I apologize to you, Chair, and to the committee members for being late. I was in a cabinet committee meeting that ran a little late.
I thank you for the opportunity to be here today.
I appreciate this opportunity to appear before your Committee today to discuss Bill C-37, An Act to amend the law governing financial institutions and provide for related and consequential matters.
As you know, in November we introduced Advantage Canada, which is the long-term economic plan for our country. We introduced this along with the economic and fiscal update. Advantage Canada is a long-term economic plan designed to make Canada a world leader, both today and for future generations. It will help make the Canadian economy even stronger and improve our quality of life through competitive economic advantages. A strong economy must be supported by a financial system founded on competition, which instills confidence and efficiently provides the financial services that families, individuals, and businesses need in Canada.
Canada does have a strong and sound financial system that has served Canadians well. It provides about 700,000 highly skilled, knowledge-based, well-paying jobs.
In the coming years, however, Canada's financial system will have to adapt to the evolving needs of households and businesses.
It will also need to embrace the increasing use of technology in the delivery of financial services.
That would be achieved through a flexible regulatory framework founded on sound principles. That is where Bill comes in. The bill does not seek to overhaul the financial institution statutes that by and large work well. Rather, the bill introduces adjustments to the framework, fine-tuning to further promote competition disclosure, regulatory efficiency, and innovation. The results will benefit families, individuals, small businesses, and the economy overall.
Before I outline the measures in the bill, I want to underline the fact that the proposed changes I'm referring to today are based on extensive consultations. These changes were then outlined in a white paper, which was issued last June, entitled “2006 Financial Institutions Legislation Review: Proposals for an Effective and Efficient Financial Services Framework”.
Catchy title, isn't it?
Some hon. members: Oh, oh!
Hon. Jim Flaherty: Bill is consistent with the policy commitment of Canada's new government to ensure that our country's regulatory framework remains responsive to domestic and global developments. It also maintains the regular practice of five-year reviews of the financial institution statutes.
This bill has three basic objectives.
First, to promote the interests of consumers. These proposals will do that in a number of ways. One way this bill will benefit consumers is by improving the disclosure regime so that consumers have the information they need to make the best decisions in light of the choices made available to the them.
For example, with the increasing popularity of online banking, Bill proposes to harmonize online and in-branch disclosure requirements. This will allow consumers to compare products more easily and ensure that adequate disclosure is provided to customers conducting transactions online.
Another way the bill will benefit consumers and small businesses is by helping reduce hold times imposed on cheques. Instead of using this regulatory power, the government has finalized an agreement with the banking industry to voluntarily reduce the maximum hold period for cheques from ten days to seven days. Once electronic cheque imaging is fully implemented, that hold period will be reduced even further to four days.
The second objective of the bill is to increase legislative and regulatory efficiency in our banking system. One such example is to simplify the foreign bank entry framework. This will be especially helpful to the so-called “near banks”. These are foreign entities that are not regulated as banks in their home jurisdictions but that provide banking-type services. A car manufacturer, for example, currently has to obtain ministerial approval before being able to provide loans or make leasing arrangements, and this will no longer be required.
The measures in the bill will simplify the entry framework, reduce the regulatory burden, and provide for an environment that is conducive to increased competition.
Another way in which this bill will increase efficiency in our banking system is to improve the regulatory approval regime. This will ensure that transactions are dealt with faster and more efficiently.
Bill also responds to changes in the marketplace. Mandatory insurance for high-loan-to-value or high-ratio mortgages was introduced over 30 years ago, and that was as a safety measure to ensure that lenders are protected against fluctuations in property values and associated defaults by borrowers. The marketplace has of course changed over time and the mortgage insurance restriction is no longer required to the same extent. So this bill proposes to raise the loan-to-value ratio requiring mortgage insurance from 75% to 80%.
This will lower the mortgage down payment consumers are required to make before the law requires the purchase of mortgage insurance and will create an opportunity for mortgage cost savings.
So a family purchasing a $200,000 home with a down payment of 20% could save approximately $1,600. This is a significant amount, of course, especially for first-time home buyers.
The third objective of Bill is to provide the financial institutions framework with the ability to adapt to new developments in the industry. Amendments in Bill C-37 reflect the fact that banking services must remain up to date with new technology. The proposal to implement electronic cheque imaging is one such example.
Given the development of new technology, the old paper-based process of clearing cheques is too labour-intensive, time-consuming, and costly. So electronic cheque imaging will result in significant efficiency gains, saving time and resources currently dedicated to the movement of cheques. This amendment is complementary to the proposal to reduce cheque hold times that I mentioned earlier.
