Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 7 - Evidence
OTTAWA, Wednesday, July 3, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day, at 9:00 a.m., to continue its examination on the state of the financial system in Canada.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, as I think you all know, we are here to discuss three different topics this morning. The first issue before us will be a response from Mr. Manley on behalf of the government to our report on Crown financial institutions which we tabled in the Senate about three months ago and which, I think it is fair to say, has been the source of considerable commentary, both pro and con, in the media from one end of the country to the other.
Thank you, Mr. Minister, for honouring your commitment to appear before us. As you will recall, when we agreed to undertake this study, you were kind enough to volunteer to come before the committee shortly after the study was released in order to give us the government's response to it. We very much appreciate your doing that.
The minister will begin with an opening statement, after which we will turn to questions.
The Honourable John Manley, Minister of Industry: Thank you very much, Mr. Chairman and senators. Let me begin by introducing Mr. Peter Sagar who is with me this morning. He is an official with Industry Canada who perhaps will help me with questions of a more technical nature to which I may not have the answers readily available.
Mr. Chairman, there has only been some passing reference in the media to any views I might have had on your report. In fact, the only question I received was immediately after it was released and before I had a chance to study it. Therefore, I will make a comprehensive statement, following which we can go to questions.
I was here a year ago when your committee was considering the Business Development Bank of Canada Act. I invited you to look at the question of how the federal government's financial institutions as a whole function in relation to the private sector, the appropriate role for them to play and the kinds of gaps they are endeavouring to fill. I also suggested that a horizontal and deeper review by this committee would be very helpful to the government.
[Translation]
On behalf of the government, I want to thank the committee for its work. You have provided us with a clear advice for the evolution of our business and economic development policies -- the Crown financial institution and regional economic development agencies.
Over the last year, these organizations have undergone a series of dramatic changes. Broadly speaking, these have led to improve client service and help to minimize overlap of duplication.
[English]
These changes can also be seen through increased cooperation among the Crown financial intermediaries -- the Business Development Bank of Canada, the Export Development Corporation, the Farm Credit Corporation and the Canadian Commercial Corporation -- as well as among regional agencies and private sector institutions. The focus of these efforts will continue to be on identifying and addressing client needs in under-served market niches.
As I see it, these are also the fundamental goals which shaped your recommendations. Therefore, you will not be surprised to learn that the government agrees with many of the key thrusts behind the committee's report, although in some cases we have chosen different approaches to achieve similar goals.
Your committee focused on achieving these goals through structural and institutional change. The government's approach focuses on customer needs rather than institutional reform. It involves increased operational collaboration among the institutions and regional agencies to achieve the goals that we share. Let me give you some examples.
The government has already taken several substantive actions to increase the policy coherency and cooperation among the regional agencies. In doing this, we have preserved their ability to meet and represent the needs of very different regions.
[Translation]
The Prime Minister took an essential step in this direction earlier this year. He put the regional agencies within the Industry Portfolio -- a portfolio that already included the Business Development Bank.
He also moved to consolidate, under the minister of International Trade, Canada exports development support mechanisms. These include export financing and insurance provided by EDC and export contract services provided CCC.
Mr. Chairman, the government sees these actions, taken together, as being consistent with the key thrusts behind your recommendations.
[English]
We have also changed the focus of the regional agencies in working with the Crown financial intermediaries and the private sector. These changes have been directed at improving client services, increasing collaboration, and offering seamless service delivery. This involves levering private sector activity, where possible, using partnerships and other approaches.
While this partnership approach is an important new development, it has not changed the critical and continuing role the regional agencies play within the industry portfolio. Easing access to financing is only one part of this role. For example, the regional agencies were given a mandate in the 1995 budget to be the federal government's single window of access for small business. This means operating integrated client service networks such as the enhanced Canada Business Service Centre Network, which now includes many Community Futures Development Corporation offices as well as a number of local Chambers of Commerce. They also provide the federal government with an important window on regional needs. Through applied research, they inform policy program development and expenditure decisions. They also act for the federal government in negotiating region-wide approaches to promote economic cooperation and synergies, a task for which Crown financial corporations are ill-equipped.
The regional agencies have also provided the government with an effective mechanism for implementing initiatives like the infrastructure program and economic adjustment programs. A 1994 OECD study found that the regionalized agency-based system of economic development appears to be a significant improvement on the centralized system that it replaced.
[Translation]
Let me now turn to the regional agencies' financial services.
Each of the agencies has recently announced innovative partnerships whose aim is to exploit the specific strains and advantages of the public and private sector. Their objective is to enhance its client service and cost efficiency.
[English]
For example, since February of 1995, Western Economic Diversification has been establishing alliances with Crown and private sector financial institutions. In forming these alliances, WED has developed a loan fund model whose goal is to enhance SME access to capital where gaps exist. By using public funds to share the higher risk of these loans, it leverages private sector funds and activity. The loan fund model is intended to move the banks farther and faster up the risk curve.
Under this model, WED has invested $36 million in partnership funds. This has generated commitments of $280 million from private sector and Crown financial institutions. This has helped WED to achieve a 8:1 leverage on its funds for lending on patient and flexible terms to small business.
In addition to financial participation, many regional agencies also assist applicants with their business plans, reducing the cost of due diligence related to smaller loans. This helps to facilitate private-sector lending activity. It is a role which also pays dividends for the firms in developing their management skills.
Under the loan fund model, WED, FedNor and FORD(Q) have each developed a series of partnerships with private sector and Crown financial institutions.
Another model is ACOA's facilitation of the Atlantic Investment Fund, a $30 million equity fund. This fund is an equal partnership with the four Atlantic provincial governments and the chartered banks.
The Crown financial intermediaries have also been active in developing partnerships with the private sector. For example, the EDC has established the Master Accounts-Receivable Guarantee Program which permits small exporters to access export financing from the major chartered banks. The EDC has also taken a number of new initiatives aimed at improving services to emerging exporters.
The CCC established the Progress Payment Program. This program gives small exporters better access to pre-shipment financing on individual export sales through commercial sources. It also gives them open access to CCC's contract service expertise.
[Translation]
Just last week, the BDC and ScotiaBank announced a strategic alliance to improve services to small and medium size businesses across the country. Earlier this year, the BDC and the Royal Bank created an alliance to provide lending and related services to knowledge-based firms in many parts of Ontario. BDC have also recently participated with regional agencies in many of the partnerships generated by the Loan Fund model, which I outlined earlier.
[English]
While these are important new developments, I believe we can do more to increase collaboration between the Crown financial intermediaries. To this end, the government will encourage these institutions to develop practical, operational collaboration between the BDC and the FCC, and between the BDC and the EDC, and to enhance cooperation among the EDC, the CCC, and the BDC to improve services to exporters. These arrangements will mean seamless delivery of services to clients, improved access to capital and minimized operational duplication.
To ensure continued progress, I am pleased to announce that the government will establish a Council of Crown Financial Institutions. It will include the chairs and CEOs of the institutions and relevant deputy ministers. The council will focus on identifying opportunities for collaboration and provide a forum for information and discussion of ideas on improving customer service. It will also provide a vehicle to address an important recommendation that your committee has made.
You recommended that data on financial services to SMEs be provided by Crown financial intermediaries in a manner compatible with the lending benchmarks established for the chartered banks by the industry committee.
[Translation]
Mr. Chairman, I note that in your letter of June 19, 1996, you reiterated the importance of this recommendation. I am please to make this recommendation on behalf of the government.
However, you will recognize that many products and services provided by Crown financial intermediaries and the regional agencies are not directly compatible to those of the banks.
[English]
As I indicated earlier, public sector service to clients increasingly depends on leverage and partnerships. The lending benchmarks developed for the banks may not provide a suitable basis for comparative analysis. We may well need our own lending benchmarks. The Council of Crown Financial Institutions will provide a forum for cooperative development of reporting standards.
The Farm Credit Corporation and the Business Development Bank have committed to provide small business lending data comparable, where relevant, to that produced by the banks. In addition, the EDC and the CCC will work to develop similar data, although they do not provide the same kinds of products and services as do the banks. I expect that this additional information will be available in the institutions' next and subsequent annual reports.
Mr. Chairman, I should now like to address a second concern which you underlined in your letter to me of June 19, namely, identifying gaps in capital markets. I want to raise two points in that regard.
I would argue that the best way to identify gaps is simply by listening to our customers in the Canadian business community. The evidence we see shows a clear and continuing need for Crown financial institutions and regional agencies. Given the rising demand for the financial services of these institutions, it is clear that our clients see that need as well.
The Alliance of Manufacturers and Exporters of Canada and the Canadian Federation of Agriculture agree that these institutions play a key role in the financial markets by providing products and services not usually available from the private sector. These institutions focus on under-served market niches, take greater risks, and help to meet the needs of businesses in emerging fields such as high technology. In addition, these organizations provide financial services irrespective of the cyclical nature of many industries.
In 1994, the Standing Committee on Industry, the Small Business Working Committee and other research identified four capital market inefficiencies which were sometimes seen as gaps by small business: the "risk gap", linked to lenders' unwillingness to lend at any price to riskier businesses; the "size gap" that denies loans under $100,000 which were seen as unprofitable; a "knowledge gap" that makes lenders reluctant to finance low-asset firms developing new technologies or new export markets; and a "flexibility gap" that expects steady payments, not taking into account the unsteady cash flow of many growing small businesses. These gaps are there. The role of our institutions and agencies in filling these gaps has been rapidly changing.
Finally, Mr. Chairman, you made the point that the role of the government in the late 1990s is not to compete with the private sector but to fill gaps the private sector is unwilling to fill. While I somewhat agree with this statement, each institution which does compete in a limited range of its services is also the sole provider in other areas. For example, Parliament has given the FCC a mandate to compete, but it does so in response to customer demands. In many of its markets, it operates in niches which are usually not served by the banks, except in good times.
In addition, as I have already outlined, most of these institutions are identifying opportunities for collaboration with the private sector. This practice will ensure that they are truly complementary. However, the process of improving the focus and the work of these organizations is never finished.
[Translation]
As I said at the outset, we have seen important changes in the function of many of these organizations. Like you, I recognize that the public expects us to minimize overlap and maximize the effectiveness and accountability of our efforts to improve access to capital for small businesses. We are committed to doing this.
[English]
We will ensure that both the Crown financial institutions and the regional agencies have the needed flexibility to meet the changing needs of Canadian SMEs in under-served market niches.
Mr. Chairman, while we may not always agree on the methods, I am convinced that both your committee and the government share the same objectives.
I have asked that a copy of my statement be distributed to the committee. Attached to the statement are notes that address the issues raised in your report in more detail. I would be pleased now to respond to any questions and to discuss our approach further.
Senator Angus: Good morning, minister, and thank you very much for appearing here today with your colleague. I found your comments most interesting.
I take it that the statement you have just presented to us is the current government policy statement respecting Crown financial institutions.
Mr. Manley: I am here as a minister speaking on behalf of the government, yes.
Senator Angus: I am just now being handed a copy of your statement, but I did listen carefully to what you had to say. I was wondering about the process. You talked about terms of rearrangement and an approach which is more user friendly or has a consumer emphasis. We recommended structural change. What is the next step? Are you planning to introduce legislation?
Mr. Manley: What I have really said in the context of both the financial intermediaries as well as the regional development agencies is that a process of change is under way. The BDC bill, which in fact gave rise to this, is less than a year old. The changes we are attempting to bring about in that institution take some time for their effects to be seen and measured.
As I said in my remarks, the application of the benchmarking measurements to the practices of the BDC is something we have undertaken to do. By the time of the next financial report, we should have that kind of measurement with respect to the BDC and the FCC. We are gaining knowledge and information as we move forward.
