Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 9 - Evidence - Afternoon Session
OTTAWA, Tuesday, October 1, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day at 2:00 p.m., to examine the state of the financial system in Canada (review of financial sector legislation).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we pick up on our discussion this morning on foreign banks and the rules which govern foreign institutions.
Our first group of witnesses represents a pair of companies, accompanied as usual by their esteemed legal representatives from Toronto.
Mr. John van Leeuwen, President, Trans Canada Credit Corporation, Norwest Financial Inc.: With me are Mr. Scarfo of Trans Canada Credit, and Steve Wagner and Richard Owens of Smith Lyons law firm.
Because of our parentage, Mr. Chairman, Trans Canada Credit would have to convert to becoming a full bank while all our competitors would not need to become banks at all but would be considered as "near banks".
The Chairman: I have had discussions with some of you so I know your parentage, but your comment about "because of our parentage" may be lost on my committee colleagues. Please expand on that.
Mr. van Leeuwen: We are owned by Norwest Financial Inc. of Des Moines, Iowa, which is deemed to be a regulated bank. Because of that, Trans Canada Credit falls under the new tier of being regulated as a Schedule II bank and that is the problem.
We are a consumer finance company. Here in Canada we have 150 branches coast to coast. We basically extend small loans. To put it in perspective, Trans Canada Credit has a specific loan customer profile. Our customers tend to be younger with no credit history and little or no assets or net worth. Usually, they have had some credit problems in the past and have been turned down by a number of banks or similar institutions.
We also purchase sales finance contracts from small retailers such as Cohen's Furniture, Advance TV and others in the furniture and appliance trade. We provide a lot of liquidity to some small businesses. We are also involved in auto financing and auto leasing and in some small business leasing such as computers and faxes.
Norwest Financial purchased Trans Canada Credit's business from the insolvent Central Guarantee Trustco group back in 1992, thereby saving the CDIC some substantial funds.
Like our competitors -- Beneficial, Avco and others -- Trans Canada Credit is not a regulated financial institution, although we are bound by extensive provincial consumer protection legislation and security law when raising capital. Unlike banks and trust companies, we do not take retail deposits and are not members of the Canadian payments system, so the absence of comprehensive regulation from our business is not surprising.
Nevertheless, as I said earlier, because our parent is a foreign bank under the Bank Act, when Norwest Financial obtained Trans Canada Credit, it had to obtain a Governor in Council order. In return for the order, Norwest Financial provided certain undertakings regarding the extent of Trans Canada Credit's activities and imposing minimum size limits on the debt instruments we can issue.
For the first time, regulators will attempt to distinguish between regulated foreign banks on the one hand and near banks on the other. The basis of the distinction will be whether the entity is regulated as a bank in its home jurisdiction or whether banking services constitute a large part of its operations.
Based on our discussions with the Department of Finance and OFSI, it seems that Norwest will be regarded as a regulated foreign bank while Trans Canada Credit's competitors will not, a distinction based not on the services that we provide but on the identity of our U.S. shareholder.
For us to stay in business, we would have to become a Schedule II bank, with all that entails. Meanwhile, virtually all of our competitors would face even less regulation than they do now.
The history of regulatory policy in Canada establishes clearly that there are two main reasons to regulate a financial institution. The first is to protect members of the public who deposit their savings in the institution and, indirectly, to protect the CIDC. The second is to ensure the stability of the payments system.
In cases of consumer finance companies such as Trans Canada Credit, these reasons for regulation simply do not apply. We do not take deposits and we do not participate in the Canadian payments system. Our customers are borrowers, not savers.
If Trans Canada were to become a bank, the general market impact of having to portray ourselves as a bank would severely impair our competitiveness. What is the difference between Trans Canada Credit, Beneficial or Household? We are all in the consumer finance business competing against each other for the same customers. We are all foreign owned. Each of us has foreign affiliates that are banks. We all raise our external funds in the same way.
Simply put, how relevant, from a regulatory standpoint, is it whether we are owned by a bank, an industrial conglomerate or by a large number of individual shareholders? What should matter is the nature of our business and, on that basis, everyone in the same business should be treated the same way.
The foreign bank proposals also raise a concern having to do with national treatment under the North American Free Trade Agreement and reciprocity of our NAFTA partners. As you know, the NAFTA requires Canada to provide investors from other member countries with treatment no less favourable than it provides to its own investors and their investments. In our view, and in the opinion of our counsel, the foreign bank proposals would violate this commitment. Moreover, U.S. and Mexican law would not require a Canadian bank to establish a separate, fully regulated bank to offer consumer finance services in those countries. We recommend that the federal government not move away from the kind of reciprocity with our trading partners that our international trade policy normally seeks to achieve.
Since Norwest acquired Trans Canada Credit, we have increased the number of our branches from 129 to 150. Our employees have increased by 30 per cent to over 1,000. We plan to open an additional 50 branches in the next three to five years, creating another 250 to 300 jobs. Our business volumes have gone up almost 40 per cent. We have raised hundreds of millions of dollars in the Canadian debt market, and we have expanded the scope of our business too.
As recently as February of this year, we received government approval to expand into leasing and credit cards. Until the white paper was published in June, there was never any suggestion by OSFI or the Department of Finance that the rules would be changed for us so dramatically. Although we appreciate that government policy can and should change to suit the times, we now feel as though the rug is being pulled out from under us, and for no good reason.
The solution, as we see it, is to regulate financial services based on the type of service being provided in Canada. There are no prudential or competitive reasons why regulations should be based solely on the financial services that a Canadian company's affiliate offers outside of Canada. That approach would mean that the regulation is based on the activity that needs regulation, not on the particular form of the institution.
In today's fast-changing global financial service marketplace, preconceived institutional classifications are, in our view, outmoded, both as a means of carrying on business and as a rationale for regulation.
The Chairman: Thank you very much.
Mr. Willey, will you please summarize your company's views on the white paper. I know that there is a specific credit card issue you want to raise.
Mr. David M. Willey, Vice-President and Treasurer, Capital One Financial Corporation: Thank you for the opportunity to be here today. With me is Chris Curtis, Associate General Counsel of Capital One.
Capital One Financial Corporation is a financial services company whose principal subsidiary, Capital One Bank, issues credit cards in the United States and the United Kingdom. As of June 30, 1996, Capital One had approximately $11 billion of credit card receivables under management and almost 8 million customers. Capital One is one of the top ten issuers of MasterCard and VISA credit cards in the United States. That is our main line of business.
Six months ago, Capital One Financial Corporation received approval from the Canadian government to incorporate a Canadian company -- not a regulated financial institution -- to offer MasterCard products in Canada. As we understand it, the Bank Act process requires foreign entrants to get the approval of the Office of the Superintendent of Financial Institutions and the Minister of Finance and, ultimately, an Order in Council before they commence operations in Canada. All of these approvals were granted to Capital One in March.
When the white paper was released, it came as a great shock to us to learn that the government was proposing that we be required to set up a bank or trust company to offer credit cards in Canada, which was completely contrary to the process we had just completed. As a result of this announcement, several months of planning and dealing with government officials to obtain the necessary approval were lost. A considerable amount of planning goes into a decision to enter a new marketplace, and it is not insignificant when a key factor such as the corporate form suddenly changes.
Our business plan and investment to this point have been predicated on this corporate form. This change in policy and its retroactive application have caused us to seriously question the viability and desirability of proceeding.
I should like to focus on three areas for discussion. The first area relates to the benefits we think Capital One can bring to Canadian consumers if allowed to proceed as originally planned. The second area is the lack of a strong policy rationale for the white paper policy. The third area is an alternative approach that may better achieve the policy objectives of this aspect of the white paper.
Capital One is not simply another issuer of credit cards. In the late 1980s, we saw that everyone was charging the same price for credit cards in the U.S., about a 19.8 per cent annual percentage rate. The prevailing interest rate on credit cards was high enough to cover the costly defaults of a small percentage of customers because banks could not predict who would pay back their debt and who would default. Low-risk customers were subsidizing riskier customers.
Not being bankers by training, we developed a different approach. We developed powerful statistical models to predict the default risk of individual customers. We also made it our business to learn what credit card features various groups would find appealing. Because we focused mainly on this business, we became experts and consumers have benefited dramatically. In short, we developed customized products for each customer. While many banks offer a VISA or a MasterCard in a few forms only, such as regular and gold versions, we have literally thousands of offerings and can provide the right product to the right person.
We are also proud of the fact that our expertise has enabled us to offer VISA and MasterCard products to many individuals who would not have qualified under traditional bank lending standards. From 1988, when we embarked on our current strategy, the average interest rate offered on new account solicitations for credit cards in the U.S. has fallen from over 19 per cent to less than 10 per cent, in large part due to the competitive pressure brought to bear by Capital One and several other credit card issuers who began offering better pricing to the majority of U.S. consumers.
These consumers have benefited greatly by the increased competition brought to the market by Capital One and others through lower pricing, improved product attributes and greater availability of credit.
I will now turn to our understanding of the rationale of the white paper policy. Government policy makers seem to have concluded that because Canada One operates as a bank in the U.S., it should operate as a bank in Canada. This conclusion misses some key points.
U.S. law does not require Capital One to operate as a bank in the U.S.; it just happens to make sense for us to operate that way in the U.S. Credit card activity has not required regulation of the issuer as a financial institution in Canada or in any country, as far as we know. Many retailers have offered credit cards for years. This is because when an organization issues a credit card to a consumer, there are not present any of the risks typically addressed by regulation of financial institutions.
Canadian banks are regulated not because they issue credit cards; they are regulated because they take consumer deposits, are insured by the CDIC and are part of the payments system. Requiring Capital One to be regulated as a bank in Canada is not necessary to protect consumer deposits as we cannot and will not accept deposits in Canada, nor is it necessary to protect the payments system as Capital One will not be a part of that system. Regulating Capital One as a bank in Canada would bring no benefits to Canadian consumers and would simply result in more regulators being hired to serve to no policy end.
A question is also raised where there are other card issuers in Canada, such as Canadian Tire and Zellers. Should they be regulated as banks simply because they issue credit cards?
Indeed, requiring Capital One and other similarly situated companies to operate as banks in Canada would simply encourage those companies to rely on attracting insured deposits as a part of their funding, thereby alluding to a further and unnecessary extension of the safety net of federal deposit insurance.
The proposed policy would impose a regulatory burden on Capital One to which domestic investors would not be subject. This is discriminatory treatment and would violate Canada's obligations under the NAFTA.
Capital One will be subject to the various provincial rules governing provision of credit to consumers. Capital One has also voluntarily submitted to the federal cost of borrowing disclosure rules that apply to banks. Those rules are the body of regulation that address the risks to Canadian consumers of credit card lending activity.
We understand that a significant policy objective of the foreign bank aspects of the white paper is to categorize foreign-based financial services providers in such a way as to provide a simpler and clearer regulatory approach to these providers. We firmly believe the existing proposal has the opposite effect. Foreign banks are a diverse group, subject to widely varying types and degrees of regulation. The result is that the minister will be forced to exercise a similarly large degree of discretion in this case in the categorization of financial institutions, thus defeating the policy objective. We think a better approach would be to regulate foreign banks based on their activities in Canada, rather than how they may be regulated in their home countries for the activities they pursue there.
If a foreign bank intends to take insured deposits in Canada or have direct access to the payments system here, it may be appropriate to regulate it as a bank in Canada. However, if the foreign bank limits its activities, the foreign bank need not be regulated back in Canada.
We believe this functional approach would better achieve the underlying objective of the white paper and allow consumers to benefit from increased competition and at the same time avoid the inequitable and uncertain results of the proposed policy.
In conclusion, Capital One would very much like to begin operations in Canada. If we are successful, we believe that we could provide benefits to Canadian consumers, not to mention new jobs for Canadians.
My colleagues and I are pleased to answer any questions that the chairman or any senators may have.
The Chairman: Thank you for being concise and for enabling us to understand what the policy question is.
Senator Angus: Mr. Willey, you say you would very much like to start issuing credit cards and doing business in Canada. I think you said that at the end of your paper. Therefore, you have not started yet, even though you did obtain those approvals.
Mr. Willey: That is exactly right. We originate our credit card product through direct mail. We were scheduled to be in the mail in the first part of July, I believe. The letter from OSFI hit our desks in June.
Senator Angus: Even though this is only a white paper -- it is not legislation -- on the strength of that, OSFI told you to stop.
Mr. Willey: No. The letter indicated that in light of the white paper and the fact that we would be treated as a foreign bank under that policy, they invited us to discuss transition plans to comply with the white paper. That meant, of course, that we would be a Schedule II bank, which was not at all what our business plan was predicated upon. It is much more significantly investment involved, a different business plan to support a Schedule II bank versus the entry method which had originally been approved.
