FINA Committee Meeting
Notices of Meeting include information about the subject matter to be examined by the committee and date, time and place of the meeting, as well as a list of any witnesses scheduled to appear. The Evidence is the edited and revised transcript of what is said before a committee. The Minutes of Proceedings are the official record of the business conducted by the committee at a sitting.
For an advanced search, use Publication Search tool.
If you have any questions or comments regarding the accessibility of this publication, please contact us at firstname.lastname@example.org.
STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Thursday, October 19, 2000
The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon.
As you know, the order of the day is Bill C-38, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions.
It's a pleasure to have with us the following organizations: the Canadian Community Reinvestment Coalition, represented by Duff Conacher, chair; the Canadian Institute of Actuaries, whose speaker will be Rick Neugebauer; from Power Financial Corporation, Mr. Ted Johnson, vice-president, general counsel and secretary; from the Retail Council of Canada, Mr. Peter Woolford and Ken Morrison; and from the Canadian Institute of Actuaries, David. J. Oakden, president, and Morris W. Chambers. I think that's the lineup for this afternoon.
We'll begin with Mr. Woolford.
Mr. Peter Woolford (Vice-President, Government Relations and Policy Development, Retail Council of Canada): Thank you, Mr. Chairman. It's a pleasure to be here. My thanks especially to the clerk's office, which has been very helpful to us in making the arrangements for today.
With me is Mr. Ken Morrison, who is a consultant to the Retail Council. He is the expert adviser who has been giving us a fair amount of help in the preparation of our submission.
We're appearing this afternoon on behalf of the Retail Council of Canada. We are the voice of retail in Canada. We represent about 8,500 retailers from coast to coast. Those retailers represent roughly two-thirds of all retail sales made in Canada. Within that range we represent merchants of all sizes—large, medium, and small—in all channels, in all formats, and in many different communities in the country. Our members are 90% independent merchants, and it is particularly their perspective that I would like to bring to bear on our comments today with regard to Bill C-38.
I'll be covering four areas of the legislation: the payment system, the Financial Consumer Agency, branch closures, and merger review.
We want to emphasize to the committee just how important it is to retailers that they have access to competitive financial services within their community.
In a previous submission we had identified on a couple of pages all of the various interactions that a retailer carries out with their financial institution that must be done face to face, and I've asked the clerk if she could share that with the members. Members don't need to look at that in any great length. It's just simply there to give you a sense of the extensive range of contacts a retailer will have on a day-to-day basis with their financial institution.
The key point to make in that area is that all of these transactions are really vital to the day-to-day operation of a retail store, and without those being readily available to the merchant, they're in serious trouble indeed.
I'm afraid the list is available only in English, but if members who are French-speaking show up, I can certainly deal with the issues for them in French.
I'd like to turn now to our comments on the payment system. Retailers are one of the largest groups of participants in the payment system, and we have been looking for an enhanced role in shaping and operating that system as one of the key stakeholders. We certainly very strongly endorse the proposal within the legislation to provide for three independent directors on the CPA board and in formalizing the role of the Stakeholder Advisory Council. The Retail Council has been a participant of that body for some time in the person of Mr. Morrison.
We also believe, as a number of other witnesses and other groups have suggested, that members of the stakeholder advisory body, as key stakeholders in this exercise, be eligible to sit on the board of the Canadian Payments Association. Our role in payments and the nature of the payments we deal with leads us to urge that the Visa and Mastercard transactions be included in the definition of the payment system. They are major forms of payment, especially of course for our members, and they're also a form that's under evolution and under review in many countries around the world. The CPA is probably the best place to carry out some of that dialogue.
With respect to the Financial Consumer Agency, we support the establishment of the agency as a positive step in encouraging competition and consumer responsiveness in the financial services industries. Like many other organizations that are essentially consumers of financial services, anything that moves to a higher degree of competition in this area is something we would welcome. We suggest, however, that the agency extend its responsibilities to include the small business lending practices of FIs. Loans and financial institution lending practices still appear to be the source of many problems and concerns for our members. When these small businesses run into problems and difficulties with their financial institutions, they're just as powerless before a large FI as any individual consumer is.
Our members further report that centralization of decision-making into regional centres and the closure of branches or the removal of services from branches is worsening the performance of FIs in this area. Our members, as consumers of services, deserve better than that.
Turning then, quite naturally, to the issue of branch closures and removal of service, I would point out to the committee that many independent stores have one person on the floor at any one time. When banking must be carried out during business hours, that requires that the individual dash out to the bank to do that transaction. You'll often see a little sticky on the store door: “Back in five minutes.” That means I'm out doing my banking. That works if there's a bank nearby or within easy proximity. That's a cue for you as shoppers: please be patient, the merchant will be back shortly. But if the services are not immediately available—and this can apply both in urban areas and in rural areas—the impact on the merchant can be dramatic. In order to do their banking, in effect they have to bring a second person into the store to watch the operation while they travel, sometimes for a fair while, to do their financial business. For that reason, we have recommended that the procedures for bank closures be expanded to include looking at removal of services, particularly business services, from a local bank branch.
With respect to merger review, again our recommendation in this area is simply for a slight expansion of purview. We support the merger review guidelines. We simply believe they should be extended to any deals negotiated between an FI and the Competition Bureau.
Mr. Chair, those are the remarks from the Retail Council. At the appropriate time we'd be glad to respond to any questions.
The Chair: Thank you very much, Mr. Woolford.
We'll now hear from the Canadian Community Reinvestment Coalition, Mr. Conacher. Welcome.
Mr. Duff Conacher (Chair, Coordinator of Democracy Watch, Canadian Community Reinvestment Coalition): Thank you very much for the invitation. I'm very happy to see so many members of the committee taking very seriously the submission I'm making today and devoting their time and concentration to listening to our presentation on behalf of over three million Canadians. I will be sure to remind over 100 groups in the CCRC across the country of the dedication of the members of the committee listening to their concerns today.
The Chair: And the recommendations are made on your behalf when we publish the report.
Mr. Duff Conacher: Yes. I've submitted to the committee a summary comparing the amendments set out in the bill to the CCRC recommendations, along with three of our recent reports. I have brought along another copy today to ensure that it is on record. I've also submitted today a briefer summary of our key concerns about the amendments set out in the bill.
Starting with the area of community reinvestment and financial institution accountability, we are concerned that the public accountability statements will be defined by regulations that will largely be done behind closed doors and will not be detailed enough to actually help Canadians hold financial institutions accountable for poor service. The statements must include very detailed information on each branch, or, in the case of a larger community with a few branches of the same institution that are close together, the community service record, lending record, and investment record for those branches in the community.
In order for these public accountability statements to be of any use at all, the committee must recommend that the regulations that define the content of the statements should follow as closely as possible the requirements under the U.S. Community Reinvestment Act. In addition, as is done under that U.S. act, we feel that the federal government should evaluate the statements and grade each financial institution's performance in serving each community and penalize and require financial institutions with poor grades to take corrective actions.
As the Senate banking committee noted when reviewing the task force report in its hearings in the fall of 1998 and in its report in December 1998, the statements will simply be public relations statements by financial institutions unless they are very detailed and there is a review and grading system that follows the disclosure of the statements, again as they have done in the U.S. for over 20 years for over 8,000 institutions.
