1. The "Big Shall Not Buy Big" Policy
2. Institutional Coverage, Responsibilities and Authorities
3. The Competition Bureau and Competition Concerns
4. OSFI and Prudential Concerns
5. The Minister of Finance and the Public Interest
6. Approval, Oversight and Enforceable Undertakings



1. The "Big Shall Not Buy Big" Policy


Canada has federal legislation dealing with mergers and acquisitions, specifically relating to the financial services sector and, more generally, relating to the commercial or business sectors of the economy. Past mergers and acquisitions of financial institutions have received selective reviews, both separately and focused, by the Competition Bureau, OSFI and the Department of Finance.

There is, however, no comprehensive review process in place. For example, nowhere in established public policy pertaining to financial institutions is there a guideline that would indicate what types of mergers will undergo public scrutiny and, if so, by which of these three government agencies. Moreover, there is no clear public policy governing the hurdles that must be overcome to meet the approval of the government in terms of safety and financial soundness and the public interest. Only the Competition Bureau has well established and well understood competition-based hurdles, but, even here, they are very much case sensitive.

With respect to current public policy on matters of mergers of large financial institutions, as the Task Force report indicates, it is widely recognised throughout the sector that there is an informal "big shall not buy big" policy. The Government of Canada’s 1990 White Paper entitled the Reform of Financial Institutions Legislation provides indirect evidence of such a policy when the consolidation involves high levels of market concentration in the provision of both banking and life insurance services, except in the case of a failing institution.

In the end, what is clear about the existing process of review is that the final decision on mergers of both large and mid-sized federally regulated financial institutions rests with the Minister of Finance. How the Minister would come to a decision, on what factors he/she would rely, and in whose counsel he/she would seek are not matters of public record.

The Task Force proposes to remedy this omission in part by offering specific public policy recommendations to guide the Minister.


Task Force Recommendations

45)There should be no general policy which prevents large institutions from entering into business combinations with other large institutions, whether by amalgamation, acquisition or in other ways. The "big shall not buy big" policy should not apply to any federally regulated financial institution, including the Schedule I banks.


Views of Witnesses

Witnesses who favoured a "big buy big" policy generally commented on the validity of mergers as a business strategy.

Clearly, mergers represent a valid business strategy. In-market mergers are a classic response where companies wish to increase market share and reduce costs through elimination of duplicate networks. That is clear. I have no problem with this in principle… (Peter Godsoe, October 7, 1998).

Bank merger advocates supported the Task Force recommendation of a public review on a case-by-case basis.

On mergers, the Royal Bank is in full agreement with the report’s conclusions that mergers among institutions are a viable business strategy and should not be prohibited outright. We also fully support the report’s proposals for the case-by-case merger review process. (John Cleghorn, September 29, 1998).

One witness argued that:

… we need to understand how the merged bank will, in fact, be financially stronger on its balance sheet than the two predecessor banks taken separately, and in particular, I think it should be demonstrated that the merged bank will have greater access to capital markets for their own capital requirements and their own ability to conduct the widespread business than the two predecessor banks taken separately, and of course, I think related to this will … improve their ability to get good credit or maintain good credit ratings, and credit ratings are very important in this business. (Michael Mackenzie, November 3, 1998).

There were witnesses who did favour a policy of "big shall not buy big." They pointed to the effects on small institutions.

"Well, if we are going to have over-concentration, why not match it with over-regulation, and we will protect the consumer that way." We believe quite strongly that history has taught us that it is competition, not regulation, which has historically kept prices low and provided consumers with choice. We should always keep in mind that regulation fundamentally favours large enterprises over small and reduces competition because it ultimately hurts the smaller player who actually provides the competition to the large player. In the long run, in my view, it hurts the consumer, not helps them. (Ed Clark, October 7, 1998).

Some witnesses addressed prospective mergers between large banks and large life insurance companies in the wake of demutualization.

