FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, September 29, 1998

• 0932

[English]

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

As you know, in accordance with its mandate under Standing Order 108(2), the committee resumes its study of the report of the Task Force on the Future of the Canadian Financial Services Sector.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Chairman, I was given permission to make a presentation as a witness this morning at nine o'clock. As you know, a member of Parliament or a member of the Finance Committee has the option of doing this. I received permission from the Clerk's office and I intended to make a presentation on the MacKay Report.

Yesterday morning, the Clerk telephoned me to say that I had to get special permission from the steering committee to appear and that my appearance with my leader on October 30 as part of the pre- budget consultations had also been cancelled. It is completely unacceptable that you should function in this manner.

Moreover, there are precedents. This is the fifth year that we have sat on the Finance Committee, and members of Parliament have already appeared before the Committee. This is a question of the Clerk's management of the agenda, not a matter of a decision by the steering committee.

Yesterday, I interpreted this decision as an affront either on the part of the Clerk or that of the Chair. This has never been done before. When you plan a presentation such as this one—and I have every right to make one—it involves work. I do not accept the fact that the Clerk, by a mere telephone call, can tell me that a mistake was made, that my appearance has been cancelled and that there are now new procedures on the Finance Committee. I don't accept that. I'll tell you right off the bat that I don't accept this decision, particularly since I believe Mr. Manning has appeared before the Finance Committee three times in the past five years. His appearance did not require a special decision by the steering committee, merely a decision concerning the Clerk's management of the agenda.

If you are in the process of stripping us of our right to speak, our freedom to appear and to give our views, that's another matter. If you want to play that game, I can tell you we can play it too. And if the Clerk wants to be a smart guy, we can straighten him out as well.

• 0935

[English]

The Chairman: I think the point you raise is a point you should raise if you're concerned about it. As I recall, two meetings ago you raised that point, and we said it would be dealt with at the steering committee. At that point in time, you didn't raise an issue at all. So I'm kind of....

[Translation]

Mr. Yvan Loubier: No, the last time, we agreed to consider the motion I had made. And by the way, I was going to ask you what happened to that motion, in which I asked that we extend the period allotted for consultations on the MacKay Report and that we expand the consultations. You said that we would discuss the matter at the next meeting of the steering committee, but we never know when the next meeting of the steering committee will be.

There was never any question of discussing my appearance as a witness on the MacKay Report or of talking about the appearance by my leader, myself and my Finance assistant, Odina Desrochers, before the Finance Committee to submit the results of our work this summer on the pre-budget consultations. There was never any question of raising this before the steering committee. That was not what we agreed on.

I don't understand. We open these consultations to all organizations, all Canadian citizens, but when we want to appear as witnesses, that requires special treatment and a decision by the steering committee. I call that political agenda planning, petty partisan politics. If you want to play that game, Mr. Chairman, I can assure you that we won't join in with you. We will denounce you. And if the Clerk wants to play the game, well that's even worse.

[English]

The Chairman: Mr. Loubier, as a matter of fact, I don't think there's a member of Parliament who's held more town hall meetings in his career than I have. I can say this quite clearly. There is no chair who has dedicated himself more to opening up the process to members of Parliament and taking in their input.

As a matter of fact, it was in response to a letter I sent to the members of Parliament that many held town hall meetings. I'm glad to see this year that you held even more than you did last year.

So I don't think you want to go down that road in terms of that issue, because my record is an excellent one.

The other issue concerns your appearance. I'm going to check the blues. I'm not going to occupy the time of the witnesses today to deal with this particular issue right now, but I'm going to check the blues in reference to the comments made vis-à-vis the appearance of members.

I'm not saying you can't appear. I thought it was a decision we were going to take in the steering committee. You may not agree, but that's what.... We'll check the blues.

[Translation]

Mr. Yvan Loubier: No, Mr. Chairman, you're mixing things up. I informed you about two weeks ago that we wanted to appear before the Finance Committee to discuss the MacKay Report and to table the results of our consultation work in all the regions of Quebec. Gilles Duceppe and I went across Quebec to consult Quebeckers, and Bloc MPs worked very hard indeed. No other member of any other party worked as hard on the pre-budget consultations, and we did so at your invitation.

Three days ago, the Clerk confirmed for us that I could appear this morning at nine o'clock to discuss the MacKay Report and that I could appear again with Gilles Duceppe as part of the pre-budget consultations on October 30 at 9:00 a.m. Yesterday we were told it was all off. Even though we had planned it all and our timetables are as tight as yours, we were told that it was all off.

What I want from you this morning is for you to concede, in accordance with the decision made three days ago, that the appearance set by the Clerk for October 30 at 9:00 a.m. is still on and that there are no new procedures smelling of partisan politics for the selection of witnesses here on the Finance Committee.

Ask Mr. Harris whether Mr. Manning needed a decision by the steering committee to appear here. No, he did not need one.

[English]

The Chairman: Mr. Loubier, how other chairmen have dealt with the committee before, and the type of traditions they may or may not have had, is their business, not mine. What I wanted to do was to have a meeting amongst the members of Parliament to find out how we were going to deal with members of Parliament appearing in front of the committee.

Just forgive me for a second here. Just hear this out.

• 0940

We'll have to decide whether the committee is in fact the place where members of Parliament are going to make presentations. Also—

[Translation]

An hon. member: A...

[English]

The Chairman: Just one second.

[Translation]

Mr. Yvan Loubier: This is crazy!

Mr. Odina Desrochers (Lotbinière, BQ): I would like to speak as well.

[English]

The Chairman: Just a second.

[Translation]

Mr. Yvan Loubier: This is crazy!

[English]

The Chairman: We'll have to decide whether we open it up not just to Mr. Loubier, because Mr. Loubier's not a special member of Parliament; he's a member of Parliament like everybody else. If every member of Parliament decides they want to appear in front of the committee, given the fact that we have a House of Commons and we have two days of debate on pre-budget, where we can talk about all the things we hear about, we have to decide whether we want to open it up. If you, as a committee, decide that every member of Parliament in the House of Commons can in fact appear in front of the finance committee to make submissions and to be here as witnesses, then that's the choice of the committee. But no decision has been made.

Do you want to open it up to the 301 members of Parliament?

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Mr. Chairman—

[Translation]

Mr. Yvan Loubier: No, no, listen, the decision...

[English]

The Chairman: I'm going to let Mr. Harris in here.

[Translation]

Mr. Yvan Loubier: Just give me a second...

[English]

Mr. Dick Harris: Mr. Chairman—

[Translation]

Mr. Yvan Loubier: ... to clarify the issue.

[English]

The Chairman: I've recognized Mr. Harris.

Go ahead.

Mr. Dick Harris: Mr. Chairman, I would like to speak to that for a moment. First of all, I know precedents have been set for members of Parliament to represent their party's position and views before this committee. Indeed, Mr. Manning has appeared before this committee on different occasions with, to my best understanding, no special permission.

I think the issue here this morning is that I would like an explanation of the decision to allow Mr. Loubier, a representative from the Bloc Party, to appear. First of all, the approval was given, the presentation was scheduled for one day, the October 30 date was scheduled, and then within a matter of 48 hours that decision appeared to be arbitrarily changed.

I would like to know why the presentation was scheduled and then within 48 hours changed. What's the rationale behind that, and who made that decision?

The Chairman: The rationale behind that is the following. There was a meeting, I think two meetings ago, where we basically stated it would go to subcommittee for decisions on how we were going to handle this particular issue. That's my recollection. Mr. Loubier obviously doesn't have the same recollection.

I also want to discuss with committee how we're going to deal with requests from members of Parliament. Because if we're going to get 50 to 100 members of Parliament who want to appear in front of the committee, then we have to factor that in.

Mr. Loubier.

Mr. Paul Szabo (Mississauga South, Lib.): I have a point of order, Mr. Chairman.

[Translation]

Mr. Yvan Loubier: Look, the decision...

[English]

The Chairman: Mr. Szabo has a point of order.

[Translation]

Mr. Yvan Loubier: One second there. You're twisting the truth.

[English]

The Chairman: Mr. Szabo.

[Translation]

Mr. Yvan Loubier: The Clerk's decision had already been made.

[English]

Mr. Paul Szabo: Mr. Chairman—

[Translation]

Mr. Yvan Loubier: The Chairman is being arrogant! He is more arrogant than the other one! You are arrogant! You're acting like a dictator!

[English]

Mr. Paul Szabo: Mr. Chairman—

[Translation]

Mr. Yvan Loubier: This is crazy!

[English]

The Chairman: Mr. Szabo.

[Translation]

Mr. Yvan Loubier: This is not right!

Mr. Odina Desrochers: Like Jean Chrétien, like the Liberals. It's the same everywhere.

Mr. Yvan Loubier: It's crazy! Dictator!

[English]

Mr. Paul Szabo: Mr. Chairman, with respect, in my view, the matter that's come before the committee now is extremely important to resolve. We have this issue, though, with respect to the witnesses who are here. In view of the fact that there is a vote at 10:30 a.m. today, we will lose these witnesses and not have the opportunity to hear them, and they are important witnesses to this committee.

I would therefore ask if hon. colleagues who want to deal with this issue could agree that immediately following the vote a decision would be taken on how we could come up with a forum in which this matter could be properly discussed to the extent that members need to discuss it, but not to sacrifice this panel of witnesses. We've already lost 15 minutes of the hour.

I respect the member's intervention. I applaud him for doing the work and having the input to make. There appears to be some issues that have to be discussed, and I want them to be discussed, but I would hope that the members would show some courtesy to our panel, to our witnesses, so that the rest of the committee could at least do some of its work this morning.

[Translation]

The Chairman: Mr. Desrochers.

Mr. Odina Desrochers: Mr. Chairman, these people worked had to prepare for their meeting with you today, just as we worked to prepare for our meeting with you this morning at nine o'clock. What you don't understand is that it's not a matter of members; it's a matter of parties.

When Mr. Manning came to appear before the Finance Committee, he came on behalf of the Reform Party, just as we want to come and talk to you about our party's position. What then is the Minister of Finance, Paul Martin, doing when he comes before the Finance Committee? He is a member like all of us.

• 0945

Mr. Yvan Loubier: He has no business here.

Mr. Odina Desrochers: Why does he have the privilege of coming when you have stripped this privilege from my colleague Yvan Loubier, who is the Finance critic?

Mr. Yvan Loubier: We're going to send him away.

Mr. Odina Desrochers: And why, Mr. Chairman, are you adopting new rules?

Mr. Yvan Loubier: Paul Martin has no business here.

[English]

The Chairman: When did I say that Mr. Loubier and Mr. Duceppe could not appear? Have I ever said that? I have not said that. I'm just saying that—

[Translation]

Mr. Yvan Loubier: Mr. Chairman, three days ago, we made a decision. That decision goes back to last Thursday. The Clerk's decision was forwarded to my office, confirming that I was to appear this morning on the MacKay Report and that, on October 30, Mr. Duceppe and I were to appear together with Odina Desrochers on the pre-budget consultations. Yesterday we were told that this was off. The decision had been made.

Now you're talking about future rules. To date, we haven't set out any new rules on the steering committee for the appearance of members of Parliament representing their parties. We operated in accordance with the old rules, and, as Mr. Harris mentioned, the old rules did not require a decision by the steering committee.

Your conduct is utterly unacceptable. I find this inappropriate on your part. I will therefore object to Mr. Martin coming to appear here before the Finance Committee. I'm going to oppose his appearance here. He is also a member of Parliament and he also has the opportunity to talk himself hoarse in the House of Commons and tell us whatever he wants. He has no business here.

[English]

The Chairman: We're all equal; you're right. I agree with that, and that's the point I'm going to raise with you when we meet to deal with this issue. If in fact we're all equal, then we have to open up the entire process to 301 members of Parliament.

But if a decision is made that it's going to be based on party representation, then that's fine.

Order!

[Translation]

Mr. Yvan Loubier: You're really stupid! Come off it! What twisted reasoning! You're being twisted this morning! He's just told us that I was supposed to represent my party this morning on the MacKay Report. A member representing 45 members. Can you understand that? When Paul Martin comes here, he will represent the government party: a member, a minister representing a party. When Preston Manning has come here previously, it was to present his party's position. Is that clear enough? Can you understand these things and use reasoning here this morning that is not twisted?

[English]

The Chairman: Yes, I clearly understand. I don't think the quality of the debate is enhanced by the volume of your voice.

[Translation]

Mr. Yvan Loubier: Not twisted arguments like the ones you've given us either. You really don't understand anything.

[English]

The Chairman: What I want to tell you, quite frankly, is that as I said two meetings ago, we were going to meet to discuss these issues. I still stand by that. That's the way it's going to be. That's the rationale behind it.

[Translation]

Mr. Yvan Loubier: A dictator!

[English]

The Chairman: I know you know how to read, so when I show you the blues you'll be able to read the fact that we said this particular issue was going to be dealt with at the steering committee. That's very clear to me. If there is anything you don't understand, I can clarify it for you.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, that's the third time you've said this kind of thing. When I asked you to expand the debate on the MacKay Report and to extend the consultation period, you told me that you would discuss the matter within the steering committee. Now you're telling me that, on the steering committee, we're going to set down rules that don't yet exist. And yesterday, in accordance with rules that don't yet exist, you cancelled my appearance today and that of October 30th on which we had agreed. That's entirely twisted reasoning.

When will you call a meeting of the steering committee? When will you make a decision? When will this committee work properly? It seems to me we're operating in a slapdash manner. As Committee Chairman, you are using arguments devoid of any sense.

[English]

The Chairman: Mr. Loubier, look; I think we've taken up enough time here. I am going to be very clear to you. I'm going to repeat it and I'm going to go very slowly.

We're going to meet as a subcommittee to deal with the issue of how we deal—

[Translation]

Mr. Yvan Loubier: When?

[English]

The Chairman: That's something we'll have to decide, when we're going to meet.

I know your presentation is extremely important. I know you have worked very hard this summer. We spoke about this vis-à-vis pre-budget consultation and MacKay. I was the one who asked you to do those town hall meetings. So there is not a problem there. I understand the process.

But this morning, we have witnesses in front of us who would like to contribute to the process. I am not saying that you will be denied the right, which you rightly have, to appear in front of this committee. The only thing I am saying is that the subcommittee would like to deal with the issue of how wide we open it up for members of Parliament. That is the only reason this issue is being postponed.

[Translation]

Mr. Odina Desrochers: He doesn't understand anything.

Mr. Yvan Loubier: Mr. Chairman, out of respect for our guests, I am going to stop the discussion. But out of respect for our intelligence, stop passing off these stupid remarks as arguments.

• 0950

The question is not whether we should permit 301 members of Parliament to appear before the Finance Committee, but rather whether a member who is presenting his party's position may appear here to discuss fundamental issues such as the MacKay Report or the pre-budget consultations. We have already received the answer as a result of the precedents set in particular by Mr. Manning over the past five years.

Don't start telling me your tall tales, your nonsense that no one believes. Don't start putting on your superior air and say my testimony may be more important than that of others; that's not what I said. My testimony is as important as that of others, and your refusal to allow me to appear this morning is a sign of a lack of respect on your part.

[English]

The Chairman: I don't see a problem. The subcommittee can deal with this issue and that's the end of story.

[Translation]

Mr. Yvan Loubier: There is a lack of leadership on this committee, which has operated in a slapdash manner from the very start.

[English]

The Chairman: I don't see a problem.

[Translation]

Mr. Yvan Loubier: No, you never see any problems.

Mr. Odina Desrochers: Would you like glasses? We'll lend you some.

Mr. Yvan Loubier: A magnifying glass, a microscope, a telescope perhaps?

[English]

The Chairman: I don't see a problem, because—

[Translation]

Mr. Yvan Loubier: The problem is this big.

[English]

The Chairman: —we're going to have a subcommittee meeting. I said this two days ago, and I don't know why you're bringing it up again.

[Translation]

Mr. Yvan Loubier: It isn't just the problem that's big; he's big too.

[English]

The Chairman: I've dealt with that issue. It's in my book. It's going to be dealt with at the subcommittee level, and that's that.

Yes, Mr. Harris.

Mr. Dick Harris: Could I finish this with just one question? Can you tell me if it was you personally who cancelled the appearance of Mr. Loubier this morning? Who gave the decision?

The Chairman: The clerk booked it and the clerk cancelled it. I don't book meetings. That's not my job.

Mr. Dick Harris: And the clerk was not influenced in the cancellation?

The Chairman: No.

Mr. Dick Harris: Was the clerk directed by anyone to cancel his appearance?

[Translation]

Mr. Yvan Loubier: He's also a liar.

[English]

The Chairman: I said that every decision we make has to be based on and be consistent with earlier decisions, which means—

Mr. Dick Harris: Who told the clerk to cancel the meeting?

The Chairman: I said that we have to have first a subcommittee to see how we're going to deal with this particular issue.

Mr. Dick Harris: So you told him. You told the clerk then to cancel the appearance.

The Chairman: No—

[Translation]

Mr. Yvan Loubier: The Clerk told me yesterday that the Chairman had asked him to cancel my appearance today and the one scheduled for October 30. The Chairman asked him to cancel my appearance, which had already been approved.

[English]

The Chairman: Look, every decision we make has to be consistent with previous decisions.

[Translation]

Mr. Yvan Loubier: Don't resort to lies, Mr. Chairman. That could come back to haunt you fairly quickly.

[English]

The Chairman: I disagree, Mr. Loubier, quite frankly. I disagree with the depiction of the facts.

[Translation]

Mr. Yvan Loubier: Oh yes? The Clerk told me you had ordered him to cancel my appearance today and that of Mr. Duceppe and myself scheduled for October 30.

[English]

The Chairman: What I told the clerk was very simple.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, Mr. Harris asked you a question: is it true or false that you asked the Clerk to cancel my appearance this morning and that of October 30?

[English]

The Chairman: I said that the appearances of members of Parliament have to be dealt with in a subcommittee, which everybody agreed to. So it's pretty inconsistent for him to be booking members of Parliament to appear if in fact a subcommittee—

[Translation]

Mr. Yvan Loubier: So it was you who dictated the Committee Clerk's administrative agenda. It was you who told him to cancel the Bloc Québécois' appearance scheduled for this morning.

