Mr. Chairman, I'm from the Small Investor Protection Association. I'll keep my comments short because I have made a submission to your committee.
In August 2008 the Small Investor Protection Association made a submission entitled “Investor Protection Illusion” to this committee. The asset-backed commercial paper fiasco and the subsequent financial market meltdown are revealing financial fraud and wrongdoing at a scale that is hard to believe. The industry created structured investment vehicles to enhance the industry's take, and executive compensations spiralled ever higher while regulators failed to react.
The regulators claimed to provide preventative investor protection, but failed to prevent financial fiascos or systemic fraud and wrongdoing, the direct cause of small investors losing their savings. The Canadian public is being misled by the financial services industry and the regulators, who would have us believe that the investment industry is well regulated and that investors can place their trust in the industry. Reliance upon the industry to self-regulate and protect investors is an inherent conflict of interest and does not protect investors.
The industry creates innovative structured products to circumvent regulations, which cannot keep up with the fertile minds developing new products. Regulators allow these practices and at times provide exemptive relief from regulations supposedly meant to protect investors.
The Canadian Securities Administrators' 2008 enforcement report states that In 2008 about $200,000 was ordered in Saskatchewan and Manitoba in restitution, about $570,000 was paid out in Quebec and Manitoba in compensation, and about $15,800,000 was ordered in B.C. and Ontario in disgorgement against respondents.
In plain terms, the regulators ordered or paid out a total of about $770,000 to aggrieved investors in 2008, which is slightly more than David Wilson, chair of the OSC, receives in annual salary, but about $15,800,000 was paid to the regulators.
Canadians who lose their savings to investment fraud and wrongdoing need time to realize they have been victimized and then to find their way through the maze of regulators, who do not help. Victims will be condemned to finish their declining years without the fruits of their life's labour. Their lifestyle will be compromised, and in many cases so will their health. Still worse, many lose faith and hope, and contemplate suicide.
We recently received an e-mail, and I'll read the contents. It's quite short: “My parents, ages 81 and 76.... All of the money invested is lost. This was most of my parents' life savings.... My father became depressed from losing all of his money. Coupled with the cancer that he had, this caused him to take his own life.”
Widespread practice of fraud and wrongdoing costs Canadians $20 billion per year. Forged signatures and false documents are not unusual. Selling unsuitable products and use of inappropriate leverage are accepted practices. Creation of structured products to circumvent regulations, lack of disclosure, and use of creative accounting to mislead investors are rampant.
Industry tries to create an illusion that the industry is well regulated. The illusion is supported by regulators levying headline-grabbing fines, but the fines may never be collected. Our submission quotes extensively from the Markarian decision, because it illustrates reality. Judge Jean-Pierre Senecal wrote, “In this case, the defendant's conduct was highly reprehensible”. We've included longer quotes in our submission.
Registered representatives are given titles such as investment adviser, financial consultant, or vice-president. This conveys a message to investors that suggests these salespeople are qualified to act as advisers. However, they may simply be salespeople of mutual or segregated funds who are seeking to generate commissions.
Also, industry creates innovative products with names that tend to deceive investors. A prime example is the principal-protected note, or PPN, for which guarantees apply only at maturity and returns may be cut or suspended.
The Ontario Bar Association says that the justice system is not designed to provide justice, but to resolve disputes. The Laflamme decision shows victims take 10 years to obtain justice, but most seniors cannot survive the ordeal. Laflamme died a few years after gaining a Supreme Court decision.
The recent Longstaff case in British Columbia was dismissed because the judge found that an uneducated labourer who lost his savings did so because his adviser followed an accepted practice of a “leverage plan”.
Other issues impacting Canadians' retirement security include excessive executive compensation, and Nortel illustrates this issue by the current Nortel executives' grab for bonuses while the employees have concerns about their pensions; exemption from regulations and the law, whereby many faulty products had exemptive relief and the ABCP solution exempted perpetrators from the law; lack of whistle-blower legislation to protect all Canadians; lack of special courts and judiciary to deal with white collar crime; underfunded workplace pension plans and the possibility of taxpayers without pension plans paying for a bailout.
I believe the majority of Canadians are just and upright, with a sound sense of morality and ethics. However, regulatory failure has allowed fraud and wrongdoing to become rampant. The investment industry has exploited this situation by providing incentives to create fundamentally flawed products and strategies that are sold to unsuspecting investors.
The investment industry is guilty of fostering an ideology that they are capable of self-regulation. Events have proven they are not. There were alerts raised that the investment system was faulty, yet regulators failed to react. There is lack of oversight, and there is no authority with a sole mandate to protect investors. Investors are left in the hands of the perpetrators of the various schemes developed to devour the savings of Canadians. We can only hope that the financial meltdown has sufficiently raised awareness to create public outrage that will precipitate government action to rein in an investment industry by revising legislation and regulation. It is time for government to act.
Thank you, Mr. Chairman, and thank you for this opportunity to meet with the committee.
We've titled our submission to the committee “Getting Credit to Main Street Canada for SMEs and Consumers”.
The Canadian Finance and Leasing Association strongly supports the government's goal to restore liquidity and stability to the financial system while minimizing any potential long-term negative impact on taxpayers.
We are here today to strongly endorse the creation of the Canadian secured credit facility with an allocation of up to $12 billion to purchase term asset-backed securities, backed by loans and leases on vehicles and equipment.
For us, the Canadian Secured Credit Facility represents very positive commitments being made by the federal government, a significant and innovative step towards kick-starting funding for loans and long-term leasing of vehicles and equipment.
