FINA Committee Meeting
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STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Thursday, October 5, 2000
The Acting Chair (Ms. Albina Guarnieri (Mississauga East, Lib.)): Seeing a quorum, I'll ask members to please have a seat.
Today we're hearing witnesses. We have the pleasure of welcoming the Insurance Bureau of Canada, Mr. Mark Yakabuski and Mr. Randy Bundus. Secondly, we have the Canadian Life and Health Insurance Association, Mark Daniels, president, and Jean-Pierre Bernier, vice-president and general counsel. Thirdly, we have École des Hautes Études Commerciales, Jean Roy, associate professor of finance.
Mr. Yakabuski, please.
Mr. Mark Yakabuski (Vice-President, Ontario, Insurance Bureau of Canada): Thank you very much, Madam Chairman. I want to thank you for this opportunity to come before the finance committee this morning to discuss the government's new financial services legislation, Bill C-38.
My name is Mark Yakabuski. I'm the outgoing vice-president of government relations of the Insurance Bureau of Canada and the vice-president for Ontario of IBC. Joining me this morning is my colleague, Randy Bundus, our vice-president, general counsel, and corporate secretary.
As many of you know, IBC is the national trade association representing Canada's private property and casualty insurance companies. Our industry employs about 100,000 Canadians across the country. Last year we paid out just under $14 billion in claims to insurance consumers for loss or damage to their automobiles, their homes, their businesses, and to rehabilitate injured accident victims.
Over the past several years, Madam Chair, IBC and our member companies have actively participated in the great debate over the future of Canada's financial service sector. The introduction of Bill C-38 brings closure to this long review and brings forward a package of sound reforms, which I am confident will strengthen our financial institutions, enhance our competitiveness at home and abroad, and in particular empower consumers.
For this, Madam Chair, I want to particularly commend your work and the work of all members of this committee in playing such a crucial role in helping bring these proposals forward.
I want to stress from the outset that the property and casualty insurance industry strongly supports Bill C-38. I would urge this committee, whatever the events of the next several days, to complete its study of this legislation as quickly as possible so that Parliament may at least have a chance to pass this bill without any further delay.
I say that because we believe that Bill C-38 is a finely crafted and balanced piece of legislation. The bill makes a significant attempt to reconcile very different interests within the financial services community while at the same time ensuring that that sector has a strong legislative and regulatory structure within which to face the challenges of the future.
I have to say that I am particularly grateful for the committed work of the members of this committee and the work of so many of your colleagues in Parliament in ensuring that Bill C-38 maintains the current rules governing bank sales of insurance. The continuation of the rules put in place in 1992 will ensure that Canadian consumers continue to enjoy the benefits of strong competition in auto, home, and business insurance. It will also give the industry and its thousands of brokers, agents, and representatives the stability needed to focus their energies on meeting the changing needs of Canadian consumers, and not having to look out for what their competitors might be seeking with respect to legislative advantages.
I am pleased that the new legislation, upon receiving royal assent, will be in place for a period of five years. Madam Chairman, that is the kind of stability that we and all financial institutions need in order to pursue growth in a dynamic environment.
I am delighted that Bill C-38 contains a number of important and balanced measures which will encourage greater competition in the deposit-taking sector, such as lowering the minimum capital requirements for deposit-taking institutions. At the same time, the legislation provides major banks with the ability to use holding companies to organize their business in a more flexible way. In our view, this provision may also help small- and medium-size institutions in Quebec and other parts of Canada to come together in order to compete with larger institutions.
With over 200 damage insurers competing to meet the auto, home and business insurance needs of Canadians, IBC has long maintained that consumers would benefit if similar levels of competition were also achieved in other parts of the financial services sector.
Of course, it will take some time to see if these measures are fully successful and are promoting more competition in the banking industry in Canada, but it is definitely a step in the right direction.
Consumers of financial services will also benefit under the new legislation given the creation of the new Financial Consumer Agency of Canada. This new agency will be given substantial powers to enforce the consumer protection provisions of all financial services legislation.
There is no doubt that the new agency will be a powerful new force in the financial services sector. P and C insurers welcome this strengthening of consumer protection, provided that the agency concentrates on dealing with those issues in the financial services sector that have given rise to the bulk of consumer complaints in recent years.
On our part, we know that very few consumer complaints have been received by federal and provincial regulators of insurance in Canada about P and C insurance matters, and our companies rightfully want to avoid having to pay for the consumer redress of other financial institutions. However, we also understand that consumer protection is fundamental, and it is one of the key objectives, to our mind, that Bill C-38 successfully balances.
In order to ensure speedy passage of this legislation,
at any rate,
I would urge this committee to consider only those amendments that are of limited scope and are not controversial. In this light, it is our suggestion that the committee focus its review on two things: first, those sections of the bill that relate to new powers given to OSFI as well as to the new commissioner of the Financial Consumer Agency to apply administrative monetary penalties; and secondly, the new restrictions on financial institutions' ability to declare dividends under certain circumstances.
More specifically, Madam Chairman, Bill C-38 gives OSFI and the new financial services commissioner the power to apply administrative monetary penalties in a way that puts the regulator in the position of being both an enforcer and a judge. That's an uncomfortable position in the eyes of many. Even though the application of an administrative monetary penalty could be appealed by a financial institution to the Federal Court under this bill, many financial institutions might be reluctant to make that appeal if they think other possible transactions that require the superintendent's approval could be affected by appealing that penalty to the Federal Court. There could be a chilling effect, in other words.
Ultimately, the effect of this new power will depend upon which matters are prescribed to be violations subject to administrative monetary penalties in the government's regulations. That is why we would suggest, at the very least, that this committee recommend to the government that when regulations setting out what are violations to which administrative monetary penalties could be applied, that those regulations be closely discussed with financial institutions before being finalized. I think it would be very helpful if you could make that very important and yet very simple recommendation.
The other new power given to the Superintendent of Financial Institutions is also a matter of some concern. Under the new legislation, the superintendent's approval will be required for the declaration of any dividend by a financial institution when the total of dividends paid during the year exceed that year's net income plus the retained net income for the preceding two years.
