FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 27, 1998

• 1532

[English]

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

As everyone is aware, this afternoon we are studying the task force on the future of the the Canadian financial services sector.

In this round table session we have the following organizations: Option consommateurs; the Consumers' Association of Canada; Insurance Consumer's Group; London Life Policyholders Association; the National Council of Welfare; and the Public Interest Advocacy Centre.

As you all know, you have approximately five minutes to make your opening remarks, and thereafter we will engage in a question-and-answer session.

We will begin with Mr. Bill Podmore from the Insurance Consumer's Group.

Mr. Bill Podmore (President, Insurance Consumer's Group): To begin with, I wasn't really informed that there were only five minutes, so I'll just begin my dissertation and stop at five.

The Chairman: See if you can give us the overview, the major points, and then we'll have a lot of opportunities to ask questions.

Mr. Bill Podmore: The whole thing is a major point.

The Chairman: Then you should begin. Go ahead.

Mr. Bill Podmore: First of all, I'd like to thank you for the opportunity to present our comments and concerns regarding the MacKay task force paper, particularly the serious considerations we have regarding consumer protections within the financial services sector, and our thoughts and concerns regarding insurance consumer protection.

We have over the past year and a half attended a number of meetings with members of the office of Secretary of State for International Financial Institutions, including the Hon. Jim Peterson. We've also met with representatives from OSFI and the Department of Finance.

In October 1997 we made a presentation to the committee of the task force on the future of the Canadian financial services sector, expressing our views of the insurance industry from the consumer's perspective. The additional material I've included describes some of the numerous insurance consumer protection initiatives our group has been involved with, of which some have been remarkably successful.

• 1535

Prior to the release of the task force paper, we prepared a discussion paper to be given to the Hon. Paul Martin, with copies to specific governmental parties. This document, although not ultimately communicated to the Hon. Paul Martin, does contain, however, some thoughts that we feel are of some merit.

It reads as follows:

Honourable Paul Martin:

We are issuing this communication to you as a follow-up to conversations held regarding issues discussed at meetings held between representatives from the Office of the Secretary of State for Financial Institutions, the Department of Finance, and OSFI.

As we await the much anticipated Task Force Paper, its ensuing examination, and eventual end result we take this opportunity to express to you what we consider to be key areas of concern for all financial services consumers.

In our review of the financial services industry, (and governmental framework) we have kept in mind the key overriding principles of responsibility and accountability.

For financial services consumers we emphasize the need for appropriate education and awareness.

Firstly, and as suggested by you, there's a real need for an effective international financial regulator. The risks of world-wide financial turmoil cannot be justified (i.e. bad loans in Japan and Asia, etc. etc.). Financial Services, as a continuous and ever evolving industry requires a measure of safety which is not yet serving all people of all nations. The ability of any particular nation or region to adversely affect the financial well-being of billions of people, world-wide due to poor and dangerously unsound business practices cannot be justifiably permitted to continue.

Current structures of “accountability” and “responsibility” of management and boards of directors have time and again proven to be all too inadequate. Real penalties for lack of ethical business ethics and prudential management have proven to be severely deficient and, as has occurred in Asia, caused a ripple effect through the world's economies. Accountability and responsibility of all Financial Services Industry management must be the basis from which any regional, national or international financial organization must operate.

The development of Financial Services Task Forces such as those in Australia and now Canada are commendable and due to their existence also indicate a larger global dilemma. Our international reputation of successful initiatives and interventions (the Montreal Protocol, etc.) would tend to favour and enhance Canada's ability and credibility in presenting unbiased support of the establishment of the type of financial regulatory organization that you suggest.

Secondly, and in reference to the issues above, it would seem that, as a priority, Canada should “clean up its own back yard”. The rapidly and constantly evolving financial system as now exists in Canada clearly does not serve all Canadians fairly and adequately. There have recently been very serious issues regarding lack of prudential regulation within the financial services industry, including:

Insurance regulation and supervision—The “Vanishing Premium” class action lawsuits with many more product-sales-process lawsuits to follow.

Banking regulation and supervision—The tied selling battle and the banks' attempts to influence legislation and emerging issues regarding credit card operations.

Securities regulation and supervision—The BreX lawsuits and others.

As one of our industry advisors has suggested, “If you are looking for abuses perpetrated upon consumers by the insurance industry it is a little like shooting fish in a barrel”. Our membership, as well as a remarkably growing number of irritated Canadians, are deeply concerned that the insurance “barrel” is not the only target that will soon be shot at.

Primarily as a concerned Canadian, but also as a financial services product consumer seeking to achieve a level of fairness and impartiality for all financial product consumers, and through my involvement in initiating vanishing premium class actions in Canada as class representative against Sun Life, my launching of the Insurance Consumer's group and our role in the protection of participating policyholders legal rights and interests in the demutualization process, we would submit the following:

Would Canadians be more fairly protected in their financial dealings:

1. if financial industry lobby groups were less influential in defining government policy and legislative outcomes? Are the intensification of profit seeking opportunities of industry more important than the short and longer term financial well-being of all Canadians?

2. if the financial services industry were self regulated with the provision that there be a governmentally supported and legislated Consumers' Advocacy Organization? (As established in the states of Florida and Texas.)

• 1540

3. if the financial services industry continued to evolve in its current largely unregulated and ineffectively supervised form, and were to face, on an ongoing and consistent basis, the potentially more financially and publicly damaging aspects of litigation? (See current class actions against Canadian insurers regarding “vanishing premium” policies [one flawed product of many to be litigated in the near future].)

Note: Sun Life agreed to settle their vanishing premium class action out of court, relatively quietly, while clearly convinced that they would have won in court. This was also alluded to in one of the rulings given in this case. Bad publicity, so far, clearly has a great influence on the superintendence of financial industry players, and clearly influences profitability and ultimately market share.

It would seem apparent that all Canadians would benefit from fair and equitable treatment by the financial industry and this primary consideration cannot be invalidated given the ultimate costs that may be borne by industry, government and consumers. A structure and process to achieve the necessary safeguards is urgently needed. The initiative and the responsibility for this process must clearly be that of the federal government, with significant support given by consumer groups of record, acting in cooperation with provincial governments in defining and resolving areas of conflicting interests.

Government must fully take on, as a priority, its primary responsibility of protecting the Canadian population fairly and adequately. As Former Secretary of State for Financial Institutions, Mr. Doug Peters, expressed at the release of the 1996 White Paper, that he was “frustrated at the limited scope (of the white paper) and that the process wherein the government conducted its own policy review was vulnerable to extensive lobbying by financial interest groups whose views might be motivated by self-interest rather than the health of the Canadian economy and the interests of Canadian businesses and consumers as a whole”.

And that's the end of my letter.

I have additional comments.

Although the recently released task force paper indicates nominal support for some form of financial consumer organization, and encourages the continued funding of consumer group project initiatives, primarily by Industry Canada, the report fails to accurately review the role of consumer groups and their ongoing support by government.

We have serious reservations that a financial consumer organization could continue to be a successful and effective entity if the principal source of financing were overly dependent upon consumer contributions.

As the playing field now stands, there are clearly mutually beneficial alliances between government and industry players, a spin-off of which includes an increasingly fragmented and disorganized consumer protection movement. The proliferation of like-minded consumer and pseudo-consumer protection industry players, often working in duplication of effort, with the resulting great loss of efficiencies, clearly does not produce effective results and does not serve consumers fairly and well. A structure for fulfilment of adequate consumer protection legislation is overdue.

The level playing field concept that is so often referred to by financial institutions must include all three players—industry, government, and consumers. Recent models of legislated consumer protection in Florida, with the Office of the Consumer Advocate, Texas, with the Office of the Insurance Council, and the proposed legislation in Massachusetts, for an association for insurance, are all commendable, and should be seriously considered in the development of a realistic and attainable Canadian consumer protection system.

Regarding bank mergers, we believe “a complete overhaul of the financial services sector is required”, as Mr. Peter Godsoe from Scotia Bank recently stated. Canadian banks are already very successful. They have effectively taken over the trust business, the securities business, and now, as the task force paper suggests, they will, or should be able to in the near future, sell insurance in their branches and also provide auto leasing services.

Through their announced intentions to merge, which were very questionably initiated through the back door prior to the completion of the work of the task force, the monopolistic control that banks have over financial products and services could now be increased with potentially detrimental effects to all competition and consumers.

As a concerned Canadian, I ask if the monopolistic control of these banks and indeed the financial services industry will include the Canadian government.

As Mr. Godsoe expressed, “It is far more important to get the policy framework right than it is to get it done fast”. Reviewing task force recommendations while concurrently reviewing the proposed mergers, prior to establishing a clear policy framework, can, at best, be a risky proposition for all Canadians.

• 1545

Can the government be counted on to act impartially? How can four major banks merge into two mega-banks without severely lessening and ultimately eliminating any area of competition? Banks are in business to make profits, and profits are now seen to be dependent on size. Size, however, is driven by growth requirements that the shareholders put on stock. There is an evident danger that a self-perpetuating cycle of growth will drive an uncontrolled wave of financial services mergers, which will necessarily include the demutualized insurance companies, and stock prices may reflect growth expectations beyond capability, thus leaving no option but to continue to keep the merger process ongoing to some questionable and potentially dangerous outcome for all.

Should bank mergers be approved, consumers must have clear and legally binding assurances that, among other issues: capital standards are considerably increased to protect consumers if losses exceed expectations; and there must be a clear no-risk policy for all consumers. U.S. thrifts, bailed out at taxpayers' expense, cost $150 billion.

The larger the new company, the greater the consequences should the company fail. Who will bear the responsibility and accountability? What protections must be in place to protect consumers, governments, and ultimately the businesses themselves?

The merging mega-banks must also guarantee mega-responsibility as well as mega-accountability, and we have not clearly seen this to date. For example, political pressure was necessary to establish the national banking ombudsman in as late as 1996. The House of Commons industry committee recommended in 1994 that an independent national ombudsman, based on the British model, be established. The government at the time opted to let the banks proceed on their own. I wonder why.

Although our group is primarily concerned with insurance matters, we strongly endorse the British model as a model upon which to base a fair and impartial financial services ombudsman system, paid for by industry, to act as independent adjudicator with powers to make binding decisions in financial awards where merited.

OSFI has also just recently requested sweeping changes as to how financial service providers are supervised. This, in our view, can only serve to underscore the seriousness and urgency of the requirement to overhaul the financial services industry and to legislate straightforward and permanent safeguards for all consumers of all financial products.

Thank you.

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

We'll now hear from Option consommateurs, Madame Louise Rozon, executive director. Welcome.

[Translation]

Ms. Louise Rozon (Executive Director, Option consommateurs): Good afternoon. Thank you for your invitation.

Options consommateurs is a consumer rights defence association based in Montréal which has been involved in relations between consumers and financial institutions for almost ten years.

Not only do we receive complaints from consumers every day, but we have also carried out several studies in this area. Among other things, we have looked into issues relating to the readability of contracts, the handling of complaints, and the protection of personal information. These issues have also been addressed by the task force.

Generally speaking, we support the recommendations made by the task force on these issues.

In the short time we have today, we wish to focus on the issues relating to bank services, addressing, among other things, three of their aspects: the obstacles to opening a bank account, the closing of branches, and bank charges.

In our view, it is essential that everybody have access to basic bank services in our society. Unfortunately, we see that this is becoming increasingly difficult.

With respect to opening a bank account, the problems are obvious as soon as you want to open an account in a financial institution. Yesterday, we made public the latest results of a study we carried out on bank charges and opening accounts. These results were published in our magazine Consommation.

Our investigators visited 36 bank and credit union branches and one trust company of the Montréal area to try to open a current account. In many cases, opening an account proved difficult, if at all possible. Sometimes three identification documents or one card with a photograph were required, and in half the branches visited, the client had to accept that a credit investigation be conducted. In almost 40% of the cases, the consumer was given an appointment, sometimes two or three weeks later, before he was finally allowed to open an account.

• 1550

Everything seems to indicate that the situation is similar in the other provinces of Canada. In fact, our results are consistent with those of a Canadian Bankers Association investigation, which were made public last August. In the first phase of the Canadian Bankers Association investigation, the investigators visited 179 bank branches across the country. In 41% of the cases, they were unable to open a bank account because of the excessive requirements for identification or other various reasons.

In its report, the task force found that 85% of Canadians feel it is very important or essential that everyone be able to open a bank account. It looked into the 1997 agreement between the Department of Finance and the Canadian Bankers Association relating to identification requirements. The report concludes that if there is no significant progress in a relatively short term for solving these access problems, Parliament will have to legislate. More than 18 months after this agreement, things have not improved very much in the field, notably in terms of identification requirements. Worse, new obstacles to access to bank services have appeared.

Therefore, we feel it is time to legislate so that consumers who legitimately require opening a bank account be able to do so.

With respect to branch closures, we would like to point out that access to bank services has become complicated in certain neighbourhoods and regions. We have carried out a comprehensive study on this issue, and the results were published last June.

Consumers have less and less choice; they must go farther and farther to find a service outlet. For example, on the Montréal Island, since 1997, 200 branches have closed. In Hochelaga—Maisonneuve, a Montréal district, 16 of the 20 branches closed during that period.

This of course causes serious problems for citizens and communities, who are increasingly deprived of services. Yet, there is currently no control when a bank decides to close a branch, contrary to what happens in the United States. We therefore believe that a review mechanism for branches should be implemented and that steps should be taken to encourage banks to continue providing adequate services to the public as a whole.

We are also not convinced that the task force's hypothesis, according to which a second level of financial institutions will develop in Canada, will be enough when it comes to serving clients in regions that were abandoned by the current large institutions.

On the issue of bank charges now, the study we published in our Consommation magazine is clear: bank charges are sometimes quite high and vary enormously from one institution to another. Most of all, it is very difficult to figure things out.

When we asked various financial institutions to make recommendations on what accounts certain types of consumers should choose, miscalculations occasionally occurred at the head office or regional office. We also noted considerable differences, up to 300%, in the fees charges by various financial institutions for the same services.

Of course, we could simply recommend that consumers shop around. However, with the increasing number of branch closures and difficulties in opening an account, this option is not really very practical.

There are other questions we would like to briefly raise. The task force report raises issues other than those we pointed to. It notably suggests that banks be allowed to sell insurance and offer light-vehicle leasing in their branches. We have serious reservations about these two recommendations.

The report also formulates the hypothesis that second-level financial institutions will develop. This is possible. However, it is not at all sure that these new institutions will be interested in the clients that have been abandoned by our large banks. This raises a fundamental question: Do we want to see a two-tier bank system develop in Canada?

The task force also proposes that a more rigorous control process be implemented for bank mergers. We support this recommendation. Incidently, we feel that the two merger projects currently considered offer no advantages for consumers, and that this would aggravate the problems we have identified.

• 1555

Here is a last comment. The task force recommends that the Office of the Superintendent of Financial Institutions be mandated to protect the interests of consumers. We feel that the Superintendent is not an appropriate authority in this area.

Of course, we will be happy to provide more details on our investigation and our position on the many other aspects of the task force's report. Thank you.

The Chairman: Thank you, Ms. Rozon.

[English]

We'll now hear from the Consumers' Association of Canada, Ms. Jennifer Hillard and Ms. Gail Lacombe. Welcome.

Ms. Gail Lacombe (President, Consumers' Association of Canada): Good afternoon, and thank you for inviting CAC.

The Consumers' Association of Canada, which was founded in 1947, is an independent, not-for-profit, volunteer-based organization. Our mandate is to inform and educate consumers on marketplace issues; to advocate for consumers with government and industry; and to work with government and industry to solve marketplace problems in beneficial ways.

CAC focuses its work in the areas of food, health, trade, standards, financial services, communications industries and other marketplace issues as they emerge.

All CAC policies on specific issues are framed within a set of general, consumer-oriented principles. Eight such principles govern consumer associations belonging to the worldwide federation of consumers groups, Consumers International. Among these principles are the right to chose, the right to be heard, and the right to redress.

I will now turn to Jenny Hillard, our vice-president of policy and issues, to make comments on behalf of CAC.

Thank you.

Ms. Jennifer Hillard (Vice-President, Issues and Policy, Consumers' Association of Canada): Good afternoon, ladies and gentlemen.

CAC has reviewed the recommendations of the MacKay task force on the future of the Canadian financial services sector. The task force has done a remarkably thorough job of examining their topic and produced 124 comprehensive recommendations.

