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FINA Committee Meeting

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[Recorded by Electronic Apparatus]

Thursday, October 5, 2000

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The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Good afternoon. I would like to call the meeting to order.

The order of the day is Bill C-38, to hear witnesses. Bill C-38 is an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions.

Our first guests are from the Canadian Bankers Association. I'd like to welcome from that association its chairman, Mr. Pedersen; its vice-president, Mr. Alan Young; and the president and CEO, Mr. Raymond Protti.

I'd like to start with you gentlemen first, then we'll go on with the other guests. You have roughly ten minutes to make your presentation and we'll leave some time for the questions, please. Welcome.

Mr. Mike Pedersen (Senior Executive Vice-President, Retail and Small Businesses Banking, Canadian Imperial Bank of Commerce; Chairman, Canadian Bankers Association): Thank you.

Mr. Chairman, members of the committee, thank you for having us appear before you today.

Several weeks ago we delivered to each of you a copy of our submission on the bill, and I'd like to reiterate upfront what our bottom-line conclusion was.

We support passage of Bill C-38 and we hope that it will be put into place as soon as possible. In our view, it represents an important step in the ongoing process of ensuring that our policy and regulatory framework is kept as up to date as possible. I note, however, that the ultimate success of this bill will lie in the detailed regulations and guidelines to be passed pursuant to the bill and to the interpretation given to the legislation by regulatory authorities. We encourage policy-makers and regulators to ensure that there is as much flexibility as possible built into the framework so that it stays current with the needs and demands of Canadians.

Our support for the passage of Bill C-38 does not mean that we agree with everything in the bill. Like every important piece of legislation, Bill C-38 represents a balance of competing interests and there is some unfinished business that we would like to work on with the government and Parliament following passage of this legislation. In our submission to you, for instance, we noted that further flexibility can be built into the permitted investment regime by allowing banks to provide after-the-fact notice to the regulators when they've made an investment that's permitted by law, rather than being required to obtain prior approval.

As another example, in light of the growing convergence among products in the marketplace, it is our view that the requirements for CDIC member banks and non-CDIC member banks to carry on business in separate premises is too inflexible.

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As well, in the interests of a more efficient market and better consumer protection, we think it's important that the federal government, interested provinces, and financial services stakeholders devote their efforts to creating a single national financial services regulatory system in Canada.

We've concluded, however, that the bill introduces several key measures that have the capacity to reshape our financial sector in a way that can benefit consumers and create opportunities for Canadian companies to succeed. It raises the bar to a new level from which to build on in the future.

For today's presentation, I will assume that you've read our submission, and I will not, therefore, summarize it.

If I can leave you with one key message today, it is that Canada's financial sector will continue to undergo tremendous change. There is no turning back from that.

As the Minister of Finance said in a speech a few weeks ago regarding the new economy and Canada's place in it, we all have to—and I quote—“understand that the rules of the game have changed forever”, and he went on in his recent speech to declare: “Change is a test, one that asks us to do things better at the same time that we do things differently.” I accept this as a challenge to our industry.

There can be no question that consumers will notice bank financial groups doing things differently. To that end, again, Bill C-38 offers some important tools aimed at enabling us to do things better at the same time as we do things differently, for the ultimate benefit of our customers.

In that light, we support the passage of Bill C-38 and look forward to working with parliamentarians to move this important legislation forward.

Thank you for listening, and we look forward to your questions.

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

Who will do the credit union presentation? All right, Mr. Knight.

Mr. Bill Knight (President and Chief Executive Officer, Credit Union Central of Canada): Thank you, Mr. Chairman, for the opportunity to speak to the committee on this important legislation.

I'm the president and CEO of Credit Union Central of Canada, and my colleagues here are Brian Topp, one of our senior vice-presidents, and Joe Dierker, our legal counsel. We will be very happy at the end of our opening statement to answer any questions the committee may have.

It's been a long road to get here today in terms of financial services reform. Together we've been working on this legislation for the better part of four years—through the MacKay report, your committee report, the Senate report, the Minister of Finance's white paper, and many long hours of discussion over details of the bill that's now before you.

Let me say up front that Credit Union Central of Canada on behalf of the credit union system supports the basic thrust of Bill C-38 as it affects the credit union system, and we support passage of the bill, although we are hopeful that your committee will address a few outstanding issues in the details of this legislation.

We're going to speak to you about three topics this afternoon. We're going to tell you a bit about the credit union system, because we are complex and widespread through the geography of this country. We're going to highlight the key gains we believe the credit union system achieves in this bill. We're also going to draw your eye to a few areas that we believe require further work and where we would appreciate the support of the chair and your committee.

Let me begin by drawing your eye to two key facts about the credit union system. One you may be familiar with and one perhaps less so.

First, our country's credit union system is one of the great quiet success stories of the Canadian economy. The cooperative financial services movement in Canada is one of the largest in the world. One in three Canadians is a member of a credit union or a caisse populaire. We are the only financial institution in many towns in this country. In fact, in 300 communities we're the only financial institution represented, and our market leaders or key players are also significant players in markets such as Montreal, Quebec City, Vancouver, Hamilton, Niagara, Regina, Saskatoon, etc.

In our own quiet and incremental way, credit unions and caisses populaires are winning an ever-increasing share of the business market.

You asked us, in the MacKay report and the report of this committee and others, to do more in the area of small and medium-size business. We're doing it. The Canadian Federation of Independent Business reports that over the past ten years our share of small and medium-size business markets has grown by 25%. Why? Because our credit managers stay in their jobs long enough to get to know their customers and therefore make better lending decisions; because the CFIB members rate credit unions as providing the best value for money on banking fees; and because we're staying put.

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So for a very large number of Canadians, and for a steadily rising number of Canadian businesses, credit unions are their home for their financial services. That's why I believe the federal government is on the right track in efforts to give us new tools to provide Canadians with a better service in that national marketplace.

Mr. Chairman, in our written brief you will see considerable detail as to the highlights of the improvements we find in Bill C-38 for credit unions. I just have some quick comments.

