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FINA Committee Meeting

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[Recorded by Electronic Apparatus]

Tuesday, March 13, 2001

• 0938


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

As we all know, the order of the day is Bill C-8, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions.

Many of you have appeared in front of the finance committee, so you know how we operate here—of course, always in a fair fashion, and results are always excellent.

I want to begin by welcoming everyone. We have representatives from the Credit Union Central of Canada, Sun Life Financial, CS CO-OP, and City Lumber Corporation.

We will begin with the representatives from the Credit Union Central of Canada. We have three individuals with us: Mr. Wayne Nygren, president and CEO, Credit Union Central of British Columbia; Bill Knight, president and CEO of Credit Union Central of Canada; and Brian Topp, senior vice-president, Credit Union Central of Canada.

You have approximately seven minutes to make your remarks. Then we'll hear from other witnesses, and thereafter we'll engage in a question and answer session.


Mr. Wayne Nygren (President and CEO, Credit Union Central of British Columbia): Good morning. It's good to be here.

First of all, I apologize for not bringing the Vancouver weather with me, but I didn't want to bring too much good cheer.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Not even Saskatchewan weather.

Mr. Wayne Nygren: Not even Saskatchewan weather, yes.

I want to spend a few minutes this morning talking to you not just about the credit union system in Canada but also about how Bill C-8 fits in and affects us as we move our industry ahead.

A lot of you, especially members from probably Saskatchewan, Quebec, and British Columbia, know that credit unions play a major role in the economy and the economic environment of British Columbia. We have approximately $22 billion in assets and 335 locations in British Columbia. In Canada the credit union system serves over 10 million members. It's a major player in the country, with $56 billion in assets.

Just reflecting back on the credit union system in this country, it was started mainly to fill a gap. There was no real need to go into a profit centre to make money or to build equity for shareholders. It was there because there was really no need, especially in the rural communities. So this is the reason why the credit union system started. As it grew and expanded, it enhanced its powers, and it moved into being not just a filler or a provider of services that weren't there before but into becoming a major player in the economy, especially in the provinces I mentioned.

• 0940

As you will recall, in the last year or so we've been very active in expanding our network. You know that we've purchased 51 branches of chartered banks over the last while. That made a lot of sense to us, as the banks were prepared to close in those areas. We were able to buy the branches and add them to our networks and provide more synergies.

We are determined to stay in the communities. For example, in British Columbia there are now 38 communities where the only financial organization is a credit union. We want to continue to make sure our presence is there. We will do whatever we can to make sure we're efficient.

The challenge we have before us with Bill C-8, and the old Bill C-38, is the fact that we have set up member-owned structures that are autonomously controlled and operate in unique environments. As the world is evolving and we get into a global environment, we've had to look at how we can start working with other financial organizations, combining the credit union system assets and volumes across the country and developing synergies for ourselves. The member-owned and -controlled structures we have had over the years certainly are very effective, and we intend to keep that. But we have to be able to ratchet this business up to a higher level. We have to be able to merge, to work alliances, and to develop synergies to keep our businesses growing and prospering.

We want to talk to you this morning about some of the obstacles in Bill C-8. For the most part we feel very positive about the bill. We feel there are only one or two areas that have to be looked at in terms of the associational part of it, one association owning another association. That does create problems for us in comparison with the old 10/50 rule we had before.

With that introduction, I'll pass it over to Bill, and he can go through some of the issues we face.

But let me say that we are supportive of the bill. There's just the “associational” aspect that does make it difficult with the unique structure we have to ratchet it up to start merging and amalgamation. It does affect us, and it does create some difficulties and hardship in pulling our businesses together.

We've met with the finance department people, and I'm familiar with the MacKay report. One of the things the federal government was interested in creating was more competition. We feel that the real alternative to the big banks in this country is the credit union system, and not because of its growth and potential and services but because it's the only alternative vehicle in the country that has a distribution network. There's no other organization in this country that has the distribution network across the country that credit unions do. That's why we want to make sure this distribution system is effective and can be merged with other distribution systems and with the credit unions across the country under the Canadian central banner. That's why we want to talk to you about some of the issues in Bill C-8 that we feel are inhibiting us from basically merging, moving from the local level to the national level.

Mr. Bill Knight (President and CEO, Credit Union Central of Canada): Thank you, Wayne.

Mr. Chairman, I'm going to give you a brief summary and get right to the amendment that is, in our view, of significance in terms of Bill C-8.

We've been working with you as members of Parliament as well as with the department and the task force on financial services a better part of four years. As Wayne has pointed out, we're very supportive of the legislative reform package. We believe that if you take Bill C-8, or the old Bill C-38, you'll find within it a number of moves that substantively enhance our capacity to act provincially, such as we have in the province of British Columbia, and to broaden those services on a national basis.

The establishment of federal associations to create national financial retail associations, which are unprecedented, is a significant move to assist us in our business. Within the bill you've enhanced our business powers both for existing centrals and Credit Union Central of Canada, allowing us to provide more support to our retail credit union operations.

• 0945

Within the bill you've given us the potential to restructure our system in what is the fastest-changing marketplace I can think of in terms of financial services so that we can take advantage of economies of scale and work together in tangible ways.

When we spoke to this committee last year on Bill C-38 as it was before Parliament, there were some outstanding issues. We were hopeful that, number one, we would be seeing some changes and amendments to meet those substantive issues. We're very much in support of a number of key issues that I've just referred to.

I'll just go quickly through this. There are improvements we'll be seeing, and we hope to have your support on changes to regulations related to small and medium-sized business and commercial lending. We have some commitments from the department that we would very much like to see in the finance committee's report as further endorsement of assisting us in those areas in terms of amendments on that. But the issue we need to raise today is not operational but a governance issue related to the cooperative system.

Last fall, as you'll recall, when we were before this committee, we raised with you, and we were assuming there was to be, a technical amendment to allow us to continue to function in our cooperative structures. These are not always related directly to the 10/50 control rule but are related to us negotiating amongst ourselves in terms of how we structure control of our entities from the point of view of a cooperative principle.

We did get, and I should be clear, some changes related to this particular problem, related to governance and control. We have a proposal for you under proposed subsection 390(4). We have proposals for you for another amendment that would bring clarity to our cooperative principles in terms of this bill.

I want to say that we have had meetings with the finance department and the government. We have been able to get assurances that they would seek to get changes within the regulatory changes that will come out of this bill. But let me make some comments from my experience both as a former member of this committee and from being around this town a long time.

One, when we had need for changes in the regulatory side in the 1992 financial services legislation, because of the unique structures of credit unions we're still working on them, and that's eight or nine years later. However, if there's clarity in the legislation, we can progress in terms of truly meeting that market need for us to be more national in scope. That's the first comment.

The second comment is that, in this unique round, we have an omnibus bill where we have over 900 to 1,000 pages of significant work. My view is that when we get to the regulatory regimes, the amount of work around regulations is going to be even doubled.

So we've had some assurances from the finance department that they would look significantly at our problem in terms of trying to answer it in a regulatory manner, but you'll see in my notes here this morning why we believe one simple addition of an amendment, of which we've got a copy there for you, will significantly allow us to function on the governance side as cooperatives.