Moving to the area of consumer protection, in the first area, access to banking services, in the regulations there must be a clear right to open an account. We're very concerned that loopholes will remain in what seems like a right to open an account. Having discussed the draft regulations with the civil servants at the Department of Finance, it sounds as if they will be designed to leave a very significant loophole that will ensure that no one will have a right to open an account. That loophole is that banks will be able to turn away anybody, arbitrarily determining whether that person is committing fraud in presenting their identification to the bank. As a result, we believe there very much will be a secret policy by banks that will never be disclosed, telling tellers to arbitrarily determine whether someone is a person with a low income and conclude that the bank does not want to serve that person and therefore charge the person with fraud. By charge, I mean simply saying “I'm sorry, I think you're committing fraud, and I'm not going to open the account for you.” Tellers will have that power, according to what we have been told by the civil servants.
We think we've come up with a way to stop this ongoing abuse, which has been very well documented by ourselves and many other groups. If the staff person at a branch suspects that an account applicant is presenting fraudulent identification or opening the account for a fraudulent purpose, the staff person should still be required to open the account, thereby creating evidence of the fraud, and then should also be required to contact the police to report the fraud. If the fraud is then proven by the police, then the financial institution should be permitted to close the account, but only in that particular circumstance. If you leave this loophole—and it sounds as if you don't have much say because it appears that the civil servants at the Department of Finance have made up their mind—if you do not recommend very strongly that this loophole be taken out, then this problem of banks arbitrarily turning away people with a low income will continue to be a problem, and they will continue to abuse many Canadians in this way.
Similarly, in the area of cashing cheques and holding cheques, there must be a clear right to deposits and to cashing cheques. As with opening an account, we believe this right should be created for all staffed branches of all financial institutions, including trust companies. We understand that you have to work with the provincial governments to cover some of the trust companies, and we hope that the government will work very well with provincial governments to ensure that trust companies are also covered by these requirements.
In addition, as in the U.S., there should be a requirement to give any account holder access to moneys they have deposited in their account in the form of a cheque within a certain period of time. The U.S. has had standards for several years. There's no reason why Canada can't have similar standards. The Canadian Payments Association standards will not solve this problem. All the Canadian Payments Association is doing is setting standards for clearing deposited cheques, not for giving people a right to that cheque, and all that the government is committed to do is to require financial institutions to explain their hold policies to their customers. I'm sorry, but most customers are going to be very disappointed with that explanation when it says, if the banks were honest, “On an arbitrary basis we'll put whatever hold we want on whatever cheque we want. If you're low-income we'll particularly treat you arbitrarily because we don't want to serve you.” So there must be a clear right.
In the area of branch closures, there must be a full review of withdrawal of service in order for the requirements to in any way ensure that branches are not closed arbitrarily. The full review should require, in every case—not as stated in the bill, but in every case—that the branch give full notice, including contact information for the Financial Consumer Agency of Canada and the ombudsman, so that people can contact both of those agencies if they feel they're not being consulted. A full consultation in a meaningful way should be required and that consultation should include the requirement that the branch disclose the branch's profit-loss record and net income for the previous five years.
The banks hold all of this information. They claim they are always closing branches because they're unprofitable, and yet in 100% of the cases that we have tracked they refuse to disclose their profit-loss record. If it is true that the branches lost money, then require the banks to prove it. Otherwise you are just opening Canadians to further abuse. If banks are trying to claim, as they have, that Canadians don't want full-service branch banking, they are simply lying, because every survey that has been done, including one that you would have seen in The Globe and Mail, recently reported in a special financial services section conducted by Acumen Research Group in London, Ontario, shows that Canadians want full-service banking. In terms of maintaining loyalty, Acumen found that telephone banking and Internet banking were the fifth last and third last reasons why anyone would bank with a particular financial institution.
Clearly, the bank's agenda of self-service banking and shifting all of the operating costs of banking to people—people have to maintain their own bank machines at home, whether it's a computer or a telephone, pay all of those costs, plus be nickled and dimed with service charges. That's the bank's agenda. They're trying to shove it down Canadians' throats, and it is the government's job to act in the public interest and actually protect consumers from having this agenda shoved down their throats. They clearly don't want it, and if you're reflecting the will of the majority of Canadians, you will tighten up these regulations.
In the area of transparency and disclosure, we're very concerned that the government is committed to continuing to use voluntary codes, which we have proven, through several surveys, clearly do not work in any way, simply because they're voluntary. There's no downside for any financial institution disregarding those codes. So transparency and disclosure rules must be put into law.
The financial services ombudsman, in order to be effective, must have binding powers. The banks have shown that they are not swayed by moral suasion, so let's not continue with this charade and let's finally give a place where people can call where the complaints can be handled and actually dealt with.
In addition to the Financial Consumer Agency of Canada, we believe a financial consumer organization must be created. I've talked about this idea before. It costs the government nothing. It will cost financial institutions nothing. It simply involves sending out a one-page pamphlet in the mail-outs the banks already send to customers, and that pamphlet will invite people to join a financial consumer organization that will be consumer-funded, consumer-directed, and dedicated to helping consumers. It will in some ways balance the marketplace and as well balance the advocacy process. So there will not be simply ourselves and a few small consumer groups up against the 100 full-time lobbyists of the banks, the $15 million they spend each year on advertising, the reported over $30 million they spent pushing the mergers, and of course the over $1 million they donate to political parties each year as a means of undue influence over politicians. Financial consumer organizations will balance the marketplace.
As well, in terms of accountability, the fines currently in the Bank Act are simply inadequate. Most of the institutions that the Bank Act and other financial institution legislation cover have annual revenues in the billions. The maximum fine is $100,000. The chance of getting caught will not be 100%, and any bank or financial institution will multiply the chance of getting caught, which I bet will be about one in a thousand, by the maximum fine of $100,000 and therefore view it as simply a $100 fine, as a cost of doing business, and they will continue to abuse their customers.
In the area of mergers, takeovers, and other ownership and control issues, we do not believe the share-ownership levels for large banks should be increased because the increase will allow, we believe, a few shareholders, including foreign shareholders, to effectively control a large bank, and that effective control will come mainly through the selection of directors and executives. We are also opposed to the holding company structure because that will simply allow banks and other financial institutions to rearrange their affairs to escape regulation.
In terms of foreign banks, we have not seen foreign banks come into Canada to any great extent in terms of market share or even operations. We believe the barriers should be maintained, and that is to ensure that Canada's economic sovereignty is not threatened by allowing our key sector of financial services to be taken over, especially in the area of banking, by foreign financial institutions. In addition, all foreign operations, whether branch or virtual, should be regulated fully.
Finally, in terms of mergers, we believe there should be a moratorium on the expansion of banks' powers in any area. That includes giving them powers to sell any new product or service. We also believe there should be a moratorium on any merger or takeover until banks prove they deserve to expand. As in the U.S., the merger review process should take into account the current lending service and investment record of the financial institution, and, as I mentioned earlier, review and grade that record. If the institution has a failing grade, then that should be grounds to turn down any merger or takeover. But there should simply be a moratorium until we have a few years of hopefully very detailed public accountability statements and a review of the grading of those statements, and if the banks prove that they are actually serving people fairly and well—and all of the evidence currently on hand shows that they are not serving many Canadians fairly and well—and other considerations are taken into account and addressed, then we could allow mergers and takeovers to continue.