First, this legislation allows credit unions to go into the national marketplace, and basically for the first time, with national, federally regulated, cooperatively owned, cooperative-governance legislation. The new cooperative retail association contemplated in the bill is a key breakthrough for the credit union system in federal legislation. It gives us an opportunity to offer consumers an alternative on a more level playing field with our competitors.

This legislation gives credit unions the flexibility we need to structure and adapt to a changing marketplace. Credit unions have enhanced access to the new holding-company model and have an opportunity to simplify our system, eliminate duplication, and reduce costs.

This legislation strengthens the business powers available to the credit union system under federal legislation. A particularly important gain for our system is the major reform of the rules governing investment powers, moving to a de facto instead of a de jure control regime. Given the nature of the cooperative system, these new rules will make it much easier for us to access and assemble capital and move forward with new initiatives.

Finally, the legislation itself is extremely flexible. The bill creates a regime that allows the credit union system and federal regulators to design customized charters for carrying on financial services through associations. In an environment where business needs are changing quickly, that's a big selling point for us.

We have a couple of outstanding issues—for example, proposed changes to sections 410 and 411, related parties legislation. The proposed sections set out rules that define who is a “related party” under the Cooperative Credit Associations Act. For a retail association, as drafted, essentially every credit union in the country would be defined at law as a related party. As a result, routine banking transactions between an association and credit unions would require separate OSFI approval in advance. This would make it impossible for us in terms of the number of transactions we do and would make it much too cumbersome, if you like.

Proposed section 410 gives us a door out, however, for the majority of these difficulties. It permits the government to provide relief for this, in a clause, by regulation. We would be grateful if your committee would include in its report a recommendation that work on regulations addressing this issue will proceed quickly. We would like to put it on the record that when the federal financial services legislation is next up for review, we believe it would be appropriate for Canada's cooperative sector to have a level playing field with the banks in this particular area.

Another issue is around commercial lending limits. Proposed section 399 puts a very tight cap on how much lending a federal credit union association could provide to small and medium-size business. The Bank Act prescribes no limits at all for commercial banks, but the new CCA Act places a cap of 5% of assets on the cooperative retail association being made possible under the new act.

Here again, relief is available. OSFI can increase the limit. As well, the government can increase the lending limit through proposed section 403 of the bill.

Again, we would be grateful if your committee would include in its report a recommendation that the government use its regulatory power to ensure that the cooperative financial system can provide services to business on a more level playing field with our competitors. Like the “related parties” I discussed, this should be on the agenda for the next round of legislative reform.

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Another issue is permitted incorporators, and this will be my final one. I'd like to note a difference in the rules governing how banks and cooperative retail associations can be incorporated. Under the terms of the Bank Act as amended, any one credit union or provincial central can incorporate a commercial bank. But under the terms of the Cooperative Credit Associations Act as amended, ten credit unions or two provincial centrals from at least two provinces are required to incorporate a cooperative association.

We understand why this section is written this way. The credit union system is currently provincially regulated, and the government wants to see an interprovincial national dimension to justify federal legislation in the cooperative sector.

As a business issue, the result is that it's much easier to charter a commercial bank than a cooperative financial association, and that may not be a good thing for the cooperative financial sector in the future. It means that most of my members may be drifting inadvertently toward my good friend Ray Protti there.

So we'd like to see that section looked at again. We would appreciate it if this committee would take note of this disparity and recommend that the government work with credit unions and provincial authorities to arrive at a more level playing field during the next round of revisions to the act.

There are remedial amendments to this legislation.

Just as an aside, Mr. Chairman, I've not only been through the last round of financial institutions legislation, but I've also sat on this committee as a member of Parliament, when I was affectionately known as a child MP.

So I say to all parties, including ourselves—and, I have to say, even with my lawyer and drafter here—that as you work through this kind of legislation, often there's a need for enhanced and improved drafting after you've tested it on all aspects of the industry out there.

We have before you in our details some reference to accepting those remedial amendments for what they are, that is, improvements in all of us working together, and hopefully they'll be put in the bill as well.

Finally, thank you. I've been a little bit lengthy. I don't know if I stuck to my ten minutes. Maybe it was my old training or something. But I wanted to make the point that yes, we're in support. There are some changes and some direction for future changes that we wanted to put before you. We've appreciated, and we continue to appreciate, the working cooperation of all members of Parliament, the Government of Canada, and the Department of Finance in enhancing our role in this industry.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Knight.

We'll start the questions with Mr. Epp, for seven minutes, please.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you for being here. Before we started I was telling some of the members that in these sessions I'm the student and you're the teachers. I believe in education, so I appreciate what you said.

The Vice-Chair (Mr. Nick Discepola): Are you going to learn or are you going to teach?

Mr. Ken Epp: Today I'm learning. I'm a student.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Are you a fast learner?

Mr. Ken Epp: I'm a fast learner, yes.

Okay. So much for the preliminaries.

I would like to start, first of all, with the Bankers Association. I would like to ask you this question, since you were mostly supportive and complimentary on this legislation. If you had one item that you would place at the highest priority that should be amended before this bill is passed, what would it be?

Mr. Raymond Protti (President and Chief Executive Officer, Canadian Bankers Association): Thank you very much for the question. I'd like to approach it slightly differently. I'd like to pick up on something Bill Knight commented on in his presentation and we did as well.

We've been at this now for about four and a half years. There has been very extensive discussion of all elements of this package, first in the MacKay task force, and then the government considered it and put out a policy paper. There were extensive discussions in the House finance committee. It's not by any means a perfect bill from anybody's perspective, but we do feel that a tremendous amount of work has gone into putting this together and that time is now of the essence.

The last major changes to the financial services legislation in this country were in 1992, and the industry itself has undergone tremendous change over the past eight years. So although there are some changes that we would clearly like to see, at this point we would like to see the bill proceed as quickly as possible through the process.

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The second point I would make is that, as my chairman indicated, much of this bill is really going to be subject to a great deal of interpretation and regulation-making, and it will be very important in terms of that regulation-making that we in fact proceed as quickly as we possibly can.