CAC is on the whole pleased with the report and impressed with the detail. It's clear that the task force paid particular attention to the impact of any possible future changes in the financial services sector on Canadian consumers. There are, however, some issues on which we believe more detail and clarity is needed.

With regard to new entrants, CAC welcomes new entrants to the market and applauds the pro-competition proposals in the task force report that affect foreign banks and credit unions. These provide greater scope for strategic alliances. We believe potential entrants to the market have been excluded by the high cost of entry. There are still many regulatory hurdles to creating alternative financial institutions.

While we would not be agreeable to a lessening of regulations that protect consumers, some of these regulatory hurdles make it more likely that new entrants will enter the marketplace in urban areas rather than in rural and remote communities, which have the greatest need.

We believe efforts to encourage new entrants to the market have been largely unsuccessful in improving competition in the retail banking sector. The market should be monitored to ensure that new choices of financial service delivery are available to consumers before any further consolidation is allowed in the existing market.

While CAC welcomes new and innovative methods of delivering financial services to Canadian consumers, we are also concerned with the cost and the risk to consumers. If the service charges for new entrants are significantly higher than those levied by existing institutions, will the consumer be given adequate information? Will any deposit held by these new entrants to the market be insured? If the risk is increased, will the consumer be given adequate data to enable them to make an informed choice?

It's essential that these concerns be addressed to ensure that consumers are well-enough informed to make reasonable choices between institutions.

With regard to expanded business powers, CAC strongly agrees with the task force recommendation that privacy and tied selling issues must be dealt with prior to allowing deposit-taking institutions to venture into the areas of retailing insurance and vehicle leasing.

Tied selling is a major concern, and reports of non-conformance with corporate policy on this issue are rife. The legislation to deal with this is in place but has not yet been proclaimed. We believe this must be done. While we do not believe the legislation is clear enough on the separation between tied selling and bundling, it's preferable to no legislation.

• 1600

Increasingly, bank employees are compensated or evaluated on the basis of meeting sales quotas, not customer satisfaction. While this is common in the financial services industry, individuals in that industry were licensed and had to comply with a code of conduct. Recent changes to financial services legislation is shifting the licensing to the business, which removes the constraints imposed by individual codes of conduct.

This raises such questions as, who will provide the consumer with unbiased information when everyone is a seller and when the sellers control the information? What is going to make them act in the best interests of the consumer? Regimes to deal with this problem must be put in place before the business powers of deposit-taking institutions are expanded.

Banks, like any other organization, will be under the federal privacy legislation that we trust will be forthcoming soon. We are, however, concerned that this legislation will not have sufficient provisions for oversight. Privacy is one of those instances in which a complaints-driven process will not work because of asymmetric information problems. Generally, the consumer does not know that privacy has been violated until too long after the event to identify the violators. Redress issues will be difficult due to problems of quantifying damages that may be largely qualitative.

We would welcome stronger legislation to apply to federally regulated financial institutions that would provide for outside audit and an oversight agency to make enforceable decisions.

A satisfactory solution to these issues is essential prior to expanding the business of these institutions in order to allow them to retail insurance and/or lease vehicles. Solutions must not just be in place but must also be seen to be functioning well before these new market areas are made accessible to banks.

CAC would like to see a review of the banking sector's performance in protecting privacy and avoiding tied selling before there is any discussion of allowing them to sell insurance or lease vehicles.

The MacKay recommendation on a public interest review should be applied to studying the impacts of allowing the banks these expanded business powers. This would allow for adequate research and reasonable input by all of those who will be impacted in the other industry sectors. This review process must allow for input from Canadian consumers.

With regard to consolidation and mergers, CAC is very supportive of the proposal for a public interest review assessment to be performed before considering consolidations and mergers. We also agree with the community review and analysis required during the four-month notice period for a branch closing. We do, however, have some concerns as to the possibility and probability for the public to participate in this review process. We believe that without the public input, these assessments would be written by industry, for industry, and would only incorporate a global rather than a domestic perspective.

This shifts the reports away from concentrating on the financial industry's role in Canada. This is a critical shortcoming, and we need to examine the possibility of domestic harm to consumers. It is essential that Canadian consumers have a say in the scoping phase of public interest review assessment to ensure that the process adequately addresses the right questions. It's essential that the banks pick up the cost of this review process and that these costs are not passed on to the users of bank services.

With regard to empowering consumers, we believe it's essential that the ombudsman remain independent. Any possibility of the board that supports the ombudsman becoming political appointments would give us cause to doubt this independence. Care will have to be taken to ensure that the OSFI office is not put in a conflict of interest situation.

The OSFI has the task of ensuring the long-term viability of the financial services sector and is not renowned for its concerns for consumer issues. CAC would be concerned if the financial oversight duties were allowed to override the consumer protection function of this office.

For this reason, it may be useful to consider setting up a special arm's-length office of the OSFI to deal with the consumer protection aspects of the recommendations. This office should also be assigned sufficient resources to enable them to take on some more proactive roles, such as the development of plain-language documents, redress systems, model codes, etc.

• 1605

CAC believes the community accountability recommendations are going in the right direction. We believe any attempts to influence the composition of a financial institutions portfolio should be moral rather than by fiat.

We would like to give the market-based solutions suggested by the task force time to work before advocating interference in the market. CAC has not seen adequate evidence of serious market failure to suggest another solution at this time.

With regard to disclosure and transparency, CAC would hope that consumer representatives would be part of the multipartite working group, which is suggested as the oversight body to ensure the user-friendly production of consumer information. This would also help to reinforce the suggestions of strengthened partnerships with the voluntary sector to help financial institutions find innovative solutions to meeting consumer demands.

As Canadian banking documents were found by MacKay's research to be particularly difficult to read, CAC believes this oversight body should be implemented as soon as possible. The issue of unreadable documentation, which is hampering disclosure and transparency, should be dealt with as a priority issue. New entrants to the Canadian market should have to conform to a reasonable standard of readability of documentation, and existing institutions should be required to comply before any of their requests for mergers and/or expanded business powers are even addressed.

The final recommendation of the report suggests that Canada should continue to play an active role in international initiatives to improve standards for financial institutions. It also recommends the implementation of international best practices.

CAC's standards task force has reported a resistance from Canadian business to the development of service standards, and we would like to see this changed. It would be encouraging to see the banking sector leading the way on this initiative.

In conclusion, we believe it is dangerous to assume that the more competitive environment envisaged by the task force will necessarily protect the interests of small-business people and consumers. The literature does suggest economies of scale up to $1 billion in assets. It will take time, possibly a long time, before sufficient numbers of competitors of sufficient size to realize these economies of scale emerge. The major banks are realizing maximal economies of scale right now. That is why the industry is not contestable despite the excess profits being earned.

It is worth asking the question of whether the public is better served by having a small number of technically efficient oligopolists earning excess profits or by having a large number of competitors earning normal profits but below efficient size. If the answer is the former, what is the right number of oligopolists to have?

CAC would recommend the implementation of the recommendations of the task force first and then an evaluation of the impact of the recommendations. If the changes to the financial services sector have reduced consumers' reliance on the big banks, then the mergers could be considered. The volume of business being conducted by competitive institutions should be considered, not just the number of Canadians using alternatives to the big banks.

CAC believes the proposed mergers have failed the competition tests, and we do not believe there is a sound economic rationale for allowing the mergers to proceed at this time. We believe the bank mergers will harm Canadian business and consumers, and considerable time should be allowed for the implementation and effectiveness monitoring of MacKay's recommendations before the mergers are even put to the tests suggested by MacKay.

We are attaching a CAC paper on the proposed mergers, which we proposed last June. I'm not going to read it. It gives more details on CAC's positions on the consumer impacts of the proposed mergers.

The MacKay task force has produced much better results than we ever expected, and it's exceedingly difficult to do them justice in a short presentation.

Thank you.

The Chairman: Thank you very much, Ms. Hillard, Ms. Lacombe.

We will now hear from the London Life Policyholders Association: Anne Holmes, founding chair of LLPA and CLIPA; Dr. Leland Davies, director of education for LLPA and CLIPA; and June Davies, director of education for LLPA and CLIPA.

Welcome.

Ms. Anne Holmes (Founding Chair, London Life Policyholders Association): Thank you. It's a pleasure to be here to present our opinions and our position.

The Canadian Life Insurance Policyholders Association is the umbrella group formed after London Life Policyholders Association was formed last year. We're a national association of people who believe we have a valid claim against our insurer for misleading us in some way during our purchase of a life insurance policy, or for misleading us in some way to surrender a life insurance policy and replace it with another policy.

• 1610

Currently, we have membership of policyholders from 37 life insurance companies selling in Canada.

The association shares information with other policyholder associations—in the Atlantic region, the Atlantic Life Policy Holders Association, known as ALPHA, and in Calgary, Winnipeg and Montreal. This association has a mandate to reach fair and equitable settlement for all members with their insurers.

Today it is our mission as consumers to set out for the Standing Committee on Finance not only our complaints with the Canadian life insurance industry but long-term solutions as well, which are equally as important.

Members of the association and other Canadian life insurance policyholders require a Canadian regulation system that would assure ethical, competent treatment of consumers by the life insurance industry.

Our presentation will be in three parts. I will present part I, “The Crisis”. Dr. Davies will present part II, and part III will be done by June Davies.

First, there are the consumer complaints with the Canadian life insurance industry.

One, the consumer does not have a sample policy/contract at point of sale to compare the policy wording with the agent's sales presentation.

Two, the application for insurance, with scant details of the policy contract, is completed by the sales agent and signed by the consumer. The agent does not leave a copy for the consumer to review or compare the life insurance they have agreed to purchase. The agent, therefore, could make additions or changes to the application. We have proof that this has in fact happened.

Three, twisting and churning of existing policies benefits sales agents and the insurer while creating detrimental results for the consumer.

Four, lack of disclosure at point of sale and throughout the term of the contract betrays the consumer's trust.

Five, complexity of wording in policies allows company administrators complete control of the sale and allows unilateral change of rules during the term of the contract without notification of the policyholder.

Six, systematic extortion of unnecessary and extra full-premium payments is occurring against elderly and unsuspecting policyholders under threat of losing their policies.

Seven, companies charge out automatic loans for full premiums with interest against the policyholder's own cash values.

Eight, companies charge different costs per $1,000 death benefit within the same contract of insurance on the same insured with the same likelihood of mortality, and the policyholder has difficulty discovering this fact.

Nine, London Life, on a selective basis, is charging $50 per policy for annual financial results that are not provided in their annual statements.

Ten, a policyholder's personal information is distributed to others outside the company.

Eleven, no Canadian regulator has shown the will to investigate the life insurance industry for unlawful and immoral dealings with consumers.

And twelve, insurers are unwilling to deal with policyholders' associations as a group and continue to deny there is a major crisis with their industry and the consumer.

There is a lack of representation and disclosure by insurance companies' directors. Life insurance companies are not required to reveal to the public their method of determining dividends returned to participating policyholders. This is the only industry that is allowed to do this. The very issue of vanishing premiums that didn't happen hinges on this very crucial information.

Class action litigation was launched that should have required, but did not require, the insurer to reveal the basis of their claim that interest rates dropped and caused directors to alter dividend scales downward. The company, Sun Life Assurance of Canada, insisted that such information was secret and could not be revealed. Yet a review of annual financial statements of Sun Life finds the participating investment funds grew phenomenally since the sale of premium offset options along with participating assets and reserves.

This information leads policyholders' associations to believe that the courts' certification of the class and approval of the Sun Life agreement perpetuates major injustice against Sun Life policyholders.

• 1615

Directors of insurance companies have not been revealing to participating policyholders any alterations they approve that adversely affect returns on life insurance policies. Often they do not even respond when policyholders contact them; a company employee often responds to the policyholder.

Bylaws are issued without any information supplied to policyholders. Insurance companies can be sold where participating policyholders' assets outweigh stockholders' assets, yet policyholders have no say in the matter of the sale. Board membership representing stockholders can be easily manipulated to outweigh policyholder representatives. Participating policyholders have no say in the appointment of those who will represent them. These governance issues must be addressed by revision of the Insurance Companies Act.

The bad experiences of participating policyholders of a stock company—for example, London Life—have been related to our federal regulators long ago, yet we see the process of advancing and promoting demutualization to policyholders of the mutual companies as if no problems exist in stock companies. This is totally unacceptable.

Participating policyholders need to be allowed to participate. They need to be able to nominate and elect their representatives to the boards. They need to have representation on the board that is proportionate to the assets held in the company.

We must dispense with the old boys' network. Representative membership on boards of directors should reflect a broader cross-section of ordinary policyholders: one, our Canadian multicultural society; two, balance in gender and age; three, more realistic social spectre to reflect different levels of wage earners; and four, life experience—widow/widowers, young family heads, and living benefit requirements, to name a few.

Our third part is on lack of government regulatory action for consumer protection. Using dunning letters and home visits by sales agents claiming policies are under threat of cancellation, insurance companies have been successful in receiving billions of dollars in extra full-premium payments from angry policyholders. I am one of them.

The obvious question has to be, are these extra full-premium payments warranted? If extra payments are warranted, it should have been a simple matter for regulators and qualified staff to investigate the situation, using test-case samples for each policy type sold by each company involved. To date this has not happened despite numerous requests by CLIPA.

If these payments are not warranted, great injustice has occurred against premium offset policyholders. It is my belief that threat of cancelling of policies while demanding extra, unnecessary, out-of-pocket payments is tantamount to extortion. If proven as such, the fact that these methods have been used by white collar executives in the insurance industry does not reduce the severity of the crime.

Ordinary Canadians who dispute extra premium payments are obliged, therefore, to accept representation by legal firms under class actions that are not necessarily in their best interest. Most policyholders cannot afford independent court action against life insurance administrators with deep pockets that hold the policyholders' own funds. By contrast, the British parliament did not require their citizens to go through court. Investigations by Scotland Yard revealed that mis-selling had occurred, and large fines and compensation to victims ensued.

Three Canadian judges approved the certification of the class and the Sun Life agreement. These judges did not investigate evidence brought to their courtrooms that proved extra premium payments to Sun Life Canada were warranted. The statements of claim in Ontario, Quebec and B.C. meant nothing, as they did not lead to any requirement of proof by Sun Life—they didn't even file a defence—that these extra payments were truly warranted. The court-approved Sun Life agreement gives Sun Life the right to demand further payments from policyholders without proof that they are necessary.

On behalf of all Canadian premium offset policyholders, I must ask, who really has benefited from this legal exercise, and where are our Canadian regulators?

• 1620

On demutualization, policyholders must know all of the reasons before making the choice. Although it appears these wishes will not be met, CLIPA has asked the Department of Finance to ensure the following will be provided to fully inform policyholders with mutual insurers wishing to demutualize.

1. An independent financial analysis from 1980 to 1998, inclusive. The purpose? To ensure demutualization is in the best interests of policyholders; to prove there is a need to demutualize; and to determine alternate methods to raise capital other than change of ownership.

2. A required five-year plan of financial projection fully achieved and proof of benefits to policyholders prior to any sanction of stock options for the administration. How could the federal government even consider stock options for management after demutualization without some form of accountability to the existing policyholders of a mutual insurer? Illustration sheets with projections calculated by company actuaries are still being used as sales tools on a daily basis to make policy sales to consumers. Accountability for those projections must be obtained for the consumer, and some form of financial accountability after demutualization must be obtained for the policyholder of a stock company. As a policyholder with a stock company, I can truthfully say such financial accountability currently does not exist.

3. A simply worded 10% ownership clause does not protect future participating policyholders in a publicly traded company. London Life is a stock company, and participating policyholders' funds and assets have been manipulated to benefit the new owners. I have protested these actions to Minister Martin and received no reply. The former actuary of London Life, Mr. William Rudd, has told me he has written to OSFI to launch his objections to missing funds, and at last word with him, Mr. Rudd has had no reply.

4. A broad, fully inclusive, open, international, public consultation process for all stakeholders concerned with demutualization in the life insurance industry. The results reported from such an education process would assist those forming the regulations and clearly offer the preferred popular choices on which to vote. All stakeholders would have opportunity to listen to the concerns of others and work toward a common solution.

Our fifth part addresses the consumers' solutions.

We require legislated change to incorporate the following.

First, standardization of clearly understandable language in life insurance policies—for example, standard form of contract for basic types of life insurance with full explanation of insurance terminology.

Second, a code of ethics for both insurers and their sales representatives—for example, establish fair practice criteria where policy/contract wording does not allow unilateral change of rules by insurers during the term of the contract, and where consumer education at point of sale is a prerequisite.

