounting firms—one of the KPMGs and Deloitte & Touches of the world. Reference was made by someone here about the automotive industry, and when you come from Oshawa, as I do, you tend to be interested in the well-being of the automotive industry.

Here is that person's take on a matter that I think may be germane to these discussions. He believes the Auto Pact will inevitably die because world competitive factors will simply insist upon that in some kind of uncontrollable way. He also believes that's why the dollar has been allowed to sink by about 10¢, which of course will cost all Canadians somewhere around 12% to 14% on their standard of living over time. Apparently, that's the price governments feel Canadians must pay to stay competitive.

That may seem a bit Machiavellian or Draconian or whatever to some people in the room; nevertheless the Auto Pact is under discussion, the dollar has just sunk by a dime, and our standard of living will go down by around 12% to 14% if that prevails.

• 1440

These are major prices to pay to prop up artificial competitiveness. If the world is as tough as it apparently has become, there's only one way to be competitive, and that is to be competitive.

I'm proud to say, for example, that my own organization, which isn't huge—it's only about $55 million—has learned we can out-Yank the Yanks in certain product lines in the United States. We have a staffed office in Dallas, for example, where we are selling millions of dollars worth of ISO training to Americans.

Maybe it would be lovely if the world were simpler, but it doesn't seem to be and it's better to be tough and good than something else. Thank you.

The Chairman: Thank you, Mr. Polonsky. Thank you, Mr. Szabo.

We'll have a five-minute round for Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chairman and ladies and gentlemen. The time is limited, so if you can be succinct in your answers I'd appreciate it.

I have a quick question for Mr. Quenneville and then I'd like to get into micro-lending and small-business lending with Ms. Rock and Ms. McArthur.

Mr. Quenneville, I found the argument of double jeopardy interesting. I hadn't seen it before. But if banks, as you tell us now, have insurance subsidiaries, presumably there is a double jeopardy there already. I'm wondering if you object to that, or if you can just expand on that double jeopardy at the branch level.

Mr. Jules Quenneville: The double jeopardy argument has to do with the financial institution system. If you take all the capital employed in the system the way it is today and move it ahead to what's been put forward, a bank should be allowed to do the kind of business we do in the property and casualty business, which is a risk transfer business. The likelihood is that their retentions would be much larger and they would carry more of the risk against their capital.

If they do this in a separate subsidiary, this matter can be reviewed and commented upon. Regulations can be promulgated. The OSFI people, who are the federal watchdog people, can have a role where they make recommendations as to what is prudent for our financial system to have. If we start confusing these different types of financial transactions into one entity, it becomes very hard to differentiate what is going on.

Mr. Roy Cullen: Thank you.

You talked about the level playing field. If we look at it from the point of view of consumers, that there is more choice for Canadian consumers with single-stop shopping and they can go to their banks and buy their property and casualty insurance and take out their RRSPs, how do you argue on the consumer choice argument? As opposed to a level playing field, let's look at it from the point of view of the consumers. Why is it not in the interests of the consumers to have more choice?

Mr. Jules Quenneville: I made mention of this in my presentation. For example, when the industry consolidated the trust companies and the investment dealers, we actually got less competition. Those choices disappeared. There were no such places any more because the banks came along and bought them. So I think you will have a situation where you have reduced choices, not expanded choices.

Mr. Roy Cullen: Okay.

Ms. Rock, in your paper you talk about the risk with mergers, with respect to access to capital. I think the U.S. experience bears that out, and also with respect to local retail services. But then you talk about a concern about centralized decision-making being a possible result of mergers.

I'm wondering if it is possible that it could go the other way. If you have a Royal Bank merging with a Bank of Montreal, you might consolidate small business programs. They might have a higher ceiling for loans and maybe a greater critical mass. What leads you to believe there will be more centralized decision-making on loans if there are mergers?

Ms. Carol Rock: Personal experience and just a general fear of consolidation.

• 1445

When we had a farm, we had an account with the Bank of Montreal and they decided to remove the decision-making from the local branch. So we would go in, arrange our operating loan for the year, and have what we thought was an agreement. It would go off to wherever, and when it came back it was changed. Meanwhile, we had no interaction with the decision-maker.

So I guess it's just a general fear and some literature search.

On the other hand, what you say is possible. If there is a Bank of Montreal and a Royal Bank in the same town and they consolidate, there may be enough of a critical mass to keep the decision-making in the local bank. But if there's no guarantee of that, we're left with the bank making that choice.

Mr. Roy Cullen: I have one last question, Mr. Chairman.

Ms. McArthur, you mentioned the comment that Mr. Barrett has made about potentially setting up a new small business bank. I must say that I'm attracted to the concept, but I may be somewhat cynical. Do you think there's some real substance to this? What would it accomplish other than, as they say, moving the deck chairs around on the Titanic? What of substance would be accomplished by pooling it all into one small business loans company?

Ms. Kim McArthur: That's what I read in the press. He made a speech in Calgary, and that is where I got this from. Along with saying he would form this small business bank, he was talking about what you have mentioned, which is higher ceilings on loans and faster loans of up to $100,000 in 24 hours.

I guess it's just the whole idea of merging those two entities. The Bank of Montreal is known for—of course I'm speaking personally—really good things for women within the bank, really good programs to make sure that women rise within the bank. The Royal is better known for dealing with women entrepreneurs. If you put those two together, I think there is a really viable option to have a small business bank that would have a focus, with all kinds of really skilled people you could get hold of, as Carol was mentioning. You could actually get hold of them, because he's guaranteeing that there would be a response within 24 hours on things like loans.

The Chairman: Thank you, Mr. Cullen.

Mr. Roy Cullen: Thank you.

The Chairman: Mr. Discepola.

Mr. Nick Discepola: Thank you, Chair. I'll be very brief, because I understand there are other members who want to ask questions. I have a series of questions, but I want to focus on one issue.

When I was chairing the committee hearings in the maritimes, I also heard something disturbing. It didn't hit home until I heard Mr. Polonsky today. I want you to be specific, sir, because I heard the same thing as Mr. Szabo heard. As a matter of fact, I have it in my notes here. Were you or were you not approached by a bank employee to make representation on their behalf in front of this committee? Yes or no.

Mr. Gary Polonsky: No.

Mr. Nick Discepola: So Mr. Szabo and I both heard wrong, then.

Mr. Gary Polonsky: Or I perhaps misspoke. What I did say was that a bank person called me.

Mr. Nick Discepola: A bank person, but not a bank employee?

Mr. Gary Polonsky: A bank employee called me to say what I felt I wanted to say, not what—

Mr. Nick Discepola: And you then sought that out, and you were able to get a meeting with the president very quickly like that?

Mr. Gary Polonsky: The president had been scheduled since June to come to my college to attend an open forum. I was able to take advantage of that already scheduled opportunity. There was absolutely no coercion. I am absolutely no one's stooge, sir.

Mr. Nick Discepola: Okay, I wanted to clarify that, because in Newfoundland we met two people who were approached by their bank managers also to testify on behalf of their banks. I thought that was okay, but if all of a sudden we saw a trend being set, I would be concerned.

Mr. Gary Polonsky: I must have misspoken, and I apologize for that.

Mr. Nick Discepola: Thank you, Mr. Chair.

The Chairman: Thank you very much, Mr. Discepola.

Mr. Valeri.

Mr. Tony Valeri: Thank you, Mr. Chairman. I'll be very brief as well, because I understand the chair does want to ask some questions as well.

The Chairman: No, that's fine.

Mr. Tony Valeri: I just wanted to touch on the public interest process, because I'm not sure whether it's been touched upon in any detail or not. Mr. Polonsky, again, I just hope I didn't misunderstand. I'm going to follow up on the last...

In response to another question, you talked about the Auto Pact. I understood you to say that as a result of the Auto Pact, there was essentially an artificial level of competition in place and that we were in fact suffering in terms of our standard of living because of it.

Mr. Gary Polonsky: No.

Mr. Tony Valeri: Did I misunderstand that?

Mr. Gary Polonsky: It could just be that I'm not having a good day, Mr. Chairman.

• 1450

I meant to say the survival of the Auto Pact is under discussion, and there are those who are predicting it will die. In many quarters, there is a feeling that if it did die, it would be difficult for Canada to compete with an 80¢ dollar, for example. In that case, it would be in the national interest for the dollar to sink, and, son of a gun, has it sunk!

Mr. Tony Valeri: I must be having a bad day, but my linkage to my next question was whether or not there should be a public interest in this whole merger question. MacKay talks about a public interest and public impact statement process as part of the future of the financial services when we look at potential mergers. Prior to your own testimony, we heard from at least one witness today who said there really is no role for the public in this, that it's purely a business decision, that if the banks feel this is what they should do and it does clear the Competition Bureau and OSFI in terms of the technical aspects of the proposal, then that's good enough—that there is not a public role to be played here. I just wondered if I could hear from the panel.

More specifically, there has always been a policy in place that says “big shall not buy big”, particularly when it comes to the banks. MacKay has advocated dropping that particular doctrine. Is there agreement from the panellists that this should be dropped, or are there some exceptions to that particular rule?

As for the public impact process, is it too onerous? Should we be able to have such undertakings? Is there a role for the public? And should government follow this process, as MacKay has advocated?

Mr. Gary Polonsky: I would answer that with a yes. I think this is very valuable. I think the ultimate manifestation of the public interest will probably be conducted by the public as consumer, as opposed to the public as advocate, or as expert or as whatever.

I believe there's a definite transformational sea change that has taken hold of the economy, and it's a market-driven sea change. So I believe that if a bank makes a bad mistake, they will pay for that mistake because of how consumers will act. Shareholders will ultimately be disappointed and will have a role to play in terms of who runs the bank shortly thereafter. Executive changes will happen, and all that cyclical stuff.

Simply, my point is that I have no idea whether the banks should merge or should not merge. If they do so and it turns out to be a good decision, consumers and shareholders will be well served. If it turns out to be a bad decision, they won't be well served but they'll conduct themselves so that there will be changes. I think the banks will adapt, because ultimately the consumer will win out in the new millennium.

The Chairman: Mr. Marchese.

Mr. Rosario Marchese: I wanted to comment, as we are having an opportunity to touch on other things.

