FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, November 6, 1998

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[English]

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

As everyone knows, the finance committee is studying the MacKay report, and we look to Canadians' input on this very important issue as we try to define the 21st century financial services sector, a sector that is indeed extremely important to Canadians.

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This morning we have the pleasure to have with us Mr. Arthur Donner, economist and consultant; and the Honourable Douglas Peters, financial and economic consultant. We of course look forward to your comments, and we'll try to absorb all the wisdom we can this morning. Welcome.

Mr. Douglas D. Peters (Individual Presentation): Thank you very much.

Mr. Arthur Donner (Individual Presentation): Thank you, Mr. Chairman. I'll start with a brief presentation.

Doug Peters and I urge the standing committee to reject the two proposed mega-bank mergers.

Canada's chartered banks fulfil an important public policy purpose. Banks are not like any other business or industry. Their key assets, which are personal loans, business loans, mortgages, and government securities, and their key deposit liabilities are essential to the functioning of a well-managed economy. Indeed, this is why banks have been accorded special privileges and public support that other private firms do not have.

To demonstrate that the proposed bank mergers are in the public interest, the supporters of the mergers would have to demonstrate that the benefits of increased concentration would outweigh the costs to the public stemming from reduced competition, branch closures, reduced services, higher service costs, and heavy job losses. On this subject, the public is right to be skeptical. The bank emperors have no clothes.

Supporters of the mergers claim that the banks need to be larger to compete in the domestic and international markets. There are no compelling arguments or studies around suggesting that mega size is really required. Indeed, virtually the reverse is the case.

Supporters of the mergers claim that the banks would become so much more efficient, due to economies of scale and scope, that their unit costs would decline. This would place the banks in a better position to lower prices and/or to improve services to their customers.

That issue has been heavily researched in the literature. There is no compelling evidence to suggest that our already large banks would be able to generate major efficiencies should the mergers go ahead. Moreover, even if they were able to reduce their costs as they hope, the excess concentration in local markets does not suggest that the benefits would be passed on to their Canadian customers.

The proposed mergers place our financial system and our economy at risk should a financial bailout of a mega institution be required. This concern was also expressed by John Palmer, the superintendent of financial institutions. The herd instinct is common in banking as it is in other financial fields. Banks in the past have gotten into trouble, and no doubt they will do so again in the future. However, the cost of a possible bailout of a mega-bank will be enormous should the mergers be approved. Think of the current problems in Japan with their own mega-banks and their financial crises, or the savings and loan crisis in the United States in the early 1990s.

If the mergers were approved, it would result, in our view, in too heavy a concentration in the domestic financial marketplace. From the consumer perspective, the historical evidence suggests that undue banking concentration results in reduced competition, which translates into higher service charges, lower deposit rates, or higher borrowing costs. Imagine how much more difficult it will be to negotiate a mortgage loan, a consumer loan, or a business loan when there are significantly fewer suppliers of credit among which to choose.

Even if the mergers were approved with conditions, such as selling off certain lines of business, selling off branches to competitors, it is doubtful that new competition from foreign firms or from local competitors would be able to offset the undue banking concentration in a number of market areas.

Canada's regulators have traditionally relied upon the proposition that big shall not buy big, and the widely held ownership rule for chartered banks. The arguments for this were straightforward. Should the mergers go through, in our view, this would require dramatically changing the regulatory system, towards a tighter regulatory system.

We recommend that one of the outcomes of the public financial review process should be permitting banks to move into two new areas of business, insurance and leasing, where they currently do not participate directly and where their participation would increase competition, and in our view, would result in improved consumer benefits. Unlike the proposed bank mergers, this direction, which was also supported by the MacKay task force report, would also keep our current regulatory system intact.

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Finally, I have a brief response to some of the arguments surfacing in support of the mergers. For example, Mr. Cleghorn of the Royal Bank of Canada has criticized our estimates of up to 20,000 to 40,000 job losses resulting from the combined two mega-bank mergers. Our estimates are credible. Indeed, job cuts and branch closures are the main instrument Mr. Cleghorn has to enhance shareholder value.

Mr. Matthew Barrett, CEO of the Bank of Montreal, indicated in a speech that the merged bank would by the year 2004 establish a stand-alone bank for small business along the lines of mbanx. Would a stand-alone, small-business bank entity tied to a mega-bank really make a difference for small firms accessing loans when overall competition has been so reduced?

Mr. Barrett is also quoted in a September 25 Globe and Mail article stating:

The Bank of Montreal would need to slash annual expenses by $800 million and cut services to achieve the productivity gains it hopes to make at a lesser cost through its proposed mergers.

He argues that the mergers remain the best way to improve efficiency without resorting to massive lay-offs or exiting low-margin business lines.

In our view, this defence of the proposed bank mergers has absolutely no substance, Mr. Chairman.

Thank you for the opportunity to make these remarks.

The Chairman: Thank you very much, Mr. Donner.

We'll now hear from Mr. Douglas Peters.

Mr. Douglas Peters: Thank you, Mr. Chairman and members of the Standing Committee on Finance. I'm pleased to be able to make this presentation to you. You have our paper. I will just add a few words to what Arthur Donner has already said.

In the study we presented to Laurentian University and in this paper we've handed out we've stated the two proposed bank mergers will significantly reduce competition in the Canadian market for financial services. This means a more monopolistic banking system.

Economic theory, as both Arthur and I were taught by Professor Weintraub of the University of Pennsylvania, holds that a monopoly affects the composition of output and the distribution of income. In the case of these proposed bank mergers, the output effects will be to reduce the amount of banking services supplied to the Canadian public, and the income effects will be to increase the incomes of bankers, mostly the incomes of bank executives, I think. And if the bankers tell you otherwise, you might ask them why economic theory does not apply to them.

As Arthur has said, to support the mergers it is necessary to show that the benefits of these two mega-banks will outweigh the negative effects to the Canadian public—job loss, branch closures, and the various other items. Our analysis led us to conclude the two megamergers would create an unhealthy climate for financial services competition in Canada and would be a detriment to the consumers of financial services.

There is one other aspect of this that I think is extremely important when you look at the overall questions the financial services sector is going to have in the longer term. With the behemoth size of the two institutions, the overall financial system becomes more vulnerable to external or domestic financial shocks. The cost of bailing out a failing megainstitution would be enormous.

We've also said even if the mergers were approved with conditions designed to provide added competition, such as branch sales or things like that, the final outcome would be a reduction in competition.

We have also proposed an alternative to the mergers, which I hope you will consider. It proposes enlarging the scope of financial institutions rather than narrowing the level of competition, as would the proposed mergers. We therefore agree with the MacKay task force recommendation that selling of insurance should not be prevented in the offices of deposit-taking institutions, and small-vehicular leasing should be allowed. I think the task force makes a convincing case for both.

Now, our alternative would continue to prevent mergers of very large financial-like institutions, very large banks, but allow the mergers of different large institutions. For example, the proposed sale of the London Life Insurance Company to the Royal Bank of Canada, which was not consummated, doesn't make more sense competitively than does the Royal-Montreal merger.

The advantage of allowing the banks to merge into other sector lines instead of merging with other banks is it would allow the development of much larger financial institutions that could be internationally competitive, and would entail little or no job loss. It would provide Canadians with competitive pricing in two areas that badly need it: automobile leasing and insurance. The combined institutions would provide all types of financial services in all parts of the country.

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Our estimates of future development say that there would be maybe six to eight or as many as a dozen large financial institutions throughout the country, which would provide a level of competition even greater than that at the present time. Our proposal is consistent with allowing the maintenance of schedule I and schedule II banks, the 10%-ownership rule, and foreign bank branching under strict supervision.

We also think it's important to assess the vast number of recommendations in the report of the MacKay task force, which your committee is doing as well, of course. We've done that in the third section of our paper, which we tabled with you today.

There are some aspects of the MacKay task force with which we do not agree. As I said before, we agreed with the suggestions on insurance and auto leasing.

With regard to the safety and soundness of Canada's financial system, the MacKay report suggests, I believe in recommendations 4 and 10, that a lower capital requirement for a new bank is needed and that OSFI should consider competition as well as safety and soundness.

Canada has an enviable—it's not perfect, of course—record of responsible financial institution regulation. The cost to the Canadian taxpayer has been minimal. Recent events, from the S and L fiasco in the United States to the $500 billion U.S. bailout of Japanese financial institutions, have shown the need for careful regulations. I had to very carefully count the number of zeros in our report to make sure I had that right figure: $500,000,000,000 U.S. It almost took a whole line in the paper, but that's what the Japanese public will be paying.

We feel this is not the time to detour to an untried regulatory system, and we do not support the recommendations in these two areas of the MacKay report.

I think the MacKay report also fails to distinguish between the consumer protection needed if the two bank mergers go ahead and what would be needed if the present five major banks remain. We feel that a much more rigorous consumer regulatory system would be required if the two proposed bank mergers were allowed to proceed. We spelled out that need in our report, and we also indicated that any increased regulation should apply only to the two merged institutions.

Now such a system, although it does look rather peculiar, would allow the smaller institutions to continue to innovate, compete, and broaden the base, while the two mega-banks, if they were approved, would be constrained by the consumer regulation needed at that time.

We would emphasize that as far as consumer issues are concerned, the federal government would only regulate banks. I think that's an important question. As for other financial institutions, as far as their consumer regulation is concerned, they're regulated provincially. This means it's very easy for the non-banks to suggest the need for consumer bank regulation, knowing that such rules will not apply to that.

We would suggest that you look very carefully at competitors' suggestions. We urge you to pay much more attention to what individual consumers say about bank services, and pay little or no attention to competitors' comments.

Though the MacKay task force suggests the amalgamation of the Office of the Superintendent of Financial Institutions Canada and the Canada Deposit Insurance Corporation, as the minister to whom both reported for four years, I would not agree with that. I found that the independent advice of the insuring agent, CDIC, was important.

This amalgamation is a suggestion that has been around for some time, and has been rejected on a number of occasions. When I was working closely with the two organizations for some years, there was a tendency for there to be a creative tension between the two of them. Amalgamating them would remove this. This would be, I think, a considerable loss. It is a safer and sounder system to have the regulator separated from the insurer of deposits.

There's considerable cooperation between these two, and little, if any, inefficiency. One might suggest that there might be a less efficient regime under one management, as the head of such a larger group would have to consider the insurance problems as well as the regulatory questions, which could very well delay effective actions when difficulties arise, as they inevitably will do in the future with the financial institutions. There would be savings associated with such a combination, and the loss of an independent adviser I think would be serious.

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One other item is the MacKay task force recommends the government back CompCorp; in other words, extend CDIC coverage to insurance. That would result in a large increase in the liabilities of the federal government, and I'm not in agreement with that. There is no systemic risk to insurance; we've seen that. The systemic risk is there for deposit-taking institutions, quite clearly, but there is none to insurance. We've seen that with the demise of Confederation Life, which I was intimately involved with, and we saw there was no systemic risk at that time.

If the insurance companies are operating at a competitive disadvantage at the present time, it is because of the failure of Confederation Life and the fact they could not get together as a group to bail out Confederation Life, but rather thought they would step aside and pick up the remains.

That's the end of my presentation. I thank you for your attention. I'd be pleased to answer any questions, and I'm sure Dr. Donner would as well.

The Chairman: Thank you very much, Mr. Peters.

Mr. Forseth, we'll begin with you.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Ref.): Thank you very much.

Welcome, Mr. Donner and Mr. Peters. It's good to see a colleague from the 35th Parliament. Welcome back. Now that you're retired from this place you're much happier.

It's quite striking that you positively recommend the banks be permitted to enter into auto leasing and insurance selling. In fact in your report you say quite boldly “Why not tied selling?” and getting into those new areas, a basic change of the rules. That seems somewhat inconsistent with the main thrust of your argument about rejecting the bank mergers, when you say it would reduce competition and the new merged entities would control too much of the financial sector. They'd become so dominant that it would limit competition.

But in essence, that's what tied selling is all about. Tied selling limits the ability to shop and compare. It thwarts the competitive market forces and doesn't allow a customer to really have a market in which to operate. That's what tied selling is all about, and that's the economic advantage of the institution. When they have a customer and they have a hold of them it thwarts market forces and reduces competition. You say that's good for the financial market and good for the consumer, yet on the other hand you say you don't want to recommend mergers because that thwarts the market. Can you try to explain the inconsistency there?

Mr. Douglas Peters: I don't believe there is an inconsistency. We certainly do not recommend tied selling. I think tied selling is illegal and should continue to be illegal. That's not an issue as far as we're concerned. We did say in our paper I do not think it is as large an issue as it appears to be. The problem is that it is put forth by the competitors of the banks.

As a member of Parliament for four years, I never had one consumer come into my office and complain to me about tied selling. You may have, but I haven't. I had lots of them complain about bank service charges, card interest rates, small-business lending, etc., but I never had one of my constituents come in and complain about that. We were just saying in our paper it's probably not as great a problem.

As far as the mergers, it's a very good point you've brought up. The competition now in auto leasing is strictly between the auto leasing companies. I think the MacKay task force reports 80% to 90% is done by the three major automobile companies, plus Honda and others, on their own. There is no competition in that area. That is why I suggest allowing the banks into that area would add competition to the financial services sector.

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On delivering insurance products, you can deliver insurance products from a department store. Allstate and Sears were together for years. You can deliver insurance services from the corner grocery store; you can deliver insurance services from the back seat of a Volkswagen, but you can't deliver them from a bank branch, and that seems to border on the ridiculous. We're one of the few countries in the world that prevents competition in both insurance and auto leasing. In our view, allowing the banks to do that would increase the competition and benefit the consumer in both those areas.

Mr. Paul Forseth: I notice in your report you say the 10% rule is easily understood, and scrapping it for a more complex set of rules appears to have no advantage to Canada. You recommend the status quo. Certainly changing the 10% rule would be destabilizing to the market, and long-term decisions and the set-up of financial plans have been predicated on that decision. Certainly any radical change would be destabilizing. Could you just perhaps support that statement a little bit and tell us why you feel the 10% rule of ownership is of value and should be maintained?

Mr. Douglas Peters: I think the 10% rule is the key factor in several areas. It maintains widely held ownership of the major financial institutions, and widely held ownership has a particular advantage. Let me give you an example. The ownership of a financial institution can be handled in a number of ways. An individual owner of a financial institution has the ability to undertake certain other projects to his own advantage. Widely held ownership prevents that particular item.

On the S and L question in the U.S., when they changed the rules to allow individual ownership in S and Ls you had one of the worse messes in the history of financial institutions, with the possible exception of the financial sector in Japan right at the moment. It was a mess because the individual could control the financial institution and had the ability to move funds from the financial institution to his own account.

That is the major reason for the 10% rule: it prevents that particular item. It also allows the large Canadian financial institutions—which are not large and will never be large. I think somebody said if you added up all the capital of all the Canadian financial institutions, insurance companies, banks, mutuals and the rest you would not get as large as Citicorp in the U.S. Our financial institutions are never going to be as large as those in the U.S., and Citicorp is only a small portion of the total U.S.—it's not 20%, it's less than 10%. It's a small portion of the U.S. financial community.

It maintains a Canadian ownership, and I think that's important. It maintains Toronto, Montreal, Calgary and Vancouver as financial centres in Canada, and that's also very important.

Mr. Paul Forseth: I have one final question in this round. It's the generally accepted theory that Canada's financial world and Canadians especially are better off in a world of more open competition, and fostering competition is the best way to ensure Canadians are well served if we have a market that works within a fair set of rules. That's the accepted mantra we hear over and over again.

I would like you to comment first of all on the validity of that idea and if you accept it. Regardless of whether mergers happen or a basic change of rules happens, how can we, from your perspective, increase competition in the financial sector? Certainly there must be other things we can do to advance the working of a market so Canadians can be better off.

Mr. Douglas Peters: I think the mantra of competition is fine but competition is not an end, it is a means. The end is the welfare of the individual consumer in the country. Competition is a means to reach that end. With financial institutions the competition is regulated for very good reasons. It's regulated because there is a risk to financial institutions; there is a wider public policy to financial institutions. They are the means of issuing of the economy, of operating monetary policy and that. So there is a wider purpose there.

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The competition in financial institutions is always backed up by a safety and soundness mantra, which is another mantra as well. So it's not just the same as the corner grocery store. It is a different level. And it makes your decisions here in the Canadian Parliament and in this committee very important. Your decisions are an extremely important aspect of that, because it does affect the Canadian economy.

So, yes, competition is fine. In terms of how I would improve the competition, I suggested that in the financial services sector having the ability of the consumer to purchase insurance if they want to from their local bank, or getting a lease. Let me add onto this that the only way the federal government can get into any set of rules on the leasing side is by allowing the banks in there, because the federal government does not have any control over the leasing aspect of it; it's provincially regulated. If the banks are allowed to lease, the banks would have to have a set of rules. Disclosure rules for the banks are very strict, and the disclosure rules would be comparable if they were allowed into leasing.

That would be a clear benefit to consumers, because if you want to have a competitive market, you'd better have an informed consumer, and in many cases I think the studies have shown that in auto leasing, for one, the consumer is not as informed as he might be.

Mr. Paul Forseth: Thank you.

The Chairman: Just to follow up, I'm really interested in your model about job losses and that. Sometimes I've thought, as we analyse this issue, that job losses, while important— I've seen many mergers—I'm not talking about necessarily the financial services sector, but throughout the economy—where job losses have in fact happened. I often wonder whether when the tractor was introduced in a farming community it would have been approved through the public impact statement or not. I often wonder, because 500 workers would have lost their jobs, whether or not you would have introduced the tractor. But that's a discussion of a more philosophical nature.

I want to ask you if in fact the job losses that would take place in the insurance field— When insurers come in front of us, what they talk about is 20,000 job losses. And I think that's an important consideration. At least you think so, because you always talk about job losses. I'm wondering why you talk about job losses when it comes to banks, but you don't use the same logic when it applies to insurance.

Mr. Douglas Peters: I use exactly the same logic. I think the job losses in insurance would not be there because what the insurance companies are talking about are losses of jobs in the insurance business, not the loss of jobs in people selling insurance. You're still going to need the same number of people to sell insurance, but they may be working for a bank instead of working for an insurance company. The difference is quite clearly the question of what institution they work for.

If an individual can sell an insurance policy in such and such a length of time, then you're going to have to do that anyway in the banks. I think the insurance companies' estimates of job losses for this is rather peculiar, because in the bank merger question what you're going to have is a reduction of service to Canadians because of a monopolistic banking system. That's pretty clear.

The 20,000 people—this is what the banks themselves estimate—are not sitting around doing nothing right now. They are working and they are serving the public. So if the banks themselves say there are going to be 18,500 fewer jobs, those are 18,500 people who are going to give less service to the customers. That's where the profitability of a merger comes in. It's that they are able to give less service to the customer and possibly at a higher cost.

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If the insurance people say the same thing, you're not going to get less insurance service; you're probably going to have more insurance service. So you'll probably have more people working in insurance in the broader sense, although some of them, if the banks were selling it, would be working in the banks. That's not a job loss to the economy.

Arthur is far more of a labour expert than I am, and I'd defer to anything he has to say.

Mr. Arthur Donner: Thank you for your deference, which is often needed.

I'd like to just point out that whereas the job issue is a very important issue, to me it is not the paramount issue in the mergers issue or in the issue of financial institutions regulation. I do not believe that the banks and insurance companies should be in the business of public works. They're not there to create jobs in the ordinary sense. We need them to create jobs, but I think overall the job responsibility is a macro-economic responsibility, the responsibility of everybody, centering of course on the federal government.

I quite agree with Doug Peters' point. We are talking about the service industry. I think what the insurance companies are saying is that insurance companies per se might lose jobs, but they will simply transfer over to another sector. I don't see this as necessarily a bad thing.