Three, entrenchment of policyholders' rights within every policy/contract—for example, right to view the policy prior to application for purchase; right to free and full disclosure of financial information, perhaps of the policy, at all times during the policy term; the right to deal with an insurer's representative who is not in conflict of interest; right to see your own underwriting file; the right to privacy on the insurer's database; the right to ongoing service; the right to obtain fair and equal redress; and the right to select and appoint fair representative membership on the board of directors on an annual basis.

Four, support and recognition of policyholders' associations by the insurers with full representation and voting privileges on the boards of directors.

Five, an independent consumers' board of review, knowledgeable but not from the industry, for all new life insurance products' approval prior to marketing. Such a board could accredit life insurance companies for their performance in meeting needs of consumers—for example, the introduction of living benefits for families.

Six, training programs for new life agents, with certification supplied by educational institutions independent of life insurance companies for stricter compliance with code of ethics in marketing life insurance and investment products.

Seven, a broad consumer education program to demystify different types of policies so that consumers can self-determine the best policy in terms of pricing and needs. This is particularly important with the rapid introduction of electronic commerce via the Internet, where consumers will have direct interaction with the insurer for purchasing.

• 1625

Eight, at redress, the consumer should have a full public declaration of settlements between parties. What common good is achieved when fair access for equal rights are denied to each and every policyholder when they are systematically denied the settlement information?

At this point I would like to hand over the rest of the presentation to Dr. Leland Davies and June Davies.

Dr. Leland Davies (Director of Education, London Life Policyholders Association and Canadian Life Insurance Policyholders Association): Thank you, Anne.

Before I start, I just want to point out that some of you may have received two versions of our education piece in the brief. The one I'm referring to is the one that has numbers at the bottom of it. I do apologize.

I think Anne has pointed out some of the serious concerns our policyholders have with the life insurance industry, and pointed out the fact that many of our policyholders are challenged to understand how they can be more knowledgeable about the issues affecting them and how they can be more of a partner in the decision-making they are facing at this point in time.

I think what we want to do in terms of the Canadian Life Insurance Policyholders Association is to work with the life insurance companies and with regulatory bodies established by the finance ministry to develop a kind of strategy to strengthen this relationship and understanding by the public.

We're suggesting three different approaches. One is an education and consultation process. The second is a consumer empowerment strategy. The third is the establishment of an accreditation process for life insurance companies and broker agents.

I think the principles behind these are reflected in the report of the task force, which highlighted that, “The current framework for consumer protection is not as effective as it should be in reducing the information and power gap between institutions and consumers”. That's from page 10 of the highlights document.

What we're suggesting in terms of education and consultation is a process based on some of the work we've done with national issues forums, which are a deliberative process that allows people to make decisions and choices based on being fully informed. I think the pilot case for this kind of approach could be the demutualization issue.

As we see it, in the current effort, Mutual Life, for example, has been running a series of meetings for their policyholders about this demutualization, but we feel it misses the mark. The notification of the policyholders' meetings was received, by at least one policyholder, the day of the meeting. The meetings were convened only in large city centres, and many people in this country, including us, live outside of and a long way from those large city centres. Those meetings were not accessible.

The pamphlet Mutual Life produced, called Quick Facts on Demutualization, has a section called “Why is Mutual Life making this change?”. It stresses only the benefits of the change. We feel that for people to make informed decisions they need to consider both the benefits and the costs of demutualization.

The task force report in terms of the bank merger situation argues for a public interest impact assessment in which both benefits and costs are presented to the public. We would argue this same requirement should apply to demutualization and to the meetings that are held with the policyholders.

We have four steps, then, in the approach.

One is to frame the issue of demutualization into choices that the policyholder has, and that these choices include the benefits and costs of each choice. That's necessary for somebody to make an informed decision and close that gap that was mentioned in the task force report.

So we think these processes should be convened across the country and they should take place in smaller communities as well as large cities. These forums should be moderated by impartial people so that the information can be clearly presented in terms of what are the pros and cons.

• 1630

At the end of these, a report could be produced that would provide additional information to the policyholders who are going to have to vote on the issue of demutualization.

Ms. June Davies (Director of Education, London Life Policyholders Association and Canadian Life Insurance Policyholders Association): It's interesting that we have a number of issues facing us not just in the financial realm of things but in every ministry. How do we consult effectively with the public?

The process we're suggesting allows us to set up a system where we can teach people in communities large and small throughout Canada how to frame issues. We can frame issues together, in a really spontaneous way, and we can be training moderators, people who can facilitate forums in communities across Canada.

I think what we're wanting to do is to present to you not only an opportunity to deal with one issue but a process that could actually be used to engage Canadians in any and every issue. We really urge you to start to look at these kinds of processes that can actually begin to engage Canadians in a very real way.

It's hard for us to sit here and only be able to present an advocacy role for certain positions. It immediately sets up an adversarial sensitivity, and what we're trying to accomplish is a way of being able to collaborate together.

Unfortunately, many of our ways of presenting issues is in a very partisan way, and we're really being pressured to introduce our literature in ways that are always proponents for one position. We really urge you to speak to us in more detail at other times. There are some really exciting processes to engage us.

What we're trying to tell you is that we want to be involved, and we don't have a mechanism that allows us to do it and feel heard.

When you form an advocacy group you automatically assume it's no longer public interest—you've become a self-interest group—and yet what we're speaking to you about is public interest. So we're sort of damned if we do and damned if we don't.

We urge you to really talk to us and talk to some other organizations that are doing similar work. We'd like to take this process and apply it to this very important issue and maybe use it as an example, not just for this financial issue but also something that could probably help Canadians across Canada in every issue.

Dr. Leland Davies: I wanted very quickly to finish with our two other points.

The second one is for empowering consumers. In light of these misunderstandings around many of the policies and what happens, we think we need a collaborative mediation process for policyholders and the insurance companies.

Second, we need to build in principles for decision making and resolution of customer concerns with the insurance industry. There don't seem to be good ways of doing that at this point in time.

Third, under empowering consumers, we think there should be an insurance information system, a kind of comparative matrix that shows the various policies, what they mean, what they offer, which allows consumers to become educated about the differences in the policies and the implications for them.

The final thing we're arguing for is an accreditation system for insurance companies and broker agents so that the public can tell if the insurance company they're dealing with and the brokers and agents they're dealing with are meeting certain standards established for insurance companies, for their products, and for the agents and brokers who sell insurance. I think that's the critical thing to increase the confidence of the consumer in the industry, and one that certainly takes place in many other fields, in terms of the health industry and so on. So I think that kind of accreditation system needs to be established to give the consumer a greater sense of confidence.

Ms. June Davies: Probably we need some international standards. I think we all recognize that many companies, as we're driving to and fro wherever, have the ISO 9000 and 14000 and 9002 and 9003. As soon as I see that, I know that company's doing something special, and I feel good about it.

• 1635

Even though standards are actually minimum standards, and a lot of these companies are surpassing those minimum standards, even if I saw an ISO 9000 outside of a London Life or a Mutual Life company, I'd have a natural respect for that. So what we'd be looking at is developing accreditation specific for service companies, and in this case, financial companies.

As we suggested, there are certain industries— The health industry is the one we're familiar with. It has its own accreditation program. I know when we're contracting service providers to provide services in community, we are asking them if they're accredited or pursuing accreditation, because that gives us a natural identity with their capacity and quality of service.

The Chairman: Thank you very much.

We'll now have to move to the National Council of Welfare.

Steve Kerstetter, director, welcome.

Mr. Steve Kerstetter (Director, National Council of Welfare): Thank you very much, Mr. Chairman.

The National Council of Welfare is very pleased to be able to appear today to talk about issues concerning the financial community.

As you know, the council is a citizens' advisory group to the Minister of Human Resources Development, and its mandate under federal law is to advise the minister on matters of concern to low-income people.

The council recently published a report, entitled Banking and Poor People: Talk is Cheap, which was prepared in part to assist the task force in its work. The main focus of the report was on access to banking services by low-income people. We very much appreciate the work of the task force in publicizing that as a major issue, and we very much appreciate the recommendations the task force made.

Our report also raised a number of concerns about the proposed bank mergers. Our council as a whole appears to be less enthusiastic than the task force is about the prospect of bank mergers, but we agree in general with the type of recommendations in the task force report.

What I would like to do today is to focus on an area where there is some disagreement between our council and the task force. That lies in the general area of community reinvestment.

We believe this area encompasses two distinct but related areas. One of them is the lending practices of financial institutions in poor neighbourhoods and the other is the issue of personal and mortgage loans to disadvantaged individuals.

With respect to lending practices in poor neighbourhoods, we remain unconvinced as a council that Canadian financial institutions, either individually or collectively, are living up to the needs of small and medium-sized businesses in poor neighbourhoods, or to the needs of voluntary non-profit groups that work in poor neighbourhoods. We have found no reliable data to support claims by the Canadian Bankers Association and others that all areas of Canada are well served by financial institutions.

With respect to the other part of the issue, personal loans to disadvantaged individuals, we're equally unconvinced that people at the lower end of the income spectrum, and people covered by the federal Employment Equity Act, are all well served by financial institutions.

In our report we recommended that legislation similar to that in effect in the United States—specifically, the U.S. Home Mortgage Disclosure Act and the U.S. Community Reinvestment Act—be passed in Canada to require financial institutions to make much greater disclosure of loan approvals and rejections in all census tracts. The council's position is that then—and only then—will Canadians know how well their financial institutions are living up to their rhetoric.

We thought today that members of the committee might like to take closer look at a table from our report. It's reproduced in our brief to the committee. It's table 2, entitled “Mortgage-lending patterns in Atlantic, Georgia, in minority and white areas, 1991”. It was compiled by researchers based on the kind of information that was disclosed at the time in Atlanta, Georgia.

If you look at the table, you will see basically two types of financial institutions, or two different types of assessments. On the first line of the table, it talks about Sears Mortgage Corporation, which had a 0.4% market share in minority areas. These are areas that are 75%-or-more black in the case of Atlanta. Its market share in white areas, in white neighbourhoods of the city, was 3.2%, or some eight times larger. That's why the corporation was rated as a worst-case scenario in the study we refer to.

• 1640

The other extreme is at the bottom, in the last line, the line represented by Gulf States Mortgage Company. They had 16% market share in minority areas of the city in 1991 as opposed to about 3% in white areas of the city. That is the reason the institution was rated as having an affirmative-lending pattern, the U.S. terminology they use for institutions that do reasonable levels of business with minority groups in minority areas of the country.

The same type of analysis, we believe, could be done in Canada using data collected by financial institutions and reported to government. This data could be compared with information—for example, income information—from individual census tracts. This kind of analysis, in our view, would show definitively how serious our financial institutions are about their obligations to serve all their customers. It would be particularly well suited to Canada, because it would look at all branches of all institutions regardless of where they're located, and would also cover virtual banking activities where they exist.

The key question to be answered would be this: How does the market share of loans made by each institution in a well-to-do neighbourhood compare with its market share in a low-income neighbourhood? Once we had that kind of information, governments would have a very good idea of the extent of any problems that do exist and would be in a position to deal with them in a logical manner.

If, for example, it turned out that discrimination against poor neighbourhoods is not a widespread problem, governments might want to take a look at the lending practices of a particular institution and maybe twist a few arms to try to get a more affirmative lending pattern. If, on the other hand, discrimination against poor neighbourhoods turned out to be rampant, we feel that more sweeping measures would be necessary.

As committee members know, recommendations 101 through 111 of the task force report deal collectively with issues related to business lending. Among other things, they would require more information be provided to government and some new data-collecting activities by Industry Canada and by Statistics Canada.

In our view, the recommendations are clearly an improvement over the status quo, but we think they would be considerably less useful than the kind of data that's available already in the United States. At least some of the task force proposals would involve collection of information based on surveys, and they would give little more than a bird's-eye view of a particular institution or a particular area. We doubt they would capture problems that may exist within a small geographical area, such as the east end of Montreal or downtown eastside in Vancouver. We also doubt they would capture any problems that may exist within particular groups of individuals, such as people with disabilities or members of visible minorities.

I believe I'd like to stop there. On behalf of all the members of the National Council of Welfare, we very much appreciate the opportunity to be here today. We hope our presentation will assist you in your work. As the afternoon progresses, we'd be more than happy to try to answer any questions you may have.

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

We'll now hear from the Public Interest Advocacy Centre.

Ms. Angie Barrados, welcome.

Ms. Angie Barrados (Researcher, Public Interest Advocacy Centre): Hi, and thank you very much for the opportunity to present our views today on the task force report.

The Public Interest Advocacy Centre is a non-profit organization with a national board of directors and both organizational and individual membership. We specialize in representing the consumer interest in the delivery of important public services, particularly regulated industries such as telecom and energy, and have a particular concern for the vulnerable customers of these industries. We've attempted to apply some of our knowledge from some of these other utilities to the banking sector.

We'd like to commend the task force for producing an intelligent, fair, and balanced report. As Harold MacKay said before this committee a few weeks ago, the task force recommendations are a package. The task force made many recommendations that go further than ever before in dismantling the pillars of the financial services sector. The recommendations aim at increasing competition in the sector, but they do not guarantee that banks will not grow even bigger or that concentration will not increase in retail banking.

As consumer representatives, these possibilities are worrisome. However, the task force report is acceptable to us because of the recognition that strong consumer protection measures need to be part of the framework for the financial services sector.

• 1645

The task force's vision is that through a combination of legislated consumer protection measures, codes of practice, and ongoing dialogue between the industry and consumer representatives, ordinary Canadian consumers can be well served by the financial services sector. While the task force's approach to consumer concerns is “common sense”, it is, in fact, revolutionary for this sector. Over many decades, the financial industry has lobbied strenuously—and for the most part, successfully—to avoid consumer protection measures and avoid consumer involvement in decision making.

The task force recommends an entirely new way of treating consumer issues. New ways of doing things can be threatening. This committee needs to be aware that many parties will want to water down the task force's recommendations on consumer protection issues. We strongly recommend that the government not tamper with the balance that the task force has achieved—that government recognize that the consumer protection measures must accompany the implementation of the other recommendations.

The government will be pressured to move quickly to implement the changes recommended by the task force and to limit the time it takes to make a decision about the bank mergers. The need for speedy deliberations needs to be balanced by the need to ensure full and fair public participation. The type and extent of public involvement that the task force recommends is new for this sector. The need to involve consumers and consumer representatives in upcoming deliberations needs to be carefully thought out.

We feel that the task force is on the right track, and have some comments to make in support of the task force's recommendations. We have chosen three key issues to bring to your attention today.

Our first recommendation is that the government develop an implementation plan for the task force recommendations in consultation with consumer organizations and other interested parties. This implementation plan would be a vehicle for an open, orderly process to proceed with the task force's recommendations, recognizing that many of the recommendations involve consultations and multiparty involvement in various initiatives.

The task force report notes that consumer organizations—such as ours—need to be strengthened. The implementation plan would form the basis for discussions on consumer organizations' future role and what measures may be needed to ensure adequate resources.

Our second recommendation is that the government ensure that we get the institutional arrangements right in the implementation of the task force recommendations. The Auditor General's 1995 report stated that the responsibilities of OSFI, CDIC and the Department of Finance for implementing public policy objectives were unclear. As far as we can tell, this problem with unclear responsibilities is still the case. The implementation of the task force recommendations will be quite confusing unless government players' roles are clarified.

In the context of these unclear roles, we are quite concerned about the proposal to make OSFI responsible for the proposed consumer protection measures. Its principle mandate is to supervise financial institutions for financial soundness, and it's not clear how consumer protection measures would fit into this mandate.

As well, despite many and ongoing consumer concerns with the banking industry, no measures to address consumer concerns have ever originated from OSFI. We suggest that consumer protection measures should be implemented by a body that has an appropriate mandate and that has some experience with, and commitment to, consumer issues.

Another institutional issue is with regard to the proposed changes to the banking ombudsman system. We support the task force recommendations, and would like to emphasize the need for the ombudsman framework to be open and accountable. In this case in particular, consumer representatives should be involved in developing the new framework.

Finally, we have some recommendations about the review of the mergers. We are very encouraged by the government's commitment to implement the public interest review process, as suggested by the task force. We have a number of procedural recommendations about the process, which are given in an appendix to this brief. I won't read them now.

• 1650

One recommendation I want to bring to your attention today is the recommendation that participant funding be provided for the public interest review process for the mergers. It's very important that all interested parties have the resources to participate meaningfully in the public interest review process.