The reason I'm here is that I worry about the public interest, in fact. I'm not sure who said what you attributed to somebody, that this is not something for public interest consumption—

Mr. Tony Valeri: It was a prior witness.

Mr. Rosario Marchese: Well, I find it odd as a comment.

We are all affected by these decisions, so there is most definitely a public interest as the decisions relate to jobs, as they relate to branches and how they affect service, as they relate to whether or not service charges will increase or decrease, as they relate to the whole issue of whether small business—the reason I'm here—is going to be adversely affected or positively affected.

I am worried that traditionally... Just to give you an example, there was a $100-billion increase in bank business lending between 1995 and 1997, and over $80 billion was loaned to big business in the form of loans of $5 million or more. Furthermore, the mega-banks would control 75% of total small and medium-sized business lending, and 80% of the credit and purchases. That also worries me a great deal.

There are no assurances from the banks other than their saying that they're going to set up this small business bank so that more money will flow to small business. We haven't seen that traditionally. Because of their worry about the public interest and public opposition to these mergers and the fact that we would likely not see more money come to small business, they have proposed the small business bank.

• 1455

I don't have any faith in that. I don't think money will increase to small business. I think that if this were to happen, we would need full disclosure of lending practices and loan statistics in order for the public to genuinely see whether or not such a small business bank would indeed flow more money to the public.

But as for your question, there is a definite public interest. I am worried about mergers. I don't accept them as the way to go to make them more entrepreneurial.

The Chairman: Is there any further comment from the panels?

Mr. Dempsey.

Mr. Robert Dempsey: I would just say that I think the banks deliver a product that we look upon like a utility: it's a necessity of life. The real question of whether you allow a merger to go ahead or not is whether there will still remain competition in the marketplace that will allow a bank, regardless of its size, to be innovative and answer to the consumers' needs.

History shows that as you allow utilities to get bigger, they become somewhat harder to control. That really becomes a question of whether it's going to get so big that it becomes uncontrollable or that it cannot be allowed to fail in the open marketplace without destroying the economy of Canada.

The Chairman: Thank you, Mr. Dempsey.

Mr. Nares.

Mr. Peter Nares: Just quickly, in our presentation we talked about balance a couple of times. I found the report, in direct response to the question, to be balanced from the point of view of the banks needing to make a business case in a way that they feel is going to advance their business case. Politically, a case is being made to protect the public interest. Then there's a community case to be made in terms of what's going to happen given the decisions.

If in fact banks are allowed to merge, I believe the task force report describes a broader environment in which that may work. I would argue, as an advocate on the community side, that it's an opportunity that may be presented for you to begin looking at some of the trade-offs that could be negotiated if there is a strong business case for a merger. I'm not enough of an expert to know whether there is or not. If there is in the minds of others, I think there's an opportunity to increase the amount of community investment that banks can have.

The Chairman: Thank you, Mr. Valeri and Mr. Nares.

I just have a question related really to the objective of this exercise, which is designing a world-class financial services sector and addressing the future orientation of this sector. This is really I think at the core of the public policy debate.

MacKay spoke about the forces of globalization, technology, and the demographic transition that's taking place in our society. He spoke about the development and evolution of a more entrepreneurial financial services sector.

Yet what I hear from many of the witnesses who appear in front of this committee—I don't mean necessarily this particular panel, because I think some people were speaking about the future—is that people come here with a position either representing an industry or whatever their self-interest is and they fail to paint for us a picture of the future. What do they see as sort of the new financial services sector? What should it look like? What are the elements that would make it different and better?

Consider what we're looking at right now. Forgive me, because I'm the father of two children who are 9 and 10, so for obvious reasons, you begin to think generationally about issues. What I sense is that the debate, which is really about two or three years down the road, if that, if we're lucky to get that far, is about what's in it for the next generation of Canadians. What type of system do we want to evolve into? What are the criteria we should be looking at?

I'm wondering why people are shying away from that. It's difficult to predict the future, but I often say that while that's the case, one thing I'm certain of is that we can help shape it. I'm just wondering why there's the hesitation to venture into this. Is it fear of the unknown? What is it that's holding people back?

Mr. Andrew Bolter: Maybe I can answer that.

The Chairman: Yes, Mr. Bolter.

• 1500

Mr. Andrew Bolter: From my perspective, looking at the community base in my community, what I want to see from my bank—there's been a sense of “my bank” and “this is where I bank”—is a bank that's there to serve the needs of the community in which it does business. You give your money to the bank. It gives you some security. It protects your money. You want it to hopefully help you in terms of developing your own personal wealth and resources. We also want it to help the community generally develop community resources.

Banks are basically places in which we keep money, right? They look after it for us, and they use it to make money themselves. It's very simple. They use it in all kinds of ways to make money.

I just think it would make more sense if banks used our money in our own communities a lot more and made decisions in our own communities. How that model would work, I don't know.

The Chairman: Your perception of the financial services sector, it seems to me, is banks.

Mr. Andrew Bolter: I'm sorry, banks?

The Chairman: Yes, basically. That has also been a challenge we face, because every time we talk about the financial services sector, people speak about the banks more than they do anything else.

Mr. Andrew Bolter: Well, I include credit unions and trust companies and generally places where people keep their money.

Credit unions need to do more business. Well, they're not doing it. They're becoming more bank-like, and that's a problem. Our local credit union used to be more socially conscious. They are more socially conscious than a lot of banks are in terms of local communities, but what I find is that they're becoming like banks. They're emulating the banks, and that's not a model that's really benefiting our communities. It's not creating jobs in our communities. Where's the social capital? Where do we measure that in terms of what banks do?

It's like a utility. Banks are not a business in the pure sense of the word. They control the transaction systems. They have money. Anybody who has a million dollars can make money just by investing.

You can lose money around the world. You can hire lots of experts to do that for you, but it doesn't generate social capital when you do that. We want to see the money coming back into our communities where it can do some good things.

If you include the measurement of social capital and measure profit in terms of social capital and benefits within the community and how it's helping especially low-income communities and communities that need some reinvestment, then you can say this is good and this is what banks should do. They should make a profit, but they should return some good to the local level. That's basically the picture we want.

I don't know the complete mechanism. I know that in the U.S., we have the Community Reinvestment Act. I think that works there. Something similar could work here, but we have to design it to meet our needs.

The Chairman: Mr. Polonsky.

Mr. Gary Polonsky: My comment, Mr. Chair, would be that I think all Canadians want a prosperous and compassionate country. Maybe we take that for granted, but the reason the Polonskys ended up in Canada is that for the first many centuries of our lives, we were in a part of the world where people couldn't even spell “compassionate”, “prosperous”, “free”, or any of those good words.

I think the same comment would come if one moves from the nation to an industry, whether or not it's the banking industry. I think people who run it are paid to make it work. Unless the company is both prosperous and progressive, it's not going to cut it any more.

We're talking about the banking industry this afternoon. This morning, I was involved with a panel on the telecom industry for a while. A question was put by somebody about whether it was the telecoms, IT companies, satellite companies, or cable companies who were going to win out on this. They also wondered who should win out.

I thought, who cares? As long as the people are well served, they'll make the ultimate choices. The people who will win in that industry will be progressive, prosperous, and compassionate companies.

Ultimately a country is a sum of its communities, companies, and people. I think there's only one way to be both. I'm just rambling a bit, but I'll just conclude by saying that I think one of the big evils out there is people who force others into thinking in terms of “either/or” dichotomies. The world is searching for “both/and” inclusive solutions.

• 1505

I think, just to come back to the banking industry, that if they turn out to be judged by consumers as having all the right stuff inclusively in terms of being prosperous, progressive, compassionate, community-committed, and so on, then they will win, which would also be true of the country as a whole.

The Chairman: Thank you, Mr. Polonsky.

Mr. Marchese, do you have a comment?

Mr. Rosario Marchese: The reason we focus on banks is that they have control of the greatest assets that are there, which is approximately probably 70%. The insurance companies, as was mentioned, control 3% of those financial assets. It could be more, but I'm not sure. We focus on banks because that's where the big bucks are.

But in terms of looking at the financial sector and what it should look like, that's a question that, if it's of interest to the chair and to the committee, there might be people to have some future deputation for that kind of guideline that we could speak to. That might be helpful.

But the point for me, as an individual who's worried about bank mergers and the lack of access for small business generally, is that the job of the politicians here is to worry about the public interest. Therefore, it's my view that your obligation is to have criteria that protect the public interest. What is that? It's something that you've got to work out.

My view is that you, as a committee, have to look at values, criteria, and/or principles that protect the public interest. From time to time some of these financial sector decisions will collide with the public interest, and from time to time they may coincide. But where they collide, it is your duty to protect the general public interest. So it would be my sense that certain values and principles should be drafted as they relate to the well-being of the general public, communities, and individuals in general.

The Chairman: Thank you. Mr. Nares.

Mr. Peter Nares: I'd like to comment on the question itself.

The Chairman: Yes.

Mr. Peter Nares: With respect, Mr. Chair, I think it's an unfair question with respect to the broader-vision side. In effect, a lateral-thinking response is required in a context of vertical thinking. So on the one hand we're being asked to respond to the task force report with respect to our particular areas of interest, but on the other hand you're saying you're concerned that we're not also addressing it from a broader context.

I'd respectfully suggest that this is not the venue to get at the answer to your question. I think it's a really good question, but I think we need to think a bit about a different process as a way to get at what I think is behind what you're asking.

The Chairman: I thank you very much for that comment. My impression was and still is that people are invited to appear in front of this committee to of course provide us with their perspective. There's no question about the fact that your perspective and comments have an impact on the overall picture.

I'm sure those people who come here to advocate mergers will understand that there will be repercussions on the other sectors within the financial sector, as do people who advocate against mergers, just to cite that particular example.

But your point is indeed well taken. I could tell you that not only on this issue but on a lot of other issues in this country, we need to discuss a lot more about the future.

So on behalf of the committee, I'd like to thank all the panellists. It was an excellent panel. It generated some great questions and answers. Thank you very much.

We're going to take a two-minute break. Then we'll be right back.