We agree that this provision is reasonable for companies that are near what is called their minimum capital requirements. You don't want a company paying out money when they probably don't have a lot of money to pay out. It makes good sense. However, we think this restriction is inappropriate for companies that are well in excess of the level of capitalization needed for the level of business they are transacting. In other words, they are nowhere near their minimum capital requirements. We would suggest that the obligation to obtain the minister's prior approval be restricted only to those cases where companies are in fact nearing their minimum capital requirements. Otherwise this provision could well be seen as discouraging investment in financial institutions, which is completely contrary to the spirit of this bill.
So I would again ask that you take that under consideration. That's a very simple recommendation and yet a very powerful one that you could make as a committee.
Madam Chairman, in closing, I want to commend the work of this committee again in having played such a critical role in the debate we have had over the past several years on the future of Canada's financial services sector and in helping to fashion the very legislation we are considering today. I strongly urge you and your colleagues once again to find every means possible to complete your study of Bill C-38 as quickly as possible and, as I say, at least give Parliament a chance to pass it before other events may take place. In doing so, I can assure you that you will be giving Canada a strong and stable legislative and regulatory environment within which its financial institutions can grow and meet the great challenges of this new century.
Thank you for your attention, Madam Chair. My colleagues and I would be happy to answer any questions you may have.
The Acting Chair (Ms. Albina Guarnieri): Thank you, Mr. Yakabuski. This finance committee has a reputation for working as expeditiously as possible, so thank you for the advice.
Next we'll be hearing from the Canadian Life and Health Insurance Association Inc. Mr. Daniels, you have ten minutes. Thank you.
Mr. Mark R. Daniels (President, Canadian Life and Health Insurance Association Inc.): Thank you, Madam Chair.
Chairman, honourable members, thank you very much for this opportunity to participate in the House of Commons finance committee study of Bill C-38. As the chair noted, I'm Mark Daniels, president of the Canadian Life and Health Insurance Association. With me at the table is Mr. Jean-Pierre Bernier, the association's general counsel.
Madam Chairman, the committee has before it copies of the industry's submission on Bill C-38. Recognizing the time constraints the committee is faced with, I'm going to confine my opening remarks to providing the committee with a very brief overview of the industry's views.
By way of introduction, our association, the CLHIA, represents over 80 companies, which account for somewhat above 90% of the life and health insurance business in force in Canada. Our members protect more than 20 million Canadians and another 10 million policy holders worldwide.
I want to begin, following Mr. Yakabuski's lead, by first noting the important role that this particular committee has played in the development of this legislation. Your reviews of the MacKay task force report and related matters have contributed substantially to the development of this legislation, and I think that entire process is really unique, as far as I know, in the development of financial services legislation historically.
We very much appreciated the many opportunities we were provided by this committee to contribute constructively throughout its studies. Similarly, the testimony and submission we are providing to the committee today are intended to contribute constructively to the committee's review of this very significant piece of legislation.
Madam Chairman, Bill C-38 represents the culmination of a very long and extensive consultative process, and while the bill does not resolve every issue put forward during this process, it does strike an appropriate balance among the many suggestions and recommendations put forward by the various stakeholders. In this context, Bill C-38 offers a balanced and comprehensive vision for the financial services sector, which will significantly benefit Canadian consumers.
In addition, Madam Chairman, Bill C-38 offers increased competitive flexibility to Canadian life and health insurers consistent with the intense competitive pressure of the rapidly evolving financial services marketplace of the 21st century.
In our view, Madam Chairman, it is a good piece of legislation—good for consumers and good for the financial services industry. We would therefore submit to this committee, Madam Chairman, that in the interests of clarity, certainty, and putting in place a modernized and internationally competitive legislative framework, Bill C-38 should be passed and proclaimed into force as soon as possible.
Although Bill C-38 is well crafted, our industry does believe there are opportunities for this committee to improve the extent to which the stated goals of Bill C-38 are attained.
We would suggest that the committee report might want to recommend changes that would do two things: first, encourage harmonization between the activities of the newly created Financial Consumer Agency and those of the provincial superintendents of insurance; and second, simplify the legislative provisions relating to the public accountability statements required by removing unnecessary powers to make detailed regulations prescribing their content, form, and manner of publication.
Madam Chairman, I would reiterate that Canada's life and health insurers strongly believe that this is an important and very timely piece of legislation. In this context, we are appreciative of this early opportunity to provide the committee with our views and perspectives.
Madam Chairman, this concludes my opening remarks. My colleague and I would be prepared to answer any questions. Thank you.
The Acting Chair (Ms. Albina Guarnieri): Thank you, Mr. Daniels. You'll have that opportunity after we hear from
Mr. Jean Roy, of the École des hautes études commerciales. Welcome before the committee, Mr. Roy. The floor is yours.
Mr. Jean Roy (Associate Professor of Finance, École des hautes études commerciales): Thank you, Madam Chair. I greatly appreciate this opportunity to express my views. I am a professor of finance at the École des hautes études commerciales in Montreal.
In order to introduce myself and to give you some background, I should say that I have no links with any financial institutions whatsoever. My professional activities outside the École des hautes études commerciales have been limited to acting as a consultant for private, provincial and federal organisations. I can therefore put forward my views in an objective manner.
I would also like remind you that I was involved in draft one of the MacKay Commission's special reports, focussing on public participation in the study of proposed mergers. I will not say any more about that, however. I have also testified before the Standing Committee on Finance and Senate Committee on Banking a number of times.
I agree with my colleagues; the process has been long and a great deal of progress has been made. We should not bring the fundamental aspects of this bill back into question. We should, however, look at the details to fine-tune them as quickly as possible. After all, this is an important bill.
On the whole, the bill is forward-looking and balanced. It offers new opportunities for growth to businesses and financial services sector through new provisions dealing with ownership rules, the creation of holding companies and broader access to the payment system. It also redefines relationships, in particular relationships between consumers and financial service providers, domestic and foreign companies, and banks and life insurance companies.
My view is that the bill is partly intended to deconcentrate the financial services sector by putting a lid on the growth of banks and fostering the emergence of new financial groups built around life insurance companies. I believe that this objective is entirely warranted. Generally, I therefore agree with the content of the bill.