With respect to our own 20,000 to 40,000 job figure in terms of potential losses from the mega-mergers, I think this would be an adverse consequence. I do believe that the job losses may occur in this industry over time in any event, and I agree with Mr. Peters that if you follow through the logic of how the banks can make this merger work profitably, it ultimately has to result in the consumer somehow paying for this.

I see this merger issue, the financial institutions regulation issue, not so much in terms of jobs—as important as jobs are—but more importantly in terms of the overall public interest and certainly public interest as expressed in terms of the consumer, in terms of the quality of services they receive and the prices they pay for those services.

The Chairman: So should a public impact statement include jobs or not?

Mr. Arthur Donner: Of course they should include jobs. And by the way, Mr. Chairman, I'm not against mergers in principle; I'm just against these particular mergers at this particular time because I think they are so clearly not in the public interest. But if I were convinced that concentration wouldn't increase, that there would be this huge wave of new competitors arriving or that existing small competitors could suddenly fill the vacuum, then I would not resist the mergers in the same way. Mergers are not necessarily bad, but in this particular case I think mergers are very bad.

The Chairman: I'm wondering about this interesting point you raised. The question deals with the following. Now you're talking about these two proposed mergers. By the way, this committee's not looking at these two proposed mergers. We're looking at mergers as a legitimate business practice that occurs quite often throughout the domestic economy and international economy. I want to know whether or not mergers enhance the type of entrepreneurial system that MacKay talks about or not, which will speak to the creation of the types of players you're talking about.

Mr. Arthur Donner: Obviously, Mr. Chairman, there isn't a simple answer to a question that is incredibly complex and deep. I think you have to look at the circumstances and the timing, and you have to weigh all the factors. My colleague Doug Peters and I are both very concerned, for example, about the solvency of the total system; we talk a lot about systemic risk. So to me, banks, as I mentioned in my opening remarks, are not like your corner grocery store. The issue is much deeper and more serious because bank deposits are what we economists call the money supply, and it's a very critical part of the operation of our economic system. Some mergers obviously do enhance competitiveness and some don't. Some create synergies and technological innovations that we would welcome.

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I must admit, looking at the literature on larger banks versus smaller banks, it's not clear to me that the larger banks are necessarily any more innovative or indeed even in a better position to maximize profits for their own shareholders than the smaller banks are.

If I'm not giving you a clear answer, there really is, in my view, no clear answer to your question. It has to be judged in terms of the circumstances. But in terms of banks, I think you have to put on an extra level of detail and attention.

The Chairman: So I guess you have to be very cautious about the steps you take.

Mr. Arthur Donner: In this particular circumstance, yes. Very honestly, I'm not against mergers in principle, but as I look at the combined effect of these four banks merging into these two mega-banks, it's obviously clearly not in the public interest.

I can see a case that the banks can make for their own shareholders. Even that case is somewhat questionable. I can see why they would make that case, but I don't see a public interest case. Banks are not public utilities. But if you think of them as public utilities and as having a public role, then your committee has to be incredibly cautious in looking at this issue.

The Chairman: Then the future as you see it does not include large banks in Canada.

Mr. Arthur Donner: That's not the case at all, sir. I'm just saying that at this particular time it just doesn't make sense to me.

I believe our banks are able to compete. I'm sure they'll argue exactly the opposite case, which is that they have to be larger to compete better.

Again, I would just go back to the evidence that I and my colleagues have examined. I must say that the economics and finance professions have also examined this. Many of the arguments the banks make for the proposed mergers just don't stand up.

The Chairman: Mr. Donner, I still didn't get the answer. Do you see big banks in the future or not?

Mr. Arthur Donner: Yes. I see the banks being bigger, and there may be some mergers, but I think we do have an opportunity in Canada to ensure that we have head offices in Canada.

You may be worried about the jobs issue. I worry about the quality of jobs, and not so much about the total number of jobs. The quality of jobs is reflected in head office decision-making, and the salaries and incomes are much higher if you have a head office rather than a branch office. This is another reason why I would emphasize the advantage of maintaining the 10% ownership rule.

The Chairman: Thank you.

Mr. Peters.

Mr. Douglas Peters: If I can add a word, Mr. Chairman, we already have big banks in Canada. We have institutions that have grown from fairly small institutions to huge institutions. A lot of that growth has been by merger.

So you ask whether we should have big banks in Canada. Yes, we have big banks in Canada. Are the banks ever going to be as big as the biggest ones in the U.S.? Certainly not. We couldn't possibly do that. There's a financial system in the U.S. that's fifteen or twenty times the size of the one in Canada. But are our banks big in the context of the Canadian market? They're far larger now than any bank in the U.S. They're two or three times larger.

The Chairman: That was pretty clear with Mr. Donner. The question was whether or not we'd see larger banks than the previous ones. But by his answer, you'll see larger banks in the future, and some of it may be as a result of mergers.

Mr. Arthur Donner: It may come about through mergers, but frankly, I would hope that if mergers were permitted in the future, House of Commons committees like yours would be convinced that the competitive environment would not deteriorate. To reiterate, I very strongly believe that if mergers went ahead today, the competitive environment would be a terrible one in Canada.

The Chairman: Although you're not clear on whether or not a merger would enhance the entrepreneurial side of the financial services sector.

Mr. Arthur Donner: It's very hard to comment on that. I think the evidence is mixed.

The Chairman: But that's what we're trying to do here. We're trying to paint a picture of the future. As you probably know, this committee is not about the past, it's about the future financial services sector. So the major challenge we have is in fact to paint that future for the people of Canada, and to also help design it. That's the reason I ask these questions.

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I fundamentally believe that you don't have a crystal ball. Neither does Mr. Peters, and neither do we. But we certainly can help shape that future.

Mr. Arthur Donner: Yes, Mr. Chairman, I agree with those comments. I would just reiterate that one part of this that's absolutely essential when you're painting the future is that you don't want to restrict financial institutions from innovating and having the ability of passing on lower costs and improved services to the customers.

The other aspect of that is to paint the future of whether there will be sufficient competition for the customer base. Will there be sufficient options? Will there be fair prices in the ordinary competitive market sense?

I would just urge you to not focus only on the issue of entrepreneurship or competitive cost. I'm not a specialist enough in this area to be absolutely convinced that the only way to compete in the future is to compete with very large institutions. The future I envision is one where there will be a mix of very large institutions and special niche institutions. But I would say that future would exist for many other industries as well as for the banking industry.

The Chairman: I didn't get your last couple of phrases.

Mr. Arthur Donner: Right. I was going to suggest that the future that will probably arise will be a mix of different-sized institutions, a mix of very large firms and small ones, and some specialized firms.

Now I would also argue that this future will probably be similar to the future of the automobile industry and non-financial services as well.

The Chairman: Thank you.

Mr. Peters.

Mr. Douglas Peters: Just on the question of innovation, I think if you look at the history we've had in Canada on innovation in financial institutions, many of the small institutions were the innovative ones. The credit unions stayed open late. Canada Trust was open from 8 a.m. to 8 p.m. The daily interest savings accounts began in credit unions before they were taken up by some of the trust companies. The weekly payment mortgages were again an innovation.

None of these were innovated by the very large institutions, I'm afraid. So if you're looking for innovation, I think you'll find it far more often in the smaller institutions than in the larger ones. If the merger argument is for innovation, show me very large institutions that provide particular innovations.

The Chairman: I just have one final question in reference to job losses, and then we'll go to Mr. Riis.

You're spread between 20,000 to 40,000 in terms of job losses. That's quite a spread. Also, going back to the issue of the future, you have to factor things in to come up with these types of numbers that would speak to future conditions. So you must know what those conditions are; otherwise you would never be able to determine how you get 20,000 to 40,000 job losses.

In other words, I'm sure you haven't done that in isolation. You figured out the transfer of those jobs into the insurance jobs you were talking about. Did you factor all those changes in, or did you just limit it to the actual—

We have banks telling us that they can take care of it by attrition. We have people who say there's going to be aggregate growth. We have people like you who say there will be 20,000 to 40,000 jobs lost. Is there something you can all agree on? We respect everybody's point of view.

Mr. Douglas Peters: I think you have to distinguish between two different things. First of all, there's the loss of positions, which we were talking about, and then there's the firing of actual staff members.

If you look at the 20,000 figure, that's approximately what the banks themselves estimate as the lost number of positions. They stated it was 18,500. I think that was the number. It was 10,000 for TD and CBIC, and 8,500 for Royal Bank and Bank of Montreal. Now they stated those numbers themselves in position losses. We were concerned with position loss.

Look at the other mergers that have happened, such as the takeover of National Trust, the takeover of the Central Guaranty, or things of that nature. You get much higher percentage losses than the ones they put out, which gives us the upper limit. And the 40,000 is an upper limit, of course. Is it high? Yes, of course it's high. Will it likely be there? No, it's not likely to be there. The 40,000 isn't the most likely number that will be there. The 20,000 is a minimum, because that's what the banks themselves say with regard to lost positions. The 40,000 is a maximum we thought of from looking at other things. So it's going to be somewhere between the two, and those are the factors on those two estimates.

• 0955

We don't have a crystal ball. We weren't looking at the future. What have the banks themselves actually said? They say that the position loss is 20,000. Now, that is lost positions. They say they will achieve that by attrition, and nobody will be fired.

The Chairman: The point of 40,000, the upper end, is just for newspaper headlines.

Mr. Douglas Peters: No, it's not. We didn't write the headlines in the newspapers. The 40,000 is the upper limit of the number. If we could have given one most likely figure, it would probably be somewhere between 20,000 and 30,000. But if you want to give an upper limit, you look at the other mergers that have taken place and at what percentage of the staff have been lost in those, and 40,000 is the number that comes up. So is it possible? Yes, it's possible. Is it likely? Probably not. And it depends on the time horizon you want to take.

The Chairman: Thanks for that clarification, because people do often refer to the 40,000 number.

Mr. Douglas Peters: I know.

Mr. Arthur Donner: I would like to offer one observation on the point that the banks would manage the job losses through attrition. Now, attrition is still a job loss picture. With any industry, whether it's banking, automobiles, or whatever, typically you would hope that over time that industry would be adding to employment, because after all, the Canadian labour force grows over time. So if the banks simply allow retirements, which I take to be attrition, to take care of the issue, in my view, they can't manage it. But even that is a very negative statement in terms of what they're going to do regarding the job situation. I personally cannot believe they can manage this through attrition, because I don't think they'll be able to hit their cost objectives.

The Chairman: Thank you, Mr. Donner.

Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you very much, Mr. Chairman.

I found this morning's discussion fascinating, particularly the latter comment. It would appear that the banks are quite anxious to get on with these mergers once they get the go-ahead, and to take care of 20,000 or 30,000 or perhaps 40,000 people through attrition is going to take some time. So I think your observations are very helpful that this is extremely optimistic on the side of the banks.

Also, I was particularly encouraged by your comment that there are no compelling arguments or studies that indicate that the banks need to be larger in order to compete, as well as no compelling evidence to suggest that they would be more efficient by being larger. I think this is helpful to us, Mr. Donner.

Now, both of you mentioned in one way or another that these mergers are obviously not in the public interest. Mr. Donner, you suggested that perhaps even in terms of the shareholders' interest there's some question about this.

My question is directed primarily to Mr. Peters. I appreciate that because of your past life, you probably have an understanding of the banking world that some of us wouldn't have. Your comment that I thought was particularly telling was why does economic theory not apply to the banking argument? The banks are incredibly sophisticated. They obviously have people who have gone to probably the same schools you referred to earlier. What is the motivation, in your judgment, behind this, if there's no realistic economic argument in favour? Certainly it goes against any economic theory any of us have ever understood. Yet the banks seem so determined, and the CEOs who have appeared before the committee are almost zealous when it comes to these two mergers. So, Mr. Peters, what is really behind this? Why are they doing what they're proposing to do?

Mr. Douglas Peters: I don't know. I think that's a question you might ask the bank chairmen. But I'll tell you my opinion of what is behind it and what we've stated quite clearly in our report, which is that the mergers would give the banks the ability to dominate the domestic market. When they dominate a domestic market, it allows them to reduce service to the customers and lower their costs and to charge more for their services.

• 1000

One example I've heard of was in California—it's not a separate country, but it's a market that is closer in size to Canada—where there were major mergers. What I'm talking about is a comparison of the deposit rates in California to the average deposit rates in the U.S. in total. That deposit rate fell by something like 35 basis points. That was a huge gain for the banking institutions after the mergers took place. If I could get 35 basis points on the TD Bank's balance sheets, I would be the hero of the corporate structure. That's a lot of money.

You're asking me why they are doing this. It is because of their ability post-merger to reduce service and increase prices. That's what a monopoly is. That's right in line with economic theory.

Mr. Nelson Riis: Yes. In your joint paper you quote from Mr. Ferguson of the CIBC that it's all about growth, which in a sense is what is your session is about as well.

Mr. Peters, I know you've advocated your view of the future of the financial services sector to see maybe eight to twelve groups eventually form. They're largely forming up now. Let's assume that there are twelve groups out there. What would prohibit the banks from eventually moving in and taking over those twelve and bringing it down to perhaps four or five of these groups, which would be four or five banks?

Mr. Douglas Peters: I would suggest that the banks would be part of those eight to twelve institutions.

Yes, you would have the issue of mergers in that group. That's quite right. The usual reason for major mergers in the financial sector in Canada has been because one of them gets into trouble. If you have twelve and one gets into trouble, you have eleven. If you have two and one gets into trouble, you have one. So you should develop policies that would encourage the development of at least eight to twelve large institutions so that if one got into trouble, it would not affect the whole economy nearly as much as it would if one of the mega-institutions did.

Mr. Nelson Riis: Both of you make compelling arguments in terms of the banks being permitted to move into leasing as well as into the insurance sector. My question is perhaps more theoretical, in that most, perhaps all, corporations, particularly publicly based corporations, have to grow. Their shareholders demand it. I suspect we've seen banks grow almost as large as they can in terms of where they are now doing all the non-banking types of activity. Now they will grow possibly into the insurance and auto leasing sectors.

Is there any reason to think that's where they would stop, that they'd come to a point one day where they've grown into these sectors and that would be it? I guess it has become a bit of a throw-away line, but they would be now growing into selling stamps and providing stamping business through their banking machines. Can we assume that over time the banks will just simply continue to sort of hive off and grow into what we would consider traditional non-banking areas?

Mr. Douglas Peters: The word “bank” comes from the Italian “banca”, which referred to the gold-maker's bench. If we had stopped the definition of banking back in the 14th or 15th century, we'd have them making gold rings right now or buying and selling gold, which some banks still do.

Sure, financial institutions do change. The whole economy changes. And, yes, banks do different things now.

• 1005

When I started in the bank, we had savings accounts and current accounts. Those were two things. We paid 3% interest on savings accounts, and nothing on current accounts. That was your choice in the bank. We've gone a long way since that time. We had demand loans and time loans, and that was it. We didn't make consumer loans to any extent.

So yes, they will change, they will grow, and they will do different things, and we have to make sure that our banking legislation is not so restrictive that it will prevent them from selling services they are capable of doing and making a success of it. If they don't make a success of it, fine, but if they make a success of it, then they're serving the needs of the consumer and the consumer is better off.

Mr. Nelson Riis: I have one last question.

Mr. Peters, in terms of the present banking situation and the competition that exists in the banking sector now, could you comment on the level of competition as you see it? Often people refer to our existing banking system as being relatively monopolistic or with such few players. I would be curious in terms of your views as to the competition that exists in the system today.

Mr. Douglas Peters: I think there's a reasonable level of competition in the system today. The five institutions are all huge institutions. I think their balance sheets are all at the $200 billion mark, which puts them at very large. In addition, there are wide variety of smaller institutions around.

The largest financial institution in the province of Quebec is the Desjardins group, the credit union. They tell me that the largest two financial institutions in British Columbia, your province—and you can tell better than I can—are the Hongkong Bank and the VanCity Credit Union. Here we have some very clever institutions that have made a considerable mark on the financial skyline across the country.

So I would say yes, there is a good deal of competition, and it's a healthy system at the present time. It's not perfect—no financial system ever will be—but it's a very positive one.

Arthur may have a differing view on that as a sole entrepreneur.

Mr. Arthur Donner: I quite agree with my colleague. I'm really not an expert on that issue to his degree, so I would bow to him.

The Chairman: Thank you, Mr. Riis.

Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman. I want to touch on a couple of areas rather quickly.

I'll pick up on what Mr. Riis was saying. You talk about the insurance retailing and leasing. You make the argument from the macro-economic sense, essentially, that the job numbers would not be the issue because you would see a movement of those jobs from where they are today into the banking industry. Yet the Insurance Bureau of Canada talks about the 20,000 jobs. The new jobs that would be created would be the call-centre kinds of jobs, the bank branch jobs. I guess there would be some dislocation of people from outside the urban centres. Isn't this part of the problem?

You talk about the quality of jobs. Essentially, with the distribution system that's in place today, you have a number of small-business entrepreneurs, of which I think you're both very supportive. Do you not acknowledge that this type of distribution system would have a pretty significant effect on that particular sector, the small business and entrepreneur, even though from a macro-economic sense I may agree with you that the number of jobs would not shift that dramatically?

That's my first question. I have to get them all in, because I have a certain time limit.

Secondly, with respect to OSFI, one of the recommendations from MacKay had to do with establishing a board of directors to oversee operations. I'd like to hear your comments on that.

Mr. Peters, with respect to CDIC and CompCorp, you mentioned that you would see a burden or a liability increase for government if in fact you see the amalgamation of these two. Have you considered the actual privatization of CDIC and have it move exactly the opposite way, in terms of an industry-supported program rather than a government-backed program?

• 1010

On the idea of tied selling, you indicated that you haven't personally received a constituent who has come in to complain about tied selling. But what we're hearing is that along with the actual act of tied selling there is a perception of tied selling and there is an imbalance that consumers feel when they walk into a financial institution, or in some cases other situations where people have positions of authority. So there's an imbalance and a perception of an imbalance there. One of the recommendations of MacKay was to legislate an ombudsman for financial services. Do you think that would in any way help to alleviate this perception of imbalance with respect to tied selling?

As the last question and comment I have, I know a lot of the discussion this morning was on mergers. Essentially, this committee is not looking at these specific mergers; the committee is looking at the future of the financial services sector and MacKay's recommendations. In that context, you make a recommendation that there should be more intra-type mergers of banks and insurance companies—London Life and Royal Bank was the example you gave—versus mergers of the type as that between the Bank of Montreal and the Royal Bank.

But the Bank of Canada mentioned in a report that in their opinion there would probably be 10 to 12 very large Wal-Mart type financial institutions in the world. Doesn't it make some sense to have our Canadian banks focus on a certain niche market to try to compete with that global financial services sector rather than try to compete in the Wal-Mart world, where essentially they won't be able to compete? If they were to go out and buy all of these insurance companies and remain a bank and build a large domestic financial institution, from a global perspective they still wouldn't meet the challenges that are out there.

If they were to go out and consolidate and focus, and do more mono-line and focus on banking itself, do you think they have a better chance of being, if not the 10 or 12, in the top 20 or the top 15? I wonder why you went one way versus the other and whether you had considered that.

Mr. Douglas Peters: That's quite a few questions.

Mr. Tony Valeri: I've learned how to do that over a number of years.

Mr. Douglas Peters: That's right, you've been at it now for five or six years.

The job question in insurance is a good question. Are the insurance people who are in the existing delivery system at the present time a clearly efficient delivery system for the consumer is the question I think your committee should be asking. If it is, if the consumer is interested, then allowing the banks into insurance won't make any difference. If these fellows are clearly producing a product for the consumer that the consumer wants, then the banks being there won't change that and they will not be there. If the banks do deliver a product that is better, easier for the consumer to understand or something like that, yes, there will be effects, and isn't that good for the consumer?