To apply the merger review process only to bank mergers means it will only be used once or twice in Canada and then it will never be used again. The merger review process should also be in law. Currently all we have is a press release of guidelines, and we don't even know what the legal effect of that press release is. There's nothing in the act about the merger review process in terms of the criteria. It should be legalized and expanded. Again, if it's only applied to bank mergers, it's a total waste of time. It should be applied to every single institution the banks take over, whether they have Competition Bureau concerns or not. In the U.S., a bank, for example, cannot even open up a branch without being reviewed under the Community Reinvestment Act, and we believe that system should be in place in Canada, simply for this reason: Why do you want an institution that serves people badly? Why do you want to let that institution get bigger? Then it's just going to serve more people badly.
That's our submission today. As I've mentioned, I've submitted this brief summary just today of our key concerns so that all of the members will have it distributed to them for the next review of this bill, whatever it will be numbered, when that happens in February.
Thank you very much.
The Chair: Thank you very much, Mr. Conacher.
We'll now hear from the Canadian Institute of Actuaries, Mr. David Oakden.
Mr. David J. Oakden (President, Canadian Institute of Actuaries): Mr. Chairman, honourable members, on behalf of the institute, I thank you for this opportunity to speak with you today to offer our views on Bill C-38. With me is Moe Chambers, chairman of the institute's task force on insurance legislation, and also Mr. Rick Neugebauer, our executive director. Mr. Chambers is also a past president of the institute.
The CIA, not to be confused with that other organization south of the border—we like to consider ourselves the CIA that acts intelligently—is the self-regulating organization for the actuarial profession in Canada and represents over 2,000 actuaries qualified to practice here. The institute demands from its members the highest standards of personal integrity, as codified in our guiding principles and our rules of professional conduct. Our members are supported by binding professional standards of practice as well as an established professional discipline process.
We take these matters very seriously because a key aspect of what we do is to safeguard the financial interests of the public to whom we owe our first duty. This duty is recognized in the 1992 Insurance Companies Act, where actuaries have been afforded a special role in protecting policy-holder benefits promised by insurance companies. Similar responsibilities have been assigned by actuaries under Canadian pension legislation.
The Chair: Thank you. Go ahead.
Mr. Morris W. Chambers (Chairperson, Task Force on Insurance Legislation, Canadian Institute of Actuaries): Thank you.
Mr. Chairman, overall we're pleased with the general thrust of Bill C-38 in terms of maintaining the safety and soundness of Canada's financial sector while creating a suitable regulatory framework for stimulating competition within the sector.
With this opportunity to speak to you today, I would like to focus on a particular function that actuaries are required to perform in the insurance sector, as provided in sections 368 and 369 of the Insurance Companies Act. We believe that creating a position to perform a similar function in other pillars in the financial services sector would help the government to accomplish its goal of protecting the safety and soundness of the financial services sector, particularly given the remarkable pace of change in that sector.
Let me begin by providing you with a brief review of the specific elements of sections 368 and 369 of the act, which complement the efforts of the Office of the Superintendent of Financial Institutions in its supervisory and regulatory role. Section 368 requires the actuary of an insurance company to meet at least annually with the board of directors of the company to report on the current financial position and the expected future financial condition of the company. To fulfill this mandate, the Canadian Institute of Actuaries developed a technique in the late 1980s, now known as dynamic capital adequacy testing, or DCAT for short, which actuaries employ to develop their expected future financial condition reports. To our knowledge, the superintendent has been very satisfied with DCAT and its contribution to the effective regulation of the insurance industry in Canada.
Essentially, dynamic capital adequacy testing methodology involves developing a corporate financial model and using it to stress test a company by projecting on the model a variety of plausible adverse future scenarios. The technique is sufficiently flexible that it can easily be applied to all financial institutions, not just insurance companies.
Section 369 of the act provides that when the actuary of an insurance company—by the way, all insurance companies are required by law to have an appointed actuary—is aware of an action or situation that could have a material adverse effect on the financial condition of the company, the actuary must report it to the CEO and the CFO and require that situation be rectified. A copy of any such report must be transmitted to the directors of the company. Furthermore, if in the actuary's opinion suitable action is not taken to rectify the situation, the actuary must send a copy of the report to the superintendent and advise the directors that this has been done. This model for risk management has been very effective in Canada's insurance industry, and we believe that the broader financial services sector could also benefit from its use.
I hasten to add that we are not advocating that deposit-taking institutions be required to have appointed actuaries. Rather, we're advocating that each deposit-taking institution be required by law to appoint an individual who is responsible for monitoring and reporting upon the variety of risks the institution faces. However, such individual should be a member of a profession that has strong standards of practice, rules of professional conduct, and an effective disciplinary process to ensure that the role is carried out appropriately. Of course, such legislation should protect the individual from undue pressures and inappropriate influences.
The Canadian Institute of Actuaries recommends that Bill C-38 include a provision to extend this oversight rule beyond insurance companies to the rest of the financial services sector for the following reasons: first, the rate of change in today's financial services sector is greater than we've ever experienced, highlighted by substantial convergence within the sector. Insurance companies own deposit-taking institutions. The big banks are acquiring trust companies, stock brokerage companies, and insurance companies, along with launching their own insurance and discount brokerage operations. Clearly, the four traditional pillars of the financial services sector are no longer the separate silos they once were. This is not just a domestic Canadian phenomenon. It is happening, or has happened, in many other jurisdictions and in the multinational environment.
Given the ongoing convergence within the sector, we believe a uniform approach to risk management is warranted and would be beneficial. It seems rather incongruous that a stand-alone insurance company or an insurance company that owns other financial institutions regularly undertakes these corporate stress tests as an early-warning system, and yet a financial institution that owns an insurance company would not be required to take the same precaution.
Our second reason is that convergence within the financial sector is also creating significantly larger financial institutions than existed just ten years ago. As a result of mergers, customers who used to deal with separate financial institutions for banking, wealth management, stock purchases, and insurance sometimes wind up dealing with the same financial group of companies for all these products and services. Therefore, much more is at stake than ever before should one of these institutions experience financial difficulties.
Since the vast majority of Canadians have dealings with the six largest financial institutions in Canada, either directly or through one of their subsidiaries, the safety and soundness of the financial services sector rests significantly with these few institutions. Therefore, it is vital that these large institutions remain financially solvent and stable. There should be in place a named individual within a financial institution, comparable to the appointed actuary, to give warning of potential future financial difficulties.
Thirdly, the measures contained in Bill C-38 to promote greater competition within the financial services sector in Canada, combined with the recent passing of legislation allowing foreign banks to operate directly in Canada without a domestic subsidiary, create the potential for numerous small banks to enter the Canadian marketplace. These institutions may not have lengthy histories by which we can judge stability. Therefore, requiring this risk-monitoring position at least for Canadian operations can help ensure the liquidity and solvency of these financial institutions, thus instilling confidence in our financial services sector.
With the coming into force of the Insurance Companies Act in 1992, Canada moved to the forefront of modern insurance industry governance. With the recent and emerging international developments in insurance accounting and supervision, other jurisdictions are seeking to emulate what Canada has already done. We think the adoption of our proposal for deposit-taking institutions will keep Canada on the leading edge of financial services legislation. Our primary goal, like yours, is to ensure that the safety and soundness of Canada's financial services sector is preserved.