I understand that my colleague Mr. Goodale wishes to look again at the mandate of the FCC. That could lead to a legislative proposal, but the Council of Crown financial Institutions does not require any legislation. However, I think it is an important step in the direction that you are encouraging us to go, which is to improve the coordination of the activities of these institutions.
I have to tell you that I found it quite a surprise to discover that the chairman and the presidents of our Crown financial institutions do not meet on a regular basis. One would have thought that would be a normal thing to occur. Ottawa, after all, is not that big a city and it is not that hard to get to for those who are located elsewhere. That has not been happening. To establish this council on a formalized basis moves in that direction. The agencies must ensure that they understand each other's mandate, where their frontiers are and how they can cooperate. For example, with respect to the FCC and the BDC, where does the farm end and non-farm lending begin? That is a bit of a grey area. How do we coordinate their activities? I think we will progress in that area without legislative change.
Senator Angus: I appreciate that.
I was here when you appeared before us a year ago and more or less invited us to conduct this study. We worked quite hard on it. The day after our report was issued, you were quoted in the press as being against our report. That was a bit of a shock. I think you said at the outset that possibly that was a misrepresentation of your views at that time. Was it?
Mr. Manley: The only quote that I gave was a response to an unexpected question asked in the context of an interview from France when I was there for the G-7 Summit. I was replying to media calls relating to what was happening in the summit. I was thrown a question on whether we were about to end the regional development agencies which had recently been moved to my portfolio. My explanation was in fact consistent with what I said today. We are trying to make those agencies achieve certain purposes.
Senator Angus: Rather than get rid of them.
Mr. Manley: A further machinery change is not the essence of the issue. The essence of the issue is how they behave.
Senator Angus: When we approached your request, we went right to the fundamentals -- namely, these institutions were established at a certain point in time to meet certain credit gaps but never with the intention of competing with the private sector or in any way substituting for the private sector. We were to review if they had gone beyond what was originally contemplated and whether there was still a need for these agencies. Our recommendations were quite controversial in some cases. I recall you saying that it would be good to start a debate on these issues. These issues were ventilated and there has been a good debate. I am a little disappointed that you have not followed the same process that we recommended.
I should like specifically to deal with ACOA, inasmuch as it seems to have been the biggest lightening rod in terms of the debate at all levels, certainly within my own caucus and everywhere else.
Mr. Manley: I do not think Senator Kirby has found that at all.
Senator Angus: He has stayed away from caucus since then.
The Chairman: Senator Angus and I have stood back to back on this issue so that we can see people coming at us.
Senator Angus: Mr. Manley, you have seen this morning's editorial in The Globe and Mail. That indicated to me that The Globe and Mail thought our report was probably the oracle, that you would follow our recommendation and that ACOA would be finished. In any event, that is not the case, according to what you have said. However, you did not mention ACOA specifically this morning.
What is the plan for ACOA, other than to have whoever will be its new head meet with the council?
Mr. Manley: First, let us keep separate the financial intermediaries and the regional agencies. In dealing with the council, I am really dealing with the four Crown financial intermediaries as opposed to the regional development agencies which function quite differently and which play different roles.
My view on ACOA, for example, is that it is an organization that is on the ground in the region. Its role has changed considerably as its level of funding has declined.
The editorial to which you refer, senator, raises two issues. First, it raises the Auditor General's report, which really dealt with a time when ACOA had a lot more money to spend than it does now. It was in the practice of making non-repayable grants and contributions to private sector entities. That is not part of its practice or mandate at the present time; nor is its budget anywhere near as large as it was. We really have moved the organization away from that.
Senator Angus: In other words, are you saying, that it is more of an advisory body as opposed to a financing body?
Mr. Manley: Yes. There is still a mandate to deal with access to capital on small business. However, in the case of ACOA, none of its funding is non-repayable -- it is repayable only. It may have more favourable terms. Most of the stories dealt with by the Auditor General's report which are reflected in the editorial are from the times when it was thought of as an agency that just gave money away.
The second issue the editorial raises is Mr. Spector's decision to go to the private sector. It quotes a couple of MPs. I would like to say that in the rather short time I have been responsible for ACOA as minister, I have worked very well with Norman Spector. He is a public servant in whom I had trust, have trust and from whom I had the fullest cooperation. He is a loss to the public service of Canada. He has explained to me that his decision was based on a private sector offer which, at this point in his life, was timely to pursue. Those are decisions that all of us make in our lives.
The implication in the editorial is unfortunate because it does not correspond with the facts as I understand them to be, either with respect to Mr. Spector's motivation and certainly not with respect to the approach I am taking to ACOA and to the other regional agencies.
I think they have the ability to play a very effective role. I have mentioned some of those things in my remarks. For example, they were on the ground to deliver the infrastructure program when we chose to do that. They are the people who know what is happening on the ground, that is, what the economic development opportunities are. As we shift the focus to one based upon the need to stimulate local responsibility for community economic development, focusing on themes such as trade, technology and increased value added, you cannot do that sitting in an office tower in Ottawa. You have to have people on the ground who know how to do it.
Our mechanisms are changing. We no longer see that the way to do that is to give money to businesses, particularly to set up competitors in a market that is marginal, thereby creating two non-viable businesses. We want the agencies to play an important role in building viable and longer-term economic development.
I have gone to Atlantic Canada and said, "Look, if you want to create jobs, that is easy. Just give me money and we will paint every church steeple in Atlantic Canada. You will have lots of jobs. When the paint is dry and the money is gone, the jobs will be gone too." That is not what we are interested in doing. We are interested in building the kinds of infrastructure, expertise and opportunities that will mean that jobs last into the long term. That is a lot more difficult. It requires a different approach to the problem of economic development. It can be frustrating for those who want to see immediate jobs created by handing out money in their communities. However, that is the path we are on.
The committee made recommendations with respect to the agencies, really looking at the cash side of things. In fact, to some extent, although less so with ACOA than with WED, FORD(Q) and FedNor, we are actually doing what you recommended, only a little bit differently. We are using the BDC in some cases and in some segments. We are also using the chartered banks to take that access to capital money and use it to leverage greater lending activity by the banks to small businesses, in some cases by the BDC. The determination as to who gets the money in those cases is made by the bankers. We try to drive the behaviour of the bank by buying down a bit of the risk factor. In essence, that is what you recommended with respect to the access to capital activities of the regional agencies. Instead of being lenders themselves, you suggested that the money be leveraged through the Crown financial institutions.
To a large extent, that conforms with the practice. However, at the moment, I am convinced that we should continue with the activities of the agencies on the ground in stimulating local responsibilities for economic development and in providing the mentoring and training opportunities that they do.
Senator Angus: I understand that, Mr. Manley. There are always political considerations. Our real focus on that aspect was not so much with respect to access to cash, as you suggest, but what we felt was an overlap from an administrative point of view. Our suggestion of rolling them in was not necessarily into an office tower in Ottawa but into one administrative structure. As an analogy, the chairman has used the expression "a holding company". It seemed to us that there would be very substantial savings in that regard. I guess you would have had your experts look at it and suggest that we are wrong.
Mr. Manley: I would not put it quite that simply. There could be some reduction in administrative costs, but a significant additional cost could be implied by that consolidation in the short term.
Consider my institution, the Business Development Bank of Canada, as an example. I may be the only minister in this government -- although I do not know for sure -- who has gone to the Prime Minister and asked him to take something away, which I am very sorry he did take away. I refer to the Cape Breton Development Corporation.
My focus with the BDC has been to change the culture of an entity. The FBDB was not exactly well respected by its customers, by the professions that dealt with it or by government. It was seen as a political bank which had done a lot of stupid stuff over the years. We all remember the strip club in Hull and all these other things.
I can spend my time trying to change the culture of that organization and make it more client-focused and more responsive to the lending gaps, or I can spend my time working to assemble a common holding company and putting the pieces together. In my judgment, I would rather accomplish the first project and get the institution responding to its clients. That is not a small task. If we can accomplish that, then we can look at whether there are other ways we can save administrative costs in the longer term by consolidating activities of the other financial institutions. Task one was to make the thing work as it was.
I think we have made good progress over the last year. The lending numbers are up significantly, which reflect some of the changes to the legislation that you approved last year. The anecdotal feedback we are collecting from client groups across the country is very positive, and the partnership activities that the BDC has been engaged in, including with the chartered banks, has been very successful. I have told them I want them to be complementary, not competitive, with the banks, but I want them to be aggressively complementary so that they are constantly moving the yardsticks a bit. That is where I would rather put my focus for the time being.
Senator Stewart: For how many of these so-called financial intermediaries and for how many of these so-called regional development agencies are you ministerially responsible?
Mr. Manley: I am responsible for the Business Development Bank of Canada, which is the only one of the financial intermediaries. Mr. Goodale is responsible for the Farm Credit Corporation, and Mr. Eggleton is responsible now for both the Export Development Corporation and the Canadian Commercial Corporation.
At the time I was here last year and until the shuffle in January, the Canadian Commercial Corporation was in the Department of Public Works and separate from the EDC. There has been a ministerial consolidation on that one.
With respect to the regional development agencies, all of them have been moved into the industry portfolio. I am responsible for Western Economic Diversification, ACOA, FORD(Q), and FedNor, which I already had as part of Industry.
Senator Stewart: The purpose of structural consolidation would have been to make savings with regard to overhead and overlaps, but presumably it would also have been to have assured that there was stimulus to prevent these organizations from becoming simply routine operations.
Let us consider financial intermediaries first, where you have only one. How much of your ministerial time do you give to the BDC?
Mr. Manley: It is very difficult to make an apportionment of my time. I do not keep a pie chart. I have regular consultations with the president and/or the chairman of the bank. I consult with them monthly.
In addition, my deputy minister is a member of the board of directors. The Deputy Minister of Industry is a member of the board of directors, and a deputy minister of one of the regional development agencies is also on the board of directors. Currently, that is the deputy minister from FORD(Q). I have input from them as to decisions taken by the board.
A portion of my time is certainly spent, but the accountability lines are there.
Senator Stewart: Do not misunderstand me, but I suppose they tell you at these monthly meetings that all is going swimmingly.
Mr. Manley: No. If you mean they try to gloss over the problems, no. We have dealt with many problems. We are trying to change the mandate and operations of the FBDB into something different, and it has not all been easy.
Senator Stewart: I am trying to discover how much independent input you can bring to this dialogue. Are you dependent on the people whose behaviour -- to use the word you used before -- you are trying to improve? That may be a caricatured way of putting it, but I think you see the point.
Mr. Manley: There is always a certain healthy tension between the political level and the bureaucratic level in our system of government, and the Crown corporations and other agencies retain a certain independence which is necessarily part of the system.
What we have done with the Business Development Bank of Canada is different from the normal day-to-day operations of a Crown corporation vis-à-vis the minister because we developed the proposed new mandate together. The new mandate reflects my views as to the direction in which the bank should be going. I have set for the bank, in cooperation with my deputy minister -- who, as I say, is part of the board -- the objectives over time in terms of implementing the mandate, and I receive progress reports. As we get the benchmark statistics, we will be in a better position to measure the performance of the institution against our objectives.
I am under no illusion as to the size of the challenge. In my answers, I have reflected the fact that I would not come here to tell you today that we have just discovered the greatest thing yet in terms of Crown financial institutions. We have made progress, and I would be happy to claim that, but we have also struggled with an institution which has had a very low self-image. It has therefore had challenges in attracting highly qualified people. We have had to invest in retraining, re-engineering and changing the client focus of this institution. That is not all done. It is on track, I believe, with some bumps along the road, but we are moving there.
Senator Stewart: Perhaps we could shift for a moment to the regional development agencies. Are you making comparable progress there?