• 1509

• 1519

The Chairman: Let's call the meeting back to order. For this session we have the pleasure to welcome representatives from the Dominion of Canada General Insurance Company; the Insurance Brokers Association of Ontario; the Islamic Financial Institutions, Canada; the Alberta Securities Commission; the Ontario Securities Commission; and the Investment Dealers Association of Canada.

We will begin with the representative from Dominion of Canada General Insurance Company, Mr. George L. Cooke, president and chief executive officer. Welcome.

• 1520

Mr. George L. Cooke (President and CEO, Dominion of Canada General Insurance): Mr. Chairman, thank you very much.

You have in front of you both English and French versions of copies of the presentation I made to the Senate committee a week or so ago. They're filed with your committee with your consent, as a formal part of our submission. I would like to just highlight, without a formal set of remarks, a few points that will complement those lengthier documents, and refer in my remarks to the particular article attached, taken from the New York Times.

Thank you very much for the opportunity to be here. It is a pleasure to have the chance to participate in this round-table discussion.

It's been a very busy time for the insurance industry. The MacKay report, as I'm sure everyone here knows, has sparked a very sharp debate about the structure of the financial services industry, both today and in the future. One of its recommendations, that banks be permitted to retail insurance products in branches, is the bottom line we want to talk to.

As much as Mr. MacKay's recommendations may very well appear innocuous, it's our position that, if implemented, they will threaten the continued prosperity of the property and casualty industry in Canada, a sector that employs approximately 100,000 people from coast to coast.

It's important that the committee note that our industry is and has worked to deliver what the Canadian consumer needs and wants. In particular, we offer to the consumer a broad range of quality products at very competitive prices. For example, in the last two years here in the province of Ontario the average price of auto insurance has declined over 18%, which is very reflective of the competitive market circumstances we face.

We deliver excellent service. Over 82% of our consumers polled a month or so ago are very satisfied with the service levels being provided to them. That's an outstandingly high level of service, given comparative industries.

Consumers have choice. They have choice of product, choice of price and choice of service provider. We deliver products to the consumer in a variety of different ways. We believe it's very important for consumers to continue to have competitive prices, service levels that reflect an intensely competitive market, and the choice to which they've become accustomed. For that to be the case, I think certain economic conditions have to prevail in the future, as they do today.

There should be minimal barriers to entry and exit from this industry segment; consumers should be informed so they can make informed choices; and access to information should be fair and even across participants that otherwise are part of this industry. I suggest to the committee today that the MacKay report's recommendations will foster precisely the opposite environment. They will provide maximum barriers to entry and exit; they'll cause a disequilibrium in terms of access to information between banks and insurance companies; and they will fatigue consumers with less choice, less competition and less information.

There are over 230 companies that operate in our sector today, and I think it's very important this committee understand that it's not competition we fear; in fact, we encourage and thrive on competition. But competition on an uneven playing field or on unfair terms is something we don't want. We don't believe that kind of competition will be appropriate for consumers.

Banks have been able to own property and casualty insurance companies since 1992, but they've been forced to keep those operations separate from their other activities for very good reasons: to avoid unnecessary pressure for tied selling or coercive sales practices; to protect the privacy interests of consumers; and to keep market conditions fair and balanced for all players.

Interestingly enough, since 1992 the banks have been forced to compete on a level playing field, and they have found it somewhat tough. In fact, some of them have had to resort to giving away free products to entice customers, or engage in some form of predatory pricing. Perhaps that's a bold accusation to make, but given the vast amounts of capital they have available, there are all kinds of opportunities for legitimate but otherwise difficult forms of cross-subsidy.

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Interestingly enough, the supporters of the MacKay recommendations talk about product innovation, but the banks have had six years to be innovative in terms of product and we've seen absolutely no innovation whatsoever. In fact, they've done nothing more than copy the existing products the other companies in this industry sell. So now, for all intents and purposes, they want an advantage, and quite frankly, in our view the MacKay report recommends they get it.

I have provided you with a copy of an article from the New York Times where Mr. Cleghorn talks about the merger and the author of the article offers some of his perspective on it. I would draw your attention to those areas that are highlighted, where not only do we see the position dismiss what I think are some very legitimate consumer concerns about poor service, but there is also an observation that I find most strange—that the banks need to be bigger to compete domestically against the more than 2,200 provincial credit unions and, presumably, against the 230 property and casualty companies that are enjoying the benefits of a competitive marketplace today.

Basically, if the banks were allowed to retail through their branches, it's our contention that they would have access to information, notwithstanding Mr. MacKay's caution, that would be illegal and is appropriately illegal today for insurance companies like ours to collect, retain, or use in making underwriting or rating decisions. They say they won't abuse access to information, and Mr. MacKay makes the observation that legislation and excessive levels of regulation can eradicate this potential threat to privacy and competition and protect consumer interests through legislation. Frankly, our position is you can't legislate away the use of knowledge.

It's interesting that one of the participants last week before the Senate committee referred to this report as something that recommends excessive amounts of unnecessary legislation as an apology for what otherwise will be an over-concentrated and uncompetitive market environment if the recommendations are carried forward.

I'd like to share with you a couple of anecdotes, if I may. Following my presentation to the Senate committee a week or so ago, I circulated the remarks I have provided to you today, not only to members of Parliament but to all of our employees and brokers from coast to coast. To say I've been deluged with correspondence since doing that would be an understatement. People's responses have been very interesting, and two of the anecdotes are instructive in terms of the discussion we need to have this afternoon.

One response came from a broker operating in a province other than Ontario who complimented me for the stance I had taken and for articulating the concerns he and many of his customers felt. But he indicated he was afraid to express those views himself for fear that his line of credit and his loan arrangements would be terminated. That's a very disturbing observation to hear in this country, of all countries in the world.

I received a communiqué from one of our employees yesterday. He told me he had both a Visa card and a MasterCard, and attempted to borrow from the particular bank that had issued him the Visa card in order to pay off balances on both credit cards. The condition of the loan to allow that repayment of funds was that the MasterCard be cancelled. Now, if that isn't a form of fear that's quite inappropriate in the world I like to live in, and recourse over tied selling in the second example, which is quite inappropriate and very difficult to deal with, I don't know what it is.

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And I can say to you, sir, that those are only a very few examples that are taken from the many I've received.

In my discussions with the Senate committee, it was pointed out to me that the banking ombudsman had received complaints from only something like 1% of the bank's customers. That's in spite of the fact that Mr. MacKay notes that over 16% of the respondents in his public opinion poll had expressed concern and had expressed that they had been exposed directly to tied or coercive practices. I think that simply points out that one of the remedies Mr. MacKay puts forward in terms of the expanded role of the ombudsman might be idealistically correct, but it's practically not going to deal with this issue. There's obviously substantially more of this practice today than is being reported. If you increase the opportunity for abuse, I can't imagine why you would expect a remedy that's not sufficient today to be sufficient tomorrow.

I think it's important to share with you my thought that consumers are happy with their insurance companies and are unhappy with their banks. Quite frankly, if the banks are allowed to retail insurance products from their branches, then for all intents and purposes, the government will be approving job losses from coast to coast—and I'd like to just stop on that point for a moment.

The notion here is very simple. Today, companies like ours distribute our products through independent brokers in small communities. The decisions about those communities are made in the communities in which people live and work, and the people who are making those decisions are a part of those communities. With the concentration that will ultimately ensue if these recommendations go forward, those jobs will almost immediately, and certainly over a very short period of time, be displaced and replaced with jobs as call centre operators or the equivalent in a large urban setting. At best, you're going to trade one type of job in a rural community for a different type of job in an urban community.

The impact this will have on a country like Canada is, I think, quite obvious to all. I think you can make a very legitimate case. Our numbers and observations demonstrate that in the process of that dislocation, you'll actually have a net loss of jobs for some 20,000 people. That is a very significant point. It is not addressed at all in the MacKay recommendations or in the analysis that's there.

I guess the point I make is this: at the end of the day, the consumer will get nothing other than less choice, less competition, and all that these entail, including higher prices and poorer quality of service. I therefore ask you and others, in whose interests is this reform being contemplated? I suggest to you that if it's in the interests of the consumer, instead of implementing these recommendations, we should be working to ensure that our currently competitive environment is more competitive by pursuing initiatives fostering that competitive environment; providing better and more timely information to consumers; and taking advantage of the technology that we have to do so.

I thank you for this opportunity. I look forward to the discussion that will ensue.

The Chairman: Thank you very much, Mr. Cooke.

We'll now hear from the Insurance Brokers Association of Ontario's president-elect, Mr. Gil Constantini, and director Robert J. Carter. Welcome.

Mr. Gil Constantini (President-Elect, Insurance Brokers Association of Ontario): I would like to thank you for this opportunity to present our views regarding the MacKay task force report, Mr. Chair.

My name is Gil Constantini, and I am the president-elect of the Insurance Brokers Association of Ontario. I also operate an independent brokerage in North York, which is now part of mega-city Toronto. And with me today is Bob Carter, our executive director.

Although we will not repeat them here, IBAO endorses the views recently expressed to this committee by our national association, the Insurance Brokers Association of Canada. We would, however, like to expand on some of the points raised by IBAC.

Consumers in this province and elsewhere in Canada benefit from having one of the world's most solid, competitive and cost-effective property and casualty insurance sectors. The P and C sector is also Canada's most competitive financial services industry. This intense competition benefits consumers. There are a large number of P and C competitors, a non-concentrated marketplace with ease of entry for new players, a solid delivery system with short-term contracts and with no obstacles or fees to change insurance providers, and an increasingly price-sensitive consumer market.

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Our experience suggests that the current environment fosters independent pricing, greater operating stability and pricing flexibility. It is also the most effective way to ensure efficiency and product innovation. Moreover, consumers have an abundance of products. They have an abundance of choice, rates, service levels and insurance providers.

Consumers also benefit as a result of the comprehensive code of marketplace conduct that governs the independent brokerage industry across our country. Furthermore, our industry is focused very heavily on promoting enhanced professionalism through higher educational standards, through mandatory continuing education requirements and mandatory step licensing. Canada is away ahead of other foreign jurisdictions on this front.

The report also suggested consumers will enjoy lower insurance premiums if banks are given special privileges. This position is built on a false and misleading premise. There is no evidence anywhere that the total cost of the independent broker distribution channel is higher than that of the direct seller or a bank that would sell insurance through its branches. Take, for example, the cost of credit life insurance and mortgage insurance afforded by banks compared to lower cost and better coverage offered by independent life insurance brokers and agents.