Still, I would suggest that the following changes be made.
First, I will deal with the Financial Consumer Agency of Canada. In section 3, I propose two changes to the statement of the agency's mission. First, in order to contribute to the attaintment of the objective in section 3(2)(e), which is to “foster [...] an understanding of the financial services”, I would add that the agency's mission specifically include a duty to promote research on financial services. A new objective, (f), could perhaps state:
(f) encourage academic institutions, consumer protection groups and
other potential stakeholders to undertake research on distribution
of financial services;
Second, I suggest including in the agency's mission the following objectives:
(g) advise the Minister of Finance on matters relating to the
protection of financial services consumers.
Finally, I believe that the French name of the agency “Agence de la consommation en matière financière du Canada” is not a very good choice. It is too long, and it is not pleasing to the ear. It would be appropriate to consult linguists in an effort to come up with a better name. I would suggest something simpler: “Agence canadienne des services financiers”, or “Agence des services financiers du Canada”. People will come to know the agency's consumer advocacy role even though it is not spelled out in the name.
My second point concerns the Bank Act. Section 385 defines new ownership rules for banks that have between $1 billion and $5 billion in equity. As we all know, this provision affects the National Bank of Canada in particular and is a source of controversy. The general principle of making a gradual transition from sole ownership—that is, 100 percent—for small banks to widely held ownership for large banks is well-founded; the dispute is over details of how that transition will be made.
Personally, I would suggest that the ownership transition be made even more gradual by splitting the middle category in two. Banks that have about between $1 and $2.5 billion in equity would be limited to 35 percent widely-held public shares, while banks that have between $2.5 billion and $5 billion in equity would have to have at least 65 per cent widely-held public shares. This approach would be an attractive compromise on this, a sensitive issue for Quebeckers.
I will now turn to the need for a quick passage. Like everyone else in the industry, I note that the financial services sector is changing quickly and is especially affected by globalization. In November 1999, the United States passed the Financial Modernization Act, which relaxes the legislative framework applicable to financial services and gives American institutions a heads-up. In that context, it is essential that Bill C-38 be passed quickly so that Canadian institutions can adjust and stay competitive worldwide.
My last point is on automobile leasing. Bill C-38 does not allow banks to offer automobile leasing services to consumers. Given the scope of the issue, it is best not to reconsider it at this time. In its June 13 news release, the Department of Finance reiterated its willingness to consider changes between statutory reviews.
As it has frequently done in the past, the government is prepared
to revisit the legislation prior to the five-year review if it
proves necessary in order to ensure that the framework keeps pace
with the rapidly-changing marketplace.
I therefore suggest that, as soon as Bill C-38 is passed, the Standing Committee on Finance take another look at the issue of allowing banks to offer automobile leasing to consumers. This is an important issue to the Canadian economy and also for consumers. In any case, the MacKay Commission had explicitly recommended that the government allow banks to offer automobile leasing.
In conclusion, we can say that Bill C-38 is an enormous initiative. It is the culmination of a long and open process that proposes a number of timely changes, allowing the Canadian financial services sector to move forward yet assuring its stability at the same time. It will enable Canada to retain its enviable status as a provider of quality financial services. This bill must be passed quickly, and the ongoing review process must resume immediately thereafter.
Madam Chair, I hope that these comments will be useful and thank you for affording me this opportunity to speak. Though I presented my views in French, I would be happy to answer questions in English as well.
The Acting Chair (Ms. Albina Guarnieri): Thank you, professor Roy. Your comments have been very useful. We will now move to questions.
Mr. Jones, you have the floor.
Mr. Jim Jones (Markham, Canadian Alliance): Thank you, Madam Chairman.
The first question I have is for Mr. Roy, on his comments on automobile leasing.
In the U.S. are banks allowed to be in the automobile leasing business?
Prof. Jean Roy: Yes. As a matter of fact there was a special study ordered by the MacKay task force, and we have very interesting figures in this report. I would like to mention a few.
First, there are two tables we can compare. First, the title of this report in French is
Rapport sur l'élargissement des pouvoirs des banques à la location-bail de véhicules légers; in English, the title is Background Report on Extending Bank Powers to Include Light Vehicle Leasing. The report was prepared by DesRosiers Automotive Consultants. I am looking at table 8, on page 33 of the English version of the report. It shows market share comparison in the leasing market in Canada and the United States.
The chart shows that, in both Canada and the United States, there are two main categories of organizations offering vehicle leasing. First are captive finance companies, which belong to auto makers. In Canada, the 20 main captive finance companies control between 70 and 80 percent of the market, while in the United States they control 45 to 50 percent of the market. Then, there are the banks as well. In Canada, because of the legislation, banks have no share of the leasing market, while in the United States they hold 30 to 35 percent of the leasing market. This shows that allowing banks to offer leasing services is not necessarily mean allowing them to dominate the market. However, their presence has a clear impact on price.
Table 20 of the report shows that, when the study was carried out, the average interest rate on automobile loans was 7.42 percent in Canada and 8.41 per cent in the United States. For conventional loans that banks are allowed to offer, Canada's rate is 1 percent below that of the United States. However, for automobile leases that banks are not allowed to offer, the average interest rate in Canada is 9.42 percent in comparison with 8.34 percent in the United States. Banks' participation in this sector has a significant impact on price.
I would also like to make another point. In looking at the structure of captive finance companies, we might have the impression that it is a competitive market, since about 20 captive finance companies control 80 percent of the market. Allow me to list some of the captive finance companies in Canada:
General Motors Acceptance Corporation, Ford Motor Credit, Chrysler Credit Canada, Honda Canada Finance, Toyota Credit Canada, etc.
We must understand that, when a consumer decides to buy a car from, say, General Motors, Toyota Credit is not in the running. In other words, the 20 companies that control 80 percent of the market compete on the sale of their products, not on financing the vehicle for the customer. Once the vehicle is sold, the client cannot chose his finance company if he wants to lease.
I think consumers would benefit if banks, which had finance vehicles through conventional loans for a long time, returned to the market.