Mr. Manley: There are four regional development agencies. FedNor is part of the Department of Industry and has been since I arrived. It is not a stand-alone agency, as are the other three. As I inherited them, they each had somewhat different practices and policies in effect, which you would expect since the regions have different approaches.
Western Diversification, for example, does no assistance at all directly to businesses. It strictly operates its capital assistance through various intermediaries, much of it through the Community Futures programs.
We have restructured and re-engineered FedNor in recent months. It will operate far more along the lines that Western Economic Diversification has operated. In other words, it will not be lending directly to business or providing financial assistance directly to business. It will strictly do so indirectly through other financial institutions, including the Business Development Bank, but it will provide a basis of activity at a community level.
FORD(Q) has made its focus entirely small business and the point of access for small business. ACOA, likewise, has been entirely small business oriented and continues to be, but it does provide direct -- although repayable -- financial assistance to businesses.
I have a secretary of state in each of those regional agencies. They have responsibility on a day-to-day basis. We are attempting to increasingly focus the efforts of the agencies on the same three themes that the government set out in this year's budget as being the key points of focus -- namely, youth, trade and technology. In each of those areas, we are endeavouring to, as much as we can, ensure that the resources are focused on addressing what we see as the critical needs. In practical terms, this means that we are attempting to develop approaches that reflect the need to build sustained economic activity. That means that we must have acquisition and use of technology, and we must be focused on markets that are broader than local markets. Otherwise, we will inevitably find that we are doing the same kind of short-term programming that these agencies have been criticized for in the past. That is not our objective. Again, it will take time to change the expectations of the regions as well as to fully implement that kind of approach, but I believe progress is being made.
Senator Stewart: You speak of "we", and that raises a question in my mind as to who "we" are. Let us take ACOA as an example. When you were given responsibility, ACOA had a structure. Now you talk about a new pattern of operation. In a sense what you are saying is that in the bad old days ACOA did not operate very well, but "we" are trying to change how ACOA behaves. I assume you are in on this. Who else is in on this?
Mr. Manley: I am in on this, yes.
The change in approach at ACOA began before I arrived. The previous minister, Mr. Dingwall, introduced the policy of ending non-repayable grants and contributions to business, for example. That shift to full "repayability" was already part of the government's operations with respect to the regional agencies before they came under the industry portfolio.
As we move forward from here and as it has become part of my responsibility, the Prime Minister, in putting the agencies into the industry portfolio, also named a secretary of state for each of the regional agencies. I have worked very hard to build a portfolio coordination plan that includes, at the political level, myself and the three secretaries of state. At the bureaucratic level, it includes the Deputy Minister for Industry, together with the deputies for each of the three regional agencies, together with a portfolio coordination plan in key areas -- such as science and technology, small business service, the delivery of services and communications -- through an assistant deputy minister based in the industry department. The "we" you referred to are, politically, the four of us and, bureaucratically, the team of us. We are attempting to get all of the components of this very large portfolio moving in the same direction. That does not merely include the industry department and the three regional agencies. It includes the Business Development Bank, the National Research Council and the university granting councils, two of which report to me. It includes focusing that whole operation on the common themes of how we build an innovative economy in this country based on our need to develop, diffuse, apply the latest technology, and build on our existing strengths, and how we win in the international markets of the world, which is the real proving ground of the quality of our products. That is what we are trying to do. That is a big project, and it transcends the regional agencies, Industry Canada and any components of the portfolio. It is like a Sunday school picnic where they tie everyone's legs together and try to get them all working in the same direction at the same time. That is what we are attempting to do. If we can accomplish that, then we have an engine for really making a difference in moving the Canadian economy into the 21st century.
Senator Stewart: The Standing Senate Committee on Foreign Affairs has been looking at Canada's relations with Europe. One of the things happening over there is southern and eastward expansion of the European Union. Immediately that raises the prospect of regional development programs in Europe. Are those whom you referred to as "we" paying any attention to the strategies being employed in Europe?
Mr. Manley: I need to use the term "we" because this is a broad portfolio. Industry Canada, as a department, has a very strong policy component, with officers whose responsibility it is to keep abreast of economic development thinking in other jurisdictions as well as our own. They must know what people are saying and what they are doing. We have also invested heavily -- and this is something your committee may want to hear about at some point -- within our portfolio in a micro-economic policy understanding of what is required in order to effectively build an innovative economy, including a look at measures that are being taken elsewhere.
Michael Porter is famous for the report he delivered in 1990 on the Canadian economy. While speaking in Montreal a couple of weeks ago, he identified the micro-economic side as the one where focus needs to be drawn in moving economies forward. That, in fact, is what we are trying to do, and that pertains directly to your question.
Senator Stewart: Mr. Chairman, I think it might be valuable for the committee at some appropriate time to hear from Mr. Manley and others on this micro-economic approach and perhaps to bring the wisdom from that approach to bear on what is being done with ACOA.
The Chairman: Thank you, senator.
Senator Kolber: I appreciate that business is not like government, but when most businesses that I have been involved with make an investment, after a year or two they do a post mortem to see what they have received for their dollars. If we take the whole agglomeration of these agencies and banks over the last five years, has a study ever been done with respect to what the Canadian taxpayers have received from this? What has it achieved? Is there some kind of return on what you spend?
Mr. Manley: Those reviews are done frequently. There is of course an annual report from the agencies.
Senator Kolber: To quote you, what you are trying to do is long term. An annual report, while not exactly meaningless, does not give me the answers I hope to get. In other words, has there ever been a five-year report? You have spent tens of millions of dollars. What did we get for it?
Mr. Manley: Yes, there have been. We do not have a long-term report on what we have done with respect to changes that have come about in the past 12 months. In effect, that is one of my responses to your report. We have made significant and substantive change within 12 months, including putting the regional agencies into the industry portfolio and including the new mandate for the Business Development Bank. We are at a stage where we are awaiting results. The measurement based on benchmarking, which is one of your recommendations with respect to the financial intermediaries, becomes an important component of being able to make that evaluation in the future.
Has the information been inadequate to date? I think you can say that that has been the case. That is one of the reasons I am here today saying that, with respect to the intermediaries, two of them with similar practices to the chartered banks -- the FCC and the BDC -- will be providing the data in a similar manner to that provided to us by the chartered banks. That will give us better information to make a comparative analysis and to ask questions about whether they are achieving something measurable and worthwhile.
With respect to the agencies, putting them together into the portfolio is one step towards coordinating their activities in a way that will enable us to better evaluate the contribution they are capable of making.
ACOA gave me one of its reports on entrepreneurial successes in Atlantic Canada. This kind of information is being generated on a continual basis. It is there for people to look at and to consider. In our process of review of parliamentary appropriations, that accountability is in some ways more continual, more direct and more public than one would find in most private sector entities.
Senator Meighen: I wish to deal first with the Council of Crown Financial Institutions. Is that to be simply a meeting place for those in charge of the various Crown agencies and financial intermediaries, or will it have a secretariat of its own and a stand-alone existence?
Mr. Manley: I anticipate that it would not require an ongoing institutional apparatus or secretariat and that it could be handled cooperatively. Among the many agencies and relevant deputy ministers, it would not be that hard to put together the necessary minutes and agenda preparation.
Senator Meighen: Who would chair that committee, Mr. Minister? Will you?
Mr. Manley: I would not chair it; I would participate in it. There are three ministers involved with the financial institutions, and I think we could function, if necessary, with a rotating chair or with a rather less formal structure than having a permanent chair suggests.
Senator Meighen: Presumably there would be an exchange of information upon which whatever action is deemed necessary could be taken. Would any of this information be on the public record, or would it be internal only?
Mr. Manley: Much of the information is on public record with respect to the reporting requirements that the institutions currently have, together with the accountability function that is drawn through the parliamentary process. The ministers responsible, as well as the heads of the agencies, are accountable to the parliamentary process, so I would anticipate that this would be a regular line of questioning. Having put this cooperative mechanism into place, the areas of coordination, overlap and duplication become ones on which questions could be probing.
Senator Meighen: The cooperative mechanism you refer to is the council.
Mr. Manley: Yes.
Senator Meighen: And the teeth in the council presumably arise from the presence of three ministers.
Mr. Manley: The teeth?
Senator Meighen: Presumably you will meet for a purpose other than just to say, "Things are going well in my area; our loans are up and cooperation with the private sector is good." Where is the meat? You set this up, as I understand it, minister, instead of a so-called Crown holding corporation, as was suggested by the committee's report. I think we agree that the objectives are essentially the same. Are you satisfied that, with the exchange of information that will presumably take place at the meeting of the council, this forum will provide an opportunity to take action quickly to correct any deficiencies?
Mr. Manley: Prior to establishing the council, as I said earlier, these entities existed and revolved in orbits of their own. There was no consultation; they did not even meet. Until the shuffle, the chairs, the presidents, the officials and the deputy ministers required were in four different departments. Now at least it is down to three.
We are moving from a complete lack of coordination toward a structure that will enable us to at least begin to better understand among the agencies what each is trying to do. As a case in point, a typical example would be the border, if you like, between the Farm Credit Corporation and the BDC and the pressure -- increasingly in rural communities -- as farmers are engaged in other kinds of businesses in order to support themselves. Do they look to the FCC for some of that financial support, or are they told that as soon as their project involves something other than agricultural products, they must go to another institution? How do we manage that handover? What can we do, for example, about co-locating offices, if indeed we decide that they should maintain separate operations as they confront the agricultural sector?
With all the wisdom in the world, until some of those actual problems are fleshed out and examples worked through, it is not immediately clear that we can come out with the best solution in terms of making a recommendation, either you in your committee or the people in the policy sections of Industry Canada. Better we should work it out. I think it will probably take a few years of operating with the council to then be able to say the orbit of these institutions is consolidating and maybe we should only have one, or perhaps we no longer need to do what the BDC is doing and it should simply move its capital into the EDC and evolve out of what it has been doing in the past.
All of those things become topics that you can consider, but we need to take a few steps before we reach those points.
Senator Meighen: I think the only difference between us is we advocated something, if I can use my phrase, with a little teeth in it. I wish you well in your approach. I hope it works. I would like to talk about this in other years to see if progress has been made. We heard ample evidence that the left hand in many cases did not know what the right hand was doing. Maybe this meeting in the council will facilitate remedying this problem. I do not know that I am convinced it is the best approach, but I wish you well.
The Chairman: Minister, perhaps I can be modestly less polite than Senator Meighen. Perhaps it stems from the fact that I have chaired inter-departmental and inter-agency committees in this town. The notion that these organizations will want to voluntarily cooperate in any truly meaningful way is, frankly, naive.
When we discussed our specific recommendations, we recognized that the nature of organizations, which are each independent in their own right, are inclined to strongly resist giving up their independence unless, to use Senator Meighen's words, there were teeth in a mechanism. We were not hung up on our proposal for a holding company. However, we were determined that there be teeth in a mechanism that requires the breaking down of barriers other than on the hopeful assumption that people will do it because they believe in the common good and that there is no empire protection in town.
My view with respect to the council is that it is an interesting idea but, frankly, will not work. That is based on 15 years of being involved on the other side of things, not on the legislative side. I would like you to respond to that.
As well, perhaps you could respond to a related question. If you do not want to go all the way to the holding company, perhaps one way to begin to get forced cooperation -- in Godfather terminology, to make offers people cannot refuse -- would be to look at mechanisms such as, for example, having the same individual chair more than one of the Crown financial institutions so that even if you do not have a formal holding company, you get enough cross-appointments to be able to have the boards of the respective institutions force change that otherwise, in my view, will not happen.
Mr. Manley: As to whether it will work, I defer to the length of your experience, Mr. Chairman. Obviously you are much older than I.