The question is why don't you let the banks see if they can work. If they can't, fine. If the insurance delivery system out there is a terrific one, as the insurance companies say it is, and if it's really filling the consumers' needs, good, let's keep it that way.

As for the board of directors for OSFI, I'm not sure of that. I cannot see what a board of directors— It's part of a larger plan to put CDIC, which does have a board of directors, into OSFI, and I guess you have to do something with the board of directors. If you put CDIC and OSFI together in a package you may have to have a board of directors. I don't think OSFI itself needs a board of directors. The superintendent reports to a minister, and the ministerial responsibility is quite clear. Your committee sees the superintendent here whenever you want to have discussions. So I think the board of directors would be quite unnecessary from the OSFI side of it alone.

• 1015

Does the CDIC need a board? That's another question. You asked about the privatization of the CDIC. The banks have suggested this themselves, and the question you have to answer in this committee is whether there is a public interest in having the CDIC there as a part of the public sector. The answer to my mind is yes, there is a public interest. There is a systemic risk factor in deposit-taking institutions that is clearly there, and you have an obligation as a federal government to undertake the safety and soundness of the deposit-taking institutions, because that has a major effect on the economy that the failure of an insurance company wouldn't have.

Apropos tied selling, yes, there is a perception of tied selling. I really felt, and we put it in our paper, that if this is a really big problem I should have tens of thousands telling me it's a problem, and I'd have the stockbrokers telling me it's a problem and I'd have the insurance companies telling me it's a problem. Neither one of them are regulated. So I have a suggestion. Let's see the tens of thousands of Canadians sign up telling me there's a problem here on the tied selling issue. Yes, I think it should be illegal. It should be illegal, quite clearly. I'm not in favour of it at all. I'm just saying if I were still in my old office it would be fairly low on my list of priorities, because I hear it all the—

Mr. Tony Valeri: I asked the question in the context of legislating the ombudsman. Tied selling has been dealt with and we proclaimed that particular position.

Mr. Douglas Peters: The ombudsman I think is probably a good idea. You have to realize that your ombudsman— The only federal authority you have is over the banks. Unless you have the provincial governments give you the authority to legislate on their behalf on the other financial institutions, you're going to have a bank ombudsman. Whether that should be paid by the federal government or privately, as it is now, that's a question you can deal with. But you have to realize that you are making rules in the financial sector, as far as the consumer is concerned, solely for the banks.

Mr. Tony Valeri: MacKay recommends that the provinces voluntarily subscribe to this financial services sector ombudsman.

Mr. Douglas Peters: You'd better ask your Minister of Intergovernmental Affairs how he'd like to do that. We had one terrible time trying to get a Canadian Securities Commission, and we never got to first base. We had provinces onside, offside, all over the place. There was clearly a national need for a Canadian Securities Commission, and we couldn't even get that off the ground. If you think you can get all the other financial stuff off the ground, good luck to you. I wish you well. I would agree that it should be. The whole financial institutions stuff is national. The market is national. It should be there, but—

As for the Bank of Canada report that said there will be 10 or 12 mega-institutions in the world, there's only one institution now operating on a worldwide basis that delivers retail financial services in a variety of countries, one major one, and that's the HSBC out of London. They are a very peculiar organization. The Hongkong Bank of Canada, the Midland Bank in Britain, Marine Midland in the U.S., the British Bank of the Middle East, the Hang Seng Bank and the Hongkong and Shanghai Banking Corporation out of Hong Kong, and the Hongkong Bank in Australia, all operate as fairly separate entities and they all operate much differently than do the subsidiaries of most other financial institutions. They operate relatively independently. They do a retail business and they look—

• 1020

Most banks' international operations are wholesale operations. When I was in the TD Bank we had operations in various parts of the world. We concentrated on putting them in the major financial centres and we looked for a niche market that we could handle in that financial centre. We did not go into retail banking. That's the question.

Now, if you want to say there will be 10 or 12 in the world— If you want a $10 billion line of credit, there are probably only three or four places you'd go to, if that. If you want to deal in big dollars—and the Canadian government deals in big amounts, on a global issue or something like that—there are only a few people who handle that now. And the Canadian banks have got in on a sort of second run on many of those things. Both Paul Martin and I tried very hard to get the Canadian banks into that level of the second run, to be a major part of those Canadian issues. And they can do so.

But I don't see a world with 10 or 12 major institutions like the HSBC group. That hasn't happened. This is a very unique institution, and I don't see it being followed as a group.

The Chairman: Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thank you, Mr. Peters, Mr. Donner, and Mr. Parquez. I'm glad you could come to our meeting today.

Mr. Parquez, maybe just to include you in the discussion, I'll put a question to you, and then if Mr. Peters and Mr. Donner want to comment—

When the banks announced the mergers, the stock market reflected a premium at that time. Now it's fluctuated since then. Frankly, as an MP it's not a big concern of mine. I'm more interested, from the point of view of there being a premium there, whether it would it reflect a premium that would recognize that the banks, if merged, would achieve certain economies of scale and scope. Or would it reflect the fact that the banks then would have more market power, market power meaning not only the chance for interdependent behaviour, in terms of the domestic products and services, but also as a more formidable bastion, if you like, for competitors who might look to expand into Canada?

I know you're not an investment analyst, and I know you don't have a crystal ball, but could you give me some of your wisdom and experience on that, please?

Mr. Alain Parquez (Economics Department, University of Ottawa): You are raising a very major question, and I will answer by referring to the European experience.

It's clear when big merging has been announced, as has been everywhere, especially in Europe, where the banking system is much more concentrated than in Canada, nobody is discussing the mergers. Even the European Commission is absolutely uninterested in that.

But there is a very big increase in the price of stocks. Why? There is no doubt, both on empirical evidence and theoretical reasoning, what is expected is the merged banks will have much more power to impose their own lending policy on the economy without any possible interference from the central bank. It's what happened in France and Germany, where a bank in France owns maybe 50% of real assets. And the two major German banks, after many mergers, are now controlling 90% of German real assets. It's clear they are the central bank de facto. But on the other side, they can impose the level of costs they want on the consumers—mostly on households, on small-business industries. And this is why they are so obsessed with merging.

• 1025

What is interesting is that, as I said, in Europe and in Japan, not only are the so-called authorities in charge of competition absolutely not interested in merging, but you are maybe the only institution in the world now discussing that question. Nobody in Brussels would ever dare raise that question.

But on the other side, it's also clear that the result is that banks are more and more fragile, for instance, because the merged banks and those speculating on their stocks are believing always in “too big to fail”. It was explicitly said by the chairman of the Dresden Bank, one of the two largest banks in Germany, after the bank lost 160 billion to Russia, that it didn't matter; the government was obliged to raise a special tax to finance them. The German government did that, exactly like the French.

So that is why—and it is a point I will go back to—I think in the case of banks, they are not special firms, contrary to the MacKay report; they are not even a special kind of financial institution. The banks are, by direct or indirect means, creating money that is the support of those in the real economy; therefore the banks are in charge of some kind of public service. This is why public interest is deeply linked with bank functions.

But on the other side—and this is a point I will go back to later, but I dare to speak on now—that is why if as MacKay assumes— I spent months reading the report, and I hope I understand it fully. The report is assuming that globalization is good for Canada and that the banks must open to competition. But what exactly does “competition” mean?

If by “competition” we address as a fact that banks should not be able to impose on consumers their credit policies or their interest or the fees they charge consumers, of course I will agree on that. It's clear that the situation doesn't exist in Europe. In France, for instance, l'Association Française des Banques, created in 1942 by the regime of Maréchal Pétain, has the power to legislate so as to protect the banking profession against interference.

• 1030

But if by “competition” we intend that the bank managers should be absolutely free, at any cost, to raise the value of their stocks and to raise the rate of profit equal to the rate of profit of the most globalized bank in the world, like the European banks and the Japanese banks, 60% of European banks are now linked with offshore operations and 82% of their profits, as far as we can know, are arising from security positions.

But if by “competition” we intend that interpretation, there is indeed a big problem, because if we accept the fact that banks have the special power to support the Canadian economy by the creation of money, whatever the technical conditions, it's clear that those who manage the creation of money cannot be absolutely free.

I will dare to quote one of the founders of modern liberalism, Friedrich Hayek, who said in 1971:

Markets are too fragile. They must be protected against bankers.

To be more precise, what is the origin of the world financial crisis? Because this is a problem, of course, the report couldn't deal with. But now we are on the verge of a full collapse of the world financial system. Even the real economies could now begin to be badly afflicted by this fact. European banks have lost maybe half of their capital value in their operations. It's clear that banking's reserves for profits were a factor of acceleration of this crisis.

It was born in Southeast Asia, for real problems, because they had big investments but no demand, because at that time there had been policies of controlling demand in the U.S., Europe, and Japan. But European, U.S., and Japanese banks had indulged in loans at a 50 or 70 rate of interest, mostly linked with pure speculation activities. The finance, the acquisition of actions in the Bangkok exchange and those shares were the collateral of the loans.

So money was created by very short-term credits. At the same time, those banks were drastically cutting credit in their home countries because the rates of return were too low. The result, of course, was that when the Asian economies collapsed, banks tried to save their assets. They required the repayment of their loans. The economies collapsed. At the same time, banks suffered incredible losses—France and Germany, and so on.

The result was a policy of crunch in Europe and Japan. What they are now trying to do is to increase their mergers so as to create an artificial rise in the assets. My concern is that now the Canadian system is much less involved in speculative financial activities abroad, largely European, American, or Japanese. So it is time to think of some ways of protecting the system against the temptations of competing with purely speculative systems.

I went too long. I'm sorry.

• 1035

Mr. Roy Cullen: No, no. Thank you very much.

The Chairman: Just as a note, Mr. Parquez, I'm going to ask the clerk to make sure your presentation gets read into the record.

Mr. Alain Parquez: Yes.

The Chairman: This is so we'll have more time for questions.

[Translation]

(Statement by Mr. Alain Parquez)

FOR THE TASK FORCE ON THE FUTURE OF THE CANADIAN FINANCIAL SERVICES SECTOR

The economic community around the world sees the creation of the Euro has a way out of the financial crisis. And yet, never has the European Commission deemed it appropriate to conduct a study like the one being carried out by the task force. While the countries adopting the Euro will lose all their control powers by transferring them to an independent central European bank that will be independent of any national or European authority, no one has asked whether the European banking system is capable of providing effective service to the public.

One can only praise the daring efforts of the task force and the federal government that established it: in an economic environment that is becoming increasingly unstable, the prosperity of an economy, and hence the stability of its currency, depend on the efficiency of its financial system.

A clear definition is needed of what we mean by efficiency. For the task force, a financial system is efficient if it can indiscriminately deliver all the financial products the public wants at lower cost. For this mission to be accomplished, the task force recommends establishing real competition among all institutions. Where the European Commission has been content to require the privatization of public banks (such as the Crédit lyonnais in France), the task force has suggested a set of rules within which private initiatives must operate. In the public interest, the task force recommended significant powers for the federal government compared to the European governments, which no longer have any (neither do European institutions, except for the central bank, whose powers are discretionary).

Having noted what makes the report innovative, we can now better understand why more serious thinking is needed. The authors of the report did not look into ways of protecting the public interest. Why, ever since the development of modern banking systems, has it been necessary to intervene to ensure that the banking industry delivers the required services, much more than in any other industry? No doubt the reason why the report did not answer this question is that it places all financial institutions at the same level. In the report, all financial institutions do is collect the savings of Canadians and then lend them to business, households or governments. Based on this very old view, which is of course the position taken by each bank individually, the banks are the institutions that collect demand deposits and then redistribute them.

For a long time now, economists and institutions working at the macroeconomic level (central banks, Bank for International Settlements) have admitted that this purely microeconomic concept does not give due regard to banking activity at the national level.

In a modern economy, most of the money used to finance the expenses of non-banking players is created by banks, through loans or other less direct operations (securities, for example). In a simple system, there are deposits on the one hand and loans made by the institutions receiving the deposits on the other. In a more complex system, like the Canadian system, a net increase in public assets leads to an increase in the quantity of money created by the banks in accordance with increasingly complex procedures, to the point that these days, the central banks find it impossible to account for all of it. We need only refer to the reports put out by the Bank of International Settlements concerning bank financing of derivatives.

It is therefore not surprising that this indispensable and extraordinary power of the banks should have attracted the attention of legislators; hence the existence of charters from the federal government. It also explains why, on the basis of their monetary power, the banks have been able gradually to broaden the range of services to clients who are captives of the banking system.

Obtaining, in the name of the State and the economy, the same indispensable product, namely money, the banks have always tended to reduce competition among themselves. This trend has historically led to the creation of the megabanks of Japan and Europe (in France, the Crédit lyonnais holds 40 percent of all real assets) and the number is getting still smaller (four in Japan, two in Germany, three in France). The trend has also led to the passing of corporate legislation, where in France for example, in 1942, the Association des banques françaises was created to regulate the banking industry. These regulations have not been questioned by the European Commission, which is interested only in the status of the assets.

In Canada, the task force did not succeed in analyzing this property of the banks because it remained a prisoner of the static conception of a pool of savings that are eternally redistributed by the financial institutions.

Once again I wish to emphasize that this concept is certainly the one favoured by bank managers looking at year-end accounts for their banks take in isolation. If the banks are nothing more than intermediaries, as the report claims, how could the quantity of money made available to the public continue to grow and finance growth?

Once a proper understanding of the true nature of banks is acquired, one can see why it is important to limit their power over consumers. The task force's solution consists of authorizing other institutions to exercise a number of the functions performed by banks. This is not enough. The dilemma is as follows: either these institutions participate in the creation of money and become banks, or they are excluded and remain in a position somewhere below the banks. As the report does not discuss money creation, the report fails to address this issue.

The special role played by the banks is apparent in the current financial crisis, the most serious since the 1930s. The crisis still exists. It originated in the real economy (1997), and it is still having an impact today (1998) on the real economy. At the beginning, there were very ambitious investment plans in Southeast Asia. These plans were totally financed by short-term lending by the major Western and Japanese banks. Attracted by very high interest rates, the Japanese, European and American megabanks automatically renewed their loans. These loans led to the creation of money in the currency of the lending banks for local investors. The banks were betting on the solvency of the borrowers, secured by the value of their shares, which in turn were being pushed ever higher by future financing. The same financial credits made the creation of local stock exchanges possible, and these exchanges inflated the value of shares. The Western banks justified the risks by pointing to the apparent healthy management of the Asian economies: record fiscal surpluses, almost non-existent public debt—

The crisis appeared when the final products of all this investment hit the market. There was not enough demand, either local or in the wealthy countries, to buy them, because of the restrictive macroeconomic policies in Japan, Europe and the U.S. Stock prices had to melt down. In a panic, the banks demanded instant repayment of the loans. Deprived of revenues, the borrowers found themselves bankrupt. At the same time, local currencies collapsed. Overall, the lending banks suffered considerable losses.

In Europe, the banks called on the various governments for refinancing, and special taxes were imposed. In Japan, the government had to nationalize those banks that had lost the most money.

If I appear to be harping on this point, it is because the task force, which is so keen on globalization, has not given proper regard to the possibility of a world financial crisis. And yet, the banks were one of the factors that aggravated a crisis which originated in real conditions.

This aggravating factor came about because of the banks' desire to maximize their profits.

During the nineties, the major banks increased the percentage of lending to foreign investors operating abroad in high risk areas (Asia, Latin America, Russia). The Japanese and European experience proves that most of the credits are used to finance speculation abroad. The major banks wanted at any cost to improve their profitability level. The MacKay report appears pleased about the increased revenues of Canadian banks, which exceed those of any other industry. It sees this as a sign of their great efficiency. As the report goes no further than the microeconomic perspective, it does not look into the cause of this world wide increase in bank profits, which is even more marked in Germany, France, Japan and the United States.

International operations have played a key role in the increased net revenues of the banks. To achieve such results, the revenues from increasingly speculative loans to dubious markets (Asia, South America) or non-existent markets (Russia), including revenues generated by derivatives speculators. Based on the information available, we could say that the banks developed these credits and in particular developed credits that supported the disproportionate below-the-line growth in derivatives.

These trends made the balance sheets of the major Japanese and Western banks increasingly vulnerable. The Crédit lyonnais in France is a case in point. What is remarkable in the Crédit lyonnais case is that, unlike many banks owned by the State, the French government behaved purely like a private bank. In an effort to maximize profits, the CEO of the Crédit lyonnais took risks that no Canadian bank president would ever take. In the mid-1990s, half the profits of the Crédit lyonnais were from high risk foreign operations (at least 60 percent, but it is difficult to estimate profits on derivatives). One might well ask whether the president of the Crédit lyonnais was relying on the adage too big to fail, which presupposes automatic refinancing in public funds. The same was the case for the private French banks and the two largest German banks, which are also private. It is precisely these consequences of the global search for the greatest profits that the MacKay report ignores.

With governments forced to do something to counter the dangerous choices made by the major banks, it is clearly difficult to reconcile the existence of independent monetary and financial policy with the globalization of national financial system. This is a basic issue that needs to be discussed if we are to have a financial system that can support the development of the Canadian economy beyond the millennium. The question is unavoidable, because it is impossible to speak of a financial industry without taking proper regard of the fact that it is the industry on which the national economy is based. In a completely globalized banking system, which is the report's vision, the national banks, wanting to imitate their foreign competitors, may be led to stop creating enough money to meet public needs. They would only finance the Canadian public, directly or indirectly, if it yielded at least the expected levels of their foreign speculative activities. The national banks are increasingly afraid of receiving bad ratings unless they are as profitable as the most highly globalized and speculative banks in Europe and the United States.

If this were to happen, Canadians could not rely on European or American banks, which are becoming less and less interested in operations that genuinely benefit the public, and appear to be focussing almost solely on short-term gambling.

One thing is certain, and that is that in the context of unrestricted globalization, in a country like Canada, the amount of money available to meet the needs of its economy would be dictated by speculative foreign markets, unless exorbitant interest rates were charged to the public (a variety of types of interest and commissions) on the basis of how well its speculative lending was going.

The State would thus lose its ability to act. It would no longer have an independent monetary, fiscal or budget policy.

A country that is often cited as an example is New Zealand, which according to a very recent Senate report reconciled globalization and independent policies. Nothing could be further from the truth. As a study by Dr. Peters points out, New Zealand's financial experiment was a disaster. The price it had to pay was the disappearance of any independent economic policy, and this led to New Zealand going under in the crisis. In fact, its currency collapsed.

To cope with the potentially harmful consequences of globalization, regulation is needed. It is true that international supervisory mechanisms for financial activity have been proposed. Such proposals include introducing a tax on currency speculation, such as the Tobin tax. Some proposals even drew the attention of the Minister of Finance. They are certainly inadequate to keep macroeconomic policy independent.

The alternatives are simple: a true world government subject to democratic controls (unlike the Euro zone, where the only authority with any jurisdiction is a supranational central bank which is unaccountable to anyone), or the creation, at the level of each national economy, of control rules for international banking operations. It is therefore imperative, while awaiting a hypothetical world solution, to implement a financial services policy that frees the Canadian banks from being forced to try to maximize their performance at the expense of the national economy.

The report does not have a solution to deal with the risks inherent in globalization. The question of too big to fail is discussed only indirectly, and no preventive action is suggested.

According to the report, a safety net to defend against a possible financial Chernobyl, clause 39, gives the Minister of Finance the power to recommend to Cabinet, under special circumstances, the acquisition of a Canadian bank by a foreign financial institution if the acquisition is in Canada's interest. Before this, no exceptions were allowed.

Let us imagine that as a result of speculative foreign operations and after the proposed mergers have come to past in 5, 10 or 15 years, that one of the superbanks is on the brink of failing. When faced with such a financial Chernobyl, the minister would have to do something. The alternative would be to sell it to American and European banks. No Canadian institution would be able to buy the superbank. What else could a minister do to avoid placing a crushing tax burden on Canadians?