What we're doing is proposing to the committee, to the department, and to you as members of Parliament that if we're really going to work nationally as cooperatives, this amendment will enhance that. I'll jump right to it, proposed subsection 390(4) within Bill C-8. There are two aspects to this section—I don't need to read them to you—but we would add a third section that would say:

    (iii) the entity is an association and the investment is not restricted by the regulations under paragraph 396(d)

• 0950

What's our point, simply boiled down? We have cooperative structures where we do an inordinate amount of negotiation in order to get them to work together under legislation. When we do that, often an association will not seek to have total control but will reserve control. If we start off the negotiation by saying you have to have control, which we did not have under the bill in 1992, it impedes getting them together to work this out. If we have legislative backup, as we're proposing with this amendment, it allows us to begin, without the enforcement of the control factor that's in other aspects of this omnibus bill, the negotiations amongst ourselves, across provincial jurisdiction or whatever, in order to put new entities together under our association legislation.

This is very important to Canadian Central and it's very important to a number of our operating companies, which I'll give you an example of shortly. We have, for the department and the government, put in that amendment, a hammer such that under a particular association, if it were strictly in, say, commercial lending or whatever, they can step in, in a regulatory manner, and say, “No, under this one there must be one association agent of control.”

We've just said to turn it on its head. Let the cooperative principles stand, but move to give yourself a hammer in certain instances as a compromise. Put it in the bill, and don't get entangled in the regulatory quagmire we're about to enter into by May and June, when we get this passed. So the amendment does that.

Now, what am I talking about? We built quickly, for service to our members, to provide full security, full wealth management services. We have a credential group. This has evolved over a long period of time. The credential group is in three areas of business: securities company, with all of the regulatory aspects; asset management, which is third party funds; and a proprietary mutual fund. As each has grown and matured and the rules and regulations have changed, the business client has changed. We've grown that to over $3.5 billion, but each enterprise is owned differently.

The opportunity to build in participation across the country best comes through the association provisions with Bill C-38 or Bill C-8, but if we flip to one of the associations having to have immediate control because of the bill and the law, it impedes the negotiations to get everybody to play. But if we have a provision that allows us to negotiate to get all of these people to play under national legislation.... It sounds rather bizarre, I know, for other financial institutions, but in cooperatives you get the buy-in and then the defining of the controls, which keeps OSFI and everybody comfortable. So that's the purpose of the amendment in one case.

The other case—and my colleague is here—is that we have very significant moves to bring their treasury together with Ontario Central, which will give 60% of the assets, in terms of treasury, within one association, under this bill. That's to grow us nationally and to really, in my view, give us inordinate muscle to grow the markets in Ontario.

So we don't need the impediment of the way in which that particular amendment is defined within the bill. If we get an agreed-upon change there—and it's a very simple, very direct amendment—I think we all win. All the controls are in there. You'll see in my remarks I didn't go into all the other controls there are, which we support, around financial cooperatives, but in this case this would enhance our ability to do it by that type of change.

I'm sorry to be a little at length there, Mr. Chair. I'll leave it at that.

The Chair: Thank you very much, Mr. Knight.

We will now hear from the chairman and chief executive officer of Sun Life Financial, Mr. Donald Stewart.


Mr. Donald A. Stewart (Chairman and Chief Executive Officer, Sun Life Financial Services of Canada Inc.): Mr. Chairman, honourable members, good morning. On behalf of Sun Life Financial, I'm delighted to appear before you today regarding Bill C-8. I very much appreciate the opportunity to comment on key aspects of this important legislation.

• 0955

First of all, I would like to congratulate the government for the successful retabling of the bill on February 7. For the most part, our company's future is not heavily dependent on the passage of the proposed reforms. However, the bill contemplates a number of elements that will facilitate progress in the marketplace. At this juncture, we believe that establishing certainty is the most important consideration. Proceeding in a timely manner will accomplish this.

Aside from the issue of timing, I will comment on five of the specific issues that appear in our written submission: the Financial Consumer Agency, the financial sector ombudsman, public accountability, residency requirements, and the ownership regime.

An ongoing challenge for the Financial Consumer Agency will be the inevitable difficulties arising from the concurrent operation of federal and provincial legislative competence. Every effort should be made to establish a clear and consistent approach to consumer protection legislation.

The government should instruct the Financial Consumer Agency to give full consideration to existing consumer-related requirements in the performance of its activities, with a particular emphasis on the policies applicable to those institutions whose businesses do not fall within the exclusive jurisdiction of the federal government.

We support the concept of a single-window ombudsman that is independent of both industry and government. Many customers have commercial relationships with more than one financial institution. Proposals that attempt to mirror existing classes of institutions would generate a great deal of confusion and perhaps undermine the intended purpose of a simple, cost-effective complaints body. A consistent approach will help organizations learn from resolved disputes and thus make any necessary internal modifications.

We also recognize provincial jurisdiction in relation to market conduct issues and the fact that some provinces have established regimes. Therefore, we encourage all efforts to work to a solution that will benefit consumers and further enhance the quality of Canada's financial services sector.

There's a legitimate place for corporations to assume an active role in the community through a variety of ways, including philanthropic activities. Our contributions to the economy and society can vary in both scope and nature, providing a difficult challenge. To summarize in a short statement, our continued commitments to various programs, initiatives, and other contributions underscore Sun Life Financial's recognition that there is a role for a corporation to play in the community beyond the quality of its products and the value of its stock.

We are prepared to describe this in more specific terms within the purview of subsection 489.1(1) of the Insurance Companies Act. We recommend that the government allow financial institutions the opportunity to determine how—that is to say, form and substance—rather than issue regulations under subsection 489.1(4).

Coming to residency, our company operates internationally, with more than two-thirds of its net income earned outside Canada. Our board of directors currently totals 16, 14 of whom are resident Canadians. There's been a continuing increase in recent years as to what is expected from directors by the many stakeholders that boards must concern themselves with.

The combined impact of deregulation and convergence in financial services has served to increase the complexities of a wide range of issues that are complicated further by geography and the related differences of regulatory environments. We believe that improving the depth and breadth of the board's overall composition through representational diversity can only improve the readiness of any international enterprise to seize opportunities for worldwide growth.

We support the proposed amendment that would bring the existing residency restrictions for directors down to two-thirds from three-quarters of the number of board members. We believe the government should allow for the possibility of further easing the restriction in respect of any Canadian financial institution operating internationally in order to allow the composition of the board to adequately reflect the markets in which business is conducted.

Flexibility may be required in the context of the institution's international growth strategy. Once the bill is proclaimed, the potential flexibility required to permit legitimate transactions would not be available without an amendment allowing for a lower restriction under appropriate circumstances. We urge this committee to consider our proposed amendment, as set out in our written submission.

• 1000

We appreciate that one of the most challenging aspects of the policy framework is the establishment of an appropriate ownership regime that promotes the needs of consumers, strengthens a vital industry, and underpins its continued contribution to the economy, all in the context of a multiplicity of interests. We acknowledge the government's desire to foster a dynamic sector for consumers, which necessarily calls for the preservation of choice.

In this regard, choice, as the key element of competition and innovation, should be broadly defined. The probable number of remaining financial institutions in the marketplace following the next round of domestic consolidation is not the only benchmark. Choice must also contemplate the variety of market participants, and we believe that large diversified financial institutions organized under the legal entity of an insurance corporation have a great deal to offer to the marketplace and to the Canadian economy.

We support the government's clearly stated policy, which sets out that large converted companies will continue to be widely held following the transition period. We also take note of the minister's power to revoke that rule in respect of either of the two large converted insurance companies at any time following the transition period.

The implications connected to the making of such an order are significant, as it relates to the control and direction of major financial institutions. It would follow that, as a matter of process, the minister should first be given an early opportunity to hear the perspectives of interested parties, with particular emphasis on the company that would be made subject to an order. The specific outcome and timing of any short-term consolidation activity should be given due consideration among the relevant factors.