The Chairman: No, just much more frustrated and substantially more cynical.
Mr. Manley: My belief is very much as I was trying to express it before. We are endeavouring to drive fundamental change in these organizations. There are only so many calories of effort available. If we devote these calories to the creation of changes in structures and mechanisms, then we are not devoting them to the effort required to change the behaviour of the institutions.
I am entirely open-minded about what our evaluation of this part of the approach will yield. I think we can look at this in a year or two and say the council was created for the right objectives, but it has failed to address some of the problems of overlap and duplication that were there, in which case perhaps we should revisit your recommendation. However, with respect to the financial institution for which I have responsibility, I am convinced that the change in mandate and the change in practice is making a real difference at the level where customers are being served by that institution. I would rather live with some overlap and duplication if the customers are getting better service than to solve the overlap and duplication if it means the customers will not get better service. I am prepared to say let us revisit it and see whether it has made a difference or whether it is a step in the process. However, I think what we have structured can work at dealing with some of the issues on the margin. It can certainly not hurt to have increased coordination.
As for cross-membership, I think that is a very positive suggestion. I will undertake to recommend to my colleagues that we consider that there be some identification of potential cross-members, even potential cross-chairs.
The Chairman: I was specifically thinking of cross-chairs.
Mr. Manley: The problem may be getting someone who is willing to take that much time. These are not full-time positions. It is open to some discussion.
Senator Kelleher: I too share the views of Senator Kirby with respect to the potential success of this council. I have not had long years of experience, of course, but I have had some experience. One of my concerns is that I perceive an absence of written objectives for this council. Is there a mission statement? Have we set out somewhere what the objectives will be for this council? Is there any form of written structure so that we can have something to measure the performance of this council against? For example, who will be in charge? You have three ministers, and I know what that can lead to. I noticed from time to time during my period in government that a little bit of climbing on occurs within cabinet. Do we have anything by which to measure the performance of this council in an objective way?
Mr. Manley: One of the problems we have had even in evaluating the financial institutions themselves is establishing some kind of benchmarking against which we can compare results. We are moving in that direction.
The purpose of the council is really to address the issues of overlap and duplication that I think your committee considered were important. The point is to focus on identifying opportunities for collaboration, thereby minimizing overlap and duplication; to provide a forum for the dissemination and discussion of ideas with respect to everything from improving customer service through to cooperative marketing and cooperative product development, which we have seen increasingly, for example, between some of the financial institutions in the regional development agencies; and also to provide a context within which the relevant players in the institutions can agree amongst themselves on common reporting practices which will, in fact, lead to us being able to objectively evaluate their performance. We do not have any of that at the start.
Senator Kelleher: Have these objectives and mandates been reduced to writing?
Mr. Manley: There is some text as an annex to the speaking notes I prepared for circulation. The response to issue five is what we have produced so far. This is today's announcement in terms of how that will function and what its key focal points will be. I think more of that can be developed as part of the response through the parliamentary appropriations process.
Senator Kelleher: I wish you well.
The Chairman: To pick up on that point, I wish to clarify three specific points.
With respect to recommendation number one where we asked that data be prepared and released by Crown financial institutions in a manner comparable to private sector financial institutions, you have agreed with that, have you not?
Mr. Manley: We have agreed with that to the extent that there are comparable points.
The Chairman: You discussed the gap issue. The committee wanted to know what gaps the Crown financial institutions were trying to fill.
In your speaking notes, you mentioned four gaps that emanated from a 1994 report of the House of Commons committee. Is it fair to infer from what you said that the Crown financial institutions, in their subsequent annual reports or statements to Parliament, will indicate how they are filling those gaps, and, if there are other gaps that they think they are filling, what they are?
Mr. Manley: That is certainly a fair inference with respect to the Business Development Bank, and it is one I would be sympathetic to with respect to the others.
The Chairman: Then I think we should try to understand it because that would address our recommendation number two.
Mr. Manley: Exactly.
The Chairman: On the third point, I admit I am puzzled. You said there was a theme throughout our report, which is that the role of Crown financial institutions should be to avoid competition in the sense that the public sector does not need to go out and compete head to head with the private sector. In your remarks, you made a statement in which you used the FCC only as an illustrative example, so this is not to be construed as picking on it. You said that Parliament has given the FCC a mandate to compete but only in response to customer demands. First, if there are no customer demands, there is no demand for the service; therefore, competition does not occur. You cannot compete for a service that customers do not want. I would infer then -- excluding the end of that sentence -- that the operative part of that sentence is that the FCC has a mandate to compete. However, I noticed in a June 27 article in The Globe and Mail, Mr. Beaudoin, the CEO of the Business Development Bank, commented on the fact that they had a record profit-making year. He is quoted as having said that there is no point taking risks if you are going to lose money. He said that if we could all find ways to invest so that we did not take risks and still made money, that would be wonderful.
When I see a statement like that, in light of your statement about competition and the FCC and the record profits from BDC last year, the feeling I get is that these institutions, spurred on in large measure by the social sustainability criteria, are going in the exact opposite direction to that proposed by the committee, which would have resulted in their ending up competing in small niche areas almost accidentally. I am beginning to get the feeling they are out and out directly competing with private-sector institutions. Is my inference from all of this correct? If so, is that government policy?
Mr. Manley: First, let us keep this in perspective. I will focus on the BDC because it is the one with which I am most familiar. How the BDC could be seen to be competing with the chartered banks when it is not a deposit-taking institution is beyond me.
Senator Angus: It is competing in lending.
Mr. Manley: Yes, it is competing in lending, but it does not have access to the vast amounts of low-cost deposits that the chartered banks have. You are comparing a bank, whose assets are about $3 billion, with chartered banks, who have assets of $800 billion or $900 billion. If you are worried about this little guy competing with the big banks, they are not even on the same level.
The Chairman: It is not that.
Mr. Manley: My direction to the BDC to be complementary but aggressively complementary implies that it will be doing things that chartered banks, if they chose to, would also be doing. I hope that what it will do is lead the behaviour of the chartered banks. It will perhaps take on things that the chartered banks have been reluctant to take on. It will occasionally leverage contributions so that it will be in areas that they would not otherwise be in. That, to me, is what the role should be. This is a shift from lender of last resort, which was quite a different approach to the practices implied by the new mandate.
Are they competing with the chartered banks? Well, they should be pushing them, they should be challenging them, and they should be aggressive.
The Chairman: I think this committee would support your statement about pushing private sector financial institutions into new areas that they would not otherwise get into. However, when I then see the president of the BDC making statements about not taking risks, I say to myself, "If they are pushing the private sector into areas that it would not be in, then they should be taking risks which, for any of a number of reasons, the private sector is unwilling to take." When I see that kind of cautious statement, it seems to be inconsistent with the direction you are recommending.
Mr. Manley: The statement of Mr. Beaudoin's that you referred to is, admittedly, a bankerly statement.
Senator Stewart: That is very harsh.
Mr. Manley: To give Mr. Beaudoin the benefit of the doubt, I do not know exactly what he said or what the context was. I would encourage you to invite him in to explain what he meant. In the context of past practices, you have put your finger clearly on the issue. In directing the bank to be self-financing, I know they obviously will have to manage their portfolio in such a way that they make money to offset their losses. That is simple. In discussing the level of activity with the president of the bank, I have indicated to him that I was not expecting the BDC to generate a level of profitability comparable to that of the chartered banks. I was expecting him to ensure that the bank generated enough profit so that it was able to finance its own expansion of activities and that it should not expect the government to put in additional capital. We put some in with this past budget by way of acquiring preferred shares, which I think will accelerate the implementation of the new mandate. If one of the things we are trying to fill is the need of businesses to get money into areas where more cautious and more profit-driven banks are reluctant to tread, then clearly there must be an appetite for risk; otherwise, you are quite right, we may as well shut the thing down.
Senator Meighen: Mr. Chairman, you have raised a concern that bothers me.
Mr. Minister, you have spoken for the BDC. I presume that you have discussed the same issues with your colleagues and you know their philosophy. It may be the same as yours; it may be different. Perhaps your council will help iron out differences. If I may make an editorial, closing remark particularly with reference to the FCC, if its mandate is expanded and if it aggressively competes with the banks across the Prairies where many towns have only one bank, we may end up with a lot fewer bank branches across the Prairies. I do not think that would have a salutary effect on the economy of the Prairies.
Mr. Manley: I think Minister Goodale wants to look at the FCC mandate, and I have no doubt that someone in this room will be relaying your comment to his office.
Senator Meighen: He would be aiming at reducing the mandate, no doubt, rather than expanding it.
Mr. Manley: You would have to ask him.
The Chairman: Mr. Minister, thank you very much for appearing before the committee today.
Our next set of witnesses is from the Department of Finance. The purpose of this session is to have officials from the Department of Finance take us through the paper put out by the department entitled 1997 Review of Financial Sector Legislation: Proposals for Changes. Our purpose is not to engage in an extensive debate with the officials about some of the ideas in the paper. We will do that when the committee holds hearings on the paper at the end of September. The primary purpose is to have the officials hit the highlights and respond to questions, as opposed to debating the policy ideas.
The committee has agreed that we will hold hearings on this document on October 1, 2, 3 and 4, and, if the Senate is sitting, we will get permission to meet all day while it is sitting. The Clerk will be sending out letters of invitation to groups that appeared before us on the broader issue of general financial services.
At the end of our hearings on Friday, October 4, we will be expecting the minister to appear. I would ask you to speak to the minister to book that date.
Senators, we have with us today Bob Hamilton, Acting Assistant Deputy Minister of the Financial Sector Policy Branch; Frank Swedlove, Director of the Financial Services Division; and Martine Doyon, Chief of Policy Development in the Financial Sector Division.
Mr. Hamilton, this is your first visit to us in this capacity, and you have our condolences in advance.
Mr. Bob Hamilton, Acting Assistant Deputy Minister, Financial Sector Policy Branch: Thank you, Mr. Chairman and senators. In my last capacity, I was here to discuss the GST, and I will not weigh the relative merits of these two tasks.
I am pleased to be here. I recognize the important role that this committee has played in helping to shape financial sector legislation, so I am indeed pleased today to try to outline the paper that the Hon. Douglas Peters, Secretary of State (International Financial Institutions) tabled on June 19.
I have a hand-out which takes you through the main elements in the paper, and I will use that as the framework for discussing what is in the paper.
Let me start by giving a bit of the context for this set of changes. As you know, 1992 brought quite a significant change in the financial sector legislation, and that comprehensive reform removed many of the restrictions that were preventing FIs from fully competing with each other and allowed them to diversify into new lines of financial business. There were changes in the corporate governance and self-dealing area. Given the breadth and scope of these changes, it was decided to review them after five years. We are in the 1997 review right now.
Since the reforms in 1992, major changes have taken place in the sector, as reflected in the paper that the department put in front of this committee about one year ago. There has been a restructuring and consolidation. The trend toward globalization and international provision of services and capital markets has obviously continued. There have also been legislative proposals in the form of Bill C-15 to enhance the safety and soundness of the system. With these significant developments, we entered into this 1997 review process.
We have two main goals. One is to determine whether the sweeping legislative changes passed in 1992 are functioning as intended. The second is to see whether the legislative framework remained adequate in light of the developments in the financial sector.
We kicked this process off in December 1994 with a paper we prepared for this committee entitled "Developments in the Financial Services Industry Since Financial Sector Reform." Since that time, we have had extensive consultations with this committee. Secretary of State Peters called for submissions in March 1995 . We have received about 30 submissions. We have consulted with a wide range of interested parties since then, and the many points raised during the course of those consultations could be summarized in one statement, by saying that the regime is working well overall. The system put in place in 1992 still seems to be appropriate. There is no need for a fundamental rework at this stage. That being said, a number of issues were raised in that context of framework, things we are following up on in this paper and beyond.
