FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 11, 1999

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call the meeting to order.

As you know, in accordance with the order of reference of the House of Commons of Tuesday, April 13, 1999, the committee is presently studying Bill C-67, an act to amend the Bank Act, the Winding-up and Restructuring Act, and other acts relating to financial institutions, and to make consequential amendments to other acts.

This afternoon our witnesses are from the Canadian Bar Association: Ms. Joan Bercovich, senior director, legal and governmental affairs; and Mr. Blair Keefe, member of the business law section.

As you probably know, you have approximately five to ten minutes for your presentation, and thereafter we'll engage in a question and answer session. Welcome.

Ms. Joan Bercovich (Senior Director, Legal and Governmental Affairs, Canadian Bar Association): Thank you. Thank you for hearing the Canadian Bar Association today.

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CBA is an association of lawyers, judges, notaries, and law students across the country.

[Translation]

The Association's objectives include improvements in the law and in the administration of justice. Our comments this afternoon will focus on these particular areas.

[English]

A brief will be briefly presented by Blair Keefe, who is a lawyer in Toronto and head of the financial institutions unit at his law firm, as well as co-chair of the CBA's financial institutions committee, which is a committee of our larger business law section. The brief has been approved by both the committee and the business law section and has undergone an extensive review and approval process within the Canadian Bar Association. Mr. Keefe will do a brief presentation, and then of course we'll be happy to take your questions.

Mr. Blair W. Keefe (Business Law Section, Canadian Bar Association): Thank you, Joan.

Mr. Chairman, on a personal note, I'm very pleased to be here. I was telling Joan on the way over that it was twenty years ago when I first came into this building as a page. I thoroughly enjoyed my time here and have a great deal of respect for the institution flowing from that experience.

I'm appearing here on behalf of the Canadian Bar Association. We've reviewed the bill and believe that it's a good bill from a drafting perspective. We don't take any policy position on the issues in the bill. What we've tried to do is offer comments on the bill to be helpful to the process of the drafting of the legislation and ensure that the issues we've identified are taken into account by this committee and by the Department of Finance in proposing the legislation.

We're pleased to report that we've had an opportunity to discuss the issues raised in our submission with the Department of Finance. We're even more pleased to discover that they had considered most of the issues, either in the process of drafting the bill itself or in the consequential amendments that the minister indicated this morning he will be bringing forward to this committee during clause-by-clause.

With that introduction, we're happy to respond to any questions you might have of the Canadian Bar Association on the bill.

Thank you.

The Chairman: We'll begin with Mr. Harris.

Mr. Richard M. Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman.

Welcome.

I think we've got sort of an unusual situation here where the official opposition party is giving full support to this bill. We think it's long overdue. Quite frankly, we've had an excellent briefing from the finance department on it, so I really don't have too many questions from a legal point of view. I guess I do have one.

I'm not sure whether this is your area of comment, but there are some tax rule changes that apparently have to come in now in order to level the playing field for foreign bank entry. Could you maybe just give us a little bit of a comment on what those changes are from your point of view and how you see them affecting this whole scheme of things?

Mr. Blair Keefe: Certainly. We identified these as items three and four in our submission to the department and to this committee, and we were pleased this morning to hear that the minister was intending to make changes to refer to them.

The main issue we raised in our submission, and we understand that others did as well, is when you read through the background papers and the bill itself and the ways and means motion, there is no indication that there would be any tax-free rollover to allow a subsidiary in Canada to convert to a branch status. The Canadian Bar Association wants to draw this to the attention of this committee for two reasons. One is we think there would be fewer institutions using the legislation if they weren't allowed to get a tax-free rollover for it. So the impact of the legislation wouldn't be as significant as it would have been in the absence of these tax-free rollovers. The second reason is it was arguably putting the institutions in Canada at a disadvantage vis-à-vis new entrants, because the new entrants would not have any taxes payable on the conversion.

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The main tax we had identified that would be payable is if in the absence of this tax-free rollover the subsidiary would have been deemed to have transferred the property to their foreign bank branch at fair market value. That would include any goodwill that had built up over the years they were here. It would end up that they would have to pay out real tax dollars but they wouldn't have the real income, if you will, to pay that tax with.

Mr. Richard Harris: Okay. Can you also comment on the section that deals with the minister or the superintendent of financial institutions and their criteria for deeming a foreign bank suitable to establish in Canada? Are you satisfied with what you understand the criteria to be, as they've laid them out?