Overall, we agree with the direction that the bill contemplates for the Canadian financial services sector. At this juncture we encourage efforts to bring this important legislation through Parliament in short order.

On behalf of Sun Life Financial, I thank the Standing Committee on Finance for the opportunity to provide input on Bill C-8. Thank you.

The Chair: Thank you very much, Mr. Stewart.

We will now hear from CS CO-OP, the president and chief executive officer, Gary M. Seveny, the vice-president and chief financial officer, José Gallant, and the manager of corporate growth, Madeleine Brillant.


Mr. Gary M. Seveny (President and Chief Executive Officer, CS CO-OP (Community Financial Services)): Thank you, Mr. Chairman, and thank you to committee members. I will make the presentation. My colleagues will assist me on any questions.

I want to thank you for providing me with the opportunity to appear before you today to discuss Bill C-8. As you may recall, I appeared before this committee on October 16 last year to emphasize that Bill C-38 was missing a key measure—namely, provisions that would allow for cooperative ownership of banks. These are still missing in Bill C-8.

I have attached to my remarks on the handouts my presentation from last October, together with our testimony in response to your questions. But the purpose of my appearance here today is, first, to update you on the understanding of the current situation respecting cooperative bank legislation, and second, to ask the committee to signal its strong endorsement of the government's commitment to introduce cooperative bank legislation as soon as possible.

When we met in October, I provided you with a little background relating to the issue of cooperative ownership of banks. I highlighted that the MacKay task force had made the following recommendation in its report released September 1998. I quote:

    Federal legislation should permit cooperative banks and other financial institutions to be chartered as new institutions, with ownership and governance to be based on cooperative principles.

In December 1998 both this committee and the Senate banking committee strongly endorsed the MacKay task force recommendations for legislation to allow for cooperatively owned banks. In October I then presented to the committee some of the primary reasons behind the task force's recommendations that led to the strong endorsement for cooperative banks from this committee.

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Cooperatively owned banks will provide a second tier of financial institutions that will increase the competition and help meet the needs of small businesses and consumers better; create an important alternative to the major banks, with strong ties to local communities; empower consumers by giving them a greater voice in how their banks are run; permit cooperative banks to better serve their members on a national basis, with no provincial borders restricting their activities; and take over branches closed by larger banks, thereby ensuring ongoing service to rural and remote communities throughout the country.

I would now like to update the committee on recent developments that encourage us to believe that cooperative ownership of banks will be a reality in the near future.

CS CO-OP has received assurances from Secretary of State Jim Peterson and Department of Finance officials that the government remains fully committed to the concept of strengthening our financial sector through the introduction of legislation that would allow for cooperative banks. Although provisions to allow for cooperative ownership of banks are not included in Bill C-8, we are very encouraged by Mr. Peterson's statement concerning cooperative banks when he discussed Bill C-8 following its second reading in the House of Commons. He stated:

    We have been working with the credit union movement to find out exactly what type of cooperative bank legislation should be brought forward.

Then he went on further:

    We have continued to study it, and we will continue to study it, running on a parallel basis to Bill C-8. When the model is in place we will issue it....

We understand from our discussions with Mr. Peterson and Department of Finance officials that the government intends to consult with interested parties, likely through a consultation paper, on the model and requirements of cooperative banks. CS CO-OP has clearly indicated it is ready to work and committed to working with the government to move this project forward as expeditiously as possible.

This consultative process must be focused on developing the legislation needed to create cooperative banks within as short a timeframe as possible because of its importance to our future. As you know, things are already changing rapidly in the financial services sector, and Bill C-8 will accelerate that pace of change even more. We simply cannot afford to be left behind because of further delays in creating the legislation needed for cooperative banks.

The purpose of my appearance here today is therefore to share with you our understanding of the current status of this important initiative and to emphasize the need for quick action to see its implementation. We remain convinced that this option is essential to strengthening the second-tier financial institutions, to providing credit unions with an all-important additional avenue to better serve their members, and to providing Canadians with more choice. We want to ensure that it remains a key government policy and priority.

For this reason, I ask the committee for its continued support. We would appreciate it if the committee, in tabling its report to the House of Commons, would also provide a statement supporting the plans of the government to introduce legislation to allow for cooperative ownership of banks and urging it to move ahead quickly in tabling that legislation.

Mr. Chairman, that concludes my presentation before the committee, and I would be happy to answer questions in due course.

The Chair: Thank you very much, Mr. Seveny.

We'll now hear from a representative of City Lumber Corporation, the president, Mr. Robert Rosen. Welcome.

Mr. Robert Rosen (President, City Lumber Corporation): Thank you. I appreciate the opportunity to be before you today. I apologize for the fact that my submission is not available in French. I hope you will take our limitations into consideration.

The presentation I would like to make today, unlike what you've heard from these other ladies and gentlemen, reflects more of what I would call a user's experience in dealing with both banks and credit unions.

My parents started this company in 1949, when we moved from Flin Flon, Manitoba, to Edmonton. During those 52 years, even at the worst of times in Alberta, we never missed a payment to any of our financial institutions or to any other of our creditors. I might point out to you that, until four years ago, we had utilized millions of dollars' worth of resources yet the actions of financial institutions were not a major issue. Unfortunately, we hit a very unusual wall.

I'd like to make it clear that my comments are not anti-bank comments. Rather, I feel that there is a very major anomaly in the system. As well, we are in a global marketplace today. We use new technology. Banks in business today are very different from what they were 25 years ago, although I think credit unions have something to offer in this area.

• 1010

Now, 25 years ago, if you had a difficulty with a bank, you could sit down and speak to your lender. That does not happen today, I can assure you. What we dealt with, I think, is a very important case study for this particular group. What happened was the bank decided that we would no longer be their client.

I made a similar submission in 1998, and I've given you some of the comments that I shared with the Kirby commission at that point. What simply happened at that point, without getting specific, was we went through four years of misery, including being forced into receivership. But if you actually went through the audit of our books, there was no need for this.

At that point in 1996-97, the ombudsman was there in name but not in fact. We were in touch.... To be specific, the bank gave us roughly two weeks' notice that they no longer wanted our business and asked us to close our operations. We said, no, we would not do that. We were out of margin; however, the company had over $1 million in assets, and at no time did we not have sufficient—just going to the auditing point—receivables and inventory to offset that. I don't want to get caught at that issue. So we then got dragged into a process with the bank where they put in a monitor.

Prior to that, though we had done business with this bank for 25 years, I personally—if you look at my resume, my family has been a very active part of our community in every way—would be taken to meetings with bank people, and I was abused. It was made clear to me they no longer wanted my business, and they made it clear they were going to do everything they could to put us out of business. I was quite astonished, because at that time I had large sums of money outstanding to other banks and to credit unions, none of whom moved against us during this exceptionally strange time.

But the process that I think is important here is at no time did the bank make any effort to make us aware that there was an ombudsman process or offer arbitration or sit down and talk about how they could ease us out of their operations by lowering our lines of credit so that we would not be caught in what is a very complex issue with Canadian banks. If one bank chooses not to do business with you—in our case it was strange because we were out of margin and we had done business there for 25 years—other banks are very reluctant to touch you. So you're caught in a no man's land. It's very hard to get credit from anybody else.

Anyway, they put in a monitor, and we had no say as to the monitor or the expenses of that monitor. That monitor was in place for one year, and they put in senior auditors from a major accounting firm, who made it clear to us they had zero interest in saving the company or in the impact on the creditors. During that year they also hired their own lawyers—and they could do this under boilerplate legislation—who, in turn, also, along with the auditors, cost my company, as we were trying to work our way through this, roughly $5,000 to $6,000 a month.