The third point, which will get to your question, is that we do think there are some shortcomings in the bill. I think the most obvious one is the limited choice consumers will continue to face in car leasing and insurance retailing. Obviously we had taken a position on these issues, which goes back the better part of a decade, but for a variety of reasons the government has not chosen to proceed. We think it's disadvantageous to consumers. We think we could have offered very competitively priced products in those areas.

Mr. Ken Epp: What would be your response to that same question?

Mr. Bill Knight: There are a couple of points. Our business powers are under provincial jurisdiction, so we're very much into retailing insurance products as a deposit-taking institution in the province of British Columbia. Our first cousins, the Desjardins movement, are very effective in this area in Quebec.

Frankly, as we're opening up the payment system to the insurance industry—as I think we should, I might add—and as we're trying to create a more competitive market, we're going to have to come to terms with doing that on products too. For each of these entities, which traditionally used to be separate pillars, in terms of doing the business, I think we should just allow them to offer a full range of choice to their members. It works in the province of Quebec, it works in B.C., and it certainly could work in the rest of the country

Mr. Ken Epp: One of the things this bill does is give very sweeping powers to the minister. As long as you have a good lobby association and you're close to the minister, everything is fine. Do you have any apprehensions about that?

Mr. Raymond Protti: When we looked at the 900-page bill in some detail through the course of the summer, we had a look at it, Mr. Epp, particularly from that perspective. Where you find an increase in ministerial power, authority, and decision-making, it's almost all attributable to the new holding company option that's available for the first time to banks in this country. There has always been an awful lot of discretion built into the Bank Act, and where you find an increase here, it's really with regard to the holding company option. From our perspective, it's quite understandable.

The other thing that's interesting when you pore through the pages of the bill is that there are also some changes in terms of switching the authority for decision-making from the minister to the Superintendent of Financial Institutions. We find those changes positive because we think it will really speed up some of the decision-making associated with this particular business.

I don't know if Mr. Pedersen or Alan wish to add something.

Mr. Bill Knight: Mr. Chairman, in my opening comments we referred to flexibility, and for us it just gives us a lot of flexibility in a market that is truly changing daily in terms of delivery. I think from our standpoint we're pretty comfortable with that latitude.

This kind of legislation used to get locked in for a decade at a time, and from my perspective I think those days are over. I think we're going to have to deal with the legislation, the regulation, and the marketplace on—I hate to say this—an annual or at least biennial basis, because this is not a sit-still industry.

Mr. Ken Epp: Switching topics dramatically, we've had a number of presentations from people in the lower income group, and they're very concerned that the banks are available and accessible only to those who are rich, literate, able-bodied, and all these other characteristics. They feel that the banks exclude those in the very low-income bracket. Many of them have cheques to cash, which is their only source of livelihood, and the banks hold their cheques. We heard testimony yesterday that they're held up to ten days.

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I told them I would ask you, when you came here, how you justify holding a cheque for more than one day. I noticed the other day... But maybe I shouldn't tell you this. No, I am going to tell you this—with pride.

I'm a member of a credit union, and have been for many years. I wrote a cheque here yesterday, deposited it, and it's debited on my account today. Now, if you can do that for me and pass that cheque, why can't you do it for someone who comes with a government payment cheque?

Mr. Raymond Protti: Thanks for asking the question, because you've put your finger on one of the enormous strengths of the national banking system in this country, which we're partners in along with the credit union movement, the trust companies, the Mouvement Desjardins, and the banks. We all belong to the Canadian Payments Association, which manages and administers the system. It's an arcane, technically complicated system, but from a consumer perspective—and this is the important point—it works enormously well and gives a strong competitive advantage to this country, becoming even more important when you move to such an e-commerce-based world.

Why is it important? For precisely the reason you just said, that the vast, vast majority of cheques, over 99%, clear the same day. Now, that is unusual from a developed country perspective. If you go south of the border to the United States, where everybody likes to think they have this hugely efficient system, the standard clearing time for all cheques is between four and six days. We clear here the same day.

Why? Because we've built an effective national clearance system in this country. It has some features to it that are absolutely essential and that all the players abide by. You have to be carefully regulated at either the federal or provincial level, you have to have adequate capital levels, and you have to have access to same-day liquidity. When you operate under those rules, the institutions bear the risk, not the individual consumer. So it's an extraordinary system, and it's one that works very well.

On the issue of holds, I know the Canadian Payments Association is doing a thorough review of this issue and is preparing a paper that I hope will be available in a matter of weeks. Prior to that paper being available, I know some informal testing was done to find out just how many cheques get held. Three of the major players in the system checked their systems on a snapshot basis. One day they checked, at the end of the day, on how many cheques got held that day. Well, 0.13% of cheques were actually held, so we're talking about a very small number in terms of the volume that goes through the system.

The second point I'd make about this is that where cheques were held, they tended to be for foreign currency transactions or issues associated with deposits in ABMs.

The last point I'd make, although my colleagues may want to add an additional comment, is that in terms of whether or not we see a volume of complaints on this, the answer is no, we don't. We have a very small number of complaints actually generated on this issue.

I don't know, Mr. Young, if you want to add anything to that.

Mr. R. Alan Young (Vice-President, Policy, Canadian Bankers Association): Yes, there's one other point I would make.

Clearly there's a role for financial institutions to deal with this issue, but there also is a role for governments, both federal and provincial. We put this forward in our submission to the MacKay task force a long, long time ago, it seems.

Australia has provided for all of their government payments to be done electronically through direct deposit, so this issue disappears in that scenario. The Province of Alberta has just recently gone that same way.

So we can work together, and there's a way to be out of this issue altogether.


The Vice-Chair (Mr. Nick Discepola): We will now go to Mr. Loubier for questions. You have 10 minutes.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Following up on Mr. Epp's comments, we have heard a number of representations from consumers since the bill was first tabled. We've heard that this bill is quite inadequate in terms of protecting consumers in their dealings with the Canadian banking sector.

For instance, there's been talk of branch closures. This bill affords no protection to consumers. Depending on the circumstances, anywhere from four months' to six months' advance notice may be given. There's nothing consumers can do about the eventual closures of branches, particularly those located in the poorer neighbourhoods of large cities.