Another important change is the proposal to allow financial institutions to add more foreign directors to their boards. This amendment will enhance the ability of our financial institutions to pursue global business opportunities, allow for even greater benefits from the expertise and experience of foreign talent while maintaining a majority of Canadian directors on their boards.
As I've said before this committee on other occasions, I'm very proud of the performance of our financial institutions internationally, including in China, where four of our chartered banks are active and two of our largest insurers, Manulife and Sun Life, are active as well. This is something to be encouraged and applauded in terms of our financial institutions taking leadership roles outside of Canada, helping to promote trade for Canadian businesses, which can follow in the path, as they often do, of the large Canadian financial institutions.
In summing up, the amendments proposed in Bill C-37 will enhance the framework governing Canada's financial institutions.
Thank you, Chair.
I invite questions that committee members may have. And officials are here, of course, with me from the Department of Finance.
Given that we're in full agreement on this subject--
A voice: We should order drinks more often.
Some hon. members: Oh, oh.
Hon. John McCallum: It appears that we're in full agreement on this subject, although we may change our minds after we hear witnesses, and I wouldn't want to prejudge that. Since that is the case and there's not too much point in going further when we're in agreement, I'll change the subject to income trusts.
As you may know, we recently came up with a proposal to have essentially a much more moderate rate of taxation on income trusts. We believe that, as four expert witnesses who came before us established, a much more moderate tax would in fact be sufficient to ensure tax fairness and to ensure that the personal sector was not disadvantaged in any way by lower taxation paid by corporations in income trusts. We dealt with the tax fairness issue according to these four experts, and we didn't really have opposition from the government side, because on that all we got was a blacked-out paper. We didn't get the numbers.
The great virtue of our plan is that experts have also shown that by virtue of a much lower tax rate, we do much less damage to the sector, and that approximately two-thirds or so of the wealth that was destroyed--the $25 billion of wealth that was destroyed by your plan--would come back under our much more moderate plan. So in that sense, our plan is fairer: it is fair not only to households, but also in that those who've lost so much money would stand the chance of regaining the majority of their losses.
I think this is a balanced alternative. CIBC World Markets has come out with a report stating that the Liberal proposal does create a balance between the investing public's need for a strong and growing income trust sector and the public policy need to stem tax leakage and eliminate unrelenting conversions to income trust structure. In addition, the Canadian Retired & Income Investors' Association says, and I quote:
|The Liberals' policy is a major improvement over the ill-conceived, highly damaging Conservative plan. We applaud them for caring about seniors and other ordinary Canadians.
Mr. Minister, you were aware of this option. Our proposal is the same as one of the proposals made by PricewaterhouseCoopers, and certainly finance department officials were aware this was an option. Clearly it did far less damage to people who had taken the Prime Minister at his word and invested in income trusts; and clearly as well, it would have restored tax fairness, and it would have been, indeed, fairer because it would have been so much less damaging to those individuals.
So my question to you, given these third-party endorsements, and given what I would regard as a compelling need to do minimum damage to those who had taken the government at its word and invested in income trusts, rather than maximum damage to the tune of $25 billion, is whether you would consider changing your plan to the plan that we have just proposed.
I'll stick to the Bank Act. I don't think the bill you've introduced contains any elements to which we object. These are very technical elements. Cheque imaging is an interesting thing for consumers and banking institutions.
However, I'm concerned by what isn't in the bill. The Bank Act is revised every five years. This was an opportunity to settle and decide a number of issues. Take insurance, for example. The banks want to sell insurance. They've proposed a compromise solution, as you know, but the insurance companies don't want that.
Why haven't you decided the matter? This issue will no doubt continue over the next five years.
There's also the issue of electronic payments, which are increasing in number. Debit cards are now more popular than cash. Here I have a document from the Canadian Consumer Initiative. That consists of six Canadian consumer associations. In Quebec, Option consommateurs, a consumer association, is requesting that a coherent, modern electronic payments structure be created, as the United States and the European Union have done. According to that association, the fact that the forms of protection are highly uneven and complex will ultimately cause problems for consumers. It's already causing some, but this might even put a brake on the development of electronic payments.
Why weren't these matters addressed in the context of the Bank Act review?
Thank you, Minister, for being here. We always appreciate having you available to us.
My friend Mr. McCallum chose to bring up income trusts, so I'd like to continue on that. As you know, the Liberals brought out a proposal this week. I like to think of it as the gang who couldn't shoot straight comes back.
This is kind of an odd proposal. It continues to tax some businesses more than others. It says that trusts should continue, even though a number of witnesses said that two-thirds of the trusts make payments from capital brought in by investors and not from their income earned. Some witnesses referred to a substantial segment of the industry as a Ponzi scheme, and said there were some structural problems there.