The auditor and this particular bank made it very clear to us that the monitor could become the receiver. So I said to the senior partner of a very large national firm, “This is not a reasonable process.” He said, “Mr. Rosen, we're here for one reason only—for the bank. What happens to you, what happens to your accounts, is none of our business. All we want to do is collect the bank's money.”

Ultimately, the bank did push us into receivership for roughly three days. During that time we had a meeting with the auditors or the monitor and our own people, and what they said to us was, “Mr. Rosen, we suggest you shut your company, pay 20¢ on the dollar to your creditors, and start again under another name.” We told them we would not do that, and instead we then finally paid the bank out. But we were pushed into receivership for three days by a bank manager, their monitor, and their lawyer.

Now, we were made aware of the ombudsman halfway through the process. That was the bank's own ombudsman. The ombudsman was a member of the bank, a polite person, but showed very little interest in our issue, other than saying, “The bank is doing what it has to do.”

• 1015

We ultimately found out, and I can share this with you, that if you walked into a bank branch today and found information on the ombudsman you'd be very fortunate. You have to ask for it.

We eventually did get hold of the ombudsman, a Mr. Lauber, a very nice gentleman, and this was 1997. He said, “You know, Mr. Rosen, at this point I have so few staff I really can do nothing for you; I am sorry.” He did not bother to ask us after the receivership what happened or what didn't happen.

Being a fairly strong company, we came out of the process, and we then pursued action against the monitor. If you look at your legislation, you'll see that one cannot pursue a monitor legally. He or she does not exist. So I think we could certainly use some help in that area.

We then pursued the lawyers, and we eventually sued them through a taxation process that took a year. When we were struggling for money.... When you're put into receivership, the bank and the monitor take your receivables and your inventory, and you are left helpless. At that point we were able to survive by begging and borrowing money through other assets. Ultimately, when the receivership period was over—and this is a very important point—the bank did not want to release our money or our position, even though we had money in place from another bank, until we would sign a release.

These releases are just the most damning things. I think many of you do not get a chance to hear from people, whether it's in St. John's, Newfoundland, Vernon, B.C., or St. Hubert, Quebec. When you sign a release to a bank, you lose your ability to pursue them to challenge what they've done to you. This is a terrible thing.

I've spoken to senior insolvency auditors, and they do not believe this is necessary. So I think these releases are a curse on the Canadian people. I really think this is a major issue.

In addition, what happens to the professionals who work for these banks? They are given a free hand to charge whatever they feel during that period. You have no right under a monitorship to challenge the amount the bank or their professionals charge.

I might add, the bank charged us fees on top of the fees during this time. Again, we ended up paying it all out. It cost us roughly $400,000.

Now, to pursue the lawyer, as I shared with you, we did take him to a taxation process. They overcharged us on a bill of $40,000. This is all documented. I might add, this is just a folder we had in pursuing the auditor. It took us a year.

Anyway, with the lawyers, they returned $20,000, or the taxation officer did. The bank in turn appealed this. And remember, I am the person who has just gone through a receivership. I'm trying to get my funds back in place. My 52-year-old company, started by my parents, is tainted by this receivership. We're caught, because no bank wants to touch you when you're in a receivership, and the best or normal process is to walk away, let the company die, and your creditors get maybe 20¢ on the dollar.

I paid the price of four years of loss of social activities and relationships with my family in order to prove a point that the system at that time was not right.

The bank appealed the compensation given to us. It cost us another $10,000 to pursue the appeal. Eventually the court threw out the bank's appeal. It cost us $30,000 to get back $20,000, but it's on the record.

We then pursued the auditors. You cannot tax an auditor in this country as you can a lawyer. You have to go through self-monitored processes. I believe the commitment my family has had in the province in turn had influence in eventually getting us through this process. We lost the first trial because they said we had insufficient information to show that the auditor had acted improperly, which again cost me about $20,000. We then got a second trial hearing, where it was found that, yes, the auditor acted within his rights but at the same time could have acted in a different way. That auditor has since left Alberta, I might add, because their reputation has been questioned for the actions they took.

I'd like to come to the ombudsman. The ombudsman arrived in my office roughly two years later through an appeal. He took about six months to do a review. In the end his report said everybody acted just fine, and this was the law. But he did mention that maybe the auditor could have acted differently—this is in his official report—had he chosen to, but the monitor has no responsibility to you.

• 1020

I'm going to give you another example, but before I do, I'd like to say that the report put out by the members of Parliament, called A Balance of Interests, is an excellent report. I think many of the issues you analysed have been exceptionally well done.

I don't want to waste your time but I do want to go to this ombudsman process, because it is the only link today, I think, between an average Canadian and.... I'm going to give you an example that I think is relevant, because the ombudsman really functions out of Ottawa. I understand the proposal is that there will be several floors of employees working for the ombudsman here, paid for by the banks, and that the issues will be dealt with here. I think this would be a tragedy.

I might add that today we have no lawsuits against anybody. I'm here because I want to share this with you, because I think it's important for the people of this country. I believe the monitors, the banks, should have absolutely nothing to do with ombudsmen. I think that's tainting the process and intimidating an average Canadian.

I'll give you a very interesting case study. Let's say you are a separated person, man or woman, living a distance from Ottawa, you have a $100,000 business, you have two young children, and for some reason one of your children gets ill, and you're unable to meet a cash demand from a bank. This is an average person. Are you expected then to fly to Ottawa in the middle of this crisis to be heard by an ombudsman? You're taking care of your children, you're trying to keep your business afloat....

I believe an ombudsman is required in each province, the Government of Canada should pay for these people, and they should be independent. Those who are ombudsmen should be people who are clear of any sense of being tainted from any involvement with any banking institution—and I believe the gentleman from Sun Life made that point.

In today's process, with banks being inaccessible, everything is done through technology. It is a very difficult process to interact with banks. I do want to leave these thoughts with you. I did a presentation, but I don't think I have the time to walk you through it. I think it outlines clearly the difficulty that an average Canadian would have dealing with the process.

I would like to say that I think the normal person working in a bank is a good person and is community oriented—and I believe the banks and all financial institutions are here to be part of the community. But if you hit a dispute process—and I think you've all dealt with it—where somebody down the line has chosen to be less than cooperative, an average Canadian today has no way to defend themselves. And if they sign one of these bloody releases, they lose everything, and they lose their democratic right to come to their member of Parliament or to do anything to pursue an injustice.

So in dealing with the Bank Act, I would hope you'd look at how it impacts the people across this country, not those closest to Ottawa. Clearly I believe a fund is required to help people who have a dispute with a bank, so they are not left helpless. To attempt to pursue any financial institution as an average company is an overwhelming and almost impossible position. So the role of the ombudsman, I think, is critical to the people of this country.

The way we deal with monitors is critical to these people, so that professionals do not get kidnapped by banks. I've talked to many senior insolvency partners of major firms. They've been told by the banks that if they don't do as they're told, they'll get other people to do their work. Therefore you kidnap lawyers and auditors, and in turn they are given an open hand to charge you whatever they like. The bank, in my case, took the money right out of our account. During the end of this process as we were trying to find middle ground, the bank gave us a one-week period for $10,000, to see whether we couldn't work our way through it. They took the $10,000 out of our account. Within a week we couldn't meet what they wanted; they kept the $10,000. This is all documented.

So I think the critical part is that we need, for the sake of Canadians, impartial ombudsmen, independent from banks entirely. We need penalties for banks, because if you do win against a bank, all they pay is a fee. You do not get the lost cost to your business and to your family. We need something to deal with auditors, monitors, and lawyers who choose to forget their responsibility as professionals.