Mr. Blair Keefe: Yes, I think we are. We reviewed what's in the statute itself together with the draft guideline the office of the superintendent issued at the same time as the legislation was tabled, and in combination we think it puts forward a pretty comprehensive regime, both for allowing the conversion of existing subsidiaries into branches as well as new entrants.

Mr. Richard Harris: And are you relatively satisfied from a legal point of view that the protection for service consumers who would use those branches...? I know in the one form of bank I think the deposits are minimum $200,000.

Mr. Blair Keefe: It's $150,000.

Mr. Richard Harris: There's a term they use for that. I think it's—

Mr. Blair Keefe: Wholesale deposits?

Mr. Richard Harris: —sophisticated depositor. Because the depositors are given that title, I guess it also means they had better know who they're dealing with and what they're doing. In the legislation, do you see any flaws from a legal point of view in the protection that would be afforded them, such as the protection is?

Mr. Blair Keefe: Not really. I think the government recognized this issue and provided procedures, including the obligation to notify depositors that they would not be CDIC-covered, and what have you.

The $150,000 limit is also consistent with securities legislation. Normally, as you probably know, when you're selling securities in the Canadian market you're required to do so through a prospectus, from which you get full, true, and plain disclosure. But they realize that over a threshold—and the threshold they use I believe is $150,000 as well—you don't need to give as much disclosure, because the people you're dealing with tend to be more sophisticated. Now, there are people with $150,000 who are not sophisticated, but it seemed a reasonable threshold and one that was consistent with other legislation, which seemed to be working well.

Mr. Richard Harris: I'll just pass for a moment, Mr. Chairman.

The Chairman: You have no further questions?

Mr. Richard Harris: Well, I may have in a second. Oh, we have no one else here. Okay, then I have one more, and this would refer to the lending branches only.

The domestic banks operate under certain customer policy guidelines when it comes to the lending part of their business and certain business practices that are determined by the institution itself and also by the marketplace. You have to be operating in a realistically acceptable way.

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I'm just wondering, how do we—I don't want to get into the word “regulate”, because I hate that word—how do we ensure that a foreign branch bank in Canada would treat their lending customers who maybe got into a little bit of trouble with what we know as an acceptable way of doing that in Canada? You know, if a business gets in trouble in Canada, most times the banks try to help them out as much as they can to help them out of their problems. The very last thing, at the end of the line, is to shut them down and seize their assets. We've come to live with that type of practice. Is there any concern that any of these new banks would operate in any way different from that?

Mr. Blair Keefe: I think it's difficult to respond in some ways. I guess Canadian banks are into profit maximization, if you will, so when they look at a credit that has some trouble associated with it, they'll look at the best way of dealing with the credit. I think a lot of times the best way of dealing with the credit is actually trying to work the loan out, as opposed to just putting the company into bankruptcy proceedings.

The reality is that when you force an institution into bankruptcy or insolvency proceedings, the cost of that liquidation is very significant, and that comes out of the pocket of the secured creditor at that point. So I think the free market enterprise would hopefully operate to have these lending branches treat their customers in the same manner as a Canadian bank would.

Mr. Richard Harris: Right.

I guess I'm it here so far, Mr. Chairman. Where are all our colleagues?

Section 12, determination of retail deposit.... Your recommendation is that proposed subsection 545.(1) be amended to allow compliance under one of two tests, and you state them there, the A and B tests. And you give a little bit of an explanation. Do you have any indication that the government might move on acceptance of your recommendations?

Mr. Blair Keefe: We understand they are intending to put a regulation-making authority in the clause-by-clause, and then we'll deal with this recommendation in regulations approved by the Governor in Council. So we're pleased with that outcome.

Mr. Richard Harris: All right.

The Chairman: Mr. Harris, thank you.

Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): That was my question. This is around the determination of retail deposits.

The Chairman: Any questions?

Ms. Carolyn Bennett: No. Do you?

The Chairman: No, I don't.

I was made aware that you in fact expressed those points of view to officials of the finance department and that in fact most of the concerns you cited are going to be resolved.

On behalf of the committee, I'd like to thank you very much for your presentation. I'm sure it will help us as we deal with and report the bill to the House, perhaps in the next week. Thank you so much.

Mr. Blair Keefe: Thank you.

Ms. Joan Bercovich: Thank you.

The Chairman: The meeting is adjourned.