I would like to address the concentration in financial services. … We would argue, however, that today financial services [ are] about more than banking or particular services provided by one institutional type. Financial services [ are] really about access to funds for individuals, for companies, and for financial institutions. As we move forward, we believe that the Minister and public policymakers should be concerned if the banks, rather than expanding globally to meet their global competitors head on, propose to continue their expansion domestically by, for example, taking over control of the top five life insurance companies. This is a particularly realistic scenario coming out of the recommended demutualisation of the life insurance companies that would eliminate a current barrier to bank ownership for four of the five top life insurance companies. (David F. Banks, November 4, 1998).

Other witnesses were concerned with mergers between large life insurance companies. They advocated restrictions on any such mergers.

There has already been some speculation in the industry that, shortly after the demutualisations and this three-year interim period, you may see some mergers among those companies. The issues that apply to the banking industry ¾ at least the public policy consideration ¾ should apply just as much to the life industry. … Government policy should restrict mergers among life companies when it looks as though our sector is getting too much concentration. That is really the issue we are trying to get at. (William A. Black, October 21, 1998).

Others expressed a different point of view.

Canada Life itself has been an active participant in that process with eight friendly acquisitions over the past six years and has one more, Crown Life, pending. I cite these examples to indicate two things: one, the pressure of change continues unabated and the size of financial institutions globally is increasing geometrically; and two, Canada cannot isolate itself from the fact of consolidation in the financial services industry. The consolidation is driven by two factors. There are too many players at a time when the market for traditional life insurance product is declining, and historic life product providers are reacting to new, non-traditional competitors particularly in the wealth accumulation business. Mutual funds and banks are major players here. David A. Nield, Chairman, President and CEO, The Canada Life Assurance Company, November 2, 1998).



It is the view of the Committee that mergers of large federally regulated financial institutions pose a significant policy dilemma to the country.

The Committee recommends that large banks and large insurance companies not be able to buy each other.

This recommendation is not driven by a desire to return to the isolated pillars of the pre-1992 policy. In fact, in terms of the products and services that both insurance companies and banks shall offer in the near future, the Committee envisages the further collapse of the pillars.

This recommendation is driven by the Committee’s belief that if the major insurance companies and banks merged, it would result in too much concentration of economic power in too few hands. The Committee is very uneasy about reducing the financial services sector to only four or five companies.

The Committee believes that, in a pluralistic society, it is essential that there be a multitude of powerful decision makers. Moreover, allowing excessive concentration across the full range of financial services could well create a level of systemic risk that would be unacceptable. This can create the conditions for what is commonly referred to as the moral hazard problem of "too big to fail."

The 1992 financial services sector led to the near elimination of the independent trust company sector; similarly, the independent investment dealer sector was quickly dominated by the banks, after the Ontario government removed the restriction on investment in securities dealers by other financial institutions in 1987. The same should not be allowed to happen with respect to the life insurance sector.

This does not mean that banks should not be able to buy small insurance companies, which they can do now. Nor does it mean that insurance companies should not be allowed to buy small banks. Currently, only a widely held insurance company can own a Schedule 2 bank whereas, under the Committee’s proposal, any insurance company would be able to own a small bank. The Committee’s recommendation means simply that large institutions should not be able to buy another large institution from another pillar.

This recommendation should not impose any significant constraint on the future evolution of large companies. Most financial services CEOs who testified before the Committee said that their primary interest was in consolidation within their own industry rather than across pillars. They made it very clear that it is intra-pillar consolidation that yields the greatest efficiencies and cost reductions, not inter-pillar mergers.

The Committee recommends that the Task Force recommendation 45 be modified as follows:

There should be no general policy which prevents large institutions from entering into business combinations with other large institutions, whether by amalgamation, acquisition or in other ways, with one exception. The "big shall not buy big" policy should not apply to any federally regulated financial institutions, except in the case of one or more large life insurance companies combining with one or more large Schedule I banks.

In the case of a failing firm, an exception should be made. The Committee recommends that:

In the case of a failing large life insurance company or large Schedule I bank with no better alternative buyer as confirmed by the Minister of Finance, the Governor-in-Council can override the combination prohibition imposed on any other large Schedule I bank or large life insurance company, respectively.