• 1025

In the case of a lawyer who we found had overcharged us by 100%, all that happened to him was that he was embarrassed and had to return our $20,000. Nothing else happened. I think these are unsettling examples of the way this country functions.

I sit here today, and I am fortunate. City Lumber is 52 years old—and I know my time has run out.

The Chair: It ran out a long time ago.

Mr. Robert Rosen: I apologize. My interest today is to simply say there is a better way for Canadians. Thank you.

The Chair: Thank you. Perhaps in the question and answer session we could also get a sense of what your feelings on Bill C-8 are vis-à-vis other related issues.

We'll move on now to the question and answer session. We'll begin with Mr. Harris. It's going to be a seven-minute round.

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, Mr. Chairman, and thank you, ladies and gentlemen, for attending the hearings today. We appreciate your input.

Mr. Rosen, I want to thank you for your submission. I have as a member of Parliament dealt with a few cases that are similar to yours, and they are frustrating at best. As a former small businessman and having survived the recession of the early eighties out west, I can sympathize with you in many respects.

I have just a couple of questions, maybe one for Mr. Knight and Mr. Nygren.

With respect to the 10/50 control rule, could you give us a brief explanation perhaps of the government's rationale when they put that in? I know you've explained how it conflicts with your suggested amendment now, but why is that in place in the first place?

Mr. Bill Knight: I think, Mr. Chairman, that each time we do an omnibus piece of legislation, we try legitimately to have as many of the common rules affect each of the financial institutions. So I'm going to take a little different angle on this.

We always start with almost each bill having the same clauses, and then we have to go through each industry, whether it's insurance, trust, or credit unions, to reflect on the issue of control. You need to know that in Bill C-8, in the credit union area, credit unions can be in an association without control. Since Bill C-38 we've amended it so centrals can be in the association. It gets complex, and I'm sorry. Then the difficulty is that if two or more of our centrals within a group create an association, the association within the next association is to have control. What we have here as we work through this is, in my view, a regulatory glitch more than a substantive policy.

So we've gotten right up to getting it almost fixed, and in my view the issue is whether, in order to get the bill through, we are going to hurry it through and hope we can fix it in terms of regulation or whether we can just fix it quickly with an amendment and get on with it. I think the amendment takes 30 seconds, frankly.

Wayne can comment on the 10/50, but I think the 10/50 rule has always applied in terms of financial institutions. It's a precautionary rule to ensure that downstream there's effective control. Our structures have controls built in, but when we come at it from the other direction, what the amendment does is allow flexibility. For a particular association, the government can just say, no, in this one we're going to have a regulatory provision that one of you has to have control. Otherwise, nine out of ten times you can just move forward because it's all in the bylaws.

Mr. Richard Harris: Thank you very much.

I have a question for Mr. Seveny. It's my understanding that when Bill C-38 was being discussed on the Hill here and even prior to that, a cooperative bank model was presented but that for some reason or other the original proposers of that model did not stay together on the model. For example, there is a cooperative bank model in Holland, the Rabobank.

Mr. Gary Seveny: Correct.

Mr. Richard Harris: Is that a model similar to what was being proposed last year, for example, when you were discussing this?

• 1030

Mr. Gary Seveny: In response to your question, there were a couple of models that we had proposed to the federal government. The more recent model was more akin the Rabobank model from the Netherlands. The difficulty at the time was resolving a lot of governance issues in that model that were unique for the Canadian culture to accept. Our partners in that model, as you inferred, had lost their interest to pursue—at the expense that we were incurring—any further development of the model and requested that those parties who were truly interested in spearheading a cooperative banking solution would lead it. The CS CO-OP has stepped in to do that.

Along the way, we've looked at it on the basis obviously of enabling legislation, because our partners around the table would want to leverage the value of that future legislation, not just legislation for our needs. So the proposal that we've taken forward is to create a cooperative bank that essentially would start from an embryonic stage—the CS CO-OP creating a cooperative bank—and then populate that sort of philosophy for anyone else who wanted to become part of it or start their own cooperative bank.

As part of that process, we offered to show proof to the federal government that we were very serious to push this ahead. On October 2, we received a charter to create our schedule II bank, CS Alterna Bank, which has been up and running since October 2. It's in our interest to convert that schedule II bank to a cooperative bank when cooperative legislation is available.

Our members of the CS CO-OP have informed us that, in order for us to carry out the transition from CS CO-OP, a cooperative organization, to the bank in its totality, cooperative ownership is a necessity. They own CS CO-OP. The bank is owned by CS CO-OP, but as individuals with the bank, they require cooperative ownership to be truly in the governance model of a cooperative. I think Bill Knight and myself are talking of the same difficulties, the governance. These are very important issues to our members. If we're going to be an alternative, second-tier financial institution in Canada, this is very important to us.

Mr. Richard Harris: Thank you.

The Chair: Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you.

First of all, I'd like to address Mr. Nygren. It's good to see a guy whose roots are in Saskatchewan as well and involved here.

I have a question with respect to your amendment. You kept talking about it, I kept looking in it, you say you need it, but I didn't see specifically what you want in your amendment to proposed section 390 with respect to the ownership rule or the regulation there.

Mr. Wayne Nygren: Let me just give you some of the practical implications and we can take it from there and maybe you'll understand the issue a bit better.

For example, credit unions right now are provincially regulated, and the deposit insurance is run by the provincial government—for the most part. The central, the umbrella, organization, like the Caisse centrale from Quebec, is both federally regulated and provincially regulated. But the deposits and everything are insured by the provincial regulatory body.

We are now looking at merging our central organizations, ourselves and Ontario. In other words, we're taking all the business sides of our operations and merging them together into one business. And we're keeping the trade associations, the politics... We're splitting the business and the politics. So what we're doing is putting the business into a federal jurisdiction.

The problem we have now is that the provincial government insures all our deposits and regulates credit unions. But now this new organization will be, with the mergers of the centrals, a federally regulated organization. All the liquidity, all the business powers will be federal.

So we're working something out with the provinces. Since they do insure the deposits, they have to be comfortable when we get a federally regulated company to do all the business operations for the credit unions—because we're looking at this as a national organization—preferably a business delivery vehicle for all the credit unions in this country that will be federally regulated. We have to build a bridge between the provincial regulators and the federal regulators.

• 1035

The problem is, if we merge the two centrals together we have in excess of 60% of the business of the country. That means our umbrella organization, ourselves, Canadian Central, either we own less than 10% of that organization or we own more than 50%. If we have to own more than 50% of the national organization, it creates a problem for us in getting all the other provinces to come in knowing that one organization already has control of this whole organization. And we don't want 50%, frankly. So that creates a real problem for us.

As well, we manage the national liquidity out of British Columbia for all the provinces in Canada, and they do that because we're all equal at the table. But if we come to the point where one organization has to control the national organization because of the associational rules, that means right now the provincial governments have said, “We're fine with British Columbia, under contract from Canadian Central, managing all the liquidity for Canada for all the provinces.” But if we get to a position where we actually control that association, it's going to be very difficult for the Province of Ontario, the Province of Alberta, the Province of Manitoba, saying, “We're not prepared to have our legislative environment being in British Columbia, controlled by one province.”

That's why it makes more sense for us, in regard to the association, that you can basically own or control a portion of an association. It doesn't have to be the majority. So it's a really practical problem to deal with this.

Mr. Ken Epp: My time is up?

The Chair: Yes, your time is up.

Mr. Ken Epp: One question?