Mr. David Oakden: In summary, we are pleased with the steps the government has taken to reform Canada's financial services sector. As actuaries, we are committed to ensuring that the Canadian financial sector is dynamic, innovative, and safe and that the general public retains its high level of confidence in Canada's financial institutions. Our recommendation to create a professional risk-monitoring role in all areas within the financial services sector would help ensure that the government's goal of maintaining the safety and soundness of the sector is achieved.
Thank you for your time today. We would be happy to answer any questions you may have.
The Chair: Thank you very much, Mr. Oakden and Mr. Chambers.
We will now hear from the Power Financial Corporation, the vice-president, Mr. Ted Johnson. Welcome.
Mr. Edward Johnson (Vice-President, General Counsel and Secretary, Power Financial Corporation): Thank you, Mr. Chairman, and thank you for being here on a day that I know is a very difficult one and one that's quite congested for all members of Parliament. I must say I'm grateful that you permitted this session to go ahead.
First, I want to say that Jim Burns, the chairman of Great-West Life and deputy chairman of Power Financial, had intended to be here with me, but regrettably he can't be here because of a family medical difficulty. So I will attempt to go on, on my own.
There is in the papers available to the committee a copy of a brief, which is really an excerpt of a brief we presented to this committee two years ago on the subject of insurance retailing. There is also a letter we sent to the committee in the early going saying that we didn't intend to appear and weren't asking for an opportunity to appear, and perhaps a note outlining the talking points that I'm going to refer to today.
Power Corporation, just by way of introduction, controls Great-West Life and London Life, both of which are, of course, federally regulated insurance companies, and which together comprise the largest provider of insurance to the Canadian market, as well as Investors Group, which is Canada's largest mutual fund and financial advisory organization.
As I say, we had not planned to appear, but after reading some of the testimony on at least one narrow issue, I feel, and we felt, that we should respond. By way of background, before getting into that response, I want to point out that we've been appearing before this committee for almost 15 years now, Mr. Burns and myself, on questions and proposed legislation dealing with ownership, merger and acquisition rules and the M and A process, powers of institutions, and customer information and privacy.
We hope fervently, as I'm sure many of you do, that this bill is the culmination of that long process of reform. There has been very substantial consultation of the marketplace, of consumers, and of the participants in the industry itself over those years. There have been many compromises along the way. Politics obviously—and legislation—is the art of the possible. We believe that essentially the government has succeeded in balancing a number of competing concerns and interests in the bill before you.
Therefore, as a first priority, we urge the speedy passage of the bill, because uncertainty as to the shape and future of regulation of the industry is undesirable to everyone.
With this in mind, our submission is brief. We're here to respond to comments particularly by several previous witnesses before this committee who have argued in favour of the retailing of insurance products by banks in their branches using customer information.
Allow me, if you will, to make a few points.
First, it's important to understand the relative size of the banking industry and the life insurance industry. The Royal Bank's domestic assets are about equal to the domestic assets of the entire Canadian life insurance industry. So we're dealing here with a David and Goliath situation. This is not a turf battle among equal participants.
Second, it's important to reject the myth that the banks cannot enter the life insurance industry. They can. The 1992 reforms allowed them to buy or to start up insurance companies. Therefore, they're presently permitted to compete on a level playing field. Why haven't they bought insurance companies? Why haven't they taken advantage of this newly acquired power? Because under the terms of the legislation and the insurance business regulations they can't mine their customer databases in order to target market insurance products, particularly to the middle and upper middle class urban clientele and to small and medium-sized employer groups. They can't cream the marketplace, and that's the reason they have not entered it through new subsidiaries or in any substantial way.
That brings us to our third point: bank “retailing” of insurance is really a smoke screen. What is really meant by that is branch selling involving the transferring of customer information. This has little to do, in our view, with fostering competition and a lot more to do with sustaining bank profitability. Banks need to acquire new lines of business in order to sustain their return on equity. Frankly, they're running out of new lines of business to acquire.
Remember, unlike the life insurance industry, the banking industry in Canada constitutes an oligopoly—few major competitors. They haven't demonstrated, and I must say that I defy anyone here to demonstrate, that they reduce prices or create competition when they enter a new market or acquire a new power. In fact, history is quite the other way. What it shows is that when they enter a new sector, they quickly come to dominate it—for example, the securities industry in the late 1980s, the trust industry in the early 1990s. They've come to dominate those sectors almost entirely. There are few, if any, real independent participants who are significant market players.
Prices, not surprisingly, tend to rise. For example, the spread between GICs and mortgages widened after the trust industry was taken over by the major chartered banks in Canada. We pointed that out in our submission to this committee in 1998, which incorporated a study, prepared for us at some substantial expense, I underline, by an independent consulting group, the Bain Consulting Group.
Another example of rising prices is in the securities industry, where once control was acquired, underwriting fees rose and true bought deals were no longer available once the industry had been essentially taken over by the major banks.
Finally, the resulting oligopoly profit is not passed on to consumers. That's the track record. There seems also to be little, if any, evidence that foreign banks, in foreign jurisdictions that permit bank assurance, have reduced prices. Take, for example, the Tilinghast group study for the CLHIA. They took the U.K. market and showed that under the U.K. bank assurance regime, life premiums charged by banks for similar products tend toward the high end of the scale as opposed to the premiums charged by the insurance companies in the U.K. for similar products.
Allow me, if I may, to deal with another myth that is put out by the advocates of bank assurance, and that's the myth that insurance pricing is too high in Canada, that there's fat in the industry. At Power Financial we know the Canadian life insurance industry. It is very competitive, and I'll give you one example: the group life insurance business. There simply isn't room to cut prices, unless the banks intend to engage in predatory pricing, selling below cost. Yet we hear over and over the litany, just let us in and we'll cut prices and eliminate the fat.
If I may, I would remind you of the recent experience of the Bank of Commerce in the casualty insurance business. They tried it in recent years, couldn't make money on a level playing field, and dropped out.
I'd like to respond briefly and quickly to a couple of specific points. I can't let this occasion pass without commenting on the chart on page 21 of the brief submitted by the Canadian Bankers Association, purporting to show asymmetry in the business powers between banks and life insurers. I have to say that that chart does not tell a complete story. For example, the power to take CDIC—that is, government-insured—deposits is fundamental to the banking franchise. It's the reason why most people and businesses, particularly small businesses, start relationships with a bank. Banks have this power and insurance companies don't, and yet for some reason the power is left out of the list of bank powers enumerated in that chart.
There is a very constructive and helpful chart that was prepared by the CLHIA, which is available to the committee, which responds to that very point.
One bank witness told you, incidentally, that only 47% of Canadians have life insurance. That's not correct. It ignores the fact that many millions of Canadians are covered by employer group life insurance plans.
I have to add that the CBA has quoted the MacKay task force report. There is an important quote contained in the research done by the consultants working for the MacKay task force, and I'll quote from the research report, which is available on the website of the MacKay task force:
Despite expressing a preference towards having
—incidentally, straying from the quote, if you ask people if they want choice, of course they're going to say they want choice—
a majority (56 per cent) of
Canadians also expressed concern that banks would have
too much credit and personal information which they
would use for inappropriate purposes if they were
allowed to sell insurance from their branches.
We share the public's concern. We're particularly concerned about the potential for coercion. I know we have legislation now, which this committee worked very effectively on, but there simply aren't enough lawyers around to write the laws it would take to prevent coercive selling by lenders. No consumer watchdog or competition bureau can stop that sort of thing.