2. Institutional Coverage, Responsibilities and Authorities


Under current policy, most proposed mergers of federally regulated financial institutions are currently reviewable by as many as three federal government agencies: the Department of Finance, OSFI and the Competition Bureau (Bureau). The Department of Finance may review any merger and the Bureau may review mergers where any one of the parties would surpass a threshold of $400 million in assets and the acquired or amalgamated assets by one or both parties are at least $35 million and $70 million, respectively. OSFI may review any merger involving at least one party, which is federally regulated. The Competition Bureau also oversees combinations of unregulated financial institutions.

Large, relatively complex transactions, such as those of the four chartered banks currently under review, may very well prove to be administratively difficult in terms of the resources required.

The Task Force was of the view that the Bureau, with minor modifications to the Mergers Enforcement Guidelines (MEGs), is appropriately positioned to examine the potential anti-competitive and abusive dominance implications of proposed mergers in the financial services sector.

The Task Force identifies OSFI as the appropriate agency to advise the Minister with respect to the incremental systemic risk, if any, posed by specific business combinations.

The Task Force proposes that the Department of Finance be assigned the responsibility of conducting a public interest review of these types of proposals. For the larger federally regulated financial institutions, such as some Schedule I banks and some soon-to-be demutualised life insurance companies, there would be an additional requirement to move the public interest review to a full-blown formal Public Interest Review Process. This process would directly involve the public and the inclusion of a Public Interest Impact Assessment.

Finally, the Minister has the final say; he approves or disapproves all merger proposals put forth by federally regulated financial institutions, while relying on the advice provided by the Bureau, OSFI and the Department.

The Task Force further recommends that, in the event that a conditional ministerial approval of a merger is given which would require remedial undertakings to mitigate concerns of adverse competition or financial stability, post-merger oversight and enforceable provisions with sanctions could be imposed.


Task Force Recommendations

46) Business combinations involving a federally regulated financial institution should be assessed by (a) the Competition Bureau under the Competition Act in respect of competition concerns, (b) the Office of the Superintendent of Financial Institutions in respect of prudential issues, and (c) the Minister of Finance in respect of general public interest considerations. Relevant information should be shared on a confidential basis among these parties as part of the review process.


Views of Witnesses

The Committee was presented with only a few substantive comments on the merger review process, as proposed by the Task Force. These views did not favour a highly bureaucratic process.

I believe the regulatory framework being considered must encourage and foster as much freedom of choice and innovation as possible. It must be prudent free choice, but free choice nonetheless. It is prudent and necessary to protect legitimate public interests, particularly to ensure that we have financially strong and competitive financial companies. It is also necessary that the regulatory framework encourages and recognises free choice by ensuring the rules of engagement are not unnecessarily bureaucratic, restrictive or cumbersome. (David A. Nield, November 2, 1998).

A number of witnesses spoke of the length of time the current bank merger review process is taking.

A side issue that is briefly dealt with in the MacKay report has to do with the regulatory process. At the present time we are in a competitive disadvantage relative to the United States. The single largest and most far-reaching financial services merger between Citibank and Traveller’s was approved in five and a half months. That merger has enormous consequences going forward for both the American system and the international financial services sector. The Canadian system clearly needs to be redefined and a broader discussion needs to be brought in for the regulatory process in that the BMO/Royal merger is now in its ninth month of deliberations. We suspect it will be at least another six months to a year. (Jason Clemens, October 28, 1998).



The Committee believes that there should be no general prohibition against business combinations of financial institutions as discussed in section D.1. But neither should they go unchallenged. The Committee favours a thorough examination of mergers that involve a significant impact on the Canadian financial services sector. The Committee supports the recommendation of the Task Force with respect to the institutions involved in a review of mergers of federally regulated financial institutions.


3. The Competition Bureau and Competition Concerns


In November 1997, the Bureau launched a public consultation process to assess how it would apply its merger enforcement guidelines (MEGs), with or without modifications, to the two proposed Schedule I bank merger proposals. This culminated in a document entitled The Merger Enforcement Guidelines as Applied to a Bank Merger released July 14, 1998.