Another example is the data obtained from the Financial Services Commission of Ontario, which was formerly the Ontario Insurance Commission, clearly shows that broker companies provide the best value for auto insurance, day in and day out.

The P and C sector is a mature industry in Canada. The fact that the majority of insurance is distributed through independent brokers shows not an affinity on the part of the insurers towards brokers, but rather a recognition that the broker distribution system is efficient and is cost-effective. These and many important industry-related facts have been totally ignored by the MacKay task force. Generally the task force shows a profound lack of understanding of the P and C sector, and this troubles us. It troubles us, given the fact that the task force is proposing such drastic reforms for the P and C sector.

It advocates a European model, a model that has had an uneven track record at best. In so doing, the task force proposes a framework that will reduce choice and reduce competition. Once there are fewer choices and less competition there will be resultant higher prices.

How will this benefit consumers? Why would we unfairly disrupt what is right about our financial services sector so that banks can gain more control? The P and C sector demonstrates how well healthy and fair competition, choice, innovation and excellent service benefits consumers and our economy.

The issue is not about the lack of competition in the P and C sector. The real issue is about a lack of competition in the banking sector. We would like to see the competitive forces characterizing the P and C sector evolve in our banking sector. That is where federal policy efforts should be focused at this time.

As a matter of public policy, the federal government has stated that growth of the small to medium-sized business sector is the hallmark of Canada's economy and is essential to creating jobs for Canadians. If the MacKay bank insurance recommendations are accepted, it is the small P and C insurance sector that will bear the brunt of job dislocation and, yes, job losses. Regional benefits will be significantly reduced as a result.

To give members of this committee a better idea of how our industry contributes to the economic well-being of our respective communities, we have provided you today a summary of the socioeconomic study that we commissioned in May 1998.

Canadian bankers argue that they must have unfettered access to other businesses such as the P and C sector to sustain their international competitiveness. Without any compelling evidence, the MacKay task force proposes to give Canada's highly concentrated and dominating banking sector even more special privileges. Other than increased bank profitability, we fail to see how putting hundreds of small enterprises in this province out of business will contribute to improved bank rankings. We fail to understand how putting thousands of Ontarians out of work will benefit anyone other than the banks. It is clear that the present debate, which is peppered with references to competitiveness and globalization, is not consumer driven, but is based squarely on the need to satisfy the banks' desires for growth, control and profitability at the expense of fair competition, at the expense of the economy, and at the expense of the consumer. There is no doubt in our minds that the new powers proposed by the MacKay task force will give the banks any more ability to compete in ways that are inconsistent with consumer and small business interests.

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The bank insurance rules, put into place in 1992, as you know, are working and they should be preserved. The 1992 rules have enabled new participants, namely the banks, to enter the P and C sector without unfairly disrupting its competitiveness. Let's not get sidetracked by trying to fix something that is not broken.

Mr. Chair, I'd like to read an additional statement into the record. There is a more important issue that needs to be more widely discussed and it has nothing to do with mergers or powers. From a public policy perspective, the MacKay report acknowledges that banks have a special position in our society. In this country, public policy measures have been put into place to facilitate the privileged position our banks enjoy. Yet the MacKay task force is advocating dramatic changes in this widely accepted and fundamental Canadian public policy. The change is also being forced upon Canadians by the very institutions that have benefited from decades of protectionist measures. This needs to be considered by all Canadians. We believe it ought to be the first step of reform in the reform process.

Thank you, Mr. Chair.

The Chairman: Thank you very much, Mr. Constantini.

We will now hear from the Islamic Financial Institute, Canada, the chairman, Mr. Said Zafar. Welcome.

Mr. Said Zafar (Chairman, Islamic Financial Institutions, Canada): Thank you very much, Mr. Chairman, and members of the House of Commons Standing Committee on Finance, for giving us this opportunity. Here to present with me is the vice-chairman of the committee, Abdalla Ali, and Shameela Chinoy, member.

I would like to begin with the remark, Mr. Chair, you were addressing in the last session in saying you are expecting some futuristic comments and things like that. That is exactly what we are here for—the future. And the future is not tomorrow or the day after tomorrow, but the future is for a generation. Islamic banking comes from 1,400 years and it is in the process of leaping forward to the 21st century.

There are over 130 Islamic banks around the world, managing in excess of $120 billion U.S. In Islamic and non-Islamic countries, such as the United Kingdom, some conventional banks have started operating Islamic windows or counters offering Islamic financial products. Among these are the ABN Amro Bank, the National Commercial Bank of Saudi Arabia, Bank Misr Egypt, Banque Nationale de Paris, Kleinwort Benson, ANZ Grindlays Bank plc and Citibank. In fact, London, England, may well be described as the centre of Islamic banking in the western world.

We presented our case to the task force and this is what we said to them, a little altered for this presentation.

Given the significantly large Muslim population in Canada, approximately 500,000... Mr. Chair, in your own riding, you will vouch that Muslims are not 500,000 but at least 20% of your riding association, which we have the figures for. Other members, Carolyn Parrish—

The Chairman: I'll keep that in mind.

Mr. Said Zafar: Yes, do, because they are going to hear that I presented this and appeared before you.

The Chairman: And I'll say wonderful things about you.

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Mr. Said Zafar: Thanks. Don't worry about the wonderful things, but I would appreciate that you recommend to the full House finance committee that we should be allowed to open Islamic banks.

There are significant sums of savings lying idle and untapped, waiting to be channelled into an Islamic financial product. This non-utilized reservoir of savings in Muslim hands should be put into use and utilized as a source of working capital and venture capital for small and medium-sized Canadian corporations, thereby boosting further the engines of the Canadian economy.

The Canadian economy is based on free enterprise. That is what we, Muslim society, believe in. Many economic decisions are shaped by the economic forces of demand and supply, profits, markets and competition. Given the anticipated demand for an Islamic institution offering Islamic financial products, there is a need for such an institution in the Canadian financial marketplace.

The Islamic bank is not just a bank, but also an investment company or investment fund. With the current trend towards providing one-stop shopping for financial services, there is an even greater need to integrate Islamic financial products offering the market for financial services in Canada. Islamic financial products offer such a niche market.

Recent years have seen a significant shift in investment choices and patterns of Canadian investors, and a definite increase in equity participation. Given the equity-based nature of Islamic finance, it will in a major way be a significant source of working capital for small and medium-sized Canadian enterprises. Furthermore, the stable investment plan into Canada has appeal for international investors. The presence of Islamic financial institutions in Canada would act as a stimulus and offer the potential for attracting foreign capital into Canada.

At this time I would ask my colleague, Shameela Chinoy, to articulate exactly, key by key, requests that we would like you to consider.

Ms. Shameela Chinoy (Member, Islamic Financial Institutions, Canada): Thank you. Mr. Chair, members, before I outline the committee's submission, I would like to take you through the index of the manual we submitted, and I would encourage questions on any of these issues.

We have prepared for the committee a proposal for an Islamic bank in the Canadian banking framework, and we don't see this as something that is impossible to fit in. There are slightly unique concepts, which I have tried to explain by way of questions and answers and outline the principles, and I would encourage any questions that the committee may have during the later session.

Our submissions are as follows: that Islamic financial institutions be allowed to be established in Canada as regulated financial institutions—and we stress the word “regulated”—to offer Islamic financial products; and that conventional Canadian banks and financial institutions be permitted to cater to the niche markets and offer Islamic financial products in Canada at their retail branches through Islamic windows. If I may point it out, this is what Citibank and ANZ have been doing through their branches in London, England. They have been offering Islamic products through their branches on High Street. It's not something where you have to fly down to the Cayman Islands if you want to conduct banking on Islamic principles. And the other submission is that there be no compulsion on banks or financial institutions to offer interest-bearing accounts to depositors, and that an interest rate of 0% be recognized as an acceptable rate.

Let me pause here for a minute and explain why we are asking for a 0% rate. The basic prohibition in Islam lies against interest or any form of predetermined return. According to those precepts, when the bank offers you a 2% or 3% fixed return, that is contrary to the principles. But at the same time, just because it is interest free does not mean the capital is costless. That is a major misconception that a lot of people have when you express the words “interest-free banking”. It is not costless capital that is being doled out. Every investor in an Islamic financial institution expects a return, but he is also willing to participate to the point of it being a non-fixed return, and the return would be a fluctuating return based on the profitability of the venture in which the funds are invested.

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Our next submission is, with regard to funds being handled on interest-free principles, that the requirement for maintaining reserves with the central bank be done away with. This is an unusual concept, but I would like to explain that since there is no guarantee of the principal, that fact is explained to the investors or the depositors. They are aware of it, so that CDIC deposit requirements are done away with.

We would like the committee to acknowledge in the new banking legislation that there is a need, and now more so than at any other time before, for products and services in Canada that offer interest-free modes of financing. Accordingly, we request that necessary amendments be made to the Bank Act, the Income Tax Act, the goods and services tax and other legislation, to accommodate Islamic financial institutions.

I would welcome any questions that members may have. Thank you.

The Chairman: Thank you.

We will now hear from the Alberta Securities Commission, Mr. William Hess, chair. Welcome.

Mr. William L. Hess (Chair, Alberta Securities Commission): Mr. Chairman, the issues we wish to raise with you today are of importance to consumers of all financial products and to the fair and efficient operation of financial markets in Canada.

When you're in Montreal you will be hearing an additional submission by our colleague from the Quebec securities commission, but I can assure you that what you hear today represents the ongoing deliberations of the securities regulators in each of the provinces and territories of Canada.

With your permission, I would like to turn our presentation over to David Brown, who is the chairman of the Ontario Securities Commission.

Mr. David Brown (Chairman, Ontario Securities Commission): Thank you for that introduction, Mr. Hess, and thank you, Mr. Chairman and the members of the committee, for this invitation for us to appear and speak with you today.

Our principal reason for coming today is to be available to answer any questions you or members of your committee might have of us as securities regulators. But I thought I would like to take advantage of the opportunity to address a few opening remarks to you, to speak about one of the aspects of the MacKay report that has attracted considerable attention and discussion among the Canadian securities administrators—that is, the segment of the MacKay report calling for improvement in measures to protect the consumers of financial products in Canada.