The task force noted that consumer organizations are short of resources and struggling to meet their current commitments. Without participant funding, non-industry parties will not have the resources to devote to reviewing documentation, assembling expertise, and preparing for hearings. Participant funding would ensure that there is a strong public interest presence at the public interest review process of the mergers. This strong public interest presence is crucial for the process to be legitimate in the eyes of the Canadian public.

I don't have time to discuss the task force recommendations in further detail today. We may wish to submit further recommendations to the committee before these hearings on the task force report end.

As well, I would like to mention that today I would like to table a report we've recently completed on tied selling. I've left some copies of that report with you.

The report discusses the task force's recommendations on improving the recently proclaimed section of the Bank Act on tied selling, which this committee was involved in reviewing earlier this year. I'd be happy to discuss our report on tied selling further today or at another time.

Thank you very much.

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

We now will enter a question-and-answer session.

Just so everybody is aware, the committee members will have to go to vote at 5.30 p.m., so we will only be able to have a 10-minute round for questions.

We will begin with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman, and thank you, presenters.

My first question is to the representatives of the insurance interest group.

In reading the presentations and listening to you, if the allegations have some substance to them, I guess these insurance companies in Canada must be a pretty nefarious bunch. If that's fact, I'm wondering why—and I tend to be a pretty good student of the media—there has not ever been a huge hue and cry in the media about how the insurance companies are mistreating the policyholders and the Canadian consumers of those products.

Is there any short answer to that?

Ms. Anne Holmes: I can tell you that recently I was contacted by a leading reporter from The Globe and Mail to learn that one of our rating agencies in Canada had met with reporters and asked them to stop reporting on the vanishing premium issue and to concentrate on the benefits of demutualization.

The press is a very important part in getting this information out to people. There have been many articles. I can tell you, I have been interviewed many times by the press.

When I hear that one of our rating agencies is interfering with the freedom of the press, I get very upset.

Mr. Dick Harris: Okay.

Second, the insurance companies are pretty much overseen by OSFI, the agency that regulates the industry; I suppose that's the main agency. Have you ever approached the superintendent of that office and asked him to call a meeting between your groups and the insurance people, on the other side of the table, where he could sit in the middle and listen to the concerns you had and then look for responses from the insurance company with regard to your allegations of abuse in the industry? Have you requested it, and has it ever happened?

Ms. Anne Holmes: I have actually corresponded with Mr. Palmer on several occasions. Recently, after he found out that I had given my information to your leader, he responded to me.

I asked Mr. Palmer why, first of all, he doesn't investigate the very allegations I am making, when I have evidence to present. His response? He is only responsible for safety and soundness of financial institutions. He is not responsible for consumers, per se.

• 1655

I questioned that in a further letter, and said, Mr. Palmer, for whom are you responsible for the safety and soundness? Because the very crux of that is the consumer.

I haven't heard back from him on that one.

Mr. Dick Harris: I would suggest to the committee that if this in fact is a serious problem—and your group seems pretty determined that it is a serious problem—it would probably be a very good step to have Mr. Palmer sitting there, have the insurance people over here, and have your group here.

Mr. Bill Podmore: Can I add something here?

Quite earlier on in the whole demutualization process we suggested that there be established a policyholder task force to look at the whole demutualization issue in partnership with government and industry. Government suggested to industry, in the media, that if they did not agree to a policyholder task force they had better have a better alternative.

We do not have a policyholder task force. The best we were able to accomplish was to offer our comments on the draft regulations.

We met with the industry task force to go over some of the issues that we thought were of grave concern, but there was no overall policyholder task force.

So I don't see any workability, now or in the near future, between government, industry and consumers.

Dr. Leland Davies: Perhaps I might add, though, to be fair to the insurance companies, that we have had one meeting with some representatives from three of the four insurance companies who are going through demutualization, and we've put forward a proposal to them on how we might begin to kind of turn this around and start working together.

Ms. Anne Holmes: That was simply on demutualization, though. With the consumers' complaints on the vanishing premium and now the universal life policies, in fact, our association put forward to each CEO of all of the large insurers, with the difficulty of the vanishing premium issues, a proposal to sit down with them at a conference and to discuss the issues. Not one responded. Not one company came back to us and responded.

That's really quite disheartening. The approach is, “Mrs. Holmes, we will deal with you as an individual; we do not want to talk with you as an association”. So we must be kept as mushrooms in the dark.

I think London Life's big problem with me was that they told me I was the only stupid one who didn't understand my policy. It was a mistake, a very big mistake, to tell me that, because I have now learned there are 500,000 people with London Life policies with premiums that didn't vanish; about 400,000 people with Sun Life; I believe 187,000 with Manulife; and so on. One out of every three policies sold in Canada since the turn of the 1980s had vanishing premiums that didn't.

So it is a systemic problem. It is not just one or two people. It's systemic in the industry.

If we're going to be able to be reasonable people, why can't we sit down with these life insurers? But they're in a state of denial.

Mr. Dick Harris: I would suggest that you have the people at the table now to demand some sort of a round table with the insurance people. With the regulator sitting there, with the representative from Industry Canada sitting there, today is the day to make your demands.

Mr. Bill Podmore: It think what we're looking at is history right now. I mean, all these issues are unfortunately the result of inadequate supervision and regulation, and that's what needs to be addressed.

• 1700

Mr. Dick Harris: Okay.

I have one short question. I guess you're all consumer groups, but what I get from the presentations is that there appears to be a request that more regulations are brought into force to try to address a lot of your concerns. We can get to a point where regulations start to cost a lot of money, and certainly people who are in business in Canada never end up paying for the regulations themselves. They always pass the cost back onto I guess the very people you're representing. There comes a point when the cost of regulation is just too much to bear for consumers, and they would rather sometimes take a backward step and say, okay, lower prices but less regulations, please.

How do you balance that, and where do you find the balance point?

Mr. Bill Podmore: You see, I think what's really happening is that the consumers are paying for the regulation and they're paying for lack of regulation, either way.

Ms. Anne Holmes: Weigh that against court costs. We just had a Sun Life hearing in Ontario that went on for over a year. That's also costing consumers and the general public, people who didn't even get involved in the insurance industry.

So while I must agree, I do believe in less government and a more efficient government, and in order to do that, you must involve consumer groups. You must have the voice of the consumer contributing to the control of new products that are going out so that we are willing to accept responsibility then for what we purchase. But we also have to have a say in what will come forward to the market.

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

Mr. Bill Podmore: What happened in the whole vanishing premium issue is a little bit of a joke, because in essence I'm an owner of the company, and I've effectively sued myself.

The Chairman: Thank you, Mr. Podmore.

Thank you, Mr. Harris.

Monsieur Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): I would first like to thank all those who came today to share their comments and remarks with us on the important issue of the future of Canadian financial services.

I would like to ask a few questions to the Option Consommateurs group, which I congratulate for their work and study, whose results were abundantly published in the media yesterday.

Does the comparative picture you drew include the assumptions you made about what would happen if the four banks currently considering a merger did merge? Would there be advantages for the consumers, or would the situation remain as what you described in your study?

Mr. Jacques St-Amant (Analyst, Option Consommateurs): This is an interesting question. There are indeed disparities between financial institutions.

In our study, we drew four theoretical consumer profiles to find out what financial institutions could recommend to us. Generally, there is relatively little difference between the Bank of Montreal and the Royal Bank. The difference ranges between 0% and approximately 15% for the recommendations made by the two banks, and most of the time, it is the Bank of Montreal that offers the most interesting products.

However, there are really significant differences between the Toronto-Dominion Bank and the CIBC, in some cases up to 140% or 150%. For example, a consumer who uses the automatic teller a lot and has an account with the Toronto-Dominion Bank must pay approximately $105 in charges per year, while if he had an account with the CIBC, he would pay $267 per year. This is a very significant difference.

If these two banks merge and decide for example to use the CIBC price list, some clients will be fairly distressed. In several cases, the Toronto-Dominion Bank obtains very good marks in our tables, while the CIBC is really all the way down the bottom.

So it is clear that there could be an impact on consumers.

Mr. Odina Desrochers: I have another question. You say that approximately 41% of the people who conducted the investigation could not get a bank account. The Holiday Season is approaching. Could you tell me if it is easier to get a credit card than to open a bank account?

Mr. Jacques St-Amant: That is what certain bankers at least seem to think. We visited 36 branches in our study. In 20 cases, someone asked if we had a credit card and stated that he could not open a bank account for someone who did not have one. However, he presented the form that allowed the client to obtain a credit card from that bank. He said to apply first, and he would open an account once the credit card would be obtained.

According to us, this is really a topsy-turvy world. A credit card is a product that is not necessary in everyday life. A bank account, however, is extremely useful. That is the least we can say.

Mr. Odina Desrochers: Could you tell me the name of this financial institution which, during your investigation, preferred presenting a credit card application form rather than opening an account?

Mr. Jacques St-Amant: I completely forgot to mention it. Shame on me! It is the National Bank, the branch located on the corner of Park and Laurier. The National Bank tends to have policies that are not always very interesting in the field.

• 1705

Mr. Odina Desrochers: I also noticed that it is currently the champion for the highest bank charges.

Mr. Jacques St-Amant: This is just about the case, indeed. In most cases, they are at the bottom of the list.

Mr. Odina Desrochers: Since this institution is present throughout Québec, what are the differences between the National Bank and the Mouvement des caisses Desjardins?

Mr. Jacques St-Amant: With respect to tariffs, in the four profiles we established, the Mouvement Desjardins was about in the middle of the list, that is neither very good nor very bad. As for access, there are somewhat significant differences. Generally speaking, credit unions are more willing to accept opening accounts than banks are.

This being said, there are also occasional blunders and aberrations at Desjardins. Again this morning, we got a complaint from a person who went bankrupt in 1995 and who tried to open an account with a credit union. A credit investigation was made, and the person was told that the application was refused because of the past bankruptcy.

Mr. Odina Desrochers: When did you notice that a credit investigation was required before deciding to open or not to open an account to someone's name?

Ms. Louise Rozon: It was about a year and a half ago that we started to receive complaints from consumers who said they were required to submit to a credit investigation.

We carried out a study in the fall of 1997, during which we again tried to open accounts. At that time, the ministère de la Sécurité du revenu du Québec had accepted to issue social welfare cheques to our three investigators. So they went to the banking institutions with these cheques to open accounts. Even at that time, 20% to 30% of the branches required that our investigators accept a credit investigation.

When we resumed the exercise, sometimes by phone, sometimes on site, but without social welfare cheques, indicating we were workers, we found that in 50% of the cases, before accepting to open an account, we were required to submit to a credit investigation. We find this totally unacceptable. It is as if the people who ask to open an account were borrowing $10 000 or $15 000. This is not at all the case. This policy should, in our view, be changed in all financial institutions.

Mr. Jacques St-Amant: With your permission, I would like to add a detail. We have been looking into this issue since 1993, and we have noticed that the main problem, the main obstacle to opening accounts, is identification papers.

After all the work that has been done, this is a problem that is very slowly beginning to improve. However, we are seeing new difficulties appear; people are being blocked because of new policies. We therefore come to the conclusion that once a problem is solved, three others arise. Someone may have to take action.

Mr. Odina Desrochers: One last question, Mr. Chairman. Among the financial institutions that require a credit investigation, are some of them more strict than others, or do they all have the same behaviour?

Mr. Jacques St-Amant: It varies considerably. Not only does it vary from one financial institution to another, but it varies from one branch to another. Oddly enough, when the head office learns that its branches act like this, we are sometimes told that there is no reason for things to be like this, that it is not logical, that it is not the institution's policy. But it is unfortunately what happens in the field.

Mr. Odina Desrochers: Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Desrochers. Ms. Bennett.

[English]

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

I think one of the things all of you have reflected is that people were pleasantly surprised to see that the task force had actually dealt with the issue of consumers and consumers' issues. I would just like to begin with regard to giving the banks new things to do.

We're being told by lots of other groups, but not specifically from the consumer groups, that it would be very bad for the banks to be able to sell insurance or lease cars. I would like to hear from anybody in I think this really important panel on your impression of that.

I notice in the Consumers' Association brief it does say that you'd like to see a review of the banking sector's performance in protecting privacy and avoiding tied selling before there's any discussion of allowing them to do these new things. Is it good or bad for consumers?

To fill you in on what we've been hearing from all across the country, people are worried that something like insurance would be a loss leader, that it might even be tossed in for free, and then, if they weren't able to make a profit, eventually they'd just decide not to do it any more. Meanwhile, all the independent insurance agents would be out of business.

• 1710

Ms. Jennifer Hillard: I think the bank has a record of completely taking over anything it gets into, and I think that's one of the great concerns. You know, a competitive marketplace always works better for consumers, so as it is right now, on the whole, the system is working fairly well. I think if the banks got in, we wouldn't have the choice. They would gradually take it over.

I think the tied selling issue is horrendous. We can see such a massive access to information, especially things like people's health data, which is frequently tied to some of the insurance policies, that could really affect access to loans, to credit, to mortgages and that type of thing. So I think it really is a problem.

The car leasing issue—

Ms. Carolyn Bennett: Sorry to interrupt, but one of the things in the privacy issue is that there are some pretty specific provisions that it shouldn't be the same person doing both things. I guess what I've been trying to understand is, in Quebec, where there is a little bit more of this, have the consumers felt that the information is shared regardless of who it is, and in the smaller branches, is it often done by the same person?

Ms. Jennifer Hillard: I come from the prairies, so I'm a little disadvantaged in terms of answering on Quebec, but having been in some of the smaller financial institutions in small towns, I don't see how they can possibly keep it separate. I mean, Joe Jones is going to move from here, where he's opened your bank account, to here, when he's selling you insurance, simply because common sense says that a financial institution can only support so many jobs in a small centre. If the alternative to that is closing down and not having a financial institution, I don't think that would help people either.

You can put all sorts of things in place to protect privacy, but in small centres, I truly don't see how it's going to work. I really can't imagine being able to completely shut your brain to what you've just read in someone's insurance file when you go over to deal with their mortgage file. Even if you have different people doing it, again, in a small branch, people talk. It's small towns. It's a difficult situation.

The car leasing problem is, I think, a whole other issue. There have been some major problems in the States where the banks got into car leasing. When it came to the ends of the leases, the banks just didn't have what was necessary to deal with a huge slew of used cars on the market.

It just seems to me that if the banks get into car leasing, while it's another way of providing credit, I'm not sure if the long-term problems and issues have really been thought out and whether we're then going to finish up with all sorts of unreasonable pressure on consumers to buy the used cars that the banks don't know quite what to with rather than going through the channels that are there now, where they would roll over into a different kind of lease, maybe on a different kind of car.

Mr. Jacques St-Amant: I would generally agree with Ms. Hillard but I'd add two details.

First, as to privacy, of course having a privacy act is essential, but then you have to make sure it is being enforced, and that is a problem. As CAC mentioned earlier, there is asymmetrical information whereby it's often very hard for the consumer to know that his or her privacy is being violated.

Beyond that, there is no need for banks to do what they want to do in branches, because they are currently using alternative channels and they can perfectly well continue to do so without being prevented from being active in insurance and in leasing. Why do they insist so much on mixing up basic banking and those kinds of activities? I don't know.

Ms. Carolyn Bennett: Do you have any reports of the experience in Quebec with the caisses populaires?

Mr. Jacques St-Amant: We have seen some very odd things done by Desjardins regarding privacy. They sometimes forget that there is an act out there. Although we're told by some people that they are concerned, again, at a grassroots level it doesn't always show up.

Ms. Anne Holmes: I don't have a concern with the banks selling life insurance, because I currently do not feel reassured that my private information is protected on my file with my insurer's database. I have personal experience to prove otherwise, that it is not protected, in fact.

• 1715

I welcome the competition of the banks selling the life insurance. I do have a concern with privacy, though, just as you have expressed. If the head of a small company has a heart attack and needs to have funding, then perhaps later it could be a concern that they mightn't get it because of their health issue being known.

Having said that, however, the life—

Ms. Carolyn Bennett: Can you just differentiate? Life insurance obviously is your expertise. I think the concerns we've had articulated were that MacKay hasn't really sorted out the difference between life and property and casualty, and that they've been almost lumped together. Maybe life would be okay, but the property and casualty people feel it wouldn't be good for consumers.

Ms. Anne Holmes: Right. No, it's true, I have been looking only at the life insurance aspect, but the property and casualty may very well be best kept separately. My concern is that if we have mergers, such as Great West purchasing London Life, then the numbers of insurers in fact are narrowing also.