This initiative is a win-win situation for both small and medium businesses and the consumer, as well as a short-term, low risk and profitable investment for the government. The spinoff will be significant. We should expect consumers and SMEs to receive credit which will contribute to restoring the confidence of private investors in the commercial sector.
The members of the Canadian Finance and Leasing Association are the largest providers of debt financing in Canada after the traditional lenders, the banks and credit unions. As of December 31, 2007, the industry's portfolio of assets financed was estimated to be worth $112 billion.
Most of the financing industry's clients who rely on assets and long-term leasing are small and medium-sized businesses and consumers.
In the five minutes allotted to my opening remarks I want to offer a few key points.
First, all this industry does is finance the acquisition of equipment, machinery, and vehicles by business and consumer customers. All the capital obtained by the industry is deployed to carry out that single mandate. Any liquidity injected into this sector will directly, quickly, efficiently, and effectively reach the general marketplace.
The industry does not borrow excessively, and does not accumulate capital. Capital must be used. As such, each dollar of liquidity injected into this sector shall be used in the economy directly, rapidly, efficiently, and effectively.
Second, the assets financed by this industry are straightforward: equipment and vehicle loans and leases. Customer credit generally has not experienced problems associated with poor underwriting standards. Industry receivables continue to perform within the normal levels that can be expected in an economic downturn and well within anticipated tolerances.
Assets financed by this industry are straightforward: they are loans and long-term leasing of equipment and vehicles. These assets are generally necessary to meet the basic needs of our clients: essential equipment for business operations or a car needed to travel.
Third, this industry supports a broad network of dealers, manufacturers, distributors, vendors and brokers and their customers in hundreds of communities across Canada. Equipment financing companies have relationships with manufacturers, vendors, and distributors of all sizes to provide financing to their customers to acquire machinery and equipment.
The automobile manufacturing sector's financial affiliates finance dealerships, and the clients of dealerships who are seeking to acquire a vehicle. For those clients, longer-term lessors of commercial fleets use the automobile dealership network to acquire, maintain and dispose of vehicles in all the provinces.
Fourth, funding, which is fundamental to the credit cycle provided by our members, has just stopped. Despite having been prudent in credit extension, this industry is suffering from the effects of the freeze in credit and liquidity. Very few private funders remain active in this marketplace.
Fifth, the Canadian Secured Credit Facility is an investment being made by government. The taxpayer will draw the same benefits, and receive the same protection that any private investor would have received.
Sixth, we do not expect the government to have any long-term role in funding the industry.
The goal is to restore the confidence of private investors so that they restore financing for these transactions.
I would be very pleased to answer your questions.
Good morning, Mr. Chairman and committee members. Thank you for the opportunity to present, on behalf of Financial Executives International Canada, our recommendations for your study.
FEI Canada is a voluntary membership association of more than 2,000 of Canada's most senior financial executives from coast to coast. Our recommendations are the result of consultations with our membership through a task force and a survey conducted to respond to your study, the summary of which is included in pages 6 to 8 of the materials we've left with the committee.
Michael Boychuk, who's with me today, serves as a volunteer director of the Quebec chapter of FEI Canada, and in his day job Mike is treasurer of Bell Canada.
Our recommendations are framed around three goals: increasing the availability of credit to business, the efficiency of capital markets, and rebuilding confidence in the economy. Achieving these goals will foster strong Canadian global competitiveness, support expansion projects, and help companies develop markets--
Achieving our goals will foster strong Canadian global competitiveness, support expansion projects and help companies develop markets, enhance profits, boost capital productivity, and most importantly, create jobs.
I'd like to begin by addressing the availability of reasonably priced credit to business. Our survey results confirm that businesses are finding that access to credit has significantly tightened, its cost has risen, and the process of securing credit has become much more difficult. Our survey revealed that the situation is particularly difficult for small enterprises, businesses seeking longer-term credit facilities, and companies whose loans need to be syndicated because of their size.
Increased credit availability can be accomplished in four ways.
One is to encourage funding of small and medium-sized businesses, which could be done by adjusting the Canada Small Business Financing Act to allow for larger loans, and by supporting an emerging new economy by both making funds available to early-stage enterprises that focus on innovative new processes and technologies as well as green investments and funding more innovation centres to serve as incubators that nurture the development and sustainability of start-ups in a knowledge economy.
Second is to help increase the availability of long-term credit facilities by providing incentives to financial institutions that grant loans for the longer term, and by enhancing existing government guarantee programs for qualifying business loans, particularly in the most impacted area of equipment lending and leasing.
Third is to help improve working capital credit availability by increasing the rates for and the refundable portion of investment tax credits and scientific research and experimental development tax credits, since banks lend against this collateral.
Fourth is to provide relief to defined benefit pension plans by allowing plan sponsors to fund solvency deficits over the actual liability timeframe. Not only would this be more equitable, it would free up capital to reinvest in the economy.
Finally, we call upon the government to encourage EDC, BDC, and similar lending agencies to increase loan volumes and venture capital availability to companies requiring capital.
Our second set of recommendations deals with improving the efficiency of capital markets.
FEI Canada encourages the government to reduce interprovincial trade barriers. This would include moving to a single national securities regulator and achieving the free flow of capital, goods, services, and labour among Canadian provinces.
There must be a review of the tax system with an eye to easing the burden of economic restructuring on Canadians. How might this be accomplished? First, expand tax credits for flow-through shares to ease the raising of equity for small and medium-sized businesses, particularly early-stage companies not yet in a taxpaying position; provide relief to displaced workers and troubled companies by extending to three years the period over which severance payments and capital gains on debt forgiveness are reported for tax purposes; and provide a three-year tax holiday for start-ups launched by entrepreneurs coming out of employment displacement.