Before addressing those issues specifically, I thought I should, first of all, talk a little bit about a national securities commission and some of the expressions of interest that have been in the press and elsewhere about a national securities commission, because it ties into some of the suggestions we as securities administrators would like to make in order to address the concerns identified in the MacKay report.

Clearly, with ten separate securities regulators in Canada—and indeed, there are 12 if you count the securities regulators in the territories—there is concern about the potential for regulatory fragmentation of what is essentially one capital market.

There have been various attempts through the years to achieve a national securities regulatory agency. In fact, there have been four royal commissions and task forces over the last three decades that have examined this issue and made recommendations for a national securities commission. The most recent of these was approximately two years ago.

I think it's a matter of record that those initiatives were unsuccessful partly due to the inability to satisfy jurisdictional concerns of the Province of Quebec, and also to satisfy the concerns of some of the provinces that regional discrepancies or differences could not be handled.

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Interprovincial coordination, though, has long been a focus of the securities regulators themselves, and this has resulted in the creation of what's the practice now of calling the virtual national securities commission. This has been built around a system of mutual reliance, and indeed a memorandum of understanding has now been published by all of the securities administrators across the country. And it covers situations in which issuers or registrants find themselves in a position of having to deal with more than one securities regulator, in other words in more than one jurisdiction.

What the memorandum of understanding indicates is that each of the commissions now across the country is prepared to rely on the analysis, or the review and recommendations, of the staff in each of the other provinces. So if an issuer of a prospectus, for instance, wishes to qualify the prospectus in more than one jurisdiction across the country, the issuer need file now only in one jurisdiction and deal only with a principal regulator, basically the jurisdiction in which the head office is located. The securities commissions, then, do all of the work in the background, and in particular, the securities commissions of the provinces other than the principal jurisdiction agree that they will accept and rely on the recommendations of the staff given in the principal jurisdiction.

This virtual national securities commission has meant now that issuers and registrants, and others who have to deal with the securities system, need deal only with one jurisdiction. It has the strength of having the full participation of all jurisdictions, including the province of Quebec, and it allows for sensitivities to regional realities.

Coming back to the MacKay report, then, and the MacKay report's identification of the need to strengthen protection of consumers of financial services, this is an issue that has also been very high on the priority list of the Canadian securities administrators. We have been seeking ways to bring greater efficiencies to the marketplace to eliminate duplication, some of which are identified in the MacKay report, but principally to fill some regulatory gaps, which are also identified in the MacKay report.

One of the challenges arises from the constitutional division of powers in Canada. As we all know, regulatory and legislative jurisdiction over banks and banking is the exclusive purview of the federal Parliament. Courts have awarded securities regulation to the provinces under the property and civil rights power. Trust companies and insurers are regulated in accordance with the jurisdiction of incorporation. The result has been that the regulatory field has been divided along institutional lines, rather than by category of activity or business. We've seen in recent years that the role of market participants has changed dramatically since the present regulatory structure was put in place, and it partly was triggered by the demolition of the four pillars concept starting about 10 years ago.

Now we have a situation where domestic and foreign banks, securities dealers, trust and insurance companies, credit unions and other intermediaries offer many similar services but under quite different regulatory regimes. In fact, the left-hand sides of the balance sheets of most of the financial players are now almost identical. The businesses of banks and of their investment dealer and trust subsidiaries are becoming increasingly integrated.

We, as the Canadian securities administrators, think it's time we should be rethinking this regulatory split. We think it's unlikely that the regulation of banks exclusively by federal authorities, and the exclusive regulation of the wholly owned subsidiaries by the provinces, will produce the best regulatory result. And clearly we believe that this state of affairs has contributed to the concerns about consumer protection set out in the MacKay report. The members of the Canadian securities administrators are currently examining whether it's time for us in Canada, therefore, to examine a new regulatory split that focuses on activities rather than on the form of incorporation of the institution.

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Much of our thinking has been influenced by the new regulatory system that was just implemented in Australia. And as the committee members may be aware, effective July 1 of this year the regulatory system in Australia was reorganized into two separate regulators, a prudential regulator, which concentrates only on the safety and soundness of market participants, and a market regulator, which regulates the market activity of all financial service providers.

In the Canadian context, OSFI would be the natural choice for the prudential regulator. That's currently OSFI's principal thrust, and indeed OSFI currently has very little involvement in market regulation. We believe the prudential regulation of provincial trust companies and insurers by provincial bodies should also be slowly transformed or migrated over to the federal authorities by provincial agreement.

Clearly, we also believe that the securities commissions, through the Canadian securities administrators, would be the natural choice to regulate the market. It's essentially what the securities administrators do. We have the regulatory systems and infrastructure in place. Our mutual reliance system has created a national system of harmonized regulation across the country with the regional presences necessary to accommodate the differences in local practices.

Under this model the securities commissions would assume responsibility for the market practices of all financial institutions, including banks, trust companies, insurance companies and credit unions, and would set the standards for portfolio management for all pools of capital, not just mutual funds but including pension funds and segregated insurance funds.

Over the next few months the Canadian securities administrators will continue to develop these concepts, and to discuss them with our provincial governments. Our objective will be to be in a position to submit proposals to the federal authorities so that they can be factored into the continuing consideration of the MacKay report.

Thank you, Mr. Chairman. Mr. Hess and I would be pleased to answer questions in the course of time.

The Chairman: Thank you very much, Mr. Brown. We'll now hear from the Investment Dealers Association of Canada, Mr. Joseph Oliver, president and CEO, and Ian Russell, senior vice-president. Welcome.

Mr. Joseph Oliver (President and CEO, Investment Dealers Association of Canada): Mr. Chairman, ladies and gentlemen, thank you very much for having us here.

I'm joined today by Ian Russell, our senior vice-president, capital markets. We appreciate the opportunity to present our views about the future of the financial services industry of which our members are a critical part. How legislators deal with these recommendations will shape the direction of this vital industry. It will also determine its impact on Canadians and the Canadian economy as we move to the new millennium.

We filed a formal submission, and so I'll summarize the central points. Let me begin my remarks by very briefly providing you with background on our industry and our association. The IDA is Canada's national self-regulatory organization for the securities industry. Our mission is to regulate the business activities of investment firms, and the selling practices and proficiency requirements of investment advisors. The association also represents the industry to regulators, governments, the Bank of Canada and the public. We have 184 members currently, and they include large full-service firms, as well as medium-sized and smaller houses. They offer financial advice, trading and underwriting services to retail and institutional accounts from coast to coast. Some are large, integrated and bank owned, but most are independent firms. Others are affiliates of foreign security houses or foreign banking organizations.

The size and the growth of our industry is impressive. Regulatory capital has doubled in the last four years to $8 billion. Client assets under management total nearly $350 billion. Product innovations abound and the liquidity that we provide to markets is critical to their viability. Therefore, our industry plays a key role in the Canadian economy. Our member firms employ some 34,000 Canadians nationwide, which doesn't include the indirect job creation, which we estimate to be significant.

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Large, medium-cap and small companies rely on our members to raise the capital they need to build their businesses and, in the process, to generate employment for Canadians. Our industry raised between $15 billion and $20 billion in equity capital in each of the past three years, and that is nearly double the amount proportionally raised in the U.S.

Individuals are increasingly relying on our industry to provide the capital they need for retirement. Canada is shifting from a nation of savers to a nation of investors. Mutual funds have grown from $33 billion about 10 years ago to $275 billion this year, so for the first time in history, Canadians have as much money invested in mutual funds as in their savings accounts and GICs. This represents a sea change in Canadian participation in the market—now up to about 38%.

Individuals realize they must rely increasingly on their own resources to provide for their futures, so it's vitally important that our industry continue to operate fairly and efficiently. Canadians increasingly are depending on us.

In regard to the task force, we believe enhancing competition within the financial services sector is in the best interest of all Canadians. The Canadian securities industry is not nearly as large as some other industries or its competitors in other countries. Still, we welcome competition, provided there's a level playing field. A more competitive market leads to competitively priced financial products and services, to innovation in the marketplace, to efficient capital formation, and to the greatest potential for employment. So that's why we're pleased that the task force centres on proposals to stimulate greater competition. We're fully supportive of this general thrust, and we urge you to adopt its recommendations expeditiously.

Let me briefly review our reaction to the key proposals. Looking at new entrants to the market, we agree that barriers to entry for foreign banks, notably prohibitions on branching and capital requirements, should be eliminated or substantially reduced in order to promote a more competitive banking sector.

We strongly support the proposal that non-deposit-taking institutions should join the Canadian payment system, provided, of course, that they meet certain criteria for solvency, liquidity and regulation. Specifically, our members firms should be eligible for membership in the Canadian Payments Association.

Access to the payment system would enable security firms to offer chequing privileges on client accounts directly. It would create a more level playing field for security firms to compete with banks for client business and for their financial assets, and it would enable our customers to engage fully in electronic commerce through direct access to the Interac system.

We are pleased that the task force agreed with our submission that federally regulated institutions should be given the flexibility to organize into holding company structures. This would achieve a level playing field with minimally regulated businesses in areas such as wholesale leasing and financing.

The IDA stated its support for change in the “big shall not buy big” policy, with a caveat that some of our members are not in agreement with this proposition, as I think you know. The special committee recommended, nevertheless, that federal authorities vet the mergers to preclude adverse competitive consequences. We agree.

The task force recommended more flexible accounting rules to facilitate acquisitions, both in domestic markets and abroad. In our view, the rapidly integrating capital markets in North America necessitate that the Canadian Institute of Chartered Accountants should conform Canadian accounting rules as much as possible to U.S. GAAP, particularly in respect to business combinations.

Also, we believe provincial commissions should permit listed companies some flexibility in applying Canadian and U.S. accounting rules. The goal here is to give listed Canadian companies more scope to undertake mergers and acquisitions to facilitate expansion. This would also put Canadian companies on an equal footing with their U.S. competitors.

• 1610

On taxes, the task force recommends abolishing special capital taxes on financial institutions, and if this isn't feasible, then at least proposing a more uniform application of capital tax and shifting the tax burden to corporate profits. The association agrees with this.