Our major chartered banks are privy to immense amounts of customer information, much of it obtained in their quasi-fiduciary role as lenders. They want to use this information in an anti-competitive manner to eliminate their insurance competitors, take over the sector, and realize oligopoly profits. This is what the so-called insurance debate is really all about. We call this predatory marketing. Once the insurance competitors are eliminated, will the banks pass on their oligopoly profits to consumers? Will they provide insurance services to all corners of the country? We doubt it. By the time we have the inevitable negative answer to that question, it will be too late for policy-makers to repair the damage.
In view of this, there are three questions: Is Canada ready to take the chance that bank insurance will lead to more competition and lower prices? Are we ready to put at risk and substantially disrupt the present marketing system, with over 45,000 agents and brokers in all corners of the country, most of them employing others? An eyeball figure would be roughly 150,000 to 200,000 people employed in that delivery system. Do we want to concentrate our entire financial services industry, including the insurance pillar, which is the only non-bank pillar left, under the big six chartered banks? These are some of the questions that policy-makers must face if they wish to open up the issue of permitting bank insurance in Canada.
In our view, the issue has been dealt with and processed. The result was clear in 1996 when the Minister of Finance said in the House of Commons that banks would not be given additional insurance retailing powers. This result was buttressed in 1998 by the Ianno committee report. Chapter 9 of that report explains clearly why this issue must not be reopened.
I thank you for this opportunity to attempt to balance the record. Again, may I say please pass the bill as expeditiously as you can.
The Chair: Thank you very much, Mr. Johnson.
Mr. Epp, you have all the time you need.
Mr. Ken Epp (Elk Island, Canadian Alliance): It looks that way, doesn't it? Maybe you and I will share some. I'm sure you'll have some questions.
Thank you for coming. I really appreciate this. I probably should apologize on behalf of my colleagues, although I feel no obligation to do so since they're from other parties. But, partisanship aside, it would have been good if they could have been here to hear your input. Despite that, your presentations are on record, and the other members will be able to read them in the evidence of the committee.
I have a number of questions. I'd like to start with Mr. Johnson. We'll do this in reverse order. It's my understanding that Bill C-38 does not widen the banks' ability to sell insurance, so why are you so concerned about it?
Mr. Edward Johnson: Thank you, sir. I'm here simply because others have been here before me making statements and attempting to reopen that debate, and we felt it was important to correct the record. You're quite right, the bill is silent on the subject. As I say, the whole issue has been processed. Nonetheless, as has been the history of the last half century, with every revision of significant financial services legislation, there are representations from the banking industry for new powers. They have again lifted the lid on this issue, even though it has been processed and put to bed, in an effort to try to put a marker down for future years, and we don't think that should go unanswered.
Mr. Ken Epp: Okay. So you're here as an antidote to the presentations of others to this committee, and you fear that maybe the committee will make amendments to the bill before it presents it to the House that would change it.
Mr. Edward Johnson: I'm not concerned with that, frankly. I don't believe that's likely to happen.
Mr. Ken Epp: You just want to strengthen our resolve.
Mr. Edward Johnson: There is a public record here and we think it should be answered. To paraphrase Bernard Shaw, brief shall answer brief until the end of time.
Mr. Ken Epp: Indeed, I agree we shouldn't open this, and yet I have one burning question that I always ask, especially of my insurance friends, because many of them have approached me and said “Make sure you don't give the banks this because then I'm out of a job.” I understand that concern. But I'm just wondering, the insurance companies—and I'm thinking of more than just the life insurance, which is of course a major facet, but also of liability insurance, casualty insurance, automobile insurance. I think we have in this country a colossal waste of human resources annually filling in thousands and thousands and thousands of forms... send out a bill and you renew your payment. With life insurance this isn't the case because usually it's an annual or a monthly premium, but with vehicle insurance it certainly is.
So you have all of these thousands of people filling in these forms all the time. Surely there would be a better way of doing it. If someone comes along and says “I have here a better product, which doesn't involve all that manpower, all of this huge hierarchy in the insurance business, and all of these insurance guys going on their retreats on cruise ships”—I know it's a government agency that's in the news on that right now, but we know that insurance companies do this too. In fact, one of my insurance friends is rather boastful of the fact that his company holds their annual meeting for their motivation sessions down on some South Seas island somewhere and he's able to take his wife. I said “You know, you object to me as a member of Parliament doing that at public expense, but you're doing that at my expense because my premiums are paying for you to go.”
So there are inefficiencies there, and on behalf of consumers, I'd be interested in having a response.
One that came to my mind is, what happens if somebody says “Well, I'm going to run an insurance company without all that human hierarchy that we have to have; I'm just going to have an Internet site and people can sign on, give me their credit number, and bingo, they have insurance”? I bet we could get it for one-tenth the price. I don't know. Our actuarial friends have left, unfortunately.
Mr. Morris Chambers: No, we haven't.
Mr. Ken Epp: Oh, I'm sorry. Maybe the actuaries have something to say in terms of what proportion of the premiums in insurance companies actually go to cover the losses or the payouts. What's your response to that?
Mr. Edward Johnson: I'll go first, if I may. I can't speak for the casualty industry, and in fact with great temerity would I attempt to speak on behalf of the life industry. We're a shareholder but not a day-to-day participant in the industry.
Nonetheless, if I could take a run at it, in terms of forms and paperwork and so-called back-office efficiency, I have to say that I think the Canadian industry—and I can point to our own companies—have come a long way in back-office efficiency in the last ten years. We're in life only; we're not in the casualty business. There has been a tremendous expenditure on data processing, and hopefully the clients of our companies are finding that the paper burden is substantially reduced from what it has been.
Is it perfect? Have we eliminated all of the inefficiencies? I suspect not, but I think we're getting asymptotically close to it, and I'll bet you'll find we're as good, if not better, than any other organization of comparable size in any industry dealing with individual consumers.
On the question of cruises and the other sorts of bonuses and so on that are given to people, I think you'll find that as an overall portion of marketing delivery expenses, those costs are quite low. They are a form of compensation. They're part of an incentive compensation operation. In any industry, people who are involved in direct selling and in directly dealing with the public... In any country, frankly, and I think if you go to the United States you'll find it's the same thing, and in Europe, there will be incentives offered to people. It can be a cash incentive or it can be an in-kind incentive, like a trip to a resort or a cruise.
I have not participated in those things, but my impression is that they are tremendously effective in conveying information. There are sessions where people get together in an informal atmosphere, sales forces network together, financial planners network together, and they learn about the kinds of problems others are having; they benefit from the experience of others. You can't put a value on that precisely. The MBAs and accountants can't quantify it, but it works, and it's tremendously effective at informally providing people with information that's very helpful to them in working effectively and efficiently, in reaching the marketplace and serving it efficiently.
I can't tell you, I'm afraid, what marketing costs are as a proportion of overall selling prices. We looked at those numbers in 1998 and I can't remember them. We looked at them when we were appearing before you in 1998 and talked at some length about how the insurance marketing system is efficient. In spite of assurances of those who would enter the sector and take over the franchise, there is not any kind of significant room or so-called fat to be eliminated in that area.
Mr. Ken Epp: Okay. I also want to look at some of the other witnesses. I presume that our friends from the Retail Council of Canada had to catch a plane. I'm sure that's the case, so we'll forgive them. I had some questions for them.