Finally, we call upon the government to help in the restructuring of the securitization market through better transparency, accountability, and reporting practices, as this will instill greater confidence and will improve liquidity and availability of short- and long-term funding.
I'll move to our final category of recommendations: rebuilding confidence in the economy.
To keep our banking system strong we must continue to enforce capital regulations and lead the way in international oversight of financial products. While we support some economic interventions, such as infrastructure spending, it is key to ensure that these moneys are being spent responsibly and that Canada stay fiscally prudent by avoiding structural deficits.
Ladies and gentlemen, the objectives highlighted here not only contribute to the stability of our financial system; they also strengthen Canadian competitiveness and long-term prosperity.
FEI Canada thanks you for your time and the opportunity to present our ideas to you.
Thank you very much for the opportunity to present to the committee today and provide input on your deliberations on the Canadian financial sector, protection of investors, and the stability of the Canadian financial system.
I will endeavour to be brief in my comments, so as to leave sufficient time for questions. My colleague, Thomas Johnston, will also be making his own remarks. We will be very happy to answer your questions. To begin, allow me to tell you who we are.
The Investment Counsel Association of Canada represents investment management firms across Canada. We invest the assets of private individuals who are saving for retirement, and we invest the assets for pension plans across Canada.
We have 115 companies that are members of the association. They represent every province and every territory in Canada. Our members are managing total assets of $700 billion for their clients.
As you can imagine, the turmoil in the financial sector during recent months has been a grave concern for our members and their clients. The market collapse has been broader and deeper than many downturns in recent years. With millions of baby boomers within 10 to 20 years of retirement, the urgency of an economic recovery that will restore Canadians' capital and confidence as soon as possible is critical.
We want to interject to applaud the federal government for some of the measures you have taken recently in the federal budget, measures that we believe are important first steps toward strengthening the economy: the stimulus package announced in the budget, with $40 billion in stimulus over the next two years; support for the liquidity measures through various measures, which have been commented on in some of the presentations; and support for the OECD in terms of the GDP spending that has been recommended.
We believe government intervention is important, but we also believe it is critical that the federal government look at ways to restore confidence of Canadians in investing in the capital markets and to encourage saving to ensure that they can meet their retirement goals. Confidence in the markets is key, and confidence in the markets is necessary not only for short- and medium-term credit, but also for encouraging savings and investment in the country.
What can the government do? We are going to focus on about six specific initiatives that we believe could restore confidence in the financial system and help Canadians rebuild some of their lost capital. I want to highlight that we truly believe some of these measures would immediately increase the return that Canadians are seeing in their statements, in their investment portfolios, and in their retirement savings. We will end with a key point that our association has been on record for supporting for many years, which is to move forward as soon as possible with a single securities regulator.
The first recommendation we have is that GST be eliminated on investment management fees.
If there is any lesson Canadians have learned during recent months with the economic turmoil, it is the importance of having good investment advice and selecting advisers who clearly understand their retirement goals, understand and are comfortable with their investment philosophy, and communicate with them in a manner that allows them to understand their financial position. Presently, investment management fees are subject to GST. In provinces with harmonized tax, the amount paid by consumers for investment management services is even higher. If Ontario moves forward with the harmonized tax, investors will pay an additional 8% in investment management services. It is important to note that investment managers are able to reclaim the GST or the harmonized tax, but investors are not.
In this time when individual investors are in more need than ever of professional investment advice and pension plans are turning to investment managers to turn around their portfolios to meet their pension plan commitments, it is critical that the federal government consider this as one way to help Canadians rebuild their lost capital. For this reason, we urge the government to consider the elimination of GST on investment management fees. This would restore some capital to individual Canadians and their pension plans and would also encourage some Canadians to seek advice in pursuing their retirement goals.
The second recommendation we wanted to make is with regard to a former Bill C-10. I don't mean the recent budget bill, but Bill from the last government. It will be reintroduced in the House in the near future, and this committee will be reviewing it. Our association made a presentation to this committee in 2006 and subsequently, in part of our pre-budget submission, in 2007.
The heart of this bill looked at closing off some offshore tax havens through changes to rules on non-resident trusts and foreign investment entity rules. Had the bill passed without amendment, pension plans and retirement savings would have been subject to tax, so over a trillion dollars in pension money would have been subject to tax.
This bill is not before the House right now, but we wanted to comment on this matter because it will likely be introduced in this session of Parliament.
Working with the Senate banking committee, the Department of Finance did issue a comfort letter that provided some exemption for pension plans. It is our hope that when this bill is reintroduced and this committee is reviewing it, you will see those exemptions for pensions such that pension plans will not be subject to any tax, in the event that they invest in anything internationally deemed to be a trust. We are confident that the Department of Finance is working on this initiative but want you to be aware that this is something that will likely be coming in the next legislature. If the amendment is not introduced, Canadians who have already been hit with losses in their retirement savings are going to be subject to tax.
The third point is that our association has always been in support of reduced barriers to trade, both interprovincially and internationally. The former government removed the 30% foreign content limit on RSPs, which we saw as a very positive development. This helps Canadians investing and their investment managers to diversify their portfolios and look at things both within Canada and abroad.