Senator Angus: As I understand it, other than the issuance of the white paper for discussion, nothing has changed. The rules of the game appear to have changed. I understand why you would think that. However, in actual fact they have not.
I appreciate as well that when you are told by the regulator that you better not go ahead on the strength of what we told you earlier you could do, you listen. In fact, I am trying to organize my questions for OSFI. Frankly, I find it a bit unusual.
Mr. Willey: The initial characterization from OSFI was that they would be applying this policy immediately. The message we received was, for all intents and purposes, that this was the regime we should be thinking about complying with, and they invited us to discuss a transition plan.
Senator Angus: Was that in writing? Did they invite you and advise you that they would be implementing this policy immediately in writing, or did that come at the meeting you had?
Mr. Christopher T. Curtis, Associate General Counsel, Canada One Financial Corporation: We do not have the letter in front of us, but the Department of Finance told us they were proposing this policy and that they understood it might affect us. They invited our comments, which we have been in the process of submitting.
Senator Angus: I think I understand. I am sure Chairman Kirby will ask you if you could possibly let us see a copy of that letter.
The Chairman: That would be very helpful.
Senator Angus: I have a few questions that may appear to you to be facile, but I do not quite understand. You operate as a bank in the U.S.; is that correct?
Mr. Willey: Yes, sir.
Senator Angus: Just applying plain-meaning rules, you are a foreign bank.
Mr. Willey: We are an unusual animal in the U.S. banking world. We are a limited-purpose credit card bank. Capital One Bank is a principal subsidiary. Capital One Financial Corporation is not considered to be a bank holding company for regulatory purposes.
Our selection of a limited-purpose credit card bank in the U.S. as a corporate platform to pursue business was based on the particulars of the U.S. business case, including the fact that we actually came out of a commercial bank several years ago. It was a regional bank called Signet.
Senator Angus: A deposit-taking bank?
Mr. Willey: A full-service commercial retail bank.
Senator Angus: You are not any longer.
Mr. Willey: No. In fact, the nature of our charter is that we are precluded from taking consumer deposits of less than $100,000 U.S., and we are precluded entirely from any sort of chequing account activity. We are a wholesale-funded institution in the U.S.
Senator Angus:I want to be sure I understand how you operate. You say your main business is the issuance of credit cards. You mentioned some MasterCard and some VISA products as examples. Can you explain to me how that works? I do not follow how your company in the United States works.
Mr. Willey: We market almost entirely through direct mail. We do not have a branch network. We operate by testing many different products in terms of their pricing structure, the amount of credit line offered, and whether it is a gold card or whether it has other attributes. We test those things against different consumer segments and monitor the results on a scientific basis to see what works. Once we have defined an acceptable credit risk, we then originate those products. The whole process is about finding consumer segments and designing products particularly suited for the different consumer segments.
Senator Angus: Would an analogy be one of the oil companies that sell at the pump? Let us take the XYZ Gas Company as an example. You would identify a consumer need for that product and then issue a credit card that is usable for that product; is that right?
Mr. Willey: Let me give you two examples of a few products we offer. One product which led to much success in the last several years offered a low introductory rate. The annual percentage rate was quite low for a period of six, 12 or 18 months. It targeted low-risk consumers and offered them an opportunity to transfer a balance away from a much higher priced issuer. We were very successful with that and saved consumers a lot of money through lower interest charges.
At the other end of the spectrum -- this is not something we intend to do in Canada, nor could we under our current structure -- in the U.S. we offer a credit card secured by a collateral deposit, which is offered to people who either have no access to the credit system or have gotten themselves into trouble and are trying to reform themselves. That is at the other end of the risk spectrum, but again, it is a very customized product that provides a form of credit to that consumer who typically is unable to achieve any kind of credit product or any sort of access to the consumer payments system.
It is hard to live today without a credit card. You cannot rent a car without a credit card. We are attempting to make a product available to a consumer that most traditional banks exclude from their customer base. It is about providing MasterCard and VISA credit cards, custom designed products, either through price or some other product attribute, to consumer segments.
Senator Angus: VISA and MasterCard are trade names, but who owns them? An American Express Card is one thing or a Diner's Club is another, but who owns VISA and MasterCard? I am confused by that question.
Mr. Willey: You are not alone in your confusion. The structure of the industry is a bit confusing. MasterCard and VISA are both associations owned by their members. Banks offer a MasterCard or VISA card that has the bank's name on the credit card but also the MasterCard and VISA symbols. The primarily brand, if you will, is really MasterCard and VISA.
Senator Angus: That is not how they started. In my short memory, I thought one of the banks here started off with VISA and another bank, being competitive, started with MasterCard. Now I find they all use both.
Mr. Willey: I will speak of the U.S. market. It used to be that they were competing on payment mechanisms, and banks could not belong to both associations. In the U.S. now they can. Capital One, through one of its predecessor companies, was one of the founding members of MasterCard, for example. It has been in the business since 1953. Ultimately, the rules liberalized so that banks could be issuers of both MasterCard and VISA, which is what we do. That is called duality, not that that matters, but that is not in place in Canada today. Banks are issuers of one or the other.
Senator Angus: I have just one last question. It concerns not the specific definition of credit cards, but the business of the services you wish to provide, whether it is your company or the Trans Canada Credit Corporation. Do they fall within the definition of banking services under Canadian legislation?
Mr. Willey: I will defer to someone who knows more about it.
Senator Angus: Your counsel would probably know, but to the extent that you are here to seek our help and to bring attention to this anomalous situation which appears to have arisen, I am trying to think of avenues through which we could help. One might be to suggest an amendment to the definition of what is a banking service.
Mr. Willey: I would suggest that it really should not be considered a banking service. At the end of the day, it is consumer lending. My understanding of the Canadian consumer lending business is that one does not have to be a bank to pursue it. In fact, one of the reasons that we are interested in entering Canada and trying to bring what we can to Canadian consumers is that we do not have to be a bank to be here. We are able to do it through a non-regulated financial institution. I guess it is also true that there are other issuers of credit cards in Canada who are not banks. I believe that insurance companies here have the ability to offer credit cards as well. It seems incongruous to call it a banking service when so many institutions which are not regulated financial institutions or are not banks operate domestically in the business.
Senator Kolber: I share some of my colleague's confusion. If someone applies for a VISA or MasterCard and you okay it and give the person a limit of "X" amount of dollars, and if that person goes to a store and uses that card, who does the store keeper call? Does he call your company? Is there no central office for VISA or MasterCard?
Mr. Willey: Yes, there is. There did not used to be. VISA and MasterCard both operate clearing networks, if you will. When you walk into a merchant, pull out your MasterCard and purchase something, that merchant transmits the transaction over a network. It works its way back to your issuing bank, be it Toronto Dominion or Bank of Montreal, and finds its way into your account at that bank.
Senator Kolber: Who okays the credit at that moment?
Mr. Willey: The transmission finds its way through that network back to the issuing bank.
Senator Kolber: That bank okays the credit.
Mr. Willey: That is correct.
Senator Meighen: Who pays for the service you just described?
Senator Kolber: They are all members.
Mr. Willey: Who pays for the transmission of the information?
Senator Meighen: Is it the members of the VISA or MasterCard association?
Mr. Willey: VISA and MasterCard each charge a small amount for each transaction and collect that to maintain the clearing house.
Senator Meighen: You are not a member, are you?
Mr. Willey: We are a member of MasterCard and VISA, yes.
Senator Angus: The vendors have to pay them.
Mr. Willey: Just to close the loop for you on how one makes money doing this, the first source of revenue is the finance charge that consumers pay by borrowing on the credit card and allowing the balance to revolve. That is the most important source of funds.
There are two other sources. First, there are fees of one sort or another, such as an annual membership fee to maintain your account. Second, the merchant from whom you bought something worth $100 actually only gets $97.85, or something like. Some small amount of the difference between that amount and the $100 comes back to the issuing bank as well.
Senator Kolber: Can you think of one good reason why you should be classified as a bank if Eaton's is not?
Mr. Willey: I cannot. Banks are regulated to manage the risk inherent in the banking system which, as we mentioned, seems to us to arise from consumer deposit taking and from the contagion of failure in the payments system.
Senator Kolber: There is one other risk, though. Does the store keeper take a risk?
Mr. Willey: Actually, no. The store keeper, as long as he has followed his procedure, which is to transmit the message that a transaction is about to take place, is insulated from risk.
Senator Kolber: If Capital One goes belly up, who makes up the difference?
Mr. Willey: Well, the transactions are cleared each day. A settlement happens every day. However, I suppose it is arguable.
Senator Kolber: There must be a day's worth of settlements that would not get paid.
Mr. Willey: At worst, it is a one-day risk. In fact, in the particular way that Capital One is anticipating entering the market, an existing Canadian bank will actually be taking the credit risk for that one day for us. We have an arrangement with Canada Trust to provide service and access to the payments system. They are looking at us and assessing our risk on a day-to-day basis. The risk is entirely a commercial credit issue for Canada Trust.
Mr. Richard C. Owens, Partner, Smith Lyons, Capital One Financial Corporation: MasterCard is a two-tier membership system. There is no direct access to the payment system with the attendant risks to the MasterCard merchants for any second tier member. It is only the direct members, who are also members of the Canadian Payments Association -- the Canada Trusts and Bank of Montreals of the world -- to whose risk those merchants are exposed. They are thoroughly insulated.
Senator Kolber: They are not exposed to your risk, are they?
Mr. Willey: That is correct.
Senator Meighen: You were saying, and Senator Kolber was asking, why Eaton's should not be regulated in the same way. Is there any distinction to be drawn from the fact that Canadian Tire or Zellers, the examples you gave here, are involved in the business, for better or worse, of merchandizing products and you are involved in the business only of selling credit cards?
Mr. Willey: There is some advantage for that reason. Typically, retailers are financing sales not necessarily because they make a lot of money on financing, but because they get more sales by doing so. It is a higher margin business. We are a bit disadvantaged in not being a retailer in that sense.
Mr. Nick Scarfo, Assistant Vice-President and General Counsel, Trans Canada Credit Corporation, Norwest Financial Inc.: Canadian Tire now issues MasterCard as well. Many Canadian retailers are also getting into the business of issuing bank cards.
Senator Meighen: My observation is that fewer companies are issuing their own credit cards and more are going to MasterCard or VISA.
Mr. van Leeuwen: As a company, Trans Canada Credit also plans to introduce MasterCard in November.
Senator Meighen: Did you receive a similar letter from OSFI?
Mr. Scarfo: Yes.
Mr. Steve Wagner, Assistant General Counsel, Norwest Financial Inc.: It was from the Department of Finance; but, yes, we received a similar letter.
Senator Meighen: Would you have any objection to letting the committee have a copy of that letter?
Mr. Wagner: No. We will provide a copy.
Senator Meighen: This morning we heard from representatives of the Canadian Bankers Association. I do not want to put words into their mouths, but it seemed to me that one of the points they made was if you are engaged in a banking activity -- and let us assume you are for the sake of discussion -- then you or anyone else should not be allowed to come along and cherry-pick one banking activity and not be regulated as a foreign bank, or any bank for that matter. Is your response to that simply that regulation should be limited to the deposit-taking activities and that the rest of the activities should be largely unregulated?
Mr. Willey: I think I might state it a little more broadly. The proposition is that we have decided on deposit taking and access to the payments system. The notion we would propagate is that one should target on the purpose of regulation. That is to say, what are we trying to do with regulation? We should then adapt regulation accordingly. In this case, we are at a loss to see what positive effect comes from regulation. More cost comes from it; more regulators are hired. There are many things that do not seem to be positive for anyone. We are at a loss to imagine the positive purpose of that regulation.
As far as cherry-picking of businesses and so forth, Capital One's success in the U.S. has been driven not entirely by fundamental changes in technology and marketplace forces. Capital One is not alone. Half a dozen credit card issuers similar to us have enjoyed a similar significant success, niche providers who are very focused on particular segments of the business. What we have been about is seeing trends in the marketplace, seeing the marketplace forces and being in front of that. It is also hard to imagine that a good purpose for regulation is to swim upstream against marketplace forces.
Senator Meighen: Did I understand you correctly to say that your negotiation with potential customers is carried on through direct mail?
Mr. Willey: That is correct.
Senator Meighen: That would not necessitate any physical presence in this country, would it? You could do it all from outside the country.
Mr. Willey: The plan we put forward, which was approved by all the folks we mentioned before, involves outsourcing all this business to Canadian providers. For example, in terms of the actual servicing of accounts, if you call up with a question on your account after the statement has been printed and mailed, that is contracted to Canada Trust. The people who produce the direct mail pieces are Canadian vendors. There is a significant dollar investment into Canada. There is job creation indirectly through Canada Trust. I talked about our testing and figuring out a marketplace approach. Our notion is to test in this way. If it then makes sense to enter here on a larger scale, then that would be the natural extension of what we would do.