Mr. MacKay also recommends that insurance companies now can start to act much like a bank. So you have insurers selling mutual funds, and you have banks doing the same. We are the only country, actually, where banks do not sell life insurance. I would suggest perhaps we should look at other countries to see the experience where that has proven perhaps detrimental in some ways, but perhaps there are some positives to look at.

But the more competition, as far as I'm concerned, and in my experience, the better.

Mr. Jacques St-Amant: If I may, I have one short concern. It has to do with training. Unfortunately, we already find that bank staff don't even know banking policies and standards. Now we want to ask them to do insurance too? I shudder to think of what's going to happen.

Ms. Anne Holmes: That's why I suggested we take the education system away from the insurers and put it into the community colleges for accreditation.

[Translation]

Ms. Gail Lacombe: Being from Québec, what I am interested in is access to information. Credit unions now have the right to sell insurance. This gives them access to our names, our addresses and our social insurance numbers. They cannot have a better way of sending us all kinds of information and promotions. They tell us that insurance is available in branches. This frightens me.

[English]

The Chairman: Go ahead, Ms. Bennett.

Ms. Carolyn Bennett: I have a short question for Mr. Podmore.

My experience in my constituency office has been that people are very much happier with the bank ombudsman than perhaps they were at the original outset of the CBA deciding to help with this, or whatever it is, that having the majority of outside directors, and that the threat of publishing the banks that don't do what the ombudsman says, is working reasonably well.

Now, you have some concerns, and I guess the next question is, would that kind of system, with always a majority of outside directors, work for the whole financial sector?

Mr. Bill Podmore: I think the major issue with the banking ombudsman right now is: (a) if I as a consumer go to the banking ombudsman with a complaint and through their facilities discuss the legal issues and so on regarding my particular complaint, I cannot use any of that information further in a court of law; and (b), the ombudsman system is almost fully supported by industry.

Ms. Carolyn Bennett: I understand they pay for it but aren't allowed to make the decisions.

Mr. Bill Podmore: And I believe the number of complaints actually brought to the Canadian banking ombudsman is quite small.

Ms. Carolyn Bennett: Okay.

The Chairman: Thank you, Ms. Bennett. Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you, Mr. Chairman.

I want to follow up on something Mr. Harris had started.

The MacKay report is in fact a breath of fresh air in the sense that we have, in regulated federal industries, relied upon bureaucrats to protect consumers. That's the theory. The reality is that it doesn't work very often. So this is in fact an attempt to “level the playing field”, to use that old cliché.

Mr. Harris had raised the issue of who's going to pay. In fact, Canadian consumers have been paying through things like the CRTC, through the NEB. There are lots of boards that regulate federal industries. Those are two of the big ones.

• 1720

I've heard the idea that you want to be involved. I certainly agree that you should be involved. Groups such as PIAC and CAC and a number of you have lived off the good will of the public and sometimes some funding from various levels of government, but it's a hand-to-mouth existence.

Oh; Ms. Holmes doesn't.

In any event, getting back to this whole business Mr. Harris raised about cost, do you see this as an opportunity to say that the financial institutions should put up the money? We're in a sort of user-pay society now.

I throw that out to you. What do you think about assessing— I'm not talking just about banks but about this whole marketplace called financial services, or financial institutions.

Ms. Anne Holmes: It costs $50 to join our policyholders association. Most people would be glad to pay $50 more for their life insurance to have a group who could in fact mediate their situation with the insurer. It only makes sense to me to avoid the court action, avoid that very expensive outlay by all consumers, and refine the cost to those who are making the purchase. Adding it into the cost of the insurance makes so much sense to me.

Ms. Angie Barrados: Perhaps I could make a comment.

Especially in banking, when you look at the level of profits, this is a very profitable industry, and there is room for some slight reduction in profit—0.1%, say—in order to ensure that Canadians are well served by the industry. In fact, the banking industry has little of the obligations that a lot of other industries have in terms of involving the public in deliberations and so forth.

As well, I would want to point out that not all of the consumer protection recommendations involve heavy expenditures. Some of them involve just a bit more training. The banks seem to do a lot of training. I just think they need to do more effective training.

Mr. Bill Podmore: I've been toying with an idea that's sort of similar to the British model, where there's a truly independent ombudsman to review all financial services issues for consumers, supported by industry and government. I think in Canada what would be really valuable is a structure, a real structure, for consumer organization input into an ombudsman system.

Mr. Roger Gallaway: You had raised—or I think you were raising, in any event—a consumer advocacy board, a CAB such as they started in Indiana, whereby, for example, a bank— Let's start with utility companies. The utility companies were required to send notice that you could join and actually deal with them.

But I think we're going beyond that today. We're going into the realm of having some type of statutory consumer protection branch, if I can call it that; that may not be fair.

Mr. Bill Podmore: Because OSFI, I think, although their major concern is solvency issues— and I'm not really sure right now where the whole competition bureau fits in, but it would seem to me that the competition bureau should be the entity responsible for supervision and regulation of consumer issues within the financial services industry.

Mr. Roger Gallaway: Dr. Davies and Mrs. Davies, you gave us the point that you want to be involved. I think that's a good point, because consumer associations in this country have always played around the fringes and have never had any direct role in the creation of laws or the administration of laws vis-à-vis consumers, and the regulatory system has been a dismal failure in protecting consumers in this country, especially with large financial institutions, whether it be banks or insurance companies. It's difficult for the little guy to go toe to toe with a large financial institution.

How could you envision becoming more involved as a consumer group, though, in a regulatory framework? Do you see it as being a stand-alone government agency that brings in consumers or consumer groups or do you think it should be outside the regime of government?

• 1725

Ms. June Davies: I think consumer groups are just one method of addressing issues, and the position that consumer groups are usually put into is advocacy for a particular position. Oftentimes these consumer groups can appear to be competing with each other, but they're just representing a different public voice.

I think what we'd be looking at is also mobilizing the general public. Include us at the beginning of the discussion, not at the end, because so often we feel we're brought in just as a token gesture, with something that's already been decided, because the experts, who have done a really good job on a task force— congratulate them on their work, but still, it seems a fait accompli.

We want to be involved at the beginning. I think we have a really exciting opportunity here to learn how to mobilize the public.

Just to intrigue you, and to get you on the wavelength, an interesting book to get us started, if you haven't read it already, is a book entitled Coming to Public Judgement, by Daniel Yankelovich. And the work that's been done by the national issues forums is work we've been developing in our own work for the last few years.

I think we have some really good opportunities ahead to look at some ways of involving the public. It's a way of learning, as we've shared before, how to frame an issue, and the public helps frame the issue.

We were asked if it was good or bad. I can't come to public judgment until I've been presented with the choices in a non-partisan way. I could choose this, I could choose this, or I could choose this. If I choose this, this is what's good, this is what's not good. This is what's good, this is what's not good.

Then I look at the pros and cons. I weigh the consequences. Oftentimes I come up with a fourth choice that emerges in a creative process in something that makes a lot of sense, that's brought a lot of the good points. When we know that we make this choice, we realize it's going to have these consequences. We spend some time to say, “How do we diminish the effects of those consequences?”

We can show you a process where you can take that to small-town Yukon. It's a way of having this network of people to frame an issue and then a team of moderators in communities. We already have them there. teachers, consultants and facilitators exist in every community and can learn how, in a non-partisan way, to moderate these issues.

What I get so frustrated about is that I've held a lot of flags and a lot of banners, particularly in the environment movement, which has been one of my bailiwicks. But I seem to always be frustrated because I don't have a chance to be involved at the deliberative stages of discussions.

So I would urge you to start to play with this, even in a small way, a small pilot project, to see how this process works.

Dr. Leland Davies: Just to answer, I think an independent agency where all the parties can sit around makes some sense to me in terms of even getting something going, where we have more consumer involvement with perhaps some government agency, some of the industry, and some consumers.

Mr. Roger Gallaway: Thank you very much.

The Chairman: Thank you, Mr. Gallaway.

On behalf of the committee, I want to thank you very much for your excellent presentations. I think they were all very comprehensive and detailed.

Very quickly, though, we spoke a lot about the consumer issue, and as far as we're concerned, really, the ultimate benefactor of any changes we're going to make will be the consumer. Whatever you speak about, whether it's competition or any other issues related to the future of financial services sector, we know we're doing it for the consumer.

I would like yes-or-no answers to these questions.

First, in reference to the issue related to access to the payment system by life insurance companies and mutual fund investment dealers, you're open to that, I gather?

You are.

In reference to giving new powers to credit unions to make them more effective, including the power to form banks, you're in favour of that?

In other words, you're in favour of those issues that relate to enhancing competition.

Now, in terms of a phase-in, do you think we should get the issues of privacy and all the consumer concerns first, or can we do these things simultaneously?

Mr. Bill Podmore: First.

The Chairman: That's one “first” out of eight people.

Ms. Jennifer Hillard: First, absolutely. It's not difficult, because the tied selling legislation is through; it just needs proclaiming. The privacy legislation is starting.

• 1730

I mean, we're on the way, but let's fix that first, open up the competition, and then look at all the other alternatives that the banks are asking for.

The Chairman: Basically, then, you want this to be the consumer's round. That's what you're saying.

Okay.

For a point of clarification, this committee has in fact recommended to the government to proclaim this section. That section on tied selling was proclaimed September 30, if I'm not mistaken.

So you see, you're achieving great things at great speed.

Voices: Oh, oh.

The Chairman: Thank you very much.

• 1731

• 1933

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

As you know, the finance committee is studying the report on the future of the financial services sector.

This evening we have the pleasure to have with us, from the Bank of Canada, the governor, Gordon Thiessen; Charles Freedman, deputy governor; and Clyde Goodlet, regulatory policy adviser.

Mr. Thiessen, welcome, and we look forward to hearing your comments.

Mr. Gordon Thiessen (Governor, Bank of Canada): Thank you very much, Mr. Chairman.

I'm pleased to appear before you today as part of your study of the task force report on the future of the Canadian financial services sector.

I thought it might be useful if I were to start by clarifying the Bank of Canada's role in this area. The bank has no formal responsibility for the development of financial legislation. However, we do have a vital interest in the efficiency and safety of the financial system because it can affect the transmission of monetary policy, because of our role as lender of last resort, and because of our regulatory oversight role for large-value clearing and settlement systems. As well, I'm a member of the Financial Institutions Supervisory Committee, which is chaired by the Superintendent of Financial Institutions, and I'm an ex officio member of the board of directors of the Canada Deposit Insurance Corporation.

• 1935

The bank is also involved in a number of international discussions on financial system issues, and as a result, the bank has traditionally played an advisory role to the Minister of Finance and his department on policy regarding financial legislation.

I would note that with regard to the specific measures proposed in the task force report, there are very few of them that have a direct implication for the Bank of Canada. None of the task force's recommendations have any significant implications for the conduct of monetary policy, and the same thing can be said for most of the other operations of the bank.

[Translation]

As for the payment system, an area that concerns banks, the task force recommends that the financial institutions other than deposit-taking institutions be authorized to become members of the Canadian Payments Association. This clearly illustrates the difficulties in reconciling competitiveness and security issues in financial sector policies. Consumers could benefit from an increased competition created by a wider and more practical array of payment services, and possibly at better prices. At the same time, adding new participants to the system could increase the fear created by potential risk. This could cause an increase in costs or a reduction in the quality of payment services if additional and more complex measures were to be adopted to limit the risks associated with the arrival of new participants.

Theoretically, I would tend to support a broader participation in the payment system, but I also believe it is important to carefully review all the complex issues that are associated with a broader participation and not underestimate the complexity of the task.

The task force also looked into the issue of overseeing the payment system in Canada. As indicated in the working document published by the federal government in July 1998, a more thorough control of the payment mechanisms by public authorities could be necessary for mechanisms to be compatible with the objectives targeted by public policies. In this respect, two major issues deserve attention. First, the scope of the control must be defined. According to the task force, this control should apply to the Canadian Payments Association activities. It may however be a good thing to see if this should be extended to private payment networks such as Interac or to the future networks that will support the use of electronic money.

The second issue is to determine who will exercise control. The task force recommends that it be the Minister of Finance, but the working document of the Department of Finance suggests other solutions. Whichever proposal is accepted, it will need to consider the current mandates of the agencies that have responsibility in this. The Bureau of Competition has the general responsibility for competition issues, and it has dealt before with payment issues. The Bank of Canada is held by law to exercise control over the limitation of systemic risk associated with the high-value payment system. I take for granted that the chosen formula will also see to it that the twofold objective of efficiency and security be adequately considered and that the roles and responsibilities of the various agencies be defined.

• 1940

[English]

In the area of financial sector supervision, the task force recommended that a board of directors be created to oversee the operations of the Office of the Superintendent of Financial Institutions. The proposed board would be made up mainly of independent directors, but it would also include ex officio members, including the Governor of the Bank of Canada.

In general, Mr. Chairman, I believe a board of directors can be an important part of the governance arrangements of public sector institutions. That is certainly true of the board of the Bank of Canada. However, it is crucial that the role of the board be clearly articulated. In the case of OSFI, it will be important to be explicit about the respective roles of the minister, the superintendent, and the proposed board.

I must also say that I have some reservations about the proposed inclusion of ex officio directors on the board. I believe it can be difficult for officials who are heads of public institutions to carry out the fiduciary duty to another public institution that membership on a board of directors requires.

With regard to the broad issues examined by the task force, I think we would all agree that an efficient and strong financial sector is one of the key requirements for achieving a strong and internationally competitive domestic economy. Over the past three decades the changes to the legislation governing the activities of financial institutions have sought to increase the competition associated with the delivery of financial services. However, these changes have always been made in the context of a continuing concern about safety in the financial sector. The MacKay task force has adopted a similar framework in considering possible future changes.

All of the changes proposed by the task force to increase the amount of competition in the financial sector are worth considering. However, it is possible that with more new entrants and the greater organizational flexibility being proposed, there could be an increased likelihood of failure of regulated financial institutions. A healthy, competitive marketplace does not preclude an occasional institution failure, and while it's not something one wants to see very often, we need to recognize this possibility. Thus, I think it's very important to consider changes to the regulatory framework that might serve to identify potential problems and to reduce the costs associated with financially impaired institutions by ensuring an early exit from the financial sector. One should also consider whether increased disclosure and other means could be used to strengthen market incentives for financial institutions to manage the risks they face in a prudent fashion, thus reducing the likelihood of failure.

Mr. Chairman, your committee is examining issues of vital importance to all Canadians. We strongly agree with the task force's desire to promote greater competition in the financial services sector. The forces of change are very strong, and there is need for a regulatory framework that can assist in producing a more efficient financial system while at the same time addressing concerns about the safety of the system. The real challenge is going to be in finding a balance between these two public policy objectives.

• 1945

Mr. Chairman, my colleagues and I will be pleased to answer any questions your committee may have.

The Chairman: Thank you very much, Governor.

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

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Welcome, Mr. Thiessen, Mr. Freedman, and Mr. Goodlet. We will try not to keep you too long, Mr. Freedman, so you can catch your plane to England.

I basically agree with what you stated, Mr. Thiessen, but I would like to ask you a few questions about your monetary policy if you don't mind.

For the past two or three months, I have been wondering why you increased the interest rates by 100 basis points, all of a sudden in August, and a few weeks later, caused another chock to the monetary economy, and be extension, to the actual economy, by announcing a reduction of 75 basis points following the American rate. This is the first question I asked myself.

Secondly, I wonder why, in Canada, we say that we have a monetary policy that is independent from that of the United States. I have been looking at you for the past two or three weeks, and each time the Chairman of the US Fed reduces the interest rates, there is a similar action taken by the Bank of Canada. You thus reduce the difference and may be increasing the risk of speculation on the Canadian dollar or capital flight to the United States.

These are the two questions I ask myself. Does the Bank of Canada really have an independent policy from that of the United States?

[English]

The Chairman: Excuse me, Mr. Loubier. Could you please relate this to the Mackay task force? This is why the governor is here this evening, to comment on—

[Translation]

Mr. Yvan Loubier: Yes, I will establish a link with the MacKay report. To have a stable and promising financial sector for the future, there needs to be a consistent monetary policy, a monetary policy that can be judged for what it is. If you say it is independent from that of the United States, as you mentioned before in your many statements, why is it that your recent actions proved to us that it was not independent from that of the United States, since a few hours following a decision by the American Fed, you reacted in the same way, reducing the Canadian interest rates exactly proportional to the American reduction? There is a link. If the policy is not consistent and stable, the changes to the financial sector—

A voice: —

[Editor's Note: Inaudible] —

Mr. Yvan Loubier: Since when are we gagged in the questions we can ask here? Mr. Thiessen is very competent in monetary policy. I do not think such a question can embarrass him.