One of the issues that has come up is that of concentration and competition. Concerns were expressed coming out of the changes in 1992 as to whether the financial services industry was becoming too concentrated and whether there was a lack of competition. We spent a considerable amount of time looking at this issue. We talked to academics, the Competition Bureau and other interested parties. The conclusion of all that work was that while there may have been an increase in concentration in the banking and insurance sectors, there is no evidence that this has had a negative impact on competition. Therefore, we do not see a need for a fundamental rework of the structure of the financial sector legislation at this stage. Nevertheless, it is an issue that continues to be of importance and will continually be monitored.
Another issue that came up through the course of the 1997 review related to business powers, be it insurance networking or leasing. As reflected in the policy paper, the government decided that now is not the time for a fundamental shift in the business powers of financial institutions. We will come back in a moment to talk about that and link it with the task force that will be created.
Stakeholders have pointed to a number of other areas where they would like to see some changes. Consumer groups are interested in more protection in this area. Privacy protection has been a major issue. This committee identified this concern in its report and we heard more about it in the consultations. This committee and others have talked about ways of easing the regulatory burden. Are we absolutely sure that the regulations in place are necessary? Is there anything we can do to streamline those regulations?
As well, people have raised issues about the Canadian Payments Association Act, which, although it is not expiring in 1997 like the four other statutes, it has an important impact on the financial sector. It is something we will be doing some work on, and I will talk about that in a moment. Those are the changes that led to the proposals in the paper.
Beyond that, recognizing that this sector is evolving, fundamental questions were raised by people about the future of the financial services sector. They have urged the government to address these issues and prepare for the next legislative review. Coming out of that, the government decided to establish a task force. I will talk more about that in a moment.
The bottom-line conclusion is that, although the framework that was put in place in 1992 is largely seen as serving the financial sector well -- it has given us a very strong and competitive financial sector -- we are proposing to make some important adjustments. We see a need to do further work to prepare the financial sector for the upcoming century.
I would like to take you through the proposals in the paper. You can refer to the handout I have given you. The first page of the hand-out talks about the key elements of the paper. There are proposals to strengthen consumer protection. That is one of the key areas the paper addresses. There are proposals to streamline and update the legislation. Finally, the paper announces a comprehensive review to determine the appropriate financial framework for the financial sector, and a task force will be established.
We identified three main points under the strengthening of consumer protection, the first of which is privacy safeguards. Obviously, through discussions we have had with a number of parties, the protection of personal information is an area of concern, recognizing the special relationship financial institutions have with their customers. Financial institutions have made efforts to address these privacy concerns. They have participated, in particular, in developing the new privacy code of the Canadian Standards Association, a voluntary industry code.
In this paper, we are proposing to build on those efforts to formalize and consolidate these self-regulatory measures. The paper proposes new privacy regulations that would require financial institutions to adopt a code of conduct governing the collection, use and disclosure of information, plus the requirements that they inform consumers about the code and how to make complaints, and to report on complaints received.
We encourage the use of the CSA code as a minimum standard. It has a number of attractive features in it. For example, it requires the consent of the individual to collect, use and disclose information. We would encourage to build upon the CSA efforts and use that as a minimum standard that financial institutions to which should adhere in setting up their codes of conduct.
As well, we recognize that Industry Canada is looking at a privacy framework from a broader perspective. We believe that the regulations for financial institutions should be consistent. We think that what we are proposing here will be consistent with that broader framework, but we will keep an eye on the developments of that broader framework to see if there is anything we need to incorporate.
The next items relate to cost and the availability and disclosure of financial services. We have heard concerns about service charges, the disclosure of service charges, the disclosure of the cost of credit, and the ability of low-income individuals to access basic services with financial institutions. In this area, we are not proposing legislative changes, but that we work with financial institutions to improve the dissemination of information about fees and to develop and implement a strategy to improve access to financial services for low-income Canadians. We know that financial institutions are interested in pursuing changes in this area. We want to work with them. In fact, we have started the process by working with institutions to see what is possible in this area.
Senator Meighen: In terms of the cost of financial services, do you have or will you be able to obtain comparative statistics from other jurisdictions?
Mr. Hamilton: We have some comparative statistics relative to the U.S. and other countries. We hope to obtain more through this exercise to try to compare how our institutions are doing relative to those in other countries. We have information which suggests that fees and spreads are lower in Canada than they are in the United States. We have some information already, and we would hope to develop better information as a result of this process.
The Chairman: Perhaps I could pursue that for a moment.
The data I think you are referring to is data that this committee asked to be prepared approximately a year ago. I want to clarify your comment. You said you hope to get more of that out of this exercise. My guess is you will not get more out of it. If I can interpret what Senator Meighen was saying, it would be helpful to us as a committee if we had the best set of comparable data that you have before we start our hearings so that when people make comments about the pros and cons of various aspects of the cost of services, we will actually have the data. Could you give us the best set of data you have by about mid-September?
Mr. Hamilton: We will try.
Senator Kolber: Under the appellation of "Consumer Protection," you said that you decided the banks could not sell insurance or lease cars. I understand both of those decisions politically, but from a consumer point of view, they would seem to be anti-consumer. You are upping the cost to the consumer in both areas. Why did you come to that decision?
Mr. Hamilton: The decision was made at this time not to change in a significant way the business powers of financial institutions. We will discuss in a moment the task force that will look at the future direction of the financial sector, and I expect those issues will be debated in that forum. As we look forward, we will have to consider what is best for the consumer, and we will have to ask how the financial sector can best anticipate what is needed. At this time, however, the decision was that it would be inappropriate to change the business powers significantly.
Senator Kolber: Why inappropriate?
Mr. Hamilton: For example, in the area of insurance, as was noted in the budget, the industry is still adapting to the major changes put in place in the 1992 reforms, and it was felt that it would be unproductive or inappropriate at this time to change the business powers significantly in light of that.
Senator Kolber: And with regard to car leasing?
Mr. Hamilton: There were arguments on both sides of that issue. I am not sure that we heard fully from the consumers on that issue, but there certainly were arguments from both the financial institutions looking to get into that area and from other companies hoping to keep them out. The sense is that this is not the right time to make that decision. Rather, the sense at this moment is that we make the changes that need to be made right now in terms of streamlining and fine-tuning what was put in place in 1992. The task force will be looking at things in a much broader context going forward. We believe that this is the best way to decide what should be done in the area of business powers.
Senator Kolber: You do not think it was strictly politically motivated.
The Chairman: A public servant cannot comment on that question.
Perhaps I can clarify one thing, Mr. Hamilton. Will the terms of reference of the task force include the issue of powers?
Mr. Hamilton: We have not actually drafted the terms of reference, but the task force would be expected to look in the broadest possible way at the financial sector, which would include that issue.
The Chairman: My second question relates to privacy. It seems to me the fundamental issue that must be addressed in the privacy field is who owns the data. If I give someone information on myself, do I own that information or do they? I think the whole approach to how you handle privacy becomes a function of who is the real owner of that information. I am not asking what you think the answer ought to be. My question is: Am I correct in assuming that that issue would ultimately be addressed under the privacy question? If the financial institution owns that information, then we have to place all kinds of constraints around the financial institution. If the individual owns it, the way we approach the regulatory process becomes inherently quite different.
Mr. Hamilton: I will let my colleagues deal with that question. Ms Doyon is very well placed to respond. She has been following that issue quite closely.
Ms Martine Doyon, Chief, Policy Development, Financial Sector Division, Department of Finance: I am not sure I want to answer the question directly in terms of who owns the information. Perhaps I could just make the following comment.
The CSA code uses as its starting point that a customer has some information and consents to giving some information to a financial institution. The information that the customer provides to the institution really relates to the specific financial service that the customer is seeking, and the customer has the full freedom to allow the institutions to use this information for a purpose beyond what has already been provided. If the customer does not care about his or her information being used for marketing, the customer can consent to that. However, if the customer prefers that the information not be used, he or she has full control over whether the information is used other than for the specific purposes for which it was provided in the first place.
Does that help you?
The Chairman: I am not sure it does. I was not seeking an answer to the question. That is ultimately why you want to have the hearings. My question was with respect to privacy. Is the issue of the ownership of the data up for debate, or is there an assumption that if I give data to financial institutions, it is automatically their data?
Ms Doyon: I would say that if you provide information to the institution, it does not become the institution's data. You keep control over how this information will be used and how it will be disclosed. You can have access to it. The customer retains full control over the use of the information provided.
Mr. Hamilton: I have one final point to deal with. It relates to the middle bullet on this page on availability and disclosure. The cost of credit disclosure regulations is the subject of the internal trade initiative and is being discussed by the federal government and the provinces. It is hoped that some progress can be made and that these regulations can, in fact, be harmonized and updated.
I hope to see that sometime in the fall because it will help improve consumer understanding of the cost of credit and the cost of loans and leases. That is just another ongoing element that I hope will bear some fruit over the course of this year.
As the third point on this page suggests, we are proposing to examine other areas further, such as tied selling and the right to pre-paid mortgages.
With regard to tied selling, concerns have been raised through the course of our consultations that the customers of financial institutions are vulnerable to coercion. Some people have claimed that market forces and rules in the Competition Act do not provide sufficient safeguards. I think it is fair to say that we have not heard conclusive evidence of this, but we have heard enough to suggest that we want to look at it further. In looking at it further, we want to recognize that we need a balanced approach in this area and that where institutions link products together and provide discounts, this can actually be beneficial to consumers. Those kinds of legitimate activities should not be discouraged. On the other hand, we want to ensure that there is adequate protection against coercion and anti-competitive practices. This is an area, as we say in the paper, on which we want to hear more. We have heard enough to suggest that we want to hear more about it but not enough to put forward specific proposals.
Some of what we heard arose in the context of insurance networking, which is not proposed in this paper, so we want to get a sense of the level of concern out there.
The Chairman: The Americans are in the process of easing their rules on tied selling. Do you have a paper outlining the tied selling rules in the U.S., the problems which caused them to try to ease the rules, and what the new rules are likely to be?
Mr. Hamilton: We have definitely looked at the U.S. in this context, and we have some descriptions of what the U.S. system is and the changes in the system.
The Chairman: I would ask Mr. Swedlove to provide whatever he has to the committee's researcher because I think it is another topic we would like to understand prior to starting our hearings.
Mr. Hamilton: We can do that.
The other proposal mentioned here is the right to pre-paid mortgages. Again, we have heard some concerns in this area. Under the current legislation, for mortgages greater than five years, the maximum penalty for prepayment is three months' interest. For mortgages less than five years, there is no legislation. Institutions do not have to allow prepayment and they can set penalties as they choose.
We have indicated here a willingness to look at this area to see if we should be providing prepayment rights across the board and whether we should look at some sort of standardized approach to calculating the prepayment penalties. Again, this is an area where there is not a specific proposal in the paper, but we do want to discuss further with interested parties whether there should be some help in this area to amend the Interest Act.
Senator Kolber: Is that only for mortgages over five years?
Mr. Hamilton: There are two aspects to it. For mortgages over five years, there is a prepayment requirement of three-months' interest. The question is whether that is the right penalty. For mortgages less than five years, where there is no legislation, should we in fact have a prepayment requirement, specify what the penalty should be and perhaps look at a standardized approach for determining the penalty across the spectrum? Right now there are differences between less than five years and greater than five years. One option would be to eliminate those differences and have a standardized approach across the range.
Senator Kolber: Does that not give the institution a problem of funding?
Mr. Hamilton: At this stage I will turn to Mr. Swedlove, who has been actively engaged on this file for a number of years.