However, there is still a significant barrier that exists for Canadians wanting to invest internationally. Investments on certain foreign stock exchanges are not qualified for investment within RSPs and other tax-deferred savings plans. Even though the government has removed the foreign content limit, there is still a very limited number—about 35 to 40—of foreign exchanges that are allowed for RSP purposes. There are a number of very well respected, established foreign stock exchanges that are not presently available for RSP investment. The list is simply out of date and requires updating to reflect the fact that we are part of a global economy and that a part of diversification of investments is looking internationally and locally. That list needs to be updated.
Our fourth recommendation is this. The federal government and the provincial governments have been looking at modernizing some of the pension rules, which we very much support. The federal government recently released a pension paper entitled “Strengthening the Legislative and Regulatory Framework For Private Pension Plans Subject to the PBSA”. One key recommendation we made as part of our submission is the loosening of the pension rules, again in keeping with encouraging international investment and removing international barriers to investment. Right now there are very restrictive rules limiting the investment pension plans can make in specific companies and portfolios. We are simply asking that these rules be less restrictive and rely on a prudent person to allow investment managers—
It's a good question, Mr. McCallum.
I think at the heart of the issue is that investment mutual funds are a financial service and that there are other financial services that are very similar, such as GICs and deposit instruments, which are exempt from the tax on the labour portion of the fee, which represents about 60% of the management expense ratio of the fund. If we assume that the average fund has a management expense ratio of about 200 basis points and there's $600 billion in the funds, there's $645 million of tax that right now is being attributed directly to the GST. The money is really Canadians' savings for retirement. It's a financial service, but it's categorized differently.
As my colleague has indicated, if we had harmonization with some of the provinces—Ontario, for example, where the provincial tax is currently 8%—that would take the $645 million in tax up to about $1.6 billion. Of that $1.6 billion, $1 billion would be taxable to the labour, if we assume that 60% rate on a financial service, whereas it wouldn't be if it were in a GIC.
At the heart of your question is that mutual funds are retirement savings. They are a financial service, but they are categorized differently. At the end of the day, if the government wants to encourage people to save and have money for retirement, then taking a potential extra $1 billion out, if there were harmonization in just one province alone, would have an adverse impact.
I'm sure they've been working very hard. I'm sure the BDC has been working very hard. The trouble is that the crisis goes on and on, and nothing much happens.
That leads me to Mr. Conway.
You mentioned the BDC. First of all, I thought you had a very good list of proposals to make credit flow, including the Canada Small Business Financing Act, early-stage enterprises, incubators, and longer-term credit facilities. I don't think the government has done any of those, except for some action on pension. It hasn't acted on the other ones you mentioned.
You mentioned BDC and EDC. Since you're in touch with all these financial executives, you might have feedback. I haven't heard any negative commentary about EDC, but I've heard a great deal of negative commentary from business people about the slowness of BDC. When the president was here before our committee, he couldn't give any estimate of how much, if any, of the new credit would flow in this calendar year. I made the point, as I made earlier, that it should flow in 2009, not in 2010, 2012, or 2013.
Through your association, do you have any information as to the speed, or lack thereof, with which BDC is acting?
Good morning, everyone.
My first question is for Mr. Buell. In your testimony, you made some extremely important statements on behalf of the Small Investor Protection Association. The financial crisis and the ABCP scandal, among others, are greatly affecting Canadians and Quebeckers. This is fundamental, in that all of this comes down to a matter of trust. You quoted emails received from people who put an end to their lives, and I am convinced that there are others in the same situation, who did not send such a message.
You said that the investment sector exploited the situation by offering very deficient products that also seemed attractive, and that warnings were issued with respect to the system's shortfalls. What sort of warnings are you talking about, exactly?
Over the years, a number of people have been warning that there are problems with the regulatory system, and I had the great pleasure of accompanying Dr. Al Rosen to Ottawa in June of the year Minister Flaherty issued the income trust decision. That created great flak, but Dr. Rosen presented a report where the Accountability Research Corporation had studied the top 50 business income trusts in Canada, and already many investors had lost most of their investments in some of those trusts. To me, that was a very significant warning to the government that something was wrong, and whether Minister Flaherty made the right decision or not, something had to be done. It might have been done in a different way, but he didn't create the problem. The problem was created by industry.
We've had warnings on our website. There have been various journalists warning about faulty products like principal-protected notes. This misleads people into thinking the principal is protected, but I've heard from one of our members who called me and said, “ I've found the ideal product; my principal is guaranteed; I'm getting return of 8%.” And I said, “Ed, you'd better look into it, because it sounds too good to be true.” Three months later he called me and said, “Stan, I don't believe it. The interest rate has been cut to 4%, and when I tried to get money back, they said I could only get it back at the end of the guarantee period, 10 years out, and if I want my money now I get 70%.”
The problem is that the media in some respects does speak out, but not everybody is able to.
Because of the time, we didn't highlight this in our fifth recommendation, but it ties to pension plans as well. The issue is that you have $1 trillion worth of pension plans; you have the top eight or ten who invest themselves, like Teachers, OMERS, and CPP. The vast majority of the remaining pension plans—there are about 6,000 defined benefit plans in Canada and about 46,000 capital accumulation plans, which are group RRSPs and DC pension plans—invest through members like us. We use our pooled funds to manage, where there are synergies.
There is a key issue, in that the tax act creates an arbitrary distinction between a fund that has 150 or more investors and a fund that has 150 or fewer. It really is just arbitrary. The anecdotal evidence we've heard is that Stanley Hartt, when he was in Finance, came up with this 150 threshold on the back of an envelope in an Ottawa restaurant.