Senator Meighen: From where would your mailings originate?
Mr. Willey: The mail would originate here. There is some cross-border activity involving data processing, print vending and that sort of stuff. The mail would enter the Canadian postal system in Canada.
Senator Hervieux-Payette: I want to point out to my colleagues that you have supplied us with three legal opinions regarding the interpretation of the semantics of the Canadian legislation. We often run into the problem of having almost identical legislation on both sides of the border. Your definition of "financial services" differs from ours. For my colleague from Smith Lyons, there is a definition of "financial institution" at page 4. Paragraph (h) deals with a foreign institution.
Perhaps that is not the answer to the letter from the Department of Finance. However, I do not know how they came up with that definition. I merely wanted to alert my colleagues to that fact.
My question concerns the actual business you are doing on credit cards in the United States. I used to receive with my American Express bill a list of about 200 items I could buy. Are you also a direct mail operator at the same time?
Mr. Willey: I recall what you are referring to, senator. I used to receive the same thing.
Senator Hervieux-Payette: You could buy almost anything -- a boat, a car or a plane.
Mr. Willey: We offer some additional products to our customers. We also give them the opportunity several times a year to opt out of all that. Unlike many merchants in the U.S., we do not make our customer list available to other marketers. We try to be sensitive to consumer interests in not receiving all that kind of thing. We do offer it to those who would like to receive it.
Senator Hervieux-Payette: Why are you so generous with your interest rates? You must be making money elsewhere. It is not just through competition with the bank. Provided that you would be obliged to work as a foreign bank, would you say that this would not be possible because the return on your investment would not be good enough? If you were operating under the same rules as any other foreign bank which is lending money and issuing credit cards, what would be the end result for your corporation?
Mr. Willey: Our particular business plan -- and Trans Canada's situation is different from ours -- has to do with testing a marketplace. To be comfortable doing that, the less the amount of fixed infrastructure one needs to establish in the market, the easier it is to be comfortable with an extended testing process. When I talk about testing, it will often go on for five years. To establish ourselves as a Schedule II bank, we must have capital of at least $10 million. We must do all the regulatory reporting and incur all the expenses associated with that, including a boards of directors. There is a long litany of things that make a lot of sense which banks are required to do when there is risk to deposit insurance and risk to the payments system.
For us, it is a significant expense and makes us less comfortable with the idea of trying something for five years without any immediate hope of payback and without really understanding what public policy purpose is being served.
Senator Hervieux-Payette: If I understand correctly, you would charge a higher interest rate or not be in business.
Mr. Willey: Our costs at the end of the day either show up in lower profits or in higher prices. I would expect that a higher cost base in any of our markets at some point results in higher prices.
Mr. van Leeuwen: From our perspective, our customer profile is much different from those of the banks. Back in 1978, we were part of Traders' Group, and Guaranty Trust was our trust company. We went through an experiment and took four of the Trans Canada Credit branches. We came up with a new premise which took the customer base and tried to convert it into a trust or banking operation. The end result is that we closed those branches. We found out, not to my surprise, that our customers are borrowers, not savers.
We are talking about a company that is successful in servicing a niche market and making it into a bank. When Canadian consumers think banks, they think lower rates. If they make us a bank, we will be at the high end, and there is no doubt about that. It will be interesting to see our rates publicized in a marketplace comparing us to the Royal Bank and Toronto-Dominion Bank for all the services that we offer. It is almost hard to imagine. I do not know how you can convince customers that we are a bank but that we are operating as a finance company.
There is also the cost structure of converting the reporting requirements and all the things we have to get into and which we are not into today. We were on a level playing field before, and that has not changed because of our parentage. This is a problem that we have.
The Chairman: I will try to summarize, and please correct me if I am wrong.
Mr. van Leeuwen, you have been in business in Canada since 1940, which is a long time. Your parent has not changed recently.
Mr. van Leeuwen: In 1992, Norwest Financial purchased our company. Central Guaranty Trust Co. was bankrupt.
The Chairman: From 1992 until today, you have been in what I call the unregulated part of the financial services sector in the sense that you have not been subject to federal regulation, and neither were you when you were a subsidiary of Central Trust.
Mr. van Leeuwen: Correct.
Senator Angus: When Central Guaranty went bankrupt, your subsidiary was still a going concern and was solvent.
Mr. Willey: The sale of the company brought a premium, so we were very successful.
The Chairman: It appears as if the department and/or OSFI are treating the proposed changes as law, and that is why we would like your letters, but the proposed changes are in fact clearly retroactive. In a sense, they roll back the status quo. In your words, they change the rules for you but not your principal competitors such as Avco, Household or Beneficial.
Mr. van Leeuwen: That is correct.
The Chairman: Avco, Household and Beneficial will be appearing after you, and they will likely be commenting on the retail funding question. Are you also affected by that retail funding issue, or are you not affected by it because your parent is a bank?
Mr. Wagner: We are currently affected by the retail funding issue as well.
The Chairman: You chose to focus on the other issue.
Mr. Wagner: Yes.
The Chairman: Mr. Willey, I want to be clear on your position. You defined yourself in the U.S. as a narrow-purpose bank. As I hear you, you are in fact a single-purpose bank, and that purpose is credit cards.
Mr. Willey: Yes.
The Chairman: It is quite narrow. You received all the approvals from the government up until March or sometime this year to proceed into a new type of business, consistent with legislation. At no point in that process were you warned that the approvals you were about to receive might be pulled out from under you in the sense that the environment in which you were doing business might be radically changed.
Mr. Willey: That is correct.
The Chairman: You were then told three months later, after the white paper came out, that in fact the environment had changed, and again you were told that they would act as if it was law and not merely a proposal.
Mr. Willey: That is correct.
The Chairman: We will have a letter that will verify that.
As well, your single-purpose product is aimed at providing credit cards to individuals at a significantly lower interest rate than in your perception are currently offered by other credit card suppliers in Canada, not just banks but everyone.
Mr. Willey: That is correct.
The Chairman: I wanted to ensure that I understood. You made your case very clear.
Senator Stewart: In your statement, you say that U.S. law does not require Capital One to operate as a bank in the U.S., but it just happens that it makes sense for you to operate that way in the U.S.
As I understand it, you are saying that your operation in the United States is not technically banking and that what you would be doing in Canada is not banking. Is that correct?
Mr. Willey: Generally, I agree with you. The Capital One bank is in fact a bank. Capital One Financial Corp., its holding company, is not considered a bank holding company for regulatory purposes. We are not required to operate as a bank. It is a bit of a legacy from a business case of a few years ago.
As far as banking in terms of needing regulation, I would argue no, it is not banking because I cannot, in all candour, identify the risk that the regulation is designed to mitigate or manage. If one is using the word "banking" to mean that it needs some sort of regulation, I would say no, it is not banking.
Senator Kolber: During these hearings, we continue to hear the phrase "cherry pick" as if it is something terrible. Maybe we should change it to "specialization". You do not criticize a guy for selling Mercedes Benz cars only. I think that part of it is getting out of hand.
The Chairman: It is regarded as being pejorative most of the time.
Senator Meighen: That is because of the cross-subsidization.
Senator Kolber: If they want to do only credit cards, that is not cherry picking ; it is a business.
The Chairman: Thank you very much, gentlemen, for being here today.
Mr. Denis Savard is Chairman of the Board of the Quebec life and health insurance agents brokers association.
Please proceed.
[Translation]
Mr. Denis Savard, Chairman of the Board, Association des intermédiaires en assurance de personnes du Québec: Honourable senators, the Association des intermédiaires en assurance de personnes du Québec -- the AIAPQ -- would like to thank the Standing Senate Committee on Banking, Trade and Commerce and the Finance Secretary of State for inviting it to submit its comments on the 1977 review of legislation regulating financial institutions. Allow me to introduce the individuals here with me today. On my left, Ms Anne-Marie Beaudoin, who is Senior Counsel of our Association. On my right, Mr. Alain Poirier, who is First Vice-President and a broker in life and health insurance.
AIAPQ, an association of some 13,000 Quebec agents and brokers in life and health insurance, was created in 1989. Our association is the legal extension of another association that had been in existence for more than 30 years.
We are not and we do not represent the socio-economic interests of our members. At the time it was constituted under Bill 134, the legislators entrusted it with a dual mission: to protect investors and savers at large and to develop and control the quality of the professional services offered to consumers by its members and to enforce compliance with a strict code of ethics from each member.
Over the last few years, AIAPQ has established its reputation throughout Canada by setting high objectives for the professional framework and training of the individuals who offer professional insurance services and financial advice to consumers.
It has developed sophisticated training courses and fostered the ongoing upgrading of skills among its members by making it easier for them to obtain well-defined designations that correspond to carefully evaluated levels of expertise, attested by the Chartered Life Underwriter and Registered Life Underwriter designations.
The Association designs and manages upgrading mechanisms to round out the training of licensed intermediaries and implements continuing training programs which are offered by the public sector and the Association itself.
AIAPQ has taken part in the different consultations that preceded the 1997 review. Thus it has already had the opportunity to comment on the legacy of the 1992 reform with respect to the concentration and growth of federal institution activities. For this reason, we will merely touch on this point.
AIAPQ only has an incidental interest in the question of financial control of institutions, provided all intermediation activities are performed by highly qualified individuals who have received standard training.
Nevertheless, the Association appreciates the wisdom of the federal government which did not promote the entry of banks into the insurance sector but chose instead, as the stakes in the reform expected in 1997, to focus on the consolidation of deregulation put forward in the 1992 reform and the fine-tuning of consumer protection measures.
In the present consultation, the Association intends to address only seven points: (1) protection of personal information, (2) tied sales, (3) overlap and duplication of federal and provincial regulations, (4) obligation to sell through a subsidiary, (5) capitalization of mutual insurance companies, (6) the payment system and (7) job-loss insurance.
Point 1: "Protection of personal information".
Given the very nature of the information held by financial institutions, consumers expect their personal information to be protected by stringent regulations. The measures proposed in the white paper are a step in the right direction, but they are still incomplete. The gathering, storage, disclosure and use of this personal information must be regulated and monitored rigorously and uniformly by a body that is independent from the institutions themselves.
For all financial institutions, the personal information they hold and use is an important asset that gives them a competitive edge, particularly since the advent of the electronic highway. This being said, these institutions are not suited, in our opinion, to assume full responsibility for controlling and monitoring information protection measures; to do so would put them in a position of conflict of interest at all times. Although we can encourage institutions to take responsibility for consumer complaints regarding personal information, we believe it is preferable not to entrust them with the responsibility of monitoring the application of these rules.
Moreover, we deem that the privilege given to institutions through the payment system and the resulting access to personal information must be completely and totally separate with respect to the institution's other activities, without exceptions. Thus, we want to depart from the principle that an individual can agree to dispense an institution from some or all of its obligations with respect to personal information. The disclosure of personal information would then be absolutely forbidden.
We also feel it relevant to point out that professionals in financial intermediation in Quebec are personally and individually subject to strict obligations regarding personal information. Our Association and its authorized entities monitor the practices of agents and brokers in life and health insurance and verify, through professional inspections for example, that they comply with in-force regulations. Thus, doing business with a life and health insurance intermediary working in a subsidiary of a federal financial institution would be an added guarantee for consumers.
Point 2: "Tied sales". We are among those who believe that consumers, because of the special relationship that exists between them and their financial institution, are particularly susceptible to coercion. For this reason, we believe that current provisions are inadequate, and we would like to take part in your proposed study to consider the adoption of stronger measures.
In this context, developing appropriate regulations on incompatible functions for a clerk in a financial institution should be considered.
On this subject, AIAPQ could bring to the table its special investigation file on group life and disability insurance sold by financial institutions in conjunction with mortgage loans. We aptly called this file the mortgage insurance Black File, copies of which we have here before us.
In addition, we would also like to call your attention to the fact that the sale of a variety of financial products in a branch of a financial institution, namely those traditionally sold by another industry, can be confusing for consumers, especially if the clerk selling the product also performs other duties. Therefore, we are convinced that, as part of your efforts to abolish tied sales, requiring the use of a subsidiary, preserving a clear distinction among activities and enforcing compliance with the requirements of the jurisdiction of each industry, such as insurance and securities, are effective measures that must be maintained, and even extended. By that we mean they should be extended to group life insurance currently permitted in the banks.
With respect to the sale of insurance products tied to credit, a practice that is allowed in branches, we had already stated our position in our brief entitled, "Abus, risques et tragédies découlant de la vente directe d'assurance de personnes" [Abuses, Risks and Tragedies Stemming from the Direct Sale of Life and Health Insurance], which we submitted in June of 1995 to the Finance Minister of Canada. In our view, only qualified, licensed life and health insurance intermediaries should be allowed to offer the public such products.