[English]

The Chairman: Anyway, Mr. Loubier, I think what I said—

[Translation]

Mr. Yvan Loubier: He's also a liar.

Mr. Odina Desrochers: You haven't answered Mr. Harris' question. What is your answer? Yes or no?

[English]

The Chairman: It's very simple. If we agreed that we're going to deal with members' appearances prior to that, then how can you start booking members? You can't.

[Translation]

Mr. Odina Desrochers: No, I'm asking you to answer the question. Yes or no, did you ask for the appearance this morning to be cancelled? That's what we're asking.

[English]

The Chairman: It's not yes or no.

[Translation]

Mr. Yvan Loubier: He's a liar.

Mr. Odina Desrochers: That's what we're asking. Are you conducting yourself as you do in the House of Commons?

Mr. Yvan Loubier: Yes, he's a liar. He's a liar.

Mr. Odina Desrochers: Liar! Hypocrite!

[English]

The Chairman: You're making a big deal out of something you know we're going to deal with in subcommittee. I know this may be good showmanship, but it certainly doesn't add value to the debate.

I'm going to go to some people here who may in fact give us some insight into the MacKay task force report. From the Canadian Taxpayers Federation, we have Mr. Walter Robinson, federal director; from Acorn Partners, Mr. Peter Kemball, managing director; and from the Regional Group, Leonard Potechin, chairman of the board.

Welcome to our meeting. You are not new to the finance committee hearings, so you know how these hearings operate. You have approximately 10 minutes to make your recommendations and thereafter we'll enter into a question and answer session.

Mr. Robinson.

Mr. Walter Robinson (Federal Director, Canadian Taxpayers Federation): Thank you, Mr. Chairman. It is a great pleasure to appear before you this morning and to offer comment on the McKay Task Force Report on the Future of the Canadian Financial Services Sector.

[Translation]

As usual, my presentation will be in English only, but I'm going to try to answer your questions in the language of your choice.

[English]

To begin, allow me to comment to all committee members on your present workload. Your double-duty efforts to study this issue as well as conducting pre-budget hearings is commendable.

In the interests of time, I have provided a backgrounder on the history, scope and mandate of our organization for the benefit of new committee members.

While we are not a direct stakeholder organization in the debate on the future of financial services, we welcome the opportunity to offer our comments with respect to Mr. MacKay's report.

• 0955

As an overarching theme, we believe two of MacKay's observations, or guiding principles, if you will, are very poignant: first, that public policy should not second-guess business strategy; and second, the emphasis on minimalist and flexible regulations that ensure that the financial services industry is not placed in a straitjacket as it responds to the technological, globalization and demographic challenges that Mr. MacKay and his team so eloquently articulate in his report.

We encourage you to strive for consistency and congruency with these principles when you make your recommendations to the Minister of Finance.

As opposed to commenting on all 124 recommendations, we have opted for general comments in the interests of time.

To start, we agree that the implementation of MacKay's recommendations should not wait until the year 2002, and further agree that the appropriate regulatory consultation and review requirements with respect to the bank merger issue—Competition Bureau, OSFI approvals, and ministerial approval—be held concurrently where possible.

With respect to fostering greater domestic and foreign-based competition, we believe Mr. MacKay's recommendations, of which there are many, are directly on target. The oligopolistic structure of our financial services sector is slowly eroding to the benefit of consumers. We believe MacKay's recommendations will further accelerate this erosion. Allowing a cross-fertilization, if you will, of service and product offerings amongst the traditional four pillars of the financial service sectors should—and I stress “should”—result in greater choice and lower prices for consumers.

We also support MacKay's recommendations that address coercive tied selling and the task force's insight to distinguish between tied selling, or competitive bundling, and coercive tied selling.

We are also in support of the recommendations to protect the privacy of data that Canadians provide to various financial institutions. We believe the basic minimum standards articulated are not onerous, and indeed protect the privacy rights of individual Canadians. They are a basis to build upon.

Finally, we are in general agreement with MacKay's recommendations on a strengthened role for the Office of the Superintendent of Financial Institutions. Such a role, we believe, is symmetrical with the convergence and obfuscation of traditional industry lines among the traditional four pillars of the financial services sector.

These areas where we are in agreement with MacKay are in the public interest and do not violate the principles I outlined at the beginning of my presentation. However, we do have some fundamental concerns with some of the other recommendations put forward by Mr. MacKay.

Specifically, we are opposed to proposals for an ombudsman for the financial services sector that would report to the finance minister. For example, the banking industry as well as the individual institutions have already established their own ombudspeople, and we believe many of the other players in the industry have as well. We believe it is the role of consumers, through their personal and collective choices as well as through co-ordinated lobbying efforts by many of the groups who've appeared before you, to effect change and redress for commercial practices to which they may be opposed.

As for a separate bureaucracy within Industry Canada to report on the financing of small and medium-sized enterprises, we are opposed to this idea as well. MacKay's report already reveals a trend toward greater access to capital for small and medium-sized enterprises as well as knowledge-based industries from traditional and non-traditional funding sources.

As an adjunct to this point, I would remind the committee of the government's prevalence in many areas of financing, including the Small Business Loans Act, the Business Development Bank of Canada, and various other sectoral initiatives indeed sponsored by Industry Canada. We believe the government should not be in the business of playing venture capitalist to businesses, large or small, and view MacKay's recommendations for a bureaucratic examination of the lending practices as an attempt to second-guess business strategy.

In addition, we find it quite ironic that the government may be not only an active participant in the marketplace but a commentator or a regulator as well.

The creation of such a bureaucracy would only ensure that financial institutions could—and I stress “could”—be embroiled in future disputes with the government over what constitutes appropriate levels of lending to SMEs and KBIs. A proposed benchmarking exercise could—again, I stress “could”—pit the bureaucrats against bank executives as the squabble over the appropriate level ensues.

We also believe the current structures within Industry Canada are sufficient to report to Parliament on current and emerging trends in SME and KBI financing. A great deal of resources are already dedicated to those activities.

Instead, we recommend that the government examine and seek to close the gap between American and Canadian tax rates, specifically personal, business and capital gains tax rates. For example, capital gains rates, on average, double that of American rates, depending on the state and length of time held.

We also believe private sector funding for business and job creation in Canada has been hindered by these excessive rates of taxation. These points must be kept in mind where the lack of start-up capital for Canadian businesses is concerned.

As for the public interest review process to address bank mergers, again, we believe this recommendation constitutes an attempt to second-guess business strategy. In addition, to empower the Minister of Finance to seek enforceable insurances with respect to levels of employment, service penetration or other matter, is, we believe, in clear violation of MacKay's principle of not second-guessing business strategy. Obviously, the beliefs of some committee members may differ from ours.

• 1000

I was going to talk about a 20th century example of buggy makers in the automotive sector, but I believe a bank chairman has already discussed that issue. I won't bore you with those details.

Technological process, changing consumer demands and competitive pressures continually change the types of jobs available in the economy. We believe governments need to concentrate on the future, not on the past, and ensure that such future jobs have the potential to be created within Canada instead of attempting to preserve certain types of employment at all costs. Attempting to rescue sunset jobs will only have the effect of preventing sunrise employment from taking hold.

Finally, allow me to vehemently note our objections to any form of government assistance to pro-consumer advocacy organizations. Neither MacKay nor the government really has any role in encouraging consumer advocacy organizations to work together or at cross-purposes or participate in the financing of consumer coalitions.

As an organization that relies solely upon the free-will and non-receiptable contributions of our supporters to fund our activities, we are adamant on this point.

In conclusion, Mr. Chairman, aside from the objections we've enumerated, on balance the MacKay report is a comprehensive document that forwards the debate on the future of the financial services sector.

We wish you well throughout the remainder of your deliberations. If I can use a football analogy, we believe the MacKay report has set the yardsticks on the field, and your job is to enforce the rules of the game and allow the participants in the industry to worry about the inches to get to first, second and third downs.

Thank you for your time.

[Translation]

I eagerly await your questions.

[English]

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

Now we will hear from a representative from Acorn Partners, Mr. Peter Kemball, managing director.

Welcome.

Mr. Peter Kemball (Managing Director, Acorn Partners): Thank you, Mr. Chairman.

My comments to this committee will be quite different from Mr. Robinson's in terms of the overview he has given, and hopefully complementary in many ways.

Just to give you a brief background on Acorn Partners, we provide financing to small enterprises in primarily Ontario and Quebec. We finance those firms that for one reason or another are “beyond the banks”, using the phrase Allan Riding has given me, but not venture capital.

Briefly, my understanding of venture capital is that you're making an investment in a firm that will create an industry. That is not our game; that's for others.

There are two main messages I would like to leave with the committee and its members. I have a serious reservation—I use the word “disagree”—with the MacKay task force conclusion that banks will be central to financing SMEs in the next decade. I believe it could be the case but it need not be the case, and it is for members of this House to decide whether that will be the case. That depends on the rules you set. I have a slogan: The rules you set determine the players you get.

The second point that I believe is of importance to making funds available to SMEs is the topic that the MacKay task force labelled as “market conduct”. Because of the nature of SMEs, it is very important that there are very high standards of commercial conduct. In the absence of those, the first place you don't put your money is in small, unknown entities, but in large.

In going ahead, I have a point of view I'd like to express that is my own personal one. I'm speaking for no other firm on that one. It's an observation on the availability of funds—and I believe it complements what you were saying, Mr. Robinson—and then some specific suggestions for improvement under two topics.

The point of view I have is that this is the opportunity of a lifetime to put in place a financial services sector that meets the various and varied needs of small businesses. We haven't seen an opportunity like this in forty or fifty years. So your work is terribly important to all of us, and I wish you very well. It's not just about mergers; it's a fundamental restructuring of the financial markets.

• 1005

Where are we at today in terms of availability of funds for SME? That was clearly laid out in the McKinsey submission and quoted in the MacKay task force report. It's not good enough, period.

My disagreement on the role of the banks is actually, I believe, clearly laid out in the task force report. It draws the conclusion that the banks are going to be the primary source of funds, but then if you look at where money is going, it is not going into bank deposits, traditionally the way money was gathered and then allocated. It is, in fact, increasingly going into mutual funds, because the rates of return aren't high enough in deposits. So I believe that the banks—and this is a horrible thought—may run into a problem of lack of availability of cash.

I may be exaggerating, but that is a potential, and that is why I believe the statements on securitization of assets are so important.

What MacKay said, as I read it, was as follows. One, the banks have great difficulty dealing with SMEs, which is not a statement of surprise to any of the members in this room. Those differences will be a challenge to overcome. Second, they are going to have to learn to do something that hasn't been done, as I understand it, successfully anywhere else in North America, and that is to securitize the loans they make to small businesses.

Well, if you take those two facts and say the odds of any one of them happening are one-half, then you can say the odds of two of them happening are one-quarter, when you put them together. That's why I disagree with MacKay. If you give the banks more credit—that is, odds of seven out of ten on each one—you're still under one-half that they will continue to be the primary source of funds for SMEs.

That is an extremely important consideration for you in your deliberations, to choose whether or not you want the banks to be the primary source. The real problem is the barriers, an absence of a pipeline from the moneys now directly available from individuals, through institutions, and getting them into the hands of SMEs.

In fact, if I can put it succinctly, what we need is another Newcourt, but one that is a firm—and many firms would be better—designed to originate loans to SMEs and then to sell them to others who are efficient at gathering assets. That's a radically different vision. That is what I believe is possible.

On the topic of availability of funds today, Mr. Robinson has said it's better. I believe most small firms—and I would emphasize the word “most”—regardless of where they're located and regardless of where their bank is located, have a better chance of getting a loan today than they have had at any time in the past.

The reason for that is simply that the banks are introducing credit scoring. Basically that means they give you a credit card. You don't have to deal with an account manager. You don't have to worry about where the branch is. You have very nominal reporting.

It's available. It's here. It's now. The limits are up to $100,000, which is the CIBC level. Others range from $35,000 upwards.

The interesting lesson for this committee to take from this is that this product is now available, in my view, because competition was allowed in by OSFI, reluctantly and far too slowly from the point of view of SMEs, but it was allowed in, and it took about a year to respond. The tragedy is that the Canadian banks didn't undertake this innovation by competing amongst themselves, which is what I would like to have seen.

Let me put this in a dramatic way, for which I will probably get clobbered by a number of my friends in the private sector. I believe the banks could close every small business branch today and the availability of funds to most firms would not be reduced, period. There are lots of sources beyond the banks, and one of those sources, I believe, is talking to you later this morning—the factoring industry.

Now, I've used the word “most” for obvious reasons. Some businesses aren't going to meet the credit scoring hurdles. There are good reasons and bad reasons for that, and what I would like to see is a pipeline that allows a sorting out of the good and the bad reasons so that those who don't meet bank criteria for good reasons, such as super-heated sales growth rates or the lack of equity, still get financed.

• 1010

I would like to leave with members of this committee a number, from a Statistics Canada report, that surprised me. As I understood it, 40% of the firms that went bankrupt should not have. I make an assumption here that may be unfair to the banks, and that is that most of these were in special loans departments at banks. That's 40% that could have been saved, could have been turned around. I think as a measure of progress for the financial services sector, if we can cut that into half over the next decade then we've made real progress.

I have some very brief suggestions for improvement on the financial side. One of the things that bothers me as a small business person is that I know my commercial deposits aren't insured. Because of the nature of my business, I can have relatively large deposits on any given day, and I would like to see insurance on commercial deposits up to $250,000 for any deposit-taking institution.

I believe non-banks, the future Newcourts I have suggested, should also be able to provide SBLA loans and not be actively blocked, as Newcourt was when it tried to get that privilege.

On the issue of taxation, I would like to see the capital gains tax eliminated if the proceeds are from shares that have been held for more than seven years. What that will do is that instead of when I ask somebody for money for a small company, they're not going to say to me, well, I have to sell $200,000 worth of Newbridge to put $100,000 into this new company that probably isn't going to work.

I'd like to at least have a level playing field when I'm asking for that money.

I believe very firmly that conduct is extremely important. Let me express the reason why. If you put a drop of sewage in a barrel of wine, you get sewage. That's the fundamental rationale. We can't afford to have any sewage in the system, and we certainly have to do a far better job on our commercial conduct in this country. Right now, from what I see, it looks more like the American wild west. It's not everybody, but there's just enough. It's the drop of sewage issue.

For example, one of the constructive things an ombudsman could do would be to require that all financial institutions file any statement of claim against them within 10 days of their receipt and report any adverse judgment.

I collect odd things, obviously, things like that. There are some very disconcerting facts when you look at these matters.

I would like serious penalties for that, as I have laid out. I would go one step further and suggest that we could have a capital fund of $5 million to be used for SMEs to sue financial institutions by leave of the ombudsman. If it were never used, it would be terrific. I rather have my doubts.

Finally, I'd like to re-establish the rule of law in commercial transactions; special courts; a special police force for that; strengthen the superintendent of bankruptcy. To make sure that it is at least a level playing field, any firm that pays out money for forensic expenses should be allowed to have tax credits.

In conclusion, Mr. Chairman, I believe you have a marvellous opportunity to adjust the financial services sector so that it really fits the needs of SMEs. I believe stopping the bank mergers is not what it's all about. What it is about is making sure there is first-class competition for the SME business.

Thank you, Mr. Chairman.

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

We'll now go to Mr. Leonard Potechin, chairman of the Regional Group of Companies.

Welcome.

Mr. Leonard Potechin (Chairman of the Board, Regional Group of Companies): Thank you, Mr. Chairman. I'll be brief. I'll be using my background as the regional chairman of the Association of Canadian Airport Communities as a parallel for what I'm going to say today.

• 1015

Is Canada going to continue to be a capitalistic society with a social conscience? Should government control all mergers and acquisitions or should they set the rules and regulations and allow private enterprise to act within those regulations?

There's no doubt in my mind that Canadians are good competitors and can compete worldwide with any other country, and in all phases of private enterprise, providing our government allows us to compete freely without tying our hands.

Recently government provided the tools for our airlines under the Open Skies agreement. Previously, businesses within the nation's capital were prevented from competing freely because of government regulations. Just two years ago there were no direct flights out of Ottawa to the United States. We now have 39 flights a day out of the Ottawa airport, and the high-tech industry and tourism have flourished. Canadian airlines became more profitable and more employment was created. The government provided the communities and the airlines with the proper tools to compete freely.

Controlling banks is another example of government believing they must control all mergers and acquisitions. Do banks lack competition? Would the amalgamation deprive Canadians of obtaining good services? I don't think so. If I want a mortgage, I can go to trust companies, caisses populaires, insurance companies, credit unions, finance companies, and, yes, even CMHC. How about financing for automobiles and credit cards? Is there a shortage of competition there?

Then we have federal agencies, such as Business Development Bank, the Export Development Corporation and the Farm Credit Corporation. Should government leave the rules and regulations as they are? No, definitely not. Allow others to compete and provide loans in competition with banks. I don't believe the status quo is an option.

Should banks from the United States be allowed to set up services in Canada? Why not? United States airlines are now allowed to fly freely into all Canadian cities, and I don't see Canadian airlines suffering any. In fact, it has been a blessing to employment and profits for Canadian companies.

What rules and regulations could be implemented? Perhaps no bank closing in a community where only one bank exists, and no reduction of staff where two branches exist in near vicinity of each other.

I'm a Canadian first, but also a resident of Ottawa-Carleton. I see the growth of our high-tech industry. I see growth in the number of people visiting our community. The biotechnology industry is doubling in size.

Allow our enterprises to grow. Provide the regulations to allow us to compete provincially, nationally, and internationally.

The best example is credit card solicitation. My wife and I have had several dozen solicitations. We get accosted at hockey games to change credit cards.

There's no doubt in my mind the niche services can be provided by financial service companies, credit unions, caisses populaires, finance companies, and pension funds. Please don't turn our banks into just providing niche services. They must be able to compete in the mass market and continue to be a financial services player for all Canadians.

We allowed banks to purchase stock brokerage outfits. Midland Walwyn, one of our major stock brokerage companies, was purchased by Merrill Lynch, a United States company. Remember, there are far less brokerage outfits than banks.