The Director of Investigation and Research (the Director) of the Bureau will inform the Minister and the parties proposing to merge of his views on the competitive aspects of their proposal immediately upon concluding his/her investigation. After considering the public interest concerns expressed by the Minister, the Director and the interested parties will then consider if it is worthwhile to explore potential remedies to any anti-competitive concerns raised by the Director (assuming there are any). Upon successful negotiation of remedies, the approval of the Competition Tribunal and Minister, under the Bank Act, would still be necessary.

The Task Force is of the view that the overall approach taken by the Bureau is sound. But given that the Director did not make any significant changes to the MEGs, the Task Force suggested that certain other areas warranted further focus by the Bureau. These include the special needs of small and medium-sized enterprises (SMEs), branch-dependent customers that tend to exhibit clustering purchase patterns, and rural markets where people have few alternatives. Finally, the Task Force recommended that the Director be vigilant as he was in the Interac case in scrutinising industry network arrangements as to their potential impact on the competitive landscape of the financial services sector.


Task Force Recommendations

47) In respect of the review by the Competition Bureau:

(a) The Task Force endorses the general approach proposed by the Director of Investigations and Research in his submission to the Task Force in November 1997, as amended by the Merger Enforcement Guidelines for Financial Institutions issued on July 15, 1998.

(b) The Task Force agrees, in particular, that the Director should not assess mergers on a "first in, first out basis," but rather should consider all merger proposals separately and in combination, as the Bureau makes its determination.

(c) The Director should pay particular attention to the competition concerns of small and medium-sized business, users of personal financial services who may still be branch-dependent, and regional markets where there are few alternative suppliers.

(d) The Director should consider the new competitive choices which already exist in respect of certain product lines and which are also likely to emerge as a result of the emergence of new channels of distribution and liberalization of public policy constraints.

(e) Where necessary, the Director should actively pursue remedial options.

(f) In reviewing merger proposals and in carrying out other responsibilities under the Competition Act, the Director should consider the extent to which the terms and conditions of access to networks, and their functionality, inhibit effective competition.


Views of Witnesses

The Committee received limited testimony on the Bureau’s review process.

On the issue of mergers, the report gives us the context to examine these and examine them through the Competition Bureau or any other agency that you so wish in the public interest. I would urge that this line be drawn very carefully in terms of markets and industries. In other words, I would not just say let’s demarcate banking in the context of deposit banking or retail banking. One needs to look at the issue of the totality of the market and the totality of the financial services industry. (Professor Colin Dodds, October 20, 1998).

Another witness questioned the appropriateness of the two-year time frame for evaluating competitive responses of rivals to a non-transitory price increase of a theoretical monopolist.

There is one other recommendation upon which I would like to comment because it could have a negative impact on the thrust of the legislation you develop to reshape the sector. That is recommendation number 47 which endorses the Competition Bureau’s policies for reviewing bank mergers. We certainly agree with the need for Competition Bureau review, but we are concerned about the Bureau’s policy to restrict its view on the competitive impact of technology to a two-year time frame. We operate in a world where technology is changing day by day and transforming the marketplace. And you, as senators, will be responsible for developing legislation that will be in place for many years. We believe that a two-year focus falls far short of what is necessary for such long-term legislation. We also caution against over-regulation of the sector in the context of a rapidly changing environment. The businesses in the sector need to be flexible to be able to respond to the competitive environment. (Charles Baillie, November 2, 1998).

Finally, a few witnesses questioned the appropriateness of branch divestiture as a mitigating strategy. Most felt that "bricks and mortar" assets could be transferred quite easily but not the clientele.

It is one thing to sell or require an institution to divest of physical plants. It is another thing to be able to transfer the business and the customers that are associated with that branch. And the fact of the matter is that the Canadian banks so well entrenched as a result of their national networks, so well entrenched as a result of the range of products that they have, their access to the wallet of the Canadian consumer, be it mortgages, be it loans, be it credit cards, be it a whole range of services that they currently provide represent, quite frankly, very, very capable, very excellent, and very tough competitors for a newcomer coming in. (Harvie Nagley, November 3, 1998).