The mortgage insurance Black File, which includes supporting evidence, demonstrates all the more so that the current framework and regulations are inadequate. For consumers, being referred to a qualified and licensed individual for the purchase of insurance products tied to credit provides many advantages such as reducing the risk of tied sales and distinguishing between the two transactions.
You can count on us to take part in the future consultations you may hold to study measures that would better protect consumers in their dealings with financial institutions. The scales are tipped in favour of financial institutions, so much so that government must not be afraid to take strong measures to prevent problems. Numerous examples bear witness to the fact that an aggrieved person has little recourse, if any.
Point 3, now: "Overlap and duplication of federal and provincial regulations". Since the 1992 reform, bank-type federal institutions were authorized, through duly authorized subsidiaries, to enter into activity sectors, such as insurance. What is important is that these rules be applicable to all people and to all financial institutions that choose to offer this type of product or financial service, regardless of the jurisdiction under which they are incorporated.
With respect to market intermediation and, more specifically, the distribution of life and health insurance products, provincial jurisdiction has been established under the Quebec government. It is currently being revised following a quinquennial report.
Point 4: "Obligation to sell through a subsidiary". We previously insisted on the importance for consumer protection to keep the basic activities of the different types of financial institutions separate, thus requiring the use of agents office subsidiary, particularly in insurance.
We understand that government does not intend to recommend this requirement be abolished for our industry. Still, we feel the need to warn you against considering lifting this requirement. Arguments, such as operating costs could be reduced, should not deter you from this commitment.
Point 5: "Capitalization of mutual insurance companies". We deem it wise to adopt measures to facilitate access to capital for insurance mutuals so that those that want to may expand and prosper while keeping their characteristic mutual identity. It would be tragic to witness the demise of this type of financial institution that belongs to the insured, that is the consumers.
This must not promote de-mutualization. Insurance mutuals are part of Canada's insurance industry and address the needs of "mutualists" who are consumers first and foremost.
Point 6: "The payment system". Advisedly, the federal government is undertaking to conduct a comprehensive study of the payment system. In the meantime, however, it is not expanding the activity sectors of federal financial institutions. Consumers must be at the heart of this review, and their rights and obligations with respect to the services must have priority.
It is obvious to all financial players that access to the payment system is a competitive edge for financial institutions. Strengthened by this undeniable advantage, they now want to compete in other industries. In this new context, it is difficult to justify preserving exclusivity of this function for deposit institutions.
We therefore recommend that the federal government grant access to the payment system to insurance companies as the financial institutions they are. AIAPQ would like to take part in all your consultations that deal with this matter.
Seventh and final point: "Job-loss insurance". The proposals include a technical amendment to change the types of insurance to include job-loss insurance under life insurance.
AIAPQ has already stated its position to the federal government -- only qualified and licensed intermediaries may "safely" offer insurance products to the public.
The initial concept of group insurance linked to credit has deviated from its initial definition; credit insurance now borrows features from both individual and group products. Either way, the features used are the ones least likely to profit consumers.
AIAPQ's Black File clearly shows that the regulation and framework applicable to these types of products and individuals who offer them are inadequate. It would therefore not be wise to add new types of insurance to those that already exist. On the contrary, considering the degree of trust that consumers place in them, they must be able to rely on the same high-quality service when they purchase an insurance product at a financial institution.
The federal white paper indicates the government's wisdom in wishing to limit, in essence, the 1997 review to the consolidation of the 1992 reform, and to set up a task force to study the future of Canadian financial services in the twenty-first century.
Questions of public interest which we raised in the white paper are important and worth considering. It seems appropriate to refer them to a task force in which AIAPQ would be honoured to participate.
Senator Meighen: On a number of occasions, you referred to the task force that the Minister intends to set up -- let's hope that happens soon. Is there anything that your group finds completely and fundamentally urgent and that could be changed in the regulations pending any thorough changes that that task force might propose?
Mr. Savard: The most important point is to establish that the same ground rules apply for everyone, regardless of the way in which insurance could be distributed. Group insurance is currently distributed through the financial institutions, the deposit-taking institutions, and they don't have to comply with any ground rule in the distribution of those products. They can go ahead with replacements of insurance products held by consumers and they don't have to comply with any ethical rule applicable to them.
What we hope is that a qualified intermediary will be required for all group insurance currently distributed through the financial institutions. What we are suggesting is that a subsidiary be used for the financial institution, that is to say an agents office that is separate from the financial institution, to enable consumers to see that two financial transactions are being conducted, one clearly being the acquisition of a loan or a line of credit. However, when it comes to protecting that loan with insurance, consumers should see another person and there should be no possible confusion or tied sales should be separate for consumers and they should not feel morally obliged to purchase insurance because they have just been granted a loan.
We have been told of the lax manner in which these kinds of insurance sales are currently made by officials in the deposit-taking institutions because they have no qualifications in insurance and we have too often seen cases that have wound up in court. This is what our Black File shows: a consumer who believes he is insured when he makes a claim for disability or death benefits and the estate is told that they have always paid the premiums, but they were never protected since there were pre-existing conditions. The officials forgot to ask them questions about their health, and if this had been done adequately, the person would have been informed at the outset that he did not meet the insurance requirements. So they return the premiums to the customer's account and he must continue paying his mortgage out of the estate. And since it has taken four, five or six months for the court to dismiss the case, the customer is six months late and must make up the payments or lose the house.
Many consumers have found themselves in similar situations and it is a situation that cannot continue much longer. This part must be corrected.
Senator Meighen: Could referral to an independent firm be required merely by regulation?
Mr. Savard: Yes.
Senator Meighen: Or would that require a legislative amendment?
Ms Anne-Marie Beaudoin, Senior Counsel, Association des intermédiaires en assurance de personnes: We have not studied the question whether a regulation or a legislative amendment is necessary as such. We have no opinion to give the Senate committee as to whether it is better to use a regulatory or legislative amendment.
Senator Meighen: You nevertheless claim it is an acute and urgent problem?
Ms. Beaudoin: Yes.
Senator Meighen: An important problem?
Ms Beaudoin: Yes.
Mr. Savard: The size of the Black File that we submitted on this point shows that these are not isolated cases and, unfortunately, too many consumers find themselves in this situation. We have taken inventory of mortgage insurance cases at two courthouses. The Quebec City and Montréal courthouses show several hundreds of cases currently before the courts.
Obviously, when consumers institute proceedings, the courts find in their favour in three cases out of four, but, after a consumer wins at trial, the financial institution appeals and that can take five, six or seven years before the consumer can emerge from this difficult situation which results from the death of a spouse, all at a time when the person really does not feel like instituting legal proceedings.
Senator Meighen: Let's consider this hypothetical case: a consumer goes to a financial institution and is referred to a firm and is told that the firm belongs to the financial institution, but that the people there are very qualified and will give him the best possible opinion? Would that be suitable to you?
Mr. Savard: Yes. At least that would enable consumers to see the distinction between the two transactions.
Senator Meighen: It's disclosure that counts?
Mr. Savard: Yes. That's very important.
Senator Meighen: In capital letters.
Mr. Savard: The other important thing is that personal information should not be passed between the firm and the financial institution. How can an official who has just had access to all an individual's financial information just by looking at his computer screen be a completely independent market intermediary knowing what he knows about that person's financial situation? It's too dangerous. This is why we want to separate the two operations.
Senator Meighen: On page 7 of your brief, you say:
The gathering, storage, disclosure and use of this personal information must be regulated and monitored rigorously and uniformly by a body that is independent from the institutions themselves.
The Privacy Commissioner of Canada has appeared before our committee on a number of occasions and has offered to act as an independent institution. Would that be a full or partial response to your requests? And, second, in Quebec, the statute that concerns protection of personal information with respect to financial institutions is very stringent, perhaps even more so than the federal statute. Are you demanding that the federal government follow the provincial government's example and implement that kind of statute?
Mr. Savard: There are two parts to your question. For the supervision and regulatory framework of financial institutions, we think the offer that was made to you by the Commissioner could be a promising one. However, for the regulation and supervision of intermediaries within various firms, we think a professional organization should oversee the self-regulation and self-discipline of professionals in a firm within a financial institution or in an entirely independent firm.
Senator Meighen: And provincial?
Mr. Savard: And provincial, indeed. As to the second part of your question concerning Bill 68, the federal financial institutions came and said they did not feel bound by Bill 68 in Quebec. However, they did say they would comply with the spirit of Bill 68. But this is clearly inadequate. The equivalent of the requirements of Bill 68 should exist at the federal level.
Senator Angus: According to you and your colleague, do the problems set out in the Black File occur across Canada or only in Quebec?
Mr. Savard: The problems are the same across Canada.
Senator Angus: Despite the various jurisdictions?
Mr. Savard: Despite the various jurisdictions. The insurance products distributed in the financial institutions seem to us to be the same across Canada because there was a desire to simplify the purchase of those products. Rates are not scaled or people's eligibility is not reviewed on health grounds. There is no risk selection at the time of purchase. A selection is made at the time a claim is made merely for convenience's sake. Insurers in Canada do not know the customers in the financial institutions. Only when a claim is filed are they informed that the customer, for whom premiums have been sent on a monthly basis, are not known... The insurer does not know its customers. It is not until a claim is filed that it conducts an analysis to determine whether that customer is eligible or insurable.
In cases in which the amount of the loan is greater than $100,000 or $125,000, the review is conducted immediately. As the average amount involved in mortgages in Quebec is about $40,000, this is never checked at the time of purchase.
Senator Angus: Could you file a copy of this Black File?
Mr. Savard: It would be our pleasure.
[English]
Senator Stewart: I assume that the black file comprises a set of cases in which the problem to which you have been referring appears. Is that correct? Are all those cases in one province, namely, Quebec?
Mr. Savard: Yes.
Senator Stewart: They are? But you argue that the same kind of problem would arise in New Brunswick or in Ontario.
How did you become aware of these specific cases? Was it because of the court action?
[Translation]
Mr. Savard: As we are a consumer protection organization, consumers frequently come to us when they have problems with their insurance. The file initially came to us and we then made checks in the various financial institutions to determine how this insurance purchase had proceeded. We even saw officials in the financial institutions distributing pamphlets of insurance companies that had gone bankrupt two years earlier and they presented them as the insurer of their group plan. The information that was distributed to consumers was inadequate and some officials were even unable to calculate the premiums, even two different branches of the same financial institution and with the same plan. They came to different results. There was no kind of standardization from branch to branch, even for the same insurer.
For starting the investigation, we subsequently checked with the courts to see how widespread the situation was and, at two courthouses, in Quebec City and Montréal, we noted several hundreds of cases. In addition, we know from another study that, when consumers have problems with financial institutions, only 10 per cent seek remedy. We find this more troubling because this gives an idea of the scope of the situation, which should be stopped very soon.
[English]
Senator Stewart: Were the financial institutions involved in these cases in many instances the major Canadian banks?
[Translation]
Mr. Savard: There was not necessarily any difference between the situations experienced in the caisses populaires and the major Canadian banks. We found the same situations in the financial institutions, the major Canadian banks and the caisses populaires. Of course, in Quebec, the caisses populaires have approximately 45 per cent of the mortgage market. So it was normal for us to find more cases in dispute in the caisses populaires, but, on a proportional basis, this was entirely normal: we found just as many in the banks visited.
[English]
The Chairman: Thank you very much, Mr. Savard and colleagues, for appearing here today to give us your views. Perhaps you can leave a copy of the black book with us at this time.
Our next witnesses are from the Canadian Institute of Actuaries. Mr. Panjer, the president, will make the presentation, but he has several other actuaries with him. Thank you very much for coming here today.
My colleagues will recall that your organization has testified before us on a number of occasions. I remember a lengthy discussion we had with members of your organization about dynamic solvency testing approximately one year ago.
Please proceed.
Mr. Harry H. Panjer, President Elect, Canadian Institute of Actuaries: With me today from the Canadian Institute of Actuaries are Ms Claudette Cantin, Vice-President responsible for property casualty insurance matters and a member of the task force an insurance legislation; and Mr. Morris Chambers, Chairperson of the Task Force on Insurance Legislation, whose task force prepared our submission on the June 1996 white paper. We appreciate very much our continued involvement in commenting on the proposed legislation relating to insurance matters.
Our response highlights several areas relating to the role of the actuary. Specifically, I should like to highlight four items, and then Mr. Chambers, the principal author of the brief, will provide an overview for the committee.
The four key items in our response relate, first, to the role of the actuary in providing opinions; second, to the role of the Canadian Institute of Actuaries in being consulted in connection with amendments to legislation for fraternal benefit societies; third, to some specific technical matters in the brief relating to such items as prepayment of mortgages, definitions of reinsurance, and reinsurance with provincially licensed companies; and, fourth, disclosure of information on a confidential basis to the Canadian institute's discipline process which polices professional activities of the actuarial profession. This issue may also apply to other professions with responsibilities under the legislation. We will focus on our own responsibilities under the legislation as professional actuaries.