[English]

The Chairman: No. There is no question about the plan.

[Translation]

Mr. Yvan Loubier: We can ask him if he is embarrassed.

[English]

The Chairman: Mr. Loubier, I really would like you to concentrate on the Mackay report. Perhaps you can rephrase your question so it is relevant to the issue.

[Translation]

Mr. Yvan Loubier: In his presentation, I listened very carefully, Mr. Thiessen said that the bank also participated in the international discussion on financial systems. There are undoubtedly international links between financial systems. How does your monetary policy fit in this international system, and how can you ensure that the future of the financial sector is based on a consistent and stable monetary policy, and from which we will know approximately what to expect, a policy that is independent from that of the United States? Is it clear enough? Is it sufficiently linked?

[English]

The Chairman: I don't know which recommendation in the MacKay report this refers to.

But, Governor, I'll give you a chance to respond in relation to the Mackay report.

Mr. Gordon Thiessen: Let me say that a stable financial system certainly does require a stable monetary policy. Our monetary policy is geared to provide stability in inflation. That's why we have the targets for inflation control. Our monetary policy actions are geared to this end.

The movements we've made have really reflected an attempt to provide a greater degree of confidence in financial markets, because in the current unstable international environment there have been times when we needed to respond to this. And that is basically what we've done.

I must say, Mr. Chairman, I'm having difficulty relating this very closely to the Mackay committee. All I can say is that I certainly agree that a stable, coherent monetary policy is important. And I believe our monetary policy, geared to inflation control, does provide this stability.

• 1950

The Chairman: Thank you, Governor.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: I told you, Mr. Chairman, there was a link between the stability of the monetary sector and the MacKay report. Mr. Thiessen has just proven there really is a link.

Seriously, as Mr. Thiessen admitted by his answer, it is one thing to plan reforms for the financial sector, if there is an inconsistent monetary policy in the financial sector, the positive effects of the reforms we could legislate may be compromised. Mr. Thiessen mentioned it in his presentation.

Mr. Thiessen, I would like to come back to the stability and consistency of the policy. How can you say that the monetary policy of Canada is consistent, while you said in your annual presentation, before the summer, that you intended to continue focussing on inflation, and that you would not take action, increasing the interest rates for example, to stabilize the Canadian dollar, that your priority was not the Canadian dollar but inflation, and that monetary management would be like that?

A few weeks later, you took action several times, every week. In August, you took more than $5 billion in currency to support the Canadian dollar. How do you explain this inconsistency between the message you delivered, the steps you took and the independence of the monetary policy, and the actions you took to follow the American Fed? I have a problem with that, and many analysts also have problems with that. You read the newspapers as I did during the past weeks. You are strongly criticized for your monetary management. I would like you to respond to this because it is very important.

Mr. Gordon Thiessen: I must say that an independent economic policy is a policy that has an independent objective. In Canada, this objective is an inflation rate between 1% and 3%. We maintain this objective.

Mr. Yvan Loubier: But you are under 1% right now. You are beyond the lower limit of the range. This is beginning to look like deflation, which adds to world deflation.

Mr. Gordon Thiessen: No, not exactly. We are within the range for the inflation trend, but sometimes on the financial markets, confidence in Canadian dollar equity can be lost. If this happens, the cost can be very high. It can create economic problems and a real deflation situation. We increased our bank rate to improve confidence and encourage a longer term decrease in interest rates. When confidence is lost, we see an increase in interest rates in the long term. This is what happened at the end of August, and our actions were aimed at bringing the interest rates back to a more acceptable level. We met this objective.

[English]

The Chairman: Thank you, Governor. Merci, Monsieur Loubier.

Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you, Mr. Chairman.

First of all, I want to welcome my fellow Saskatchewanite, Mr. Thiessen, to the committee this evening.

I would like to ask you some questions related to the MacKay report recommendations in the context of the proposed bank mergers. I think you have commented publicly already on the whole theory of a bank being too big to fail. This is what I want to ask you some questions about.

We assume that if these bank mergers go ahead—and I say if they go ahead—they would not fail and things would go along pretty well. But when it comes to economics, we've had surprises around the world many times. Japan is just the most recent example.

What would be the consequence for the Canadian financial services sector if one of these big mega-banks failed, considering the assets they would have?

• 1955

Mr. Gordon Thiessen: I think there's no doubt that the bigger the bank, the more difficult the situation is to manage.

I guess what one hopes in all of this is that if we're going to have a more globalized financial market, if we're going to have more competition, then the point we were trying to make in our opening statement is that you have to look at the financial regulations more carefully and you have to set up a series of processes that allow you to find these problems earlier and deal with them earlier so that you're not dealing with having to wind up insolvent institutions. You may still have to arrange mergers, sales of assets, and so on, but you want to do that while these institutions are still solvent. I think that's the crucial thing, so that you avoid suddenly finding yourself with a large and insolvent institution, which is a terrible mess to have to handle.

I guess I feel strongly that the more we go in the direction of globalization and encourage increased competition, the more important it's going to be to have that kind of early intervention process.

Mr. Lorne Nystrom: What can you say about what you'd like to see in terms of the early intervention process, in addition to what you've said tonight? Do you want to elaborate on what you mean by that?

A lot of people out there are concerned about the consequences on the entire financial sector if a mega-bank were to fail—in terms of the person on the street.

Mr. Gordon Thiessen: I'm a bit hesitant to go too far into this area because this really is the area of the Superintendent of Financial Institutions, and I'm sure you're going to be talking to him.

In general, I think the whole idea is to have a series of indicators whereby if it looks like an institution is heading down a path towards becoming non-viable, there is a requirement for them to either turn that situation around early or they basically have to be wound up or sold out.

I think the crucial thing here is that you want a financial regulation that essentially allows you to impose these very drastic requirements on institutions that are still solvent, that still have some capital, but do not look like they are going to be viable in the long run. That's not normally where we've been. Normally, you try to save an institution, but it's only when its solvency is gone that you then engage in drastic actions. I'd like to see us consider a much earlier intervention.

Mr. Lorne Nystrom: Without that, if one of these institutions were to fail, what would be the consequence on the dollar? I would assume it would be quite drastic.

What kind of a chain reaction would that set off in terms of what will happen to interest rates?

I'm asking you questions I hear on the street from a lot of people who are concerned about the sheer size of this institution and what happens if it stumbles. It's a bit of a domino effect. As you say, the consequences are much more difficult to manage than in a smaller institution.

Mr. Gordon Thiessen: With a large institution, I would assume that you would certainly get to it before it suddenly hits everybody by surprise. The real problems that markets and financial sectors have difficulty in dealing with are surprises, when all of a sudden it turns out that institutions you thought were fine are suddenly insolvent. Those are things that cause real disruptions in markets.

Mr. Lorne Nystrom: Confederation Life, perhaps, back in 1994.

Mr. Gordon Thiessen: Perhaps, although I don't think that was quite as unexpected as that, but it certainly was a bit of a surprise; I agree with that.

I guess that's why I keep wanting to return to the importance of getting there early, because I just don't like to speculate about a circumstance where a very large institution suddenly catches you by surprise. We don't ever want to be there.

Mr. Lorne Nystrom: You're on the board of the Canadian Deposit Insurance Corporation and an ex-officio member of the Financial Institutions Supervisory Committee, the head of the Bank of Canada, and so on. Does the fact that a mega-bank could be so large have any consequence in terms of monetary policy? I'm thinking that these banks would be so large that, as Mr. McKay himself said, if one did stumble, the government would have to intervene and do something. It might be a massive bailout by the taxpayers, it might be the changing of regulations very quickly, maybe an American bank coming in and buying out part or all of it. Does that put that bank in a very unfair competitive position because people know it's so big that the government just won't let it fail? Does that have any ramifications in terms of monetary policy in the country, from your point of view?

• 2000

Mr. Gordon Thiessen: As I've said before, I don't think we ever want to say that an institution is too large to fail. It may well be that when the circumstances arise, you decide that in those circumstances the government wants to intervene. But I don't think you ever want to be in a situation where you say in advance that the institution is too large to fail, because I think, as you're implying, the implications for the discipline inside that bank are very bad. So you don't want to be there; absolutely not.

When it comes to monetary policy, we operate through financial markets, and so the degree of concentration among financial institutions is not all that much of a concern for monetary policy as long as we've got markets that function. These days markets tend to be quite global, so there tends to be a lot of players. Even if there's some concentration in your domestic financial sector, there still tend to be a lot of players in the markets. As a consequence of that, I must say I don't see implications for monetary policy directly.

Mr. Lorne Nystrom: My last question is in terms of your discussion about what happens internationally, that we're in a global village. Do you have any recommendations that you want to make to the committee in terms of bringing in some sort of regulation to the international marketplace, which has been very chaotic recently?

I think, for example, of an idea, a theory, the Minister of Finance himself was interested in a couple of years ago. It was the so-called Tobin tax, advocated by Nobel Peace Prize winner James Tobin. When this was discussed a couple of years ago it didn't really fly because there were governments in Germany and Britain that were very much opposed to the idea. We've now had a change of government in both those countries, with the demise of Mr. Major in Britain and Tony Blair coming on the scene and, more recently, Mr. Schroeder in Germany. There may be a new receptivity for either the Tobin tax idea or something similar to it.

Do you have any recommendations to our committee that you want to make in terms of trying to rein in the international financial scene more than we see it today, particularly a Tobin tax or something similar to it?

Mr. Gordon Thiessen: I think there are certainly some interesting things that are going on internationally, but they don't include a Tobin tax, which I think is a bad idea.

I think the thing that taxes and controls of those sorts don't recognize is that there are a lot of financial flows, short-term financial flows, that are very useful to us.

In Canada, we have a very seasonal kind of economy. For those of us who come from Saskatchewan, you can have the time when the wheat crop is sold. So you have lots of export receipts coming in and you essentially have a surplus of foreign currency coming in. There can be other times—in the dead of winter—when we're importing a lot of food and we have a net deficit.

If you don't have capital flows, you're going to have your exchange rate moving to equate supply and demand in those markets. It's going to move enormously. It's going to be highly uncertain. What capital flows do is they smooth that out, because they say, well, the crop is being sold now, but in a few months' time we're going to be importing a lot of stuff. These speculators get in and smooth that out by buying the foreign currency in the first place and selling it in the second place.

So if you impose controls or a tax on those valuable short-term capital flows, you're going to lose out on that. I think that's a thing that you don't want to lose out on.

Mr. Lorne Nystrom: It's such a small tax, though.

Mr. Gordon Thiessen: But, you see, that's exactly it. These short-term speculative flows operate on very narrow margins, and they're the very ones you're going to discourage. The kind of more rabid speculative ones are the ones that are after big gains, and a small tax is not doing to discourage that. So you're going to discourage the good flows and you're not going to discourage the bad flows.

• 2005

There are some important things going on internationally, and they do have to do with trying to improve the standards of financial institutions around the world, the regulatory standards and the standards of financial supervision by the equivalent of our superintendent. I think those are very valuable.

We're also looking at improving the amount of disclosure and transparency in markets around the world. Part of the problem that we've seen has been lack of information. Then, as we were saying a moment ago, you suddenly get a surprise. Those are the things that are really disruptive. The more information you've got out there, the more transparent is the operation of financial systems, governmental systems, monetary policy, the less you're going to have these surprises and therefore the less you're going to have these sharp exoduses of capital of the sort we've seen in Southeast Asia.

I think those are the things that are going to be helpful in leading to a more stable international financial system.

The Chairman: Thank you, Governor.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Governor, for your intervention tonight. For me it's raised maybe a few more spectres than we've had before. I think it's healthy.

In our hearings in Toronto we had a former Superintendent of Financial Institutions appear before us. He raised the simple issue of the millennium bug, the Y2K problem, that alone being a very major source of risk or concern should a merger of two very key banks move forward and then run into a problem.

Now you have brought another layer. It's basically that your ability to do your job in terms of the monetary policy side does require a stable financial banking system to be able to allow that to operate.

Let me give you a hypothetical. If nothing else changed from today except the fact that the two proposed mergers took place, in the absence of any additional competition, would that make you more or less comfortable with your ability to deliver on your strategy for delivering monetary policy? What is the risk direction? Or is it neutral?

Mr. Gordon Thiessen: I have to say it's neutral. I cannot really tell you. I think there are lots of issues that one wants to consider in looking at mergers, but I really cannot say that monetary policy would be put at any risk.

Mr. Paul Szabo: Those proposed mergers, then, in the absence of any new competition, would not impair the banking system as far as you are concerned.

Mr. Gordon Thiessen: I think that's a question that needs to be looked at. I cannot say now. I think that's one of the important things the MacKay committee suggests—that you've got to look hard at these things.

I think issues of competition and concentration do indeed need to be looked at. That requires a lot of study. I don't have those answers, I have to tell you, on those grounds.

Mr. Paul Szabo: And I wasn't expecting you to have the simple solution to a complex problem.

The MacKay report obviously contemplates a substantial increase in competition in the financial services sector, not only in the banking sector. Given what you've said about the harmony between a facility for a good monetary policy and a banking system, if we were to in fact make changes that would open up the competition to near banks, to credit unions, to foreign banks, and a whole bunch of new players who haven't operated at the major leagues before, would that affect your comfort level with respect to being able to do your job?

Mr. Gordon Thiessen: Again, I don't think so. One of the points I was making in my opening statement is that I think if you're going to do these things, you really do have to look at the financial regulation and supervision. That's why I was referring to some kind of early exit arrangement so that if you are going to have people who don't have a long track record and whom you're not sure about, you want to make sure you've got in place a system such that if things go wrong you can deal with them quickly, before they are major and before they cause a great disruption.

• 2010

I have to tell you in general that failures are going to happen, and if we try to design a system where there are never any failures, we're not going to have an efficient system. But neither do you want to go to the other extreme, where the banking system is in a mess. If you go to the other extreme, if you go to the situation Japan is in right now, you do have a problem. Monetary policy does have a problem there. It's not able to stimulate that economy where you have a banking system that essentially doesn't work. If you go to that extreme and you have a whole banking system that is not working, then there is a problem for monetary policy.

Mr. Paul Szabo: You have raised some concerns about the complexity of expanding the payments system. I think you've raised some concerns from a regulatory perspective. This is a complex area, the financial services sector. It's a very complex area, with the synergies and the integrations and the potential risk areas. We're talking about a substantial risk management project going on here.

If in fact we are talking about changes that are going to bring us into a more modern financial services sector—which brings with it necessarily the risk of failures, and if we're prepared to deal with them, that's not a bad thing—then would you suggest that there is an order in which things should occur, as opposed to let's do everything now? There's so much on our plates. Is there a chunking of this process, of the modernization of the financial services sector, which means that maybe what we should do is open up a little bit of competition and bring forward the regulatory system and see if we can in fact achieve a better competitive environment and a secure banking system, or maintain the security or the stability that you require, before we start talking about some of the other major moves? Or is this something you would be comfortable with, that should all the decisions go in one particular direction, a decision is going to be taken and as quickly as possible we're going to implement 124 recommendations? What happens to your temperature level or your risk scenario when we go from zero recommendations being approved up to 124?

Mr. Gordon Thiessen: I find that a difficult question to answer, I must say. Obviously, you can go to an extreme and have such a complicated package that is so difficult to put together and so difficult to draft the legislation that you have everybody in confusion. I can see that extreme case. But there are some things that do need to go together.

If you're going to increase competition, I think you have to look at the supervision and regulation side at the same time. I wouldn't like to see doing one and not the other, because I think those two things go together. It seems to me that there's a bit of a package there.

I'm having trouble answering your question. I really don't have a view on whether it has to be a complete package or whether you can do some bits of it piece by piece.

Mr. Paul Szabo: Okay.

The Chairman: Mr. Valeri.

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

MacKay essentially says that the status quo is not on, that the future is changing, with issues of demutualization, mono-lines coming in, the banks are saying, and MacKay is saying as well, so there may be mergers coming, which is why he has a public impact statement in place. He says that tier two banks should be allowed to compete more, so there's a consumer package in place, more competition. You underline your proposal with the safety and soundness in trying to find a balance in that.

I refer to your technical report number 82, which says things like:

—empirical work thus far has provided no evidence that a bank has to be a mega-institution, rather than just large, to exploit most economies of scale.