Banks are competing within the automobile industry. Allow more competition to compete with banks.

The forces driving changes in transportation, financial services, the rapidly evolving technology, and the shifting of customer preferences are very evident in our region.

Is our economy changing? Obviously. First we had the free trade agreement with the United States, and then we had NAFTA. We no longer live in just a Canadian economy. We have to prosper within a North American society and even worldwide. We have to compete with our neighbour to the south and their larger and more aggressive private sector establishments. We need the tools to do the job.

• 1020

Recently the Government of Canada downsized its employment. I don't profess to know the locations of where these people were re-employed throughout Canada, but in Ottawa-Carleton, many started their own businesses or were employed in our tourism or high-tech industry. They were all absorbed in our community because the transportation to our nation's capital was improved.

The transfer of the airport to the private sector is a good example of government allowing business to flourish. The Standing Committee on Banking, Trade and Commerce should learn from the successes and spend their time creating an atmosphere that allows business to flourish. It is only in this manner that more taxes will be paid, less government involvement in welfare will be needed, and all Canadians will be better off.

Thank you for allowing me to appear before you this morning.

The Chairman: Thank you very much.

We have approximately 15 minutes prior to the vote, but we're going to utilize the 15 minutes to get some questions in. We'll be back after the vote to ask further questions.

Mr. Harris.

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

I want to thank you gentlemen for your very informative presentation this morning.

Mr. Kemball, I can't agree with you more about the need for more players in the small business financing area. I think it's such a critical part of our economy. A government that maintains or promotes a mindset that banks shall always be the major players in small business financing is taking a very backward-thinking position.

I've been in small business all my life. When I bought my first business at age 18 in 1962—I hate to admit that it was so long ago—for the $2,000 I needed to buy that business I had to crawl over broken glass and to pledge my children, who weren't even a vision yet. Having talked to small business people now, particularly those who want to get into small business and who have some great ideas and a great vision of how they can succeed, I know they still have a very difficult time with traditional lending institutions such as the bank, getting money, unless they have $5 in their pocket and want to borrow $1.

So I really appreciate your comments, and when the committee is considering recommendations to the government, I think we do really target in at increasing the niche players just as much as we can, particularly in the area of small business.

Now, this might be a redundant question, since I've just given you my point of view on what I think is really important, but there's no doubt the committee will have to make its recommendations in some type of prioritized fashion. It's quite inconceivable that the government could institute all of the task force recommendations in one fell swoop.

If you were to give us the priorities, in your mind, in terms of the recommendations in the MacKay task force that we should be focusing in on, saying to the government “You should consider doing these first”, what exactly would those be?

Maybe in the brief time we have, we could get some brief answers from everyone.

Mr. Peter Kemball: Mr. Harris, I have a very real bias, and the focus of my comments were on small business. I can only comment within that, in fairness to all the other issues the committee faces.

I believe the availability of funds to small business should be a top priority, because that's where we get our jobs, our growth, to fund all of the activities we want in our society. So improving that aspect of the financial services sector is crucial to our ability to evolve as a country and an economy. It's a very high priority.

Mr. Dick Harris: Thank you. Mr. Robinson.

Mr. Walter Robinson: I have nothing to add. I'll wait for further questions, Mr. Harris.

Mr. Dick Harris: Mr. Potechin.

Mr. Leonard Potechin: Nothing to add.

Mr. Dick Harris: Mr. Chairman, I know we have to go. I'm sure we'll come back after the vote.

The Chairman: We don't have to go yet. If you have some more questions, go ahead.

Mr. Dick Harris: All right.

• 1025

Mr. Robinson, on the subject of the capital tax that is placed upon banks, we've received presentations from the banks, naturally. Could you perhaps comment on the capital tax that banks pay and maybe relate it to other large, industrial, private corporate sectors?

Mr. Walter Robinson: The subject of taxation will be very much part of my presentation to this committee on pre-budget stuff, as Ms. Redman and Mr. Szabo and other people know.

Our position is very simple, as much as we strive for lower taxes across the sector. Let's be very clear: We should put a tax on profits, not capital. That would be our basic standing point in terms of that.

Indeed, especially in the financial services sector, given the amount of capital involved to have a national infrastructure in terms of financial services across our large country, and indeed to make that receptive to international transactions, I thinks it's a disincentive to that type of investment, that type of R and D, to tax that type of thing.

But in terms of the banks being profitable, we all know that. Am I here as an apologist for the banks? No. They make great profits. They should be taxed on those. I think it's unique to this industry, if I'm not mistaken, in terms of this tax on capital.

So we should tax the profits and not the capital. That's our very simple answer.

Mr. Dick Harris: One final question, Mr. Robinson. How would you respond to the claims or the challenges from, say, Mr. Nystrom—and I'm sure we're going to get around to it—that the banks don't pay their fair share of tax? How would you respond to that?

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): He thinks the banks are overtaxed.

Mr. Walter Robinson: Again, I'm no apologist for the banking industry. I've had my own personal horrible experiences with them. We all have the anecdotal stories.

We have to remember that the banks, if you believe what the Canadian Bankers Association tells you, pulling from Statistics Canada data, are the thirteenth-most profitable industry in this country. They are not the first-most profitable industry.

The second point to note is that as much as there's all the hysteria out there in terms of saying, “Tax them, and make them pay more”, we also have to remember that one out of every two Canadians has direct ownership in the banks through their pension funds or through their RRSPs. Mr. Kemball talked about the cash crisis they may have.

The level of taxation? Again, shift it from the capital, and if there needs to be a compensating effect, place it on the profits.

That's how I'd answer that question.

Mr. Dick Harris: You haven't quite answered it yet.

Mr. Walter Robinson: I'm aware of that, Mr. Harris.

Voices: Oh, oh.

Mr. Dick Harris: The question was, how do you respond to the question that the banks don't pay their fair share of tax?

Mr. Walter Robinson: The financial services sector in large part pays a great deal of taxation in the economy to fund the programs and the role of government in this country.

Again, I would answer from a cross-industry perspective. We believe—and I'll make this point in the pre-budget consultations—there's still a great focus, for example, on the anticipated surplus or non-surplus that may be here come next February. What we're saying is focus on the $109 billion spending envelope, and if you can reduce that, then you may be able to look at reducing tax on profits for banks or other industries.

Mr. Dick Harris: Okay. Thank you, Mr. Robinson.

Mr. Walter Robinson: Again, I may not have answered your question, but that's deliberate.

Mr. Dick Harris: All right.

[Translation]

The Chairman: Mr. Desrochers.

Mr. Odina Desrochers: Just a moment, Mr. Chairman.

[English]

Mr. Dick Harris: Mr. Potechin would like to respond.

The Chairman: Would you like to respond to that?

Mr. Leonard Potechin: Yes, I would like to respond briefly.

In my experience, government doesn't create capital; it just redistributes capital. Private enterprise creates the capital. Banks get charged for unemployment insurance. They get charged for Canada Pension Plan. They get charged for all the things they do.

Set the regulations. You decide what's there and let us compete. But remember, we have to compete worldwide. I don't represent any banks and I deal with a half-dozen of them, so I couldn't care less if they joined forces or not. I just want to make sure that a climate is created so that we can compete right across the universe.

The Chairman: We'll go to Mr. Nystrom.

Mr. Lorne Nystrom: Mr. Harris asked one of my questions, I guess, but he speaks with great knowledge. At 18 he started his first business, in 1942, so he—

Mr. Dick Harris: Lorne, it was 1962.

Mr. Scott Brison (Kings—Hants, PC): It was 1932. During the Depression, too, and that was a difficult time.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Nothing has changed in those intervening years.

• 1030

Mr. Lorne Nystrom: My question was that you're talking about more competition in terms of your vision of the economy. When it comes to banks, we have the most concentrated banking sector in the western world. If these mergers go through—and you say, with great respect, you don't care if it goes through or not—we'll have an even more concentrated banking sector. I just wondered what your recommendation would be to make it less concentrated.

A lot of people are concerned about the 10% rule going and allowing the American banks to buy up Canadian banks and so on. What recommendations do you have?

The Reform Party is squawking in the background here, Mr. Chair. I wonder if I could....

What recommendations do you have as to how we'd have a more competitive banking sector without getting rid of the 10% rule and allowing foreign banks in, which might take over an industry that is now Canadian owned and operated?

Mr. Walter Robinson: If I may, Mr. Chairman, I can start to answer that question.

I would not look for a more competitive banking sector. I think the MacKay report is very clear that among those traditional four pillars of banking, investment, insurance, and mutual fund dealers there's a convergence, so I'd look for a more competitive financial services sector. I think that's already under way.

Perhaps I can provide an example in terms of instruments. In terms of MacKay's recommendations, the banks are going to be allowed into the insurance business through not their arm's length subsidiaries but the branch network. There's been a concern from insurance agents, for example, with insurance brokers basically saying that could affect their ability to sell.

I don't really buy into that, because I think that competition is already there. The banks may use their branches to sell insurance, but insurance agents are already selling savings instruments through their policies. It's no longer just buying a term policy; it's buying a whole life, with built-in returns and looking in terms of how you can use that as a savings vehicle.

So I don't look to build a more competitive banking sector, Mr. Nystrom, I look for a more competitive financial services sector. I think that movement is underfoot. Your challenge here is just to set the rules to ensure that for Canadians, as I mentioned in my presentation—which I understand you had to miss, probably for other reasons—it should—and I believe it's “should”; I'm not saying “will”, because markets aren't perfect, as much as I'd like them to be—result in more choices.

Mr. Lorne Nystrom: Markets are anything but perfect, as we're seeing now right around the world.

We've been hearing a lot from the insurance brokers that it's not a level playing field if the banks go into insurance. The banks are big. We have many insurance companies in the country. I'm not talking about just life insurance here but also property and casualty companies. We have many small brokers around the country. We're getting calls already that they're afraid that the banks will be allowed in here, and there would be a non-level playing field.

It's sort of like you taking on Mike Tyson. I'm not sure what would happen.

What kind of a comment do you have to that? Is that really competitive forces or is that just the unfairness of one big guy and one small guy, which you then call “competition”?

There's one other thing about capital I want to mention. A gentlemen here was saying that capital is created by the private sector. I think workers also create capital in terms of the men and women going out there and working. It's not just the private sector and private enterprise that create capital. It's a combination of small business and bigger business and the workers themselves, because without the workers, you wouldn't have any productivity.

Mr. Walter Robinson: A couple of points very quickly, Mr. Nystrom. With respect to the “Asian contagion”, the international collapse, I'm not going to blame that solely on markets. I'm going to blame that on very fraudulent regulatory regimes in certain of the areas that we've seen around the world. We've benefited that you, as custodians in this committee and parliamentarians, have ensured that the regulations exist so that hopefully those things will not happen here, or mitigated against the risk for that.

With respect to taking on Mike Tyson, I would call on Mr. Brison's comments: I would cover my ears. That's the first thing I would do so that he wouldn't bite me.

The other question was on the industry. Again, what we're seeing in terms of the concentration of the banking industry, as MacKay has articulated in his report, is that, yes, you have a move to global behemoths, if you wish to call them that. There's no doubt I agree with you with respect to the concentration of the banking industry in this country—

Mr. Lorne Nystrom: My last question was on the fairness, or lack thereof, of the banks in the insurance companies'—

Mr. Walter Robinson: But we've seen that there is a simultaneous move toward conglomeration and global entities that have a far reach in terms of competitive pressures. The fact that individuals can still compete successfully in using technology is the paradox of power, as John Naisbitt says. The smaller you get, the bigger your reach is.

We have a disaggregation of niche players and sector companies. An example is Netscape—it's from another industry, but it's parallel—in terms of a small start-up that took on Microsoft and won. There are examples there.

There are examples of individual small niche funds who can take on the banks and offer more directed products. For example, for some of the environmental funds, their profits from returns are magnificent. Those funds are very small operations, yet they compete successfully for investor dollars against a comparable product offering that a bank might throw at you, or another larger mutual fund dealer.

• 1035

So in terms of the technology, consumer demand has made some of this equilibrium a little closer so that people can play. I err on the side of letting the people play and compete. I think they'll do well, and workers will do well.

Mr. Lorne Nystrom: So you think, then, the insurance industry is suffering from an inferiority complex that they can't compete.

Mr. Walter Robinson: Those would be your words, not mine. I think in the insurance industry, in terms of the examples of products that are available to me for property and casualty, for life, for savings instruments, there is a great deal there. Indeed, for mortgages we look to insurance companies for our mortgage more so than we look to banks, on a personal level, because the product was better. I think they can compete, and they will.

Mr. Lorne Nystrom: You're being very political in your answers. I'll try another way, then.

Do you think the insurance industry is misguided that they can't compete, then? Because they're very concerned about this recommendation. They call us and say, look, this is a non-level playing field.

Mr. Walter Robinson: I think the insurance industry has to defend its turf the best it can. That's their job. Again, I'm not an expert on the insurance industry, but given the product offerings I've seen from personal choice, as a consumer, I think they can compete.

Mr. Lorne Nystrom: Thank you.

The Chairman: Thank you. Ms. Redman.

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

I'd like to thank each of you for very thoughtful presentations.

I would direct my question to Mr. Robinson. It actually has a similar theme. It's the fear we hear from the auto leasing people as well as insurance that banks may come in, and in the short run there will be more competition, but in the long run, if they skim the cream off of the sector, or the easy to—and this is aside from whether or not they're using their information base, because I think the MacKay task force deals with that very well—then competition may be eliminated. For instance, the insurance sector will be left servicing the higher-cost people who are hard to serve and more expensive.

The question I would ask you is whether there is a role for government regulation to play in that concern. Is that even appropriate, or is that something that as a regulatory body anybody should address?

Mr. Walter Robinson: As I think I articulated in my presentation, a variety of public policy focus bodies already play that role. There is the Competition Bureau, the OSFI approvals, there is the minister's approval, which under law he has to give to the mergers, hopefully keeping those sorts of competition interests in mind. The role of your committee does that as well.

So I think those vehicles are already there. I see no problems with that in terms of the government setting the rules of the marketplace. Again, if you will look back to my comments, the problem I had was when government not only sets the rules but is also an active player in the marketplace.

Mrs. Karen Redman: Good. Thank you.

The Chairman: Mr. Kemball.

Mr. Peter Kemball: I'd like to comment on that. I believe it's very important for legislators to understand thoroughly that a whole bunch of little rules can tilt a playing field, to use that analogy. I would say that over the past 50 or 100 years, the banks have been very skilful in co-opting many of our governments in the past to get the rules in their favour.

I mentioned the SBLA. That's a good example. There are others. To the extent that as you review the future of the financial services sector you always ask the question, “Are we inadvertently tilting the rules?”, it's very important, because that would underscore realistic concerns on the part of others. If the rules aren't tilted, then I agree with Mr. Robinson.

The Chairman: Mr. Discepola.

Mr. Nick Discepola: I am a bit perturbed by some of the comments of the presenters.

Mr. Robinson, your position shocks me. Frankly, it's not the Canadian Taxpayers Federation that I've known over the past four or five years.

I don't want to put words in your mouth, as Mr. Nystrom tried to do. I'll ask you outright: You are in favour of bank mergers, are you not?

Mr. Walter Robinson: In terms of the bank merger issue, I would agree with MacKay that it should be assessed by an individual—

Mr. Nick Discepola: Just a simple yes or no.

Mr. Walter Robinson: At the end of the day, if two private, legal, taxpaying firms wish to marry, again, public policy should not second-guess business strategy.

Mr. Nick Discepola: Can you answer my question now?

Mr. Walter Robinson: In that sense, yes.

Mr. Nick Discepola: So you are in favour.

According to your brief, we should allow the banks to not only lend money to small businesses but we should now let them get into the insurance business, leasing businesses, auto leasing, the brokerage, and worse. We should prevent the Minister of Finance—or indirectly, the government—from even seeking assurances with respect to levels of employment or levels of services.

Why don't we just give them a carte blanche? Go ahead; displace the 30,000 employees. Go ahead; displace all the small brokerage firms and the small businesses across country. Go ahead; close all the branches in my small, rural communities. I have nothing to say in it, sir.

• 1040

Carte blanche—is that what you're saying?

Mr. Walter Robinson: To very quickly answer the question—I know you have an important vote to take—in terms of the carte blanche issue, we've seen it in this city, if I could speak to the experience Mr. Potechin has had.

I think it would be very incongruous for the government to seek assurances with respect to employment guarantees when this government and members of Parliament who sit in your caucus, Mr. Discepola, who promised in the 1993 campaign that they would not touch a public service job in this city, turned around and laid off 45,000 men and women across this country. So I'm asking for a little consistency in that.

Indeed, I believe to seek those employment insurances...and even the MacKay report seeking sanctions for fines and penalties. So you're going to put Mr. Cleghorn or Mr. Barrett in jail, or you're going to fine them millions of dollars. Is that going to make those jobs come back? No.

What I'm saying is, make sure you have the regulatory climate.... The government, to its credit, has done that in past budgets by allowing people to withdraw out of their RRSPs for retraining initiatives. Job losses will happen. Am I callous about it? No. Layoffs of 5,000, 10,000 or 15,000 means 15,000 unemployed families. I'm very cognizant of that fact. But I would ask that the government not take the moral high ground on this issue when its record has been less than stellar in the same types of guarantees and job assurances. We've seen from this government that those assurances were pointless.

That's my point.

Mr. Nick Discepola: So we should blindly allow them to merge, no conditions. Is that what you're saying?

Mr. Walter Robinson: No, that's not what I'm saying. If you look at the context, I think some of the good things in MacKay's report show up in terms of the expanded role of the Office of Superintendent of Financial Institutions to set the rules—in response to Mrs. Redman's question—and to be a regulator in the marketplace as opposed to a player. I've answered those questions very clearly, and on the record. But we've already seen as well, despite the government's broken promises in this community in which I live, a great resiliency of the workforce to be taken up into the knowledge-based industries in Kanata and in the west end, into the tourism-based industries in this country, into the emerging life sciences industries in this community.