The Liberal proposal would say, “Well, no more trusts can be formed, but if you lobby hard enough maybe you can still form a trust”. So there's a great deal of uncertainty re-created. I guess the Liberals haven't learned that uncertainty is not good for the market and causes a great deal of difficulty for investors.
I think the Liberals are sort of hoping they can convince Canadians that they can have their cake and eat it too. It's the same with a lot of issues with the Liberals. There's a lot of unreality about what they tell Canadians. I think this is dangerous. I'm very concerned about this.
As finance minister, what can you tell Canadians about this proposal the Liberals brought forward? I might add that their proposal came forward after we heard all the witnesses. The committee hasn't really had a chance to ask anybody about it.
On your second point, I'll raise with the banks that issue about instantaneously giving credit. I think there's probably a consumer expectation for it, and if it's not happening, there may be some technological reason, or there may not be. I'll ask and I'll respond to you when I get an answer.
On the issue of why not 85% or some other percentage—90%, I suppose—it's a judgment call about what's prudent in the market. You're correct that there are more entrants in the market now, so there's more competition in the market. We thought, based on the consultations, that it was prudent to move the extra five percentage points, to 80%.
There could be more in the future. I know we are all accustomed now to a very strong housing market. It's not inevitable that it would always be thus. We've lived through cycles before in the housing markets, and some of us are old enough to remember, I think it was August 1981, when the prime rate was 22.5%. You're too young for that—no, you're not—but some of us remember it. People were losing their homes, walking into the lawyer's office and leaving the keys because they couldn't afford to renew their mortgages.
We thought this was prudent. As I say, at 20%, on a $200,000 home the savings is about $1,600 for the purchase.
I'd like to continue the discussion on electronic payments. More and more citizens are talking to us about that. This issue is a great concern for them. In Canada, one industry could expand extensively, on the Internet, among other things, if statutory measures aren't introduced to slow that trend. However, those measures aren't included in the act for the moment.
I know you favour a voluntary approach, but that involves two problems, in my view. First, it can be a long and difficult process, and it isn't clear that it will be to the advantage of consumers. In addition, people's perceptions are at issue. I won't be telling you anything new when I say that a large segment of the population has little or no trust in the financial institutions. Citizens often tell me that they doubt those institutions are able to regulate themselves. They also doubt that this process is to their advantage.
One of the measures sought by a number of consumer advocacy organizations is to set a fraud liability limit of $50 for every electronic payment. At the moment, that limit applies when you pay by credit card.
Would you be open to the idea of applying that limit to other payment methods, so that this minimum protection always applies, regardless of payment method? We would be assured that the financial institutions would make even greater efforts to prevent fraud since they would have to bear the balance of any potential frauds.
If we were to adopt that measure, would you support it?
Madame Ablonczy pointed out that we did hear witnesses who pointed to some dangers in the income trust sector, but the fact remains that the promise had been made not to tax it, and you did. What could have been a surgical strike was a nuclear bomb. Lots of money was lost. The Governor of the Bank of Canada, David Dodge, said there were some investment needs in Canada for which trusts were a good vehicle forward, a good instrument forward. You, yourself, I believe, have agreed with that by leaving the REITs in.
What I fail to understand is this. You now have a proposal on the table for modification of your plan, a proposal that maintains the principle that you want to look at—stop the proliferation of trusts—but one that answers to all those other needs by permitting them when it's the proper tool, when it's the proper instrument, thus reducing the hit on individual Canadians.
We have heard that large institutional investors were not hit by your decision, that things get mitigated over the medium to short term for them, but individual investors were hit very hard. Now you refuse to consult with the industry and you refuse to study or even discuss a proposal put forward by Mr. McCallum to mitigate some of those negative effects. I fail to understand that, Minister.
That's a good question, and certainly a very broad question.
I'm for competition in the financial services sector and elsewhere. I'm happy to see the strength in the credit union sector, quite frankly. I think it's good to have that kind of growth and competition in financial services in Canada.
At the same time, when I look internationally, we can be very proud of our financial sector and its participation internationally. We need to grow Canadian businesses globally, which we made clear in our economic plan for Canada, Advantage Canada.
Our large chartered banks and our large insurance companies are leaders internationally. We don't have that many large businesses in Canada—unlike our neighbour to the south, perhaps—that can lead the way into large emerging economies in the world. But our banks can and our large life insurance companies can, and they're a way for Canadian businesses, including SMEs, our small and medium-sized enterprises, to have access to some of the foreign markets.
Internationally, I think it's terrific that we have this strength of financial services. I'm thrilled at the employment numbers, which are great, with substantial employment, of course, in the greater Toronto area, where I'm from. It is one of the pillars of the Canadian economy, and I hope we'll continue to have substantial competition, and even more competition in the Canadian banking system.