The real issue of how this affects Canadians is that you could have your pensions in a fund that might have ten pension plans, which might have one million underlying investors in them, and one large group RRSP that has 200 members, so that you're over the 150. If the group RRSP comes out, you still have one million members, but from the tax act standpoint, the trust comes to be seen as non-commercial. And you have all sorts of tax implications that hit the pension plans: part of it minimum tax; part of it Part XII.2 tax; you can't do non-taxable mergers; it's no longer a registered investment for an RRSP.
What we're recommending is very clear. We believe there is no detrimental tax loss to the capital base for government. You can keep the 150; it's been there since the 1970s. But allow for a look-through for defined benefit and defined contribution plans, just as you do for group RRSPs. Also, consider changing the 150 down to 10 unrelated investors. This one effect would really demonstrate to the markets a recognition of the realities of how money is invested and show some sympathy to the pension industry.
Let me go back to access to credit. Mr. Buell, you made some comments in your opening remarks and publicly about a common securities regulator. We had people here last Parliament reminding us, concerning this asset-backed commercial paper, that they didn't know what they owned, and others appeared before us who said that they didn't know they owned it, which we found very troubling.
Your group has been very good at highlighting those concerns, and I think all of us around the table share the concern that there are no repercussions for that type of adviser or broker, or whatever term you want to use. We'll all admit that a common securities regulator might not have stopped this, but if we can prevent a similar situation by bringing this together....
One of my favourite radio commentators, Anna Maria Tremonti, when you were speaking to her the other day.... I was speaking to her just the other morning, John, if you didn't hear me. I will quote: “One of the things that we're concerned about is that we don't have a national system of protecting investors, and that's to my point. People from different provinces will be treated a little bit differently, and we think it's important that all Canadians should have the same amount of protection, and that can only be done if there's a national organization.”
Do you have any advice for us, when putting this panel together, this group that will be recommending to the minister on how we set it up on a voluntary basis—just some quick advice, if you have some?
My opinion is that the main fault with the regulatory system is that it's set up based on prescriptive rules, and this can be quite onerous but still ineffective in protecting investors. To me, there's a fundamental lack of the sense of right and wrong. In our court system, the judges follow the law, and you see some decisions that seem wrong—morally wrong at least, but maybe correct in accordance with the law. The Ontario Bar Association admits that the justice system doesn't mete out justice.
What we feel is needed is a change in the fundamental way we approach regulation. We should be talking about right and wrong. To me, it's fundamentally wrong to destroy a senior's savings, to put them into unsuitable products, when in many cases under the mattress would be all they need. They have enough money, but they end up losing the majority of it because they've been put into principal-protected notes or business income trusts or even some mutual funds that are quite toxic, which seniors should not be invested in.
Somehow I think we have to get the idea across that the financial services industry has a fiduciary responsibility, and if there is a court case...and court cases are not very suitable, because they take too long. We need something that gives a timely resolution, in two to three years. You can't have an 80-year-old spend ten years going through court. Somebody has to step up and say that we need a way to resolve these disputes quickly.
Firstly, I wish to thank Mr. Buell most sincerely for his statement. His testimony was very moving.
Last night, at the NDP caucus, we met with Ms. Diane Urquhart who, like Mr. Buell, works extensively in this area, namely with the victims of non-bank commercial paper. She was accompanied by a retired police officer who had more than 30 years of service with the Toronto police in the area of economic crimes. They both made a very impassioned plea in favour of a more stringent enforcement of legislation, especially the Criminal Code.
I would like to know if Mr. Buell shares the same point of view as Ms. Urquhart.
Allow me to ask another question. You are right. Your comments are similar to the ones made by Mark Carney, Governor of the Bank of Canada. He said that in all of these issues, we must return to the concept of value-based
products, to use the term that he used. Thank you very much, Mr. Buell.
I would like to now turn to an old friend and colleague from the Quebec Bar, Mr. David Powell. I can assure you of one thing, Mr. Chair. The fact that he is sitting next to me does not necessarily mean that he has joined the international socialist movement, even though I still remain hopeful.
Now that the budget has been adopted, what is the most important thing that the government must accomplish? I greatly appreciated the nuances and subtlety in his answer to my colleague Mr. McCallum's question, and I understand the circumstances, but in concrete terms, what must the government do to achieve its objectives?
Thank you, Mr. Mulcair.
Yes, indeed, you're right that it may be some time before I consider joining the international socialist movement. That aside, I will say, and it may sound contradictory to my earlier remarks, that I do agree that time is of the essence.
I didn't say that at the outset. Our concern is that there is still demand out there for credit, but with every day that passes and with what people read in the newspapers, there is concern that people are going to start making decisions about whether they want to take credit or not, and I think that moving this forward as quickly as possible has to be a primary objective.
The second is the KISS principle: keep it simple.
Mr. Thomas Mulcair: Isn't there a second S?
Mr. David Powell: No, it's “Keep it simple, customer”, or KISC.
We've seen programs that were put forward for the banks in the fall that were just not taken up by the banks because they didn't work. That was because either the pricing was too high or some other criterion just didn't work and didn't reflect the marketplace. So I think it's extremely important to keep it simple.
The last point is that we cannot wait for the government to create its own internal major infrastructure to deal with this issue, because if we wait for staffing rules and practices, procedures, and forms, it will be 18 months from now and we'll find that the marketplace has changed dramatically.
There are a lot of people out there. This is an industry that was well known, that has been around for 25 or 30 years, with a lot of expertise. Quite frankly, as I've told people at Finance, the people who have the expertise that the government can draw upon are underemployed right now, and my concern is that in a few months' time they may be unemployed and we'll lose a lot of expertise that we will need going forward.
Thank you very much, Mr. Powell.