When France was prohibited by the European Commission from continuing to refinance the Crédit lyonnais by means of taxation, the government decided to sell it. Most of the shares were purchased by French insurance companies which, unlike Canadian insurance companies, are financial giants. It is doubtful that services to the French public have been improved.

To conclude, I think it is safe to say, in view of a review of foreign experience, particularly in Europe, that Canada is lucky to still have a banking system whose priority is not a race towards growth through speculation.

Instead of voluntarily or involuntarily encouraging a focus on speculative profits engendered by globalization, some positive thinking is needed. I wanted to contribute a few ideas. The Canadian banks need to be helped to strike a balance between a strategy of maximizing profits and protecting the public interest, which the MacKay report, to its credit, recognizes, even though it did not consider the macroeconomic dimension of the public interest. To quote one of the founders of modern economic liberalism, Friedrich Von Hayek:

It is obvious that the market is much too fragile to be left to banks that seek nothing but the highest level of profits.

[English]

Mr. Roy Cullen: I have one more question.

The Chairman: Go ahead, Mr. Cullen.

Mr. Roy Cullen: Thank you very much, sir.

I'm sure that Mr. Peters and Mr. Donner would have some insights on that question too, but I would like to pose a question to Mr. Peters.

We hear now about the banks saying that if the mergers don't go through, they're going to be shutting down branches. The worst case you could put on this would be that it's sort of blackmail or some kind of a heavy hand they're trying to hold over the government. The best light I guess you could put on it is that's it's a business reality that will happen with the global economy and changes in technology, etc.

Mr. Peters, you were living with banks for many years. You appreciate the management culture. What's driving branch closures? Is it technology? Is it profitability?

If you look at the banks now that are earning a 17% to 19% return on equity, they're hardly suffering. Is it that certain branches don't meet their criteria for return on investment or is technology replacing people? What is really behind this comment from the banks that we've heard now with respect to what they might do if the mergers don't proceed?

Mr. Douglas Peters: I'm sure the banks will not close branches that are profitable and that serve the public. They will continue to close and develop branches as a result of all those factors that come out. Branches may not meet the requirements of profitability.

My little branch that I go to locally is going to be closed. It's sitting in a building that has been empty for a year since the major tenant moved elsewhere. There's a huge building across the street where the tenants have also moved out. The branch obviously is having some difficulty in the meeting the criteria, so it's going to be closed. I'm going to miss it. I'd like to raise a protest if I could, but I know better than to do that.

Technology has changed. The automatic teller is there. Telephone banking is there. It makes a big difference to the development of branches.

It used to be that the most valuable thing you could do— We used to talk in the bank about what it cost to open a branch. How quickly can you make a branch profitable? How quickly could you open a branch and make it profitable? We used to say it took a year and a half. In certain areas, we could do that in a year and a half, while other banks could do it in six months. You had an advantage if you did that.

That was the key: how many branches could you open in a year while standing the losses? You knew they were going to lose money, so there was a limited amount of money you could invest in branches over the years. That was the push.

Technology has changed that. Technology has made the branch less effective. It's not totally ineffective, but less effective in delivery. The delivery mechanisms used to be just the branches. Now there are the delivery mechanisms of the telephone, Internet, ATM, credit card, and branch. Now the branch is still a key part of it, but as for all these other things, if you look back not many years ago, none of them existed. It's changed, and technology has changed. Branch closures are happening because of technology and the profitability.

We always close branches in the bank. When the gold rush was over in the Yukon, what did they do? There was nobody there. There was nobody left. What do you do? When the farm communities close and small towns disappear, they're no longer viable places. That's happening.

It's a function of demographics too. That's another factor. You move to close offices, and you open other offices too.

Mr. Roy Cullen: Thank you.

The Chairman: Thank you, Mr. Cullen.

We have Ms. Bennett, followed by Mr. Riis.

• 1040

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chair.

As you know, this committee is supposed to look at MacKay and not comment on specific mergers. So what I would like to know is this. In the MacKay specifics, in the merger review process, are you comfortable that if those steps were taken, the outcome that you would want in the public interest would automatically follow? Is the MacKay recommendation for the merger review process one that you're comfortable with? In his public interest criteria, Mr. MacKay was very clear about the costs and benefits to individual consumers, small and medium-sized business, regional impacts, international competitiveness, employment, the adoption of innovative technologies, whether the transaction would create a precedent, and any other public interest consideration. Are there any that are missing? Are there any other suggestions that you would have for the Minister of Finance that you think should be taken into consideration other than those that have been laid out by MacKay?

Mr. Arthur Donner: Could I go first?

I can't remember every one of the process statements, but when I read the MacKay report, what struck me is that the process they recommended is exactly the process we're going through anyway. So obviously I would endorse it. I'm quite impressed at the level of public attention to this issue.

Now with respect to the outcome, I must admit that my first impact concerning the announcements was that the mergers were an automatic fait accompli. Your colleague asked the question about the stock market and how it built a merger premium into bank equity prices. I put the question to some investment managers yesterday on this very question: what has happened to the bank merger premium? Both managers told me—I think it's self-evident—that this premium has been reduced, which tells me that the stock market no longer takes for granted that the mergers are going to go through.

I agree with Mr. Parquez with respect to the perceived advantage of the mergers from the sense of a stock market price. I believe that the market understands very clearly that should the mergers go ahead, opportunities will increase for the banks to improve the spread between the cost of funds and what they lend up front, and raise the fees they charge for various services. As well, the stock market obviously understands some of the other economic advantages that are potentially there.

Ms. Carolyn Bennett: In your report, it suggests under the Bureau of Competition Policy's response that it's possible for some conditions to be imposed. One likely condition would be some branch divesting by a mega-bank. If competition bureau is able to place conditions on it, would you still feel that this doesn't protect the consumers enough such that the mergers would still have to be stopped? This is even if the bureau suggests a set of conditions.

Mr. Arthur Donner: I think that's a very important question. My colleague and I have discussed this continuously between ourselves. We concluded that it's very difficult when you sell a branch to sell much banking business along with that branch. We concluded that setting conditions in other sectors when mergers occur in order to increase competition might work. In our view, there's too much that's tied to head office, credit cards, and other things that are not directly linked to banks that cannot be sold off.

Our conclusion was that even if you assigned conditions, you couldn't possibly compensate for the loss of competition that's going to be around. We also concluded that even if you assign conditions and open up the financial system to foreign firms, the foreign firms wouldn't come in fast enough to make a difference. So on that score, we would be very pessimistic that this would work.

Ms. Carolyn Bennett: In the process they've set out, there are many steps that will take a long of time. Certainly one of the comments we're getting from the banks is that not knowing this is killing them. Would you think this slower process is still the best way to go?

• 1045

Mr. Arthur Donner: I absolutely applaud the process, and I do not worry about the fact that this is killing the banks. It comes back to an emphasis that all three of us here on this panel have made; that is, that the banks are there to serve the public interest. The banks are talking as if they're there to serve only the private interest. The public interest is being well served by this process, so I applaud the government and the various components of this process.

Mr. Douglas Peters: Let me just add a point on that. The ability to move very quickly is also essential in a financial system. Let me tell you that if a Canadian bank or financial institution is in difficulty and is required to go through a kind of process like this in order to arrange a merger or something like that, I think the MacKay report recommended—I can't remember exactly—that it move more quickly. But that is of—

Ms. Carolyn Bennett: As long as they recognized that in it.

Mr. Douglas Peters: When there were questions about a financial institution, and I've had the Confederation Life thing on my lap for several months, things moved very quickly, and you had to be ready to do things probably far faster than you wanted to. If it were a bank rather than a life insurance company and if it were a large institution, it would be very quick. I was with the Department of Finance when the first Canadian bank got into difficulty in 1984, and the negotiations took place over a weekend. That's the time horizon.

So you now have the option of a long public hearing process, and you have to have another option so that if some difficulty arises you move instantly on these things. So I would just add that. Where you have a merger of two equals of two magnitudes, it should be a large process, but when one's in trouble, you have to move instantaneously, and you have to have the ability to do that. We have that in the system right now. I think MacKay makes provision for that. If he doesn't, he should.

Ms. Carolyn Bennett: Were there any other things in terms of public interest? Do you feel that's a complete list?

Mr. Douglas Peters: I can't think of anything at the moment, but give me a couple of weeks, and I'll think of something.

Ms. Carolyn Bennett: Let us know. Thank you.

The Chairman: On this particular issue of the merger review process, should this committee set a timetable, a deadline? In other words, as you say, if one firm in the financial services sector is in trouble, we need instruments in order to react quickly.

Now, the opposite side of the coin, of course, is that if mergers were going to take place, we wouldn't be able to take forever to figure out whether or not these mergers should go ahead, because the economic dynamics are precisely the same ones you're talking about if a failure is going to occur. A merger and a deal that is good today isn't necessarily going to be good a year or two down the road.

Mr. Douglas Peters: I would agree with you. The public review process clearly should be expeditiously handled. But all of these items have to be handled carefully, too.

What we're facing right now with the two mergers is a fundamental change in the structure of the financial sector in Canada. What we are also facing now is a report of the MacKay task force, which very clearly sets out a plan for the future. That's why I set up the task force in a white paper, and I announced that was the purpose of it.

You have to carefully consider these mergers as part of this process, because they are a fundamental change. If it were a merger of say National Trust and the Bank of Nova Scotia, that's not a fundamental change in the structure of the Canadian financial system. That merger was approved and was handled by the minister. But these two mergers are much different. This is fundamental change, and it has to be considered as part of the MacKay task force and where it fits into that as well.

• 1050

It's a little different situation with these two mergers than it would be with— I signed off on half a dozen or a dozen mergers when I was Secretary of State for Finance; there were lots of mergers. Look, if two American or two British banks merged overseas and had two Canadian subsidiaries they would merge themselves. You approved that. It was automatic and there was no question to it; the process is there, and you don't want a public review of something like that. This, however, is of a different magnitude. I would suggest that you look at the magnitude of the problem.

The Chairman: Absolutely. But you're also saying you need to have instruments that can assess these issues in a reasonable timeframe.

Mr. Douglas Peters: Absolutely.

The Chairman: Mr. Riis.

Mr. Nelson Riis: I have two questions. My first one is a take-off on the points Ms. Bennett was raising, and is addressed perhaps either to you, Mr. Peters, or Mr. Donner. Our concern is the future, and the task force was looking into the future. In your judgment, was there anything the task force missed? Is there something we should be aware of that we should add on to this inquiry?

Mr. Douglas Peters: I can't think of anything right at the moment that the task force missed. I'm sure they missed a lot of things, but I think they've done a very exemplary study in the—

Mr. Nelson Riis: Are there other areas we should be considering?

Mr. Douglas Peters: The other area that I've always put first is the consumer interest, and it clearly was a point in the task force.

I think one other area we do criticize the task force for is safety and soundness. Clearly, there's a balance, and safety and soundness is not something about which you can say we'll reduce safety and soundness and we'll let this go. That's a very dangerous proposition. I think the MacKay task force moves along that line a little too far. I would think that the safety and soundness area is a key one. Really, I'm biased, because during my four years as a minister safety and soundness concerns were on my lap every month, and a list of institutions. So that's one clear area.

Mr. Nelson Riis: Mr. Parquez, I have one question, again dealing with helping us as we look to the future of financial services in Canada. I know that your perspective is often of a global nature, and I know you are well informed in terms of what's going on in other jurisdictions. Could you just use a phrase or a short sentence to describe what you see happening financially, or maybe economically and financially, in some of the major global sectors—the Asian sector, the Latin American sector, in Europe—just a phrase or two to help us understand what we can expect there in the next two or three years?

Mr. Alain Parquez: Of course. They try to become absolutely independent of their home economies and they wish to ignore it.

Mr. Nelson Riis: Let me ask further, when you look at the financial situation in Asia, South Asia or wherever you want to focus, in Latin America, Europe, Africa and the United States, what will you predict is going to happen there in the next five years in each of those areas, financially and on the macro-economic front?

Mr. Alain Parquez: I predict first a complete collapse of South America. That could be in the same turmoil as Russia, because they made a lot of mistakes. First, they substituted short-term credits for domestic financing. All their investment plans were financed by loans granted by European or mostly American banks.

• 1055

Under the pressure of the IMF and the Bank for International Settlements, local banks were forbidden to create money for the domestic economy. It was explicitly enshrined in the adjustment plans shaped by the IMF.

Those investments were made because they expected enormous rates of return, with rates of interest maybe twice or ten times the level in the U.S., and high speculated gains in the stock exchange. But all those gains were virtual, in the sense they were not supported by the real gross of the domestic economies. So there came a time when the virtuality of the financial system collapsed, and now the foreign banks want to be paid back. At the same time, the IMF is imposing plans to cut government expenditures.

Everybody knows that the public debt of most American countries was insignificant relative to the private debt. But according to the chairman of the IMF himself, when we are imposing on Brazil to reduce its expenditures by 50% and fire 60% of its public service, it is not because of an economic mechanism; it is because we believe the markets want that. So the result will be a collapse of the South American economies.

At the same time, it's clear now in the west that the American and European banks are desperately craving sound investments to protect their capital. They can't invest in Russia any more; it is a dead market. They can't invest in South America any more; the market is more dead than the Titanic. They don't invest, of course, in their own economies; they refuse to do that. So what remains is the acquisition of government bonds. Every observer in the market now remarks that there is a race for the acquisition of government bonds.

In the U.S., for instance, there has been a huge increase in the market value of bonds. This is why many investors like the renowned Georges Soros and many others, like another well-known American investor, Warren Mosler, are saying the agenda is now that they want the government to reimburse the debt because they fear that sooner or later they will be short of liquidity. They want to be reimbursed now to cash the plus value, resulting in the tremendous increase in the bond prices.

• 1100

To answer your question, it is my deep concern that we are moving more and more toward a financial system that is controlled by the banking industry. After all, all the hedge funds were financed by bank credits. But such a system is moving more and more in a virtual world, trying to survive in itself but ignoring the real economy. Now what remains of the safety net is the acquisition of government bonds. But if there were no more supply of bonds, that would be a deep problem for the financial markets and the banks.

So I do think we are just at the starting point of the financial crisis, and that is why we need an assembly such as yours to think about what should be the appropriate regulation to protect the banking industry and to help the banking industry back to the domestic economy. Mechanisms like the Tobin tax could be helpful in such a way, but of course that deserves much more attention.

Mr. Nelson Riis: Thank you.

The Chairman: Thank you very much, Mr. Riis.

Mr. Parquez, Mr. Donner, and Mr. Peters, on behalf of the committee I'd like to thank you very much. It's very important to hear various perspectives on this very important issue, and today you've certainly provided us with yet another perspective on this debate. We certainly welcomed your comments, and we will bear them in mind as we make recommendations to the Minister of Finance.

The meeting is suspended until 12.30.

• 1102

• 1238

The Chairman: I'd like to call this meeting to order and welcome everyone here this afternoon.

As you know, the finance committee is studying the MacKay report, the future of the financial services sector. We of course welcome views from across the country as we begin the process of writing recommendations for the Minister of Finance on this very important issue.

We have the pleasure to have with us, from the Canadian Association of Mutual Insurance Companies, Mr. Normand Lafrenière, president; from the Canadian Federation of Independent Business, Catherine Swift, president and CEO, and Mr. Garth Whyte, senior vice-president, policy and national affairs; from the National Action Committee on the Status of Women, Sandra Carnegie-Douglas, executive co-ordinator; from Results Canada, Dr. Richard Ernst; and from the Rice Financial Group Inc., Thomas J. Rice, president and CEO; and Mr. Brian Gray.

We will begin with the Canadian Association of Mutual Insurance Companies. Mr. Lafrenière, welcome.

Mr. Normand Lafrenière (President, Canadian Association of Mutual Insurance Companies): Thank you.

I'd like to thank you for the opportunity to appear before your committee and provide you with CAMIC's comments on the MacKay report.

The Canadian Association of Mutual Insurance Companies is an association of wholly Canadian-owned and policyholder-owned small insurance companies. These property and casualty mutual insurance companies have most often provincial charters.

CAMIC is focusing its report on the assumption that the consumers' best interest is achieved by a stable, sound, and competitive financial services sector. In our view, the stability of the financial sector is ensured by both government regulations and the financial sector's self-regulation.

• 1240

For its part, the efficiency of the sector is brought through technology and the regulatory system, which minimize the burden on the industry.

Finally, and this is where we depart most significantly from the MacKay report, we believe the competitiveness of the sector can only be ensured when a large number of companies operate in a given sector of activity and compete for the same clients.

In this report, the MacKay task force did not provide evidence that bancassurance would bring about more competition in the insurance sector and therefore be in the consumer's best interest. Further, the task force failed to provide the full assessment of the current level of concentration in the banking industry by individual markets and product line. It also failed to provide a level of concentration that would be attained should the deposit-taking institutions be given additional insurance-retaining powers.

It is CAMIC's belief that, just like what happened in the trust and securities sectors, bancassurance in the banks' branches and the banks' use of personal customer information to better target their clients would translate into less rather than more competition in the insurance sector.

Banks have claimed that if they were to get the additional insurance-retaining powers they seek, they would be able to reach larger economies of scale and be better able to penetrate foreign markets. We believe size is not always a pre-condition to increase market share and penetrate foreign markets.

The farm mutual insurance companies, for instance, are small compared to the average property and casualty insurance companies under the federal charter. However, in spite of our limited size, we succeed at occupying an ever-increasing share of the Canadian insurance market.

When marketing their insurance products, traditional insurance companies have to market their products widely, with the hope that enough consumers will be interested in the products offered. Banks, for their part, would like to use individuals' and small businesses' personal information obtained in the course of their banking activities to market their insurance products only to those who would most likely be interested in the products offered. Needless to say, this would give banks an important competitive advantage over the traditional insurance companies that do not have access to such personal information on potential individual customers and small businesses.

While there is no doubt that policies on coercion and undue influence carried out at the level of the head offices of banks would be sound, we are concerned that these policies may not be well implemented at the branch level by frontline employees.

These are our comments, Mr. Chairman.

The Chairman: Thank you very much.

We'll now hear from the Canadian Federation of Independent Business. Ms. Swift.

Ms. Catherine Swift (President and Chief Executive Officer, Canadian Federation of Independent Business): Thank you very much, Mr. Chairman. As always, it's a pleasure to appear before this committee.

I might just add that Brian Gray is our senior vice-president of policy and provincial affairs, just to clarify that.

Today we have a very simple message for this committee from the small and medium-sized business community in Canada, with three key themes. One, which specifically pertains to the merger issue, is that less simply cannot be more; it's not possible. Fewer banks has to mean less competition and less provision of services, typically at a higher cost, not just to small businesses, but notably to small businesses in the marketplace.

Secondly, we do not agree with an underlying contention of MacKay that competition can be relatively easily achieved in the Canadian marketplace. We've had a long history in this country of dominance by a handful of large banks, and that situation will not be turned around easily. As a result, we refer to the Australian experience and their conclusion that they wanted to see evidence of true existing competition before permitting mergers to take place.

Finally, in terms of the whole issue of financial institutions' reform, we're very pleased that this committee and several other exercises going on simultaneously are taking what we believe to be very much the necessary time and consideration on this issue. Whatever is decided will be irrevocable and irreversible, to a certain extent, and as a result I think it is essential to take the time to consider all of these financial institution reform issues properly.