The Committee supports the overall review approach taken by the Bureau. It urges the Bureau, however, to fully take into account the dynamics of this sector when it carries out its analysis.. Technological innovation and globalisation, together with regulatory reform, continue to break down many of the remaining technical, institutional and regulatory barriers to entry in this sector. New electronic distribution networks are significantly reducing the costs incurred to enter the financial services sector.


4. OSFI and Prudential Concerns


The Task Force praised the merger review practices of OSFI and, recommended that the Competition Bureau be prepared to second OSFI personnel for their specialised expertise and knowledge of the sector. The Task Force, bolstered by statistical evidence which showed that Canada had fewer bank start-ups as well as fewer bank failures than most other industrialised countries, argued that OSFI should not be attempting to ensure that financial institutions never fail; that in considering mergers of large financial institutions, OSFI should focus on the doctrine of "too big to fail."


Task Force Recommendations

48) In respect of the review by OSFI:

(a) The Superintendent’s attention should be directed at identifying any new prudential risks that may arise by reason of the transaction.

(b) OSFI should be prepared to provide assistance, including the secondment of personnel, to the Competition Bureau to ensure that it has sufficient expertise, with industry experience and awareness, to assess and protect the public interest from the competition perspective.


Views of Witnesses


One witness cautioned that the regulatory process must remain strong and that larger banks are stronger.

What if one fails? Again, you must look at the anatomy of why banks fail. In many respects, history indicates that too small to survive is a bigger problem than too big to fail, if the history of bank failures since the 19th century is any indication. To give you an example, a major bank has not failed in Canada since 1920, which means Canada came through the 1930s without a major bank failure. We have an outstanding supervisory and regulatory regime in the country. The two institutions involved are AA rated. They would have a combined capital base of $25 billion before you would ever get anywhere close to there being a loss. I argue that when you combine banks that are strong to begin with you reduce the risk of failure. (Matthew Barrett, October 8, 1998).

The Superintendent of Financial Institutions, on the other hand, indicated that the evidence on bank size and financial solvency was inconclusive.

As a general matter, however, I think it is very hard to determine the simple answer as to whether risk increases, decreases, with things like size, geographic scope, participation in particular business lines or other business lines. I think that the sort of experience on this internationally does not support a conclusion one way or another. (John Palmer, November 3, 1998).

Further, the Superintendent interpreted the Task Force recommendations as suggesting that OSFI should accept more risk at the small end of the size spectrum of financial institutions.

The schema in the Task Force report is, as we understand it, that we should be prepared to accept a bit more risk at the bottom end of the size scale. At the upper end of the scale, they are recommending that institutions still be widely held, be free of commercial links which we think are important risk mitigating recommendations, but at the lower end of the scale, dealing with smaller institutions, they are recommending that we be prepared to accept institutions with commercial links with closely-held ownership. So there is a bias to accepting more risk at the bottom end of the spectrum. (John Palmer, November 3, 1998).

However, some witnesses felt that, at the large end of the size spectrum, bank mergers pose a significant risk in that the remaining institutions are not likely to be able to pick up all the pieces of a failed large bank without taxpayers having to make a contribution.

With regard to "too big to fail," if one of the five of us went under, could the other four, the government, insurance companies, et cetera, subdivide it and, as we have done since 1920, work this out without costing the taxpayer one cent? Probably not. (Peter Godsoe, October 7, 1998).

With respect to evaluating a merger proposal, there are a few criteria to consider.

We then tend to try to look at whether the quality of the risk mitigants, the risk control systems, the capital levels, the reserving levels are appropriate for the kind of inherent risks in the activities, and a balance of those two, so that the net risk, if you will, is manageable from the point of view of the overall safety and soundness of the institution. Clearly, for example, there are lot of cases in which expansion of geographic scope can actually reduce risk because it diversifies risk. There are other examples in which expansion of scope can lead to control problems if not managed appropriately and lead to surprises that have occurred, and there is experience of that internationally. (John Palmer, November 3, 1998).