The task force recommends that governments work aggressively to eliminate overlaps in prudential regulation, both between federal and provincial governments and among provincial governments. Our regulators just made that point earlier.

The collapse of the four pillars has enabled banks, insurance companies, and security firms to offer retail and institutional clients a wide range of products and services. They include debt and derivative products, private placement financings, mutual funds, and segregated funds.

The upshot has been significant differences among institutions in capital rules and sales practices. In some cases, the regulatory gaps mean weak protection for consumers and have increased financial risk for institutions.

Different rules have also resulted in an unproductive shifting of business to organizations that are subject to more lenient regulation. This phenomenon is known as regulatory arbitrage, and it weakens the overall integrity of the financial system.

The IDA recommends that federal and provincial regulatory authorities achieve greater consistency in regulation. In particular, we recommend they ensure that market participants carrying out similar financial functions are regulated in a similar manner.

Over the past several years, there has been greater cooperation between OSFI and securities regulators regarding banks' securities affiliates. This is important in order to minimize regulatory overlap. The IDA has the regulatory responsibility for financial and sales compliance of bank-owned affiliate dealers.

So OSFI obtains detailed information about banks' securities subsidiaries in two ways: from the banks' own internal audit procedures and from the IDA financial compliance reviews. The use of a single self-regulator, the IDA, by both the securities commission and OSFI avoids duplication and confines compliance reviews of investment dealers to one external regulator.

The task force also recommends that securities salespersons meet appropriate proficiency standards, which should be harmonized among provincial jurisdictions. Currently, certain federally regulated institutions selling securities-related products to the general public may not be subjected to same proficiency standards as IDA-regulated firms.

The IDA is Canada's only national entity with the delegated responsibility for securities regulation and investor protection. It is, therefore, in a unique position to assist the Government of Canada and the provincial authorities in coordinating and meeting consumer protection goals and policies in the securities field operated by its members.

For example, at the request of Canadian securities administrators, the IDA assumed the responsibility of establishing and managing the Mutual Fund Dealers Association of Canada, MFDA, which is a self-regulatory organization for fund distributors. The association will be jointly governed with IFIC and public directors. Federally regulated institutions selling mutual funds will be required to join MFDA, which will cover some 50,000 individual registrants. This is a huge and important endeavour.

The IDA and the four stock exchanges are also working to develop a standard for employees of member firms who wish to be called financial planners. It will address the public interest need that individuals using the designation possess a high degree of proficiency and experience. Our goal is to arrive at a standard that obtains regulatory approval and is accepted outside the securities industry.

In summary, the integration of the financial services industry, the disintermediation of personal savings into mutual funds, and the impact of globalization represent a significant challenge to Canadian policy-makers. The challenge is to encourage efficient and competitive financial institutions, fair play for consumers, and efficient and liquid markets for issuers and investors. The IDA stands ready to assist in this critical task.

• 1615

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Mr. Oliver.

We'll now proceed to the question and answer session. We'll begin with Mr. Valeri.

Mr. Tony Valeri: I just have a very quick question for the IDA. It has to do with your comments in your brief about the flexible corporate structures and the holding companies.

I guess “holding company” is a way of introducing regulation by function rather than by institution itself. I don't think that the actual MacKay report goes that far, but do you think regulation by function is a preferred method of regulation? Who do you think would take advantage of this type of new system? Would it be large institutions, schedule I, or smaller? What is it that they would be able to do that they cannot do now? Finally, what are some of the risks that you might see from this holding company structure, and how could OSFI perhaps contain them?

Mr. Joseph Oliver: I'll try to address the questions, most of which I think I have in mind, but you may wish to remind of some that I don't deal with.

The advantage of functional regulation is that, first, no regulatory gaps emerge. The regulator who specializes in a particular area and whose mandate is consistent with that responsibility consistently provides the same level of protection across the entire market.

One of the concerns the Mutual Fund Dealers Association is specifically designed to address is the regulatory gap that has emerged with the great growth in mutual funds sales. There's the fact that some 60,000 individuals across the country are selling funds without the same level of protection afforded to individuals who buy mutual funds from firms that are members of the IDA or other members of the self-regulatory system. So first, they don't have the same rules applied to the distribution. Second, they don't have anyone effectively monitoring those rules.

The basic principle, I think, is that an individual should be afforded the same protection when they buy the same product irrespective of who they buy it from. That's the advantage of functional regulation in the context of consumer protection.

There are other areas that the Mutual Fund Dealers Association of Canada, as an example, will not be addressing currently. One example would be segregated funds, which economically are very similar to mutual funds but do not afford the same protection to investors in terms of their sale.

So those are instances of why functional regulation will make some sense. In addition, the mandate of different regulators will appropriately differ. OSFI is a bank regulator. It's concerned with prudential regulation and wants to avoid insolvency in the system. It wants to ensure that there is no systemic risk that will imperil the entire system.

From a securities regulator's perspective, full, true and plain disclosure protects investors who will at least have the information to be able to make intelligent decisions. Sometimes those two mandates are in conflict. That's another issue.

• 1620

The Acting Chair (Mr. Roger Gallaway (Sarnia—Lambton, Lib.)): Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman. Maybe I'll follow up with Mr. Oliver.

One of the recommendations, since you're talking about enhancing competition and attracting the foreign aspect, is a ten-year holiday on the capital tax for new financial institutions. In terms of fairness and equity for the existing institutions, do you think this is a pragmatic recommendation for stimulating particularly foreign institutions to enter Canadian banking?

Mr. Joseph Oliver: I don't think I'm prepared to answer the question at this time. I can get a little more information on it and get back to you. I don't think I can do the question justice.

Mr. Paul Szabo: Okay. Conceptually, in your experience, do we have to induce more competition, find incentives, or would there be an appetite naturally, as Wells Fargo and ING, for instance, have shown, for niche marketing?

Mr. Joseph Oliver: There is an appetite. I think the rationale related to the basic concern about the nature of the tax and its inappropriateness in principle.

Mr. Paul Szabo: My last question is for Mr. Zafar and Ms. Chinoy. The concept of Islamic Financial Institutions is relatively new, to me any way, in conceptual terms. There is some experience, and you have some good experience particularly in London. Have any overtures been made in Canada or the U.S. with regard to Islamic Financial Institutions, even on a pilot basis, through, for instance, windows...? What kind of success or degree of success has that met with so far?

Mr. Said Zafar: If this had been successful, we would not be here. That is the answer to that.

Yes, in 1980, the chairman and board of directors of the international Islamic Development Bank in Egypt came to Ottawa and met the Superintendent of Financial Institutions. At that time I was told the climate in Canada was not yet right to open Islamic banks.

We went to Quebec. You'll be surprised—we were surprised. Quebec said yes, we will allow you to have an Islamic bank on a provincial basis like the caisses populaires. But my client, the Islamic Development Bank in Egypt, did not intend to follow.

Let me answer another way. Unfortunately, Mr. Szabo and all members, what sticks out as a sore thumb in the international banking community is that out of foreign schedule B banks, not one bank is allowed to accept applications from any Arab or Muslim countries. With your help, Mr. Chair, with 20% Muslims in your riding, I hope we will be able to change that. Mr. Szabo has the largest Islamic school in Canada, and Carolyn Parrish has four mosques in her constituency.

So we do monitor these things. Mr. Szabo, you are aware of our efforts, and we are continuing. We tried to develop a task force—

Mr. Paul Szabo: Could I ask one last question, very briefly. There is a significant Islamic population in Canada—

Mr. Said Zafar: Over half a million.

Mr. Paul Szabo: They have a significant store of savings and wealth that presently is not working in Canada.

Mr. Said Zafar: Yes.

Mr. Paul Szabo: It may very well take time to make this inroad in terms of establishing formal regulated Islamic banking in Canada. In the interim, have you explored any other ways in which those resources can be working in Canada, particularly venture capital, etc.?

• 1625

Mr. Said Zafar: We have a cooperative housing society, which we started 17 years ago. It now has $25 million in assets. We have started a car leasing company. We bought a medical building, and in Montreal we have a similar... A new housing corporation is going to be launched on Bay Street called the Halal Housing Corporation.

Little by little we are making inroads. You will be surprised to hear that the Islamic Cooperative Housing Society receives more requests for loans to buy houses from non-Muslims. Let me make it clear that it is not only reserved for Muslims. In Bank Malaysia Berhad in Kuala Lumpur, 30% of the clients are non-Muslims.

In our view, money has no religion. Let me repeat it, and you can quote it, sir: money has no religion. It is the use of money that has religious connotations. Therefore, the Islamic banking system has equity participation.

As our Prophet has said, man is responsible for his own economic well-being. That is why we wanted to have futuristic plans, to which the chair referred, and I was very pleased, sir. Thank you very much.

Mr. Paul Szabo: Thank you, Mr. Chairman.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): I would just like to ask a general question about consumer protection and the MacKay report—to whoever would like to answer. I'd like to see if there is some consensus.

As you know, MacKay thought all of that should be tightened up, to be not as self-regulating as it had been before. I guess we are looking at independent ombudsmen, privacy protection legislation, and more tied selling prohibitions. What we are hearing, certainly from the insurance side, is that you are very concerned should banks have more product. Do you think the current system might work well? With or without the convergence, would you suggest that the system needs to be tightened, or is the tightening only necessary with convergence and with new products for the banks?

If you had some feelings about the auto leasing piece, that would be fine too.

The ultimate question is, is the self-regulating system working or do we need something tighter, generally?

The Chairman: Mr. Carter, followed by Mr. Cooke.

Mr. Robert J. Carter (Director, Member of the Executive Committee, Insurance Brokers Association of Ontario): I would like to comment that we get numerous complaints that we are unable to file because people are not willing to sign documentation. We've learned that just writing notes doesn't work.

The current system is working well. We seem to run into difficulties on the privacy issues. We have instances where people go in for car loans and mysteriously, after they provide their insurance policy, they get quotes from the bank's auto insurance company.

I'd like to give you two or three small examples that bother me about current banking that I think would be further abused if they were given more powers.

A friend of mine is a senior executive in the insurance business and he received an offer of insurance from one of the banks. He threw it out because he was in the insurance business. Three weeks later he got a telephone call on his private line asking why he had not responded. The only way anyone would know that private line was his was from information the bank held. There was no other way they could find out that that was how to reach him.