Mr. Morris W. Chambers, Chairperson of the Task Force on Insurance Legislation, Canadian Institute of Actuaries: Once again, thank you for providing the opportunity for the Canadian Institute of Actuaries to appear at these hearings with respect to the Department of Finance's white paper.
Our written submission in this report is not lengthy, and it confines itself to aspects of the white paper that are of particular interest to, or fall within, the expertise of the actuarial profession. For that reason, most of our submission addresses the elements of Annex B of the white paper.
I should begin by expressing our appreciation that, as we understand it, several of our earlier suggestions will be incorporated in the Insurance Companies Act changes to be introduced next year. Some of these are relatively minor and technical in nature and have not warranted identification in the white paper. Nevertheless, we look forward to our opportunity to review and comment on the specific wording that will be proposed for these amendments to the act.
We are gratified that the white paper does highlight the intention to simplify the manner in which the act presents the definition of "actuary" as we had suggested.
On two particular matters, the white paper identifies the intent of the regulator to consult with interested parties to develop appropriate amendments to the legislation. These are, first, criteria governing exemption from ministerial approval of certain transfers of business; and, second, amendments to provisions of the act related to fraternal benefit societies. The CIA has registered its desire to be considered an interested party in these consultations.
There are three areas of the proposed amendments where the institute believes that a formal actuarial opinion is an important complement to regulatory review of proposed action. The first is with respect to the fairness of the methodology for allocating earnings and expenses between policyholders and shareholders where mutual companies have raised equity capital. The white paper has identified the need for the actuary's opinion in such instance and the institute supports this position. It is consistent with other elements that already exist in the act. In addition, the institute believes that similar actuarial opinions should be required to accompany applications for certain transfers of funds from participating accounts and applications for transfer of Canadian business of foreign companies.
As stated in our brief, we support the white paper initiative with respect to the rights of borrowers to repay mortgages. However, we urge that in developing standardized prepayment penalties, proper recognition be given to the economic loss suffered by the lender as a result of the early repayment of the loan and, in particular, to recognize the time value of money in that regard.
Finally, I should expand somewhat on the proposal made on page 3 of our brief under the heading "Confidential Information".
The white paper identifies the intention to add provisions to the legislation that would allow the superintendent to disclose otherwise confidential information to law enforcement agencies during the course of an investigation by such agency. Under the 1992 Insurance Companies Act, a number of significant responsibilities have been placed upon the appointed actuary. Some of these responsibilities are regulatory in nature. Indeed, some would argue that the nature of the legislation is such that the appointed actuary, in certain circumstances, almost becomes an agent of the regulator.
The institute believes that this aspect of the legislation has been adopted because there is a degree of confidence on the part of regulators and legislators that the CIA has adopted rules of professional conduct and standards of professional practice that justify that confidence. However, for those rules and standards to have force and power, they must be enforced. Consequently, the CIA, recognizing its responsibilities in this regard, has adopted a strong professional discipline process to ensure that its members do operate within its standards and observe its rules.
That discipline process is as much a law enforcement agency, within the context of professional rules and standards, as are public law enforcement agencies in the context of the law of the land. Therefore, in the interest of ensuring that the actuarial profession is able properly to serve the Canadian public and is able to live up to the expectations and challenges of the responsibilities given to actuaries in the Insurance Companies Act, the institute requests that the provisions which are being considered be extended to allow the superintendent to disclose information to a properly constituted investigation team of the Canadian Institute of Actuaries during the course of an investigation of the professional conduct of a fellow of the CIA in respect of that individual's professional responsibilities under the act.
I hope that provides some background about the motivation for us making that proposal in our submission.
You have received our brief, and we would being most pleased to respond to any questions you may have.
Senator Kolber: I do not know much about the actuarial profession. Do most work for insurance companies, or are they self-employed?
Mr. Chambers:Traditionally, life insurance companies -- that is, in the distant past, depending upon how old you are -- have been the principal employers of actuaries. More recently -- for example, in the past two decades -- the numbers have tended to even out. There is a relatively even split between consulting actuaries and insurance company actuaries. The insurance company actuaries are split into property, casualty and life practices. On the consulting side, there is a split between consulting to insurance companies or consulting to pension plans. More recently yet, actuaries are getting more involved in investment activities and asset liability management, both in insurance companies and in a broader aspect of finance matters. As Mr. Panjer will attest, a significant number of actuaries, at least in profile, are employed in academia.
Senator Kolber: Why are you commenting on the prepayment of mortgages?
Mr. Chambers: Because in a life insurance practice, life insurance companies undertake long-term liabilities, particularly in respect of issuing contracts for annuities, for example. In order to ensure that they can meet those obligations, the money that they take in as premiums must be properly invested.
Senator Kolber: That is the life insurance company's problem. Can you get a house mortgage today of more than five years?
Mr. Chambers: No, you cannot.
Senator Kolber: What is the problem?
Mr. Chambers: The life insurance company must know what risk it has out there and, to the extent that there is an additional risk of losing money as a result of an inappropriate prepayment clause in the mortgage, then that must be taken into account initially and will ultimately increase the cost to those who do not intend to prepay the mortgage early.
Senator Kolber: But will not life insurance companies have to adjust and fund in accordance with what their actual actuarial liabilities are? If they are funding or selling annuities -- and you say that there must be an income stream so that they are guaranteed for 25 years against the liability on the annuity -- surely they can buy long-term government bonds, or something.
Mr. Chambers: Oh, and not provide a competitive interest rate?
Senator Kolber: That may be, but that is the government's problem if that is what they want you to do.
Mr. Chambers: But other institutions selling the same kinds of products are not constrained in the same way.
Senator Kolber: What do you mean by "constrained"? How are they funding it?
Mr. Chambers: They do not have the same obligation to have their liabilities attested to, if you will, by an actuary.
Senator Kolber: What does "attested to" mean?
Mr. Chambers: A life insurance company or a property casualty company must provide an opinion of the company's actuary that the liabilities are appropriate to the circumstances of the company, recognizing all the risks both on the asset side and the liability side. No such responsibility is given to anyone on the side of deposit-taking institutions, for instance, which are also selling similar types of products.
Senator Kolber: You lost me, but I assume you know what you are saying.
If you look back historically, is it not a fact that the real estate business in North America would not have existed if there were no insurance companies?
Mr. Chambers: No.
Senator Kolber: I mean the real estate business as we knew it. How would you get a 25-year mortgage if people were not selling traditional life insurance because they knew they would get an income stream that they had to guard against? All we ever did in the real estate business was discount pieces of paper from Woolworth's, and others, against a 25-year mortgage. How else could we have existed?
Mr. Chambers: I would agree that the development of the life insurance industry and the development of long-term mortgage capabilities in North America have developed in concert and have helped each other, but I think it is an unnecessary hypothesis to suggest that one could not have existed without the other.
Senator Kolber: Are you not arguing against yourself a bit here? You say you need the certainty of long-term mortgages in order to protect your liability against annuities.
Mr. Chambers: I did not say that we need the certainty of long-term mortgages.
Senator Kolber: Long-term paper and government bonds do not pay enough.
Mr. Chambers: Our brief suggests that in establishing a standardized prepayment penalty, a requirement that the determination of what that prepayment penalty is should take into account what the economic loss will be to the lender. That should be properly recognized so it does not create an inappropriate prepayment or a prepayment penalty that will potentially result in an increase in costs to all consumers of the product.
Senator Kolber: You are saying that if the government insists on that, you will have to raise the cost of mortgages.
Mr. Chambers: That may well be the result.
The Chairman: On page two of your brief, you comment, not surprisingly favourably, on the recommendation on page 32, which is a technical recommendation that defines an actuary henceforth to be a member of your association. Recipients of monopoly powers are always delighted to get them. What was the definition before?
On at least two occasions in the last ten years, this committee has been asked by the Canadian Institute of Chartered Accountants to deem similar monopoly power on them vis-à-vis a variety of conditions in various acts, and we have steadfastly refused to do so. Who is losing out as a result of you being officially named the monopoly purveyor of actuarial services?
Mr. Chambers: The reality is that no change results. The Canadian Institute of Actuaries is the national organization of actuaries in Canada. It is the only recognized actuarial organization in Canada.
The change that we had proposed was not to change the effect. The existing legislation required that the actuary of the company be a fellow of the Canadian Institute of Actuaries. However, as a result of an early oversight in drafting, the legislation had been drafted in such a way that it became very circuitous to come to the conclusion that that was the requirement. Within the legislation, it meant that that definition was repeated three or four times. As you will find in the Hoyt paper, there is a suggestion that certain elements be dropped later in the legislation. They can be dropped because the central definition has been brought forward into section 2, which states that an actuary is a fellow of the Canadian Institute of Actuaries. The effect with respect to who can do the job has not changed one iota. It is a simplification of the legislation.
The Chairman: It is merely a clarification but does not change the status quo for anyone.
Mr. Chambers: That is right.
The Chairman: On the bottom of that page, you refer back to a recommendation that you gave us approximately one year ago, which was your proposal that under the Winding-up Act, if a block of insurance of a company being wound up is already being reinsured by someone else, that reinsurance should stay in effect in the process of going through the winding-up transaction. Could you enlarge on that for us? I will tell you why.
The amendments to the Bankruptcy and Insolvency Act are working their way through the House of Commons. We will be spending a substantial amount of November and December on that issue.
While the Winding-up Act is not directly and specifically involved, it would be helpful, I think, if we understood that issue and whether or not it is an issue we ought to deal with in the course of dealing with the proposed amendments to both the Bankruptcy and Insolvency Act and the CCAA.
Mr. Chambers: I will try. This aspect of the brief is not my specialty.
Essentially, the issue is that the reinsurance business is founded on a lot of trust, expectation, word of mouth and gentlemen's agreements, in many respects. As the legislation now is or has been implemented in one particular case, to have reinsurance agreements ignored and abrogated creates an element of chaos in the reinsurance business in the country. This creates a problem for the future of reinsurance within the country.
The Chairman: That change is essentially an obligatory change on the part of the reinsurer. You are saying that the reinsurer cannot back out. Do you know if that change can be achieved by regulation, or does it require legislation? I realize you are not a lawyer, but I thought you might know. It would help if you could give us a definitive answer in the next couple of weeks.
Mr. Chambers: We can certainly provide an answer. One of my colleagues who was here on a previous occasion and is known can certainly put that together and would be eager to do so.
The Chairman: If it requires legislation, does the change need to be made to the Winding-up Act, or can we do it at the same time that we do the Bankruptcy and Insolvency Act this fall? I ask that because I have never completely understood where the dividing line is between one and the other.
Mr. Chambers: I am afraid you are entering into legal waters.
The Chairman: I realize that, but can you provide us with that answer at the same time?
Mr. Chambers: Of course.
The Chairman: Those two answers would help us.
Mr. Chambers: It is my expectation that the matter can be dealt with by regulation and need not be dealt with by legislation, but that is just a superficial, initial comment on my part.
The Chairman: We are asking your lawyers to help us with the correct process.
I have one last comment with respect to the point you stressed of confidential information and having your disciplinary committee make that information available. It is nice to see a disciplinary committee of a profession opening itself up to ensure it has all of the information required when it is undertaking that kind of a disciplinary hearing. I would certainly support you in that regard.
Mr. Chambers: The process we are talking about is itself a confidential one and that concerns on the part of the regulator with respect to confidentiality will be preserved in our disciplinary process.
The Chairman: Thank you for appearing today. We will be seeing you again when we get to our hearings on the task force report, but probably sooner than that. If you have any comments on the legislation when it comes forward in January or early February, we will expect to hear from you at that time.
Our next witnesses, honourable senators, are representatives of three companies which have a fairly similar problem -- Beneficial Canada Inc., Avco Financial Services Canada and Household Financial Corporation.
As I understand it, all three of you are concerned about the proposed changes with respect to retail funding. Norwest Financial deliberately left that issue to you.
Please proceed.
[Translation]
Mr. Jean Bédard, Vice-President, General Counsel and Secretary, Beneficial Canada: Mr. Chairman, it is my pleasure to introduce my colleagues from the other member companies of the Association of Canadian Financial Corporations. Ms Diane Wolfenden is Director, Communications and Community Relations, Avco Financial Services Canada.
[English]
Scott Furlonger is Vice-President and Controller at Avco. To my left is Terry Cretney, Treasurer of Household Financial Corporation.
By way of background, our three companies are members of the Association of Canadian Financial Corporations. We have had a significant presence in Canada for quite a while. We gathered some statistics before we came here. Household has been in Canada since 1928; Beneficial has been in Canada since 1934; and Avco has been in Canada since 1954.