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In Montreal and even in Vancouver, for instance, some banks no longer offer any services at all in certain neighbourhoods. Branch closures in rural areas are becoming increasingly commonplace. Branches are often replaced with outlets that do not provide a wide range of personalized services to customers. How do you respond to the widespread criticism levelled at the bill?

For the past two and a half years, when the subject of mergers has arisen, I've often heard the heads of Canada's major banks promise not to close regional branches and to maintain services and jobs. Yet, as soon as the merger debate died down, these commitments fell by the wayside. What do you have to say to these consumers?

Mr. Raymond Protti: Thank you for your question. There's much that I can say. I'll start by answering in French, and then, if I may, I'll switch to English.

Let me start by saying that ten years ago, there were 7,300 bank branches in Canada. Today, the number stands at 8,3000. Therefore, 1,000 additional branches have been opened over the past decade.


The second point I would make is that of course this has occurred over a time period when there's been a radical transformation of the way in which financial services are distributed throughout the country. So while we were still increasing branches over that period of time, the last ten years, we were also adding alternative distribution systems. ABMs, for example, started in 1982. We started with a little less than 1,000 ABMs in 1982, and by the end of 1999 we had 16,500 of them. Debit card terminals started with about 120,000 in 1994, and we now have over 400,000.

So the ways in which Canadians can now access their basic banking needs have changed tremendously in the last decade. We have not reduced the number of branches overall in the country as a whole; we have increased it at the same time that we have stacked on a variety of alternative distribution channels as well. When you look at it from the point of view of the number of access points that Canadians now have to get their cash, there's been a phenomenal explosion. That's the first point I wanted to make.

Second, we are very sensitive to the issue of access across the country, because that's been our business. You know, we've created in this country six national department stores of financial services. We have been available everywhere to everyone. Now, where it's clearly dictated by a business decision that we want to change the configuration, then we work very hard to figure out what's the best alternative way to provide that service. Sometimes it might be a reduction in the number of days a branch is open. Sometimes it might be working with our friends from the credit union movement, as we have been this year particularly, where we've been selling branches or working with them. In some cases it's the training up of Canada Post employees to offer alternative means for accessing basic banking in remote communities. In some cases it might be in the general store.

So we have canvassed, and we believe we do canvass exhaustively, the range of options available in those sorts of situations.

I don't know if you want to add anything.

Mr. Mike Pedersen: The only thing I will add—and Ray referred to this—is that it is now the case across Canada that over 85% of transactions are done through electronic means, including ABMs, telephone, the Internet, and so on. In my own bank, CIBC, that number is 92%. That's all very interesting, but the real issue is what's actually happening in the branches.

Well, I can tell you that for a long time, as people went to electronic channels, they still continued to go into the branches. That has changed dramatically in the last few years. For example, in my own bank, across our branch system the number of transactions done through that branch system has gone down by 40% in the last four years. So if you think about a business owner, for example, having a business where transactions are down by 40%—and that's of course on average, because in some individual branches it's much more dramatic than that—then you realize we have to react to that in some way.

As Ray said, we've tried to be very sensitive to local needs, and we've done a lot of the things he's... We literally have bankers coming into people's homes when it's difficult for them to get to a branch because one has been closed.

So it's a real issue, but we're very sensitive to it.

The Vice-Chair (Mr. Nick Discepola): Mr. Knight.

Mr. Bill Knight: I have just a quick comment. I believe there are two aspects to the market here. One is the competitive nature of... In Canada, only the Swiss get ahead of us when it comes to using electronic services in the financial services business. Canadians pick up on technology very quickly.

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Then there's the other group, within the neighbourhoods of Montreal or Vancouver, that needs services that don't fit the category of the general middle class in this country, which I think Mr. Epp referred to. That is a major challenge in terms of financial services.

VanCity, one of our major members, and others have done considerable outreach into those neighbourhoods. We'd be happy to share some of the information on how you need to go about it, but it is complicated and quite labour-intensive in terms of delivering those services. I don't think an overall blanket law that I'm aware of could resolve that issue easily, because a lot of the individuals involved need other services in that community, and you have to work as a full package. Sometimes it's psychiatric services or housing, and the list goes on. You need to combine those services.

In a particular part of Vancouver—and maybe all of us collectively could get the end result of this experiment—the Province of British Columbia set up what they referred to as a bank, but I think probably all of us would refer to it maybe as a type of service agency, to try to really focus in on these areas and see if there is a way of making sure they get the services.


Mr. Yvan Loubier: Changing the subject, you share the same concerns as Doug Peters, someone you know and who was involved not long ago in the process of reforming the financial sector, and Jean Roy, a professor at the HEC who also contributed to the work of the MacKay Task Force. Both these individuals have voiced their concerns about changes to the ownership rules.

Yesterday, Mr. Peters warned of the risk of changing the rules having to do with the number of shares a single person can hold in a large bank, as well as of allowing a single person to hold 65 per cent of the voting shares of a bank with less than $5 billion in equity. He said he preferred the ownership rules previously in effect.

How do you feel about this matter? Are you concerned about this or are you satisfied that the whole question of widely held ownership has been resolved?

Mr. Raymond Protti: Thank you for that important question. The MacKay Task Force gave careful consideration to this issue during its work and made a number of recommendations.


Essentially, when the MacKay task force looked at this issue and suggested that we should have more flexibility in the ownership regime, and quite an increase in the ownership regime, they did so because, as I understood it, they were driven by a desire to see an opening up of the system and more competition and the creation of a whole range of financial institutions. I think that type of spirit that animated the MacKay recommendations found its way into the government's June policy paper and has also been the subject of quite extensive discussions by this committee. So we are in support of the tiered ownership regime that has been introduced.

With respect to, in particular, the move from 10% to 20%, I would indicate that we think, from our perspective, it will clearly add a degree of flexibility to the existing institutions. We think we're going to be in a better position to partner in a strategic way with institutions that can help Canadian-based companies remain highly competitive in what is clearly a very rapidly changing marketplace. Our bottom line here is that we are in support of these changes.