To Mr. Conacher, I don't know how to put this to you, but you seem really not very happy with the banks. I got that impression. I just wonder what kind of data you're using to draw that conclusion. I'm not here to defend the banks, don't get me wrong, but my personal experience with them has been reasonable, for the most part, notwithstanding that I'm a member of a credit union and don't deal with banks.
I guess we get more complaints about banks from our constituents than we do about the post office, which really says how things have changed in the last 25 years in the country. But you have a previous assumption that whatever the banks do, they're out there to really pick on people. You use some pretty strong language. I wrote down one thing you said. You said banks will continue to abuse customers. There's really nothing in it for the banks to gain a reputation that they abuse people who walk through their doors, so why would you come to that conclusion? What's your data source?
Mr. Duff Conacher: First of all, we did this survey, which I've submitted to the committee. We surveyed 103 branches of seven financial institutions, mostly banks but also trust companies, across the country on this voluntary code that was negotiated in 1997 on access to banking services, mainly to protect people with low incomes, and also in terms of opening accounts and cashing cheques, and 96% of the branches of banks and trust companies violated that code. That's abuse. That's turning people away arbitrarily, including saying things to people such as “We only open accounts for professionals here” or “We'll put a 30-day automatic hold on every cheque you deposit for the first six months”. Even though the Canadian Payments Association, I'm sure you know, has verified that 99% of cheques clear overnight, the banks will put on a 30-day hold. That's abuse.
Also, in terms of credit card interest rates, this is an area—I'm glad you brought it up—in terms of bank abuse. The latest July 2000 report from Industry Canada shows credit card rates still far above the prime Bank of Canada rate. The bill does nothing to address this. It's a major gap in the bill. I'm sure if the bill, which it should, required banks, which they currently do not have to—and I'm sure the actuaries can help back me up.
First of all, banks are allowed to state all of their foreign operations as one group. They do not have to break it out country by country. Therefore, we do not know where the banks are investing and quite possibly losing money in many countries and gouging us here at home with excessive service charges and credit card interest rates to subsidize those losses overseas. There's no requirement, as there are with many other companies. Most companies are required to state country by country their profit-loss record, but not the banks.
You will see in any annual report domestic and then foreign. In the domestic category there is no requirement to break out their credit card division, electronic banking, or any other particular service division, whether it's in-branch, telephone, Internet, or electronic. As a result, we do not know the profit margin in each of those divisions. But I am quite sure that if it were required, as it should be—and we've been pushing the superintendent and also the CICA, which jointly set guidelines for the banks in terms of how they set out their annual reports—that all those divisions and the various countries where the banks are operating were to set out a profit-loss record and profit margin, you would see gouging. You would see 50% to 100% profit margins in several of those divisions, and that's abuse.
So that's their record of abuse, turning away people arbitrarily.
In addition, more recently their agenda has been shown by this survey by the Public Interest Advocacy Centre, which I know you heard from earlier. I'm sure you also heard a summary from Option consommateurs, which did a survey of branch closures. Branch closures have very clearly taken place in disadvantaged neighbourhoods and in rural areas, but mostly in low-income neighbourhoods, over the past 20 years. Once again that's abuse. So I make the judgment of whether banks abuse their customers based on their own record.
I agree with you, it's not in their interest. As was shown when four of them tried to merge into two, Canadians' reaction was visceral, because they realized that's just part of the abuse agenda of the banks, that they just wanted to get bigger and more profitable and withdraw service. It's not in their interest.
But I have yet to meet a senior banker who understands corporate social responsibility. If they did, when we approached them—and we approached every one of them and the CBA as a whole—they would have agreed to enclose that one-page pamphlet in their mail-outs to customers. It would have cost them nothing, and it would have given their customers a very easy way to band together into a financial consumer organization that would have represented consumers nationally and would have been only funded and directed by consumers, as was recommended by the MacKay task force, as the House of Commons finance committee recommended in its December 1998 report, and as the Senate banking committee also endorsed. It's the only recommendation in the MacKay task force report on which there has been no action.
It doesn't require government action. If any senior bank executives had any sense of corporate responsibility, they would have done this automatically, because they would have seen the interest in having a well-organized, well-resourced consumer organization out there that would have been able to compile and report to them all of the complaints nationally that consumers have about banks. Then they would have been able to address those complaints and serve people better.
So that's what I base my strong words and judgment on. It's completely justified, and Canadians agree.
Mr. Ken Epp: That's interesting.
The Chair: Can I get back to my first question?
Mr. Ken Epp: Sure, it's between you and me.
The Chair: Mr. Conacher, just to get your philosophical position on this, would you consider banks to be businesses or public utilities?
Mr. Duff Conacher: Given the privileges, subsidies, and protection that the banks have had over the past three decades in particular, since they were formally protected from foreign competition, we place them on a spectrum much closer to public utilities. It is our money. It is a natural resource that just happens to be human created, but it is a resource that we are creating in the same way we have rivers and trees and minerals in the ground. They are exploiting that resource and using it to their profit.
The whole structure is set up so that the banks are extremely privileged and protected from foreign competition. Except for selling insurance from their branches, every single area they've wanted to get into they've been allowed to get into.
The takeover of the trust company sector was largely subsidized by taxpayers. According to Peter Cook, columnist for The Globe and Mail, it cost the Canadian economy $40 billion. There was a $4-billion direct subsidy from the Canadian Deposit Insurance Corporation for that takeover.
So when you add it all up, they don't have monopoly power, because there is not one company, as with many other utility sectors, but they have a regulated oligopoly that controls the marketplace in every sector they operate in. The regulatory structure endorses that control and, frankly, has very little accountability measures. This is the first round, since service charges were slightly addressed, but not really effectively, back in 1992, that accountability measures, measures that give rights to financial consumers and responsibilities to financial institutions, are included in the changes to the Bank Act. Now they're not even being passed, and, as I mentioned, the bill only provides a framework, and the regulations, from what we've heard from the Department of Finance, will leave all sorts of loopholes in these supposed accountability measures. Finally, we get a round that addresses some of these issues and some loopholes will likely be left in it.
So when you look at that and you look at the history of any utility sector, it's very similar: the power, the lack of regulation, and the overall ability to abuse customers without accountability. That's why we place them on the scale of public utility through to fully private company, very much closer to a public utility. And the government should treat them that way. Where are they going to go? What are you afraid of? They're not going to close down and fly to another country. They need our money to exist. People are not going to put their money in a bank if the branch is not here and the headquarters aren't here. So they're not going anywhere. Regulate them. Make them serve people fairly and well. The U.S. did it over 20 years ago to great positive effect for every community across the United States, and it's about time the Canadian government did the same here.
The Chair: I'm sure you're not advocating an American banking system, are you, because then you would have to also accept the failures that go with that?
Mr. Duff Conacher: We've had the failures. The failures of our trust company sector on a per capita basis, according to the size of our economy, cost our economy just as much as the failure of the savings and loans sector. The savings and loans sector failed because of lack of regulation that encouraged fraud. No, I'm not encouraging lack of regulation that encourages fraud. What I'm suggesting is regulation that will encourage our banks to serve people fairly and well in the way that the Community Reinvestment Act has worked in the United States, the heart of capitalism, for over 20 years. It's a compelling example, and if the government would only examine it, they'd realize how compelling it is. Two hundred Republican mayors wrote to the Republican-controlled Congress in 1994, which was just about to gut the Community Reinvestment Act, and said, “If you gut this act, you're gutting our cities, because there is no way that public funds will replace the private capital that is now required to circulate in our communities by the Community Reinvestment Act. If you remove the Community Reinvestment Act...” These were 200 Republican mayors, led by Newt Gingrich, his party, their party. They defended the Community Reinvestment Act.