• 1245

We've provided you with a reasonably comprehensive brief of the views of small firms on the key issues of concern. I just want to highlight a number of points in this brief. One thing I might note, which we found interesting, is we did a lot of our own due diligence research with our members and met with all of the chairmen of the major banks, as well as a number of other key players in the financial marketplace. Something that seemed to be a consensus among these groups—and maybe one of the only areas of consensus—was that when looking specifically at the mergers, the small-business sector was viewed as the most vulnerable sector. Given that this sector is increasingly acknowledged as the most dynamic job creator and contributor to community economic growth and national economic growth, we feel this observation, which even the senior bankers agreed with, was a pretty important one.

Our bottom line is that true competition is the ultimate answer. We're not looking for high levels of regulation or anything along those lines. What we really need is true competition. We've been arguing this for some time, and unfortunately over the years we've actually ended up with less in a number of different ways.

I'd like to just refer you to our first chart on page 2 of our brief that looks at the proportion of small and medium-sized enterprises that report problems with the availability of financing. We survey our members regularly on this issue, among others. As you can see, this covers a 15-year period. You can look through the business cycle of what happens over this time. Naturally these problems became especially acute through the early nineties recession and reached a peak at that time.

What we have also found to be of considerable concern over time is that we see a secular trend of increasing problems with financing. Maybe more appropriately, from late 1997 to early 1998 we had reasonably comparable economic conditions, in terms of the phase of the business cycle, as we saw in the late 1980s, with pretty good economic growth and so on. But what we saw in our data was almost twice the level of concern about availability of capital.

We think this is due to a number of things. Lenders themselves have admitted they became extremely gun-shy through the early 1990s, retrenched dramatically and excessively in terms of their credit granting to the small-business sector. As a result, it has taken them an awfully long time to get back to even pre-recession levels, despite the fact we have a larger economy and all those other factors coming into play.

We've also seen much more automation and much more of this credit-scoring type of activity happening, which seems to be something that over time has also restricted credit. We see more centralization of decision-making within the institutions. This is also a factor that has served to lessen the element of service in the community that is especially crucial to the small-business sector, which is the banker—the one who knows the business best—actually having the decision-making power to grant credit.

The MacKay report itself acknowledged that today there is too little competition in the provision of banking services to small firms. So the logical conclusion is with fewer institutions it's hard to see how that competitive situation is going to get any better.

Looking at figure 2 on page 3, we see that despite the contention of the Canadian Bankers Association and others that we've seen an increase in credit-granting to the small-business community, again we see over a 10-year timeframe a pretty flat performance. The CBA data, mind you, looks at loans of $1 million or less, when your average small-business loan is usually around $60,000 to $70,000. This particular chart represents the $200,000-and-under category, which captures the vast majority of the small-business market.

Interestingly, even during the early nineties, which was that rough recession period when credit dropped to the small-business sector, it was increasing to the large-firm sector. So there wasn't a retrenchment happening right across the entire business sector at that time.

We've also seen—and this is demonstrated in figure 3—some interesting anomalies. This is just an example of one, and it happens to show some fairly radical changes in market share among some of the different institutions. This is the kind of thing we've always found disturbing.

• 1250

This particular chart relates to small business market share in Manitoba. We see two institutions quite dramatically decreasing, most staying roughly the same, and one rather dramatically increasing its market share. This is obviously conscious decision-making. We see a problem if one bank decides for one reason or another that it no longer wants to dabble in that province, that sector, or wherever it may happen to be. Having even fewer banks in a post-merger environment means that if one decides it will get out of the retail sector, out of Alberta, or whatever, there will be many drastic impacts on those sectors or regions as a result.

Something we've heard from some bankers is that lending to small business is a nuisance business. Well, we don't deny for a second that it's not the easiest way to go. It's a lot easier to loan large chunks of money than smaller ones. It's a lot more administratively straightforward and whatnot. But something that certainly some of the bankers and others have found in the research is that if you take the entire banking relationship, including personal products that the small business owner consumes with that institution, the overall relationship is actually quite a profitable one. We've always been sort of bemused that one or two institutions have not seriously gone after this marketplace, because they themselves even admit there isn't a profitability problem here.

In terms of some of the current issues of financial service that are of concern to small firms, overall we found that general satisfaction ratings with the banks have been around 70%. Many would consider that high. We think, however, that if most businesses were faced with about a third of their customers being dissatisfied, they'd probably think it was a serious problem.

Something else I should note—and we've noted this before—is that at any given time, typically about half of the small business community doesn't actually need a financial institution. They'll use one for clearing, for certain services, but they're not actually indebted in that sense. So those dissatisfaction numbers are actually a lot higher if you consider those in a credit-receiving position with the institution.

Service charges naturally continue to be problematic, mostly because of arbitrariness. I think everyone is willing to pay for service if they believe the service is there. What we've seen, of course, is a lot of increases that seem to have no basis in service increases, no kind of justification. We've also seen arbitrariness. If the business owner is in a more advantageous position vis-à-vis the bank, service charges seem to be much more easily reduced or eliminated than they are if that business owner is in a position of owing the bank considerably.

Turning over to figure 4, this is just an illustration of how many small businesses use their existing institutions for types of instruments other than pure business credit. As you can see, there are significant proportions in each instance that do, so this overall banking relationship is really what has to be taken into account when you look at competitive markets.

Another argument that some of the financial institutions have made is that there is such a competitive threat to the existing Canadian banks that mergers are necessary to combat it. For our market, that is certainly and clearly not the case. We recently did some research with our members, looking at some of these alternatives. As you can see from figure 5, some of the institutions that are cited as being such terrible competitive threats to the major banks are unknown in most cases. If they are known, there is a very small proportion of small businesses dealing with any of these. The banks therefore clearly continue to have, far and away, very much the dominant position amongst our market segment in the Canadian environment.

In terms of again looking at the competitive marketplace, the small business market share of the big four continues to be very significant—and we have it represented by province in figure 6. What we see is that it's even higher when you look sectorally in different regions. For example, the BM-Royal proposed merger would mean that this combination would have over 70% of the retail market in Canada. Again, down the road, if that merged entity were to decide it was not that interested in the retail market any more—and that's a big chunk of the small business sector—obviously that would cause huge problems for that sector, and of course the economy in general. The banks themselves have said there are a number of alternatives that can fill in some of these competitive gaps that we have identified.

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One vital thing that has to be kept in mind is that the existing banks themselves, having been active in the small business market for decades, have taken a long time to come up the learning curve. They themselves would admit that they still have challenges lending to certain sectors, the knowledge-based industries being one notable example. They still have a lot of learning to do, and they've been in these businesses for a very long time.

So the expectation that we're going to see competition just springing up all over the place, we don't find terribly realistic. We're hopeful we will see true competition in a variety of forms, but it certainly isn't going to happen quickly. That is yet another reason to take a very cautious approach in any radical changes to the structure of the financial market.

To mention some of these potential competitors that have been noted, foreign banks are one obvious example. Again, we do see some foreign institutions serving small niches of the market, but to expect foreign players to come in and provide any kind of full-service alternative is simply unrealistic. I would certainly expect that it wouldn't happen at all outside of the major centres.

If insurance companies were to get into this area some time in the future, it would take quite a long time. This is not a group that's established in this area.

I think probably the most likely hope would be credit unions. Some credit unions have already been successful in lending to small business, but their authority is very limited under provincial jurisdiction. There are all kinds of problems in the regulatory vein, and there are also many credit unions that are not at all active in the small business market. So although we could be hopeful for future activity on their part, to expect that to be happening in two to five years is not realistic.

Electronic banking currently has quite small utilization among small businesses. Again, we're hopeful for the future, but nothing there is going to take place overnight.

Community banks are another area that came up in MacKay and elsewhere. Although we certainly would be very supportive of this, the fact is that our existing banks have had such dominance in the Canadian environment that expecting any kind of community banking movement to quickly move in on this marketplace is not likely in the short term.

In terms of some other brief merger concerns that small businesses have, one thing we've wondered about the mergers of institutions is, for one thing, which culture will prevail. The Bank of Montreal and Royal provide a very good example. The Bank of Montreal has made more of an effort to attempt to serve the small business market than, for example, has the Royal Bank. As you saw in that Manitoba slide earlier, there are data nationally showing that Royal Bank's share of the small business market has declined, whereas the Bank of Montreal's has increased over the last number of years. If those two are to merge, which culture will end up prevailing?

We've seen throughout recessions that, in the crunches—the difficult economic period of the early 1990s is a very good example—the banks abandoned small business at that time. Even the past-president of TD Bank, Robin Korthals, admitted as much, and we certainly agree with that observation, based on what we saw from our perspective. Again, looking down the road, with even fewer institutions, what kinds of choices will small business have when things get tough?

I think the impact on jobs and communities has been discussed extensively, so I won't go into that too much here. On the whole matter of vulnerability of the economy generally, of course—and this is also a key issue—there is again the question of the point at which banks get too big to fail. I'd say they're too big to fail now, probably. We have had instances in the past in which our existing banks got into serious trouble—with some real estate challenges in the late 1980s and early 1990s, for example—and I wonder whether or not we would have seen a collapse of one of the big five at those times without bailouts by governments and other banks. Of course, with even bigger banks, this threat, this vulnerability issue, will be even more worrisome.

We've polled our members a couple of times on this issue. We're actually currently polling them yet again to track where these views are going. We don't have some of those data quite yet, but we will in the near future. In figure 7, however, you can see small business views on bank mergers, and we've disaggregated this by the size of the business. As you can see, certainly the vast majority are opposed overall to bank mergers, and that opposition increased from roughly about 64% to over 68% during the last eight months or so. What we see is that the smallest of firms, typically the ones in a more vulnerable position, are not surprisingly the most opposed to bank mergers.

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In terms of some of the promises the banks have made, they've changed over time for one thing, so I think there are some credibility issues there. We've found rather interesting the notion that the banks really have a communications challenge here and not a substance challenge. That's rather dubious. In fact, we tend to believe the banks are communicating very well, which is why we see opposition to the mergers both among our members and among the general public.

Let me identify some of MacKay's brief recommendations that we're certainly fully in agreement with. On the need for greater competition, we think this theme as expressed by MacKay is extremely appropriate for this whole exercise. Getting better information is also extremely important. For a long time now, we have felt we did not have adequate information on this market, and getting more disaggregated, detailed information is a very positive recommendation. Controlling such factors as the incidence of account manager turnover is something we have stressed for a number of years. The banks agree with us that it's a problem, but nothing has been done about it. We would like to see some action on that front. Again, there is the idea of getting some decision-making authority for credit granting away from the centralization trend that has been happening for the last number of years. More accountability measures for communities are needed, as is a little better situation on the whole service charge side in terms of value for money. Pricing for risk where appropriate is required, as is greater access to equity financing. The focus has been on debt a great deal, but the equity issue shouldn't be ignored either.

Tied selling has come up, and it's of considerable concern to our members. We've heard many complaints about the incidence of tied selling. It's clearly a reality, and it has a deserved focus.

The credit card area is also one that has received deserved attention. Our members frequently very much feel held to ransom by the lack of choice in this area. Naturally, a post-merger type of world would have even less choice.

In terms of the extension of powers of the banks to areas such as insurance and small vehicle leasing, our members have consistently opposed this on a number of grounds. They feel the banks are quite powerful enough as it is, and further extension of powers is not justified. They feel they're also being well served by current providers, so what is the burning need to see the big banks get into the system? They also feel there will be a lot of predatory pricing behaviour going on. This has happened in other areas, displacing a lot of existing providers from the various systems. Once the banks then have a monopoly on the market, past experience has suggested that savings and so-called efficiencies that may be able to be gained will not be passed on to consumers.

Just to conclude, as members of this committee, you've certainly heard the strategic plan of the banks and some other players in the financial industry. We've presented to you today the strategic approach of the small business sector. We can't emphasize enough the importance of serious deliberation on these issues. They will not be able to be changed afterwards. We know change is inevitable, but right now we don't see the need to accelerate this change and make it precipitous through the approval of such things as mergers of large institutions. What this committee overall must consider is the strategic plan for Canada, and we've hopefully provided you with one component of that today.

Thank you.

The Chairman: Thank you very much, Ms. Swift.

We'll now hear from the National Action Committee on the Status of Women's Ms. Sandra Carnegie-Douglas. Welcome.

Ms. Sandra Carnegie-Douglas (Executive Coordinator, National Action Committee on the Status of Women): We want to thank you for inviting us to present on the report.

First of all, we think it would be remiss of NAC to not comment on the report, out of the context of the reality of many women's lives in Canada. We think the MacKay report rightfully points out that we need to consider the changes, challenges, and opportunities in the financial sector through the lens of globalization and unprecedented technological development. The question for NAC and most women across Canada centres around how these changes, challenges, and opportunities impact women, individuals, communities, and poverty as a whole. Are the best interests of women and our communities being served?

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Certainly the financial sector, especially the banking component, has grown by leaps and bounds during this age of global economy. Record profits are reported each year. At the same time, statistics on the economic status of women, aboriginal peoples, immigrants and refugees, people living in poverty, the homeless, people with disabilities, and younger and older Canadians, have steadily shown deterioration, with no due recognition coming from the financial sector. In a context in which the government has shredded the great social equalizers—social and public services, health care services, welfare and other supports—the ability of many people living in Canada to embrace globalization and the rhetoric of the leaders of the financial sector has been impaired.

From the report, we see the task force also agrees that many characteristics about the financial sector do not exist, due to the lack of statistical data and their relevant analysis. Specifically, information about the kinds of service for and access and treatment of women, people living in poverty, and people of different races, ages and abilities, by members in the financial sector has long been overdue. We strongly believe independent research of this kind is absolutely necessary in order to engage the financial sector in a process wherein they take into account the impact of their plans and their aggressive move to merge and create more opportunities in terms of gaining more profits. These plans impact on communities and individuals who traditionally have been disadvantaged, thus, in particular, banks, credit unions, stock and mutual bond houses, and insurance companies must divulge their record on access to the above groups and the level of treatment in dispensing their services.

We feel Canada has never been more wealthy, yet women's poverty sits at almost 20% of the female population. Additionally, many women fall into the category of the working poor. Women still experience wage gaps. On average, women who work full-time make 73¢ compared to what males make. Women who are marginalized in our society earn even less when they have disabilities. Women of colour will earn another 8% less. And it continues to drop for other groups of women, like aboriginal women. For young women the reality is even more shocking. The poverty rate for them runs at around 27%, and it skyrockets even more if they are unattached young women. Women as mothers also come under pressure.

Essentially, what we're saying is that things are not getting better for women. Things are getting better for the banks, yet there is no recognition from the financial sector in this regard. These are some of the things we would like to see given some recognition in the report.

The sector of marginalized people and others not favoured in this new economy also depends on geography. People in Canada who live in the north, in rural areas, and in the so-called economically poor communities are being left behind. These areas are being seen as not being economically viable. If we're globalizing the economy, how can we serve a customer in Boise, Idaho, with such superiority, but not one at Jane and Finch, Toronto, Ontario? Banks and the rest of the financial sector must take this into account.

NAC finds that while the committee addresses some issues of access and addresses the good of the public, it essentially avoids fully challenging the financial sector on coming up with aggressive and proactive policies to address the inequities of sexism, racism, classism, ageism, and ableism that permeate this sector. If Canada is to become competitive and effective in this new global economy, then we must proceed with equality of the fundamental principle. Meaningful dialogue on the future of the Canadian financial sector requires that we put these “isms” on the table and see them as integral to the discussion on matters such as access to services and the public good. Canada and the majority of the composition of the world's people demand it.

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When we talk about people as service users, in Canada we expect that corporations such as banks not only serve to assert their rights to exist and make a profit, but they are also responsible to the communities of people they serve. And while the committee emphasizes the number of people the big banks employ, and their contribution to charitable causes, a review of who is actually hired, what positions they're hired into, and which charities are supported must also be closely scrutinized.

These are strong indicators of the values and principles that banks and the rest of the financial sector operate on.

It is shameful, given the profit margins, especially of the big banks, that many Canadians are still living in poverty and denied access to bank accounts. An estimated 300,000 Canadians are denied bank accounts. Many are harassed or treated shabbily in trying to cash their government cheques, which are subjected to the G-8 rule. While we are not recommending banks ignore procedures to verify cheques, we feel the rigorous and abusive ways in which bank policies are arbitrarily applied to certain groups of customers by bank managers and other bank employees are unwarranted and discriminatory.

So we think it's an area the committee needs to take into account in their review and recommendations around changes in this sector.

Other examples of this are refusal of some banks and credit unions to cash cheques. Basically, what we're saying there is it creates another pressure, another barrier for people in these groups. We're saying poverty is not a natural phenomenon; it's a consequence of social, political, and economic development and policies within our society.

People don't get up one day and decide, well, I'm going to be poor. What we're saying is financial institutions must support the needs of the poor, not further kick them in the stomach by creating barriers and impossible challenges to their being able to live their daily lives.

While we applaud the attempts of the Canadian Bankers Association to direct banking employees to accept a wide range of IDs to cash government cheques, we are left wondering why the association has not been able to discipline or enforce this practice in all banks across the country, and what kind of fundamental culture change is needed for this kind of practice to be widely implemented.

Women are in the job market at an unprecedented level, with 68% of women in paid jobs. Yet given women's history of good loan repayment before the due time and their strong skills and expertise in financial management, it is unacceptable that women experience high loan-refusal rates compared to men, particularly when we talk about women who are starting up their own businesses.

As Catherine mentioned earlier, the small business area is a growing area and more and more women are turning to small business and setting up their own businesses as a way of addressing and responding to job losses and the few jobs that are available for them.

What we're finding is they are facing more challenges in getting loans, and being refused loans by a lot of the big banks. And there is no attempt by banks to make any kind of progressive changes in that area.

Women of colour, aboriginal women, and immigrant women report even worse experiences when it comes to this particular area. So the mix of race and gender combine to present a frustrating and abusive pattern of services for these groups of women.

The extent of the discrimination is difficult to prove, as in Canada so far there has been no appetite expressed by the banks or our governments to undertake any kind of research in this regard. In the U.S.A., our strongest trading partner, this information is commonplace.

If we are to talk about empowering consumers and acting in the public interest, an evaluation of services in the financial sector is essential to effectively deal with the weaknesses and inadequacies and to strengthen this area.

Women, people of colour, and people living in poverty are part of the Canadian society and contribute to the economic health of this country. They have a right to expect good service and to have access to services equal to that of any corporate CEO.

We recommend an evaluation of the financial services with regard to access and treatment be immediately commissioned by the Government of Canada, and this assessment must take into account lending patterns; access-to-service patterns; access by race, gender, economic status, and other variables in that regard.

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In terms of automation and technology, the report from the committee speaks to the proliferation of ATM machines, the issue of service charges, and cheque-clearing practices. Again, while these are all opportunities and challenges resulting from changes within the context of the global economy, it is not practical for Canadians in rural, northern, or aboriginal communities, or so-called depressed urban areas if they do not have access to banks, credit unions, or insurance companies.

Given the context that almost 300,000 Canadians are denied a bank account because of poverty, the poor service meted out to Canadians who need to cash government-issued cheques and the high interest rate charged on credit cards and some loans indicate a service problem in the financial sector. Moving banks out of communities that are not seen as economically vibrant or viable disadvantages people and businesses in those communities. How can our financial institutions flippantly promote banks as visionaries and “personal” when they alienate and disenfranchise whole communities and people?

While we're not advocating for a bank on every street corner, all communities must have access to live financial institutions. Financial institutions' effectiveness and competitiveness must be measured also against their ability to serve the groups who are on the margins of society. Financial institutions must evaluate their service principles with the needs of the most disadvantaged at the centre. If you can serve the most disadvantaged member of the community, it follows that every other customer benefits and receives even more superior service. In short, you would have covered all the bases.

We recommend that instead of spending millions of dollars selling unrealistic concepts using pop songs and appropriating different cultures, which in some regard we see as clear tokenism, our financial institutions, especially the banks, should look realistically at what is happening to Canadians.