Mr. Jim Jones: Thank you, Mr. Roy.
Mr. Daniels, Bill C-38 creates an ownership regime for life insurance companies that treat converted companies differently from non-converted stock companies. Do you support this? What is the rationale? And does it create a competitive imbalance among firms?
Secondly, Bill C-38 allows life insurance companies to be members of the Canadian payment system. What practical effects will this have on services offered by life insurance companies?
Mr. Mark Daniels: Let me, if I may, Mr. Jones, take the second question first.
On the practical effects, sitting where I do in the association, I'm not privy to individual company plans. We do know a lot of companies are working on plans that would involve the use of one form or other of electronic payments changes. To get a sense of it, sir, the life and health insurance industry in Canada pays out $100 million a day to Canadians. About 10% of that is in the form of life insurance benefits. The rest of it is in the form of payments for dental plans, for annuities. This is just a huge flow of funds, most of which in recent times finds its way out in the form of cheques drawn on a bank.
The fact of the matter is there are technologies out there now that would permit a hugely different kind of access for people to their funds and their deposit-like products with the insurers. I know there's a tremendous amount of detailed work going on. I'm not privy, of course, to the precise design of these ideas. You see mention of it.
Just yesterday I noticed an article in which the head of Canada Life was being interviewed at the New York Stock Exchange about the fact that Canada Life is now listed in New York. He pointed to two features of this law, Bill C-38, that he was particularly interested in, and indeed one of them was the payment system for precisely that reason. So this is a very significant development for the industry that we have been looking at for some time.
With respect to your first question on the ownership regime, I think my answer is that the one large stock company in the country, prior to the four de-mutualized companies, has had a special regime under the Canada Business Corporations Act—and I think I'm right about that, J.-P.—that has existed through ownership transfers for quite some time.
The regime on the newly de-mutualized companies, if I understand the intent of the legislation correctly, is to make sure these companies have an appropriate time to acclimatize to the new public ownership regime. As far as the position of the association on this is concerned, we were very much involved in the discussions on these provisions and support them entirely.
Mr. Jim Jones: I have one last question for Mark.
One of the things you talked about in your presentation was the urgency for the approval of this bill. Can you tell me what impact it does have on the industry, say, for example, in monetary terms, if it was approved at the end of the year or if it was approved at the end of June of next year? I just want to understand what benefits you get from the urgency in improving this bill.
Mr. Mark Yakabuski: We all recognize that this has been a very long financial services debate. All of us have been involved in it. Parliament has certainly been involved in it. And there is a strong feeling that this bill balances very successfully a number of differing, sometimes competing objectives.
You don't always get a bill that successfully balances competing objectives. I think this bill does it, and, as a result, if I read the press releases correctly, the Insurance Bureau of Canada, representing auto, home, and business insurers, supports this bill. CLHIA, representing life insurers, supports this bill. The Canadian Bankers Association, appearing later on before this committee, in their press release has said that this is a good bill.
That doesn't happen without a lot of work, and I think there are definitely people in the market who have been waiting for this bill for a long time. If, for some reason, this bill is not passed, dies on the order paper, or whatever, we can't predict how this issue of financial services review and reform will be taken up. I don't know what a future Parliament will do and I don't think anyone else does.
So given that we have done so much work that now has encompassed two successive Parliaments—the last Parliament began this process, this Parliament has spent a great deal of time during this process—there are a lot of reasons why we would want to complete this process in this Parliament.
The Acting Chair (Ms. Albina Guarnieri): Mr. Daniels, you have an intervention.
Mr. Mark Daniels: Thank you, Madam Chair.
May I just add, though, that I think there's another dimension that has come upon us. We'd be arguing for timely passage in any event. It's been a long process and a thorough process, but certainly in the life and health business, the reality is that we are facing, of course, the United States. We have a huge amount of business in the U.S. The U.S. has a major new bill that comes into force in a month. That bill is going to change the operating climate for financial services industries in the United States in a very significant way.
Frankly, Madam Chair, Canadians can't afford to let the operating climate for financial services industries in the U.S., which has not been the equivalent of ours for a very long time, all of a sudden turn tables. At the end of the day capital is eminently mobile. In the North American marketplace we have to work very hard to ensure that our institutions have the most flexible, fluid environment possible, and that's why this bill is important in a time sense at this particular point.
The Acting Chair (Ms. Albina Guarnieri): Thank you very much.
Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I will take up where Mr. Daniels left off. We also consider this bill very important, and I have been waiting for it for years. For the past seven years, we should have had a bill moving forward much more quickly than it did. I don't want to denigrate the efforts of Mr. MacKay, those who worked with him, and all those who contributed to the process like Mr. Roy, but we had hoped for a fast track so that bills like these could be passed quickly. In our view, we have to move quickly to remain internationally competitive. That was the topic of a brief I tabled myself on behalf of my party before the Standing Committee on Finance two years ago.
We believe that about 95 percent of this bill is well-designed, because it meets the needs of the industry. We have heard a great many witnesses, including Mr. MacKay. We have read Mr. MacKay's report, and to some extent I share Mr. Yakabuski's enthusiasm. There are entire sections of the bill that are highly satisfactory.
However, there are some controversial aspects that Mr. Roy pointed out. When several of us appeared before the committee, representing the Bloc Québécois, we questioned the wisdom of allowing a single individual to hold a greater number and percentage of shares in a bank with medium capitalization or with average equity of less than $5 billion.
We still wonder—and personally, I have not yet had an answer—where to find the flexibility Mr. Martin is so glad to provide by allowing a single investor to hold 65 percent of shares in a bank like the National Bank of Canada. How would that bank get flexibility? Personally, I don't see that it would gain any. What is the difference between an institution where a single individual holds 65 percent of shares and an institution where 65 individuals each hold 1 percent of shares? Where is the added flexibility in the first instance? How is the institution's capitalization capacity increased? I still don't have an answer to that.
Yesterday, Doug Peters—who was a secretary of State for financial institutions before Mr. Peterson—appeared before us to state that this was a ridiculous argument and that provisions in Bill C-38 relating to the deconcentration of property, the concept of widely-held property, were dangerous. Since that statement comes from a man who has been closely involved in the review process of the reforms—Mr. Peters was here before—I can conclude that we are not alone in our belief.