So on the resilience of the Canadian workforce, I believe I gave it some credit to bounce back from those layoffs, which will happen. It's not just the banks who are going to say, oh, today we're going to merge and lay off 15,000 people. It's you and I through our consumer choices, going to the bank machine, cutting out the branch network and looking for other choices, that are also driving some of those job losses.

Mr. Nick Discepola: But one of your responsibilities—

The Chairman: I'm sorry, but I have to interrupt you. We're going to go and vote, and then we'll be back.

I have to suspend the meeting.

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The Chairman: Order. We'll continue with some questions.

We'll begin with Mr. Discepola and then we'll have a final questioner in Mr. Brison.

Mr. Discepola.

Mr. Nick Discepola: Thank you, Mr. Chair.

I'd like to briefly touch on the concept of competition versus concentration. One of the preoccupations I have is that tomorrow morning I would gladly approve the bank merger if I was assured that there'd be more competition. But contrary to your position, Mr. Robinson, or even Mr. MacKay's position—he's clearly stated that we should allow banks to get into insurance, which allows banks to get into leasing—I can't see how I as a consumer, now having a choice among six banks versus three or maybe four, having a choice amongst all kinds of small brokerage for leasing services, etc., with banks being allowed to to merge and get into all those businesses, will have, to quote from your presentation, “greater choice and lower prices”.

I've asked the banks, I've asked the presidents of corporations of the banks, to tell me how Canadians would benefit. None of them has come out clearly and stated that through the economies of scale or whatever they are going to pass on the savings to consumers. They haven't said that. They could've said that, but they haven't.

So I have that as a question.

Mr. Potechin, I believe you said in your brief that you'd like to allow more competition to allow the banks to compete globally. Could you tell me how the banks are hindered? What regulation hinders them from participating in global transactions? Do you know of any transactions the banks have lost because they weren't big enough to do them?

Mr. Leonard Potechin: Sure. They can't compete because they don't have the wherewithal to compete globally. The only bank that I see offshore is the Bank of Nova Scotia.

Mr. Nick Discepola: And it's competing very well and being very successful, sir.

Mr. Leonard Potechin: In a small way, but I don't see them as leaders of any consortiums on large projects. With the high-tech industry and the amount of money that I see needed in the high-tech industry, I think that becomes a problem.

Mr. Nick Discepola: In questioning to some of the chairmen of the banks through the Liberal task force during the summer, the bank chairmen themselves have stated clearly that they have not lost a merger yet. They are able to pool their resources and consolidate in any offering that may be given there, but they haven't lost anything.

In a response on the technology, sir, when I started my business, not in 1962 but in 1976, I had to borrow $140,000 for a 64K computer with a five-megabyte disk. Today I can get that for about $1,000. So technology is not the issue here.

They have in the past pooled resources on technology joint ventures. For example, the banks were in payroll services but now are getting out of them because they're not profitable. The banks were in all kinds of fields.

So when they say that they have to merge to take advantage of technology, they don't. They can do that by outsourcing or they can do it by other avenues.

Mr. Leonard Potechin: I would set regulations, and that's your job. I'm not knowledgeable in international financing, but I do know that if you set proper regulations and allow business to function....

I liken it to what took place in this community in 1966 and 1974, when we weren't allowed to have a non-stop flight into the United States. That was in the transport regulations. All of a sudden, once we got the Open Skies agreement, we got 39 flights a day going into the United States from this community so that the people in this community can get to their markets. I could see the employment that was created by it.

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I'm saying, hey, I'm not concerned with the banks; I'm more concerned with government regulations, and I would like to see the government set regulations so that business can compete.

Mr. Nick Discepola: I asked you, though, what regulations you see that hinder banks from competing globally.

Mr. Leonard Potechin: Capital—they don't have enough.

Mr. Nick Discepola: The government can't set regulations for that, sir. They have to acquire the capital themselves.

Mr. Robinson on my other question on competition, please.

Mr. Leonard Potechin: But—

Mr. Walter Robinson: With respect to your questions on competition—

Mr. Nick Discepola: And concentration.

Mr. Walter Robinson: I understand that, but let's take one at a time.

With respect to the competition issue, MacKay, as I read it, highlights 49 separate recommendations with respect to competition, also dealing with concentration. In terms of looking at additional competition, the opening of the Canadian payment system for non-deposit-taking companies to participate in that system, the recommendation for an expanded role for Interac, which we all use on a daily basis: I think those things would increase choice. If I'm not mistaken, $10 million was the minimum required to start a bank, in theory.

On the foreign non-branch penetration, Mr. Potechin has argued, as a person who has greater net worth than I do with respect to his being pursued by credit card companies.... In the last week, I can count MBNA and Capital One each sending me, at one time, lovely $50,000-limit credit cards at 9% interest, something I don't need, and if they knew me, wouldn't give me anyway.

But those choices are there, and I think these things are there, the 49 recommendations that are in the report.

With respect to the concentration issue, as I answered to Mr. Nystrom, I agree that the concentration in our financial services sector is very high, and a cursory look at the Competition Bureau guidelines would indeed, perhaps, preclude the banks from merging, just looking at what the Competition Bureau laid out.

Again, I noted that in terms of access to credit, MacKay has rightly indicated that more people are going outside those traditional concentration areas for credit in terms of floating for money on the markets. Indeed, in the small business area, which is a concern I know you have spoken to in the past, I know, attending many of the MacKay task force committee meetings, there are other non-institutional lenders where the choices are there.

So I don't view the issue of choice as six institutions. In the premise to your question, you articulated probably 40 or 50 different areas where consumers can already go for access to financial services products.

The Chairman: Thank you, Mr. Discepola and Mr. Robinson.

Mr. Pillitteri, and then we'll go to Mr. Brison.

Mr. Gary Pillitteri (Niagara Falls, Lib.): I have a small question. We're talking about competition, and we always have reference to south of the border, possibly. Do you believe that south of the border banks have more red tape to go through than do Canadians? Do you think the banking system in the United States has more restriction or less restriction?

Mr. Walter Robinson: I am not an expert on the U.S. banking system. In terms of the regulatory regime, I know they are a bit different because there is a greater deal of state regulation within the U.S. banking system.

As I noted from the MacKay report, under the Community Reinvestment Act, for example, in the United States—

Mr. Gary Pillitteri: But the question was specific: Do they compete more or less?

Mr. Walter Robinson: I don't have enough information to answer that question.

Mr. Gary Pillitteri: Well, then, I'll answer it for you. They have more restrictions than Canadian banks.

Mr. Walter Robinson: That would be your opinion, sir, and I would take it as such.

Mr. Gary Pillitteri: No, that is fact, sir.

The Chairman: Okay, Mr. Pillitteri. Mr. Brison.

Mr. Scott Brison: Actually, in answer to Mr. Pillitteri's question, the ease of entry for U.S. banks is significantly greater than it is in Canada. The minimum capital requirements are actually less restrictive than they are in Canada.

That's one of the wealths of fact, but one of the issues that is addressed in the MacKay task force...and it's unfortunate that we have a MacKay report that deals holistically with a very complex public policy issue. Around this table we suffer from “merger-opia”, when we should be dealing with an entire restructuring and a set of policies designed to revolutionize, or evolutionize, an industry that is changing globally. We can't always let politics get in the way of public policy on these issues.

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Now, in terms of the changes in the payment system, which nobody has really discussed here—and they may not be aware—in the MacKay task force there are some very exciting recommendations relative to the payment systems and the entry of new banks. The idea that somebody or a group of people with $10-million worth of capital can start up a bank and compete and actually have a 10-year horizon of no taxes on capital is a fairly significant change.

One of the differences between raising money in the U.S. for business and raising money in Canada is that in the U.S., if you get turned down in Maine by the Bank of Bath, you can go to the Bank of Bangor. In Georgia, if you get turned down by the Bank of Snellville, you can go to the Bank of Loganville. In Canada, traditionally entrepreneurs have been denied that access to capital and that variety of choice.

How do you see that evolving, and do you see that representing a significant level of competition within the system if we in fact encourage and augment MacKay's recommendations for the start-ups of new banks?

Mr. Peter Kemball: I believe that by removing regulations that are in the way, as you're talking about, Mr. Brison, or making sure that a variety of players, whether or not they are deposit-taking institutions.... If that happens, there will be new entrants, because there is good business to be done, provided you are designed to do that business.

It is becoming, as we know, a fragmented business, with lots of niche marketing and demands. One of the demands from the small-business community is a good relationship with their bank manager, and a bank manager that stays around for a few years so you can build a relationship. I think that's one of the underlying themes that keeps coming up.

Well, you need to have an organization that doesn't, for other and perhaps valid reasons from another point of view, want to rotate people. You can be too darn cosy with your bank manager, too, and that leads to problems from the bank's point of view.

So you have to have other kinds of organizations that have higher tolerance for that type of thing because they're not regulated for other and valid reasons in public policy sense. I'm talking about commercial finance organizations, because their money would come from investors, for example.

So I believe what we will see over time—and much of this has been laid out in the testimony before the MacKay task force—is new entrants, some of whom will be banks. I expect a large insurance conglomerate like Power Financial will align itself with a bank, that we will have that kind of thing. They will compete. That's why the payments point is is so important. I expect there will be a whole new class of player and it becomes accepted. Some of them will be quite large and international, such as Finova. Others will be local and highly responsive to local conditions. They may or may not be deposit-taking institutions, but they will perform that crucial role of getting money from somewhere into the hands of the SMEs who want it. So that whole intermediation process is shifting all over the place.

Logically, looking at the MacKay report, you would think that some of the money market mutual funds would try to devise a way to get money into Government of Canada paper. Right now what they do is buy bonds.

There is another way to do that, by the way. If they're pushed for returns, they'll do it, and if the banks are being pushed, they'll figure it out first. I don't care who figures it out first, although I'd like to for my own competitive reasons, as Mr. Pillitteri points out to me.

The important thing, from a public policy view, is that it gets figured out and that the SMEs have a better chance at getting the right kind of money quickly, without hassle, without walking across fire or coal, etc. I'm not advocating charitable donations, by the way, but I believe that we can allow this sector to evolve, and that this is the essential thing to let happen over the next decade so that we don't get what I regard as the terrible score card McKinsey gave us, which is that the service is less-than-fair to fair. That isn't good enough for our SMEs, and that's what we want to change.

Does that address your question, Mr. Brison?

Mr. Scott Brison: If we can change the system and if we can ensure competition—and ensuring competition is a difficult thing to do, but I think we can put in place a lot of the MacKay recommendations, and in fact put them in place in an environment that will ensure competition—then I think that's a far better alternative than these guarantees.

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I have to concur with Mr. Robinson. I mean, I want to see jobs protected as well, and I want to see maximum employment as well, and I don't want to see branches closed—nobody wants to see any of that—but I have a concern, when you have 50% of Canadians directly or indirectly owning shares in banks, to a government regulatory system or punitive system.... For instance, if there were a downturn, and if the banks had troubles, and to maximize return they had to close branches, saying to Canadians who have invested heavily for their future and who are saving for retirement, etc., that we are going to minimize your returns and minimize your retirement fund because of this concept of Big Brother, who is going to protect all of us against the evil forces of the market, then I think that's naive. So I do concur somewhat with Mr. Robinson on that.

One issue of these new banks that I think is underestimated is the degree to which they can explore market niches and actually use their size to an advantage. Being a member of the fifth party, we have been exploring that option as well.

In any case, there is a market niche that is there. A few years ago, when there was a significant level of bank merger activity in the U.S., some of the smaller banks that resisted mergers marketed aggressively the fact that they were smaller and were more community based. I think we could see significant opportunities out there in these new banks in that sense as well.

The Chairman: Mr. Robinson.

Mr. Walter Robinson: I'd like to pick up on Mr. Brison's comments with respect to the thing that people have talked about in terms of bank mergers—that is, economies of scale. But a little-known line in MacKay's report is “economies of scope”, which is a relatively new term. It's where institutions have a relative size, speed, and flexibility to realize market needs and fill market niches much quicker than big, behemoth institutions can, regardless of their capital base, regardless of their size, regardless of their geographic reach and penetration.

That's the paradox of power in this whole argument, as MacKay rightly points out in his report. I would direct members of this committee back to the report, because he identifies those trends better than any of us here or than many of the people who have appeared before you in the hearings have articulated.

I'd just like to return to what Mr. Brison talked about in terms of these guarantees of certain employment levels. That's where a public policy decision, I think, would second-guess business strategy and the bank's responsibility as a private entity—I repeat, a private, incorporated entity—to its shareholders to reflect the discipline of the market and take appropriate decisions.

Again, I return to my response to Mr. Discepola. If the Government of Canada gives guarantees and then breaks them, and we have no redress for that, don't expect to impose that discipline on private entities in terms of—

Mr. Scott Brison: You're talking about the GST, free trade.

Mr. Walter Robinson: You can make all those points, if you wish.

Mr. Scott Brison: Sure. Okay.

Thank you.

The Chairman: Is that your final point, Mr. Brison?

Mr. Scott Brison: That's fine.

The Chairman: On behalf of the committee, I would like to thank you very much. We've certainly appreciated your comments. They've been extremely helpful.

I'm sorry for the delay we had, but we had to go and vote.

Thank you.

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We now have representatives here from the Canadian Association of Factors and Credit Insurers; the Canadian Automobile Dealers Association; the Quebec Dealers Association; and the Canadian Vehicle Manufacturers' Association. Welcome to everyone.

You're all veterans of the finance committee hearings. As you know, you have approximately 10 minutes to make your presentation, and thereafter we will engage you in a question and answer session.

We will begin with a representative from the Canadian Association of Factors and Credit Insurers, Mr. Mark Perna. Welcome.

Mr. Mark Perna (Chairman, Canadian Association of Factors and Credit Insurers): Good morning.

On behalf of Canada's factors, we appreciate the opportunity to present our views to the finance committee of the House of Commons.

I am chairman of the Canadian factors association and president of Accord Business Credit Inc. Accord is one of Canada's leading factoring companies.

With me today is Michael Teeter, our consultant and public affairs manager.

We appreciate the opportunity to talk to you about factoring, a financial services subsector that is poorly understood in Canada. We also wish to raise some important public policy matters and concerns not directly referenced in the main body of the MacKay report.

Our central public policy concern is this. In 1993 the Export Development Corporation Act was amended to allow the EDC to sell domestic credit insurance. This insurance is sold to Canadian exporters and manufacturers to ensure accounts receivable from Canadian retailers.

Domestic credit insurance has little to do with facilitating exports, yet it has now become part of the EDC offerings. EDC domestic credit insurance competes directly with the credit guarantee offerings of the Canadian factoring industry.

We cannot compete with the government's EDC. EDC as a government competitor in the Canadian domestic market is hurting our business and it is discouraging new investment in our business sector.

What is factoring? Our organization, the Canadian factors association, represents service factors and accounts receivable financiers across Canada.

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We service upwards of a thousand small and medium-sized enterprises, SMEs, that either manufacture or distribute products predominantly to retailers. Many of the clients we service also export their products.

Our members are non-bank financial service providers. A main part of our group, service factors, are generally contracted to act as the credit and collection department for their clients, with the important feature that the credit worthiness of the retailers being sold is guaranteed by the factor. If the retailer fails to pay, the factor makes good the debt to their clients. Other members specialize in accounts receivable lending along with credit and collection services, which may include accounts receivable guarantees as well.

Why is factoring important? Factoring services are sold directly to Canadian small and medium-sized business. The factors act as the accounts receivable department for Canadian manufacturers and technology companies. Professional management of this function in a small business improves cashflow management and reduces accounts receivable risk. Our guarantees on credit will ensure a more efficient use of existing bank credit lines.

Receivables are frequently the most important asset a business has. Additionally, factoring can provide quick cashflow through the outright purchase of accounts receivable, a service not offered by traditional Canadian banks. This type of asset-backed financing can be an important element in small business growth and expansion.

It should be noted that relative to the U.S. and Europe, Canada's factoring industry is very undeveloped. It is a fact that a more fully developed industry could greatly assist with SME service and financing needs. A competitive Canadian factoring industry brings to Canadian small business many innovative services and functions not provided by the EDC. Some of these are as follows.

One, accounts receivable management. Frequently this is a part of small business that is neglected and where professional help can be important to small business success.

Two, credit intelligence. Factors keep their clients fully informed about the credit worthiness of important customers. This information can be critical to financial stability and success.

Three, better and faster payment terms. A factor will ensure that accounts receivable are monitored and requests for payment are made early.

And finally, specialized financing. This includes the purchasing of accounts receivable, purchase order financing, and secured loans against accounts receivable.

As long as the EDC continues to compete with this important financial services subsector, small and medium-sized business will not enjoy the benefits of a highly competitive factoring industry.

My next topic is the MacKay report and our sector. We are pleased that the MacKay report focuses on community accountability and consumer and small business needs. We are also pleased that the report encourages competition to as great an extent as possible. These are important principles that we believe in.

At the same time, we are disappointed that our major concern as a sector is not mentioned in the body of the report. The terms of reference asked the task force to inquire into public policies affecting the financial services sector and make recommendations to enhance competition, innovation, etc.

While we know this subject matter is large and difficult, a public policy matter that is a key factor in reducing the growth and potential of Canada's factoring industry is the presence of Canada's Export Development Corporation as a government-owned competitor to Canada's factors and credit insurers.

The Export Development Corporation is a federal crown corporation that competes directly with Canadian factors and credit insurers. In 1993 the EDC was given government approval to offer additional services to exporters. One of the new services was domestic credit insurance, which was previously handled exclusively by the private sector.

In order to qualify for EDC's new domestic insurance program, the manufacturer had to have exports of $5 million or more, or at least 15% of total sales had to be exports. Partly because of EDC's success in promoting exports to small and medium-sized enterprises and partly because free trade requires that Canadian manufacturers export to survive and grow, the universe of companies meeting the 15% export rule has been ever-expanding since 1993.

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Actually, for the first couple of years, our business sector was not affected all that much by EDC's new domestic insurance capability. However, by mid-1995 EDC became noticeably active in the market as the clientele of both service factors and private sector credit insurers became increasingly aware of EDC's entry into domestic credit insurance.