The Task Force emphasised the importance of this aspect of the merger review process and warned those concerned not to underestimate it. The public places a very high priority on safety and financial soundness of the financial services sector, particularly when it involves core banking functions. The Committee does as well.

The Committee supports the recommendation of the Task Force with respect to the role of OSFI in the merger review process.


5. The Minister of Finance and the Public Interest


The final aspect of the merger review process is the Minister’s discretion in making a decision on a merger proposal. The Task Force proposes that only mergers of federally regulated financial institutions that do not meet the pre-notification obligations under the Competition Act do not need the Minister’s approval. OSFI’s approval, however, would be and is already required.

Before the approval or disapproval of a merger of any other federally regulated financial institution is issued, the Task Force recommends that the Minister consider the broader public interest. Since the potential public interest impact of a merger generally rises with its size, the Task Force concludes that cases involving the largest financial institutions should be more transparent, with the public directly included in the process.

More specifically, a Public Interest Review Process is proposed for federally regulated financial institutions that would combine their activities to produce a company with a shareholders’ equity of greater than $5 billion, where each of the parties has a shareholders’ equity greater than $1 billion. This formal process would involve the public and require the merging parties to submit a detailed Public Interest Impact Assessment that would outline their business plan and objectives, as well as identify the public benefits and costs of the merger.

While not providing an exhaustive list of factors to be covered, the Task Force suggested the following public interest considerations in the context of Schedule I banks:

The Minister would also be given the prerogative to order a public review process for all other merger proposals.


Task Force Recommendations

49) In respect of the review by the Minister of Finance:

(a) The approval of the Minister should be required for all business combinations involving one or more federally regulated financial institutions, except for a transaction between two federally regulated institutions which does not require pre-notification under the Competition Act. This should be subject to approval by the Superintendent.

(b) If two or more institutions, at least one of which is federally regulated, propose to combine to form an enterprise with shareholders’ equity of more than $5 billion and where each of the combining institutions has at least $1 billion of shareholders’ equity, the Minister should require a formal Public Interest Review Process prior to determining whether to grant approval. The Minister should have the right to invoke the Public Interest Review Process in the case of other transactions.

(c) The Minister should issue Public Interest Review Process guidelines to describe the mechanics of the process. The guidelines should require merger proponents to submit a detailed Public Interest Impact Assessment (i) describing their business plan and objectives; (ii) clearly identifying the benefits and costs to the nation and the public of the proposed transaction, including the considerations described in (d) below and such other considerations as the Minister may specify; and (iii) outlining any remedial or mitigating steps in respect of public interest costs, and any assurances in respect of public interest benefits, which are proposed by the merger proponents.

The Public Interest Impact Assessment should be available for public comment for a reasonable time period to be specified by the Minister. The decision of the Minister on the proposed transaction should be made as promptly as possible following the public comment period.

(d) In assessing whether approval should be given, the Minister should review the recommendations of the Director and the Superintendent, and the views obtained in the Public Interest Review Process, in light of all relevant public interest considerations, including:

(i) the costs and benefits to individual customers and small and medium-sized business;

(ii) regional impacts;

(iii) international competitiveness;

(iv) employment;

(v) the adoption of innovative technologies; and

(vi) the extent to which approval may create a precedent.

50)Merger proponents should endeavour to structure their proposals in a manner that is consistent with public interest goals. It should be the objective of all parties to balance (a) institutional interests, e.g., the achievement of substantial efficiencies and enhanced competitiveness from the merger, with (b) public interest objectives, e.g., continued competitive markets, the mitigation of public interest costs and the maximization of public interest benefits. The Minister should be prepared to work with merger proponents to help them structure transactions with important public interest considerations in a manner which will better assure the public good.


Views of Witnesses

Some witnesses suggested that the Task Force proposals would give the Minister of Finance broad powers in a merger review, perhaps too broad. One witness questioned the need for a public interest review process given the authorities granted to the Competition Bureau and OSFI.