The Chair: We'll have to go to Mr. McCallum, followed by Mr. Cullen, and then we'll go to Mr. Nystrom.

Mr. McCallum.

Mr. John McCallum (Markham, Lib.): Thank you, Mr. Chairman.

It's the first time I've been on this side of the table at one of these meetings rather than that side. It is a pleasure to be here.

One thing I might say, thinking of what Mr. Rosen said, is that I am perhaps tainted by having once worked for a big bank, but I'm not here to defend banks, nor to attack them.

I'd like to start with two general principles and then ask two questions. I think one of the good things about this bill, and a central objective, is to increase competition in financial services in this country—to let a thousand flowers bloom. We could certainly do with more competition, and I certainly believe the credit unions are a major part of that focus. I think it's extremely important to increase the flexibility of the credit unions so they can have alliances, economies of scale, and all of those good things that will help them be more effective competitors against the banks.

So one principle is to maximize competition. A second principle, I would say, is to maximize flexibility. We need flexibility both because situations differ so much across the sectors and also, looking forward, because things change so fast and none of us are smart enough to tell what the future will bring, we want flexibility to deal with unknown contingencies down the road. But neither of those objectives can be absolute. They have to be subject to, first of all, safety and soundness. There must be more competition, more flexibility, but subject to safety and soundness.

I think we in Canada have had two bank failures since 1923 versus something like 10,000 in the U.S. So it's hardly the usual 10:1 rule, but we want to preserve that. Second, this is subject to wanting to have, broadly speaking, Canadian control over most of the industry.

My two questions, then, relate to those “subject to” issues, one being safety and soundness on the credit union side and the other Canadian control on the insurance side.

I was extremely sympathetic to your arguments about flexibility and ownership, but if I understand it correctly, the counter-argument to your view, what Finance Canada might argue—and I'm not sure they have—would be that if you don't have definite control, if something then gets into trouble and there's no clear locus of control, that's a problem. So it could be a safety and soundness issue that is the counter-argument to your otherwise very nice argument.

Is that a fair comment? That's my question.

Mr. Wayne Nygren: I think if you look in the past—and I'm not sure this is in most jurisdictions, but I know this is in ours—there hasn't been a credit union failure where anybody's lost any money, or not that I'm aware of.

• 1040

The reason for this is that when there's a problem, even though you're not part of the problem.... For example, in our organization, it's mandatory membership. In other words, you have to belong to the central and you have to deal with them. Prior to that, it wasn't mandatory and credit unions could do their own things and be part of their own associations. What happened is that even when they got into trouble, even though they weren't part of it, the system had to come in.

So regardless of who or who doesn't have control, in the financial industry the bottom line is credibility. If you don't have credibility, you really don't have anything. There has to be trust that you're going to pay back the deposits that you've taken from your members or your customers.

The issues that we've had in the past, the fact that nobody has been in control, means everybody has stepped to the plate and worked as a cooperative to solve the problem. That's why we have really solved our problems as a system. Because of the structure, you as an organization may have only 20% of the business, but yet under the 10/50 rule, you're either going to have to take less than 10% or take control. But if you take control, you don't have the resources to solve the problem anyway. Everybody has to come and help you.

So the fact that you're all in this as a team, as a player, as a cooperative environment, that means everybody pitches in to try to solve the problem. That's why we've been so successful as a credit union system. We don't look at it as our problem, we look at everybody's problem because we're serving an industry and our membership.

Mr. Brian Topp (Senior Vice-President, Credit Union Central of Canada): Mr. Chairman, perhaps I can just add a little technical point on this.

This is a very important question you're raising—that is, does the amendment we're raising with the committee raise prudential issues? I think we need to squarely face that.

Let's just remember something about the credit union system that's not true about banks. The part of the credit union system that deals with the public is already provincially regulated. The control issue, the prudential control on the dealing with the public, is done by this network of provincial regulators, provincial deposit insurance. When we're talking about this federal act, we're talking about the credit union system's back office. We're talking about entities that serve credit unions that then deal with the public. So the prudential issues are slightly different from dealing with the bank where the federal regulator is directly concerned with deposit taking with the public.

What we're pointing out here is, in effect, a catch-22 that's been written for us in Bill C-8. The catch-22 is that when we take up the act, it attacks the cooperative nature of our system, in dealing with in effect back office structures. What we're basically pointing out is that under the status quo, if Canadian Central, which is the national trade association and liquidity utility for the system, is controlled by credit unions or controlled by section 16 centrals, this issue of control is not a concern to the federal government.

The current status as set up under the legislation in 1992 does not require 10/50 control. But as soon as we set up the new tools that Bill C-8 gives us—for example, in the case of an Ontario-B.C. merger—a fundamental step forward as far as what the government has asked us to do, which is please get your act together, be less fragmented, use federal legislation to do a better job.... As soon as we do that, then because of a drafting issue, which up until weeks ago was identified as a drafting error, suddenly a 10/50 rule written for bank regulation is triggered and the new association has to control our liquidity fund and then you have a fundamental governance problem in a cooperative. Basically you are out of one member, one vote, and into “he who has the biggest bucks has the control”. The people who don't have the biggest bucks go, and this isn't a co-op any more.

That's basically the issue we're raising with you. We're asking you to carry the logic that is a long-standing principle of your own legislation, because your current legislation says credit unions don't have to have control. Centrals don't have to control. We're asking you, let us take up the new tools you're giving us without attacking our governance system. Does the federal government have enough tools to ensure that we don't foolishly use this to make terrible mistakes, like the two banks that you referred to, only two since 1923?

Boy, you just read that act. You read that act. The government has so many hammers you can't even count them. The government doesn't need the control rule to keep us out of trouble. We're going to be closely regulated. We're just saying don't allow what I believe is a drafting error to attack the governance of the system. At the end of the day, it's a tweak to carry through what you already have into the new structures that you're adding.

The Chair: Any further questions, Mr. McCallum?

Mr. John McCallum: One quick one?

The Chair: Yes, sure.

• 1045

Mr. John McCallum: The second point I wanted to make was about Canadian control, and if there's a counter-argument to the Sun Life proposal, it's probably that. I don't really think your proposal threatens Canadian control, so far as I can see. I don't know quite how to measure Canadian control in the first place. So my question to you is, what would have to happen that you should wake up one day and say Sun Life is no longer Canadian controlled? How do you measure it?

Mr. Donald Stewart: We see it, for these purposes, being measured primarily through the board of directors, which is why we're seeking to maintain a majority of the board of directors as Canadian residents.

If I might sketch it out, the primary issue here is the degree to which the bill was supporting international financial institutions. In several of the financial institutions under the insurance umbrella, including ourselves, about 80% of the business is outside the country. The prosperity of these institutions, we think, is important to the economy. If you measured it by business, you would say that already these institutions are perhaps not solely Canadian institutions. For purposes of control, I believe the board measure works, plus the fact that the primary regulator remains the Office of the Superintendent of Financial Institutions. These two in combination ensure Canadian control, both in concept and in practice.

The Chair: Thank you, Mr. McCallum.

Mr. Cullen, you have one question, then we'll have to move to Mr. Nystrom and Mr. Brison.

Mr. Roy Cullen (Etobicoke North, Lib.): I have one question?

The Chair: Yes. You may have more than one, but you can ask only one.

Mr. Roy Cullen: So this is part of the seven minute rule, is it?

The Chair: Yes, absolutely.

Mr. Roy Cullen: Given that I have one question, maybe I'll direct it to the matter of the credit unions.