The following were the predictable results of this market awareness. Firstly, EDC became a new competitor for domestic credit business. The service factors and credit insurers lost out to EDC on new business prospects that went to EDC for their domestic and export credit coverage. Secondly, even worse, some existing clientele of service factors and credit insurers discontinued their contracts or policies and took their domestic business to EDC for servicing. In this way, the EDC has hampered the growth and expansion of our non-bank financial services sector, namely the service factors and credit insurers.

I have recently told the senior management of EDC in person that service factors cannot compete with the EDC on credit coverage. One could ask, why not? The basic answer is contained in the body of the EDC's 1997 annual report. EDC's public policy role as they define it is to be an export maximizer, not a profit maximizer. As chairman of the Canadian Association of Factors and Credit Insurers, I would say that statement is totally accurate.

However, the translation of that statement in the competitive marketplace is this. The EDC on average grants more credit approvals than do private sector service providers. Also, to the EDC's credit, they have an efficient delivery system to their clients, and their marketing efforts are well funded and professional.

According to the Insurance Bureau of Canada, EDC pays no income or capital taxes, is reinsured by the government at no direct cost to the EDC, can borrow at preferred government rates, and faces no demands to earn a competitive rate of return for shareholders. The upshot of all this is that the EDC has a totally dominant market position for export credit services, much of this dedicated to insuring short-term receivables in the U.S. market. And the EDC position in the domestic market is increasing daily, at the expense of private sector factors and credit insurers.

Since the North American Free Trade Agreement came into effect, the service factors have expected substantial increases in their export business from clients and prospective clients. Our self-assessment is this: it hasn't happened. The business has increased, but it is nowhere near what it should be. While our import business from the U.S. has increased substantially, our export business has been blunted by EDC.

Regarding our export business, we are pleased to say there is room for cooperation between Canada's factors and the EDC. The factors can restructure their businesses to offer complementary services that do not compete with the EDC. Discussions between the factors and the EDC have gone well, and we are pleased with developments in the export business. We are encouraged that a joint factors-EDC export program may become a reality in the near future.

However, we cannot say the same thing about EDC's domestic credit insurance. Restructuring our business to accommodate the EDC's domestic offerings could seriously hamper our future economic viability.

In the domestic credit insurance market, the EDC is growing rapidly and is hurting our business. Despite the recent introduction of domestic credit insurance as a new product, EDC's philosophy with domestic credit insurance seems to mirror its stance on export insurance. True to its public policy purpose, EDC is a credit maximizer, consistently providing higher-risk credit coverage than can be supported by the private sector service factors and credit insurers.

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As we pointed out to the MacKay task force, this has resulted in significant insurance claims related to some high-profile retail bankruptcies in Canada. A copy of our detailed submission to the Minister for International Trade is available upon request.

EDC's involvement in domestic credit insurance has started to erode, and in our opinion will continue to erode, the client base of our private sector service providers.

The EDC claims some justification for its entry into domestic credit services. They argue that their clients want one-stop shopping, meaning they don't want to use two different service providers for their export and domestic accounts receivable. Their other point is that Canadian manufacturers asked the EDC to offer domestic coverage.

We think the real issue is plain and simple: generous credit coverage. If Canadian manufacturers think they can avail themselves of generous domestic credit coverage compared to that offered by the private sector, why wouldn't they want it and ask for it? People are always supportive of government services that bring direct monetary benefit to them.

So what is the downside of EDC's involvement in domestic credit coverage? There are three key areas: one, it hurts existing Canadian factors and credit insurers and inhibits their growth; two, it discourages new factors and credit insurers from entering the Canadian market; and three, it inhibits the growth of competitive and innovative factoring services for SMEs.

To our knowledge, Canada and Spain are the only governments in the world that offer domestic credit insurance. However, unlike Canada, the Spanish government's programs are nearly dormant, as the private sector factors and credit insurers control approximately 90% of Spain's domestic and export credit insurance market.

I would like to add parenthetically that in Canada, by our estimation, EDC controls about 70% of the domestic and export market, and that is counting the factors and credit insurers. EDC has approximately a 70% market share.

It is interesting to note that there are two large global networks of factoring companies: Factors Chain International, headquartered in the Netherlands; and International Factors Group, headquartered in Belgium. Both organizations are represented by service factors in Canada. The heads of these organizations and their members worldwide have watched with great curiosity EDC's entry into domestic credit.

Canada unfortunately is an aberration on the world stage. While other industrialized countries have privatized their short-term export insurance programs, Canada has gone in the opposite direction, not only maintaining its short-term export business, but expanding into domestic coverage as well. Canada has become quite unique, but for the wrong reasons. The collective impression of these global organizations is that Canada is actively discouraging private sector competition.

Two years ago an executive of the EDC asked me if I knew of any service factoring companies that were about to open up in Canada. I remember that my answer went something like this: “No. No one new is setting up shop here. Who in their right mind would want to open a service factoring operation in Canada knowing that they would have to compete against the government through EDC, not only in export credit, but for some domestic business as well?” I believe strongly in what I said two years ago, and I would have to give the same answer today to that question.

During the past 20 years our industry has weathered two serious recessions. Like many industries, service factors came under strong pressure to merge with others or sell out completely as a response to tough economic times. The number of service factors in Canada—three—is now at an all-time low for the past 30 years.

At this stage of the business cycle, new service factors should be coming on the scene, but they're not. We think a key reason is that, coincident with the latest consumer recession ending in 1995, EDC's domestic credit program started gathering momentum, and this has given a chill to potential new entrants. I say again: they are not coming.

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Our views today are the same as they were over two years ago, when we commenced our efforts to convince the federal government that the EDC was hurting our business and that the EDC practices should be changed.

We see no public policy justification for the EDC being in the domestic credit insurance business. What does insuring receivables from The Bay, Eaton's, Sears, Canadian Tire, and other Canadian retailers have to do with facilitating Canadian exports? What justification is there for the federal government to promote services that serve to discourage private sector competition and the provision of innovative financial services to Canadian small business? The EDC, as a government corporation, should be working with Canadian factors, not against them.

The most important offering of a Canadian factor in the domestic market is credit guarantees. This part of our business competes directly with EDC's domestic credit insurance. The EDC has no business being in the business of domestic credit insurance. We would like the government to instruct the EDC to discontinue its domestic offerings.

Thank you, and I look forward to your questions and dialogue on the issues.

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

We'll now hear from the Canadian Automobile Dealers Association, Monsieur Gérald Drolet.

Welcome.

Mr. Gérald Drolet (President, Canadian Automobile Dealers Association): Thank you, Chairman.

Good morning. I know it might not be easy for you to concentrate after what you have heard all day, but I'll try to make it clear. Please be indulgent, because my English is not as good Mark's is. I'll try to do my best.

My name is Gérald Drolet and I am the owner of Automobiles Plymouth Chrysler of Laval Ltée. I'm also the current president of the Quebec Automobile Dealers Association and an executive member of the Canadian Automobile Dealers National Committee on Leasing.

On behalf of the over 3,700 dealers in communities across Canada and their over 115,000 employees, I would like to thank you for the opportunity to address your committee.

There is little doubt that the work of the MacKay task force will have a great impact on the future shape of the Canadian financial services sector. Indeed the entire goal of the mandate of the task force was to develop a vision for the financial services sector for the coming century.

The problem for automobile dealers and our employees is that this vision for bank greatness did not take into account what is good for the entire range of Canadian interests. In sum, MacKay is all about a vision of what is good for the banks. It is not about what is good for small business, not about what is good for small communities, not about what is good for the auto industry, and not about what is good for consumers in the long run.

I'm not here to blindly criticize the MacKay report—that would be wrong and misdirected—but I need to point out that the task force was established at the request of the banks and from the outset focused on the needs of the banks. The banks set the agenda. Indeed the fact that most of the senior research team were former bank employees was quite logical, as the report was focusing on bank issues.

What would not be logical, however, would be to take the task force's recommendations on auto leasing and treat them as if they came from an independent, unbiased viewpoint, when in fact they come clearly from a pro-bank perspective that argues that our banks should be allowed into every business they want to get into.

This is where the important role of your committee comes into play. It is our sincere hope that the House of Commons will not focus simply on the banks' agenda, but instead on the broader impacts on all sectors of Canadian society.

Having said that, let me respond to where I think the MacKay report made some mistakes.

The thrust of the MacKay report is consumer-oriented. That is brilliant. Who can beat up the consumer and get away with it? No one. I won't stand for it, and definitely you won't stand for it either. However, let's undress the wolf and reveal it for what it really is.

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The MacKay report relies heavily on U.S. market comparisons, saying that bank entry into leasing in those markets has worked, so why can't it work here? Well, the last time I checked, we were not in the United States of America, and thank God.

Clear-cut examples of the differences between the Canadian and U.S. banking sectors make lease market comparisons misdirected. First, far greater banking choices are available to American dealers than in Canada—over 10,000 banks. Second, Canadian banks have unprecedented control over domestic financial services. Finally, the Canadian vehicle lease market has a far greater percentage of dealer-owned independent lease companies financed by the banks than does the United States—like my own.

The MacKay report also makes the argument that caisses populaires in Quebec lease vehicles directly, so why can't banks? That is untrue. In fact in Quebec the caisses populaires have a written agreement with the dealership community not to lease directly. This is because they understand the conflict of interest position and therefore seek to be partners with small businesses, not competitors.

The MacKay report seems to go to great lengths to criticize the manufacturers' finance arms as foreign companies. What the report does not mention, though, is that companies such as Chrysler Credit have played a crucial role in financial support for dealers throughout all economic cycles, whereas the banks have traditionally abandoned dealers during economic downturns. The auto companies are less likely to let good dealers fail in tough times, when the banks are not there. This means they save thousands of jobs when the going gets tough. They don't pull the plug.

Without healthy affiliate finance companies, dealers will again experience denials from banks during economic downturns, as the banks move to minimize short-term financial exposure rather than providing long-term support to the automotive sales and distribution process.

The MacKay report stated that they did not hear from the Consumers' Association on the issue of leasing. That's funny, because during the last Bank Act review, the president of the Consumers' Association of Canada stated:

Normally, we'd say hey, a new competitor, that is great. But we took a look at both sides of the issue and found that there would be a long-term risk of letting them in.

Let me ask all MPs around the table, how many of you have been approached by your constituents, demanding that banks lease cars? Have you felt any public pressure to let banks expand their powers? I don't think so.

On page 107 of their paper on leasing, the task force argues that if banks go into leasing, competition is so strong that they won't dominate the market. Tough luck. The bottom line is that the banks, with their size and deep pockets, have the power to dominate the market, and consumers will pay in the end.

Similarly, the task force is dead wrong to say, as they do on page 108, that factory leasing programs, rather than dealers, will be the hardest hit. Let me tell you, dealer leasing companies will be starved for credit on one hand and undercut on the other hand as the banks buy short-term market share. Independent dealer leasing companies like mine will be the first ones to go.

Finally, let me state for the record why I think the banks really want into the leasing business. The banks want the tax benefit of the capital cost allowance so that they can shield billions of dollars of their excessive profits from taxation. That's it; it's that simple.

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The CCA tax benefit is currently distributed across Canada as thousands of dealers use CCA to reinvest in their businesses. The role that CCA tax saving plays in allowing small businesses to reinvest in their continued growth is significant. By giving the banks the right to lease directly, the federal government would be taxing this ability to reinvest in small business and transferring it to the banks' ability to shield from taxation approximately $3 billion in profits.

I think consumers are happy with the way things are. At least my customers are. Even a study by Goldfarb found that most consumers would lease again and that the process they went through was simple and straightforward.

Even the U.S. magazine Consumer Reports, in their December 1997 issue, stated, “Canadian consumers enjoy clear advantages over their U.S. counterparts in terms of lease disclosure.” We promised you lease disclosure contracts; you have them. The MacKay report did not mention this. I wonder why.

Besides the reasons I have already mentioned, auto dealers are against letting the banks into leasing for the following reasons.

First, bank entry into leasing will cost real Canadians thousands of jobs in communities across Canada. This is a straight exchange for higher banking profits.

Second, banks already enjoy a significant piece of our business, including up to 50% of the auto leasing business. Banks should be working with, not against, the interests of car dealers. Let the banks do leasing the way the Bank of Nova Scotia does, the way the National Bank does, the way the Canadian Imperial Bank of Commerce does: through the dealers.

Third, the banks have access to our most confidential information, including current lease portfolios, customer renewal dates, and lease payment information. To let them compete with small business would create a serious conflict of interest.

Fourth, dealers are required to maintain showrooms and service facilities. The banks will not be required to make any further investment in the community. They will not construct dealerships and create employment.

Fifth, banks in leasing is not about equipping banks for global competition. It is part of their objective of total vertical integration into the domestic market. There must be more, not less, diversification in the financial decision-making process in Canada, and less dominance by financial institutions in the domestic marketplace.

Sixth, banks were created, developed, and backed by the government to help small businesses grow and create jobs, not to compete with them.

In closing, I want to remind you of who I am. I am a small independent business person employing 68 Canadians by serving my customers to the best of my ability. I am the business person who already competes with 212 other dealers in the Montreal area alone. I am the business person who does care about the consumer, because my business depends on it.

Presently I am spending $3.2 million to be able to compete properly and serve my customers better. Where do I get the money? From the bank.

I am the business person who belongs to an industry that in 1997 contributed approximately $25 million to local charities and community organizations. And I am the business person who is deeply concerned about the threat of five banks putting me and my employees out of business.

To prohibit the banks from consuming more power is to protect jobs in your communities, is to protect consumers from less choice, is to protect strong and healthy competition, and is to protect the livelihood of small independent business people.

Thank you.

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

We now go to the Canadian Vehicle Manufacturers' Association, Messrs. Mark Nantais, Peter Andrew, and Michael Sheridan.

Welcome.

Mr. Mark Nantais (President, Canadian Vehicle Manufacturers' Association): Thank you, Mr. Chairman.

I must say I'm rather humbled to follow such a strong submission by Mr. Drolet, but I'm pleased to be here to express to you our position on behalf of all members of the Canadian Vehicle Manufacturers' Association. I'd certainly like to thank the committee for this opportunity to talk about the MacKay task force report.

With me today, as you know, are Mr. Peter Andrew, who's the director of operations from the General Motors Acceptance Corporation of Canada; and Mr. Michael Sheridan, who is director of government relations with Ford Motor Company of Canada.

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Let me begin by saying that the MacKay report is voluminous and far-reaching, but we are really here today because of one recommendation: the recommendation that will, if accepted, allow banks into the direct vehicle leasing business through their branch offices. This recommendation will, if it is accepted, dramatically and negatively impact on the automotive industry in Canada. But more important, this recommendation will not achieve the intended objective of providing the consumer with greater choice and lower prices in the vehicle leasing marketplace.

I would like to draw your attention to a particular quote that summarizes our concerns very well. It's from Walter Stewart's 1997 book entitled Bank Heist:

In the end, if there was anything we could learn from our history, it was that banks were not to be trusted to regulate themselves, and that the most dangerous situation we could have was to allow bankers to venture into other businesses, where they could, and would, use the funds left with them by depositors, and those manufactured on site, to gamble in areas of the economy where they had clout without competence.

Having said that, let me quickly make a few remarks about this recommendation, which we think will have a very negative impact.

As noted, the task force report recommended that banks be allowed to enter vehicle leasing at the branch level. This formal recommendation, however, assumes that bank entry into vehicle leasing will increase competition, increase consumer choice, and as a result reduce prices to consumers.

From our perspective, the task force report is remiss in that it does not consider the impact of its recommendations on other sectors beyond the financial services sector. Additionally, it would appear that the task force has not appreciated the significant difference between leasing and lending.

A further shortcoming is the short-term scope—a one- to two-year timeframe—of the recommendations in the report. This, as we shall see, is very important when looking at the future of the automotive leasing market, which could potentially be dominated by the banks.

The task force has also failed to reference the cost-of-funds advantage enjoyed by the banks, which I will refer to in a few moments. It also suggests that lease market entry is easy and barrier-free, which is simply not the case.

While we agree that Canada needs a strong and competitive financial services sector, we would also suggest that it is an equally important public policy consideration to ensure that other key sectors of the economy, such as the automotive sector, are not adversely affected by the recommendations of the task force.

Simply put, our position is that bank entry into vehicle leasing will lead to increased bank financial service concentration, reduced competition in the leasing market, increased prices for vehicle leases, and decreased customer satisfaction for automotive consumers. An entry into vehicle leasing will adversely impact on local dealerships and the Canadian automotive industry, and it will damage the consumer's perception of the integrity of leasing as a viable alternative to vehicle purchasing.

The related automotive finance companies exist to support the distribution channel throughout the economic cycle. While most recognize that finance companies assist the dealer in marketing leases and often provide rate support with the manufacturer to make leasing more affordable to consumers, many are not aware that the finance companies also provide a number of significant services to the dealers. These services include mortgage financing, equipment financing, loans, and wholesale financing.

These services are often provided because banks have neither the interest in providing them nor the same consistent purpose that the dealers, manufacturers, and finance companies have in keeping the dealer network viable and updated in order to facilitate the sale and servicing of vehicles.

Let me briefly turn now to the slide entitled “The Tilted Playing Field”.

While competition clearly exists in the automotive leasing industry, we remain concerned that bank entry into the industry will largely reduce the competitive environment due to the banks' cost-of-funds advantage.

The cost-of-funds advantage arises due to the fact that banks will utilize consumer deposits, upon which they pay very nominal interest, to compete in the automotive leasing business, where their competitors must raise funds in the capital markets by floating paper. The difference between the cost at which the banks obtain their funds and the cost at which finance companies obtain their funds is about 300 to 400 basis points.

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It remains clear that bank entry into vehicle leasing is likely to decrease rather than increase competition in the leasing industry, due to ability of the banks to use low-cost depositors' funds to obtain an unearned competitive advantage in the leasing marketplace.

The argument has been made that bank entry into vehicle leasing will provide greater competition and increased choice for consumers leasing vehicles. The CVMA contends that the leasing marketplace is already highly competitive, with 10 manufacturers' finance companies, 18 large independent finance companies, and 1,300 dealers with their own lease portfolios.