Without speaking for the other member companies of the ACFC who are not in front of you at the moment, our three companies collectively have in excess of 400 branches in Canada and employ in excess of 2,400 Canadians in our Canadian operations. We have been in Canada for quite a while and have what we hope you will consider a substantial presence in this country. As well, we have $5.5 billion in total assets and serve something like 1.7 million Canadians through the general membership of the association.
[Translation]
Mr. Bédard: Before starting our presentation, I would like to mention that we divided the work among the various presenters and, as a result, some of us will make presentations on different points. However, as we are here to represent individual companies, we may state a given point that is reflected by certain views other than the point of view of our own company.
[English]
I would ask Mr. Cretney to introduce the first topic on the definition of banks and non-banks.
Mr. Terry Cretney, Treasurer, Household Financial Corporation:Mr. Chairman, I would like to thank the committee for the opportunity to join my colleagues from Beneficial and Avco to offer some brief comments on the white paper regarding the federal proposals on financial sector regulation.
Household Finance and its predecessors have been involved in the consumer finance business in Canada for over 65 years. Household is a $2-billion company, with its head office in North York, Ontario, one processing centre in Canada located in Montreal, Quebec, and 55 branches across all 10 provinces. Household employs approximately 700 people throughout Canada and serves more than 600,000 Canadians.
Household's ultimate parent is Household International Inc., a publicly owned, $30 billion U.S. corporation. Household International is defined under the Canadian Bank Act as a foreign bank principally because it owns a small savings and loan and three credit card banks, none of which take retail deposits. Consequently, one of HFC's concerns with the white paper relates to the foreign bank regime.
The white paper, as Household understands it, proposes two regulatory models. One model is for Canadian operations of foreign banks, which are regulated as banks in their home jurisdiction. The Canadian operations of these foreign banks would have to operate through federally regulated institutions. The other proposed regulatory model is for Canadian operations of so-called "near banks", entities which conduct financial services but which are not regulated as banks in their home jurisdiction. The Canadian operation for the near banks would face a lesser degree of federal regulation.
HFC supports the concept of a distinction between banks and near banks and is pleased that the white paper makes the points that near banks are not banks. HFC is concerned, however, that the white paper does not clearly define the rules which will determine bank and near bank status. It is our opinion that it would be helpful if this could be made clear in the act.
If bank and near bank status is based on parentage, then HFC feels strongly that the characteristics identifying entities as foreign banks should include such things as would signify true commercial banking operations -- a significant branch network, a gathering of retail deposits from individuals, and the offering of transactional products such as chequing and savings accounts. It is our view that if this clarity were brought to the definition of the terms "foreign bank" and "near bank", confusion would be reduced and companies such as Household International would, quite appropriately, be defined as near banks.
That concludes my comments. I will turn it over to my colleague from Avco to talk about retail funding.
The Chairman: Before Ms Wolfenden begins, can I ask you to clarify how precisely the proposals in the white paper change your current status?
Mr. Cretney: The point is hopefully that it would not. There is a lack of clarity in the white paper as to the definition of a foreign bank. We understand and are hoping that we are not a foreign bank; however, we are not 100 per cent certain of that.
Our parent, Household International, is not a bank but it owns banks. In our reading of the white paper, it was not clear whether we would be caught under that because we have some credit card banks which, as mentioned in an earlier presentation, were set up for convenience. They do not take retail deposits, so in many senses they are clearly not banks.
The Chairman: Right now you are in what I would call the unregulated sector in the sense that you are not regulated as a foreign bank or as a subsidiary of a foreign bank. Is that correct?
Mr. Bédard: There is a technical definition of a foreign bank in Canada in the Bank Act.
Senator Angus: You are referring to the present Bank Act and not what is found in the white paper.
Mr. Bédard: I speak of the present Bank Act, yes. However, if we are here today as so-called "foreign banks", then this is the background we need.
That definition, if I boil it down, says that if a holding company somehow, somewhere in the world, has a holding which looks like a bank, walks like a bank and talks like a bank, then by definition in Canada it is a foreign bank, even if the assets portion of that operation is minimal in regard to the total assets of that corporate entity. This is the situation faced by all three of us at the table.
The Chairman: Is that the situation facing you or is that your present situation?
Mr. Bédard: This is the current situation. However, we are saying to this committee that the white paper now proposes a characterization between fully regulated banks and near banks. If we fall within the definition of a near bank, as the white paper currently proposes, then there is no change to our current situation in Canada. However, the problem which Mr. Cretney was appropriately bringing forward to the committee is that when one reads the white paper and knows precisely the situation which brought each of us to be categorized as a foreign bank under the Bank Act, technically speaking, the white paper is not clear on whether we will fall on one side of the track or the other.
The Chairman: Under the current definition, all three of you are classified as subsidiaries of foreign banks.
Mr. Bédard: We are classified as non-bank affiliates of foreign banks.
The Chairman: The problem with the white paper is that it takes that class of people, which includes you and many others, and separates them into two groups. One group will be considered, in some senses, real banks and the others are called near banks. Nothing else has changed.
Mr. Bédard: Exactly.
The Chairman: Your problem is that if you fall into the real bank category, which finding is unclear in your view from the white paper, you are then subject to an non-level playing field with the other firms with which you compete in Canada.
Mr. Bédard: And we would have sat then at 2 o'clock with the other set of witnesses.
The Chairman: If you fall into the near bank category, then in effect the status quo has not changed.
Mr. Bédard: From that standpoint, that is correct.
The Chairman: Now I understand exactly.
Senator Meighen: Under the present legislation, is your position made very clear?
Mr. Bédard: It is not that clear because there are many unwritten rules. The white paper proposals bring some transparency which is, by itself, quite welcome. So far, the legislation would now recognize something called a near bank which is not really a bank, but it provides financial services.
Senator Angus: In other words, it is your understanding that these provisions of the white paper are designed to clarify but in fact they do not.
Mr. Bédard: At the moment, they certainly do not. There are many grey areas which leave a lot of discretion. We would like to see those clarified.
The Chairman: You know exactly where you are presently because you have been regulated that way for quite a while. The problem is that under the new proposal, while there is some clarification for certain institutions, it is ambiguous for you because you are very near to the edge.
It seems you are asking, subject to the comments of the other panel members, that, first, the rules should be crystal clear and, second, that you would fall on only one side.
Mr. Cretney: And that we fall on the side that we have been on.
Mr. Bédard: That is the side we have been on for 60 or 70 years.
Ms Diane Wolfenden, Director, Communications and Community Relations, Avco Financial Services Canada: I will discuss the retail funding provisions and easing the regulatory burden on the near banks.
To give a thumbnail sketch of AFS Inc., our parent, and Textron Inc., our ultimate parent, Avco does not appear to have a problem about where it falls in relation to the definition of "near bank". It clearly looks as though we would be a near bank.
Avco Canada has been controlled by Avco Financial Services Inc., also known as AFS Inc. of Costa Mesa, California, since 1964. AFS Inc. is an international company which serves more than 2 million consumers in 8 countries. AFS Inc. and its sister company Textron Financial Corporation provide commercial loans and leases to businesses in the U.S., Hong Kong, Australia and Canada.
AFS Inc. will celebrate its 70th anniversary in 1997. AFS Inc. and Textron Financial are subsidiaries of Textron Inc. of Providence, Rhode Island. Textron is a global, multi-industry company with market-leading operations in five business segments: aircraft, automotive, industrials, systems and components, and finance.
At the end of 1995, Textron had U.S. $8.6 billion in assets. Some of Textron's companies with which you might be familiar, include Cessna, Bell Helicopter, and Easy-Go Golf Cars.
Avco Canada has about $1.3 billion in assets which consist of consumer, real estate and sales finance loans. We do not take deposits from our customers, and our assets are funded through retained earnings and borrowings on the Canadian capital market, but we have more than $1 million outstanding.
We mainly use two kinds of debt instruments for our borrowings -- medium-term notes and commercial paper. Our commercial paper is issued in minimum denominations of about $1,000. Our medium-term notes are issued in denominations of Canadian and US$5,000. Our investment advisors estimate that as much as 50 per cent of our debt is bought for retail accounts in amounts as low as the limit of $5,000.
The white paper contains a retail funding proposal which would place restrictions on how foreign near banks access their capital markets. We understand that these restrictions would be in exchange for easing the federal regulatory burden on foreign near banks. The reduced regulatory burden would mean that once a foreign near bank has received approval under the Bank Act to enter the Canadian market, no further approvals would be required. This differs from the current system where we have to sign undertakings with OSFI to receive its support, for example, to make an acquisition in Canada. We understand that if this proposal is enacted, we would no longer need to sign undertakings with OSFI as long as our activities remain outside of retail funding. We also understand that any existing undertakings would no longer be in effect to provide a level playing field with new entrants into the Canadian marketplace.
Avco Canada supports the proposal to ease the federal regulatory burden on foreign near banks, except for the definition that we understand is being applied to retail funding.
As we understand it, the retail funding proposal would have a significant cost for Avco Canada. The proposal, again as we understand it, would mean that we would have to issue our debt instruments in minimum subscriptions of not less than $200,000 and with a denomination of not less than $100,000. In other words, this proposal will increase the minimum denominations for our medium-term notes by 2,000 per cent. As well, we understand that these denominations could no longer be broken down for the retail market.
We understand that this proposal is designed to protect unsophisticated investors from buying debt issued by foreign near banks once the federal regulatory burden is eased. Unsophisticated investors have been defined to us as investors who buy investments in amounts of less than $150,000.
This proposal would have a significant impact on Avco Canada's cost of funds. By eliminating 50 per cent of the market for our debt instruments, we have been advised that the spread we pay for our debt over Canadian bonds would have to increase.
In addition to the increased cost that this would impose on Avco Canada, we are not sure why this proposal is needed. Funding activities are already regulated by provincial security laws which are designed to protect all investors. These laws require full, true and plain disclosure by prospectus when debt instruments are issued, subject to exemptions which apply to commercial paper.
These laws also require that securities be sold through investment advisors who are subject to "know your client" and suitability requirements. This proposal would also limit investment options available for individual investors. It would also create an unlevel playing field in that many Canadian and foreign controlled commercial enterprises and many Canadian controlled financial institutions which are not regulated under the Bank Act undertake the same funding activities as we do, and these activities would not be regulated; nor would the funding activities of Canadian banks which are regulated by the Bank Act but which would not be subscribed by this proposal.
In summary, we respectfully submit that the retail funding proposal in the white paper designed to protect investors is unnecessary, unfair to some individual investors, and creates an uneven playing field.
[Translation]
Beneficial Canada has been in Canada since 1934. We have more than 100 branches and offices across Canada. We have 700 employees in the 10 Canadian provinces and we serve more than 350,000 Canadians. We have assets of slightly more than $900 million and, as Ms. Wolfenden mentioned in AVCO's case, those assets are also financed in the public debt market, and Beneficial Canada has borrowed more than $700 million in the public debt markets.
[English]
Beneficial Canada is part of Beneficial Corporation, which is a financial services company with assets in excess of $15 billion U.S. It is listed on the New York Stock Exchange and has in excess of 1,000 branches. Beneficial Corporation operates in the United States, Canada, the United Kingdom and Germany, and also carries insurance operations in Ireland. The Beneficial Canada Group of Companies is engaged in mortgage lending, personal loans and sales finance, including the issuance of private label credit cards to merchants and retailers in Canada.
Other issues I would like to discuss with this committee relate, first, to the Canadian payments system. We know that the Canadian payments system has been carved out of the white paper and handed over to a committee. However, we want to express our disappointment with the piecemeal approach which seems to have been taken in the reform of the system. Particularly, to go back to our earlier discussion on the powers between banks and near banks, we still hope that when discussions take place on the Canadian payments system, near banks are not carved out of the Canadian payments system because we have some issues concerning its current structure.
Those issues relate particularly to the fact that initially, in the late 1970s and early 1980s, when the Canadian payments system came into force, there were two main purposes for it. Of course, it was the clearing system for the deposit and chequing system in Canada. Also, the Canadian payments system received a broad mandate to develop an electronic banking system in Canada, which it did very well. In fact, I think Canada now has one of the more advanced electronic banking systems in the world. However, in the process, members of the Canadian payments system have not only used it to deliver deposit-related services but also a number of credit services. You can now access and get cash advances on your credit card through an ATM machine. This is an access to credit; it is no longer an access to deposit. Likewise, if you have a personal line of credit with a bank, you can write a cheque directly on your line of credit, which would clear through the payments system as if it were from a banking account. Likewise, some banks even offer the possibility to withdraw from your line of credit through the ATM machine. I submit that that is using the payments system for credit granting purposes, or credit availability purposes, as opposed to deposit-taking, clearing cheques and other facilities related to deposit.