Mr. Seveny, I was glad to hear your commentary. I think you're absolutely right in your assessment. The government is committed to creating more opportunities for credit unions to be full players and provide more consumer choice, and I think you've got the undertaking of Mr. Peterson and others to see that to fruition.

With respect to Mr. Nygren and Mr. Knight, Bill C-8 creates more flexibility, it opens things up. In doing that, it creates, as I think you'd agree, a little more risk, and I think Canadians would expect the government to manage that risk.

Under the rules, of course, the bank and the credit union movement could set up a holding company. If a bank, for example the Royal Bank, wanted to set up a holding company, Royal Bank Financial Group, any of the deposit-taking subsidiaries within it and others would have to be controlled—those are the provisions of the act. They'd have to be controlled in regard to the issues that Mr. McCallum raised, prudential issues, so that if something starts to go awry, the controlling holding company can move in and provide whatever is needed to make it whole.

On your argument—and Mr. Topp, Mr. Knight, and Mr. Nygren—is it because of the very nature of the credit union movement that those rules don't apply or shouldn't apply?

The department, as I understand it, has offered full cooperation to work with you on this merger with the Ontario Central, the B.C. Central, to provide the regulatory solutions that would make that work. And certainly you'd have my undertaking, in whatever capacity. I know Sue Barnes is a member of the scrutiny of regulations committee as well.

If I may be the devil's advocate, because these are deposit-taking institutions, why wouldn't we want to err on the side of prudence, and say that if there are exceptions, those can be dealt with on a one-by-one, case-by-case basis through the regulatory regime? Given our government's objectives, to create and foster and this kind of a consumer choice, why wouldn't that be a suitable solution for you?

Mr. Bill Knight: Well, I think it always goes back to a fundamental: Do you want cooperatives in the market?

Secondly, I need to point out to you that when you're dealing with the federal act, you're dealing with a considerable amount of the back office, wholesale operations. This is not a risk issue. I want to be very clear. If we thought you were putting any of our operations at risk, we wouldn't be playing, because we've spent a better part of 50 years building a very successful system and internal controls, very effective, highly regulated. Our most successful players, like B.C., are in highly regulated environments. So we support very highly regulated environments.

• 1050

The issue concerning this amendment is neither prudence nor risk. To be very clear, if you look at the amendment, it puts in a clause allowing the department to step in where that is seen as appropriate.

OSFI accepts us, in one of the principles around all of this, as widely held. I think it's very important, when you're looking at that amendment, not to go down the road of creating more risk with these changes, because we're not going to function in that environment. We have 50 years of experience and 50 years of being self-directed in terms of cleaning up where we've seen a problem.

It is true that a credit union in difficulty has either been cleaned up by us and our agencies or has been merged with its neighbour, so I think that's our response. That's why the amendment would be very good, because you're going to go into a massive and substantive regulatory regime in the next six to eight months, and the amendment would really alleviate getting into all that and getting on with the rest of it.

Mr. Wayne Nygren: The bottom line is the deposits are insured by the provincial government, so there's no risk federally, and there is not a risk change.

As part of our deal with Ontario, for example, we've gone to Canadian Bond Rating, Dominion Bond Rating, and Standard and Poor's. They've effectively said, “Let's see the deal; we'll keep your rating.” Our rating is the same as the big banks', an R1-mid and A1+. If that rating doesn't stay, then obviously the deal doesn't get done.

This is really a governance issue. What it does is it takes the characteristics of our principles and our culture away from us. In other words, either you're a small part of the player or you control, and that's not really our culture. Our challenge, really, is this: How do we keep our uniqueness, which has made us strong, especially in the Saskatchewans and the B.C.s and the Quebecs? How do we keep that uniqueness of a member-owned, locally controlled organization, and yet how do we ratchet the business to gain more synergies, make ourselves more efficient, keep our values and our culture?

This is more of a governance issue for us, and that's what it does. It forces us to move into a business realm in terms of a governance issue, and that's what creates our problems for us. We're not prepared to control, and yet we're not prepared to take less than 10%. That's what this does, and with a minor amendment it effectively lets us negotiate the control that we feel appropriate in terms of our size, our volumes, our influence, and things like that.

Mr. Brian Topp: But let's just take your point. Let's say that, in lieu of what we're talking about here, which is sort of the credit union way, incrementally taking up the new tools, you have taken us to try to build up our back office. If the day arrives when, under what you propose in Bill C-8, suddenly we're setting up a deposit-taking institution, that would be an interesting leap because we'd be going into competition with our own shareholders. But let's say we have got to that date. In that scenario, you probably would be looking at a control, and the amendments that you have before you wouldn't permit the government to do that.

So basically what we're getting at is...and we're with you on the prudential issue that you're raising, but now look at it from our perspective. Meanwhile, you're setting up a regime in which it's very tough for us to take up the act at all, or tougher, anyway.

The Chair: Thank you.

Mr. Nystrom.

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

I welcome all the witnesses here this morning, and I'd like to ask a couple of questions, if I may, to Mr. Knight and to Mr. Stewart.

First of all, I think you're right when you talk about it being a governance culture. The credit union is unique and different. It's one member, one vote. It's the ordinary guy who might have a butcher shop in Estevan who is a member of the credit union—is one member, one vote—and somebody in Halifax has a vote and so on. So I think it's really a change of that culture that's really important.

I just wonder if you had any response yet from the finance department or from the minister himself that might be positive in terms of being of use to our committee here, Mr. Chair.

The second question I have for Mr. Knight or Mr. Topp, or indeed Mr. Nygren, is I understand that if there is a retail association formed under the new legislation, there is a 5% limit on commercial lending that would apply to this new retail association that doesn't, of course, apply to the chartered banks. Could you elaborate on that as well?

Mr. Bill Knight: Quickly, I'd like to say two things on the commercial limit. Because it's an operational issue, there is room for a regulatory fix down the road, and we accept that one because it's not related to the governance kind of issue. I think we are working very well with the department on all of those. Like many of the financial institutions here, I think all of us would say the cooperation has been very good.

• 1055

On the second one, we felt had an understanding of the regulatory issue that was around in the fall, and we felt the legislative package would fix that in the spring. I do believe there's a general sense, a broadly based sense of concern about holding up the bill with amendments. I'm going right to the core of this, because I think this amendment takes 30 seconds and does not need to hold up the legislation either in the House or in the other place.

Therefore, in our case, we have put this before the officials. They know where we're coming from. I think there's some concern about timing related to getting this through. There's hope of trying to negotiate a fix around regulations. I've told you the problem that's there in terms of the time and effort that comes with the regs. I've been through it since 1992, so I told you we're still wrestling with a number of issues in the area of minority investments.

We think the fix should come within the bill. But certainly, getting a sense from the committee—this being a major issue—we'll certainly probably shortly just update the Minister of Finance around the issue as well.

Mr. Lorne Nystrom: I assume the Caisses populaires would have the same concern as the Credit Union Central, the B.C. Central, and so on.

Mr. Bill Knight: I think a lot of their legislation is very extensive and takes into account the cooperative principles within their legislation under the Province of Quebec. But generally, we've had significant support from Desjardins in terms of the changes the government is making within this bill and the financial services legislation.

Mr. Lorne Nystrom: Mr. Stewart, I'm interested in your comments about the residency clause for directors. Can you give us any comparisons of other jurisdictions around the world in terms of their residency restrictions? I understand ours are perhaps a bit more stringent than some other jurisdictions. That might be useful for us to have in terms of our record.

Mr. Donald Stewart: Yes, indeed, and thank you.