Mr. Frank Swedlove, Director, Financial Sector Division, Department of Finance: The Canadian Real Estate Association has been very active in bringing forward a concern that mortgages over five years are not as available as they could be in Canada because of the three-month prepayment penalty. The suggestion by that association and others is that we have a standard way of calculating the prepayment penalty for mortgages, which would encourage the mortgage market greater than five years.
Currently, institutions attempt to match the funding requirements with the term of the mortgage. In some sense, this would assist them in carrying that out because there is always the problem of the three-month prepayment penalty. One could have a 10-year mortgage in the market. After five years, if someone decides to prepay the mortgage and pays a three-month penalty and the institution has that five years of liability remaining, that three-month penalty may not be sufficient to deal with that liability.
Senator Kolber: It follows that the only time you want to repay is if mortgage rates are dropping.
Mr. Swedlove: That is right.
The Chairman: If the terms and conditions of mortgages are set by the government, we are coming pretty close to micro-managing financial institutions.
I understand from what you said in response to Senator Kolber that at the present moment there are rules governing the maximum amount of repayment costs for a mortgage of longer than five years, and there are no rules for less than five years.
Mr. Swedlove: That is right.
The Chairman: Is it fair to assume that what you really concluded is that the competitive market forces do not work? If they worked, then it would be in someone's interest to offer a relatively low prepayment or no prepayment cost. You are making the assumption that market forces for mortgages under five years do not work, and therefore you are contemplating having to step in and essentially legislate a solution. That is the only assumption one can draw from the idea.
At a time when all government policy appears to be moving toward allowing the market to work, I find it strange that you are not thinking about simply changing the rule and removing the legislated cost of over five years. Am I missing something?
Having said that, I understand the politics of what you are doing. We are not here to talk to you about politics, but public policy.
Mr. Swedlove: As Mr. Hamilton says, this is still very much a proposal.
The Chairman: Is my interpretation correct, or have I missed something?
Mr. Swedlove: I think there are two purposes. One purpose is to deal with mortgages greater than five years where there is a three-month penalty. There is a view that this has inhibited the availability of mortgages greater than five years.
The Chairman: Inhibited in which way? Is it because three months is too long or too short?
Mr. Swedlove: It is inhibited because it is insufficient. Financial institutions take on an added risk for mortgages greater than five years if the interest rate differential is so great that the three-month penalty would not cover it. That is why it has been argued that, fundamentally, the mortgage market is effectively a maximum of a five-year mortgage market.
The Chairman: A conceivable solution is to simply remove the constraint entirely and let the market operate.
Mr. Swedlove: That is right.
The Chairman: I thought you were thinking about going the other way. I have no problem with that.
Mr. Swedlove: It has been recommended by the Canadian Real Estate Association and others to specify a maximum based on the present value of the interest rate differential.
Senator Kolber: There is, then, no point in cancelling it.
Mr. Swedlove: That would be an opportunity for consumers to have the ability to pay back the mortgage if their circumstances change.
The Chairman: If you essentially do a present value calculation on the future stream of payments, as Senator Kolber says, the consumer is no better off whether he prepays or not.
Mr. Swedlove: I think the case has been made that from time to time people's circumstances change, where there is a divorce or whatever.
Senator Kolber: I would caution you on one thing. Insurance companies keep their mortgage portfolios at cost. They do not market the market. If they give low rates and interest rates go up, they do not take the write-down. Be careful in what you do because you could really mess up their balance sheets to a fair-thee-well.
Mr. Hamilton: As we have discussed, this is not a slam dunk, and therefore we wanted to put it forward for discussion. Factors on both sides will need to be carefully considered before changes are made.
That takes us through the consumer protection aspect, so I will turn to another area about which I know this committee has been interested, which is streamlining or easing the regulatory burden. A number of measures in the paper are designed to "rejig" what we have in the rules right now to make them work more effectively and efficiently.
The first area I should like to mention is one that comes up pretty much continuously in this area; that is, to do something about overlap and duplication between federal and provincial regulations. There has been considerable dialogue in this area. As noted in the past, progress has been slow, as it inevitably is in these federal-provincial discussions, but there has been some positive progress.
One of the three areas we flagged in the paper on which we will continue to focus our energies include the trust and loans sector. That is an area where we have had much discussion with our provincial colleagues. Some progress has been made, and we are committing to make some changes coming out of those discussions. Although they are not fundamental, we could make some minor changes.
I note as well that the recent Ontario budget made some very promising statements that would help eliminate some of the overlap and duplication in the trust and loan area, and we are encouraged by that.
There has been much effort in this area, and we are starting to see a bit of progress. Perhaps we may see some significant progress over the next while. It is certainly an area which federal and provincial governments are discussing.
The second area we flagged is securities regulation. There has been quite a bit of talk recently about a proposal which would establish a Canadian securities commission whereby the provinces would delegate their responsibility to the federal government. We can talk in more detail about that if you wish. It would be an opt-in system; some provinces would participate and others would not. Many have commented on the attractiveness of this proposal to try to make Canadian capital markets more efficient and make regulation in this area more effective and efficient.
The Chairman: Senator Kelleher has spearheaded a committee on this issue for the last year or so. Is that part of this, or is that part of a separate set of hearings?
Once a proposal on a Canadian securities commission has been fleshed out by the government or governments, I think we would want to hold some hearings. My question is this: Is it appropriate to conduct those hearings as part of our hearings in October, or is progress in this area likely to be such that we should not deal with it then? If so, can you give us a date? Is the spring or the fall a good time? What works?
Mr. Hamilton: I think it would be better handled in a set of hearings separate from the 1997 review. To the extent that there is progress, it is a significant issue in and of its own right. I would argue in favour of separating them.
Timing is difficult. We are in the hands of the provinces. This issue was initiated by the provinces. We are working with them to see how much interest there is, what are the issues, how much progress we can make and how quickly. It is difficult to predict. There seems to be an interest right now among the provinces. It may be that we can move reasonably efficiently to come to some sort of an agreement with some provinces, but it is very difficult to speculate whether that will happen and when. I do not know that I can help you in terms of timing, but I do not think it will be before the fall.
Senator Angus: There were reports from the first ministers meeting that some further success was achieved in this area. Are you able to comment? If Quebec and B.C. are adamant that they do not want to play or opt in, would a Canadian commission work properly without those two provinces?
Mr. Hamilton: I can comment from a technical perspective that it is possible and that a Canadian commission could work in that kind of environment. In fact, the proposal being discussed is designed to work even if all provinces do not join. From a technical perspective that would be fine. From other perspectives, the attractiveness or feasibility of this proposal is a judgment call that I am not willing to make. Technically, there would be nothing to prevent it from working if all provinces did not join.
Senator Angus: I would like to probe you a little further to see how far along we are with this proposal. Notwithstanding your comment on timing, I understand it would take an MOU of some kind. Is an MOU circulating on the issue?
Mr. Hamilton: A draft MOU exists and is the subject of discussion with the provinces. It has been taken to a level where at least something is on the table for people to talk about. Admittedly, it is general at this stage, but something concrete is on the table whereby people can get an understanding of how such a system would work. That is not to say that everyone is in agreement with respect to what the draft MOU should say. People may wish to discuss certain significant issues. However, something has been put forward.
Senator Angus: Is that a public document or is it between government officials of the provinces and the feds?
Mr. Hamilton: No public document is available.
Mr. Swedlove: A draft memorandum of understanding was made available to the public in June of 1994. Discussions this time around have centred on that document, but since then, there have been subsequent drafts of the memorandum of understanding. The concepts being played with are along the lines of the principles enunciated in that June 1994 document.
To reinforce what Mr. Hamilton said in terms of the separation of the exercise, no legislative proposals as part of the 1997 reform would be related to a Canadian securities commission.
The Chairman: I assumed we would deal with that issue separately.
Mr. Swedlove: Legislatively, it is a separate issue.
Mr. Hamilton: We have talked about trust and loan and securities regulation. The final area deals with credit unions.
Federally, the government regulates the Credit Union Central of Canada and six of the provincial central credit unions. The provinces regulate local credit unions and the provincial centrals. We think this is a good area in which to remove overlap and duplication. In the paper, we have said that we are prepared to discuss with the provinces the possibility of ending the federal regulation of provincial centrals. That discussion has not gone far at the federal-provincial level, but we will be engaging in discussions over the next few months with the provinces to ensure that we understand the implications of a change and whether a change is desirable.
The Chairman: Have the credit unions asked you to get out of the regulation of credit union centrals?
Mr. Swedlove: The credit unions themselves are regulated by the provinces. The issue is with respect to the credit union centrals, the provincial centrals. We will need further discussions with respect to their preferences in this area. There have been requests from individual provinces over the last few years.
The Chairman: The provincial governments?
Mr. Swedlove: Yes.
The Chairman: Provincial governments will always ask the feds to get out of any area they happen to be in. One takes that as an axiom.
The centrals are owned by the individual unions. We have had representatives of the credit unions appear before the committee. I recall suggestions to the effect that federal regulation of the centrals was a good idea. I hope you will not respond on the basis of what a provincial government wants done; I hope you will respond on the basis of what the credit unions and the credit union centrals themselves want done.
Mr. Swedlove: The CUCC would continue to be regulated by the federal government. There is no suggestion that the federal government not be involved in the regulation of the umbrella organization for all credit unions. The question is on the provincial centrals. Much discussion is necessary with the credit union movement and the provincial governments in this area.
Mr. Hamilton: We are concerned about the middle tier. We will regulate the top; the provinces are on the bottom. The middle tier is the one we want to have some discussions about at the provincial level.
Let us move to the second point on that slide, the self-dealing regime. The conclusion is that the framework implemented in 1992 was basically sound. We are not suggesting fundamental changes to this regime, but institutions have advanced a number of ideas to make this regime more efficient and effective.
We are looking at changes to refocus the role of the Conduct Review Committee. Currently, this committee reviews all transactions with related parties. Institutions tell us that this is just impractical. A better system might be to refocus the role of that committee, have it establish appropriate internal procedures, and have the board of directors continue to report to the superintendent. Rather than review every transaction at a micro-level, we want to ensure that the committee has appropriate internal procedures. That is a proposal we would like to put forward as part of this review.
Another area that we are looking at is the definition of "related party." Perhaps there is some scope to narrow that definition somewhat. Ideas have been put forward in the paper to try to eliminate the situation. Currently, a broad range of people can be considered to be related parties to an institution. We can limit the scope of that in some areas, without eroding the intent of the rules, to make them a little more manageable.
Turning to the area of subsidiary requirements, you will see in 1992 that financial institutions were allowed to engage in certain types of businesses through subsidiaries. One of the reasons to have them engage in activities through subsidiaries was to separate these core activities and to better contain the risk. The institutions have asked us to review some of these areas to see if we could not allow the institutions to do them in house in order to reduce operational costs.
With OSFI, we have looked at the issue and have put forward proposals in this paper as to where we think we can relax this requirement and allow institutions to do things in house that now must be done in a subsidiary. The areas we have identified are information processing and specialized financing activities that now must be done through a subsidiary. The paper proposes that they could now do this in house.
Senator Angus: Can you give an example of those two things, please? I do not understand "information processing."
Mr. Hamilton: Right now, if they want to have a company process the data and information, it would have to be done in a subsidiary.
Senator Angus: Do you mean commercially or just for their own use?
Mr. Hamilton: I assume it could be for both.
Ms Doyon: Given the nature of their work, financial institutions have developed quite a good technology in terms of their ability to process data of an economic nature. Increasingly, they have been selling that technology to third parties. That is one example where they can use their systems of technology to provide that service to third parties.
Senator Angus: What is the other element?