One other last point is that the Bank Act, of course, leaves the final decision-making authority for any changes in the ownership structure to the Minister of Finance. The government, through the Minister of Finance, would have to subject any perceived change in that ownership regime to a fit and proper test.


Mr. Yvan Loubier: I have one last question, Mr. Chairman.

The Vice-Chair (Mr. Nick Discepola): Very well.

Mr. Yvan Loubier: In your opinion, will the provisions in the bill that provide for greater flexibility, given the change in the ownership rules—although I don't really see it—and for the creation of holding companies—a provision to which I am somewhat more favourable because it allows for the possibility of strategic alliances—make it unnecessary for the biggest banks in Canada to merge in order to compete, or do you think that banks will in short order put the merger question back on their agenda?

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Mr. Raymond Protti: That's also an interesting question. One noteworthy feature of the government's announcement last June was that it acknowledged for the first time that this was a very legitimate strategy.


Whether or not we will see in the future a merger of a couple of institutions will depend on the proprietary strategies of those companies and on the decisions taken by their boards and senior management teams.

Does this framework, this set of laws and regulations, replace the need? There is still an underlying rationale that animates the merger discussion, and it's quite clear, particularly when we look at what's happening from a global perspective, there are very significant economies of scale and scope that can be generated by consolidation, and economies of scale and scope are increasingly important, particularly in certain aspects of the financial services business.

Mr. Mike Pedersen: I would add that there is no doubt this provides additional opportunities for alliance, in that when two parties form an alliance, what is really important is that they have aligned interests and a stake in common. And this, clearly, gives the opportunity for a greater common stake.

I would also add one thing, and that is that the Bank Act will continue to explicitly prohibit control, direct or indirect, as a result of this increase in ownership.


The Vice-Chair (Mr. Nick Discepola): Thank you very much. Are there any other comments or questions?


Ms. Carolyn Bennett (St. Paul's, Lib.): Yesterday there was a presentation from T-Base Communications. I don't know if you read it—I hope you will. There were a number of recommendations, some of which are our problem and some of which will be yours, either voluntarily or by regulation, I would presume.

I guess I want to know what you're already doing voluntarily in terms of equitable delivery of services or associated information to people who are visually or hearing impaired. I would like to know what kind of sharing happens among your organizations in terms of best practices, and what we will be doing to make sure that all Canadians get access to banking—whether you're working with the Canadian Standards Association to form some sort of accessibility criteria for those kinds of alternate formats, particularly in terms of web-based solutions, to make sure that Canadians can do their banking online, but mainly that they can receive information online.

One of their recommendations was the HRDC publication guidelines and specifications for providing information in multiple formats. Is that something that all of your organizations have access to?

I'd also like to know if you audit your organizations. Do they audit themselves? Because, as chair of the subcommittee on disabilities, I want to know if we're going to deal with this in a complaint-based way forever, or whether there will be a way of doing proactive audits and assurance.

The Vice-Chair (Mr. Nick Discepola): Mr. Knight, please.

Mr. Bill Knight: Mr. Chairman, already our individual credit unions are providing ATM services in Braille. We do that with a lot of our documentation. We still have a ways to go; I don't want to fool anybody here. But we're already very much into this.

Our member-based annual meetings have pushed hard on management to ensure access to credit unions and to all of our branches, etc., which I think we have a very good record on. And we have annually, as an institution, a social audit as to our impact in our communities and how we are meeting all of these criteria. So we believe that in a very significant way we are making ourselves very transparent in this area and happy to share that information.

• 1620

Ms. Carolyn Bennett: In a web-based solution, I think one of their concerns is that even some of our government documents are only available in PDF format, which doesn't talk to most of the kind of software that gives the alternate format to the sight impaired or...

Mr. Bill Knight: Mr. Chairman, I think that's exactly right. We have been one of the leaders in e-banking. Out of our four million members we have over two million actively involved in one particular product, MemberDirect. We did pick up on those comments, and we're going to go back into our systems to take a look at what are the mechanisms on which we can ensure compatible software in these areas.

The Vice-Chair (Mr. Nick Discepola): Mr. Protti.

Mr. Raymond Protti: Mr. Young will reply for us.

Mr. Alan Young: There are a number of ways to approach the very good question you asked. I would say that for starters, you're probably familiar with the consumer education campaign that the Canadian Bankers Association launched about two years ago through a series of booklets. I brought a couple of these booklets with me today. These booklets are available in alternate formats for those who are visually impaired. That was clearly done on a voluntary basis. We want to put information in the hands of consumers in alternate formats.

With regard to technology, certainly voice-recognition technology is something that is new. It is emerging, and it will find its way into ABMs and other technology that banks and other financial institutions are using to distribute financial services to customers.

With regard to access to ABMs, the CBA led a four-year exercise with industry manufacturers, other financial institutions providers, and the Canadian Standards Association to develop a new standard with regard to accessibility to ABMs. My understanding is that the Canadian Standards Association will be publishing later this year or perhaps early next year this new standard for accessibility to ABMs. Again this was something the CBA led, and it put together this group.

At present we're also working on a new project with regard to accessibility to point-of-sale terminals. Particularly the visually impaired have difficulty with point-of-sale terminals. We are in the process of putting together a group similar to the one we had for ABM access. It includes manufacturers, members from the retail industry that have these point-of-sale terminals in the stores, and also other institutions.

So we are very actively working on solving some of these accessibility problems.

Ms. Carolyn Bennett: I think one of the issues was the Canadian Standards Association helping with Internet accessibility as well. Is there some work being done on that?

Mr. Alan Young: I'm not familiar with that.

Ms. Carolyn Bennett: I think they were just postulating. They were asking that the Canadian Standards Association produce comprehensive accessibility criteria for Internet technology applications and electronic services delivery.

Mr. Alan Young: I'm not familiar with that, but that's something we can certainly look into and find out if there's—

Ms. Carolyn Bennett: I think they were asking for that to end up in the regulations for this bill.

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mr. Nystrom, please.

Mr. Lorne Nystrom: Thank you very much, Mr. Chair.