We believe from that standpoint that as soon as a category of providers of credit in Canada has access to the means of the payments system to deliver credit products and other providers of credit are shut out of that system, there exists something which is quite far from a level playing field. We want to air that concern and hope that it will be taken into consideration as well when the review of the payments system takes place and when the report comes before this committee in due time.
As well, we want to touch briefly on the cost of credit disclosures. This point is also raised in the white paper. Although we know that this will be dealt with outside of the review of the Bank Act, we still want to air our concern about what seems at the moment to be a lack of real harmonization that will take place, despite the fact that we are calling it harmonization of cost of credit disclosure.
For credit providers that are not banks, this poses a real challenge. We must understand that in Canada we have a system of cost of credit closure in the consumer loan market where the rules are both vertical and horizontal. For instance, loan companies such as the three of us here are subject in each province to the provincial cost of credit disclosure rules. However, banks making the same loan, for the same amount, to the same customer across the street or next door, are subject to the cost of disclosure rules mandated by the Bank Act. They do not have to comply. That would be arguable constitutionally, but the argument has never made it to the Supreme Court. Banks generally take the position that they do not have to comply with the minutia of the provincial cost of credit disclosure regulations.
We already have a situation where there is an unlevel playing field by virtue of the fact that two competitors in the same market, on the same street, do not live by the same rules in terms of the cost of credit disclosure, which has to do with consumer protection.
At the moment, unfortunately, what seems to come out of the discussions of the group about harmonization is that much will be left to individual jurisdictions to do things over and above the minimum that seems to have been set by the harmonization group.
The word "jurisdiction" implies that the federal government will be allowed to go its own way in regulating banks while various provinces will be allowed to go their own way in regulating the lending business that does not come under the purview of the Bank Act. We could have a discussion on why we come under the purview of the Bank Act for some purposes and not others, but that is probably a discussion for another day. We do, however, want to mention to this committee that harmonization should be harmonization. We hope that this will be taken into account.
The right to prepay mortgages also directly affects our member companies. In the case of Beneficial, for instance, 45 per cent of our assets in Canada are in mortgage loans. Although we understand the various consumer protection issues and also the fact that affordable mortgages ought to be made available to Canadians, and we certainly support the concept, we also submit that there is already much competition out there and that many possibilities exist, including the prepayment of mortgages.
Were the government to legislate on the right to prepay mortgages differently than what we currently have in the Interest Act, we submit that the compensation for the funding by the lender should certainly be taken into consideration in any rule.
One last point on behalf of Beneficial and not on behalf of the industry is our struggle as Beneficial with the current prohibition in the Bank Act relating to the so-called dual-track approach where an entity such as Beneficial cannot at the same time own a regulated and a non-regulated financial institution. There have been exemptions carved out in the current Bank Act; therefore, we will not talk about those exemptions. However, there is a principle at the moment that if a foreign bank falls under the technical definition, then you cannot own a trust company and a finance company that would operate side by side at the same time.
We have always been at a loss to understand that rationale, despite several conversations with the regulators. We think that recent developments, particularly the intended purchase of Bayshore Trust by a mutual fund, certainly challenges the principle from the Canadian standpoint.
If that transaction is allowed, where a non-regulated entity -- basically a mutual fund -- is allowed to take over a deposit-taking institution with the declared aim of getting access to the Canadian payments system, we should probably revisit the whole issue of the dual-track approach of ownership of financial institutions, also out of concern for the national treatment under NAFTA and other related foreign trade obligations of Canada.
That concludes our presentation.
The Chairman: Ms Wolfenden, perhaps you could clarify a particular point on the retail funding question. Let me see if I have your numbers right. You said that some 50 per cent of your current access to funds comes from $1,000 to $5,000 units.
Ms Wolfenden: I actually meant $5,000 to $100,000. The medium-term notes are issued in minimum denominations of $5,000 and commercial paper in minimum denominations of $100,000.
The Chairman: Roughly 50 per cent is below the $100,000 figure.
Ms Wolfenden: Right now it can be bought and resold to individual investors in small amounts and broken down into amounts as low as $5,000.
The Chairman: Under the white paper proposal, that will not be allowed in the future.
Ms Wolfenden: That is our understanding.
The Chairman: The consequence of disallowing is that you will need an increase in the spread. I presume you make less money as a firm or you increase the interest rates which you lend to your customers; is that correct?
Ms Wolfenden: Our costs would go up, and we would have to take a look at how we respond to that. I think the conclusions you have outlined are appropriate.
The Chairman: Have you done any estimate of what the increase in the interest rate would be on the loans you give out to people who borrow from you?
Ms Wolfenden: No, we have not, because we have not been able to put a firm figure around how much the spread would increase.
The Chairman: Are we talking one-tenth of 1 per cent? You have to have some rough feel for it.
Ms Wolfenden: We are starting to get into hypothetical situations. I would hate to give you a number which would turn out not to be accurate.
The Chairman: Is the increase marginal or significant?
Ms Wolfenden: We believe the increase would be significant.
The Chairman: I presume you mean the increase in the percentage rate that the people you loan to would have to pay.
Ms Wolfenden: The increase in the spread would be significant. How that would translate into the cost of loans to our customers, we would have to work that through and we have not done that.
The Chairman: At the present moment, most of the people you lend to are not eligible for bank credit.
Ms Wolfenden: We are in the same situation as Trans Canada outlined earlier. We are a niche company. Most of our customers do not have access to bank credit because of their particular circumstances, whether they are just starting out, or they are a higher risk customer, or they have a poor credit history, or they have seasonal employment, et cetera.
The Chairman: To the best of your knowledge, what is the motivation for the proposed change in policy? It is clear who stands to lose. My question is, who stands to benefit? Do you have any understanding of what prompted this idea to be included in the white paper?
Ms Wolfenden: My understanding is that it is a concern about how consumers or how debt instruments are being issued, that the lines are blurring between so-called traditional retail deposits and some of the debt instruments.
There is a concern about protecting the so-called unsophisticated investor; that is, an investor who buys in amounts less than $150,000 and buys instruments from companies whose federal regulatory burden will be eased under the proposals in the white paper.
The Chairman: Concern by whom: the regulator; the Department of Finance; the banks?
Ms Wolfenden: The concern was raised to us by OSFI.
The Chairman: It is a regulator's concern in the sense that in spite of the fact that, as I believe you said, if you do a $100,000 note and it is broken down into 20 $5,000 sub-pieces, that is regulated by provincial securities regulation.
Ms Wolfenden: That is right. Our medium-term notes are issued through prospectus. Our commercial paper is exempt from prospectus by provincial securities law. It is in turn sold by investment advisors to their retail customers, and they are subject to all the provincial legislation and regulation around their activities.
The Chairman: In spite of that level of regulation, there is a concern on OSFI's part that the person purchasing that $5,000 note is, to use your words, unsophisticated and needs help or protection.
Ms Wolfenden: Exactly.
The Chairman: There has been no other rationale put forward for that position.
Mr. Bédard: One point I would like to make at this point is that we are not alone in selling those commercial papers or mid-term notes to the market. If you want to get out of the financial services, Canadian companies such as Canadian Tire, Newcourt and BCE do that as well.
That concern is really a big problem in the financial marketplace. The attempted way to regulate it, through the so-called foreign banks under the Bank Act, is a very inefficient way to do so because it will capture only a portion of those who issue those types of papers. This is one concern that we have.
As Ms Wolfenden indicated to you, all companies issuing those papers at the moment, be they Canadian or foreign owned, do so under applicable provincial securities legislation. Either we do so through sophisticated investors on the exempt market in higher denominations, or if any of us wishes to access the general market, then we must issue a prospectus. This would place us under all the obligations of continuous disclosure and everything attendant to being a public issuer in Canada, including disclosure of our salaries.
The Chairman: Can you give me a rough estimate of what percentage of the $5,000 note market will be picked up by the proposed changes versus the percentage that you said is done by BCE or Canadian Tire and thereby not picked up?
Mr. Bédard: According to the numbers we have been given by the dealers' community, foreign near banks, which number more than the three companies at this table, have about 50 per cent of the market.
The Chairman: At best, the proposed change picks up 50 per cent of the market.
Mr. Bédard: Yes.
The Chairman: The other 50 per cent continues under a different set of rules.
Mr. Bédard: Under no rules.
The Chairman: We will protect 50 per cent of unsophisticated customers but not protect the other 50 per cent.
Mr. Bédard: Yes. That is taking the assumption that the current securities laws in the province do not adequately protect them. That is a broad assumption, Mr. Chairman. I call it a solution in search of a problem.
Senator Stewart: The last comment about "a solution in search of a problem" is exactly on target for my question. Is there evidence that this so-called unsophisticated investor needs the kind of shield that the proposed change in the law would give? Have there been many cases where unsophisticated investors have lost their money?
Mr. Cretney: I do not think anyone has lost money investing in medium-term notes or commercial paper of the companies sitting here. I can think of a few depositors who have lost money in banks, but I cannot think of any who have lost money in our companies.
Ms Wolfenden: We posed the question to our investment advisors and that is the answer they gave us as well. They were not aware that anyone had lost money.
Senator Angus: To be absolutely clear, without your parentage, you would be unregulated.
Mr. Bédard: Yes.
Senator Angus: There are other finance companies around, apart from the BCEs and Canadian Tires of this world, that are unregulated; is that correct? I am going back a few years to companies such as Premier or Atlantic Acceptance or Union Acceptance. Were they analogous? They were widely held.
Mr. Bédard: Senator, when you talk about Atlantic Acceptance, I think I was 11 years old when they went under.
Senator Angus: You did not read the report?
The Chairman: Senator Angus was practising law at the time.
Senator Angus: Are there others?
Mr. Bédard: There are certainly other finance companies, if you use that term globally to include commercial financing. Newcourt is one example. However, when we speak about Canadian Tire Acceptance, they also issue MasterCards. They do more than just retail financing for Canadian Tire. If we want to use the term broadly, some Canadian finance companies are out there. There are not only the foreign-owned companies.
The Chairman: If we sound sort of puzzled, it is because we are groping for a rationale, which it seems to me we have not found. We will deal with that problem in our own way.
We appreciate very much your taking the time to appear here and for giving us an explanation of the problem. It was extremely clear.
Our next panel have all been before us before. We have from the Canadian Association of Retired Persons, Ms Lillian Morgenthau, the president. From One Voice -- the Canadian Seniors Network, we have Robert Armstrong from the Issues Committee, and Andrew Aitkens, the director of research.
Please proceed.
Ms Lillian Morgenthau, President, Canadian Association of Retired Persons: Originally, CARP was supposed to be on at 11:30 in the morning, and we were shifted to 4:30 in the afternoon. I do not know whether it is better for CARP to be the appetizer for lunch or for dinner, but I presume that we will manage to get through our presentation.
The Chairman: Thank you very much. Would you like to go first?
Ms Morgenthau: Yes. I sent you a brief.
First of all, it is nice to see some faces I remember and to see some faces I do not remember. My name is Lillian Morgenthau and I am president of the Canadian Association of Retired Persons, CARP.
CARP is a national, non-profit organization with over 230,000 members across Canada 50 years of age and older, retired or not. CARP receives no funding from any level of government, ensuring its impartiality and its independence. I am here to speak on behalf of our members -- seniors and, of course, mature Canadians -- all of whom are consumers in the financial sector. Indeed, I represent the general consumer perspective on the issues before this committee. I thank you for the opportunity to appear before you again.
We have a number of issues to discuss. The privacy safeguards are something that we discussed in our last brief. In this brief, the issue is even more important. We are saying that the consent of consumers must be obtained if personal and private information is to be used for a purpose not originally intended. That information must not be disclosed to outside parties.
We receive letters all the time and we grow at approximately 100 members a day. Our renewals are approximately 90 per cent. The letters we receive tell us what the population of Canada really thinks about what is occurring.
We have letters from our members who say that they have received all kinds of mail from banks and that the only way they know the mail is from banks is because of the way it is addressed. In other words, they only use that particular name in their banking. That particular information is coming through in other areas and it should not. Privacy is being violated and confidentiality being thrown out the window.
Senator Angus: How do you recruit your members? Whose list do you sneak on?
Ms Morgenthau: It is a very simple thing. We do not advertise. It is all done by word of mouth. If you are 50 years of age but not a member of CARP, it is too bad for you.
Senator Angus: Why does the name of your organization say "retired"?
Ms Morgenthau: It was a mistake when we took the name. It is one of the things we should not have done. We are really for anyone over 50. If you are not over 50, we have now started an association for baby boomers. Of course, you could not be a card member, so we presume that you will join the baby boomers.
Senator Angus: In other words, it is by word of mouth. I am waiting to hear the evidence that you will give us. Do you also have some lists which allow you access to these people?