Mr. Roy, you raised the issue again this morning. There is definitely some controversy here. Quebec's largest bank, the National Bank, is treated differently from Canada's largest bank, the Royal Bank, in provisions governing widely-held ownership.
I find your suggestion interesting, but do you not feel that, given the current ownership structure of banks, allowing a single individual to hold 35 percent of shares in the National Bank, for example, would be tantamount to giving that individual full control? Do you agree?
Mr. Jean Roy: That is right. Let's just say that this is covering the full spectrum: so ownership—100 percent—is permitted for small banks so that new banks can emerge. To a point, a compromise is reached for ownership of larger banks. The difficulty lies in managing ownership for medium-sized banks.
Personally, I would say that it is not necessarily flexibility that provides control but rather responsiveness. In other words, the individual who holds 65 percent of shares can take action quickly. Thus, within a framework of new holding companies, the National Bank could become the subsidiary of a larger financial group, which would have the capacity for rapid decision-making because it had control.
Obviously, an individual who holds 35 percent of shares does not have legal control, but in most cases has effective control. That would leave 65 percent of shares for widely-held ownership, and minority shareholders could of course come together to oppose a decision. The minority shareholders would have the collective weight needed to oppose decisions.
Mr. Yvan Loubier: I agree, Mr. Roy. I believe in collective rights and powers. There is no problem there. However, when we see how shareholders' meetings are conducted today—yesterday we had an opportunity to talk about this with Mr. Lussier, president of APEIQ, the Association de protection des épargnants et investisseurs du Québec—we note that when any individual has 35% of shares and in archaic rules of boards of directors are applied—you appoint, he or she appoints, they appoint themselves—then collective power ceases to exist.
The other point that should be considered—and I don't know whether you will agree—is that in the event of a takeover, an attempted takeover or excessive control from one side, some financial operations can generate a lot of money for their shareholders. We saw that with some mergers: major shareholders made a lot of money, even though Mr. Martin decreed that the mergers could not take place.
But isn't there a need for more protection? Let's concede that your position, which is a compromise, in no way prevents an institution like the National Bank from forging strategic alliances, for example. At the same time, we would like to include criteria to assess a financial operation, so that for example, someone who holds 10 percent of shares in the National Bank could end up with 35 percent.
We might say that some criteria should apply: services must be maintained, top decision centres must remain in Quebec, Montreal must benefit as an international financial centre, and ultra- specialized jobs must be maintained. You are aware, as I am, that there are not too many financial specialists in Quebec.
In my view, implementing your proposal according to industry rules, and with some prerogatives we would like to see for Quebec, would constitute additional guarantees, don't you think?
Mr. Jean Roy: Of course. To do things the way you want, I think we would just have to divide the banks or financial institutions into four levels of capitalization, and request that the merger and acquisition study provided for major banks apply as of $2.5 billion in equity.
If that were done, all the social benefits that would be taken into consideration in the new merger study process would also apply to the National Bank.
Mr. Yvan Loubier: That is a very interesting point, Mr. Roy. I like what you are saying.
Mr. Jean Roy: I would like to make another point on the impact of ownership level on control. As you said, ownership level can affect shareholder gains. Here is how I see the old system we had in Canada. We had a fairly concentrated, almost oligopolistic banking system, to which the 10 percent rule served as some sort of antidote. In other words, if the bank as an entity made somewhat excessive profits, the 10 percent rule guaranteed that those profits would be distributed to the people.
Obviously, the problem is that we want to move towards a competitive market where there would be no excess profit, but we haven't got there yet—particularly in Quebec, where the finance market is divided up primarily among two major players: the Mouvement Desjardins and the National Bank.
So, insofar as the market is not fully competitive yet, we must maintain widely-held ownership to ensure that excess profit is redistributed.
Mr. Yvan Loubier: Thank you, Mr. Roy.
Mr. Mark Yakabuski: I would like to comment on the need to pass this bill as quickly as possible. I follow Mr. Loubier's arguments very well, Madam Chair. However, we should point out that support for the bill's new rules on holding companies is coming particularly from Quebec financial institutions, including the Banque Laurentienne, whose CEO Henri-Paul Rousseau formerly headed a private property and casualty insurance company and is familiar with the financial services sector. Mr. Rousseau believes the new rules would be very good for Quebec companies.
Mr. Yvan Loubier: I completely agree, Mr. Yakabuski. In any case, we supported those rules as well. Let me remind you that, two years ago, the Bloc Québécois caucus welcomed the presidents and directors of major Canadian and Quebec banks. When Mr. Rousseau talked about the need for strategic alliances and greater flexibility, we understood and accepted his comments. We have never spoken out against provisions allowing the establishment of holding companies and strategic alliances between banks and trust companies, for example. We fully agree with those objectives.
However, we have some concerns regarding the National Bank, and I think Mr. Roy put his finger on them. The provisions in question are controversial in Quebec, and many people are worried about them. Remember that the National Bank is the bank used by Quebec's small and medium-sized businesses, and that small and medium-sized businesses drive Quebec's economic development. So we cannot leave those provisions as they are. We need more guarantees. I think Mr. Roy has made some very good suggestions that could represent an acceptable compromise, as you say.
If we had that acceptable compromise, I assure you that we would support the bill. We would still have something to say about minor aspects like consumer protection that could be better defined, but there is of course room for improvement in any bill, and complementary measures can be added afterwards. We understand that. If that acceptable compromise was there, we would support the bill immediately. However, the government has not seen fit to deal with our concerns, though they are shared by many people.
We asked Mr. Peterson to consider four additional assessment criteria for inclusion in the bill—those reflected your position, Mr. Roy. Mr. Peterson initially agreed, but then went back on his commitment. The four criteria were specific to specialized jobs, places of business, and so on. Even though they were generalized to make them applicable across Canada, rather than solely in Quebec, Mr. Peterson still went back on his commitment.