I'd like to welcome the guests here this afternoon, particularly my old friend Bill Knight. He used to sit around this table as a member of Parliament from Assiniboia from 1971 to 1974, I think, or thereabouts.

Mr. Bill Knight: I was ten years old, Mr. Chairman.

Mr. Lorne Nystrom: He was ten years old, and I was nine years old.

An hon. member: Lorne was twelve.

Mr. Lorne Nystrom: Two country boys from rural Saskatchewan.

The Vice-Chair (Mr. Nick Discepola): Have you both grown up, Lorne?

Mr. Lorne Nystrom: We're getting there.

I think we've had a response from the bankers, but I'd like to ask Mr. Knight a question in terms of the public good and good public policy and whether or not the 10% rule is wise to abandon.

• 1625

There was a lot of concern among a lot of people in the country that if you move from 10% to 20%, you make our banks more vulnerable to being snapped up in terms of influence by foreign bankers or others. That rule was brought into Parliament in the first place back in the 1960s, before either of us came here, by the Pearson government, as I recall, when the Chase Manhattan Bank, I think it was, was going to buy one of our Canadian banks. I just wonder whether from a public policy view this is the right way to go.

Mr. Bill Knight: I think, Mr. Chairman, first I need to point out that in the Canadian financial cooperative market, we're 100% Canadian owned in terms of our structures. But I believe the shareholder base and the implications in modern-day banking...

This could lead to a very long answer, but I'll avoid that. So I will answer in somebody else's subject area.

I'm not sure it's valid to stick any longer to the 10% and that the 20% is manageable. I say that with anybody else's concern about a controlling factor. But I really believe that notwithstanding all the numbers you see on our competitors to my right here, who are very much in lots of our marketplaces... The fact of the matter is that from a public policy point of view, if you're going to deal with the FTA and the WTO and the implications of a lot of those changes, our financial institutions and many of our corporate entities are going to have to come to terms with size concentration and how to deal in those global and continental markets.

All of us are going to have to reflect that if we assist them to be competitive throughout the world—and you see a number of the banks picking up assets in the American market to function—how can we give them the flexibility to do that so that they can continue to exist and on the other hand ensure that Canadian consumers have those choices? I think we're moving down that track in this bill, but my point is that I think it's going to cause all of us to work together annually to look at the impacts.

Mr. Lorne Nystrom: I have another question that has more to do with credit unions. There has been a lot of chat by a lot of ordinary members of credit unions about the creation of a national credit union bank, a little bit different vision to what we see here today. I wonder if you can elaborate on the debate within the movement as to whether this goes far enough and whether you might see this evolving in the future into more of what you might call a credit union bank.

Mr. Bill Knight: Mr. Chairman, I think the new changes to the Bank Act within the bill allow any credit union to own a bank. We should be clear about that. So you have Vancouver City Savings, one of our really successful and largest member, that owns a subsidiary, Citizens Bank. So a credit union of a proper size and meeting regulatory criteria can create a bank. Citizens Bank is a value-oriented, interesting model. I know people who use it who find it to be very successful. So let's be clear: you can have a bank if you want one in the financial cooperative industry.

The complexities come around, quite frankly, federal and provincial jurisdiction in terms of business powers. Lots of our retail business powers are provincial. So if you said let's just stumble into creating a capacity to have a federal cooperative bank per se, you have some challenges here. Would you acknowledge the business powers we have to retail insurance in B.C. or Quebec? I'm not sure. Also, you have some jurisdictional issues between provincial powers and federal powers on all of the aspects of regulatory. So when the minister says let's look at this over a year, I think that's a prudent thing to do, and we can look at it collectively.

The last comment is that the bill now gives us—which was not entirely anticipated—an unprecedented and new opportunity to create and to work through our retail associations. With that capacity a lot of our members, like-minded credit unions of varying sizes across the country, are looking at that opportunity to work together to deliver those products. So it's less likely, other than through a subsidiary case, to want to look at a bank per se.

• 1630

Mr. Lorne Nystrom: Mr. Knight mentioned the retailing of insurance and auto leasing by credit unions in Quebec and British Columbia. Perhaps the banks can answer this as well.

There has been a pretty effective lobby by the small P and C people in particular, and I'm thinking of a couple of people named Smith and Buck on Albert Street in my riding in Regina. Mr. Knight and Mr. Topp may be aware of whom I'm referring to. They tend to drop into the office, and they lobby very effectively not just me but members of all parties. What is your argument to counter Messrs. Buck and Smith? There are lots of Messrs. Buck and Smith around the country who are small operators. They're good friends of ours, and we support them. They have a handful of staff. I'm not the only person in this room who sometimes does my business with them and others like them. How do you respond to them? They're concerned about being squeezed out of business or being hurt badly where they lay off a lot of people and the smaller ones go by the wayside. As members of Parliament from all parties, we've tended to agree with them, as you know. What is your response to their argument?

Mr. Bill Knight: Mr. Chairman, I'm going to go first, because my colleagues in the CBA and the banking fraternity are always surprised at some of my answers on this.

Bluntly put, I just think it's a very dated outlook. The next time I see Frank Buck I'm going to say, “What products are you handling? Now that we're bringing in financial services changes and opening access to the payments, what number of deposit-taking products are you going to be handling that traditionally used to be handled just by Sherwood Credit Union or a local bank?”

The market is changing very radically. In the province of Quebec many brokers and agents actually enhanced their play in the market and have had to pay attention to their product. You've seen that CIBC sold off some of their insurance to Desjardins subsidiaries. Life insurance is incredibly hard to handle from the retail banking side. It's not always a great success. But on property and casual, access to this through the web and everything else is just changing everybody's market.

So I would say to them that in a credit union a teller is no longer a teller. A teller is becoming a financial adviser who adds value in the information and advice they're giving, which is changing in our industry, and they need to catch up to that.

That's probably the last time Frank Buck will ever buy me a drink.

Some hon. members: Oh, oh.

The Vice-Chair (Mr. Nick Discepola): I think Mr. Protti would like to add something to that.

Mr. Raymond Protti: Sure, I'd be delighted. I'm absolutely delighted with the question.