I wish to congratulate Mr. Boychuk for his very refreshing and candid comments. He said in a very distinct and straightforward way: “It's not happening.” Such honesty is quite refreshing, and I thank him. That is exactly what we feel. This is part and parcel of the committee's analysis.
As I have only two minutes, I will now turn to Ms. Walmsley, with whom I would like to have a brief exchange. To her mind, the federal government could do a better job of regulating securities. She is certainly aware of the Vincent Lacroix case, in Quebec. Mr. Lacroix is serving a prison sentence of more than 10 years. His case is still before the courts, where it has yet to be determined whether his sentence will last 8, 10 or 12 years. It is the duration of the sentence that is being appealed, not the sentence itself. He was convicted on charges laid by the Autorité des marchés financiers du Québec. Vincent Lacroix is literally facing thousands of criminal charges. Yet, as regards the criminal charges that fall within federal jurisdiction, the first day of the first trial for the first charge has yet to occur.
I would like to know what makes Ms. Walmsley believe that the federal government could be doing a better job in this regard. In the sponsorship scandal, each one of the legal actions that led to a prison sentence and convictions was brought by the Province of Quebec. This was not the outcome in any of the proceedings instituted by the federal government in the sponsorship scandal.
I could draw up a long list of many similar cases where the federal government shows total incompetence in enforcing existing laws, be they provisions of the Criminal Code or the Competition Act, which both fall within federal jurisdiction. At this committee, we have heard from representatives from the famous Office of the Superintendent of Financial Institutions, which does nothing.
I'd simply like to know what makes you believe that the federal government is doing a better job. What is the basis for this bias?
I appreciate that, but it is an anomaly. When you do financing for something other than financing, you create your own internal set of contradictions, and that is one of them.
My second question is directed to Mr. Conway. It has to do with the pension issue.
There is a lot of pressure on the government to change the ratios or to move them down and be a little more flexible, etc. With certain plans, possibly Air Canada and maybe others--I don't really know--you can move these ratios around until the deck chairs on the Titanic are nicely arranged, but the truth of the matter is that the pension plan is going to require government intervention.
Mr. Conway, should the government contemplate changing the date at which the pension is realized? In other words, should it go from age 65 to age 67 or something of that nature? Should that be on the table as a point of discussion for federally regulated pension plans?
My question is for Ms. Walmsley. I agree with you. You state in your presentation that you want Canadians to have their faith in the financial system restored. That is an important point. Indeed, many people are disillusioned over the entire management of the financial system. Mr. Buell talked about this. I will have a question for him later on.
There are many stakeholders that make up our financial system. We are meeting many of them here. Your organization, in particular, represents people who work on the ground and who reassure others, who provide a certain degree of confidence. Personally, I have dealt with investment advisors, and the experience was totally disastrous. You represent the Investment Counsel Association of Canada. Earlier, in response to a question asked by my colleague, you clarified that you represent investment firms mainly. At what point do you consider a firm to be an investment firm? You say that you do not represent advisors per se, but the firms that they work in. What is the size of a firm, how many employees must it have in order for you to represent it?
Do you understand my question?
Good morning, ladies and gentlemen. Thank you for your information and advice.
I'd like to pose a question for Mr. Boychuk.
Earlier you mentioned the BDC in response to a question from Mr. McCallum. It's not my intention to defend the BDC, but I think we need to keep in mind that they have a mandate from Parliament to lend to creditworthy enterprises that may reasonably be expected to succeed, and they're required to be self-sustaining. They don't get a subsidy from the government.
I understand that they have a legislated loan loss reserve requirement that in these economic times may be limiting their ability to lend to the kinds of businesses that we would like them to lend to. Could you comment from your perspective on the loan loss reserve requirements in the BDC? Would you agree that this is something the government should contemplate doing?
Thank you, witnesses; it's always interesting.
I want to focus a little on the credibility aspect. Mr. Dechert was just talking about BDC, but besides BDC, Mr. Conway, I wonder.... You said smaller businesses are having a hard time; there is a tightening of credit. But depending on the week.... Last week we had the banks here, and they said everything was fine. CMHC put $125 billion up for bid, and it wasn't all taken up. There seems to be enough money flowing.
That was last week, and this week it doesn't seem that the money is flowing. What's happening? Are the Canadian banks actually busier than usual? Are they picking up the slack, but people are exiting? My understanding is that there are some foreign banks exiting and that the Canadian banks are having a hard time keeping up.
I don't feel that it's just small business; I feel that it's credit availability overall.
I would start by commending the Canadian banking system for what we have. The example we've been able to make on the world scene deserves great accolades.
When we look across the world, there's not a single banking system that, like ours, hasn't had to get aid or become wards of the state. Having said that, there's no question that this is a business. Most of the banks are corporations that are controlled by shareholders, and they're in it to make profit.
To your point, and to what I've seen in the marketplace today, the foreign banks, the schedule II banks, if they're participating, are participating at very minimal levels and are not participating for any extended term. Getting beyond 364-day credit facilities today from a foreign bank doesn't happen.
Great. I'm pleased to see that.
Going to the survey, then, Mr. Conway, maybe you can help us square this circle. You say right in there that access to credit has significantly tightened up, the cost has risen, and the process of securing it is more difficult, in particular for SMEs.
We all recognize, of course, that all of a sudden you're basically telling rural Canada that no credit is available. You don't have your large corporate entities in a lot of your rural areas, yet maybe 70% to 75% of all the SMEs are located there. However, they have no access to capital.