The MacKay report suggests reforming a regulatory system to streamline it and get it more in line in terms of the time requirements. … In the United States it is a referral role. Anyone on the Senate Banking Committee can refer for further investigation on any of the mergers. … there is not a clear articulation of why the minister is included, given the fact that you have two able-bodied agencies that are able to produce reports on both the effect on prudential banking, as well as on efficacy of competition. … The role of the minister and the efficacy of having the minister in such a prominent role needs to be discussed, not simply stated or asserted. (Jason Clemens, October 28, 1998).

Some witnesses were adamant that the public should have a direct say on any merger.

It is essential that Canadian consumers have a say in the "scoping" phase of public interest review assessment to ensure that the process adequately addresses the right questions. It is essential that the banks pick up the cost of this review process and that these costs are not passed on to the users of bank services. (Jennifer Hilliard, September 30, 1998).

One comment involved the omission of an international perspective from the public interest review.

Mergers by definition involve extensive management time, corporate energy and cost. Requiring a cumbersome public review process for relatively small mergers seems to be an unnecessary additional burden. Also, the public review process includes consideration of domestic public interest. With the exception of a nod to international competitiveness, the criteria seems to ignore the legitimate interests of our stakeholders abroad which, depending on circumstances, could be unfair. (David A. Nield, November 2, 1998).



Mergers of large federally regulated financial institutions have a substantial public interest impact. Because of this, the Task Force recommends a Public Interest Review Process as one necessary pre-condition for ministerial approval. Even the Minister could not exempt merging parties from undergoing such a process. The Minister, however, would have the discretion to demand such a review for smaller merger proposals. Mergers of federally regulated financial institutions that would grow their businesses to less than the Competition Bureau’s pre-notification obligations ($400 million) are the only mergers that are exempt from this review process altogether. These mergers are deemed inconsequential to the public interest.


The specifics of the formal Public Interest Review Process would be set by the Minister, who would also compel the merging parties to produce a Public Interest Impact Assessment. Some of the contents of this statement would be obligatory, but the Minister would be given discretion to determine additional contents as well.


It is the view of the Committee that, if two financial institutions propose to merge,

there are three different categories of issues that need to be addressed:

  1. competition policy issues,
  2. prudential issues, and
  3. stewardship issues (the Task Force calls these latter issues "public interest" issues).

The Committee believes that these issues should be addressed sequentially.

The requirement that the Competition Bureau be satisfied that a proposed merger is not anti-competitive, and that OSFI be satisfied that it poses no prudential problems, are necessary prerequisites to any merger proceeding. Until the necessary conditions are met, it is meaningless to address the additional set of stewardship issues that apply to financial institutions.

The Competition Bureau and OSFI review processes which currently exist, including the merger guidelines published by the Bureau earlier this year, appear to be reasonable. The Committee, however, has not studied the published guidelines in detail and therefore cannot comment in detail on them.

Assuming that a proposed merger has been approved by the Competition Bureau (most likely after extensive negotiation with the merger participants to resolve problems which the Bureau may have with respect to the initial mutual merger applications) and by OSFI, the Committee is of the opinion that the stewardship review process should begin immediately afterwards.

The stewardship accountability review process should be required only for all merger proposals involving two large financial institutions. Since the Committee’s proposals would prohibit mergers involving a large bank and a large life insurance company, the only mergers for which the stewardship accountability process would be required would be merger proposals between two large banks or two life large insurance companies.

The Committee believes that this process should begin with stewardship accountability statements by the merger proponents. This statement should address the impact of the merger on each of the public interest criteria proposed by the Task Force. These include:

Stewardship accounting statements should then be subject to public comment, either in a set of public hearings or by a process involving written submissions from the public submitted to the Minister within a specified time frame. If a public hearing process is adopted, the hearings should be conducted by Finance Department officials. This avoids unnecessary politicization of the stewardship review process.

Once the public review process has been completed, the decision as to whether or not to approve the merger should rest with the Minister of Finance.