You make reference to the fact that:

—large institutions are often thought to be less nimble in their responses to change— What appears to have been the case in some industrial conglomerates was that diseconomies of scale— led to a loss of focus and increased costs.

Then you go on to say that there's probably room for only five to ten such global institutions worldwide and the rest would have to essentially find an aspect of a market that they can survive in.

• 2015

As a committee, we essentially have been hearing information that is quite different from what's in this report. The banks come forward and say they need to merge to take advantage of technology and economies of scale, but what you're saying is quite different. I wonder if you can comment on that.

Mr. Gordon Thiessen: I'm afraid the evidence on this point really doesn't allow you to come to a hard conclusion. The analysis really says, yes, there are economies of scale up to a certain point, but after that we're just not sure.

It's also true that a lot of the changes with respect to technology, at least the major ones, are quite recent, and a lot of the analysis is looking at somewhat older information. So you don't want to be too adamant on the point, but you can't go to the other side and say we can find economies of scale for mega-banks. You simply cannot do that. But perhaps I should let my colleague, Mr. Freedman, reply since he's one of the authors of the study. The other author is Mr. Goodlet.

Mr. Charles (Chuck) Freedman (Deputy Governor, Bank of Canada): I think what we were trying to do in that paper, which was written before the mergers were announced, was to throw some caution into the debate. There certainly were people who argued that large size automatically came with economies of scale and those two are closely linked, but looking at the literature as it was then, you just couldn't find this, as the governor said. That didn't say it didn't exist, but there was no evidence, hard empirical evidence. Now, since that time, there have been some other studies that have been a little bit more in the direction of suggesting that economies of scale go a bit farther out. One of the arguments that I think carries some weight is the technology argument, that it is so expensive now that there are some advantages to being large. But that said, if you're going to rely on the economic literature to date, the case is not proved. That doesn't mean it doesn't exist, but you can't prove it by what's been done in the literature.

Mr. Tony Valeri: The other question I had relates to the safety and soundness, and I go back to the testimony that was provided by Mr. Mackenzie. He made a point that stuck with me. He talks about the many references to the interrelationships between commercial banking and securities markets. In his submission he talks about the experience in the United States; he talked about the American banking and securities regulators and how they've been able to take a decisive if somewhat controversial action affecting commercial banks and investment houses with respect to the near failure of the Long Term Capital Corporation. He made the comment that he doubts whether that type of coordination would in fact have taken place in Canada, and he criticizes MacKay in the respect that from a regulatory perspective we're probably not getting the kind of information we should be getting.

Everyone agrees that the nature of banking is changing and the risk is changing, yet on the securities side we're probably not getting enough of that information to really assess the risk. How do you react to that?

Mr. Gordon Thiessen: That's a stronger statement than I would make. There are international organizations— the Bank for International Settlements is one that's in the process of gathering information on so-called derivative products. I assume that's probably what Mr. Mackenzie is thinking about, because in the other traditional securities we do have a lot of information. So I suspect he's talking about the derivatives area.

But we are gathering information. There are initiatives to gather more information about that and provide it generally, because, as I was saying earlier, markets work best when they have information, when they're able to judge what are the outstanding stocks of this asset or that asset out there. The derivative area is one where there does need to be more information, but we are in the process of collecting it and making it available internationally. Maybe we should have done it quicker, but I don't think you can say there's an absolute lack.

• 2020

Mr. Tony Valeri: His argument was actually based on the idea that the securities industry is regulated provincially and banking is regulated federally, and that there wasn't a clear path of communication that would allow, say, a federal regulator to be able to acknowledge what may be potential risks with banks exposed to the securities business and the securities market.

He cites examples like the Long Term Capital Corporation, but he also makes reference to Europe, with banks exposed to the securities business. That was the basis of his argument.

Mr. Gordon Thiessen: There are certainly some surprises in the size of various exposures to long-term capital management, but as I understand it, the Superintendent of Financial Institutions looks at Canadian banks on a fully consolidated basis, including their securities firms. So I don't think there's a lack of information on that.

It is true that the securities operations are regulated provincially, but the superintendent still gets to look at the whole thing. So I don't think you can argue that if one of the banks had a big exposure to long-term capital management by their securities firm that the superintendent wouldn't know about it.

Mr. Tony Valeri: He understands and acknowledges that there are MOUs that do exist for exchange of information, but he questions whether that's enough, given the volatile market conditions.

Mr. Gordon Thiessen: Let me ask my colleagues, but I must say I don't think there's that much there, quite frankly.

Chuck says to ask the superintendent when he comes.

Mr. Tony Valeri: Fair enough.

The Chairman: So you don't think there's much there either—right, Mr. Freedman?

Thank you very much, Mr. Valeri. I have a couple of questions.

Mr. Freedman, to follow up on one of the questions Mr. Valeri posed, you said you wrote the report before the mergers were announced. Would you have written a different report if you had known about the proposed mergers?

Mr. Charles Freedman: No, I wouldn't have written a different report. The question is whether we would have addressed the issue at all, I suppose.

The Chairman: Okay.

Mr. Charles Freedman: But that was written in light of worldwide developments.

I think, Mr. Bevilacqua, there is and has been this tendency in a lot of countries to say you have to be all things to all people in all areas of business in all countries. Even if our banks merge, they're not going to be among the biggest in the world, and I'm certain they will also find niches around the world in some of the things they're doing, because as we said in that technical report, there are probably going to be only a half dozen—five to ten, nobody knows for sure. We're going to try to do everything in all areas. I wouldn't expect our banks, either at their current size or even if they were double the size, to do that. What they argue, of course, is that it does allow them to do some things they can't do at their current size, and that's the kind of argument one has to evaluate.

The Chairman: Do you think the dynamics worldwide have changed since you wrote that report?

Mr. Charles Freedman: No, I don't think so.

The Chairman: You don't think so.

Governor, on page 3 of your presentation, you say the forces of change are very strong and there's a need for a regulatory framework that can assist in producing a more efficient financial system. What is it about the current regulatory framework that is lacking, according to you?

Mr. Gordon Thiessen: I wouldn't want to make it sound quite as negative as that, but I think in a changing world it is important to keep looking at your regulatory framework.

One of the real strengths of the Canadian system was that we had a ten-year re-evaluation of the Bank Act. Then, more recently, we've been looking at it more frequently than that. I think when the world changes you want to go back and look at the legislative framework and ask, is this still going to get you that right balance of competition and security that you want to get? I think that's really the issue we're looking at right now.

The world is changing fast, so we need to ask ourselves whether the regulatory framework we have in place here is the right one for this changing world. Maybe there are ways of increasing the degree of competition out there, and I think we need to look very hard at that.

• 2025

I thought one of the encouraging things in the MacKay report was that they did look hard at that. They looked at a whole series of things whereby there may be a possibility of increasing competition in our financial system. I thought that was exactly the right way to look at it.

The Chairman: If you believe the world is changing as quickly as you say it is, particularly as it relates to the financial services sector, do you agree with Mr. MacKay when he says that to delay is to deny change in the financial services sector, if we don't move ahead with this package?

Mr. Gordon Thiessen: No one should argue you need to do it in the next few months or anything like that. Things aren't changing that rapidly, but if Parliament decided to put it all off for five years or something, I don't think that would be a good thing.

There are changes and we need to do the examination. We may look at a series of things and decide, when you look at the cost and benefit, that it's not worth changing, but I think we need to look.

Mr. Charles Freedman: Mr. Chairman, perhaps I could add a word in response to your earlier question. When we use the term “regulatory framework”, it's not just the supervisory side. It's a very broad term including the entire legislation, regulation, and supervision. It's the kind of thing we've looked at every 10 or 13 years, as the governor mentioned.

In the direction of opening up competition, this has happened every time we've had a Bank Act provision. The question still remains, what more can be done to increase competition and efficiency while at the same time maintaining a strong and safe system? But it's not just regulation and supervision; it's the whole broad financial framework, which is the responsibility of Parliament, of course.

The Chairman: Perhaps I can ask this question in reference to improving the regulatory framework as defined by yourself, Mr. Freedman, in reference to 112(b) where he says—this is from the MacKay report, of course:

(b) Given the importance of effective competition in the Canadian financial services sector and the rapidly changing competitive environment, the OSFI mandate should be revised to make it clear that OSFI has the responsibility to balance competition and innovation considerations with its present statutory obligations in respect of safety and soundness.

Do you think OSFI should be doing all these things?

Mr. Gordon Thiessen: No. I must say I have some reservations about that, Mr. Chairman. Certainly the regulatory framework, the legislative framework, needs to look at the two, but I think supervision of financial institutions is a really tough job, and you make it much harder for the superintendent if you suggest too many objectives. So I'm not very sympathetic with that one.

The Chairman: So basically competition, innovation, safety, and soundness should be kept separately. That's what you're saying.

Mr. Gordon Thiessen: I think so. With the legislative framework, Parliament has to look at the two, and you have to decide what the balance is. But I don't think the superintendent wants to be doing that when he's looking at supervising individual institutions.

The Chairman: Governor Thiessen, Mr. Freedman, Mr. Goodlet, on behalf of the committee, I'd like to thank you very much for your input. This is a very important document we're dealing with. You've given us great insight and it's very useful to us.

Thank you very much.

We're going to suspend for approximately two minutes and then we'll be right back.

• 2028

• 2036

The Chairman: I would like to call the meeting to order. We have the pleasure to have with us a representative from the Hongkong Bank of Canada, Mr. Youssef A. Nasr. Welcome.

You obviously know how this committee works. You have approximately 10 to 15 minutes to make your presentation. Thereafter we'll engage in a question and answer session.

Mr. Youssef A. Nasr (President and Chief Executive Officer, Hongkong Bank of Canada): Thank you for inviting me to appear before you today.

The Hongkong Bank of Canada operates 117 branches in 71 communities in nine provinces in Canada, as well as two branches in the western United States. The Hongkong Bank is Canada's seventh largest full-service bank and is a wholly owned subsidiary of HSBC Holdings PLC of London, one of the world's largest financial service organizations.

[Translation]

Since it was first established in 1981, the Hongkong Bank of Canada recorded rapid growth owing to acquisitions and strong expansion stimulated by the consistent progression of the Canadian economy. Our reputation for the quality of service we offer; the increasingly wide range of our services—including among other things brokerage services; asset management, trust and estate management services; mutual investment funds; and automobile and residential insurance—and our sustained efforts have allowed us to achieve a satisfactory return on capital. We are optimistic about the future of our enterprise in Canada, and we intend to stay here for a very long time.

[English]

I believe the task force is to be commended for the excellent work they accomplished in a relatively short time. We were pleased to see that they concurred with our recommendation for full functionality of automatic banking machine networks. If that recommendation is acted upon it will mean all customers, rather than being limited to just those machines operated by their own banks, will be able to withdraw as well as deposit funds in the vast majority of such machines.

The Hongkong Bank believes this move is one of the most significant moves that can be implemented to increase competition in the financial services sector. Such a move would substantially improve consumer choice, facilitate entry of new firms, and be consistent with the main theme of the task force's report that the financial services sector exists to serve consumers and must be responsive to their needs.

The greatest barrier to entry in the field of deposit taking and therefore full-service retail banking since the early part of the century has been that of branching. The capital cost of building a branch network is enormous and the pay-off long in coming. Full functionality would provide each new entrant with an instant 19,000 new locations to offer their services, thereby ensuring that other players, however large, would continue to face intense competitive pressures in all regions of the nation.

[Translation]

In its report, the task force concluded that there are outside forces over which we have very little control. Recognizing the existence of these forces, the task force asked what Canada could do to ensure that Canadians have financial services that are appropriate to their needs. The task force recommends a competitive, innovative, flexible, open and reliable system.

• 2040

The core message of the report involves understanding what the various governments have the power to modify or not to modify.

With the arrival of instant and reliable communications, international financial markets are now in a close relationship. It is no longer possible to isolate a market without jeopardizing its growth opportunities and harming the competitiveness of the industrial and services sectors. For a country with more that 40% of its GDP relying on trade, such a measure is both inefficient and unacceptable.

[English]

Our financial institutions, be they banks, insurance companies or mutual funds, must now compete worldwide for capital, clients, and investment opportunities. If you examine the financial services sectors in Britain, the U.S., and Canada and normalize, that is, account for changing exchange rates, differences in inflation rates as well as taxation, the fact remains that Canadian banking institutions have a lower sustained rate of return than their major competitors in these other two countries. This puts Canadian banks at the distinct disadvantage when competing for both capital and investment opportunities.

In the past this was not a huge problem. The foreign content restrictions on holding bank shares and how individuals could invest retirement savings, combined with market divisions flowing from the strict enforcement of the famous four pillars, made sure the vast bulk of equity capital stayed in Canada. Moreover, the dominant profile of the banks within the four-pillar construct meant the banks were able to obtain their required capital.

In my opinion, and I believe the task force's as well, that is no longer a viable option. With the likely expansion of the freedom of investment choices for individual Canadians, the banks' ability to rely upon such artificial investment constraints to provide needed capital will soon disappear.

CEOs and boards of directors worth their salt don't spend too much time on day-to-day events. Rather, they have the task of focusing their thoughts on five to ten years down the road and asking the following questions. What will the markets look like? Where will the firm be able to obtain capital? Where will it be able to use the funds? And how can it hope to remain competitive?

That is why I believe several of the largest institutions have begun listing their stocks on major world exchanges. It is the beginning of the process of opening up the possibility of raising capital in those markets. However, if they want to attract new capital beyond the capacity of the Canadian economy, they will have to increase their level of profitability to those of their peers in competing jurisdictions in the U.S. and Great Britain. If they don't, the capital will not be forthcoming, their growth will be curtailed, and one of Canada's most important and vital sectors will soon decline to also-ran status in the expanding North American economy.

[Translation]

Canadian banks only have two ways to increase their profits: either they increase their revenues, or they reduce their expenses. There is no magic formula. If there were one, we would all be using it.

According to me, and I have had the opportunity of working in Canada, the United States and the United Kingdom, there are few opportunities for increasing revenues, but the recommendations of the report, allowing banks to sell insurance and conduct leasing operations through their networks of branches, should prove useful. In addition, the fact that this decision would have the effect of reducing the cost of these products for consumers should not be overlooked.

[English]

Therefore, the only hope lies in cost reductions. That is what I believe is the motivation behind the announced merger plans. I can tell you first-hand the greatest potential for cost reductions is with the massive continuing investment each institution has to make in systems development.

The easiest way to visualize the importance of electronic data processing is to imagine that Canada has no computers, no ATMs, no credit cards, and no debit cards, and therefore has to sort manually all of the hundreds of millions of cheques passing through the clearing system in a day. That is a veritable torrent of paper. Without the benefit of computers, every man, woman, and child would be employed in sorting the material and posting the results. The potential for error, delay, and confusion would be immense.

• 2045

Your ability to go into any branch of your bank, find out your balance or make a withdrawal would be non-existent without substantial costs. Our economy would slow down and return to the levels of the 1950s. I doubt any of you would want that.

The institution I head is able to compete and prosper in a highly competitive Canadian market and we are able to offer a full range of services nationwide because of the immense benefits we derive from being a member of the HSBC group. The support systems we use in our trading rooms are state-of-the-art and are developed and provided to us by our parent. Similarly, much of the operating platform we use in our retail operations comes from the parent, and on and on.

Despite that assistance we also invest substantial amounts in adopting those systems to the particular features of the Canadian economy. Without the system support from the parent, our costs would be so high as to render us virtually non-operative in Canada.

HSBC Holdings is able to spread the cost of this system development work over a much wider deposit base than the $25 billion in the Hongkong Bank of Canada. It is in the area of software development, I am convinced, wherein lies substantial potential for economies of scale and improved customer service.

[Translation]

At the beginning of the century, a wave of mergers had already occurred in the banking sector, which created concerns and raised similar arguments. There were then scale economies to realize in terms of supervision and risk management, and more efficient means of obtaining capital and offer financing to clients. More specifically, in terms of capitalization, smaller regional banks did not have the required profitability to attract investors. Growth in deposits was simply not enough. Regional banks such as the Bank of New Brunswick, the Eastern Townships Bank, the Bank of Ottawa, and the Metropolitan Bank were not able to keep up, and eventually, they were acquired by today's banks, which are known as the six major Canadian banks.

Most of you will agree that Canada did not suffer from this. At the time, as Canada went from an agricultural society to an industrial power, banks were able to provide the growing industrial sector with the required financing. The banking system was remarkably stable, even during the difficult periods, specially in the 30's and early 90's, while other systems, including that of the United States, sustained considerable losses.