How can a young woman working on her own—upward of 72% are poor—realize her dream of having post-secondary education and owning her home with the assistance of Canada's financial institutions? How can an immigrant woman with extensive business experience and skills, a single parent of three caring for an ailing parent, open and manage her business and safeguard the future of her children and her retirement with the assistance of Canada's financial institutions? How can our financial institutions continue to justify high-priced loans to corporations, but speculate and deny credit to a woman starting up a small business?

The payoff in support is not only in the quantity of dollars made, it should also be measured in the quality of families and communities built in supporting these individuals. We repeat, with what values and assumptions do our financial institutions operate? These are some of the questions we feel the task force should be looking at and raising with the financial institutions in terms of the future direction.

We recommend the Government of Canada introduce legislation similar to the Home Mortgage Disclosure Act in the U.S.A., which requires financial institutions to disclose the number of people who apply for mortgages, the number rejected, and the number approved. The characteristics of race, gender, economic status, and geographical location should also be collected, as is done in the States.

We further recommend the government introduce legislation similar to the Community Reinvestment Act, as suggested by the Canadian Community Reinvestment Coalition, so this data for small business loans, personal loans, and farm loans can also be collected, analysed, and made available to people.

We feel the task force report soft-pedals on this issue. It does not proactively deal with the issue of redlining that certainly is the lived experience of many Canadians living in poverty—people of colour, aboriginal peoples, and women in Canada. And while the financial institutions will balk at the cost involved, we submit that consumers will also balk at the cost of the Canadian Bankers Association, which was designed to convince us we all have equal access and banks are good corporate citizens. A significant number of Canadians do not experience this.

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The uncovering of redlining practices in the U.S.A. has brought about more transparency, increased effectiveness in service, and positively impacted competition in the financial sector. Canadians feel that we pay to use banking services to deposit our money, withdraw our money, and pay bills. In the minds of many Canadians, the level of service is disproportionate to the cost of the service.

We propose, like the National Council of Welfare and other groups, that no more than a $2 basic fee charge should be placed for every 16 transactions per month. Given the level of unemployment and the downward harmonization of workers' salaries due to globalization, credit has become a fact of life for many Canadians. It is a rip-off for banks to charge the outrageous interest rates they do. Except for a hefty profit margin, there are no other credible reasons for this.

Currently, about 12 banks have an ombudsperson to assist bank users. While this may have advantages, we believe that a completely separate and autonomous entity with transparency in its process can better serve the needs of bank users and it can operate from a stronger sense of fairness. In order to deal with the many complaints that Canadians have about the services provided by the financial sector, particularly the banks, we support the task force's call for an independent ombudsperson.

In terms of the merging of the big banks, we're saying that the right to banking services is viewed by many Canadians as akin to water and heat: it's considered to be an essential. Regardless of their economic status, at one time or another, Canadians use banks. We do not feel that the merging of the big banks is going to necessarily mean better services for Canadians, particularly those who have been traditionally disadvantaged.

The banks have a poor record on investing in job-creating sectors in Canada. More moneys are lost by them in loans to big businesses compared to small and medium-sized businesses. In a climate of services that are already scaled down in key communities, how is this going to change and become better under the merger?

The complexity of issues and costs of merging have to be laid out for public and bank employees. How will mergers affect credit, credit card usage, and the availability of capital to small and medium-sized businesses? How will it improve services and access for women, people living in poverty, people living in rural and remote communities, and other disadvantaged groups? What kinds of regulations, control mechanisms, and consumer protection systems will be put in place? Who will provide bank users with the resources to challenge bank policies either with our government or the banks themselves?

Quality, not size, is the issue for women in Canada. Bigger for us is not better, and it can in fact work against our best interests.

NAC believes that the case has not been proven by the banks for mergers to be supported. NAC strongly believes that women, people living in poverty, aboriginal people, and people of colour will be further disadvantaged by such a change. For women, who make up a significant portion of bank employees, the job loss alone is a negative impact.

The task force speaks of competition. Mergers will drastically reduce competitiveness in the true sense of the word. U.S. studies have shown that mergers do not increase efficiency or profitability in the local or global economy.

The task force raises the issue of the 10% ownership rule. We do not believe that this should be currently changed. However, an expansion of bank powers should be prohibited in Canada until two years after the federal government has enacted promised legislation lowering entry barriers for foreign banks by allowing them to set up branches directly in Canada and take deposits of more than $150,000.

The government has to take into account the overall impact on the community. Small businesses create over 35% of Canada's GDP while receiving, at most, 7% of the total business credit extended by the banks. Will this change for the better under a merger?

Overall, our key recommendations to the committee are as follows. First, we believe that access to banking services, including a bank account, is a right, not a privilege, for people in Canada. We recommend that this right should be written into the Bank Act.

Second, we feel that banks operate at a high level of profit and that they're obligated to offer bank users a low-frills bank account.

We recommend that banking laws must take into account a limit, for example, of $2 per 16 transactions a month. This increases accessibility for all users.

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Third, the practice of freezing cheques for six to ten days must be discontinued, particularly in situations where people of low income go in to cash their government cheques, as I spoke about earlier, and their cheques are held for six to ten days. We feel it's discriminatory and that it should be discontinued. Our financial institutions must make use of the new technology to release funds in one or a maximum of two days. We recommend that the Government of Canada introduce legislation similar to the Expedited Funds Availability Act in the U.S.A.

Four, all neighbourhoods have a right to have access to financial services. The onus is on banks, the most frequently used service, to have branches and services in all communities. While banks are now operating in aboriginal communities on reserves, we believe it is less due to a commitment to service for aboriginal peoples and more an issue of access to land claim settlement payments.

Five, we recommend that there be full disclosure of lending patterns; number of loans applied for; number that are turned down; and information according to race, gender, economic status, and geographic location.

Six, we reiterate the call for an independent banking ombudsperson, as set out by the CCRC.

Seven, NAC also recommends that in reviewing the task force report, the government do so with a view to removing barriers to home ownership in order to make it easier for Canadians to own a home.

And eight, and finally, NAC recommends that the federal government undertake a broad-based race and gender analysis and a gender audit of banking services so that Canada can create the conditions to support true change, to meet challenges, and to address opportunities for all in Canada's financial services sector.

The Chairman: Thank you, Madam Carnegie-Douglas.

We'll now hear from Results Canada, Dr. Richard Ernst. Welcome.

Dr. Richard Ernst (Board Member, Results Canada): Howdy. We thank you for the opportunity to present before the committee.

Results Canada is a citizens' activist group of advocates working to create the political will to end hunger and absolute poverty. We work with members of Parliament, politicians, and the media, and we have affiliated groups in other countries.

Therefore, we are interested in the aspects of the report with regard to banks' support of micro-credit for the poor. It's important that the poor become part of the financial sector. We testified in some detail before the hearings that led to the MacKay report, and we're pleased that the report indicates a support of micro-credits.

Our purpose here is to briefly underline the importance of the banks' involvement and support of micro-credit as a precondition for any merger ideas and in any kind of general guidelines that are produced for continuing bank operations, whether or not the mergers are approved.

Micro-credit is one example of a way in which banks can make a contribution to the welfare of the poor in the societies in which they operate. Credit is a starting point for a self-reinforcing cycle of increased well-being for some of the world's poorest people, both abroad and in Canada. For example, the Grameen Bank of Bangladesh runs credit programs for the unbankable poor. Started about 15 years ago, the bank now has perhaps two million borrowers, 95% of them women, with repayment rates of 98%. The World Bank's and other studies have concluded that in a short period of time, a matter of years, such micro-credit programs allow people to bootstrap themselves out of poverty.

Programs such as Grameen, ACCION, Calmeadow, Banco Sol, and a number of others abroad and also in Canada allow people to help themselves. For instance, a woman named Fuljan from Bangladesh married at the age of 14 and was then abandoned by an abusive husband. Micro-credit has allowed her to bootstrap herself out of poverty, to send her children to school, and to build a worthwhile future for her family.

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Our emphasis on micro-credit internationally and as part of bank policy in Canada is part of a broader global movement focused around a movement launched in February 1997 in Washington, the micro-credit summit, which has launched a plan that by the year 2005, 100 million of the world's poorest families, especially the women of those families, will be receiving credit for self-employment and other financial services. This summit was launched with some 3,000 delegates from 130 countries, including strong representation from Canada and including having the president of CIDA on the campaign committee for the fulfilment of this broad micro-credit summit campaign. It is focused on the developing world, but it also includes a specific focus on developed countries.

There are examples of what the banks can do. A good example of productive investment in micro-credit is provided by Scotiabank, the one bank of the big five that isn't asking to merge. Scotiabank established a micro-credit program in Guyana in 1993, and though not well publicized, the program now boasts more than 3,000 borrowers. Bancomer, a large Mexican bank in which the Bank of Montreal has its stake, is also reported to be developing a micro-credit program. Here in Canada CIBC and the Royal Bank have injected several million dollars into the Canadian Youth Business Foundation, an organization that provides small business loans to unemployed young Canadians.

So more of this can be done, as well as the banks providing funds to sort of lender wholesaler groups that have direct networks with foreign expertise in running micro-credit programs that work. More of this could be done if required by the finance minister. As the banks are eager to merge, the chances are good that they would agree to support micro-credit if it were required as a condition of merger approval.

As always, it is important to have micro-credit targeted to the poorest people, particularly women. Otherwise, the benefits are usually used by the less poor and the non-poor, so that targeting to the poorest is absolutely key.

It is also worth mentioning that in the United States banks are subject to a Community Reinvestment Act, which makes it compulsory for them to reinvest in the community, often through the provision of funds to micro-credit institutions. Moreover, to receive permission to merge, banks must show that they have fully complied with the community reinvestment obligations. Now, whether Canada would want to have a similar community reinvestment act is not for us the key part. The key part is that the banks have some transparency in reporting their effectiveness in reaching the poorest.

Another aspect is that the banks are ideally situated to create instruments to enable investors to channel capital to support micro-entrepreneurs as they work their way out of poverty and into jobs and homes. An example of this is Grameen Trust, which is a partnership between the Grameen Foundation and the Calvert Mutual Fund Group in the U.S. Investors can invest amounts of $1,000 or more and earn a fixed rate of between 0% and 3%, the rate decided on by the investor. The funds are invested in Grameen projects managed by Calvert and guaranteed by substantial loan loss reserves underwritten by the Ford and MacArthur foundations.

A similar program for investors was recently announced by Bankers Trust, the seventh largest U.S. bank holding company. Bank clients are able to invest not only for financial gain but also to support their values and convictions and to translate them into real and measurable results.

Canadian banks offer no such investment programs for their customers. This would be the appropriate time to request that they develop and implement similar investment products to give their customers the opportunity to invest in the global effort to improve the lives of many millions of poor people, especially women.

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So again, I want to underline that we think it is essential that the banks be mandated to provide capital for micro-lending for the poor, and that their track record in reaching the poor in communities be reported on, on a regular basis.

I'd like to mention that micro-credit is of interest to a number of parliamentarians. The parliamentary micro-credit caucus is headed by Jean Augustine, and they have been looking at ways of establishing pilot projects in their communities, which would involve partnerships between local banks and groups that can distribute micro-credit. They are pilot projects at the community level.

We have an opportunity to have the banks do a reinvestment, a real contribution toward the poorer communities, in these talks. I think I would like to see the poor receive the opportunity to pull themselves up out of poverty.

Thank you.

The Chairman: Thank you, Dr. Ernst.

We'll now hear from a presenter from the Rice Financial Group Inc., Mr. Thomas Rice. Welcome.

Mr. Thomas J. Rice (President and Chief Executive Officer, Rice Financial Group Inc.): Thank you for this opportunity to share with you some thoughts.

My position, as indicated in this paper, represents that of tens of thousands of Canadian depositors who are using the Canadian banking and other financial institutions in Canada to save and move funds, whether in chequing accounts, in savings accounts, in fixed term deposits, in RRSPs, RRIFs, LIFs, or annuities—funds placed with the major banks and financial institutions of this country.

I don't want to address the competition and the other areas, but there is a major concern to me and other Canadians that's far more severe than that, which would affect everyone in this room—your children, your parents, your legacies, the estates you want to leave behind, as well as your pensions—and it is the safety of the deposits within the banking system as they grow in Canada today. Particularly as they would multiply by virtue of the mergers of the financial institutions, and with the dwindling of sources whereby people have access to the institutions, you're going to create natural growth of those deposits within any financial institution.

The proposed mergers for the four Canadian chartered banks is a major issue facing government today. Not only must the decision-makers be concerned with immediate impact, but they must also consider the risk to the individual businesses, municipalities, provincial governments, and any user of deposits within the banking system. If the question is asked, who should be the beneficiary of their decision, the answer should be the investor and the depositor, not the shareholder.

When they're looking at these issues that are involved, the order of importance is the consumer protection for the safety of the moneys of deposits within the systems, excluding mutual funds, securities, or other deposits that are not qualified as insured deposits under CDIC today. As well as that is the protection of the personal financial information of Canadians.

In terms of the risk to the security of consumers' deposits and term investments, the deposit protection is the key to the security of the investors' money. Should a bank fail, the deposit protection in place should ensure the return of the initial capital investments with possible interest growth. Without this insurance, or some other form of monetary funds set aside, the effect on the personal and corporate deposits, retirement savings, pension plans, municipal and provincial funds, etc., held in the banking system could be devastating to Canada's financial stability and the citizens, large and small savers, relying on our banking system.

Oftentimes we refer to CDIC as an insurance company and reflect that it should perform with the same values. I like to refer to it as a deposit protection rather than insurance.

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We suggested the insurance limits be reviewed for all members of the Deposit Insurance Corporation and the reserve should be in place. Insurance protection should be raised to 100% or a minimum of $500,000 per account. The cost of increased protection should not be passed on to the consumers but borne by their shareholders. The increased premium would only reduce bank profits by a small margin.

Many smaller members of CDIC now pay premiums of 100% of their deposits at higher premium rates than those enjoyed by the larger institutions. The banks argue that they do not need increased investor insurance coverages as they are too big to fail. We suggest that recent events overseas would argue this point. The increased networks of diverse bank operations will require tightly controlled management in order to retain the safety and security of their operations. No one is too big to fail. No one can predict the future, the impact of derivatives and off-balance sheet liabilities, the impact of lower stock markets, and the unstable economies of some of the world's largest countries to which these institutions want to grow to and invest in on a global basis. We should remember how past changes in other countries have impacted locally on Canada's financial institutions.

I would also like to say that I believe all Canadians, if they had a choice of leaving their money on deposit and having those institutions lending that money out and making money with the money— The banks often give us the opinion that it's their money and their deposits, and I continually remind them that it's the consumer who is the user of the bank's system whose money it is. They're enjoying the privilege of making money and using that for the period of time for which it's there.

I wonder how many Canadians, if given the choice, would sooner have that lent in their own backyard, to their own small neighbours, for economic growth within their own regions rather than expanding and using that capital for growth investments internationally, for global experiences. I think as Canadians we must protect the deposits of Canadians within the system and protect the privileges of the banks, which the banks have not grown on an entrepreneurial basis as they have in the U.S. or other countries. They have grown them by virtue of having control over the payment system within this country and because of the enjoyments they've enjoyed under the bank legislation and the acts they've been privy to. It has not been grown through true entrepreneurialism.

Every Canadian and every Canadian entity must be reassured that their capital savings and investments and pension plans will be safe and protected first and foremost. Having one financial system and standards has allowed our major financial system to grow to the size it is today, not entrepreneurial structure, as I've already stated. We have heard many arguments and reasons put forward by well-informed, organized groups that are rich in academic knowledge and research, but none of them have touched on the real concerns that face all Canadians and our future economy as Canadians and as a country. Our certainty and safety in the future, and the reassurance that all our future wealth will remain as safe and as secure as it has in the past, should be first and foremost.

Canada has witnessed the impact of this in smaller ways over the past two decades when our financial systems and structures have been tested. Some financial institutions, their management and board of directors, made decisions during bullish times to lend and invest money, which, when unforeseen economic changes occurred, were seen to have been very poor decisions indeed. They had been entrusted with the money of individual Canadians, businesses, and governments. If it were not for the quick action of the past governments when they increased deposit insurance retroactively and lent money to the insurance agency, CDIC, it would have made for tougher reporting requirements and restraints in CDIC and it would have devastated many Canadians. Also, many private and public corporations, and entrepreneurial businesses and partnerships, would have been bankrupt, including some of the municipalities within Ontario that had large deposits of tax moneys on deposit with some of the failed institutions of the 1980s.

The increase in deposit insurance should be subsequent government policy changes, not primarily to save the average Canadian deposits, as most of them were insured at that time for only $20,000. The government retroactively increased the last change to $60,000, and those deposits were insured by the Government of Canada, or the taxpayers, allowing CDIC, or lending them money at their expense, to bail those institutions and keep that money safe.

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We should learn from that and make sure the institutions fund those liabilities through increased limits now, not later and after the fact. It can be argued by CDIC that their balance sheet is clean today. They have large reserves that are going to be building up. The banks argue that they've paid for most of the premiums.

Two senior bank officials have called me since I delivered this paper, saying they had paid larger premiums—and rightfully so because they have the majority of deposits within the system. But I would think if you looked at the percentage of deposits that qualified for insurance, they would have paid less proportionately than some of the smaller institutions that have paid 100% to keep the deposits in there to be lent out for their profitability. They seem to turn a blind eye to that fact.

If huge amounts of money are gathered in those premium accounts until they are needed, perhaps the Government of Canada could sell some of their bonds, etc., use that capital for economic growth within the country, and make that an asset for the taxpayers of Canada instead of a potential liability to savers and government taxpayers.

The proposal CDIC has currently lobbied and put forward is about potentially reducing their premiums for large institutions and not having premium payments for any financial institution that scores an A on their chart. I suggest to you that any insurance underwriter would not take that approach because there's no guarantee of what tomorrow and the risks of tomorrow or the pooling reserves of tomorrow will be based on, and they may continue to be reduced by virtue of past actions.

The proposal of CDIC to reduce premiums based on past scoring and audit strengths makes little sense for two reasons. Institutions are aggressively seeking new fields to invest in as well as exploring global expansion. Past performance is not a good predictor of future results or an appetite for risk.

If audits successfully show shortcomings or weaknesses in the operations and initiatives taken by CDIC or government regulators, the policies to correct the weaknesses should strengthen the weak institutions and reduce the overall risk to the institutions and the consumer, and should not be brought about by lower premiums in the future, but more stabilized and level premiums.

The strength of deposit insurance is spreading the risk across all the companies and the financial support of the Canadian taxpayers through yourselves as policy-makers.

Deposit protection at $100,000 is higher in the U.S. than it is in Canada. The real difference between the two programs is Americans have not been encouraged to save for retirement to the same extent as Canadians. We are recognized for this internationally and should feel proud of this fact.

However, at the same time we need to take steps so consumers can continue to have government guarantees and policies in place to protect them from losses resulting from the aggressiveness of financial institutions' management and shareholders. Our deposit coverage and guarantees should be double or triple the guarantees in the U.S. because of our savings rates and the type of savings it is spread across.

The second factor in the U.S. is there are far more institutions for the consumer to put their deposits in than there are in Canada, and in Canada we're considering the shrinking of that opportunity.

The following is a quote from Mr. Sabourin who addressed the Federation of Canadian Independent Deposit Brokers at their annual conference in September 1998:

The second main theme of our new performance management system is managing the risks of insuring deposits. Before outlining CDIC's current initiative in this area, I would like to address an issue raised by a few critics, and that is whether there is still a need to insure deposits. There is a perception among some observers that the financial institutions will not fail in the future and therefore a deposit insurance system is not necessary. Let me remind you that a lot of people also said the Titanic couldn't possibly sink, and that the Japanese economy and financial sector were indestructible.