So take a look at this act. I know Jim Peterson went to Chicago and came back very impressed back in 1996. He didn't come back impressed enough. You haven't done enough. If this act is passed, banks will continue to abuse their customers, unless you strongly recommend that the regulations close the loopholes that the civil servants at the Department of Finance intend to leave.
The Chair: Mr. Epp.
Mr. Ken Epp: Okay. Bill C-38 has, for example, a specific provision that banks have to provide a low-cost account.
Mr. Duff Conacher: No.
Mr. Ken Epp: Yes, they do. It's right in there.
Mr. Duff Conacher: No. If you show up at a teller, I believe very much there will be a secret policy and it will say “Tellers, if the person looks like they're low-income, when they present their ID, say, `I think you're presenting your ID fraudulently' or `You're opening this account for a fraudulent purpose”'. This is specifically what the civil servants of the Department of Finance have told us will be allowed to be done. The teller will say, “No, I'm sorry, I'm not going to open the account.”
Mr. Ken Epp: Boy oh boy. It will be very interesting. Inasmuch as you've raised the flag, I think probably we need to monitor it.
Mr. Duff Conacher: You won't be able to. It's in the regulations. If you want to create a clear right, put the clear right in the law. If you leave it to regulations, then you have civil servants at the Department of Finance who intend to leave loopholes. They've told us. We met on September 19. They said suspicion of fraud would be a reason a teller could turn away anyone who's applying.
Mr. Ken Epp: Well, that would be reasonable, though. If somebody comes in and wants to do business with me—I'm not a banker, but say I have a different business, and he wants to get me involved in something where I'm going to get shafted—
Mr. Duff Conacher: You won't get shafted.
Mr. Ken Epp: —I have the right to say “Hey, I don't want to do business with you.” So for them to say, when fraud is suspected—and I agree with what you said. If they suspect it, then they have an obligation to report it to the police and have an investigation.
Mr. Duff Conacher: So open the account—
Mr. Ken Epp: That sounds good.
Mr. Duff Conacher: That's the solution, require them—
Mr. Ken Epp: But you shouldn't assume that the person goes in there and the banks are going to just automatically say “Well, we can't make any money off you; therefore, we're going to just say, `You must be fraudulent' and disqualify you”.
Mr. Duff Conacher: Why did 96% of them turn away people and violate a voluntary code? We walked into the branches. I did some of the surveying myself. Totally arbitrary answers were given.
I've given you the solution, and I'm glad you agree. Require the bank to open the account. That creates the evidence of the fraud. They can make a copy of the ID. Require them to make a copy of the ID. Then they report it to the police. The police will investigate. If the police cannot prove there's fraud, then the account stays open. If the police prove the fraud, then the account is closed. That would close this loophole. Just take it out of the tellers' hands to make a discretionary decision. When they're standing there and someone's standing in front of them, take that discretion out of their hands, because they abuse it.
Mr. Ken Epp: I really have trouble thinking this way, but as a young criminal, I would be applauding you because I can now go into some senior's place, who doesn't hear very well, sneak into their house when they're not watching, or even pick up their mail out of their mailbox and get this government cheque this senior has, and, according to what you want... You want to do away with holes. You want to—
Mr. Duff Conacher: No, I don't want to do away with holes.
Mr. Ken Epp: But if a person—
Mr. Duff Conacher: I just want holes regulated.
Mr. Ken Epp: You and other groups have come in front of us and have said, government cheques, because they're low risk, should be cashed right away. They're low risk, of course, to the banks because government cheques are always good, whether they're provincial, municipal, or federal. I've never heard of one bouncing yet. But the difficulty is, what happens if the person who's cashing it isn't the person he or she pretends they are? There has to be some way of providing a positive identification for these people.
Mr. Duff Conacher: That's fine. Someone can steal the cheque. If they steal the ID of an old person as well and it's a young criminal, as you said, I doubt they're going to get past the bank teller with that ID.
Mr. Ken Epp: In other words, you would require picture ID in order to have these privileges at the bank.
Mr. Duff Conacher: For the government cheques? No, just simply make a copy of the ID. The bank is fully guaranteed if the cheque is cashed fraudulently. Make a copy of the ID and there won't be any problem. The fraud will be protected. They'll be able to track down the person who cashed it—
Mr. Ken Epp: I think it's a little more complex than—
Mr. Duff Conacher: There's direct deposit on most of those cheques now anyway.
Mr. Ken Epp: It's available, but—
Mr. Duff Conacher: Yes. A large percentage are actually using it.
Mr. Ken Epp: —a lot of seniors don't like it.
Mr. Duff Conacher: No, but a lot of them are using it. It's mostly in the opening of an account that I'm worried about this discretion about fraud being used. If you don't have an account, you can't build up a credit rating. If you can't build up a credit rating, you can't ever get out of the cycle of poverty, because no one will ever loan you anything to get out of the cycle of poverty.
Mr. Ken Epp: Actually, I think borrowing money gets you into the cycle of poverty. That's been my experience.
Anyway, I have a question for the actuaries. We could go on for a couple more hours, Duff, and I appreciate your input.
The actuaries are telling us that what they want is more jobs for their—I'm just saying this in order to get a debate going here, okay? They want more jobs for their people. There's an actuarial society and there are unemployed actuaries, so let's get into Bill C-38 that every financial institution has to get the services of an actuary in order to improve the safety of the financial institution. It sounds pretty good, in theory. Of course, I'm being sort of facetious when I say you want jobs.
I don't really understand how you feel you can add to the safety of most financial institutions. Quite obviously, you have a very great role to play in insurance and annuities for future investment, for retirement, things like that. That's what your life is all about. But how can you ascertain that a bank or some other financial institution investing in some enterprise in, say, Singapore is making a wise investment? How can you evaluate the risk of that?
Mr. Morris Chambers: First of all, I tried to be very explicit that we are not advocating the creation of an appointed actuary position in banks. Frankly, five years ago I would have said that, but I wouldn't say it today, because it's an unreasonable expectation that the actuarial profession in Canada could supply the resources to do that job properly. I believe the skills that actuaries possess can in some instances fill the role that is needed. But we're not talking about putting actuaries in banks. We're talking about creating a position in the banks that requires that position to keep a finger on the bank's operations and to continually assess the risks it is undertaking. Obviously, at this stage it requires somebody who knows how banks operate. Not many actuaries know how banks operate.
To put it in a little different perspective, the Canadian Insurance Companies Act requires that each insurance company have an appointed actuary. In order to be an appointed actuary, you must be a fellow of the Canadian Institute of Actuaries. That does not mean that every fellow of the Canadian Institute of Actuaries is eligible to be the appointed actuary of an insurance company. It takes very special skills and long years of experience with insurance companies. After 42 years in one company, I wouldn't pretend that I'd be the right person to be appointed actuary of the company I work for. It's a scary job, to tell you the truth.