We've looked at the United States, the United Kingdom, the Netherlands, and Australia, and generally there are no such precise requirements as there are in Canada with the current three-quarters residency. It's left more to the specifics of the situation. These jurisdictions in particular—and, as far as we can tell, in general—have a more flexible approach to their residency requirement.

Mr. Lorne Nystrom: I have one last question, if I could, Mr. Chair.

One thing Mr. Stewart is recommending is kind of interesting, that there be an ombudsman who is not just there for the banks, but for all financial institutions. Would the credit union centrals agree with that? Should we have one financial services ombudsman for insurance companies, banks, credit unions, trust companies and so on?

I think that's one of the proposals you're making, and it seems to make a lot of sense, at least on the surface of it. Is that something you can support as well?

Mr. Wayne Nygren: Our position is that we would not support that, and it's mainly because our culture is so much different in terms of the way we operate our business. For example, we have nine ombudsmen on every board of directors. Effectively it's a board of directors to which a member can go directly if he or she has a problem. There are annual meetings members can attend in their communities. They can go to the annual meetings and express all their concerns—which they do.

We've tried to track this. I've talked to Michael on a number of occasions about wanting the credit unions to come in with the bank ombudsman. We've tracked our complaints down, and there are very few. They're almost nil in terms of the ones that can't be resolved. If a member has a problem, they either go to the local branch manager of the credit union, they go to the board of directors—they can phone them personally, because they're all listed in the phone book—they go right to the board meeting and say what the problem is, or they go right to the annual meeting.

So we feel we have a far more effective process in place, and the fact that we have very few complaints that we haven't been able to resolve would bear that out. We didn't want to get tied up in this, because we feel the members have a lot more access right to the leaders of our system rather than going through an ombudsman.

So at this point, we would not support that.

Mr. Lorne Nystrom: Mr. Stewart, do you any comments?

Mr. Donald Stewart: The position that we have is an important, forward-looking one. As you look at the convergence of financial services going forward, you see that the different entities and the different pillars that used to exist are all ultimately transacting similar kinds of business. If you look at other jurisdictions, I think it's because of this convergence of financial services. Where an organization historically has had a particular specialty, it is now in all branches of financial services. Therefore, having that consistency across the full range of financial services is an important driver. Our proposal is more forward looking than what is taking place today.

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The Chair: Thank you, Mr. Nystrom.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman, and thank you to all the presenters today.

It's that convergence of previously separate activities and the devolution or the elimination of these pillars that I'd like to focus on, Mr. Stewart.

One part of this legislation that I have some difficulty with is the part prohibiting cross-pillar acquisitions—and it applies very directly to Sun Life as well as to Manulife. If you look at the global trend, and if you look at the response in the U.S. to the proposed merger of Citibank and Travelers, it seems counterintuitive and anachronistic to have that kind of prohibition in this legislation. I'd like your feedback on it, because I haven't yet heard an argument I'm comfortable with or one that convinces me in this regard.

Mr. Donald Stewart: When I talked about the convergence, I was, importantly, looking at Sun Life from an individual customer's point of view. From a consumer's point of view, the consumer can go to a number of different kinds of financial institutions to get the full range of financial services. As far as the end customer is concerned, there is convergence already today. We talked about colleagues in mutual funds and similar things, and we ourselves will offer deposit taking and certain kinds of banking services and so on.

If you look at it from the regulation perspective, there is no question the practicalities of regulation by entity have an importance that's hard to deny. The fact that prudential supervision of an institution is more manageable on a legal-entity basis does lead you to some form of continuation of the past legal entities and the past pillars.

If you looked at other jurisdictions—and you mentioned the United States and Citigroup, but you could also look at what's happening in the United Kingdom—you would see more convergence. But there are also important failed transactions. I would cite NatWest Bank and Legal and General as examples of where mergers of pillars didn't work.

Mr. Scott Brison: But I still don't hear a strong argument for a prohibition of cross-pillar.... You just said that life insurance companies are effectively able to provide much of what banks can provide, and banks can provide much of what insurance companies can provide, etc. So if in fact the pillars don't really exist any more from an operational perspective, why the prohibition on cross-pillar acquisition?

Mr. Donald Stewart: I think the prohibition is more situational than philosophical. If you look at a major bank and a major insurance company in Canada today, the major bank will have an enormous Canadian presence. The major insurance company will be substantially at the longer-term end of financial services and will be mostly outside the country. There isn't a great deal of merit in bringing these two institutions together, because, although they both may look like large Canadian institutions, one is significantly domestic and one is significantly international. Their combination doesn't have anything like the same resonance as what took place in Citigroup.

Mr. Scott Brison: But if there were a market argument against specific mergers, that would perhaps make sense. I would think there would be reasons why a strong domestic institution would want to have a strong international presence from a diversification perspective.

But the market arguments aren't what we're speaking of here. Why would there be a government prohibition against...? From a business case perspective, if a particular merger didn't make sense, that would be one thing. But it's another thing when a government actually has an arbitrary rule against such activity. That's what I'm getting at. We're not here to argue the business case or merits of an individual transaction, but why the government has, as a public policy imperative, an opposition to, in this case, cross-pillar acquisition.

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Mr. Donald Stewart: We see that the separation of financial institutions into those with a capital below $5 billion and those above does in fact address the possibility of consolidation of the smaller members. In fact, the bill as currently structured seems to us to recognize the market reality in Canada where you have specific classes of institutions that are below the $5 billion mark where no such prohibition exists, and those that are above, which have a very different pattern of business where amalgamation wouldn't make, in our view, either industry or business sense at this juncture.

Mr. Scott Brison: But again, it's a business sense. I'm trying to figure out from a public policy perspective why this is good for Canadians.

Mr. Donald Stewart: We believe the prosperity of these large international institutions is good for Canadians indirectly by creating jobs in headquarters. It's only indirectly good for Canadians in the sense that they don't live outside the country. I think it is that prosperity of these organizations internationally that's important because it creates headquarters jobs in Canada that ultimately are important to the economy.

Mr. Scott Brison: Again, you're addressing, from a business perspective, why they may or may not make sense. But I still don't see from a prudential perspective or from a Canadian public perspective the case for that prohibition.

On the issue of directors and residency of directors, the proposed amendment, while achieving the end you would like to see, does concentrate an awful lot of power, further power, with the minister. That's one of the criticisms of this legislation, the level of concentration of power with the minister.

Instead of simply the minister having arbitrary power in this case, would you have considered the notion that perhaps the House of Commons finance committee...or perhaps some type of quantitative methodology, depending on the business activities of the firm, might be able to actually find a formula to come up with a number of foreign versus domestic? Or why not just get rid of the residency requirement completely, which is probably anachronistic anyway?

Mr. Donald Stewart: In terms of evolution, I think taking the residency requirement from the current three-quarters to two-thirds—or, as we propose, a majority, 50% + 1 or whatever—is a logical evolution from where we've been to where we should head.

In terms of our degree of support for the present ministerial discretion, we believe the processes and structure that have surrounded Canada's financial services activities have led to a very high standard of conduct. The standards, for example, around the demutualization of the life insurance companies in Canada were among the best in the world, if not the best. We don't have concerns about the amount of discretion in the legislation at this juncture.

The Chair: Thanks, Mr. Brison.

I want to, on behalf of the committee, thank you very much. As you know, we're trying to increase competition in the financial services sector. We're trying to provide an environment where the demographic, technological, and globalization challenges you face are addressed, and where consumer choice and protection are also provided.

Your observations and the amendments you have forwarded to us will be reviewed to see if in fact they can achieve the ends as I outlined them.

Once again, thank you very much for your contribution.

The meeting's adjourned.

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