According to conservative estimates, to date the Japanese government has injected some $320 billion Canadian dollars into that country's banking system, and some industry observers believe the current Japanese crisis will make the cost of the U.S. Savings and Loan crisis pale in comparison.

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It is true that Canada's financial system is strong, but we shouldn't be complacent. As a former chair of the Federal Deposit Insurance Corporation in the United States, Ricki Helfer, frequently pointed out, financial institution failures come in waves because the performance of the industry is so closely tied to the performance of the economy. Ms. Helfer questions whether anything less than the equivalent of a full faith and credit pledge by the federal government would fully protect the banking system in times of a crisis. All experience to date, including the current crisis in Japan, Thailand, South Korea, and recent events in Russia suggest not. The pictures we have all seen of Russian depositors lined up outside of banks to withdraw their savings are clear evidence of what occurs in the absence of a formal system of guarantees.

Preserving public confidence in the system is essential to prevent runs on banks when concern about one financial institution spreads to otherwise healthy institutions through what is known as the contagion effect. We need only look to the recent experiences in South America and Asia, for instance, to see evidence of what can happen. Further, a 1997 International Monetary Fund publication on deposit insurance provides a startling statistic that almost three-quarters of its 183 member countries have faced crises in their banking systems in the last 15 years. Ignoring such evidence of a systemic risk brought on by a lack of confidence would be at our own peril.

While our economy is performing very well at the present, it would be naive to assume we have permanent immunity from financial crisis. In fact, CDIC was created in 1967 in response to a crisis during which a newspaper report suggested that unless something was done to restore public confidence, there would be long line-ups of depositors waving deposit slips.

As recent events have shown, international economies are now so intertwined that even a strong economy is susceptible to shock waves from other parts of the world. The 1967 initiative was created by virtue of the failure of the Atlantic Acceptance in Canada.

The CDIC has proven to be a strong government initiative that has secured billions of dollars for Canadians and protected them against a rash of mergers, acquisitions, and changes in the Canadian economy that affected institutional lending practices and values. The combination of these factors forced into bankruptcy or consolidation a number of banks and trust companies during the 1980s. Were it not for CDIC and strong government actions, billions of dollars belonging to Canadian consumers, small businesses, and municipalities would have been lost.

Have we learned from the past or will we wait like the last time when the CDIC limits were increased from $20,000 to the current $60,000? At that time, limits were increased on a retroactive basis after the failure of several financial institutions. The limits were increased to protect consumers, businesses, and several municipalities who had over $20,000 on deposit. But I also think some of those increases were due to the wholesale deposits the major banks were holding from the smaller financial institutions as well, which were well in excess of $20,000 at that time.

The government also had to lend the CDIC money to pay out the higher limits. No premiums for the increase were paid by the failed institutions, causing huge deficits to be picked up by the taxpayers, which have now been paid back.

The government needs to be assertive in protecting the consumers who are using and depending on the safety of government guarantees and the strength they provide to the banking system. Taxpayers should not be put into deficit positions to finance failed institutions.

I've given you additional copies of briefs and newspaper clippings, noting the CDIC quotes are misrepresented on the long-term position of the banks who are quoted as saying deposits would continue to be insured if the banks come together and the $60,000 would really mean $120,000 because both banks would continue to insure their deposits. That is true until the maturity of that money. At the time the deposits mature, it would then fall to be insured by one $60,000.

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Our banks today have two, three, five or six different companies from mergers or acquisitions they can insure deposits on for the informed investor to make sure those deposits are there. The bank tellers are not advising at the bank level that that exists. Secondly, if the bank mergers are allowed to continue forward, I suggest somewhere down the road somebody will wake up and say they don't need this infrastructure here and will start consolidating those institutions into one.

There are further articles here that talk about the hedge fund and one recent one I picked up two weeks ago in the United States that Bankers Trust has had a $488 million loss— Wall Street vulnerability. As derivatives, etc., and the banks move into global environments and get more bullish in lending out and managing money in larger blocks, that could exist here.

The ING Bank has also been caught in this hedge fund. There are many European banks. In fact, it's unsure right now whether Bankers Trust will survive or who is going to buy them or take them over. Those same things can exist in the future here in Canada, and I think the primary concern for everybody should be the safety of our deposits, our moneys, and our retirements as consumers and users of those services.

Thank you.

The Chairman: Thank you very much, Mr. Rice.

We'll have a five-minute round with the CFIB, beginning with Mr. Riis.

Mr. Nelson Riis: Okay. Thanks very much. Then I'll change my line of questioning.

Ms. Swift, thank you for your presentation and your background material, which we'll have a chance to digest perhaps more thoroughly later today.

Your comments on tied selling caught my attention because they complemented the first speaker—why the insurance business is particularly concerned and whether it's tied or sort of coerced implicitly or whatever. The question was raised earlier today, before you folks came, about whether this is really a problem. The former Secretary of State for Finance, Mr. Peters, indicated that in all his years no one had ever approached him on the tied selling issue being a problem. You say your members identify this as a serious problem. Could you elaborate on that point, please?

Ms. Catherine Swift: Yes, we'd be happy to. We're also working on some data on this issue, by the way, so that's something we should be able to provide you with that's a little more tangible.

I don't know if I'd say the problem is any more serious for a business, but I think it's probably as serious as it is for any bank consumer. The more areas banks seem to get into, the more incidents of tied selling there appear to be.

I recently got a communication from a member, and of course in every instance they usually say not to use their name, for obvious reasons, because they're so worried about compromising their relationship with the bank. But this person actually sent me some bank correspondence that was, I would say, dubiously legal, along the lines that the bank required their RRSPs to be there, etc., predicated on a line of credit.

Mr. Nelson Riis: I welcome your anecdotal comments, but you said you'll have some hard data for us, and that would be welcomed.

Ms. Catherine Swift: Yes. We are surveying the extent of this because we've all heard about it for a long time. I've seen numbers of 15% to 20% cited as not atypical, in terms of this. It's also not traceable, and that's the problem. I think the fact there is a paucity of complaints is obvious. Certainly our members tell us the two entities they want to retain anonymity with are the banks and Revenue Canada.

Mr. Nelson Riis: Thank you. I will look forward to that data. Particularly with 90,000 members, it will be very helpful.

In your figure 4, you comment on the various services your members receive from the banks. Would this confirm the point made earlier that if we added insurance in there it would create the likelihood of some kind of tied selling or coercive selling?

Ms. Catherine Swift: Certainly it would be a big temptation.

Mr. Nelson Riis: My last question, Ms. Swift, is a general one. Who are your 90,000 members? Obviously certain people join your organization. A lot don't, but a lot do—90,000. Can you help our committee understand who decides to join CFIB, compared to those who do not?

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Ms. Catherine Swift: I'm happy to. We have pretty extensive data on our membership. I might also note in passing that the small business sector is an interesting sector. It's fairly changeable. It's not like a BCNI, which always has the same members for 30 years or whatever. It is a very dynamic sector and a changing one.

Our organization is part of the steering committee for the largest international small business organization around the world—almost 70 countries belong to it—and interestingly enough, the CFIB has the highest market penetration of any other similar organization. So you're correct in terms of saying that certainly small businesses do not join us, and there is a whole long list of reasons for that. I guess it's partly because in many countries, notably European and South American countries, there are actually government requirements for firms to join some organizations. Unfortunately, as a result, those organizations don't tend to lobby too hard against the governments. Why would they if there's a legislated requirement for dues to be paid?

In any event, we regularly track how well our members represent the small business community.

Mr. Nelson Riis: I'd like to rephrase my question. There's no hidden agenda in my question.

Ms. Catherine Swift: No, I realize that.

Mr. Nelson Riis: I'm trying to think— in my community of Kamloops, I know there are many active members, and others who aren't interested or active at all. I was just curious, who is it that is attracted to join your organization?

Ms. Catherine Swift: We just aggregate on the basis of all the standard criteria: size of business, sector, region obviously, and gender of owner. We go to three-digit SIC, for example, and we find our membership. In terms of how they stack up relative to the overall small business community, it's reasonably comparable. Our member tends to be on average a little bit older in business, longer in business, and that's not surprising. You'd think you'd probably be around two or three years before you might think of joining an organization and so on.

We also find we tend to have the community leaders, probably because they're more tuned in to policy issues. So typically we know our long-term members also are reasonably active in other areas of their community, and I think that's also something that is a criterion. They're interested in issues; therefore, they tend to involve themselves in a number of activities, one of which would be membership in our organization.

I think, generally speaking, they don't tend to be misrepresentative of the overall small business community, because we find when we do our polling on an issue that is not exclusively a business issue—Sunday shopping might have been a good example, when that was controversial a few years ago, and some would say it still is controversial. We found that our polling within our membership matched public opinion polling very, very closely. So I think they're a good reflection. On a strictly business issue they'd have a more business-oriented response, not surprisingly.

Mr. Nelson Riis: Thank you.

Thanks, Mr. Chairman.

The Chairman: I just have a follow-up question in reference to page 7, figure 5, “SME reliance on alternative financial institutions”. Now, Wells Fargo is known by 60% already. How long has Wells Fargo been in Canada?

Ms. Catherine Swift: How long? I guess actively just over a year. I think they've received an awful lot of press relative to some of the other players.

The Chairman: But still, relatively speaking, they represent about 0.7%, so they haven't really been able to penetrate the market.

Ms. Catherine Swift: In terms of penetrating the market, no. But people seem to be aware of them anyway. But again, they're serving a very narrow niche. Their product is targeted at a very narrow niche of the market. So we would never expect them to serve more than a couple of percentage points. That would probably be the maximum.

The Chairman: Okay. So basically you're saying they'll never move above 2% or 3%.

Ms. Catherine Swift: I wouldn't think so in the broad small business constituency.

Yes, Brian.

Mr. Brian Gray (Senior Vice-President, Policy and Provincial Affairs, Canadian Federation of Independent Business): With regard to this graph, I think it's really important to understand what it says. What we were trying to get a handle on here was— To some extent the major chartered banks have been crying that the sky is falling. We've got these major new entrants in the marketplace that are putting us on the brink from a competitive point of view. So we felt it was extremely important to go out there and understand from our members' perspective just how many of these new entrants our members are aware of, or using, and so on.

I think these numbers are pretty clear in establishing they're not players in the market, not for our people's business. Let's say one of our members did happen to use one of these players. It would be a unique, specific product for a specific use. This is not at all a situation in which they're going to Newcourt Credit, for example, for a range of financial services akin to a banking relationship that we know, in traditional terms, entrepreneurs have had throughout this country. So I think we've got to understand the pickup here, as well as the fact that even where there is some pickup, it's not what you would call a full service banking relationship.

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The Chairman: But to me, the fact that Wells Fargo is owned by 60% is something to take note of. I agree with Ms. Swift.

Mr. Brian Gray: I think that's probably a function of the fact that when Wells Fargo did come into Canada, there was a hue and cry from the major chartered banks about how unfair this was. In fact, they brought more attention to this than Wells Fargo did. They were the best publicity campaign for the Wells Fargo product, frankly. That's why you heard about it, your committee heard about it, the industry committee heard about, and we heard about it.

We told our members about it, frankly, because it was a new, competitive product out there. One of the beneficial results of all this, of course, was that the Royal Bank, for example, after the leadership provided by Wells Fargo, decided to pick up a product almost exactly the same, which was delivered to the Canadian marketplace.

The Chairman: So basically you're saying these people have no potential to penetrate the market.

Mr. Brian Gray: It's our feeling that they're not a player today, nor will they be a player of consequence in the near future.

The Chairman: What's “in the near future”?

Mr. Brian Gray: When I say “in the near future”, I mean five to ten years. I don't see them having a major portion of the small business market. Now, if you're in a major urban centre, that may be different. We represent firms in every nook and cranny of this country, every size category, and every sectoral category, and those folks are not seeing this in their day-to-day lives.

Ms. Catherine Swift: It's also not a product. Wells Fargo offers very high-cost credit for firms with a particular profile. That isn't and should never be the cup of tea for all small businesses.

That being said, the notion of having a proliferation of different products, each of which might only ever have the potential to serve 3% or 4% of the market, is a good thing, as Brian said, as it levers other institutions to offer something similar. There was never a product like that available in Canada until Wells Fargo came in. Now a number of the existing institutions are offering something like that. So that in and of itself is a valuable addition to the availability of products.

The Chairman: When you talk about the future—that's what this exercise is about—you say five to ten years. Is that what we should be focusing on? Do you think generationally about the financial services sector or do you think of 2010? Where are you at?

Mr. Brian Gray: When we appeared before the Senate yesterday, they asked us specifically for a vision, if you will, about the future of the financial services business. When we're talking here, we're talking largely about banking services to the small and medium-sized constituency.

In order to be able to sort of look into the future, you have to make a number of assumptions. The assumption we made was that a reasonable approach to financial institution reform with regard to banking services was to adopt the Australian approach, which was that we believe, as does this federation, competition is good for the economy and for business. But there are some realities in the Canadian marketplace. One of these is that you have major players that are very much established and present there now.

So in order to have a fair chance of that competition coming to establish itself and being a viable, sustainable, and true alternative on a full range of banking services, not just on a product here and a product there and so on, the assumption we made was that, for a period of time, you didn't allow the mergers to go forth. You instead allowed the competitive forces to try to establish themselves.

Even in that scenario, it's our best guess that the five major chartered banks will continue to be mega-dominant. They've got a market presence, a market name, and an established clientele that either is disinclined or unable to move. They have systems and cost structures in place. They have a huge and very established presence in the market.

Now for the new competitors to come in— We're talking from the point of view of small business lending, which the banks themselves have said is a very unique kind of skill that they've taken some 30 years to start to hone and refine. So we don't have a whole lot of hope that if you let the competitors come in, it's going to happen overnight. We're going to have a U.S. style of community banking or the credit unions will be able to come in and ramp up.

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Ontario, for example, is dominated— If you go to the merger scenario, you will have two mega-banks serving more than 70% of the Ontario market. West of Toronto, it's going to be even higher than that.

My question to you is, with a pretty much non-existent credit union movement in Ontario, for purposes of commercial banking, where's the backup? Where's the second tier? Where's the ramp-up? Who's going to replace the lost capacity? These are our concerns. We think you've got to take the time to create the competitive environment to let new entrants come in. Don't let the mergers be there until that's up and going.

Ms. Catherine Swift: Just to add to that, when you talk about timeframes, things are changing rapidly in this sector, as in a lot of sectors right now, such that looking much beyond five to ten years is probably impossible. So re-examining some of these issues five years down the road will probably be necessary.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: Mr. Riis almost asked my question on tied selling. This is particularly interesting. There are anecdotal reports that I think a lot of us have had in our constituencies, probably even personally. The 16% actually seems a bit low because a lot of it is implied. Even yesterday, we were asking about whether the mutual fund people were finding that individuals had trouble getting a loan for an RRSP if they weren't taking a product at that institution.

When I look at figure 4, as Mr. Riis did, I want to know whether some of the detail on figure 4 is actually a form of tied selling. They're not going to make any money on your small business loan, but if you bring them all of this, then maybe you can talk.

I guess I'm wondering about how you word the question to your members about tied selling. When you come to this next kind of survey, could you be specific? I think it would be very useful for the committee to know whether people felt that anything was implied or perceived because of the power differential when they're asked to sign for life insurance. They just sign that one instead of asking whether they can find someone else to give them that. People don't say they want to just wait until they talk to their insurance brokers. I don't think people do that, yet MacKay says it's 16%.

I had other questions. One was about your members' experience with the new banking ombudsman's office and whether they felt that was a good thing. MacKay says it should be statutory. Certainly some of my feelings have been that if it's statutory, then people might be less willing to go because they knew they would need lawyers and all kinds of people because it would become a big deal.

The last question concerns last Friday, when the Interac people came. I was a little concerned, in view of their monopoly, that when we asked about them taking deposits or about the kinds of things that might be offered to small business should the bricks and mortar disappear from a certain neighbourhood, they said they would see if it fit into their business plan. I guess I want to know what your members would think about Interac deciding in their business plan whether or not they'll take deposits and whether or not that would be important to your members.

Ms. Catherine Swift: I'll just speak on tied selling. Of course, the challenge with this issue is that we'll never have a perfectly worded question because you're asking about a perceptual issue. I think the reason bankers have got away with murder for a long time is that the so-called differentiation between cross-selling and tied selling is so fuzzy.

I don't know that we have a perfect answer for you there, but you're right that the implied pressure is certainly often there. It's very difficult to quantify. The best you can do is ask for the notion of whether or not the person does feel the pressure to do this.

Something else actually just occurred to me as you were asking about this that might be intriguing from our data standpoint. We can certainly disaggregate those who do owe money from those who don't. Then you might get a measure of leverage. We know that on service charges, for sure, the member who has a— They all use banks for clearing and they need an intermediary, but for those—it's roughly half, so it's a good proportion—who don't need the institution to pick up and move in an instant and not have a problem— I shouldn't say pick up and move in an instant; it's not that easy. But you know what I'm saying. They're not in debt to the institution. They negotiate away service charges all the time, and there are undoubtedly other preferential things they can do.

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What's regrettable from a public policy standpoint with that kind of thing is that it's always the more vulnerable firms, the younger firms, the newer firms, the smaller firms, that you want to, hopefully, give a boost to and have them survive and grow, that are put upon by higher charges, higher this, higher that. You might justify it on an interest rate basis because they're riskier. So you can justify it there. I don't think you can justify it with regard to service charges. You're providing the same service to A as to B. When there's no justification, what you're doing is basically making even more vulnerable those firms that are vulnerable at the outset. So that's a problem we see frequently in that kind of area.

Mr. Brian Gray: With regard to the bank ombudsman, the whole office of the ombudsman was an outgrowth of the early nineties when the system was so unresponsive to individuals and small business, and there were two things that came forward at that time: one was the concept of a code of conduct and the other was the ombudsman.

The idea around the code of conduct was, essentially, if I were to go as a business person and make an application for a loan and I was turned down, before the code of conduct I would likely not be told why I was turned down or how I could improve my presentation the next time such that I might be successful. It seems to me to be normal good business sense for a bank to do that without being asked through a code to do it. However, through the code that was something that was established.

A second of what I call the soft issues in terms of encouraging banks to do the right thing was the bank ombudsman position. That, basically, was an outgrowth of the Berger committee report where they saw that in the U.K., for example, they did have a national institution of that nature.

It was around that same time that the working committee on small business, which I was privileged to co-chair with Phil O'Brien, looked at that, among other things. In fact, Ministers Martin and Manley asked us when we delivered our report whether we thought such an office ought to be institutionalized through government or it ought to be something delivered by the financial institutions themselves and self-regulated. Of course, being from the private sector you have to have faith you can self-regulate, and we said we didn't think it was necessary to have a another government apparatus with all the bureaucracy attached, and we recommended to give it a try first on the private side.

With regard to our members' experience with how it has worked out, frankly, the biggest problem inherent in the ombudsman's office is that the most critical issue, that is, access to credit or credit problems, is off the table in terms of any complaint to the bank ombudsman. If you can't complain about credit and access to it, it seems to me that our members have a huge credibility problem with the institution in the first place, because that's really their critical problem.

The second issue is the fear of reprisals. As Catherine mentioned a minute ago, Revenue Canada and the banks are viewed as huge players in the world of the entrepreneur that can come and make a difference down the line if you happen to shake the cage a little bit. So I would hazard a guess that most entrepreneurs aren't willing to take that chance to incur the wrath either of the account manager or of the system down the line. In fact, in 1977 we asked about how the ombudsman service was working. We had 9% who said they didn't want to do it because it would jeopardize the relationship and 18% who said it wasn't worth their effort. The remainder used the system one way or the other but with differing rates of success.