In addition, DesRosiers Automotive Consultants note in their background report to the task force, on the subject of extending bank powers to include light vehicle leasing, that competition in retail leasing was intensifying due to the growing presence of bank-administered indirect lease products and the increasing focus of the independent finance companies on retail leasing. While automotive retail leasing is a niche market for banks, it represents a market of great significance for the auto industry, given that 45% of retail transactions are currently leases.

Canadian consumers have seen little increase in their disposable incomes over the course of the last seven years, and as such have been inclined to delay the purchase of new vehicles. Leasing has grown to represent a large component of the retail sales volume in a relatively short time, as the automotive industry moved to address the affordability problem with the widespread introduction of leasing.

Leasing has contributed to the sales growth observed over the course of the last two years, and without it, production at assembly plants and employment at smaller-volume dealers would likely have been adversely affected.

What about bank entry into vehicle leasing on the consumer side? As stated earlier, the current automotive leasing market in Canada is extremely competitive, with the current players competing very aggressively for the automotive customer. The result is that the Canadian customer today enjoys lower lease payments than consumers in most other markets in the world, including the United States.

In addition to lower lease payments, Canadian automotive consumers enjoy a high level of customer service at their local dealerships and in their dealings with the automotive manufacturer and its affiliated finance company.

In the short term, with bank entry into vehicle leasing, banks will tend to pass on some of their legislated cost-of-funds advantage to the customer in order to buy market share. This will result in short-term benefit to consumers by way of lower lease rates.

In the medium term, however, the aggressive strategy used by the banks to enter the market may force manufacturers' finance companies and individual dealer leasing companies to exit the market. With the resulting increased concentration and reduced competition in the leasing market, banks will have created an environment conducive to increased prices and tied selling, to the detriment of the Canadian consumer.

Vehicle leasing is an extremely risky and cyclical business. In the longer term, banks will recognize this as they come to grips with mismanaged residual values and significant lease-end exposure. Experience in the United States has shown that banks have attempted to minimize their residual losses by offloading the risk onto the consumer at lease end.

In the face of sustained residual losses and the detailed work associated with vehicle asset management, banks may well abandon the leasing marketplace. These actions by banks will damage the leasing experience for the consumer and reduce the chance that the consumer will lease a vehicle again.

Ultimately the stable and vital automotive leasing business is being threatened by banks, which are merely looking to use leasing as a loss leader to acquire a new customer list from which to solicit additional financial service products.

On this topic, I draw your attention to another quote:

...we did find out that the car loans were a great loss leader for other products that we offer in the Canadian branches, things like mortgages, deposits, investment products, credit and debit cards.... Because our approach is now more to relationship banking to build our customer base with potential for cross-selling, our strategy, therefore, is not only to actively pursue the indirect auto market but at the same time take aim at any other indirect market that is available today.

That is a quote from James O'Donnell, senior vice-president of the Bank of Nova Scotia, in his speech to the U.S. Consumer Bankers Association in March 1994.

What about the dealer impact? The recommendation of the task force will also adversely affect local small business dealers in communities right across Canada. While the MacKay task force notes that there are only 45 dealer-owned leasing companies that lease more than 200 vehicles a year, it appears to discount the 1,255 other dealers that have lease fleets of between 25 and 200 units, which would likely be lost with the bank entry into vehicle leasing. With the average dealer selling approximately 300 units per year, this smaller volume of in-house leasing represents about 10% of a dealer's sales volume.

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Additionally, if banks are allowed to lease vehicles directly from their branches, the profit of the lease transaction will reside with the bank, not the automobile dealer, who requires sufficient profit to maintain dealer sales and service operations.

The dealer will also feel the effect of bank entry into vehicle leasing because their manufacturer's finance company will be marginalized by the bank in retail leasing. This is likely to result in increased costs to the dealers for some of the alternative financing provided by the finance companies, which will force dealers to look elsewhere for financing or pass along that cost increase to consumers in the form of higher prices.

To the extent that the auto industry relies on leasing for almost half of its sales, if these volumes are shifted to the banks, the viability of many of these dealers in communities is indeed threatened.

To summarize, the CVMA and the automotive industry believe that bank entry into automobile leasing should remain a prohibited activity under the Bank Act to ensure lease market competitiveness and consumer choice, to ensure automotive consumer satisfaction, and to avoid adversely impacting the automotive industry, especially the local dealers and ultimately the consumers who reside in their communities.

I thank you.

The Chairman: Thank you very much, Mr. Nantais. Now we'll go to the question-and-answer session.

Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you very much.

What we have here today, as I observe it, is competition between private business and big government on both fronts. We got that from Accord Business Credit Inc., and we certainly have it from the leasing companies here.

My first question to Mr. Perna has to do with the Export Development Corporation.

Are you aware of EDC's financial statements? Do they post a profit or a loss on behalf of the taxpayers?

Mr. Mark Perna: It depends what year you look at. I would say that over the last five years they have either posted losses or broken even, but in the last one or two years, that performance has indeed gone into a profitable situation. They're making money now, with the improved economy, etc.

Mr. Ken Epp: Okay, so what you're saying then is that initially the taxpayers subsidized that operation, but now we are actually, as taxpayers, getting money back from them?

Mr. Mark Perna: Yes, but at whose expense? That's what I would say to that.

You've really touched on the issue here. To a certain extent, we all, as citizens, want the EDC to pay their own way, and perhaps this was one of the reasons they were granted some extra powers in 1993. But what's happening is, in order to become more profitable, it seems they are infringing more and more on the private sector providers such as our industry.

Mr. Ken Epp: Quite obviously, for you to remain in business, you are able to sell insurance, and in the insurance that you sell to businesses, your losses are less than your profits, your operating expenses, your taxes, and everything else. Is that true?

Mr. Mark Perna: In our factoring business, yes, that's true. I would say that as an industry we are profitable. I can speak for my own company in that regard, yes.

Mr. Ken Epp: And has the EDC significantly undercut your rates?

Mr. Mark Perna: The EDC generally does not undercut rates, but I'd like to add something to that, because this is a very important point, and this is where people in some ways get misled.

If I said to you that they were undercutting rates, you would say, “Aha! That is inherently unfair.” What the EDC does is every bit as onerous as cutting rates. They will give credit approvals and credit guarantees in situations that are outside the yardsticks of the private sector, and that definitely impacts on my business.

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Our company has lost business to the Export Development Corporation for coverage on domestic accounts receivable, not exports.

Mr. Ken Epp: Okay. You mentioned something about the percentage. I think it was around 15% of their insurance. No, I don't remember what the 15% was.

Mr. Mark Perna: The 15% is this. In order for a company to take advantage of the EDC's domestic program, either they have to have $5 million in exports or 15% of their sales must be in exports.

Mr. Ken Epp: Okay, right. So then my question is, what percentage of the EDC's insurance-granting now is actually domestic as opposed to export?

Mr. Mark Perna: If you confine it to their short-term business, I don't know exactly offhand. I would say it's in the area of 15% to 20% or something of that nature, and growing. After all, it is a relatively new service and has really gathered momentum in the last three years—not the last five years.

Mr. Michael Teeter (Director, Industry Government Relations Group, Canadian Association of Factors and Credit Insurers): Their North American business is about 60% of their short-term operation. So Canada and the U.S. together represent about 60% of their short-term credit insurance.

Mr. Ken Epp: Thank you.

Your recommendation in terms of the MacKay report is simply tied into this one issue, then: you want the financial services sector to so arrange things that the EDC concentrates on exports, end of matter?

Mr. Mark Perna: Basically that's correct. We did appear before the MacKay commission, and that's what we postulated to them.

Mr. Ken Epp: And they ignored you?

Mr. Mark Perna: Well, they knew there were other forums where that issue would be discussed, so I don't want to be critical that they didn't include it in the report, but yes.

To answer your question directly, it's a pretty simple issue. The EDC relatively recently has been allowed to get into domestic credit. That had implications that perhaps the people who allowed that to happen didn't foresee, but now that we are going through the experience, I can tell you it's unpleasant.

Mr. Michael Teeter: Can I jump in here too? We were very disappointed that the whole notion of asset-backed financing was really not dealt with in the MacKay report, whether it be receivables or any other type of asset-backed financing.

If you look at these kinds of providers as a different type of financial service institution that can serve small business, I think you'll recognize the potential this sector has of serving Canada. All you have to do is look to the experience of Europe and see that factors represent a major part of the financial institution sector in that economy. Often they reduce the need for bank financing too.

So in terms of the principles that were omitted from the MacKay report, if they had spent more time and attention on the potential for this sector, they would have seen that the EDC is a great impediment to its growth and its ability to serve small business.

Mr. Ken Epp: Okay.

I'm going to ask you a question that I will permit you to decline to answer if it's, shall we say, sensitive to the business, okay? I'd like to know what your rate of payout is. If somebody is exporting to some foreign country—I won't name the country lest I get into political incorrectness here—and you guarantee that they will be paid for their exports, what is your rate of payout versus the premiums you collect for that insurance?

Mr. Mark Perna: Well, the answer is a little complicated, because in the factoring industry, we don't charge a premium; we charge a fee on the sale.

Mr. Ken Epp: Oh, okay.

Mr. Mark Perna: And other services are bundled with that, such as collections and record-keeping, so I would have to strip away part of that to get to a pure insurance rate, if you will. If I did that—and this is going to be a guestimate—I would say that on a historical basis, you would be looking at something like a 25% to 30% payout. Again, that's for the factoring industry, not the insurance industry.

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The Chairman: This will be your final question, Mr. Epp.

Mr. Ken Epp: I've only had seven minutes yet.

The Chairman: Go ahead.

Mr. Ken Epp: Okay. I wanted to ask the other guys.... Well, anyway, you distracted me.

Do you do a better job or a worse job than EDC in actually checking out foreign firms or individuals who are buying exports, before you enter into the agreement?

Mr. Mark Perna: Let me understand the question. You're asking whether we do a better job or a worse job than EDC on foreign, not domestic?

Mr. Ken Epp: I'm talking foreign now; I'm talking export. I presume that before a business would sign a contract to export to someone in another country, they would have a reasonable assurance they will in fact be paid for that.

Mr. Mark Perna: Yes.

Mr. Ken Epp: Not like the Wheat Board selling grain across the world. I'm talking about the smaller businesses. Do you do performance checks on those companies beforehand?

Mr. Mark Perna: Yes.

Mr. Ken Epp: Are you better at that process than EDC? I'm giving you a chance here to....

Mr. Mark Perna: I'm going to answer that in two ways. We would perhaps check it more carefully. However, from the customer's standpoint, I think they would say EDC does a better job, because the customer doesn't care how carefully we check. They just want to know whether they have the credit or not. So from their standpoint, and because EDC is a credit maximizer, as they say, given the exact same yardsticks, the EDC will grant more credit than the private sector, and that applies to exports or domestic. That we see always.

Mr. Ken Epp: Okay.

I guess I'm done then, eh?

The Chairman: Do you have a final question, Mr. Epp?

Mr. Ken Epp: I'll just stop here. I wanted to get into the others, but can I come back?

The Chairman: If we have time.

[Translation]

Mr. Desrochers.

Mr. Odina Desrochers: Thank you, Mr. Chairman. I would also like to thank the people who came here this morning to speak on the report by the MacKay Task Force, which concerns not only bank mergers, but also the future of the financial services industry.

I would like to put a question to Mr. Drolet, who represents the Canadian Automobile Dealers Association. You spoke about credit companies and what the banks could do if we supported the changes proposed in the MacKay Report. Could you tell us whether the company where you work does business with U.S. credit companies, whether a portion of the money stays here or whether it is all repatriated to the United States?

Mr. Gérald Drolet: Mr. Desrochers, the employees of Chrysler Credit Canada Ltd. would be in a better position to answer your question than I. We're simply people who work in the trenches and lease automobiles. We believe the money is invested in Canada, including in the Windsor and Oshawa plants. I am convinced these amounts are reinvested here.

I could put the same question to you. Do the banks invest their money solely in Canada, or do they invest it everywhere? I believe the one question is much like the other, and that the other doesn't amount to much.

Mr. Odina Desrochers: Mr. Drolet and panel members, before the federal government authorizes anything in this area, would you like it to change the legislative framework concerning the entire issue of financial products?

Mr. Gérald Drolet: Could you clarify the meaning of your question?

Mr. Odina Desrochers: We seem to want to direct the debate toward bank mergers, whereas many other financial products must be protected. Consider the example of the Mouvement des caisses Desjardins in Quebec and insurance brokers. Before making any major decisions whose impact will be felt for a number of years, don't you believe it would be preferable for the federal government to change the ground rules of the legislative framework to give everybody the opportunity to succeed?

Mr. Gérald Drolet: The difference between Canada and other countries is that competition among banks is minimal here. I have never read in the papers here—and I don't believe anyone has ever read it—that the banks compete against each other. However, if you read the Ottawa, Toronto or Montreal newspapers, you will see 50 dealers advertising beside one another offering their best prices. There's a very high degree of competition among small businesses.

The financial movement is a very big one. Financial businesses are giants which could crush us overnight. Regardless of how we work or manage our businesses, we can't do anything about that. We accept this fact, without knowing how we can change it. All we're trying to do today is to protect the way we operate.

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Mr. Odina Desrochers: Are you afraid that bank mergers will take away some of your current business?

Mr. Gérald Drolet: I don't think bank mergers trouble us. We haven't focused on this issue, but rather on the bankers who come and establish themselves in our field.

We haven't come here to object to mergers because we know that mergers are inevitable in the context of globalization. Each time a merger occurs, you have to put your head in the sand and say no jobs will be lost. This morning, we wanted to come here simply to protect what we have and to ensure the banks do not encroach too much on our territory.

Mr. Odina Desrochers: Do you have any suggestions for providing better protection for your business?

Mr. Gérald Drolet: I believe we have already stated them. They are firm. You shouldn't believe that the banks are not operating in the leasing field. On the contrary, they are very much involved in it these days. I have a personal leasing fleet that is financed by the banks. When a customer comes into my business to lease an automobile, I have the option of offering him bank or manufacturer's financing. The only thing we ask is that the banks not offer retail leasing services.

Mr. Odina Desrochers: Thank you, Mr. Chairman. I invite you to give your colleagues the floor.

[English]

The Chairman: You don't have another question?

[Translation]

Mr. Odina Desrochers: No, thank you.

[English]

Mr. Mark Nantais: Mr. Chairman, might I add to Mr. Drolet's response with respect to the reinvestment of finances from the affiliate companies? I'll ask my colleagues to step in here as well, but about 90% of all the money and the profits made through finance affiliates is reinvested in Canada. As well, in the past decade or so, the finance companies and their manufacturers have reinvested about $20 billion back into Canada, in terms of new plant facilities and the infrastructure that's necessary to support not just the manufacturing side but the full dealer network as well.

I would ask if anyone else would like to add to that.

A voice: No, that's fine.

The Chairman: Thank you.

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman.

To all of the witnesses, your presentations were very thorough and effective. As you all know, other than the EDC argument, which is excellent, there are also some very effective and powerful interventions supporting leasing by the banks.

I'd like the panel to comment on two thoughts. First of all, in the last Parliament, when this matter was dealt with, the finance minister announced that the banks would not be allowed to enter auto leasing. I wonder if you could advise the committee of whether you are aware of anything that has changed—any new information, developments, or whatever—that would change significantly or materially the discussion that was held the last time we went through this. What's new? What would be there that may open up this decision legitimately, other than the task force report saying this might be something to look at?

The second aspect—and it's important to get it down into pretty basic terms—is the argument that in acquiring an automobile, a consumer has two choices: they can purchase it or they can lease it, ostensibly. From a dealer's standpoint, we assume that in the economics of the transaction, the only differential theoretically should be what is the financing cost for someone who does not have the capital to make that purchase or cannot arrange outside financing. There's an opportunity cost for the facility.

This suggests that one way or another, assuming that dealers can source capital at a reasonable cost, no matter how it happens, the profitability on automobiles should generally be unchanged, regardless of whether it's leased or purchased. That's a premise.

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So if MacKay is asking us to focus on the public interest, and the public interest should include the impact on other segments of the financial services sector and those who deal with the principals within the financial services sector, can you identify negative impacts on the public interest—which I assume includes your businesses and those that you represent—particularly as they relate to jobs and level of business?

Mr. Michael S. Sheridan (Director of Government Relations, Ford Motor Company of Canada Limited): Perhaps I can take a stab at answering that question first.

Leasing is important for the automotive industry in Canada. In fact 45% of retail purchases are leased. Why is that? If we were to go back five or six or even seven years, leasing in this industry was about 10% of vehicle sales. It has grown over the past five to seven years in response to the fact that Canadians' disposable income has not grown sufficiently enough to allow them to purchase new vehicles.

What many have done is defer the purchase. But when they're sitting around with an old vehicle and they need to purchase a new vehicle, they now look to the leasing proposition as a way they can purchase a new vehicle on a regular basis. So the affordability issue is what has driven the growth in leasing today.

It's critical for our industry to have a vibrant leasing sector. If we felt that allowing banks into leasing would allow consumer prices to decrease in the long term, we would say let's allow banks to get in. The fact is if banks get into leasing, there may be some short-term benefit for the consumer, but in the medium to longer term, as Mark has gone through in his presentation, it will dramatically hurt our consumer and hurt the leasing proposition in Canada. It will damage the leasing proposition, and in the long run it will damage our ability to sell cars and light trucks. It flows through back to the local dealers in terms of their ability to sell and keep their local businesses alive.

If we look at 1988, our industry sold 1.6 million cars and light trucks, and for the next seven years we saw a decline every year and bottomed out at below 1.2 million cars and light trucks. That is over 400,000 fewer sales of cars and light trucks in Canada. That's two assembly plants.

Our objective here is to make sure we have a vibrant industry. Leasing is required for that. Bank entry into leasing will damage the long-term interests of the leasing business and of the automotive sector and will in turn damage the long-term interests of the local dealer in the community.

Mr. Huw Williams (Director of Public Affairs, Canadian Automobile Dealers Association): I'd like to take a stab at your first question, if I can, Mr. Szabo.

The short answer is nothing has changed since 1996. The only thing we have here is a $20 million PR campaign by the banks for more powers. That's a pretty blunt answer. There's been no wave of consumerism that's changed since 1996.