But we think that all financial institutions need somebody to play that role. To repeat, we did not say it should be an actuary. It should be someone who is skilled in measuring risk; in developing corporate models, particularly financial corporate models; in developing projections; and in particular in developing the interplay among various elements of risk in future scenarios. If interest rates go down, how is that likely to affect withdrawals? If interest rates go up, how is that likely to affect withdrawals? You might think it's going to bring in a lot more money. Not necessarily. It might take a lot of money out of deposits in order to invest in other things. That's the sort of thing we're talking about.
We do add that it is important for such an individual to be a professional and to have a code of conduct that requires them to recognize that they're doing this ultimately in the public interest. It requires that they have a disciplinary process so that if they don't follow the code of conduct of their profession, they will hear about it and be disciplined in some way. It requires that they have standards of practice so that there is some measure of bringing this methodology to the industries in a consistent manner.
Mr. Ken Epp: Okay.
I have a question for all of you. My general feeling is that there's a fairly high level of confidence in the safety of our financial institutions in Canada. There's no great amount of fear out there about our banks, credit unions, insurance companies, and so on. Put it this way: I've had very few people express concerns to me in that area. Yet with Bill C-38 we have two separate organizations: the board and the ombudsman's office. Besides that we have the Office of the Superintendent of Financial Institutions, which I understand, Mr. Chairman, is going to continue. It's not being wiped out by Bill C-38. We have an individual ombudsman in each of the banks, and we have a Canadian Bankers Association ombudsman. We have Duff Conacher here today saying that what we need is a very strong consumer-oriented organization to protect them. How come we have all of these different agencies and organizations to provide protection when in fact the fear about a lack of safety in the organizations isn't there at all?
Mr. Morris Chambers: I'm very comfortable with the appearance that our financial institutions are strong. It's comforting for me at night because that's where I have my money.
But Mr. Conacher is coming at a different issue. Mr. Conacher is coming at the issue of how individual clients of financial institutions are treated or whether they're treated at all. We're talking about the protection of people, not how they're treated but the fact that their money is preserved and the continuing solvency of the financial institutions. Yes, I believe that today financial institutions in Canada are strong. But although we've had a very good economy over the past ten years and more, there have been periods, such as back in the 1980s, when financial institutions in Canada have been insolvent, as you well know, and those conditions can reoccur.
You mentioned that the Office of the Superintendent of Financial Institutions is there and is regulating the banks. That's true, and they're doing a fine job. They're there regulating the insurance companies as well. But despite that, OSFI is supportive, I'm sure, of the role of the appointed actuaries in insurance companies. I'm sure they would not shrink from the thought of a comparable role being served in the other financial institutions because essentially the role is one that's intended to complement and support the responsibilities of that office.
Mr. Ken Epp: Okay. Are there any comments from others?
Mr. Edward Johnson: I don't have much to add to that. I think that sums it up pretty effectively.
I would say that we have had, as was pointed out, some quite spectacular failures of some of the widely held institutions back in the late 1980s. You would need an army of regulators constantly on the site to do the kind of monitoring that might prevent that sort of thing.
But you have to count on other factors in the marketplace, including the discipline of the marketplace and, I would underline, the discipline of a controlling shareholder. Those institutions that went down at such great expense to the public purse had no controlling shareholder whose pocketbook was at stake. That's another factor that often works constructively to ensure prudence in management. There are many factors at work, and no single one is going to provide all of the discipline that's necessary.
If I could just add, though, let it be said and noted that Canada's industry is regarded as one of the most prudently regulated and managed in the world.
Mr. Duff Conacher: Recently, in two very public articles, the superintendent actually raised the alarm about high-risk investments by the banks. So I think Canadians' confidence is there because they don't know what the banks are doing with their money. As I mentioned earlier, we have no idea country by country how much the banks are losing because they're not required by the guidelines of the superintendent to disclose country by country where they're investing, where they have operations, and whether those operations are making or losing money.
I'm quite surprised that shareholders have not bank by bank demanded that banks disclose to them country by country. I'm also quite amazed that the superintendent can keep up these days, given the extent to which one broker or one bond or commodity salesperson can put a whole investment bank at risk with one particular decision on a day-to-day basis. I think most Canadians are generally unaware of that, and they don't really realize that at points... I'm sure there are some of our institutions in a very high-risk position right now, but of course if that were disclosed there would be a run on that institution. So we have this system of confidentiality, with the superintendent every so often making public statements to try to keep things in check and having very high-level personal meetings, I'm sure. A lot of changes were made in 1997 to facilitate the superintendent stepping in early.
It's sort of like the price the market can bear. Right now we don't know how much we're being gouged by service charges and credit cards, so a higher price can be charged. If we knew the extent of the profit margin in the service charge and credit card divisions of the banks, a lower price would be charged, because I'm sure people would be outraged by the quite high profit margins. And if people knew just how risky some of the day-to-day positions are at the banks, they wouldn't feel quite so secure that their money is safe. If one of the big ones goes down, CDIC is going to be very pressed to pay out the $60,000 per account to every customer of that institution.
Once again, it's just the consumer right to know and shareholder right to know. There are huge gaps in the regulations. As a result, what people don't know they don't fear.
Mr. Ken Epp: From the actuaries, is our deposit insurance system in Canada safe? What a question to ask.
Mr. Morris Chambers: I might have said that: What a question to ask. I frankly don't feel that I have the knowledge that I could give you any kind of an answer you can rely on. I wouldn't dare. I don't know enough about it. I presume David doesn't either.
Mr. Ken Epp: It's an interesting thing. We had a very large bank in Europe fail because of the misappropriation basically on the part of one employee. So I don't know whether the actuaries' involvement as you're proposing would prevent that type of thing. I frankly doubt it.
Mr. Morris Chambers: May I quickly disclaim that we're asking for actuaries in banks? We're asking for a risk monitor. Maybe some actuaries might be able to do the job. The important thing is to have the job there to protect the—
Mr. Ken Epp: Policy-holders.
Mr. Morris Chambers: No, the deposit-holders.
It's my background; I can't help it.
Mr. Ken Epp: Okay.
Mr. Chairman, I'm pretty well finished, I think.
The Chair: Thank you very much.
Mr. Ken Epp: I'll never finish with Duff, but I have to quit.
The Chair: I'm sure you guys will be having dinner tonight.
On behalf of the committee, I want to thank you very much.
Before we leave, I want to say something in reference to the rumours Mr. Epp initiates all the time about a possible election call.
Mr. Ken Epp: I was going to ask the actuaries whether they could predict the outcome of it.
Mr. Morris Chambers: We don't deal in gambling.
A voice: What about baseball scores?
The Chair: I want to say that the financial services sector has been very patient over the past four years as we came up with Bill C-38. If in fact there is an election—and although I'm always warned not to deal with hypothetical situations, I'm going to regardless—I really think the government should reintroduce this bill as a top priority, because it's a very important bill. As many of you have said, it does require a speedy passage.
We don't know whether we're going to be back here in this committee—
Mr. Ken Epp: The Prime Minister pretty well announced it.
The Chair: —but I think as a member of Parliament I really would like to push for this to be a top priority.
Mr. Epp, any final comments?
Mr. Ken Epp: Just to say the Prime Minister as good as announced the election today in the House, so I think it's a certainty.
The Chair: Well, they don't have that much time to wait.
The meeting is adjourned.