I'm going to come at my answer from the consumer perspective. What's interesting in this bill, 900 pages plus, is that all of it is essentially animated from the perspective of what we can do to provide more competition in the sector and more flexibility so that it is ultimately of benefit to individual Canadians as consumers. That's what animates the bill, except with regard to two issues, which of course are not in there. Car leasing is one, and retailing insurance through the bank branches is the other.

Let me deal with car leasing first. Both of these issues, of course, were exhaustively reviewed by the MacKay task force. Car leasing, I have to say, is simply unexplainable from the perspective of the consumer. About 800,000 Canadians are now leasing their cars, and 70% of the car-leasing market is the private preserve of Ford, GM, Chrysler, and their financing arms. Ten percent of the market is with the financing arms of the other foreign car manufacturers, ten percent is with a variety of other institutions, and the remaining ten percent is car dealers.

What has been done, of course, is to say that for the foreseeable future, essentially those three companies will not face any kind of competition from anybody else inside this marketplace. Inside their home marketplace in the United States it's full competition. They have to compete against entire ranges of financial institutions, including the banks. So what this means for 800,000 Canadians is that there aren't going to be sharp pencils in the car leasing business. So the consumer is really the one who is ultimately suffering from this.

• 1635

On insurance, it's the same thing if you take a consumer perspective to this and look at what it's doing for individual Canadians. It's continuing to limit the range and the choices that are available. Many sophisticated insurance products require very detailed work on the part of an insurance adviser.

But one of the statistics MacKay came up with, if I remember it correctly—correct me, Al, if I get it wrong—is that 47% of Canadians don't even have basic life insurance coverage. This is a market where I think Canadians would be well served by permitting retailing through bank branches, because we can develop the sort of mass market product at a very competitive price that should be made available to a great number of Canadians who don't have the benefit of that sort of product now. An individual insurance agent may not make very much money selling a $25,000 or $50,000 life insurance product, but that's the sort of mass market business where we think we could have been very successful in assisting Canadian consumers.

Mr. Mike Pedersen: If I can just add one thing, Ray has made the point that the bill is animated by the focus on the consumer. An adjunct to that is the focus on competition. In every facet of our recommendations and positions we've taken on the issues, we've stressed that we welcome more competition.

To me it sounds as if Mr. Buck's and Mr. Smith's argument is that they don't want competition, and that surely cannot be good for the consumer.

We make two points on this one. The first is that we can drive the price down on this product, and that's great for the consumer. The second point is that we can enlarge the market, and in that regard I don't think they have anything to worry about. They've survived many competitive advances. There are many other examples where large competitors have gotten into new businesses where the market adjusts, and it would adjust, I'm sure.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Nystrom.

Mr. Epp, last question, please.

Mr. Ken Epp: I have a question that isn't particularly addressed in Bill C-68, but it's one that interests a lot of Canadians, myself included.

Mr. Lorne Nystrom: It's Bill C-38. Bill C-68 is the gun control bill.

Mr. Ken Epp: I'm sorry, Bill C-38. No, they're not threatening to rob a bank with an unlicensed gun here.

I have a question about the security on the Internet for all of these financial transactions. I was rather intrigued with your statement that 80-plus percent of financial transactions are handled electronically. Yet we have high school kids who are very successful hackers and who can break into security systems. What are you doing to protect consumers and the security of the banks with regard to the Internet?

Mr. Raymond Protti: That's an excellent question.

The statistic, Mr. Epp, that Mr. Pedersen quoted was that for the industry as a whole, over 85% of what you'd call core banking transactions, such as depositing money, withdrawing it, switching between accounts, and paying bills, is now being done either over the telephone, through an ABM, through a debit card, or over the Internet. In the case of his particular bank, I think the statistic was 92%.

The foundation of the banks' business is the confidence that individual Canadians have in their ability to handle their money successfully in an extremely secure environment.

Right now the industry as a whole is investing about $3 billion annually in maintaining the current generation of technology and in developing the next wave. A good hunk of that—I don't have the dollar figure—is in fact devoted to ensuring that we've found the appropriate encryption devices that are absolutely essential to expanding e-commerce over the Internet and the availability of e-commerce. The next wave, by the way, is not e-commerce; it's m-commerce, mobile commerce, everything done in your hand.

We know that Canadians want that, but we know that if they're in fact going to use it, they'll only use it if we can be absolutely certain that we have successful encryption available. It's a very challenging problem and an extremely expensive one, but we're working as hard as we can on that one.

Mr. Bill Knight: I think, Mr. Chairman, I should add that we're working together on it as well. This is one area where the financial industry collectively works together through the CPA, Interac, and other forums to deal with this. Just the manner in which payments are handled, moving to satellite systems and everything else, has caused enormous changes in the way settlements and payments are made.

• 1640

In parallel with what we're doing, as Ray Protti has said, all the security capacities have to be built into it. We've been quite fortunate in this country not to have a major break in those security systems. A lot of it comes because I think we have the wit and wisdom to work together collectively—ourselves, Desjardins. For example, on any number of our systems, we share a lot of the security information and how to enhance. We do that as well with the bankers and trust companies, etc.

Mr. Ken Epp: Okay.

I have one last question, which is not related to Bill C-68 at all in its present form.

A voice: Bill C-68?

Mr. Ken Epp: No, Bill C-38, sorry. I have 68 in my head.

This has to do with coins and cash, and the move afoot to go to the cashless society and the little card with a chip in it that basically is the same as an amount of cash in your pocket. Are you moving toward that at all in your research and development, or is that off the table? Where do you sit on that?

Mr. Raymond Protti: I'll make a prediction: I don't think we'll ever see a society that is totally and completely cashless. Having said that, is there a demand out there for the development of yet more tools that will limit the need for Canadians to carry coins or bills around in their pockets? The answer to that question, definitely, is absolutely.

Is there such a tool available? Yes. Most people call it an electronic cash card or wallet, and it has been piloted in both Guelph and Sherbrooke. Extensive pilots have taken place there.