Ms Doyon: Specialized financing activities. It is really venture capital investment. Perhaps we should have called it "venture capital activities" instead of "specialized financing activities."
Mr. Hamilton: In this area, we are proposing to allow institutions to bring these in house, whereas now they might have a special corporation set up to provide this venture capital and support to small businesses.
We are also proposing to change the rules slightly so that they can hang on to these investments a little longer. Currently, they must be sold within 10 years. They must come to us and ask if that period can be extended. With the pay-off of these investments, they find that that is just a little too soon. We are proposing, therefore, to extend it to 13 years.
Senator Angus: What was the rationale for that limit?
Mr. Hamilton: The 10-year limit?
Senator Angus: Any limit.
Mr. Swedlove: It was supposed to be strictly a venture capital activity where they provide the start-up funding and over time that interest would be sold off. Again, this is consistent with the philosophy that we keep the banking sector separate, generally, from the commercial sector.
Mr. Hamilton: In terms of 10 years versus 13 years, it is a little less scientific. From their experience, we have been told that 10 years does not seem to be long enough. Therefore, we are willing to say 13 years. It applies some limit.
The next item mentioned is the deposit insurance opt-out. This comes from a concern of the foreign banks that in cases where they are serving large corporate customers, they still have to be CDIC members. This requires that they have all the reporting requirements associated with being CDIC members, even though in many cases the vast majority of their deposits would be corporate accounts in amounts that greatly exceed the maximum for insurable deposits. It was put on the table as to whether these institutions could opt out of having CDIC coverage. The paper puts forward a proposal that they be allowed to do so.
There will be continuing consultation in this area with the institutions. We will have to talk to them about defining exactly who would be eligible for this and how we determine the eligibility for the opt-out. Would it be on the size of the deposit or the type of depositor? We would want to ensure good disclosure to customers about deposit insurance status.
There will be issues of transition as to what happens when an institution is able to opt out and what kind of special rules we need to put in place.
The Chairman: This committee has proposed that change in the report we made following our so-called Confederation Life hearings in 1994.
Mr. Hamilton: The last item on that page is the foreign bank entry regime. The foreign bank entry policy was put in place 15 years ago. It has not really been updated. In this paper, we are putting forward proposals that would attempt to reduce the regulatory burden and try to ensure that there is consistent treatment with these institutions and domestic institutions.
The proposals set out in the paper would separate two types of institutions. There would be regulated foreign banks, which include institutions regulated as banks in their home jurisdiction. These institutions would be permitted to carry on financial service activities in Canada only through federally regulated subsidiaries. This is an attempt to maintain a balance between how we treat a foreign bank and how we treat a domestic bank.
Similarly, if these regulated foreign banks own a Schedule II bank, they have to hold all their financial institution subsidiaries through that Schedule II bank. The change proposed in the paper is that they now not be forced to do that. They could have a Schedule II bank but hold a financial institution subsidiary directly rather than through the Schedule II bank.
Senator Angus: What about the issue of operating not through a subsidiary in Canada but as a branch? I understand a major issue for the foreign banks was that they feel this matter was left out of this document.
Mr. Hamilton: This was another issue that came up through the course of consultations.
Senator Angus: They felt you would have better security, leverage and financial capital resources.
Mr. Hamilton: They certainly put forward to us the attractiveness of allowing branches to operate in here. OSFI and our department have looked at this issue in the past in terms of regulatory concerns. At the end of the day in the course of this exercise, it was decided that we did not need to move forward right now with any changes to the foreign branching regime.
As we look to how we will set up the financial sector in the future, I expect that the role of financial institutions will be discussed.
Senator Angus: Is that something you contemplate being in the terms of reference of the task force?
Mr. Hamilton: I imagine that as the task force looks broadly at what kind of financial sector it wants to have in place, it would comment upon issues such as the role of foreign institutions.
Senator Angus: Is it a big issue with the domestic banks? Is there a body of opinion against allowing them to operate through branches?
Mr. Hamilton: No. I would ask Frank Swedlove to elaborate.
Mr. Swedlove: The views we have received from the domestic banks are that there is a willingness to be generally supportive of the concept of branching in Canada, but they have generally tied it to issues of access into other countries, particularly the United States. Domestic banks have expressed concerns about their ability to operate their securities operations in the United States because of the Glass-Steagall restrictions and also because of remaining concerns over interstate branching restrictions.
Senator Angus: They are issues of reciprocity, then, are they not?
Mr. Swedlove: With the United States, generally, that is right.
Senator Angus: I guess you could not operate with Holland, the U.K., Italy or other countries and not the U.S.
Mr. Swedlove: That is right.
Senator Angus: I assume that in this case it is one size fits all.
Mr. Swedlove: Under our NAFTA and World Trade Organization obligations, we would not be able to discriminate in favour of the European countries vis-à-vis the United States, for example.
Senator Kelleher: In your studies, then, I assume you are having regard to our trading obligations.
Mr. Swedlove: Most definitely, senator.
Senator Kelleher: Canada has not exactly led the world in this respect. In the trading regime, frankly, I think we are regarded as somewhat restrictive compared to other regimes. Is that not a fair statement?
Mr. Swedlove: In the GATT negotiations, Canada eliminated all of its discriminatory laws with respect to foreign financial institutions. We used to have what we called the 10-25 rules for trust companies and insurance companies, and a 25 per cent rule for Schedule I banks. Those provisions have all been removed.
The 12-per-cent ceilings on foreign bank assets have also been removed.
There is no discrimination in terms of the rights and obligations of foreign versus domestic financial institutions. We are fully consistent with the principles of national treatment in the financial services area.
Senator Kelleher: With respect to the treatment of foreign banks as subsidiaries and not branches?
Mr. Swedlove: That provision has been identified by some countries as being restrictive. There is some question as to whether it is a restriction, because a foreign bank can establish in Canada and operate under the same rules as a domestic bank. There is a requirement that they be incorporated like a Canadian bank.
The Chairman: What are the implications of these changes for non-bank financial institutions? For example, what are the implications for GE Capital or Ford Credit or GMAC?
Mr. Swedlove: Right now, GE Capital is defined as a foreign bank under the Bank Act. Therefore, in order to operate in Canada, it would need to seek approval. That would remain.
The Chairman: Why is it a foreign bank? I do not think of GE Capital as a bank, any more than I think of Ford Credit as a bank.
Mr. Swedlove: The rule with respect to foreign banks is that if you are a bank abroad or if you have any affiliation with a bank anywhere in the world, effectively you become defined as a foreign bank, so the net is cast rather wide.
The Chairman: It is hard to think of a wider one.
Mr. Swedlove: That is right. We recognize that that is unduly restrictive.
Under the existing rules, GE Capital is established as a non-bank operation in Canada, but there are requirements for them to seek approval each time they establish a new incorporated entity and each time they move major assets from one incorporated entity to another. There are other approvals required each time they carry out a business transaction.
It is being proposed under the new regime that after you receive your initial approval, you would no longer be required to come to the government for further approvals, as long as you stay out of the deposit-taking business.
The Chairman: Is it the same with a company like Ford Credit?
Mr. Swedlove: Historically, they were incorporated and operated under the Investment Companies Act but that has now been eliminated. If they are indeed a foreign bank, I presume they would be considered a near bank under this new concept, which would allow them to operate without restriction in Canada.
Mr. Hamilton: That covers the second part. We have regulated foreign banks on the one hand, and this new concept of a near bank will address the issues we just mentioned.
After talking about easing the regulatory burden, we look at fine-tuning the legislation. There are four aspects: corporate governance, joint venture arrangements, access to capital for mutual insurance companies, and amendments to the Bank of Canada Act. Let me take them in turn.
Corporate governance is an issue of interest to this committee from a broader perspective. There has been a lot of activity in this area over the last while, from the Dey report, to Industry Canada's efforts, and this committee's efforts. Our view from financial institutions aspect is that the provisions that were updated in 1992 are generally working well, but we are looking at changes to ensure they keep up with the evolving standards that exist as a result of all these other studies and guidelines that are being produced. To give you a feel for the kind of things we considering, OSFI will be promoting best practices. They will be putting together a best practices paper for institutions to try to ensure that the board can function independently of management. OSFI will be taking a more proactive role in this area. Again, I am not referring to legislation here, but to best practices guidelines.
Effort will be made to clarify the statutory duty of the audit committee. Right now the committee must ensure that appropriate internal control procedures are in place. There will be some slight modification to ensure that that vague or unrealistic commitment is replaced with something that is more sensible. Again, this is not changing the intent of what is there in any way but simply recognizing that the audit committee will require management to implement appropriate control procedures. They will be reviewing, evaluating, and approving these controls. It is really a wording change to be a little more specific and realistic about what that committee can do.
We are considering some restrictions on the board of financial institution affiliates where the business is unlike the parent company.
The final area I want to mention here involves insurance companies and the area of policyholder rights. Significant changes were put in place in 1992. Again, generally, we think those are working, but there are some areas we want to discuss with a view to making some changes, such as making it easier for policyholders to circulate proposals and the like. There are proposals in the paper on corporate governance, and they will be the subject of discussion as we move forward.
Senator Kelleher: One of the things that came to light during the Confederation Life issue and in our corporate governance study, is the fact that it is a heck of a lot easier to be a chairman, president, or CEO of a mutual company than it is a company that has publicly traded shares. Have you looked into this problem or concern? An annual meeting with a concerted shareholder or policyholder action is almost non-existent. The shareholders are the policyholders. You do not have pension funds, for example, investing in these mutual companies. If, as we saw with Confederation Life, someone wants to move ahead and do certain things, there is very little or no control there.
Mr. Hamilton: The intent of these rules is to try to address some of those issues to give policyholders more ability to do certain things, such as putting forward proposals, et cetera. I think the intent is in the right direction. I would ask Ms Doyon to elaborate.
Ms Doyon: There is no question that, generally speaking, shareholders take a more active role in the affairs of their company than do policyholders. As Mr. Hamilton just pointed out, in 1992, significant steps were taken to modernize the policyholder regime. They were given rights and the means to exercise rights in terms of greater access to information, notices of meetings of companies, et cetera.
By and large, our conclusion would be that it was certainly a step in the right direction, and perhaps it is time to go one step further. The reality remains that policyholders do not, at this stage, take the same proactive role as do shareholders. I think our role has been more to ensure that, should they wish to do so, they have all the information necessary to play that more active role.
Senator Kelleher: It is not so much that they play a more active role as that there should be some stricter rules of accountability with respect to mutual companies than we have with shareholding companies. I would like to think that the Department of Finance, in light of the fiasco we had with Confederation Life, might start taking a little closer look at this area.
Mr. Hamilton: Point taken.
I will now move beyond corporate governance to joint venture arrangements, an area in which this committee has expressed some interest for change. Basically, financial institutions are telling us that the joint venture rules in place are unduly restrictive and restrict their ability to enter into joint venture arrangements domestically and abroad. This is the so-called 10-50 rule. We propose to modify this requirement. Obviously we have been in close consultation with the superintendent's office on this issue, and we believe changing this rule would provide more flexibility to our institutions to enter into joint venture arrangements without any significant solvency concerns. That is another positive development.
As to the third item, access to capital for mutual insurance companies, we are proposing two changes.
Measures were introduced in this area in 1992 to improve the access to capital for mutual companies. They were allowed to issue preferred shares, and small mutual companies were allowed to demutualize. While those steps have been generally recognized as positive, a number of concerns have been raised. One concern is that the preferred shares do not give these companies enough flexibility. Another concern is that the process for demutualization is complex and lengthy. Larger companies have also asked that there be a demutualization process as well for them.