I just had a recent experience with my bank, where I thought I was becoming the ideal customer. I had taken my bank card and converted it into my credit card, so I had one card to access my bank account and all that sort of thing. I have two different credit cards, so when one credit card company upsets me with their tactics, I switch to the other. So I happened to have switched off this particular bank's credit card, but I was continually using it to access my account. On October 2 I went to pay some bills and my card was rejected because it had not been renewed. I don't know about you, but I never look at the expiry date on my credit card.

• 1630

When I called the next day I was told that they didn't have the staff, because they had so many customers and not enough staff, to notify anybody about a non-renewal. The reason my card was not renewed was that it had not been used as a credit card for some time, but I said that it had been used regularly to access my bank account and that was unimportant. I then asked if I could speak to a supervisor or a manager, and after four attempts at voice mail, I finally just left a message that said “Never mind, I don't need your credit card and I'm making alternate banking operations.”

We have instances of people going in for mortgages where it's suggested that they should buy their house insurance from the bank. And you might be able to legislate rules, but I can tell you—and I'll use a Pierre Trudeau saying—that when you can't regulate or legislate what goes on in the bedrooms of Canada you certainly can't regulate or legislate what goes on in a private office. And when people are in attempting to get a loan, the main focus they have is what do I have to do to get the loan and how do I get the most favourable terms? And if in the course of that process someone attempts to sell them insurance or other services, they feel compelled to do so. I believe I've read recently in the paper that there's an accountant suing because in order to get his business loan approved he was told he had to transfer all his mutual funds to the bank.

So you can put in the tightest legislation in the world saying they're not allowed to use other information or they're not allowed to use tied selling, but we have instances where people have moved their car insurance because they're given a quarter percent lower on their car loan. And they'll tell me that they will not file a formal complaint because they got a good deal on their car loan and the car insurance was roughly the same price. So if you give the banks more powers in our business, they will use those powers to take greater control of the consumer.

The Chairman: Are you advocating that we should be taking powers away from banks?

Mr. Robert Carter: I'd love to see that. I don't think banks should control all financial services, and we've seen as they've taken over other pillars... I think if they're allowed to sell our services through their branches—listening to Mr. Cooke—there will be a dramatic loss of jobs and I don't think the consumer will be properly served.

The Chairman: Mr. Valeri:

Mr. Tony Valeri: I'd like to make a quick comment.

We've often struggled with the tied selling issue. Now you just described a situation where you were told that because I received a quarter point less on my loan I took the insurance.

Mr. Robert Carter: Yes.

Mr. Tony Valeri: In my mind that's bundling, that's not coercive tied selling. If he had said “I'm not going to give you the loan if you don't take the insurance”, then that in my mind falls into coercive tied selling. It's something that this committee has wrestled with, but you seem to feel that what you described was the kind of tied selling that should not be allowed.

Mr. Robert Carter: I believe it is not the tied selling that should be allowed, because that's an obvious example. I do have examples of people who have been in the bank's office and the loan has not been approved until they've filled out the insurance application. They were never asked to do it, never told to do it, but the implication certainly was there that it would help the process.

And every time we catch the banks and file a complaint and get definite ones, you'll find the bank responds that the bank manager was exceeding his powers. But when you get down to the front level and say your job is... My wife was a part-time teller and she quit; it wasn't worth it. When you get down and say you have to have so many loans, you have to sell so many credit cards, you have to do this, that bank manager in order to meet his goals is going to pull out all the stops. And you can't control that. You can't regulate it in any way, shape or form, because they're going to do whatever's necessary to hit the targets that are given them by the bank's management. And it may not be bank management policy but it happens every day.

Mr. Tony Valeri: But we agree on the definition of coercive versus bundling. The insurance industry says “I have the car insurance but if I have your home I can give you a better deal on the car insurance.” That's bundling.

Mr. Robert Carter: There are only a couple of companies that do that.

Mr. Tony Valeri: That's quite interesting, because every time I go to renew my insurance that's what I get. And I'm not criticizing the industry; I'm saying that to me that's bundling. When somebody says that—

Mr. Robert Carter: It's still insurance. It's still the same product. You're not taking something else; they're not saying you have to buy something else or do something else in order—

• 1635

Mr. Tony Valeri: We can get into the issue of whether you can bundle different types of products, but the point I'm making is the distinction between bundling and coercive... If somebody says “Fill out the insurance form and we'll talk about the loan”, I get your drift. But if somebody says—

Mr. Robert Carter: How about “Fill out the insurance form while we're considering your loan”?

Mr. Tony Valeri: I get the drift with that as well. But I don't get the drift when somebody says, “I can give you a quarter point less on the loan with the insurance” or “It's a quarter point more without the insurance”. To me that's bundling, because then they can choose. Do we agree with that?

Mr. Robert Carter: I can agree with that, but I just don't know how you can split the difference when their office door is closed.

Mr. Tony Valeri: No, I agree that we have a challenge in trying to regulate this. But I just want to make sure on the definition, because we we're struggling with that same definition.

Mr. Robert Carter: I would disagree that it's a challenge. I would say it's impossible to regulate.

Mr. Tony Valeri: Fair enough. I think that's a fair comment.

Mr. George Cooke: Mr. Chairman, can I get into this discussion?

The Chairman: Absolutely. You're on the list, Mr. Cooke.

Mr. George Cooke: Thank you.

First of all, let me make it very clear that there's a very important distinction between the property and casualty products, your home and auto insurance, and the life products, which range from a life insurance policy to segregated funds and whatever. It's a distinction that has to be very clearly understood when we're having the discussion around privacy, the nature of the product. It's a distinction that has to be understood when Mr. Oliver talks about the attractiveness of access to the Canadian payment system. It does nothing for me. It's likely very appealing to the life company, for example.

Having said that, I think none of us are going to sit here and actively suggest that appropriate levels of consumer protection legislation ought not to be in place. That doesn't make any sense. I don't think that's where we are as an industry. The problem with what MacKay does is that because he has an outcome he's trying to get to, or appears to be trying to get to, regardless of whether the facts are satisfied or not, you apologize, if you will, for your outcome by adding layers and layers of consumer protection on. If you'd engage in abstinence you wouldn't need the extra legislation, the extra regulation and the extra protection.

So there's a trade-off that somebody has to evaluate between whether or not you want to go one way or the other. It's not that the particular measures he's advocating are necessarily awful if you're going to operate in his model. But if you're going to operate outside his model in a different model, it may very well be that many of those measures are not necessary.

So what we're trying to point out very clearly is, first of all, you don't need to be in his model to achieve the end that he wants, which is increased competition, better price, better service, jobs, etc. You have to get that point very clear.

I think the second point on the coercive tied selling point is that it becomes very difficult because one of the dangers here that we haven't hit on yet is that when someone has access to information, particularly related to someone's credit, financial health, or their personal health for that matter, you might not explicitly use it as you classify a risk or price a risk, because you might be prohibited from doing that; in fact you are. But if you have access to it, it's on your mind when you make the underwriting decision to accept or reject. And you can legislate from now until hell freezes over and you cannot take that particular instance out. It is still there. It's a very serious consumer issue. Abstinence is the only way of dealing with it. There's no apology that will allow you to deal with that particular circumstance.

So there are degrees of tied selling, there are degrees of coercion that can be placed, and there are abuses of access to information that are not explicit in any of the practice you're making. It's not recorded, but it's very real in terms of determining the outcome.

To come to Mr. Valeri's question in the exchange that he had with Mr. Carter, our company, for example, very clearly will offer a discount on the home insurance if in fact we have the auto. We will offer that to each and every homeowner or each and every auto owner, and the magnitude of those discounts are approved in every jurisdiction where they're applied by the regulator. They're approved on the basis of the cost reduction or the cost savings derived as a result of having the combined policy, whether it's an administrative saving or an observable difference in loss cost. But they're applied to everybody equally.

• 1640

The scenario Mr. Carter is talking about, where you get a quarter point off your loan and you might move this or you might move that, is discretionary. People are unaware of it, they're not obliged to offer to everyone, and they don't offer to everyone. So whereas there's a bundling issue, there's a bundling issue that's fair for all, or that's fair for some, or that's fair for those that are in the interests of the person who otherwise is engaged in the practice.

The issue here, as you quite accurately point out, is that this whole thing is very, very difficult to deal with. As I understand it, the government has just proclaimed section 459(1) of the Bank Act. I think it's important that this committee understand that is not what Mr. MacKay is talking about. I don't want anybody to leave here thinking what we've just done has dealt with this privacy issue, the tied selling issue, or any of it. Mr. MacKay goes well beyond that in terms of what he recommends is necessary in order to overcome the problem he has created by his other recommendations, should they be put in place.

Think about how hard it was to get the existing legislation agreed to in some way, from the time it was originally proposed until the time it was recently put forward as law in this country, and then think about the pragmatic problem you're going to have when you try to extend that.

I think the question the committee needs to put its mind to is whether or not the outcome that Mr. MacKay is advocating is worth that extra intrusion. To the extent it is, then fine, you do it. To the extent it's not, you don't do it, but you have a very different question to ask yourself, and that is whether or not the consumer requires additional measures for protection from those that exist today. It's very possible that you may find that some are necessary, and quite frankly, I think if there was a true consumer protection motive, most of us would willingly accept and adopt those measures.

The Chairman: Thank you, Mr. Cooke.

Mr. Brown.

Mr. David Brown: I'd like to focus on another aspect of Ms. Bennett's question dealing with consumer protection.

In our view, the MacKay report approaches consumer protection in quite a narrow and restricted way, focusing mainly on the handling of consumer complaints and a little bit about the interface between the consumer and the service provider.

The securities administrators see consumer protection as being a much broader universe than that. We think it encompasses the point-of-sale advertising material, the disclosure material. How much does the consumer know about the product that's being purchased? Does the consumer understand all of the ramifications, understand what the constraints are in redemption if it's a redeemable product? So we think there is a broad aspect of consumer protection in the point-of-sale documentation.

We also think consumer protection encompasses the accreditation and the training of the sales force, that it also encompasses the sales practices, ensuring, first of all, that people who are offering financial products have the necessary expertise and training to do it, and secondly, that the sales practices are uniform across the offering of financial products.