[English]

Then, as now, legislation was adopted that strove to maintain competition and maximize consumer choice. The task force report, by concentrating on those factors within the purview of the nation and the federal government, has done us all a favour. There are steps we can take to maintain privacy, facilitate competition, instil flexibility, make all institutions more accountable, maximize consumer choice, and ensure the system is secure and stable. In my opinion, those matters should be the primary concern of this committee.

Size is inconsequential if the financial services sector serves the population in an efficient and responsive fashion, providing a suitable range of choices at competitive prices. Attempting to limit the efforts by banking institutions to realize cost savings in their efforts to survive and grow is extremely short-sighted. The long-term consequences of such actions would be an anemic and stunted financial services sector unable to meet the nation's needs in the coming decades.

Banking today is a major employer in Canada, and it will continue to be so only if it is allowed to adjust to market realities rather than being constrained by old-fashioned views of the global economy on the eve of the 21st century.

You can and should influence factors affecting competition, choice, flexibility, and innovation. Designing the right framework is not an easy task. Fortunately the task force has charted the basics of such a system. Your challenge, and I think it an exciting and important one, will be to provide the details.

• 2050

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

The Chairman: Thank you very much, Mr. Nasr. That was a very interesting presentation that clearly outlined the challenges and choices we face as we try to design a 21st century financial services sector.

We will begin the question and answer session with Ms. Leung, followed by Ms. Bennett, and then perhaps Mr. Valeri.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman. I just want to welcome my friend from Vancouver; that's why I want to ask the first question. Thank you.

It's a very interesting presentation. You stress two basic points: one is increased revenue and the second is decreased expenses. I think you focused more on the second. Now according to your theory, if we have a merger there are a lot of factors that will decrease expenses.

As you know, this committee has gone across the country for the last two weeks. We've heard a lot of pros and cons on this merger, and there is a lot of fear and uncertainty attached to the merger. So I would like to ask you, Youssef, about the special concerns regarding the decreases in the quality of services, the loss of jobs, and the suffering of a lack of services in rural areas. Would you address your comments to that?

Mr. Youssef Nasr: Sure. The point I'm making is that these are the issues that need to be encouraged, and what the task force has done is to come up with a framework to encourage those types of things. These are things that are controllable. Agreements can be reached and reforms can be undertaken to legislation to enable this increased competition and to increase consumer choice.

But I'm going back to some of the things that are not easy to control at the level of any one nation whatever, and one of them is the fact that in a global economy, competition for global capital means you have to produce a return that is comparable to the return your competitors elsewhere in the world produce. We have had enormous examples of how quickly capital can cease to be available to you and how your growth can be stunted if that condition is not fulfilled.

Ms. Sophia Leung: Thank you.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: As a schedule II bank, there are certain things you can do and other things you can't. If all the recommendations of MacKay had been in place before the Hongkong Bank came to Canada, would you have structured yourselves differently? What would you do differently with the recommendations of MacKay in place?

Mr. Youssef Nasr: If you recall, when the schedule II banks were allowed in, which was after the 1979 Bank Act, the government wanted to have a period of restricted access to see how things were going to go. So we used that period of time to establish the fact that this was a country that was very attractive for us, that we could grow in it, and so on, and that over time, hopefully, there were going to be liberalizations made to the system so we could continue to grow. These liberalizations have come on a fairly regular basis through the revisions of the Bank Act, and I look at the MacKay task force as being yet one more attempt to continue the liberalizations and to allow those banks that have prospered and invested in a big way in Canada to continue that investment. That's how I look at the task force report.

Ms. Carolyn Bennett: But say you put yourself in the position of a bank coming to Canada, with all the recommendations of MacKay in place, would it look the same as the Hongkong Bank or would you focus on different things?

Mr. Youssef Nasr: Sometimes you cannot change something that has occurred over a number of years—historical events. Clearly, if we had been able to come in branch form rather than through a separately incorporated subsidiary, that would have been a preferable way to come in originally. That wasn't the choice, so we don't spend too much time lamenting the fact that it wasn't. We did the best we could under the regulations as they existed.

Now that we have developed a level of confidence and comfort in operating in Canada, we're certainly willing to look at other ways of transforming the presence of the group here.

• 2055

Ms. Carolyn Bennett: One of the things about MacKay that everybody comments on is that it's a very balanced report. There are also people who are concerned that we not cherry-pick, or not just do the easy things and leave the hard things for later.

If you were recommending to this committee the timing and the scope of MacKay, would you say there are certain things that should be done almost immediately and certain things that could wait a bit longer, or should it all be done as a package, or could you leave a few things out without affecting the balance too much? What would be your recommendation?

Mr. Youssef Nasr: I tend to be more in the camp that looks at this as a carefully drafted total package. I also like the fact that it was a non-partisan group that put it together. The danger I see in terms of slicing it up or looking at it in bits and pieces is that there might be greater ability for special interests, and so on, to take the thing apart.

Again, this is a democracy, and in a democracy this will go through Parliament, you will represent the interests of all the people, and you will choose the things that suit you the best, but I would advocate looking at this as a carefully put together total package that deals with all aspects of what the task force thought should be dealt with.

Ms. Carolyn Bennett: Do you have any opinion about the auto leasing or the insurance?

Mr. Youssef Nasr: I don't think reducing the choice that consumers have is good public policy. So to the extent that having more providers of those services increases consumer choice, I think public policy should support it.

Ms. Carolyn Bennett: As to the consumers or to the individual insurance brokers who are worried they'll be put out of business if the banks are allowed to sell insurance, there are some people who say it will look like more choice for consumers at the beginning, but when the banks take it all over and put everybody else out of business, or give away insurance as loss leaders, the consumers will actually end up with less choice.

Mr. Youssef Nasr: I'll speak for my bank. We like to run every division and every product line as a profit on its own. We don't believe in cross-subsidizing businesses. We are actually already in the insurance business, except that we have to offer it now as a stand-alone operation rather than as part of the branches, so you're making it more inconvenient for our customers to access the insurance services that we provide.

I don't think it necessarily needs to put insurance brokers out of business. The insurance industry varies from some very simple products to some very complex products. For simple products, the experience—and you can look at a number of countries around the world—has been that it's easier to sell them over the phone, because it's fairly easy to price these things. When you get into more sophisticated insurance products, particularly in the life insurance category, you do need the expert advice of a broker. So I don't think it puts the brokers out of business; it puts them more in the high value-added products where their advice is needed, but it gives the consumer access to low-cost everyday insurance.

Ms. Carolyn Bennett: Thank you.

The Chairman: Thank you, Ms. Bennett.

Mr. Szabo.

Mr. Paul Szabo: Thank you.

Thank you, Mr. Nasr, for the excellent presentation you made.

I want to target one very narrow question with regard to the revenue generation by the insurance and auto-leasing opportunities that are recommended by MacKay. I gather from your statement here that you see this as basically being a modest revenue contributor. Then how do you explain why the banks are so aggressive to have auto leasing? Is there any other reason they may have, other than revenue, that they would want to have auto leasing?

Mr. Youssef Nasr: Again, I can't speak for the other banks, but we see it as being another product to cement a relationship with the client. We are a relationship-oriented organization, and we believe the more business we do with our clients, the better off it is.

If one of our clients is taking a series of products from us and then gets to a certain product where we have to tell them, sorry, we can't do that, you have to go across the street for that, I think that weakens our ability to serve our client. My organization is interested in it so that we have a full package that we can offer to our clients. I can think of very few other industries that have the ability to offer a full range of services to their clients and then have to send their customers to somebody else. Because of regulation, they are unable to offer part of what is in the nature of financial services.

• 2100

Mr. Paul Szabo: As long as the customers are coming to the branch to do all these other things, we might as well open up a McDonald's Restaurant in every branch, so they can spend all the time they're going to need to do all the business there.

Mr. Youssef Nasr: I used the term “financial services”. I'm not planning to go into the food business.

Mr. Paul Szabo: Well, if you're going to be there that long to use all those services, you're going to get hungry by the time you're finished. It's just a thought.

You didn't mention anything about the value of the ownership of automobiles should the leasing be done through the bank. There is also the cashflow impact. Because of the CCA availability, it's in fact quite attractive to the banks. Is this not true?

Mr. Youssef Nasr: It depends on what aspects of the business the banks will get involved in in terms of ownership. Around the world, our group is involved in auto leasing in a number of areas. In some of them there is very little cashflow impact because of how it's set up. In others there is.

Mr. Paul Szabo: Okay. My last question has to do with something I pursued with the Governor of the Bank of Canada prior to your presentation. You dealt with it very briefly with regard to this being a package and something we can work and go forward with.

I don't disagree with this. There are things that are meant to be together, and you can't take them apart or else you destroy the synergies, the balance, and all those other good things.

But if MacKay is predicating all these benefits on more competition, do you believe that, as a first phase, there should be steps taken to promote or facilitate the creation of this new competition?

Throughout the process, you're dealing with the regulatory environment and keeping that up to date. But do you want to then establish that you can have the stability within the banking sector that the governor said complements his job of monetary policy administration? Doing the competitive thing really is not one of the recommendations; it happens to be a result that has to be achieved.

Are there chunks or steps in the evolution of what MacKay envisions as the financial services sectors, or do you think we can flip a switch?

Today, we have all these credit unions that have merged and they have national banking. We have schedule B banks in there. We have foreign banks. We have all the electronic things happening instantaneously. This extreme obviously does not work.

Where are we? Is it one step at a time? Is it the whole thing all at once, or is it somewhere in between?

Mr. Youssef Nasr: My recollection of the report is that there were some recommendations involving phasing in. You brought up the question of leasing and insurance sales in branches. Again, I may be a bit rusty on the details, but my recollection is that institutions with a capital base below a certain amount, which I believe was $5 billion, would be authorized to go right away. This would give them the opportunity to strengthen themselves. The institutions with more than $5 billion in capital, which would include the big five banks, wouldn't be allowed to go until 2002.

So I think the issue you are raising has been dealt with by the task force. In that particular instance, he's seeing a two-phased approach, one at the beginning where the smaller organizations get an early entry into the business and start offering it and so on; then four years later the bigger banks get in. This is one example of where there is a phased-in approach.

In terms of saying it's a total package, I'm not necessarily saying it's a total package, all of which has to be introduced on day one. I think it's a total package with certain elements as well that are introduced in a predetermined way. On this basis, I think it's a pretty good package.

Mr. Paul Szabo: Mr. Chairman, I want to ask one more question.

This is really asking for your own personal opinion. How do you feel about two banks putting together a proposed merger and filing that application—it's happened twice—without knowing the rules of the game or the terms and conditions under which they are going to have to operate in the future?

• 2105

Mr. Youssef Nasr: I would interpret the filing of the merger intention as being the recognition, as I mentioned, by the board of directors, the CEOs, of those organizations of a global trend they see coming down the road for which they had to prepare their organizations. That's what they're paid to do.

My interpretation is that this was their way of saying we need to put this on the agenda and allow a debate like this one to take place to determine whether or not it should happen. Clearly, the message that came out of this is that, looking down the road—we're not going to see this today or tomorrow—there's a concern about the Canadian banking system proving to be an unsatisfactory place for global capital to be invested.

Mr. Paul Szabo: So you might conclude that the current applications before the Bureau of Competition Policy that have been submitted for the consideration of all parties that have to consider it may not in fact be frivolous applications. Rather, there was no real expectation that they would ever be approved.

Mr. Youssef Nasr: I can't go to that next step. I can only answer your first question.

Mr. Paul Szabo: Okay.

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

Mr. Tony Valeri: Thank you, Mr. Chairman. I have just a couple of questions.

I gather you agree essentially with what MacKay is saying and the thrust of MacKay. Essentially, the underlying principle with MacKay is certainly to build a competitive framework, but also to deal with consumers and the importance of consumers.

The Consumers' Association of Canada was before the committee this morning. I just want your reaction to this. In their conclusion, they say:

We believe it is dangerous to assume that the more competitive environment envisaged by the task force will necessarily protect the interests of small business people and consumers. —It will take time, possibly a long time, before sufficient numbers of competitors of sufficient size to realize these economies of scale emerge [for competitiveness in the marketplace].

What's your reaction to that?

My second question is, given MacKay's recommendations, how long would it be before we see a similar type of bank to Hongkong Bank coming into Canada to compete for those core banking services?

Mr. Youssef Nasr: Let me deal with the first question. The one major issue we raised, as I mentioned in my presentation, is the one that is absolutely necessary to create more competition in what you call the core banking business, which is opening up the ATM system to full functionality. When that is done, there can be a multitude of new providers who become competitive right away because they will not need to go through the expensive process of building up a branch system over long periods of time.

The analogy I use is what happened with the telephone industry. There are two aspects to telephones. One of them is the people who actually put the lines into your house; the second one is the long distance carriers. As long as the long distance carriers could not get into your house, there was no point. They could be more competitive or less competitive. It didn't matter.

What changed was when they allowed open competition for the long distance carriers. The local providers, the people who actually have the lines into the house, are the ones who became forced to open this up to any competitor to offer long distance services. For most people, the bulk of their phone bills comes from long distance calls, not the local calls they make.

This is a similar analogy. The ATM system is what we consider to be the utility function. This is what is like the lines into people's homes. The real competition will come from being able to offer a whole range of services on these networks.

With that, if they follow through with the recommendation that came in the task force, I think you will see the competition emerging much faster than if it's expected that the competition will come through traditional ways of establishing yourself in retail banking, core banking.

Mr. Tony Valeri: Okay. Thank you, Mr. Chairman.

The Chairman: Thank you.

I want to go back to the issue of profitability. On page 112 of the report, the United Kingdom is at 22.2% for net income to total revenue, while the United States is at 20.2% and Canada is at 19.5%.

What do you think of these statistics? Is the difference between 19.5% and 22.2% a major difference in the financial services sector?

• 2110

Mr. Youssef Nasr: Mr. Chairman, what matters to investors is not the profit margin, which you've just read, the profit to revenues; what matters is the return on equity, the return on investment. In the return on investment, the returns that Canadian banks have shown tend to be about 5% to 7% below the best banks in the U.K. or the U.S. This is without taking into consideration the steady decline of the Canadian dollar. If you're an international investor, what you're looking at is the total return starting with the currency you originate from, and for most people it's the U.S. dollar. So when you add in what has happened to the Canadian dollar, we estimate the returns in Canada are about half what they would be for British or U.S. banks. That becomes a very significant difference.

The Chairman: Your bank has been fairly successful in Canada. You've grown quite a bit. You're not the average case, as you probably know. Why is that? What are you doing that's so different, without, of course, revealing your trade secrets?

Mr. Youssef Nasr: I wish there were a trade secret, because if there were a secret, you could protect it.

We started out by looking at what segments of the business were underserved or not very well served by the existing players. When you come into a country that has very large financial organizations, generally successful ones and so on, you have to be very careful about choosing the spots where you can succeed. I think we were able to choose those segments we thought were underserved. That is what competition is about. Competition is to find the segments that are underserved and then to focus on them. We also had a few lucky breaks. The availability of a couple of institutions that had been weakened because of prior economic crises in Canada enabled us to establish the retail deposit base that is necessary in order to compete in core banking. But there are really no secrets to it. It is just a business focus and a few lucky breaks along the way.

The Chairman: The luck we can't control, although I often say that luck is the residue of design.

MacKay feels there's a need for greater entrepreneurship in this particular field. Are Canadians not by nature entrepreneurs in the financial services sector? Is it an area that is really foreign to many people? Why is it that we don't have as many niche players as I think our economy can in fact support and requires?

Mr. Youssef Nasr: I think part of it is the fact that because of the relatively small population in the country, the country moved earlier towards national banking, full-service banking, and so on, than, say, the United States just to the south. The financial services model should reflect the demographics of the country, and I think for a country like Canada the model is probably not a bad one to have, given the demographic realities.

I certainly don't find that we lack entrepreneurial spirit among our employees. A number of the acquisitions we have made and continue to make have involved companies that have been started up by outstanding entrepreneurs, and I am delighted that they continue to work with us and provide that entrepreneurial spirit in the way they service their clients.

The Chairman: But you're not talking about the financial services sector when you say that. You're talking about your clients who are involved in—

Mr. Youssef Nasr: No, I'm talking about the companies involved in financial services that we've acquired.

The Chairman: Okay.

This was an excellent report, and I really like the fact that you focused on the future. On behalf of the committee, thank you very much.

The meeting is adjourned.