We are proposing changes in two areas. One would be to permit mutual companies to issue participating shares, like common shares but without regular voting rights. The shareholders could participate in the earnings in proportion to their capital investment. Companies would have to establish a method for apportioning earnings and expenses between policyholders and shareholders. The proposal is to allow these shares to be issued.
Second, we propose to simplify the demutualization process and extend it to all companies; in other words, take it beyond the smaller into the larger companies.
These are things that we will be discussing with the insurance industry over the next period. They are the proposals we are putting forward at this time.
The Chairman: Does simplifying mean speeding up? One of the conclusions that came out of our Confederation Life hearings in this area -- setting aside the minor point that the process was almost incomprehensible even to the people running it -- was that even if someone had gone all the way through all the hoops, Confederation Life would have been long dead and buried before the process could be completed. It seemed to us at the time that even if it meant an element of rough justice, as opposed to absolute justice, speed was of the essence. Trying to be absolutely perfect and totally fair to everyone would result in a problem for everyone, so I hope that focusing on purity of solution is not what we are doing here. The only time one really needs such a process is in a crisis situation where a mutual company is in trouble.
Mr. Hamilton: Indeed, those concerns are recognized. We propose that the superintendent have the power to exempt companies from certain aspects of the regulations on a case-by-case basis and that the Minister of Finance have the ability to exempt companies from certain aspects in cases of financial distress. There are a number of aspects to this, but those are recognized as ways to deal with such situations effectively and pragmatically.
The Chairman: Has someone already done a detailed study of this? Exempting someone from something does not necessarily mean the process works any faster or deals with the problem. Is there something that specifies exactly how this would work?
Ms Doyon: That is being developed at this stage. In the policy paper, if we go to the superintendent's power to exempt companies, the guidelines will specify exactly what aspects of the regulations companies could be exempted from. There will be a broader power with respect to the minister, and it will apply to a company that is in financial difficulty. This has been developed knowing that in many cases time is of the essence. That is why there is extra flexibility built in for companies in financial difficulty.
The Chairman: If you are going to consult on this issue with the industry, I presume someone has written down what this process is or is about to write it down.
Ms Doyon: That is being developed at this stage, but we do not have final proposals.
The Chairman: Will you have them before September?
Ms Doyon: Sometime in the fall, definitely.
The Chairman: I know you think I am being difficult, but I am trying to be practical here. We happen to think this is important. It does not make much sense for us to have a consultation on that subject without knowing what the process is. We can agree with the motherhood statements in the report, but that is not the issue. The issue is how will it work in practice because that is where the rubber really meets the road. I do not know how we can give you any useful feedback on a demutualization process if we do not understand the process, as opposed to understanding the objectives. I can tell you now that we agree with the objectives. The question is this: What is the process? Do we leave that issue off the table in the fall because the details are not ready?
Mr. Hamilton: As to your question about whether it is written down, I can tell you it is about to be. We will try to come back to you as quickly as we can.
The Chairman: Do you understand our problem?
Mr. Hamilton: Yes.
The Chairman: The political implications, the public policy implications and the business implications rest in the details, not in the objectives.
Mr. Hamilton: Certainly, we will be talking to the industry, and we will get something written down as quickly as we can. I just cannot give you a definite time at this stage. I understand the problem you are in, though, Mr. Chairman.
The final item on that page deals with some technical changes of a housekeeping nature to update and modernize the Bank of Canada Act. We will be working with the Bank of Canada on those. They are really only technical changes.
Senator Angus: Does this apply to the payments system?
Mr. Hamilton: I will come to that.
Senator Angus: Regarding the Bank of Canada?
Mr. Hamilton: No. This set of changes deals with things such as unclaimed balances and modernizing what they can buy and sell. I will come to the payments system as a separate item.
That takes us to the end of what is in the paper in terms of the technical changes we propose be put in place before the March 31 sunset date. I will come back to talk about process.
Beyond that, there is another important aspect in the paper -- where do we go after that? We have heard concerns from all corners that the financial services sector is changing and the environment in which it is operating is changing. We need to think carefully about what kind of financial sector we want as we move into the next century; how we can ensure it remains competitive; that it provides consumers with maximum choice at reasonable prices; and that it maintains its present safe and sound nature. While no specific changes in the paper address these broad issues, we have indicated that a comprehensive study of these issues be done. The government will be forming the Task Force on the Future of the Canadian Financial Services Sector to deal with some of these broad issues, not on a piecemeal basis, but with respect to various aspects of legislation that need to be changed. This will be an effort to look at the financial services sector more broadly and to sort out the important issues, the structure we want for this sector, and the role of financial institutions. A number of issues will come up within that study, but it is intended to be as broad a look as possible at the kind of sector we want, incorporating the broad technological changes that are changing the way institutions do business. We want to determine how we should set ourselves up to have an adequate financial sector.
The task force will look at these questions. We have not set down in detail the mandate of the task force or its composition. The thinking is that there will be half a dozen people on the task force. The effort would be to enlist people who can take a broad, impartial view of this sector and a knowledgeable look at it to assess what we must put in place as we move into the next century. We will come forward in the fall with details on the composition and mandate of the task force.
As of now, I can indicate that those are the types of directions and the kinds of questions on which we expect the task force to advise the government. To give you a sense of time frame, we expect the task force to report within about 18 months of being set up. It would set the direction for the next review of financial institutions legislation, which, as I have indicated in the paper, should be no later than five years after the passage of this legislation.
While these changes are things that we think must be done before the sunset clause takes effect, it is important that the department do more work in this area. It is also important that the task force provide a comprehensive look at the financial sector to see where we need to go in the coming years.
Senator Angus: Will that task force report before the next election?
Mr. Hamilton: I am not sure when the next election will be. All I know is that we will be setting up the mandate and the composition of the task force in the fall. While it is difficult to know precisely how long the task force will take, we would like it to report within 18 months.
Senator Meighen: Mr. Chairman, what is the relationship between the task force and this committee, if any?
The Chairman: I do not know the answer to that question. At one point, a suggestion was bandied about, not officially, that perhaps this committee would form the task force. However, the government has decided to go a different route. I do not know, other than the fact that when the task force reports, I presume we will have hearings.
Mr. Hamilton: That is my sense of the interaction. The task force will prepare its report, and there will be hearings on the basis of that report. This committee will be involved, as well as a number of other parties.
Senator Kelleher: Based on the results of some of our more recent reports, perhaps the government does not want us anywhere near the issue.
The Chairman: If they are looking for reform, we have a pretty good track record.
There has been speculation in the papers that the powers of financial institutions would not be included in the task force mandate. I assume that was an erroneous press report. Obviously, powers are a critical factor if one is looking at the future of the industry. Am I correct?
Mr. Hamilton: The task force would look at the broad structure of the sector. Once we see the structure of the financial sector, powers and other such issues will flow from that. I think it would be wrong to say that powers will be outside the mandate of the task force. We want the task force to focus on giving advice as to the right structure for the financial sector.
The Chairman: Structure and powers obviously go hand-in-hand.
Mr. Hamilton: They are obviously related.
Senator Angus: How many people will be on your task force?
Mr. Hamilton: It is not finalized, but my sense is that there will be about half a dozen. That is to be worked out, but that is our current thinking. We want to keep it to a manageable number.
The Chairman: Your white paper also talks about an advisory committee of some kind on the payments system. How does that link to the task force? Will the payments group and/or the task force be entitled to look at other restrictive conditions in the recent Interac agreement? If you noticed, there were a number of comments that the plaintiffs -- if one can call them that -- could not get all they wanted because of the nature of the legislation. Is that up for grabs either by the task force or the payments advisory committee or both? I am playing the straight man; that is my role.
Mr. Hamilton: Thank you for that excellent introduction into the next slide, which looks at the payments system.
As noted in the paper, we will do a thorough review of the payments system. There is the Interac decision. A whole host of other issues have been raised surrounding the payments system, which has not been reviewed since its inception in 1980.
To understand the linkage between the task force and the payments review, the task force will look at broad structural issues. The payments system is a complex technical area where we felt we wanted a separate group that we at the Department of Finance will set up. An advisory committee will focus on payments system issues.
Payments system issues will impact on the thinking of the task force. There will definitely be a linkage between the group looking at the payments system issue and the task force, particularly on issues of access to the payments system. That group will get into a much broader field than will the task force.
A number of other areas in the payments system must be examined, pulled apart and thought through. The task force will not necessarily want to get involved in these, other than to understand broad directions. The payments system group will look specifically at those technical issues. It will obviously feed into the debate on the broader issues as well. There will be a linkage between the payments group and the broader task force.
Senator Kolber: Do you decide who will be on the committee?
Mr. Hamilton: On the payments committee?
Senator Kolber: Yes.
Mr. Hamilton: We are looking for representation from the people in the payments system now. There are others, such as retailers. As well, the associations are arguing that changes must be made. We are looking for broad representation of the deposit-taking institutions, retailers and insurers. That committee is being set up to give us advice. We want to ensure we are getting good, thorough input.
Senator Kolber: How does one recommend somebody? To whom does one write?
Mr. Hamilton: They could write to me.
Senator Kolber: Terrific academic work has been done in this area.
Mr. Hamilton: I did not mention academics. We will definitely have academics.
Senator Kolber: Do you know the dean of the business school at Concordia?
Mr. Hamilton: I do not know that person.
Senator Kolber: He does tremendous work on the payments system. I have spent time talking to him about this issue. I will drop you his name.
Mr. Hamilton: It is useful to get suggestions. In fact, the payments community is not that large.
Senator Kolber: It is quite esoteric.
Mr. Hamilton: It does not necessarily include me at this moment. It is a fairly limited group, but we do want to get good people on that committee.
Obviously, the Competition Bureau and the tribunal have looked at the Interac question. That is one aspect of the payments system, though a relatively narrow one. As a result of that decision, I think there is a recognized need to take a broader review of the payments system. That is exactly what this group is designed to do.
The Chairman: I raised the Interac issue only as an example. As you described, it is a relatively minor piece. I want to ensure that both the task force and the payments advisory committee look at the comments made by the tribunal on the Interac agreement and ultimately approving it.
Mr. Hamilton: Yes, definitely for the payments system.
That takes me through to the end of what I wanted to say about the paper. Perhaps I could close my comments with a bit of process.
As mentioned, there are two aspects to the paper. Proposed changes will come out of the 1997 review, and we will be moving forward to come up with legislation to implement before the sunset date of March 31, 1997. We have asked for comments by August 30. We know that this committee and the House finance committee are both interested in looking at this issue.
At the beginning of the meeting, Mr. Chairman, you outlined the time frame for this committee. We hope to have legislation in the House later this fall in order to have it passed by the sunset date of March 31, 1997. That is the timetable the department is working towards.
We will be putting out further details on the mandate and composition of this task force in the fall. There will be a lot of discussion between now and then about what this task force should look at. We think it is important to get the mandate right for this group. We want to spend some time talking to people who have thought about this issue.
With respect to the payments advisory committee, we hope to have further details this month about who will be on that committee, the way it will proceed and the issues it will look at. It will probably begin its meetings officially sometime early in the fall.
In the paper, we propose that the next revision of the financial institutions statutes be no later than five years from the date at which the set of amendments we are proposing here ultimately pass, say by March 31, 1997.
That concludes what I wished to say. I would be happy to entertain any other questions.
The Chairman: I believe we asked them as we went along. We thank you and your colleagues for your appearance. I remember your appearance in the GST days. I think from your point of view and ours this was a significant improvement. We do not necessarily guarantee to give you such an easy time the next time you are back before the committee.
If there is background material that would help us when we start our hearings, it is important that we have it in advance. It enables us to make our hearings more focused and meaningful.
Mr. Hamilton: We will do everything we can.
The Chairman: Thank you very much.
The committee continued in camera.