So we think the MacKay report has only really scratched the surface in consumer protection as it's looking at the broad range of financial products that are now being offered.

The Chairman: Thank you, Mr. Brown.

Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chair. I'd like to ask a question of Mr. Constantini.

You talk about the P and C sector as being a mature and very successful and stable industry in Canada, and later on in your brief you talk about it having healthy and fair competition, choice, innovation and excellent service benefits, both to the consumer and the economy. One of the things that MacKay tries to deal with in the report are the changes that technology and globalization are having on the entire financial sector, so I would ask how those two forces are changing your sector.

You also go on in that same paragraph to say you would support the banking sector evolving with the same kind of characteristics as that of property and casualty insurance, and I would ask you if you see those kinds of recommendations contained within the MacKay task force and what vehicle we would use to bring about that kind of competition in the banking sector.

Mr. Gil Constantini: First of all, I think the banks already have the ability to be in, and are in, the insurance business and have developed. For example, CIBC insurance has developed into the twenty-first largest insurance company in Canada in five years, and they've done it through the current system. Therefore, it proves they can work within the environment we're in.

• 1645

Certainly the evolvement of automation does not necessarily translate into giving the consumer better protection, it just means you can do things faster, quicker and more easily by computer. It doesn't necessarily mean the consumer has the one-on-one, face-to-face, across-the-table kind of service they want.

One of the statements we make is that the 1-800 numbers that sell insurance, for example, may not even be in Canada. Does it benefit our Canadian population when the insurance companies or the banks are using companies outside of our country to do marketing within our own country? I think that's a real challenge we have to address. Automation is certainly upon us. I just spent in my own office something to the extent of $200,000 to upgrade to the new millennium to give my clients day-to-day effective service.

We have a tendency sometimes to restrict it to one kind of insurance. We talk about car insurance more than we talk about anything, because it seems to be the most lucrative and competitive. But we're a full-service business, and as professionals we offer our clients not just home and car insurance, but business insurance, life insurance, etc. So we give a broad spectrum of service, as opposed to being very niche-oriented and restrictive in what we're trying to sell.

We also have to live under regulations and licensing rules that others may not necessarily have to live under. We have education requirements. There's just so much control over what we do day to day, as professionals, in our business. We have no problem with our competitors having the same kinds of requirements or educational benefits, but we want to make sure there is a level playing field at all times so consumers are aware they are dealing with apples and apples and not apples and oranges. I think that's the real concern.

I don't know if that answers some or part of your question.

Mrs. Karen Redman: It certainly does somewhat, but when I asked about the changes in property and casualty, I was asking how you see your profession changing into the next millennium, with or without bank mergers or whether or not they're going to sell insurance. I assume the forces we're looking at in the financial sector will affect every profession.

Mr. George Cooke: Can I comment, Mr. Chairman, at some point on this issue?

The Chairman: We'll hear from Mr. Carter first.

Mr. Robert Carter: We are seeing what the banks are proposing. We're seeing insurance company mergers and broker mergers in the interests of the expensive technology, etc. Because the banks have been given a privileged position for so many years and are down to such a few major players, the only way they could be involved in the same type of competition as we are in the future is by letting other entrants in. I don't understand the banking...

I guess my disappointment in the MacKay task force is it deals with what's good for the banks. I don't believe it's true that taking over our industry or being able to play in our industry is good for the banks and good for Canadians. I don't feel qualified to comment on what the banks need to be doing to provide better competition, but I know I didn't used to have to pay for my cheques. I know I didn't have service fees every time I turned around a few years ago, when there were more banks and trust companies, etc. Suddenly, as the banks have taken over the trust companies and included them in the payment system, I have service charges for everything I can possible think of if I don't play my cards right, keep the right amount of money on deposit or use the electronic banking.

The Chairman: Mr. Cooke.

Mr. George Cooke: On your observation about technology, nobody has a monopoly on the technology today. You'll find call centres operating from inside independent insurance brokerages, you'll find them with a captive agent, and you'll find bank operations using them. The technology is there and it's offering consumers some choice in terms of the way in which products are purchased, whether that is in a face-to-face way, which was the traditional way, over the telephone, through a call centre where the action has come aggressively on the part of the seller, or over the Internet.

• 1650

We actually have an arrangement today where we sell insurance products over the Internet. That will evolve and it will make a profound difference in a variety of ways for the consumer from a choice point of view, and in terms of the consumer protection requirements that are needed. So on the distribution type, the technology is not specific to any intermediary, but with each of the different technology types there may well be different considerations necessary.

It is also making information and new levels of information that consumers need available. That's an attribute of a competitive environment. You can now comparison shop with technology, which you couldn't do three or four years ago. Very shortly in this province you will have comparative service level information that's been obtained through independent polling. It will be made available to consumers through technology, particularly through the Internet, where you will actually be able to look at how the particular provider you're dealing with has been rated.

There's no reason why OSFI, if it can get its mind around it, couldn't make financial soundness information related to our institutions available with this technology so consumers would have another variable to go along with price and service. They could have the financial soundness variable available for consumers to make choices.

The point that's important is that the technology is going to change and is changing the way we are doing business today. No one provider has the monopoly on that technology and there's absolutely nothing in the MacKay report, from a property and casualty point of view, that speaks to any of these issues whatsoever about our future—likely should it.

The Chairman: Thank you, Mr. Cooke and Mrs. Redman.

Mr. Gallaway.

Mr. Roger Gallaway: Last week this committee was in western Canada and we heard from some of your colleagues there. They spoke about their approval of banks selling insurance because they felt they could also market products that banks are now marketing. In other words, it's a two-way street. I'm hearing it being portrayed today as a one-way street.

What do you think your brokerage network could market or sell that you do not sell now but is limited to banks? Is there anything?

Mr. George Cooke: The reality in the world is that at some point in the future, one way or another, many intermediaries will be selling different products, if allowed.

Many of my independent brokers today also sell life products, have a capacity to arrange for somebody's mortgage—albeit protecting lines and barriers—or to make a referral for a mutual fund in some form or another.

I'm familiar with the individual you're speaking of, who I think presented to you when you were in Calgary. Part of his strategy is to use the distribution network he's building to be able to push bank products and life products. The issue there is not the fact that anybody is trying to keep the banks from selling insurance. We're talking about the way they can do it, what access to information they can have, how to keep a level playing field, and how to ensure appropriate levels of consumer protection. We're not saying we should restrict consumers' choice in terms of who they can buy things from or where they can buy them. We're not saying to lessen competition. What we're trying to say is exactly the opposite. The gentleman who spoke in Calgary could do today much of what he wants to do tomorrow if he could find a way to raise the capital to do it, but interestingly enough the banks won't lend it to him.

Secondly, please keep in mind we are not suggesting the banks ought not to sell our products. They sell similar products to ours today. We're saying to keep the playing field level.

Mr. Roger Gallaway: MacKay lays out—it's already been discussed—this issue of when does bundling of services or products cross the line and become coercive tied selling. But in Canada we have a a dismal track record of protecting consumers. Cable companies bundled services and what happened? Absolutely nothing. Telephone companies bundle services constantly. What happens? Nothing.

Mr. George Cooke: You very clearly have a more competitive market when they're unbundled, in both of those sectors.

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Mr. Roger Gallaway: Of course, but you have to realize there are only three cable companies in Canada, effectively, and they control more than 95% of the marketplace. With telephone carriers, although it's somewhat deregulated, there's a limited number of players.

We're dealing with the same scenario with banks, whether there are six, five or three—whatever the number might be. Canadians are a rather complacent lot when it comes to consumer protection. Do you find any comfort at all within the MacKay report with respect to the consumer protection provisions or proposals that are laid out there? Do you think it's an impossible scenario?

Mr. George Cooke: I don't find any comfort in the report on many issues, which isn't surprising. He's trying to create an outcome that he and I disagree very strongly about. I think what Mr. MacKay was asked to do, and what he has asked those of us who are observing on his report to do on many public occasions, is talk about it in his framework—things he identifies in competition, consumer protection, jobs and the like. He has a view of the world that he thinks will enhance competition, create more jobs, lead to more innovation, etc. I happen to disagree with him on all points.

He has excessive layers of consumer protection that are necessary to go along with his conclusion about the world. I'm not necessarily rejecting consumer protection; I'm saying it's not necessarily the right way to go if you aren't searching for his specific set of recommendations. There are other ways of doing it.

The Chairman: Do you have a final comment?

Mr. Robert Carter: I'd like to make one comment and then I'll turn it over to Gil. You're talking about three cable companies, three or four telephone companies and five banks. In Ontario there are 230 licensed property and casualty carriers that deal either through us independent brokers, directly, through captive agents, or through 1-800 numbers. I don't see how Mr. MacKay can imply that letting the banks have more access in our business creates more competition. We already have far more competition than he and the banks have ever seen.

The Chairman: Mr. Constantini.

Mr. Gil Constantini: We would like to see more competition in the banking sector as well, which we think would be good. We envisage a framework that gives institutions flexibility. They need to compete on the world market, but we need to see that without compromising our domestic market and our interests within our own country. I think there's a real distinction there.

The Chairman: Thank you.

Mr. Cooke.

Mr. George Cooke: I think you used the example of telephones and cable. Clearly, since you introduced some competition into the phone business, the amount of product innovation has been substantial. Our natural gas industry is another recent example in the last 10 years where, when you mandated the unbundling of services, you were able to get extensive competition. Estimates at the time suggested savings in this province of $0.75 billion for consumers.

In terms of the bundling and unbundling, the key thing from the consumer protection point of view is that if these things will make it truly less concentrated and more competitive and you can provide information to consumers that it's third-party defensible in some way, those kinds of things are likely good. But if the bundling concentrates and provides an unevenness in the playing field that lessens competition, it likely doesn't make a whole lot of sense.

The Chairman: Thank you, Mr. Gallaway.

On behalf of the committee, I'd like to express to you our sincerest gratitude. It was an excellent panel. We're certainly going to reflect upon many of the thoughts and ideas you shared with us as we get ready to make recommendations to the Minister of Finance, first through our interim report and then through our final report. Thank you.

The meeting is adjourned.