I need to square the circle a little bit. The banks told this committee that their loan portfolios expanded by 12%, 14%, 16%, yet anecdotal evidence we hear--and Mr. McKay raised this issue on a number of occasions--from retail, from wholesale, and from the industrial manufacturing sector says there is no funding available, and of course your survey basically endorses that principle.
I would like to understand who is telling the truth. Is there a contradiction, or is this financing just available totally through other sources?
I'll turn now to the question of pensions. I know Mr. Menzies is doing his tour, and you touched briefly on the subject of this challenge.
I totally agree with you that it's unfortunate that the companies can't pay over ten years, let's say, instead of five years, because that will eat into the current earnings and affect investment and so on, but it's a question of what the pensioners think of this. I think that under current arrangements, they need the agreement of the pensioners if they're to get this extension. Am I correct? My understanding is that more often than not, pensioners would not agree.
If there is such an impasse, what do you think is the appropriate solution?
Thank you, Mr. Chair, and thank you, guests, for coming this morning.
I think I'll focus on Mr. Powell for a minute, just to make sure I understand this. I know you've been working with the finance department on this particular item.
I've heard from the constituents and people in my area who deal with floor plan financing—which we talked about before the meeting began. Floor plan financing is not just by car dealers, but also by others. Well, the one who came to see me was a recreational dealer who needs somebody to finance his boats to sit there until he sells them to customers. And there are other organizations that sell or lease heavy equipment, such as backhoes, for example, and all of those things that construction companies don't necessarily want to keep on their inventory as capital equipment, but to lease when needed, and then to return.
When we've been talking to people about the credit facility we're offering, the $12 billion, we're mostly talking about autos, to be frank with you. Are you comfortable that there are other things on the table being discussed at the time, so these other organizations may have access to government-sponsored capital, as it were, and be able to provide leases for their equipment?
My next question might be a little tough.
We've had some difficulty in this country with non-bank asset-backed paper. The courts have to get involved and confirm a deal to make it happen. And to be frank with you, based on the testimony I heard when we were dealing with this in committee, not only did investors not know exactly what they were buying, but I would also say that some of the people selling it didn't know what they were selling.
What comfort level can you give me, since we are now talking about non-bank commercial paper again, that instead of private investors buying it, the government is going to be buying it? What's the difference there, and why should the taxpayer be comfortable that we're doing the right thing in this case?
Thank you very much for the question, because I think it deals with an important clarification that I would want to bring to this committee.
ABCP, as it was called, is asset-backed commercial paper. As I understand it, essentially commercial paper is like a corporate IOU, where a company comes forward and says, we'll pay you a certain amount on a certain day. But we're talking about an asset-backed security, which is different in the sense that we're talking about actual assets being generated by cashflow from car loans and equipment loans and leases. So you have an actual hard asset behind this particular package.
What essentially happens, as I mentioned earlier, is that a leasing company will take a bunch of leases, bundle them together, and sell the cashflow to private investors, principally insurance companies and pension funds in the past, who had longer-term time horizons. Now we're turning to the government and saying, we're selling this to you; but what we're selling are actually hard assets. There's no mystery instrument in there. There are no derivatives; there are no fancy products. These are things you can go and kick if you want to go and kick them.
So these are hard assets, and our members understand what they are. And they are also under a responsibility to take these back if they don't perform as they're supposed to, the way they're traditionally structured.
I'd like to briefly return to a point made by Mr. Boychuk previously. In describing the problem, he talked about the mark-to-market accounting rule. Last week, this committee had the opportunity to meet with a university professor who raised the same problem. I'd like our witness to provide us with more details on this topic. We are here to make suggestions, from time to time. The budget has been adopted, but perhaps there is room to refine certain things.
He must certainly recall that four or five weeks ago in the United States, the possibility of changing the mark-to-market rule was raised. Markets then reacted swiftly. In the one hand, this can be seen as an indication that tweaking this rule could give rise to problems of false market values. On the other hand, if, because of current conditions, we are not able to put a value on things that are inherently of value over the long term, perhaps this rule has to be replaced with something else.
I'd simply like him to share with us the fruit of his experience and even a few observations or suggestions, if he has any.
FEI Canada has various technical committees, one of which is the committee on corporate reporting, and so we spend a lot of time talking with the standard setters and accounting regulators. You're right that marked to market is certainly something that's garnered a lot of headlines.
I guess there are a couple of things about it. It's the value at a point in time, and that means a couple of things. The value is the value set if you have a mechanism to accurately measure that value. But the other thing is that it's at a point in time. So if the market swings the way we've seen over the last year, down 17% one week and up 20% the other week, well, you have to be lucky as to when your year-end is.
Ultimately, there was something back when I was in school many years ago called the efficient market hypothesis, which basically said to disclose everything and then it really shouldn't matter, because it will be completely transparent as to what the value of the instrument is. One of the things to ensure is that all of the information is out there so that, whichever model is used, at least the investors have all the information available to them to make the assessments.
Ms. Walmsley, you ended by saying that “there is a hodgepodge of regulations” which is a very innocuous, but general statement. Now that we're on our second round of questions, I'd like to give you the opportunity to provide a more precise answer. In fact, as legislators, we have to work with very specific things. We're here to draft laws and write rules that will be applied stringently by the competent authorities.
You used the term “hodgepodge of regulations” but I'd like you to be more precise. The passport system was developed over the course of recent years to regulate financial markets in Canada, from one province to the next. I'd like you to give me a specific example of what has not worked and a specific example of a problem that could be resolved if a single centralized securities regulator were established. This has been a matter of provincial jurisdiction since 1867. Civil law, which we are talking about today, has always fallen within the authority of the provinces. This would cause a real constitutional shakeup. I'm not asking you for your opinion on this topic: I simply want you to tell us specifically what your suggestion would change.