We were very happy that he had agreed to the criteria, believing that we were moving forward. Today, you have come up with an excellent complementary compromise that could lead to a bill we can accept. However, if the government agrees but then reneges on its agreement three or four days later, it is difficult to improve the bill so that we eliminate the controversy and pass it quickly.
We want to pass this bill quickly, but some of its provisions need to be improved. We are willing to overlook some of its imperfections, but this provision needs to be amended.
I agree with you, Mr. Yakabuski. There should be some enthusiasm for this bill because, generally speaking, it is a good bill that is in line with the industry's expectations. There is no doubt about that. We will not stand in the way of it, but we want guarantees. If the government is at all intelligent, it will go along with this, because it does not have anything to lose by going along with these types of changes to the bill.
The Acting Chair (Ms. Albina Guarnieri): Thank you, Mr. Loubier.
Would any of you like to have a short commentary?
Seeing no takers, we'll go to Mr. Cullen, the parliamentary secretary.
Mr. Roy Cullen (Etobicoke North, Lib.): Thank you very much, Madam Chair, and thank you to the witnesses for being here today and for your presentations.
Thank you very much to all the witnesses.
I'd like to start with Mr. Daniels and Mr. Yakabuski, but if you wish to comment, Mr. Roy and Mr. Bernier,
Yesterday we had at the committee Mr. Doug Peters, a former colleague on this side. In his brief he talked about insurance in particular. I'd like to quote from it:
...removing...regulations that prevent deposit taking
institutions from selling insurance in their branches
and using customer information to market insurance
would benefit the Canadian public interest.
I know this has been a very hotly debated topic. I'm wondering if you could comment on that particular statement. Do you think Mr. Peters makes a point or would you disagree with him?
Mr. Mark Daniels: Well, it certainly is a hotly debated point. In many respects it has had pride of place among the issues, although I'm not sure it has deserved it in terms of its quantitative importance. But it certainly is the proverbial hot button.
I think the best answer I can give this committee is one that you provided in your own response to the MacKay report. When you, as a committee, addressed MacKay's recommendation that there be a reconsideration of insurance distribution powers, you basically said “Yes, we could go along with that, but there are some preconditions”, and you laid out those preconditions.
I was aware of Mr. Peters' comment, and I didn't agree with it, the way it was put. In fact, I thought it was to take a giant step backwards, whereas this committee, in response to MacKay, said “Yes, we think we'd look at that, but here are the preconditions.” I won't go through them, although they're very instructive, because a number of them—almost everything you said in terms of what you wanted to see as preconditions—are embodied in the current law. Then you said “Let's put those in place, let them run for awhile, and re-examine the distribution in light of the levelling of that playing field.” Frankly, that's exactly the position we accepted.
Now, if you had asked the life and health insurers if the list of preconditions was as long as it should have been, we probably would have said no. We would have wanted to include the CompCorp/CDIC issue and so on. But forget all that. I think you gave a very useful working model. I'm very comfortable with that. The industry is comfortable with it.
We embody most of the privacy and tied selling and consumer issues that you caught up in your report on MacKay. Those are in Bill C-38. Your idea, as I read it here, was to get them in place and re-examine them later on, when....
All of this, by the way, Mr. Cullen, is about level playing fields, as trite as the phrase is, and you, I thought, gave a pretty useful prescription.
So that's my answer.
Mr. Mark Yakabuski: I'd just like to pick up from that. Not to be unjust in any way, but before sitting for one term in Parliament, of course, Doug Peters was, for about 17 years, the chief economist of the Toronto-Dominion Bank. His experience in the financial services sector is one that comes from the banking sector. With all due respect, the financial services sector is more diverse than just the banking sector.
I think one of the difficulties we have faced in this country for a long time, and one of the reasons our financial services debate has gone on for so many years, is that there has been for a long time a disequilibrium in the Canadian financial services market. Things are changing, I will grant that, but Canadian chartered banks have held a greater portion of the Canadian financial services market than their counterparts in virtually every other industrialized country.
We have had a financial sector that has been dominated by the banking sector. We have had financial policy dominated by the banking sector. For fifty years we had normally ten-year reviews of the Bank Act. We waited for almost fifty years before the Insurance Act was even reformed, because financial policy in this country was largely dominated by the agenda of the banking industry.
We built up, through a matter of deliberate public policy after the Great Depression, a strong and financially stable banking system. No one was against that—no one—but that was done as a matter of deliberate public policy. We gave the banks powers that we did not give other financial institutions. We protected them from competition in a way that we did not protect other financial sectors.
That is why it is completely inappropriate to all of a sudden give banks the unrestricted ability to enter other sectors of the financial services sector when we did not have that ability, for fifty years, to compete with them in their own backyard. That's why, as I said in my remarks, there is this very, very strong and, I will say, very emotional debate across Canada about the position of other financial institutions outside of the banking industry.
Until we successfully achieve a larger measure of competition in the banking industry, it would be inappropriate to simply open wide the doors and wipe your hands irrespective of what should happen. That is why we have consistently said, in every brief from the Insurance Bureau of Canada, that the major challenge you have as parliamentarians and legislators is to introduce a greater measure of competition in the banking industry. Then we can have a more balanced debate about financial services policy.
You have done great things in Bill C-38 to increase competition in the deposit-taking sector. We'll have to wait a few years to see whether it works, but that is fundamental to the debate.
Mr. Roy Cullen: I have another short question for you.
The Acting Chair (Ms. Albina Guarnieri): Mr. Roy was indicating he'd like to intervene here.
Mr. Roy Cullen: Yes, that's fine.
The Acting Chair (Ms. Albina Guarnieri): Please, Mr. Roy.
Mr. Jean Roy: Thank you, Madam Chair. I would like to make a comment on this issue. Given what is happening elsewhere in the world, where the principle of banking and insurance is becoming common-place, Canada is clearly falling by the wayside and becoming an exception. Through its work, the MacKay task force emphasized the competitive market principles. Those two factors mean that, in the long term, Canada should, in my opinion, move in the same direction as the rest of the world and accept the principal of banking and insurance.
That said, I believe that the Minister of Finance probably made the right decision by not granting banks that privilege immediately, basically to give the financial groups around life insurance companies the opportunity to develop and to be protected for a certain length of time, but that should be a short-or medium-term measure. I therefore feel that banks should be given this privilege within five years, and consumers would benefit from greater competition in this market.