This entire review process must have a firm timetable, as it does in Switzerland where the entire process is not permitted to exceed three months. The review process cannot be allowed to drag on.

In both the U.S. and U.K., the equivalents of the Competition Bureau and OSFI processes have a fixed period of time within which they must be completed. While the Committee recognizes the need for some flexibility in the amount of time that both the Bureau and OSFI require in order review a merger application, a target timetable for these reviews should be set by the government after consultation with the agencies.

Similarly, the proponents of the merger should have a fixed amount of time, likely about one month, to file their stewardship statements. The public comment or public hearing period should have another fixed period of time, about two months, in which public consultation should be conducted. The Minister should have another month in which to make a final decision.

The Committee believes that a process such as the one described above meets the essential criteria of any government review process:


6. Approval, Oversight and Enforceable Undertakings


The Minister’s discretion goes beyond accepting or rejecting a merger as proposed. The Task Force believes that the Minister should view the submission of a merger proposal as an opportunity to reshape the sector for the public good. The review process should be structured so as to produce a variety of options other than as proposed by the merging parties. In this way, the Minister may impose conditions on a merger he would approve.

The Task Force would also give the Minister the authority to obtain enforceable undertakings to ensure that promises made to address public interest concerns are fulfilled by the merging parties. A monitoring and enforcement regime would, of course, have to be set up. OSFI would do the monitoring; legislation would have to be amended for the Governor-in-Council, on the recommendation of the Minister, to issue directions with respect to these undertakings. Such directions would have to be enforceable by the courts, including sanctions for failure to comply with an undertaking, including substantial fines for financial institutions, officers and directors, and additional criminal sanctions for those who do not comply or disobey directions of the Governor-in-Council.


Task Force Recommendations

51) Mergers of large financial institutions should be permitted as long as, after implementing any necessary remedial or mitigating steps, the Minister is of the opinion that markets will remain competitive, that there are no material safety and soundness concerns, and that the transaction is in the public interest.

52) The Minister should have legislative authority to seek and obtain enforceable undertakings from merger proponents to ensure that commitments made to address competition and other public interest concerns are fulfilled:

(a) The Department of Finance should monitor compliance with such undertakings and report regularly to the Minister, who in turn should report to Parliament.

(b) The Governor-in-Council, on the recommendation of the Minister of Finance, should have the authority to issue directions in respect of undertakings, including a direction to cease from committing an act, or to perform such act, as in the opinion of the Minister is necessary to remedy a situation where an undertaking is not being met.

(c)Strong sanctions should be provided for non-compliance with undertakings given by merger proponents and directions of the Governor-in-Council.


Views of Witnesses

One witness questioned the necessity and efficacy of the fines and penalties that could be imposed on those that would deviate from their explicit undertakings.

On the MacKay report there was a recommendation that there should be hefty penalties, fines, prison terms or criminal sanctions against boards of directors and the company itself if they do not follow certain objectives that have been set forth. What we have to understand is the financial services market, as much as any other marketplace, is dynamic. Therefore, the banks and the financial services industry will have to react in order to prudently manage their funds, depending on changes in the market conditions. Therefore, to have these types of penalties and fines and put them in some sort of binders as to whether they can move their funds out or whether they can close certain operations or lay off people is problematic to say the least. You will not have a prudent banking system if you have those types of fines and penalties against boards of directors or the companies. (Fazil Mihlar, October 28, 1998).



The Committee understands that the Task Force, in proposing these recommendations, is trying to inject added flexibility into the merger review process.

In the case where the Director has competition concerns that cannot be sufficiently mitigated under competition policy rules, instead of rejecting this merger proposal, the Minister would now be able to negotiate with the merging parties additional conditions and undertakings. The latter could include such conditions as higher small business loan approval rates, layoff restrictions, rural branch closing restrictions, etc. that would provide social and economic benefits to Canadians.

The Committee supports the Task Force recommendations giving the Minister the power to maximise the benefits to Canadians if a proposed merger is given approval.

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