The one thing that has changed within the automobile business, though, is that we made a commitment in 1996 to bring consumers better lease disclosure than they had in the past. You've all seen our guidebook on the consumer guide to leasing. It was to give consumers more complete information. Consumer Reports says we're doing a better job than the American market.

There is no wave asking for change on this. One of the things we hear from dealers constantly at our association level is, “Didn't we just deal with this?” And there's a little bit of a sense of, “I have to go back and bother my member of Parliament again about this?”

It's an element that people, when they're planning businesses—for example, Gerry's building his new dealership in Laval.... People in the auto industry are uncertain. They're asking themselves, “Do I go through that investment and borrow $3 million from the bank, which I'm going to have to repay over the next 10 years, when I have this question looming over me again?”

So you're right on the nose when you ask that question—right on the nose.

Mr. Paul Szabo: Thank you, Chairman.

The Chairman: Thank you, Mr. Szabo.

Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you, Mr. Chairman.

About credit unions, not only in Quebec are the credit unions in the auto leasing business; they're also here in Ontario. They're all over. As a matter of fact, as a businessman a few years ago, I got a little upset when they were offering a cheaper price for leasing vehicles and then for on-demand loans. So it's nothing new.

The fact is that some dealers are able to make some deals with the credit unions, and maybe the consumer benefits from it. But I just wonder, if tomorrow it were given to the banks, would consumers benefit? I doubt it very much.

The question is not really to you. The question I want to ask is for Mr. Perna. I'll make a comment first and then ask the question.

• 1235

I know you've been deprived of this type of business. It's no different from other insurance companies that come before us saying they've been deprived of crop insurance. I had one specifically from Quebec who wanted to enter the crop insurance business.

The crop insurance business in Canada, being in agriculture, is shared by three parts: the farmer, who is paying one-third; the province, which is paying one-third in administration; and the federal government, which is giving one-third in the money sector, which is almost some sort of subsidy.

Having said this, for some of those commodities that one has to insure within the agriculture component, one cannot really afford the premiums one has to pay. If you were insuring corn or barley or wheat, yes, those have become affordable commodities, because crop insurance was designed for them. But if you're doing tender fruit or some smaller crops, it is not affordable.

The affordability I'm talking about—that 10%—in tender fruit was 13%. In other words, if you wanted coverage at $20,000, you had to pay $2,600. It is no longer insurance that you can buy. It is part of the government entering into this force.

It's the same thing as EDC now. You're saying you're no longer competitive. Being that I'm a farmer, I've also looked into this export and the EDC. Looking into exporting my product, it was not even affordable. Just to think, if you want to go into the private sector, if there were no government intervention and subsidy, maybe some businesses could not survive. I've explained to you the agricultural factor.

I do understand your concerns, but another factor is that it helps businesses to export, which we're all based on. If a business were to pay.... I cannot afford EDC's rates, so I don't even want to ask your rates. So it almost becomes non-competitive to be in that type....

Mr. Mark Perna: Can I respond to that?

Mr. Gary Pillitteri: Yes.

Mr. Mark Perna: First of all, your comments were concerning the export business of the EDC. In fact in our presentation, you will see that we have no quarrel with EDC being in the export insurance business. Our quarrel is that they have been allowed to participate in the domestic insurance business. That is our main issue with them.

What we were trying to do was draw a parallel and say that because they are an export maximizer, because they don't pay taxes, they are able to deliver an export product that is very competitive—maybe too competitive—with the private sector. That very same philosophy is carrying over into the domestic business, which had been our domain up until 1993, but for whatever reason, the EDC has been permitted to embark on those services.

The EDC is a very powerful organization. They have the money, the marketing, etc., to drive these things forward. They have done that to a certain extent, and it has hurt our industry and my company in particular.

Mr. Michael Teeter: Maybe I could give you a little history of the EDC quickly.

There's no question that they used to be there, and they are there, to help businesses export to risky places. The Canada account and other medium-term and long-term financing—all the nice things they do that are in the public interest—used to be virtually everything they did. But when the Government of Canada decided they wanted the EDC to not be a burden on taxpayers any longer, it sent the EDC into these guys' businesses.

So the EDC moved from the risky type of business, where they were helping exporters in risky situations, increasingly into the short-term credit insurance business in North America—in the United States and Canada—where you had a healthy private sector operating.

• 1240

The EDC comes in with no taxes, with all sorts of backstopping from the Government of Canada, and with no risk, because it's covered by the Government of Canada, and they move into the short-term market and displace the private sector. That's what's happened because of the change in mandate delivered to them by the government.

Mr. Gary Pillitteri: I asked the question not because I'm saying that, as an exporter, I would benefit from it, but because we looked into whether there was some form of subsidy. Realistically, that's even unaffordable for us, because we deal strictly with letters of credit backed by banks. So this is much more high-risk.

If business did not have this venue—and it's not costing the taxpayers—I doubt very much that we'd have the possibility of exports or of increasing our exports. That's the only reason. I'm not saying they should be in the domestic market, but certainly in that export market, including that of the United States, because I don't consider that a domestic market.

That's all.

The Chairman: Are there any comments on that?

Mr. Mark Perna: No.

The Chairman: Mr. Discepola, followed by Ms. Bennett.

Mr. Nick Discepola: Thank you, Chair.

Mr. Williams, you brought up an excellent point. As a small business person in the mid-1980s, I was faced with a similar situation: the banks wanted to get into payroll services, of which my company was a provider. Today I find out they're no longer interested in that business, because it's not profitable for them, I guess, after 10 years.

I wrote down a little note here and I said to myself, how can you do any long-term planning if you have this dark cloud over you every single year? As a legislator, as a member of Parliament, I don't want to have to have car dealers or small brokers coming to my office every year, begging us as a government, because you're at the mercy of changing governments....

[Translation]

I was very surprised by Mr. Drolet's answer to the question asked by a Bloc Québécois member. You said you did not object to the banks' current activities in the leasing field or to their continuing those activities. You only object to them providing retail leasing services. Can you explain the difference here and the impact this difference would have for you?

Mr. Gérald Drolet: It's enormous. Currently, a customer who comes into our business has a choice of buying or leasing an automobile. We give him the price of the vehicle and he decides, based on the payments he will have to make, whether he prefers to buy it or lease it. We object to the banks purchasing cars from the manufacturers or from us and starting to lease cars directly out of their branches. The bank could then say, for example, that I have a line of credit of $3 million from my inventory and I should sell them such and such a vehicle at cost because it will lease it to Mr. So-and-so. That would be retail leasing, and that must absolutely be avoided. If that ever happened, I assure you I would be forced to close my business and lay off 68 people.

Most leases are financed by our manufacturer or by the bank. I'm currently doing business with the Bank of Nova Scotia and the Canadian Imperial Bank of Commerce for both lease and purchase financing. We simply object to the banks having an office in their branches and telling customers, whose entire portfolios they hold, that it's time for them to change their cars and offering to lease one to them. Second, they would be able to set their selling price since they would have my invoice and would know my cost price. They would have everything they need to offer an outstanding price. That would only last a certain time because there would be a lot fewer dealers. They would automatically have more power and could eventually lease automobiles at much higher prices. We saw this situation in the case of credit cards. That's where the problem is.

[English]

Mr. Huw Williams: Just to piggyback on that answer, one of the important things for everybody to understand is how exactly the banks are into leasing. If you take the Scotiabank just as one bank, they lend money to dealers to run their own leasing company. So that's one way they're getting their fair share of the profits.

The second way is they have a form called a Scotia-dealer value lease plan, which is a carbon copy of the Peter Andrew's GMAC program, with the exception that it has to be done within the dealership, as GMAC does, but the bank doesn't get the capital cost allowance attached to that and they don't take title of the vehicle, or the dealer gets the first offer of title on the vehicle. The consumer gets the same benefit of the bank's rates.

• 1245

If the banks wanted to cut those rates and be as competitive as possible, dealers would love it. Drop the rates as low as you like and let's get the Scotia-dealer value lease plan out there to the customers.

Where it becomes a problem is when a bank is given the right to do leasing out of their bank branch. They have a list of the dealership's whole client base and when they're renewing, and they're in a position to pick and choose which dealer they're sourcing the vehicle from. It puts them in a total conflict of interest.

Mr. Michael Sheridan: I'd like to expand on that.

Certainly the direct leasing proposition, where banks are leasing product from their branches, is a major issue. Beyond even that, the indirect lease is also a major issue. As was pointed out in the presentation today by CADA, the affiliated finance company plays an important role for the dealer in terms of providing a wide variety of services, such as mortgage financing, wholesale financing, and leasing.

If the banks get in, they will dominate the industry-not through being better, but by the fact that they have access to low-cost funds. When they dominate the industry, there's less choice for the consumer. We will not be able to participate in the long run in that business, and as a result, that will go to the long-term harm of the dealer as well.

So it is beyond just the direct issue of selling through bank branches. There's also the indirect concern that when they get in, they can start using this cost-of-funds advantage, which they get because they're banks and they have access to consumer deposits. It's not because they're better. It's not because they've done something to earn that right. They have access to cost-of-funds, which they now want to take outside traditional banking activity and utilize in non-banking activity: the buying and selling of automobiles.

Mr. Gérald Drolet: And not only that. Often it happens that a line of cars doesn't move the way it should. The factories do invest money in that by giving the consumer right now interest rates of 1.9% in leasing. Have you ever seen the banks lending money to a customer below prime rate? Well, the factories do. They subsidize it to help us move the cars. By doing so, we are able to order other cars, and everything keeps on moving. They are the only ones who do that. Never have I seen a bank lend me money under the prime rate. Have you ever seen that?

Mr. Nick Discepola: The other question I want to touch on is this notion of competition.

The Chairman: Make this your final question, Mr. Discepola, please. Go ahead.

Mr. Nick Discepola: Thank you.

I'd have no qualms about letting the banks get into anything they wanted to, provided they competed fairly.

You've brought up this notion of the source of funds. Notwithstanding that they are in a conflict of interest situation as far as I'm concerned, because as a small business person, they have access to my financial statements and my client list—they know exactly when my clients are going to be due for a new car, for example—they also have the tremendous advantage of being able to take depositors' money, give them a pittance of 2% or 3%, and then go out and lend it at 7% or 8% and still undercut the competition.

How could we possibly let the banks into that by regulating a certain aspect that would give everyone fair competitive advantages or disadvantages? To treat everybody equally, as Mr. Drolet said, if the banks didn't have this tremendous advantage, we could make possible regulations on disclosures, tied selling arrangements, etc. But one of the biggest problems would be the source of funds.

Can we possibly overcome it, other than strictly, every year at budget time, backbenchers applauding the Minister of Finance again for one year of not allowing the banks to get into it? I don't think that solves your industry's problem, either. You have to have something more concrete, more long-term, so you can continue investing.

Mr. Gérald Drolet: You must definitely have a regulation that banks, from now on and forever, are not entitled to direct leasing, period, so that we can keep on doing business properly.

Mr. Michael Sheridan: Leasing is largely a North American phenomenon. If you go to Europe, it represents a small percentage of vehicle sales—less than 5% in most countries in Europe. And where banks do participate in leasing, they do so through a subsidiary, where they operate at market rates. Therefore they do not enjoy the cost-of-funds advantage, and as a result they don't participate, because leasing is not a game you participate in if you don't know how to do it. It's a very risky business.

• 1250

In the United States, our nearest trading partner, leasing isn't as important as it is in Canada; it represents less than 20% of vehicle sales. It's 45% in Canada. They have better disposable income, so they buy vehicles. Banks participate directly, and they get in and out of the business. There's no consistency in the business, but there are 10,000 of them. As a result, they compete for depositors' money, and therefore the cost-of-funds differential is much lower. So that cost-of-funds issue is not as prominent south of the border.

Historically what we've seen in the U.S. market is that banks have gotten into the business in good years, they view it as something they'd like to participate in because it's profitable, and then all of a sudden the downturn happens and they try to vacate it. In vacating it, they hurt the lease proposition by damaging the consumer relationship.

Mr. Nick Discepola: I remember Harland Motors and Champlain Motors in the Montreal area.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chairman.

My question is for Mr. Perna. With my small business or consumer hat on, I understand the genesis of EDC was that business was having trouble getting loans to their riskier markets in beginning to export. Using the traditional yardsticks that you were talking about, it seems they have been able to manage their risk by expanding their ability to do this domestic job. If indeed the turnaround in EDC shows now profit, somehow they've been successful.

From the small business point of view, if they weren't able to do that, would we be concerned that they would be actually turned down without any money and that they would no longer be able to continue to absorb these riskier deals that they're now saying yes to, which is the reason for their existence?

Mr. Mark Perna: Dr. Bennett, EDC does lending and it also does credit insurance.

Ms. Carolyn Bennett: Right.

Mr. Mark Perna: Their lending activities were not really part of what I was talking about today.

Ms. Carolyn Bennett: Okay.

Mr. Mark Perna: It was their insurance capability, not the funding. The fact that they may provide funding for export arrangements does not have near the effect on us as the credit insurance aspect.

Ms. Carolyn Bennett: Is there a compromise here? You've presented a very black and white proposal: they should be out of domestic credit insurance. Is there something in between? Would you be happy if 50% of total sales had to be in exports, or is there some other way?

And concerning the two percentages that came out, you say that EDC has 70% of which market share?

Mr. Mark Perna: We estimate that EDC has 70% of the credit insurance and credit guarantee market share. That is for domestic and export business, and that is compared with the factors and the credit insurers. So if you took the factors and the credit insurers as a group and then compared that to EDC's insurance coverage business, be it domestic or export, EDC, by our estimates, would have about a 70% market share, which is huge.

Ms. Carolyn Bennett: Does that include their global...?

Mr. Mark Perna: That includes everything but their lending business. I'm not mixing up their lending. We're just talking about apples to apples here.

Ms. Carolyn Bennett: The figure you mentioned, 60% of short-term in North America, what is that?

Mr. Mark Perna: I think that's what Michael was referring to. That is actually with one particular segment: consumer products.

• 1255

EDC does about 79% of their business in North America in consumer products. I'm singling out consumer products because that is an area our industry is very involved in, more so than—

Ms. Carolyn Bennett: And can you tell me if you are now bundling North America because the U.S. market is less risky?

Mr. Mark Perna: No, I'm not doing that. I'm just doing that because that's the way EDC breaks it down.

And yes, there is another reason. Of all the export markets in which we do happen to compete with them, the U.S. one is where we would be somewhat direct competitors with the EDC.

Ms. Carolyn Bennett: You would like them out of the domestic market. Would you like them doing less in the U.S. too?

Mr. Mark Perna: As for them doing less in the U.S., you could make a case—again, as Michael mentioned before—that they seem to be getting into the less risky markets as a way of making a profit in different areas. But the purpose of our presentation today is not to take on that issue, because it's a very large issue.

Our issue is, please stay away from domestic. That is not what EDC was set up to do in the first place. They were able to convince the powers that be five years ago that it might be a good idea, but in practice, especially in consumer products, it's really out of bounds. It's distorting the market and is really hampering competition.

The Chairman: Thank you, Mr. Perna.

Thank you, Ms. Bennett.

Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman.

Mr. Perna, I enjoyed your presentation, and I would suggest that you make the same presentation to the foreign affairs committee at some point as well. When we had Ian Gillespie from EDC at the foreign affairs committee and we were looking at the books of EDC, as a businessperson I looked at them and asked why this agency is indeed necessary.

He made the case that there is a public policy part of what EDC does. That argument is highly specious, given EDC's involvement in dubious projects such as the Three Gorges Project in China or selling nuclear technology to Turkey, both of which were turned down by the U.S. Ex-Im Bank, due to their dubious nature. Also, EDC's involvement, particularly in Asia....

I guess it begs the question, if the market or if the proposition is too risky for the private sector to be participating in it or to be acting in a factoring sense, why should a government agency be doing it at all? We should not be providing the tacit representation that somehow this is a good thing to be doing. Not only does it compromise our foreign policy, but it's also dubious from a business perspective.

Mr. Michael Teeter: The EDC is, if I recall—looking at their progression over the years—much less active in risky things than they used to be. There's no question about it. They're becoming more commercial.

Part of that is driven by the fact that international organizations such as the WTO, the OECD, and so on are setting guidelines for the subsidies part of the business, which everybody says is bad. When those international guidelines increasingly come into effect, it basically circumscribes the behaviour of EDC and other government credit agencies throughout the world. In effect the international community is saying, “Get out of the subsidy game.”

The EDC, in the interests of maintaining itself, because the government wants it to, starts to act more and more like a commercial corporation that competes directly with people paying taxes and so on. That's really the progression of events.

Mr. Scott Brison: Are you aware of the code of ethics that was written by the Ministry of Foreign Affairs—the voluntary code of ethics for any Canadian companies doing business internationally? Well, there is a code of ethics, and Mr. Axworthy has promoted this as a way we can engage the private sector in helping to promote our human rights policies and that sort of thing. EDC has refused to sign it, as a crown agency, which raises significant issues as well. But thank you for your presentation.

• 1300

On the auto leasing issue, I enjoyed that presentation as well, and I have a couple of questions. You made the statement that bank entry into leasing will damage the consumer's perception of the integrity of leasing as a viable alternative to purchasing. If you could explain that to me, I'd appreciate it.

Mr. Michael Sheridan: As I pointed out earlier, leasing is incredibly important for the Canadian auto industry. Again, it's 45% of the business we do. So having a viable lease proposition that the consumers enjoy purchasing is very important.

Bank entry into leasing will have a three-stage impact, as we point out. In the near term, they'll reduce prices to gain market share, we speculate. They'll pass on some of this unearned cost-of-funds advantage to reduce prices.

In the medium term, however, they may in fact, once they dominate the industry, create a situation where price increases will occur.

In the longer term, as in other industries, they may find this is not an industry they want to participate in for the longer term. We see this in the U.S. Banks get in and out of leasing. They will get in in the hot years and target a few segments of the market, such as the Explorer or the Expedition or they'll go after the Cadillac, and leave a lot of the other marginal business alone. They'll target those key sectors and offer a good monthly payment. However, what they'll find in the downturn is that they may have overcalled the residual.