Mr. Roy Cullen: Thank you very much, Mr. Roy. I have one question for you. I am sorry, but I am going to speak in English. These are quite complicated subjects for me, and perhaps for you too.
In your brief, Mr. Roy, you argue that the general principle of making a gradual transition from sole ownership for small banks to widely held ownership for large banks is well founded; the dispute is over the details of how the transition will be made. You don't argue that we need to put tranches in in terms of the public policy issues associated with that.
However, you debate the gradations we've actually proposed. You propose a slightly different gradation. You say banks between $1 billion and $2.5 billion in equity would be limited to 35% widely held, while banks between $2.5 billion and $5 billion in equity would have at least 65% widely held. I know it's a very sensitive issue, but is there a policy rationale to that or is it—
Prof. Jean Roy: I think this is exactly what I discussed with Mr. Loubier. It's a matter of what the effect is of granting control on financial institutions and what the effects are in terms of redistribution of profits.
Mr. Roy Cullen: But in this particular case, presumably, you have in mind something like the National Bank. Is that right?
Prof. Jean Roy: It is mentioned in my brief.
Mr. Roy Cullen: Okay. I didn't see it in this particular section, but nonetheless, would you not agree that if you're setting gradation markers you have to at some point decide on amounts, and that is when it becomes a difficult decision? It's like the Income Tax Act. If we say incomes between X and Y are subject to a certain rate, it becomes somewhat arbitrary at some point in time.
As a follow-up to that, if we had a situation in Canada where a bank within the range you propose, which would be $1 billion to $2.5 billion, would be limited to 35% widely held...or let's go—
Prof. Jean Roy: No, I'm sorry. It's limited to 65% of concentrated ownership.
Mr. Roy Cullen: Yes.
Prof. Jean Roy: That's the direction of the—
Mr. Roy Cullen: Let's suppose we had a situation where a bank in that category wanted to merge or form some strategic alliance with another bank—and the Minister of Finance has communicated, as you know, with Quebec's Minister of Finance, Monsieur Landry, and set out a set of criteria in terms of public interest criteria, part of which would include regional economic interests, head office, the effect on jobs, etc. But let's say, in the determination of the minister, those criteria had been met, the board of a bank had said it would be in their business interest to proceed—in fact, they could argue that it would be necessary for them to grow and survive and prosper—are you saying, then, that given this criteria, this policy would disallow that? I wonder on what basis you would argue that if it were in the best interest of the public and the best interest of the bank, why it should be precluded.
Prof. Jean Roy: I think I can shift your question. You can easily imagine that the Royal Bank would say that total acquisition by Citibank would be a good thing for Royal Bank shareholders. We can certainly conceive of such a situation and our current law would not allow that. So if this principle can apply to the Royal Bank, I think it can apply to the National Bank.
Mr. Roy Cullen: But I thought you just finished saying that if you're going to set ranges and tranches, then that is an appropriate public policy measure. I don't know how the two are consistent, necessarily. If you say you have to set various levels, or tranches, upon which public policy decisions would be based, then how can you argue at the same time that simply because of some other considerations, any type of merger activity would not be allowed?
Prof. Jean Roy: That's not what we're saying. As a matter of fact, what we've been saying is that for the new category, capital between $2.5 billion and $5 billion, we are suggesting that basically the procedure to examine mergers would also apply to this category. As a matter of fact, what people in Quebec to some extent are asking is really that the National Bank be treated like the big five, be treated like a big bank—to some extent, not entirely.
Mr. Roy Cullen: But that's what I'm saying. How could that be consistent if you're saying you have to evolve public policy decisions around setting certain tranches? On the one hand, you say, yes, that's an appropriate public policy, but on the other hand, you say, yes, but it would have to be treated the same way as a—
Prof. Jean Roy: I just want finer tranches.
Mr. Roy Cullen: But it would be equally arbitrary.
Prof. Jean Roy: Yes. It's a matter of judgment, that's for sure.
Mr. Roy Cullen: A matter of judgment, yes, but in a case where you meet a public interest and you meet an economic interest of a bank.... If you talk about the shareholders of the board of the Royal Bank—
Prof. Jean Roy: Let me—
Mr. Roy Cullen: Perhaps you will let me finish. I'm talking about the board of a smaller bank that might be subject to a merger, and then of course their board would have to agree, wouldn't they?
Prof. Jean Roy: May I take four minutes to answer this question?
The Acting Chair (Ms. Albina Guarnieri): If the committee provides the latitude.
Some hon. members: Go ahead.
The Acting Chair (Ms. Albina Guarnieri): I see agreement around the table. Please take your time.
Prof. Jean Roy: When I did the study on public participation in merger and acquisition in the financial sector, I was asked by the MacKay task force to study three cases: one in Switzerland, one in the United States, and one in Australia. The case I studied in the United States was the acquisition of four state banks based in Philadelphia—as a matter of fact the last bank having a head office in Philadelphia—by an American bank that was called First Union.
Let me make a theoretical parenthesis here. We have a concept in finance that we call agency costs. This means, basically, that if managers were perfect they would always make their decisions in the best interest of shareholders. But they are not perfect. They are not angels. This means that when they make these decisions they will factor in the effect on themselves. And as this may modify these decisions, it may imply a loss of wealth for shareholders. This loss of wealth is called the agency cost. So what I'm trying to say is that in some cases the managers get substantial personal benefits from these transactions and that they may, to some extent, sell propositions to shareholders that may not be totally optimal.
In the particular case that I studied in the United States, the president of the acquired bank was given $26 million U.S. to leave after the acquisition. Was that person in a neutral situation to make recommendations to shareholders? In that situation, could he not very significantly influence that transaction? So I think we have to be wary about that, especially when we have aging presidents in banks.
The Acting Chair (Ms. Albina Guarnieri): Thank you, Mr. Roy.
Do you have one quick final comment?
Mr. Roy Cullen: No. I appreciate your comments. It's an issue that I know is very important with all of us and I appreciate your shedding some light on the issue.