We'll call the meeting back to order.
I have the motion by Monsieur Laforest before me. I'm going to make a ruling on it. The ruling will not surprise Monsieur Laforest. It will not surprise anyone on the committee. It's the same ruling I've given on all of these motions dealing with this issue.
We have checked this procedurally with the clerk. We've checked this procedurally with the clerk of the clerks. This is my formal ruling on the motion.
First, Monsieur Laforest's motion reads as follows: “That the Finance Committee recommend that the government increase the Parliamentary Budget Officer's budget to $2.7 million, as was planned for 2009-2010, and that the Committee report this motion to the House.”
I would refer members to the mandate of the finance committee, as specified in Standing Order 108(2). I will not read that entire standing order; I would just refer members to that.
I'd also refer members to the mandate of the Parliamentary Budget Officer, as defined in section 79.1 of the Parliament of Canada Act. I'm going to read that into the record:
||The Parliamentary Budget Officer
|| 79.1(1) There is hereby established the position of Parliamentary Budget Officer, the holder of which is an officer of the Library of Parliament.
This comes further on:
|| 79.2 The mandate of the Parliamentary Budget Officer is to
||(a) provide independent analysis to the Senate and to the House of Commons about the state of the nation’s finances, the estimates of the government and trends in the national economy;
||(b) when requested to do so by any of the following committees, undertake research for that committee into the nation’s finances and economy:
||(ii) the Standing Committee on Finance of the House of Commons or, in the event that there is not a Standing Committee on Finance, the appropriate committee of the House of Commons, or
The Standing Joint Committee on the Library of Parliament is therefore the appropriate forum for such a study, as this motion suggests.
Furthermore, Standing Order 108(4) states:
||So far as this House is concerned, the mandates of the Standing Joint Committee on
||(a) the Library of Parliament shall include the review of the effectiveness, management and operation of the Library of Parliament;
I therefore declare the motion out of order because it exceeds the mandate of the Standing Committee on Finance. It is, instead, within the mandate of the Standing Joint Committee on the Library of Parliament.
That is my ruling. I am ruling this motion out of order. Monsieur Laforest can challenge that ruling.
You have a point of order, Monsieur Laforest.
When we received notice of this, I did some research into it. I tend to agree completely with our chair. It has been explained on many occasions, but since we've had several motions and indications of motions being proposed at this committee to look into the mandate of the budget officer, I would like to set the record straight on these motions: they are entirely outside the mandate of this committee.
The Standing Joint Committee on the Library of Parliament is currently studying these matters. I would like to inform you of what has been testimony at this library committee.
On March 12, Mr. William Young, the Parliamentary Librarian, stated this before committee:
||A plain reading of the relevant statutory provisions within the Parliament of Canada Act shows that the PBO is an officer of the library and is subject to the control and management of the librarian and not a stand-alone office.
In response to a question from Monsieur Laforest, which was premised on a 30% cut in the PBO budget, Mr. Young went on to say:
||There was no budget cut for the Parliamentary Budget Officer. He received the same increase as the rest of the library received. It was not reduced by 30%. There was what I'd call a notional allocation. There was no authorization for any amount of money.... Quite frankly, the Parliamentary Budget Officer was not treated any differently from any other service head in the Library of Parliament.
At the meeting of the library committee on Thursday, March 26, Mr. Joe Wild from Treasury Board further informed the committee of the following:
||As I just noted, the legislation expressly states that the research and analysis provided to parliamentarians by the PBO is to be independent. The Library of Parliament reports through the Parliamentary Librarian to the speakers of the House and Senate, and its direction and management are completely independent from the executive, meaning the government. This means that the Treasury Board Secretariat and other central agencies play no role in determining how the library and its offices, including the PBO, operate or perform their mandates. The estimates for the library are prepared by the Parliamentary Librarian, approved by the speakers of the House and Senate. They are then transmitted to the president of the Treasury Board, who tables them in Parliament, and nothing more.
Mr. Chair, the motion before us asks the government to do what it expressly is not allowed to do--namely, set the budget of a division of the Library of Parliament. This would be an intrusion of the executive into the business of Parliament and would call into question the independence of the Parliamentary Budget Officer and, by extension, the Library of Parliament.
I respectfully submit to all honourable members that this matter be taken up with the librarian, and the librarian only.
The point that the parliamentary secretary was making was having a respect for this place that we've heard from opposition members over and over again from the other side. You did what was required of you as chair, to follow up on whether this was actually a legal motion here, whether we have the legal responsibility of the budget of the budget officer. And it was clear that there is another committee they are assigned to.
We have heard nothing, as Mr. Pacetti has said, in terms of determining whether it's the right amount or not. It's done in another committee that has members from the Bloc, the NDP, the Liberals, and the Conservatives. They have an opportunity to ask questions. In fact, Monsieur Laforest was at that committee meeting, asking questions. If you can't get it there, you come here. Is that how it works?
Our friends across the way have talked about respect, working together, and all these things. Voting for this motion today flies completely in the face of those comments. The respect, the ethics of dealing with this--
An hon. member: Whoa, whoa.
Mr. Mike Wallace: What, you don't know how to spell it?
Now, if it passes or not, I'm comfortable that it'll go to the House and it'll probably get thrown out. But what makes me a bit angry today is that we talk about trying to get things done here. We heard earlier today about delay and so on and so forth. Well, this is exactly what we're doing here.
And we're not doing it, Mr. Chair.