Mr. Garth Whyte (Vice-President, National Affairs, Canadian Federation of Independent Business): If you legislate it, you make the process more onerous. We found that in other things, whether it's through NAFTA, internal trade barriers, or Revenue Canada, the tougher you make it, the more they just walk away. It's just too expensive, it takes too long, and it's just not worth it. So your observation is correct.

Mr. Brian Gray: I'm sorry to interrupt, but part of it is that if you have a few success stories that actually are true and they get publicized and people start to develop credibility in a process and get the credit in there, then it may have a better track record. But right now it doesn't have much credibility, I don't believe.

Ms. Catherine Swift: I think this speaks to the larger issue, which I believe is contained in our brief, but we haven't touched on it yet, and that is that the banks are not like any other business. The financial industry is not like any other business. Some of the other witnesses here today have noted that they do have a privileged position, and not because they're incredibly entrepreneurial but rather because that has been mandated via legislation and so on. They have been permitted to monopolize this industry in many facets of it.

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So there is a quid pro quo here, and there is a huge public interest, obviously. That kind of thing, whether it fits with a business plan or not, is to my mind one reason they have trouble communicating, because that's a very cold-blooded way of looking at this and, we feel, certainly not justified or accurate.

Ms. Carolyn Bennett: Their concern is that maybe we won't be using cash, and therefore they shouldn't have to take deposits.

My question to you is, is there any entrepreneurial spirit in small business? With e-commerce, shouldn't they be sending bonded couriers to come and take the till at the end of the day? Why isn't there any ability to deal with this in a creative way in terms of retail markets, when you're closing branches all over the place, and our rural caucus is hugely upset over the fact that everyday people are driving an hour each way just to do their banking and then doing their shopping in that other town?

Mr. Brian Gray: We like talking in facts. All of us have also heard the anecdotes. One of our members was up in arms when the ice storm occurred here in Ottawa a year ago because at the first flake of snow, all the banks closed. But this corner store happened to have a debit machine operation and also the candles and all the other things everybody was looking for. So for a period of days no bank was open, but they became the bank. They became the supplier of the candles, but also the supplier of the money. But do you think they could get any money? They had to yank money out of their own pockets. They ran out of money, and they then got the wrath of the customers because they couldn't be a good banker. That's really a pretty unfair system and one where you're putting the onus on the small entrepreneur.

Ms. Catherine Swift: And we foresee it happening more. If a bank closes down in a given community, you can see people going in and saying, give me my hundred bucks.

It's kind of like we're all going to have a paperless office in the nineties, and we're going to have a cashless society, too. But whether it will happen in our lifetime, I'm not so sure.

The Chairman: We're going to have two final questioners for the CFIB, Sophia Leung and Mr. Cullen.

Ms. Sophia Leung: Thank you, Mr. Chairman.

I'm interested in your figure 3. You indicate that in Manitoba there's a great deal of growth in the credit unions. I don't know if you have any information on B.C. I'm sure there's a correlation with the mosaic of the population, the users' makeup. Do you find there has been a change since the Hongkong Bank entered and the Bank of B.C. was taken over by them?

Ms. Catherine Swift: It's tough to generalize about some of the credit unions and other institutions because they have all pursued different segments of the market. B.C. is a good example because there's an active credit union movement, and the Hongkong Bank in particular has pursued the small business market more so than some other alternatives out there.

Ms. Sophia Leung: So who is using the credit union?

Mr. Brian Gray: Typically, the user of a credit union is a smaller enterprise, and they are in a lending position that's more akin to a personal loan than a commercial loan. They are also likely to have a mortgage with that institution.

One of the things we've found in Quebec, for example, which has the greatest levels of competition in the form of the huge Mouvement des Caisses Desjardins as well as the National Bank, which is really a regional bank, is that in terms of satisfaction levels, for all institutions they're much higher in Quebec, and those two rank one, two.

But one of the things we have seen through our data is that as that firm grows and graduates from smallness to a more substantive size, they are kind of pushed towards the traditional banks because the credit union movement really isn't equipped to be a full-service bank. So, for example, for cash management services, foreign exchange, and some of the more complex business relationships, you will start to move out of the credit union movement and likely into a traditional bank.

I might just add, with regard to the Hongkong Bank of Canada, that was kind of unique in British Columbia in the sense that they bought an already established system, and they were able to come in and compete in a way in which many entrants can't. The distribution network is everything in terms of your ability to serve the small business.

Ms. Sophia Leung: They are very competitive.

Mr. Brian Gray: Yes, they are, and our numbers show that.

Ms. Sophia Leung: They have grown a great deal.

Can a credit union be used to help the poor and the disadvantaged? Do you see this relationship in there?

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Ms. Catherine Swift: That's probably a question you could more accurately approach some of the other witnesses with, but from the small business standpoint, because you have more of a community mindset with a credit union— And we've talked to a lot of the people in credit unions in the wake of this whole discussion. They overtly depend on that because often they can't offer the same services. They have to offer some value-added. What they do is offer this community connection, and that's how they attract business.

Mr. Brian Gray: And the continuity of account managers.

Ms. Catherine Swift: Yes, accountability of account managers—that was a good point, Brian—is also something much more present in that because they're not shifting people all over the country.

The Chairman: Thank you, Ms. Leung.

Mr. Cullen.

Mr. Roy Cullen: Thank you.

Ms. Swift, Mr. Gray, and Mr. Whyte, you have to run to catch a plane, I gather, and I have to run to get back to the House, but I'd like to congratulate you on the quality of your materials.

I'd like to go to figure 1 in your brief, where you talk about SMEs reporting problems with availability of financing. The numbers get up to about 37% or 38%, and the last numbers are around 32%. When the banks come to see us, they show us charts that indicate their approval rating on loans is up around 85%. I don't have the information in front of me, but that sort of rings a bell. So they ask what more they can do. Their success rate with approval of small business lending and business lending generally is very high. How does that stack up against this?

Ms. Catherine Swift: Actually, interestingly enough, in our data, when we ask the bankers the same questions, we get pretty much the same answers, which isn't shocking; we should. But I think one thing about approval rates, or rejection rates—I guess it's the approval rates they focus on there—that has to be taken into account is that many, many businesses never even get into the database, because the way the bankers compute those data is on the number who get through the first stages of the process. There are many, many who come—you know what I'm saying—who don't even get into the data. It's fine to cite those statistics, they're not inaccurate, but I think you have to look at the context. That's why we question those kinds of numbers.

Mr. Brian Gray: We also find these numbers really of great concern. Let's not reflect back to the base year coming out of the recession—1994. Let's reflect back to a similar time in the business cycle toward the latter part of the 1980s. As you can see, the level of concern today is almost double what it was then. We're now six, seven years out of the recession, yet it's only now that some of the lending volumes are coming back to pre-recession levels. From our perspective, there's absolutely no excuse for that. And it may explain why job creation is suboptimal in the country. It hasn't come up to the levels we would have hoped for.

Mr. Roy Cullen: Thank you.

The Chairman: Thank you, Mr. Cullen.

I'd like to thank the CFIB for your presentation. I understand you must leave.

Ms. Catherine Swift: Yes, thank you very much.

The Chairman: We appreciate your input. Thank you.

Ms. Bennett.

Ms. Carolyn Bennett: I would like to ask Mr. Ernst a question. When you're talking about the poor, one of my concerns has been the money markets. Do you have any experience with that? Do you think that's something we should be looking at, in terms of financial services? My concern is that some of the people I know, particularly the poor people in wheelchairs— A lot of those places aren't wheelchair accessible, so they give their cheque to somebody going in to cash it for them, and the person runs off with the cheque. Is there anything we could do, in terms of the usurious rates? What's happening in that area, in terms of looking after the people with the least?

Mr. Richard Ernst: I'm not familiar with the money markets' approach, but I'm a little more familiar with some of the models internationally. Clearly, those sorts of models do have the potential to break the usurious link. In some parts—

Ms. Carolyn Bennett: If the banks would let people just put money in and take it out without credit, do you think these other places would go out of business? Do you know what I mean?

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Dr. Richard Ernst: I guess the point is how you give people access to credit in a way that is sustainable for them and gives them the tools to improve their situation. There is a body of best practices being developed and engaged in now in connection with this whole micro-credit summit process. This is a field in development. Some of the models have a peer group in which there are people who develop a kind of group business or an individual business plan vetted by the others.

Ms. Carolyn Bennett: Like Calmeadow.

Dr. Richard Ernst: Like Calmeadow, and there are other individual lending models, like Women and Rural Economic Development. It's a field in some flux.

I'm not sure of the implications for the money market type approach, but one of the things allowed by this sort of access to appropriate, well-designed micro-credit programs is that people do not have to borrow from userious sources. In some parts of the world, people borrow from the same people they sell their products to. Therefore, they don't have a chance of making any kind of reasonable profit on their labours. But by having appropriate access to reasonable interest rates and structures supporting them in fulfilling their business plans and paying back at the incredible rates—the 98% rates that have become standard in many micro-lending programs around the world—

Ms. Carolyn Bennett: Maybe my question is better put to NAC, in just saying some people think credit would be a very nice thing. That they just actually can't even have a bank account is really what you're— You were complimenting the CBA on its approach in terms of identification required in order to just open a bank account. Was that your concern?

Ms. Sandra Carnegie-Douglas: Yes, those are some of the concerns, but what we are talking about are some of the rigorous kinds of rules that are applied particularly if someone—say, a woman of colour or a woman who is just starting a business—doesn't have a credit history per se. The chances of her being successful in getting the loan are extremely low. She's going to have to go back and have either a man or some other relative co-sign with her.

What we're saying is that banks need to find more innovative ways to open up those processes and make them more accessible. The kinds of things—-I'm sorry, but I can't remember your name—you're talking about are really looking at different initiatives that are being used in other countries. What we're finding in a lot of the communities is that what people are doing in a lot of the disadvantaged groups is setting up their own sorts of lending structures locally. They're sharing moneys among themselves so that they can lend it to one person who can begin to start a business, and then that kind of support is there.

We're saying that what is really needed is research in order to get some of those hard data for us to get a true and accurate sense of who is really accessing the services that the banks are providing; why a lot of the groups we are talking about are not accessing them; and how they can be improved. Those are things we would strongly like to see the task force take into consideration as part of the future of—

Ms. Carolyn Bennett: One of the concerns the National Council of Women of Canada raised yesterday was that without credit even being an issue, the inability for people to actually have a bank account—particularly those on social assistance—means that they have to go and cash their whole cheque once a month. They are then extremely vulnerable in terms of having that amount of money on their person or in their place.

I guess it's just a matter of whether or not you think the CBA recommendations now are appropriate, or whether you think there should be direct deposit when somebody is on social assistance. Those people should be the best people when it comes to getting a bank account, because they have money coming from the government. Surely that should be a reason they can get an account.

My experience as a family physician with people with previous problems of substance abuse and so on certainly indicates that having all of that money at the beginning of the month is not a good thing. To be able to pay their rent and all of those things directly is obviously something we could do for the people in our country who have the least.

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Ms. Sandra Carnegie-Douglas: Yes, because it's again increasing access for them in ways they have never had before. The fact is that once their cheques come in, they have extra moneys that they can spend in other ways. They can then use those moneys to be able to set up accounts into which to make deposits.

Ms. Carolyn Bennett: They can even get credit cards.

Ms. Sandra Carnegie-Douglas: Exactly.

Ms. Carolyn Bennett: I guess I just wanted to observe that you must be a bit jealous in terms of watching the Canadian Federation of Independent Business and how it's able to poll members to get that kind of data together. You should put in a small plug that maybe we should be finding some money for the women's organizations to be able to do the same thing.

Ms. Sandra Carnegie-Douglas: Realistically, we talk about who the banks are supporting in terms of charitable communities in order for us to go out there to do the kinds of research so necessary to give you the hard data. Every time women's groups come forward to talk about the issues impacting women, the reaction is that they are anecdotal references and that we don't have the hard data to prove things.

We don't have the hard data most of the time because it takes money to hire people to go out there to do the research. When we're talking about funding being cut off to NAC right now by Status of Women Canada, that's why we're saying the banking institutions need to also take into consideration how they make moneys available and how they're assisting the different components of the communities they claim to be serving.

Ms. Carolyn Bennett: Thank you.

The Chairman: Any further questions, Mr. Valeri? Ms. Bennett?

Ms. Carolyn Bennett: No.

The Chairman: Perhaps I'll ask a question, then.

As you probably know, one of the challenges we face as a committee is the issue of painting the future of the financial services sector. It's probably the focal point of what we're doing here. Many people sometimes confuse this committee with other organizations looking at the two proposed mergers. That's not our job. Of course, we do need to look at elements that should prevail in the 21st century financial services sector. I was just wondering what your vision of the future would be. What do you see emerging in the next twenty to thirty years? Do you see major banks or major financial services conglomerates coming through? What exactly do you see in the future?

Mr. Normand Lafrenière: I'd like to take a shot at that.

I see the insurance sector as being a very good one. With the number of companies we have, you see a lot of competition to get the client's attention, to get a person as a customer. Therefore, I would like to see the rest of the financial services sector taking that direction, but I don't see it happening.

What we see is, at best, the banking sector getting smaller and smaller. For thirty years, we have protected those banks. We have given them the 10% and 25% ownership rules, so we have therefore built a strong banking sector. It may have been a very good idea to build that by design, but after that thirty-year period, we then said, let's open the door to see how quickly you can eat the rest of the financial sectors. They did that very quickly with the trust industry and the securities industries. We now see that very same thing possibly happening with the insurance industry.

The banks have the potential to start insurance companies in subsidiaries. They've already done that, but it's not enough. They cannot eat the insurance industry quickly enough by doing so. They're therefore asking for special treatment again. Special treatment will allow them to have access probably to personal information coming from the customer. They will also have access to that customer inside the branch, so they can take that customer by the hand to the insurance agent in order to convince him to buy insurance from the bank as opposed to from any competitors.

In Quebec, we've seen what happened with that. They opened the door to the financial institutions, and in ten years the caisses populaires now have 11% of the market. It's not because their prices are better or because their service is better. They don't even claim to have better service. What they do have, and what the others don't have, is the access to the customer inside the branch. They can take that person to the insurance agent, and they can grab a lot of the insurance market by doing so.

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By opening the doors even more, by giving additional insurance retailing powers to the banks, we're going in a direction opposite to the one we should be taking. We should find ways to improve and to enlarge the number of banks in Canada. I think opening the doors to foreign banks is exactly the way we should be going. Helping the credit unions to set up banking systems is also another way. I think we, the mutuals, are probably now considering that option even more.

So instead of giving banks more powers, we should give other players in the financial sector more powers so that we'll have more players in the future. That's my view.

The Chairman: I don't understand. You said your piece, but is there any other part of the financial services sector that you want to speak to us about? Do you see the emergence of major banks that are bigger than the ones we have now?

Mr. Normand Lafrenière: No, I don't. What I would like to see is foreign banks being involved even more in Canada. I think opening the door to branches of foreign banks is the way to go. We will not see bigger ones. I think what we'll see is a higher number of suppliers, and that would be good for the economy.

The Chairman: And you would like to see these foreign banks get bigger.

Mr. Normand Lafrenière: I'd like to see them getting more access to the domestic market. The branches of foreign banks should be allowed in Canada.

The Chairman: Thank you.

Mr. Thomas Rice: I have a uniqueness. Rice Financial is one of the independent financial services companies in Canada. We serve Canadians through fixed-term deposit brokerages, by selling mutual funds, and by providing life insurance, employee benefits, and pension plans.

We have a cross-section. We represent over a hundred financial institutions and the major banks as well in procuring assets for those institutions to make money with. Many of the large institutions, including the banks, are recognizing our services in spreading out amongst the rural communities that they are extracting from, because they're no longer lending money back to those. They still want to procure the assets and the wealth of Canadians living in those areas, so they are using new channels like ourselves to do so.

You can't stop globalization and you can't stop economies of scale. I do have concern where there are privileges being granted, and those privileges have been and are currently being abused without proper competitive infrastructures that will allow time to integrate other reserves in order to build a competitive force alongside those institutions.

On some of the things you're talking about, like tied selling, like the mutual fund industry, the Federation of Canadian Independent Deposit Brokers—which I'm a member of—can provide you with a lot of that information if you don't already have it. When you start looking at the risk to Canadians, the real risk is the safety of deposits and, I think, alternative channels in which those deposits can be placed for Canadians who want to lend their money to their neighbours, etc., in their own communities instead of having it tied up within a structure that is governed.

Perhaps it's time to offer other institutions the chance to use the payments system on an uncontrolled bank basis. There are institutions currently using it, but they still have to go to big banks to approve that use, and the big banks are charging them extra fees, etc. There needs to be a level playing field developed over a period of time for that.

The abuse of privilege vis-à-vis information is another thing I address in my paper. It concerns the other people here, particularly those with low incomes and those in the non-informed investor bases. Those are the people who are going to the banks to secure their investments, to use their money for safety, and they're the uninformed. Certainly, the sophisticated investor can understand the form of the risk, but it's the uninformed who are the concern.

So long as there's a deposit or an asset there today, I suggest to you that many of the large banks are sending credit letters or a credit card while saying they're going to grant a $1,000, $2,000 or $5,000 increase of credit automatically; just sign here and you can use it. The only reason they're doing that is that they know those people have other assets there. The governance over and the changing of the documents that are being signed gives them control over those assets in the event of credit too.

Through the Bankruptcy and Insolvency Act that wasn't changed. All of that has evolved tightly over the last ten years because of the failure of many institutions. That act has now been rewritten, but it has many flaws in it that can allow new challenges for institutions to recover lost credit or bad credit against other assets. In turn, that can destroy some of the infrastructure that's in our system today.

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The Chairman: Thank you, Mr. Rice.

Mr. Ernst.

Mr. Richard Ernst: We see that micro-credit is growing. Coupled with appropriate savings programs for the poorest, more micro-credit is on the way. The development of micro-credit and appropriate savings in Canada will also be coupled with the global movement. I would say that within a few years, perhaps by 2005, there will be micro-credit in our communities with or without the involvement of the big banks. There are certainly things that can be done to make it more accessible, and I think the role of the committee is to design things so that it can be more accessible, because that is really where a lot of empowerment of the poor has to come from.

The Chairman: Thank you.

Ms. Carnegie-Douglas.

Ms. Sandra Carnegie-Douglas: That's also where we are coming from: accessibility. Anything that increases accessibility is what we would want to support. The mergers of major big banks that are going to create fewer banks and less opportunities while adding to the issues around accessibility are certainly not what we see as a vision for the future of the financial institutions, that being more banks, more diversity, so that people will have choices.

The other part that I didn't speak on much, but which was mentioned by the member of Parliament, was the ombudsperson. That is something we certainly support in a very major way. Right now, the fact that there are a few currently in place—there are twelve ombudspersons there now—is not something well-known. In regard to the concerns and issues around discriminatory practices, a lot of people from the disadvantaged groups are therefore not accessing those institutions. Because of that, we support the call for the body to be set up, with statutory components to it. Yes, it's going to be more onerous and rigorous, but I think that's also part of what has to be looked at: how it will be accessible; and what the financial supports around it will be for poor communities accessing it, so that the access does not become another level of barrier in itself.

The Chairman: Thank you.

On behalf of the committee, I'd like to thank you. I just want to tell you that the finance committee is really focused on building a world-class financial services sector for the future. We're not going to limit ourselves to the present. We need to address some of the trends that are occurring, not only domestically but internationally. Our focus will be to build a type of world-class system that embraces all the realities of our country. By that, I mean allowing our domestic players to become world-class while also having world-class consumer protection; by having world-class competition, both domestically and internationally, that reflects the type of confidence this committee has in our country, first and foremost, and, secondly, in the people of this country. That is fundamentally where we are in this debate.

We really want to thank you for giving us your input, which is very consistent and which will aid us in aiming high and building something that is going to serve the people of Canada well, not only today but in future generations.

Thank you.

The meeting is adjourned.