The Acting Chair (Ms. Albina Guarnieri): Thank you, Mr. Cullen.
Ms. Picard, do you have a question?
Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Because of the hour, I'll be very brief and simply welcome you to the committee this morning.
I support the expansion of the payment system for the insurance companies. I want you from the insurance industry to paint a picture of how this will evolve over the next ten years, how important a change this will be, how big it will be, how much competition there will be for the banks, and so on. I know no one has a perfect crystal ball—maybe you do, Mr. Yakabuski, I'm not sure, but I don't think anybody has—but perhaps you can look into that crystal ball and tell us what the reality will be in about ten years' time.
Mr. Mark Yakabuski: I can tell you that the payment system provisions do not apply to auto, home, and business insurers, so they don't apply to property and casualty insurers. We did suggest to the government that the provisions should be wide enough to include our companies, but you can't win on all fronts. We still think the bill is a good one and should go ahead as quickly as possible.
So we don't see our companies partaking in the payment system, at least for the next five years, given the legislative restrictions on that. But we do see it more generally. If this is a way of encouraging other financial institutions, such as life insurers, to compete more in markets hitherto controlled by the banks, then this is good for all Canadians and is good for the financial services sector in general.
Mr. Lorne Nystrom: Mr. Daniels.
Mr. Mark Daniels: Mr. Nystrom, I can't recall, but you may have come in after Mr. Jones asked a similar question. Forgive me, Madam Chair, for repeating this, but the most dramatic way to illustrate the potential size of the benefit is to say that today the life and health insurance industry pays out $100 million a day to Canadians. About 10% of that $10 million is for life insurance benefits. The rest of it is for your dental plans, annuities, pension payments—just a vast range.
At the moment, a good part of that comes out in the form of cheques drawn on banks. From our point of view, the recipients of those things are all customers of ours. The argument is, why can't we keep them as customers and instead give them drawing rights?
The way to get at that is with electronic technology, and that's the key to it. That's only one piece of the puzzle. There are many other potential applications for these kinds of payments' access points. But they're really all about accessing and moving the payments system around.
It's a very timely move. We could argue that we've been left behind in the past, and to a degree that's true. But I really believe these measures are about the future, because the technology is changing so fast, and to cut out a piece of a rapidly integrating and converging financial services sector on the grounds that they don't belong just doesn't seem to make any sense. That's the core of the argument.
I don't know whether that gets to the crux of the matter with you, Mr. Nystrom.
Mr. Lorne Nystrom: I think it's important. I see what you mean. But I'm just trying to project this down the road as to how big you think this will be, how big—
Mr. Mark Daniels: I think it will be huge. This is me—
Mr. Lorne Nystrom: I know it's hard to quantify it, but perhaps you can give us—
Mr. Mark Daniels: I have to say to all of you that I'm not running an insurance company, so I can't.... I know they're all working on various aspects.
My own view is that it is going to be a huge part of the business. Think about what we do. We're a payments mechanism. That's it. At the end of the day, one way or the other, everything we're involved in, whether it's hedging the risk of living too long or dying too young, which is what the business is, is all about the flow of funds and to the degree that flow of funds can be made more flexible, more adaptable, and more accommodating to consumers. Interestingly, it's all about consumers at the end of the day. I happen to believe it's going to be a huge piece of the business.
The Acting Chair (Ms. Albina Guarnieri): Thank you, Mr. Nystrom.
Mr. Jones, one final question.
Mr. Jim Jones: I have just a supplemental to what Mr. Nystrom was saying. Mark, you said fire and auto and casualty were excluded. Based on listening to Mr. Daniels, why would you guys be excluded?
Mr. Mark Yakabuski: The MacKay task force made many good recommendations. It made a few poor recommendations, in our estimation. As part of the study of the MacKay task force—and this was related to an adjunct group that the Department of Finance and the Bank of Canada set up regarding the payments system—they did come up with criteria that we thought were relatively generic. You had to have certain information systems in place and certain capital backing, in other words, etc., in order to become members of the payments system.
We all agreed with the criteria they set out, but then at the bottom of the page they said this should be restricted to life insurers, money mutual companies, and securities firms. We said there's no reason in the world why this should be restricted to three institutions. You've laid out appropriate criteria. Simply apply them generically. If our companies don't meet those criteria, they won't be able to enter for whatever reason. Again, this is a to and fro, frankly. You have to know when to say, I didn't get a bad deal; I'm in this game.
We said we regret that you're restricting the provisions with regard to entry to the payments system. That means that automobile insurers, home insurers, and business insurers cannot be...at this time. But we said, you can be darned sure that in five years' time that issue is going to be on the table.
The Acting Chair (Ms. Albina Guarnieri): Mr. Nystrom.
Mr. Lorne Nystrom: I'll just ask the obvious question as a supplementary. Would the life insurance industry support this being a right also for the P and C people?
Mr. Mark Daniels: Madam Chairman, we've not talked about it with the P and C carriers but largely because we've never been approached. It's not as if this has been a big issue between us. It just hasn't been a subject that has come up in the course of events. So I can't comment.
The Acting Chair (Ms. Albina Guarnieri): Thank you. That will conclude the round of questions.
On behalf of all of the committee members, I'd like to thank you all. It's a unique and refreshing experience to see so much consensus around the table. I think you've all acknowledged very graciously that Bill C-38 is certainly a significant attempt to reconcile the differences that make up the financial services sector while at the same time ensuring that the sector has a strong and stable legislative and regulatory environment within which to face the challenges of the future. On behalf of consumers, I'd like to thank you all for providing some insurance to policyholders that there will be competition. Thank you all.
Monsieur Loubier, that concludes our meeting, but you have a quick intervention.
Mr. Yvan Loubier: Madam Chair, I would like to congratulate you on your work during this sitting. This is the first time that I have had the opportunity of seeing you in the chair.
The Acting Chair (Ms. Albina Guarnieri): That is kind of you.
Mr. Yvan Loubier: You do an excellent job.
The Acting Chair (Ms. Albina Guarnieri): I provided a lot of latitude for extra questions.
Thank you, everyone.
The meeting is adjourned.