Unlike lending, this is a business where not only do you have to absorb a credit risk; you also have to absorb a back-end residual risk. At the end of the lease term, if you're a bank that is not interested in selling the new vehicle, you're interested in avoiding the back-end risk. If you miscalled a residual and find yourself with a vehicle that you promised the consumer would be worth $12,000 and you find it's only worth $10,000, at the end of the two- or three-year term, you're going to find yourself under water by $2,000 and will be hit with a cost when you try to sell that through the secondary market.

Mr. Scott Brison: So the bank will be hit with that.

Mr. Michael Sheridan: The bank will be hit with that additional risk.

Mr. Scott Brison: Your concern for the banks is really touching.

Voices: Oh, oh!

Mr. Michael Sheridan: Banks, however, will try to minimize that risk. What we see in the U.S. marketplace is that they will contact consumers two or three months before lease termination to encourage that consumer not to bring that vehicle back, but in fact to purchase the vehicle outright. They'll use telemarketing activities, where they will contact the consumer and say, “Are there any chips on the car? What is the wear and tear on the car? Do you know that you'll be hit with additional charges if you bring that car back?”

The consumer now is being convinced not to bring the car back but in fact to hold on to that car and to finance it through the bank. This is where the dealer has a major concern, because the consumer does not come back to the dealer and give the dealer the car. What ends up happening is the customer is taken out of the lease process.

This damages the reputation of leasing, because they now have not had an enjoyable lease experience. Banks vacate the leasing business, but we're left needing leasing to keep a vibrant industry alive.

Mr. Gérald Drolet: I can add to that, Mr. Brison.

In 1998 and 1997, caisses populaires were so strong in Quebec that all the dealers were leasing through the caisses populaires. And of course, due to the residual values, they found out they were wrong. So right now they're almost out of the market. They are no longer competitive. As we said before, they're in and out, depending on where the money is.

Mr. Scott Brison: I understand the cost-of-funds advantage argument, and I think you would agree that a lot of what you're discussing and most of your arguments are based on that.

Mr. Michael Sheridan: What we're saying is that what flows from their ability to dominate the industry is a cost-of-funds advantage and a “too big to fail” doctrine—the overall umbrella effect of being a bank in Canada.

Mr. Scott Brison: You're aware of the recommendations in the MacKay task force that address the issue of new banks?

Mr. Michael Sheridan: Yes.

Mr. Scott Brison: Effectively anyone with $10 million of capital can start a new bank. I can think of opportunities. For instance, individual dealers or groups of dealers, or perhaps the automobile manufacturers, can start up a new bank and have full access to the payment system—debit cards, chequing accounts, the whole thing.

What's the capitalization of GMAC currently? How big is it?

Mr. Peter R. Andrew (Director of Operations, General Motors Acceptance Corporation of Canada Limited): I'm not sure I can answer on the capitalization of GMAC, but let me touch on your question, which was: why wouldn't we become a bank?

• 1305

You have to go back to motivation and what our true motivation is from the standpoint of who we are. We're part of the manufacturing and dealer retailing network. Our motivation is not to become a bank. Our motivation is to serve the industry in which we work.

Having access to the payment system—the comment that was in the MacKay task force—concerned us a little bit in that the Canadian payment system is owned and operated by the banks. Allowing entry into the Canadian payment system is a wonderful thing, but at what price, and who sets the price?

Mr. Scott Brison: But let me ask you a question. It's quite likely that some parts of the MacKay task force report will be implemented and others will not be, but if for instance we support the opening of the payment system and we don't support banks' entry into leasing, any successful car dealer or group of successful car dealers or the automobile manufacturers can enter the payment system. You're saying you won't, but you could.

Mr. Gérald Drolet: How would you feel, as a customer, if the CADA were a bank? It would take us maybe 10 years just to show the people that we're good. The banks have been there for years. We know them and you know them. Tomorrow, would you change from dealing with the Royal Bank to my bank?

Mr. Scott Brison: Well, it all depends. I might. In fact in the brokerage industry, I deal with a regional boutique firm as opposed to one of the major five, because they're owned by banks, and I choose to deal with a non-bank entity. So it's hard to say.

Mr. Gérald Drolet: But they have billions of dollars, and today you say if you have $10 million, you can create a bank. The competition is still unfair.

Mr. Scott Brison: One of MacKay's recommendations is that we look at the whole notion of tied selling or cross-selling more rigorously, and that we look not just at banks but at all participants in the financial services sector.

Isn't it tied selling or cross-selling to provide people who get their lease from you with sub-prime rates to buy your car? Arguably, doesn't a significant cross-selling occur there that is analogous with what the banks do and are pilloried for regularly?

Mr. Michael Sheridan: When you look at what you refer to as us having subvented rates, if for instance we find ourselves in the most unfortunate position of having too much stock in an individual dealership for a period of time due to the competitiveness of the marketplace, we have to reduce the price of that vehicle, and that's what it's called. We reduce the price.

You can reduce the price in many ways. One way you do it is through cash back. Another way you do it is through short-term financial systems or by reducing rates. But in fact that is just a price flexibility that is inherent in a competitive marketplace.

Mr. Huw Williams: And you still have a dealer offering consumers different financial products. It's the dealer offer, and you can take it to the Scotiabank plan, you can go with the inhouse leasing, or you can go with Ford Credit.

Mr. Gérald Drolet: Whatever is cheaper for the customer.

Mr. Huw Williams: Yes, and the beauty of the system is that when Gerry is competing on a deal against another Chrysler dealer, if he offers him the more expensive options, that customer.... Not too many people buy a car without shopping somewhere else. If he doesn't offer him the best financial choice, he's lost that customer.

Mr. Scott Brison: If the banks get into the industry and really screw up, aren't the banks the ones that pay?

Mr. Gérald Drolet: You're going to pay.

Mr. Scott Brison: How?

Mr. Gérald Drolet: If the banks are losing money, they'll catch up somewhere, and the consumer is going to pay for it, period. You know banks don't lose money.

Mr. Scott Brison: Do you think the banks are going to get into this area of business if they don't have have their ducks in a row?

Mr. Gérald Drolet: Well, they have the CCA right now, and that is a fortune for them if ever they want to go into leasing. And this is what they're looking at.

Mr. Scott Brison: Sure.

Mr. Michael Sheridan: And if we look at the U.S. experience, when do banks get into the leasing business? They got in during 1996, 1997, and 1998, but when a downturn comes, they'll get out of the business. Hopefully what they'll do is park money in another industry that is more vibrant at that time. As pointed out here, we're in the business of making sure the automotive industry is successful.

• 1310

Mr. Scott Brison: What if you had full access to the payment system and you could have the Bank of Drolet?

Mr. Gérald Drolet: I'd have to borrow money from you first.

Voices: Oh, oh!

Mr. Scott Brison: You could sell insurance, you could sell banking services, you could take deposits, and you'd have the cost advantage. You'd make a lot more money this way. You'd have access to capital at low rates.

Mr. Gérald Drolet: But the trend right now of the economy of Canada is small businesses. Keep the dogs in their yards and everybody's going to be happy.

Mr. Scott Brison: Yes, but there are some big dogs out there on the other side of the border.

Mr. Gérald Drolet: I know, and they're trying to bite us, but I don't feel that we're looking at that.

See, I don't want to do that. I'm an expert in car selling and leasing, and that's my main concern. It's where I focus all my energy, and that's it.

Mr. Huw Williams: And I challenge you, in a jocular way, to go out and ask 10 of your constituents whether they'd open with the Chevrolet Bank or the Drolet Bank. I know Gerry very well, and I'm not going to bank with him.

Voices: Oh, oh!

Mr. Gérald Drolet: I hope they trust me more than you do.

Voices: Oh, oh!

Mr. Mark Nantais: This raises even a longer-term consideration, which is that the affiliate companies and the dealers are there for the customer throughout the whole life of that lease with support and service, all of which the banks do not provide. They participate up front and that's it.

If the long-term impact of this is not to have the competition that already exists and not to have local dealers to provide the support to that customer, something's going to break, and it ultimately comes down to customer satisfaction, which Michael has already alluded to. If you don't think of that long-term scenario, then of course you end up with a situation where you will have customers very, very dissatisfied. You will not have the local dealers in the communities, or perhaps in some cases even existing, to provide that support. That's what you have to think about: the whole long-term scene as to when the banks would be in or out.

Also, as vehicle manufacturers and the affiliate companies, we're there to take that up-and-down cycle out. In other words, we try to smooth the ups and downs in that cycle so they have the product and the financing they need through the ups and downs. The banks, I would submit, aren't in there for that ride.

Mr. Scott Brison: No, but you could own one of them.

Mr. Mark Nantais: Why would we?

Mr. Scott Brison: I think Mr. Drolet is getting excited about this.

Voices: Oh, oh!

Mr. Huw Williams: I give you credit for the vision. MacKay said some things about tied selling and protecting the consumer that are pretty valuable. You can't throw the whole report out. Let's be clear about that.

What would be unfair to small business, though—and if you had a round-table of our dealers here, you'd hear this.... Let's see if you can enact real cross-selling protection, tied selling protection, and consumer protection for the long term before you throw the small business community and the consumer to the wolves.

The idea that you can do it all at the same time and that the car dealers are going to become bankers is just tough to imagine.

The Chairman: Thank you, Mr. Williams.

We'll have to move to Mr. Epp for a final question.

Mr. Ken Epp: I also would like to ask a few questions of the car leasing people.

You are saying that you don't want to have the banks in the car leasing business because they're going to be competing. Obviously they will be competing only in the financing end of the leasing; they're not going to be competing in actual dealerships, as far as we know. They're not going to buy dealerships and run their leasing out of a dealership that is owned by the bank.

Right now you already have competition from the bank. For example, I'm not aware of the Ford Motor Company having a finance group, but I'm sure they do, right? And everybody knows of GMAC, because we all have relatives who owe them money.

Mr. Michael Sheridan: Well, hopefully some of your relatives own Ford products.

Mr. Ken Epp: I'm a Ford man myself, but I didn't want to say that here.

Voices: Oh, oh!

Mr. Ken Epp: The question is, do you object to the banks financing vehicles when they're purchased instead of financing them through your own organization?

Mr. Michael Sheridan: You've hit on a really important point. Here is the distinction between leasing and lending.

When you purchase a vehicle and you go to your local bank and get the financing for that vehicle, you own the vehicle. The banks are not in the business. They're not in the auto industry. What they're doing is they're assuming a credit risk on the sale of that vehicle. They compete with us for that business, but because they have a cost-of-funds advantage, they own that business. We don't participate very much in that business. The customers we get are largely customers who are turned down by the banks. Why? Because the banks have a cost-of-funds advantage.

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But if we look at the leasing business, leasing is not lending. Leasing means that, as a bank, you're in the business of buying the vehicle and then reselling it at the end of two or three years. You're in the business of buying and selling cars. And you're also taking on that added risk, that residual risk, that is outside the purview of what a bank should be in the business of doing.

Beyond that, you have a cost-of-funds advantage, which now allows you to enter a business such as leasing and out-compete the affiliated finance companies, not because you're better, but because you have a cost-of-funds advantage that has been granted to you by legislation. In the end, you're going to have fewer competitors in the business, and when you have fewer competitors, there will be the tendency to have higher prices in the long run, and the consumer will suffer.

Mr. Ken Epp: Okay, but this is exactly the same as in the purchase case, then. What we have here is the actual service from a dealer, who delivers the vehicle and presumably services it and so on and is interested in that vehicle serving you well so he can sell you another one, etc., and then on the other hand we have the question of how it is financed. One of the ways is leasing and another one is purchasing. What I'm saying now is I do not detect the difference between your objection to their leasing part, because they're not going to get involved in the financial end either....

Mr. Huw Williams: Could I take another stab at that?

It's inherent in the lease transactions that the bank has to take title of the vehicle. Under the terms of the MacKay report, they can't lease a vehicle without taking title of it. Once they take title of it, they have to buy it directly from the dealer. Then at the end of it, the customer gives the keys back to the bank and walks away, and the bank is in the used car business, because if they lease a thousand cars under the MacKay report, they have to sell a thousand cars at the end of it.

So they're in the car business one way or the other. How they're going to deal with that is an open question.

The tough part for dealers is we're happy to have the banks as a source of financing through the Scotia-dealer value lease plan, as they have now, where they don't take title of the vehicle but provide lease financing. That provides an equal playing field. They're not in the car business. They're not in the used car business.

The problem comes when the bank takes over the position of being the local branch and deciding where those cars are coming from, and they're already running the dealer money in the local community anyway. It makes it a very tough position for a dealer in Wetaskiwin who has to borrow money from the local bank branch and then compete with them on the leasing front.

The traditional prohibition in the Bank Act against banks becoming merchandisers of goods is really offended by this principle, because we don't want banks selling stuff, but if we let them into direct leasing, that's what they're doing. They're selling automobiles through a lease.

Mr. Ken Epp: Don't presume from my line of questioning which side of the fence I'm on.

Mr. Huw Williams: No, no. I love the questions.

Mr. Ken Epp: I want you to defend yourself so that when I'm debating, maybe I can carry that side of the debate too.

Mr. Huw Williams: Yes, absolutely.

Mr. Ken Epp: Now here's the other question. If the banks have a thousand cars that have been turned on a leaseback and they have to get rid of them, that has to be good for the consumer, because now there are going to be a lot of good three-year-old used cars on the market, and that's what I buy all the time.

Mr. Gérald Drolet: Then, Mr. Epp, there will be quite a few used car dealers around the banks, because the banks will have to sell those used cars. Where will they sell those used cars? At auction? Or will they put ads in the paper? Then if they do put ads in the paper and sell used cars, they're competing with small businesses. This is what is unfair.

Mr. Ken Epp: Okay.

Mr. Huw Williams: And the catch is, you have to remember the consumer in that scenario is on both sides of the equation. I own a three-year-old car, so the next thing you know—

Mr. Gérald Drolet: Hey, it's about time you change it.

Voices: Oh, oh!

Mr. Huw Williams: But the catch is on both sides. If the used car market goes to heck because the banks decide to dump some cars in a given year—and as the MacKay report has said, the American bank experience is a roller-coaster ride—then I'm trying to sell my car and all of a sudden the bank is dumping the cars on the other end.

The important question is, do we really want in this country the Royal Bank to be putting ads in the paper selling a thousand cars or running a lot out behind their bank branch? The question is, where do they fit into our society? They lend money; dealers sell cars. Banks have their fair share of it.

Mr. Michael Sheridan: If the banks are in a position where they're losing money on the sale of those used vehicles, they will do whatever they can to make sure the customer doesn't bring that vehicle back by encouraging that customer to purchase that vehicle and finance it through the bank. So that's the added incentive the banks have, which the dealer doesn't have, because the dealer wants that person to buy a new vehicle, so they will take that vehicle and sell it through the used car market.

Mr. Ken Epp: Unfortunately I guess we've all heard horror stories from vehicle-leasing deals with dealers too.

I have one last question, and it is with respect to the market. This is particularly to the guys from headquarters here.

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You talked about the potential of maybe losing 400,000 vehicles manufactured a year. You're in the job of manufacturing and selling vehicles. In other words, you manufacture them and then try to get them out there and get the consumers buying them and using them.

If you have the banks in this and if they're able to offer competitive lease rates that will permit more people to actually be buying new vehicles instead of used ones, then that should be good for your business, and I'm really surprised that you're not in favour of it. You should be saying, “Whoopee! The banks are going to help us sell cars.”

Mr. Michael Sheridan: If we believed that to be true, we would be saying whoopee. The problem is this. We think there may in fact be a short-term benefit, but when you have six major banks—or maybe, in the future, four—competing in this market, as they use their market power, they're going to push the affiliate finance companies out, they're going to push the local dealers and their leasing companies out, and you'll have four lease products out there offered by four banks.

As concentration increases and competition decreases in the financial services sector, you're going to have increased prices, and the leasing, which has allowed us to generate increased sales in our marketplace, is going to suffer.

So if we believed what you said would be true, we'd be asking the banks to get into leasing and encouraging them. The fact is, we don't believe that in the long run it will be in the best interests of our consumer. And if it's not in the best interests of our consumer, we cannot build and sell cars and light trucks.

Mr. Ken Epp: Mr. Drolet, tell me; do you make more money when you move a car out through a lease program than when you sell it?

Mr. Gérald Drolet: No, sir. It's exactly the same profit.

Mr. Ken Epp: Oh, really?

Mr. Gérald Drolet: Yes.

We did promise last year that our contracts would be full disclosure. If you come to my place and buy a car, it's $35,000 because I feel that you can afford one of $35,000. If ever you lease it, then it's the same $35,000. And it's shown on the contract. There's no bullshit.

Mr. Huw Williams: In the American market that's not the case. They don't have lease disclosure contracts to the same extent as they do in Canada. And that's what it comes down to: the effort to provide the customer with clear information has been—

Mr. Gérald Drolet: A promise from us.

Mr. Huw Williams: Yes, a promise, and it's one we've taken seriously. The Globe and Mail on Thursday of last week—I'll send you the article—ran a piece about disclosure, and one of the things they did is they happened to give my phone number out and asked Canadians from all over the country to call in and get a lease disclosure book. One of the things we're happy about is when that phone rings. We had a thousand phone calls in one morning and shipped books all the way across the country to help educate consumers.

So it's not a point that's lost on us. We have to do more and have to continue to do more.

Mr. Ken Epp: Just in closing, my last statement is that my 16-year-old 1982 Suburban, with 350,000 kilometres on it, is the car I use most of the time driving around. My newer one is a Ford product. My wife drives it most of the time. It's also seven years old.

Mr. Huw Williams: I'll send your local GM dealer—

Mr. Ken Epp: And I bought it used.

The Chairman: We'll keep that in mind as we debate the issues.

Voices: Oh, oh!

Mr. Ken Epp: I just want to disabuse these guys of the idea that we're rich parliamentarians.

The Chairman: I want to thank you very much. It's been a very interesting panel. Of course as always, you contribute quite well in the public policy debate of this committee. I know I share the feelings of the rest of the committee when I express my sincerest gratitude for your input.

Witnesses: Thank you.

The Chairman: The meeting is adjourned.