I must say, some European countries are further advanced than Canada is in the development of those types of devices. What's interesting is that some of the feedback indicates that what Canadians would like to have is one card that does everything. You know, they have a credit card and they have a debit card. Do they really want to carry a third card for small cash-based purchases in the order of $2 to $5 to $7? The answer is yes, they would like to have one, but could we have the wit to try to somehow combine all three into one?

In a sense, these technological changes are piling up on one another. I mentioned briefly the notion that the next wave is mobile commerce. I mean, again, there are some European countries that are more advanced than we are, but I think what you can anticipate in the future is everything handled in the palm of your hand. You will have in the palm of your hand a device that will do everything. It will amount to having a bank branch in your hand. That's the future.

You'll be able to handle all manner of transactions, including, for example, standing outside your bank and not going in, downloading electronic cash into this hand-held device, and calling up a local movie theatre and booking two tickets for that night. You download your cash electronically into their receiver, out pops a couple of tickets, and you walk in.

Is that Dick Tracey stuff? No. All that technology is currently available, and you can anticipate seeing it.

Are we still going to have coins and bills for the foreseeable future? Yes.

Mr. Ken Epp: Okay, but my question is, are you—

The Vice-Chair (Mr. Nick Discepola): Is this your third last question?

Mr. Ken Epp: Remember, I said five.

Do you have a research and development group in each of the banks? Are you working together on this type of innovative stuff, and will you be ready for it when it comes, when the demand is there?

Mr. Mike Pedersen: I can assure you that in every one of the member banks a lot of work is going on with respect to figuring out how to do this well for the consumer and safely for the shareholders and depositors. I can also assure you that we're working together in terms of talking about standards, etc.

Mr. Bill Knight: We're very active in the whole chip-card area. We're shareholders, equity holders, and participants in the Mondex tests on this type of card.

We concur with the comment that you're not going to head for a completely cashless society. Secondly, people do hope that we will be able to come up with a chip that will cut the number of cards in your pocket.

The Vice-Chair (Mr. Nick Discepola): Your fifth last question?

Mr. Ken Epp: No, we'll switch. I'm all finished with Bill C-68.

Voices: Oh, oh!

• 1645

The Vice-Chair (Mr. Nick Discepola): You say the smart card has three cards in it. Maybe, for Mr. Epp's sake, you can include a fourth card—the FAA licence.

Voices: Oh, oh!

The Vice-Chair (Mr. Nick Discepola): That would make him happy.

Gentlemen, I have just one comment from my own perspective. Being from a semi-rural riding and living in an urban centre, I believe in the technology and in advancements, and in the way you're headed. However, don't forget that there are still rural ridings in Canada, many of which don't even have access to touch-tone. There are still parts in my riding, believe it or not, that have party lines.

So, yes, I applaud you in the efforts to increase access, but often that access is either through a touch-tone phone or an ATM, or through a web-based, PC-based computer, which still not too many people have access to. I encourage you to take that into account when you offer the new services, but I commend you anyway, because I think that's the way we should be headed.

I have just one clarification for Mr. Knight. You say that proposed section 339 puts a very tight cap on how much lending the credit unions can do. Being a small business person... and one of our first tasks in 1994 as the industry committee was to come up with access to capital for small businesses. I know that's still a pet peeve of mine. I'm wondering why you think the Minister of Finance put that limit on that cap and why it restricts you. What recommendations would you have?

Mr. Bill Knight: I think part of it was that it was always there in the previous act. I believe some of it related to our previous structures as they were presented at that time.

I think I'm going to ask Mr. Topp to jump in on that one.

Mr. Brian Topp (Senior Vice-President and Corporate Secretary, Credit Union Central of Canada): The clause we're dealing with here is modelled on the trust act, and I think the department wanted to be careful. We're moving into new territory here with the new retail association in federal legislation for the first time, so they are modelling the clause on the trust act. But the fact of the matter is, our competitors are sitting right there. It's the banks, not trust companies.

The Vice-Chair (Mr. Nick Discepola): But with that restriction, who are they trying to protect?

Mr. Brian Topp: I think they are trying to create a regime. Obviously I'm not speaking for the department, but this is my understanding. I think they want us to walk before we run, and they want us to move prudently into this area of a retail association. They want to keep an eye on us and they want us to have to go and talk to OSFI and the minister before we build in this lending limit. But as a result, we're facing some tough problems, potentially, in taking up the act.

The first thing we're likely to do with the act is to create a back office facility to help credit unions lend to business, and we're going to bump right into this lending limit immediately. We're going to have to come to Ottawa and talk to OSFI and to the minister and we're going to have to ask for an increase in the limit up front as a condition precedent to being able to take up the act.

So I think it would be tremendously helpful to us, to do what you've asked us to do and to get into the market and provide alternatives to small business, if you would put into your report a strong recommendation to OSFI and to the minister to take a careful look at how this is going to work. It would be helpful to us, in getting that lending limit up, to take a look, the next time this legislation gets reviewed, at whether this limit needs to be there at all.

The Vice-Chair (Mr. Nick Discepola): What percentage of that cap are you already lending to? Are you exceeding it right now, or do you have any room for growth?

Mr. Brian Topp: It's different for our centrals. Some of them are well over that limit now. Indeed, we have a little tradition in our Ottawa office of trooping off to OSFI on a regular basis to ask for increases in the cap. Some of our centrals have been trying to manage this cap for years now.

As I say, the most likely first take-up of the new legislation is going to be a back office facility to do business lending, and that cap is impossible at the get-go.

The Vice-Chair (Mr. Nick Discepola): Mr. Protti, do you see any disadvantage to increasing that threshold?

Mr. Raymond Protti: I'm sorry, Mr. Chairman, it's not an issue I'm familiar with. It's obviously something they'll want to discuss with the government and the Superintendent of Financial Institutions. I'm just not familiar with it.

• 1650

The Vice-Chair (Mr. Nick Discepola): All right.

I'd like to thank our guests for their input, and for their recommendations, more importantly. I won't promise you we'll follow up on every recommendation, but I think you'll be happy with the outcome. Once again, thank you very much.

I'd like to adjourn the meeting. Thank you, colleagues.