Ms Morgenthau: It is all word of mouth. Anyone who joins CARP is happy with it. We have a phenomenal paper that has won four international awards. We send it out free to our members. Our cost of membership is $10 per year for member and spouse. Therefore, I expect every one of you to become members.
CARP supports the announced intention by the Honourable John Manley, Minister of Industry, to introduce privacy legislation for the private sector, which must include the financial sector. Although the Canadian Standards Association, working with the financial industry, has developed a new model code for the protection of personal information, which has been adopted by that industry, the code is voluntary and self-regulating. In other words, if they do not want to follow the code, they do not have to follow it. We are saying, "Here you are. You do not have to be elected. You are in there. Let's do it right. Let's make sure that if you put your name in that you do not get your name bandied about."
In 1995, the federal government amended the Old Age Security Act with respect to privileged information. This enabled the federal government to provide provincial governments with personal information on a recipient of Old Age Security. In this way, Ontario was able to use that to obtain information which was really none of their business.
With respect to the cost of financial services, CARP supports the proposal that the government should work with banks, trust and loan companies to simplify and improve dissemination of information on fees. It is difficult for consumers to do comparison shopping, ensuring that they are comparing apples with apples. CARP would like to see simple comparative data on service fees made available to consumers. To this end, CARP endorses the efforts by MP Roger Gallaway to have a consumer advocacy board -- a board on which I would like to sit -- established to provide comparative information on bank credit card rates and service fees, as well as undertaking research and lobbying on behalf of consumers. We believe, however, that the jurisdiction of this board should include trust and loan companies, that it should be funded by the banks and loan companies, and that it should be at arm's length from government and industry. In short, the board should be independent and self-sustaining. Banks must inform consumers about it as well as how to join. Membership must be free. This would ensure that the annual statements of banks would include the amount in percentage of income they derive from service charges.
With regard to service fees, CARP believes that service fees should be reduced as overhead is reduced through cuts in staff and moves toward increased computerized banking. Many seniors do not wish to use computerized services because they prefer a human being. They would like to talk to someone. You cannot talk to a machine.
Even John McCallum, Chief Economist of the Royal Bank of Canada, was recently quoted as saying that the banks could spur job creation by reducing their profits.
Reduction in service fees should especially be applied to moderate and low-income seniors whose incomes have been severely reduced either from investments because of low interest rates or from pensions because of clawbacks. Both these factors have been especially hard on the 46 per cent of seniors who, according to Statistics Canada, have an annual income of less than $20,000.
In regard to availability of financial services, we support the proposal that the government should work with consumers, community groups and financial institutions to develop and implement strategies to improve access to financial services for low-income Canadians. We recognize that the financial industry has no social responsibility to low-income Canadians. Their major responsibility is to their shareholders. At the same time, it is in the financial self-interest of the financial industry to ensure that low-income Canadians have access to their services. The volume of low-income Canadians make it acceptable to banks to continue to give them good service. We do not all have $500,000 that we can take into a bank. Many of us who have under $20,000 still use bank services. They should not be subjected to the bank charges that are around everywhere.
With regard to tied and cross-selling of products currently marketed by financial institutions, as banks continue to increase their power this issue becomes more and more serious for consumers. Banks are expanding their horizons into other financial areas by taking over independent brokerage houses. For instance, Midland Walwyn is one of the three independent brokerage firms left. Demanding entry into insurance and car leasing will result in greater oligopoly.
If the banks continue to buy up trust companies, brokerage houses and insurance companies, they will expand to such an extent that they will be telling the government what to do instead of the government telling them what to do. A conflict has already arisen. It is our feeling that the consumer is being lost in all these mergers.
Competition certainly will be reduced, if has is not already been reduced. It certainly may even be eliminated for practical purposes. Whatever happens, the power of the banks will be increased even more. Having the power to grant credit and to approve loans at their discretion, combined with the ability to invest people's money in investment and RRSP accounts, creates a situation in which banks can readily abuse their power to coerce consumers into tied or cross-selling of products they market. For example, banks could force consumers to move their investment accounts to a bank brokerage house in exchange for being approved for a loan.
If any of you were watching CPAC two nights ago, you would have seen the president of a top window products company discussing this very thing. She has a company with sales of over $3 million. She wants to expand. She went to the bank in order to finance her planned expansion. She wanted very little compared to what her assets were. The banks insisted that all her assets of $3 million be collateral, as well as her personal residence. The interest they were going to charge her was more than it should have been. This came out of CPAC. One of the committee members, a businessman, said at the time, "I agree with you. I had the same experience."
I understand that the Canadian Bankers Association said this was a myth. This is not a myth; this is a reality. When you go into a bank today and go up to a teller, if you have anything in your bank account, they will say to you, "Well, you don't want to leave it at this little interest. Why don't you put it into this bond fund." I do not think I have ever gone into a bank where they have not approached me for something else.
Cross-selling -- if there were one-stop shopping such as insurance and brokerages and everything else that is in a bank -- should not be allowed. There should be competition; there should be freedom. If you want a loan on a car, you should not be told that you have to take your insurance out with their company. There should be freedom of choice, and there should be definite regulation for small businesses. If you read the statistics, small business is the way that jobs are being created today.
I have an amendment which I will give to the clerk of the committee to put in with my brief.
As to the right to repay mortgages, mortgages are held by consumers. They have a right to repay their mortgages. The lender has a right to get a return on his lending of money. There should be a balance. If a lender has a mortgage for one year, let us presume that that money is well set up. There should be a penalty, but it should not be the whole five years. The penalty should be perhaps three months worth of interest.
I was writing in The Toronto Star on mature residential buying and selling. I have a background in real estate. When we had mortgage rates of 12 per cent, 14 per cent or 21 per cent and the rates were coming up, you could not get rid of it. You were stuck. Many banks refused to allow you to do it. If you sold your house, you could not get rid of the mortgage. You had to pay the full rate or a year or six months. I have seen it. Three months interest is quite sufficient. You can reinvest your money. The poor guy who has the mortgage cannot get rid of it, and that is not fair.
With respect to the regulation of financial institutions, legislation currently under review focuses on ending federal regulation of provincial credit union centrals. CARP agrees with any effort to reduce and eliminate federal-provincial overlap and duplication. At the same time, we believe in the maintenance of national standards and in monitoring and enforcement through a centralized system. Accordingly, CARP supports the establishment of one national security exchange commission to protect investors and maintain high standards and confidence. We believe that strict regulation and monitoring of the financial industry must be undertaken by an agency outside of the industry. Self-regulation should not be an option.
With respect to self-dealing regimes, CARP supports the introduction or enhancement of controls on transactions which take place between a financial institution and persons who are in a position of influence over or control of that institution. We agree that the operations of the conduct review committee of the board of a financial institution should be streamlined.
We would like to see a narrowing of the range of related parties in the operation of financial institutions in order to prevent passing of the buck in accountability. Accountability must be directly related to the principal decision-makers in federal financial institutions in which subsidiaries transact with each other. We do not want the CEO or the vice-presidents to say, "Well, I did not know", and get promoted while some poor guy underneath gets fired. If he does not know, he should know. I am not talking about General Boyle here.
With respect to subsidiary requirements, CARP is very concerned about the government's proposal to permit financial institutions to carry on both information processing and specialized financial activities in-house rather than separately through subsidiaries to separate core activities of different types of financial institutions as well as risk containment. What is defined as specialized financial activities? Is this a back door or a thin edge of the wedge to allowing banks to enter directly into other financial sectors such as brokerage, car leasing, and insurance? If so, say so. Let us know what you are really doing. Do not introduce such an important policy direction by stealth. If so, we are totally opposed to this development. As previously noted, this development will lead to greater concentration and oligopoly.
As to further reducing and inhibiting competition and choice amongst customers, the example of the deregulation of the telecommunications industry demonstrates the great difference between the theory and practice of competition in the current economic order. Even more financial power will accrue to the fewer and eventually fewer as a result of mergers. Jobs will be further reduced. Allowing this development will serve neither consumers nor workers. It will create a scenario in contradistinction to the government's policy of turning over the creation of jobs to the private sector.
With respect to the deposit insurance opt-out -- and we discussed this at one of our meetings -- we do not agree that you have to lower it. We would like to see it the same as the United States where it is $100,000. I will not delve into that because we did it already, and we are short on time. That is wrong. We should have had lots of time. You know I need lots of time when I am talking.
With respect to foreign banks, our observation on this item is to recognize that this provision is in accordance with NAFTA and the World Trade Agreement. However, foreign banks operating in Canada as banks or near banks must be regulated. While entry by foreign banks will expand competition, the danger still exists that foreign banks could gobble up Canadian banks. Therefore, our Canadian economy could fall even more under the domination of foreign interests. Accordingly, legislation should be passed to prevent foreign banks from buying a majority interest in Canadian banks, which must be owned by Canadians.
CARP supports the revisions proposed in the corporate governance section.
The Chairman: I am concerned because you have been talking for 25 minutes, and we still have to hear from Mr. Armstrong. We want time to ask you a few questions. Would you comment on your RSP addendum, and then we can debate that with you afterwards. It is on page 9.
Ms Morgenthau: That is where you and I have gut feelings and women's instincts. You reported that a 20-per-cent cap on foreign content for RRSPs should be extended, although you did not say to what level, and that is where we are. Extending the cap must be given very careful consideration. If an increase is adopted, it must be small and carefully controlled because of the precedent it will create to increase the cap even more. It should be gradual.
Money has no borders. It will go wherever it can make the most interest. If we are not careful, Canadians, who are more sophisticated today and follow the stock market, Wall Street, and everything else, will find where they want to put their money, and it will not be in Canada. Canada will have to complete to ensure that if Canadians are to keep Canadian money in Canada, it better be a good deal. That is all I am saying. We are not against raising it, but we are concerned to what level it will be raised and how you will do it.
Mr. Robert Armstrong, Member, Issues Committee, One Voice -- The Canadian Seniors Network: I am a member of the issues committee, which is approved by the board of directors. I am not a board member, but there are board members on the committee.
Usually, I would be accompanied by Andrew Aitkens, who is known to you, but he is ill today and cannot be here.
One Voice represents seniors in a variety of situations with respect to the prescription drug and the patent issue, generic drugs, and abusive older people -- either by financial institutions or in homes. We are concerned about transportation and safety issues. It is a wide ranging umbrella organization. Previously, it has been funded generously by the Samuel and Sadie Bronfman Foundation but, unlike my friend, we do not seem to add to our members as rapidly. We should like to pass the word today that we are open for members.
Senator Angus: What are the criteria for membership?
Mr. Armstrong: An interest in your future.
We will address ourselves to chapter 2 of the white paper, strengthening consumer protection.
Privacy is almost a philosophical issue in many ways. It is one's sense of self, playing the role of one's life as distinct from the state, which is public. Here we are speaking of "private" privacy -- that is, the private sector protecting privacy. We support the moves which are envisaged. If you have lived in Ottawa long enough, you know that privacy is an elusive commodity.
We also understand that seniors cede privacy in their dealings with financial institutions. It is called "leverage" and seniors do it all the time, but it upsets them if the disclosure goes to another institution with which they do not wish to deal. However, at this moment privacy is not an overwhelming issue for seniors.
This is very political, but I am the political voice of One Voice. The concern amongst seniors is the fragility of both the country and our institutions. That is the issue for seniors. They are very frightened about Canada and where it is going. Seniors value stability, predictability and security, and they fear the opposite. They see sudden change as unsettling. As a group or category, they feel that their privacy has been intruded upon by government itself -- and that is an irony, is it not -- in a way that the private sector cannot. Such an intrusion is direct age-related policy and income-tested benefits. That is an intrusion on the privacy of seniors.
With respect to the cost of basic financial services, we are willing to give the banks an "A minus". We do not pay very much in the way of basic charges. I cannot say that I am being charged to death by my bank. That is not true. They remind me every month of how much I am not paying, which is interesting, but the fact is that I am not paying.
With respect to the availability of basic financial services, we have been asked not to address marketplace rigidities, and we will not. However, the limitations on some institutions with respect to life annuities should be examined.
With respect to services, we should like you to enlarge your notion of that. Seniors are not first-time bankers or last-time borrowers. The press used to fill an important role in providing us with information. The Montreal Gazette, in particular, had a column by John Archer appearing on the third Saturday of each month. It was a question and answer column on annuities and RRIFs, but it no longer appears nor do the tables appear for annuities and RRIFs. A very valuable service was being rendered, but it is no longer provided.
The banks try to give you information -- and, this involves the same institution. With respect to the age change, they said that the most striking change as a result of the recent federal budget was the change to 69 from 71. They put a new spin on it three months later when they said that it means that you will start enjoying the fruits of your labour two years earlier than you once thought. We do not need the sugary stuff. The first statement was accurate. It was a striking change, if not startling.
What seniors need in the marketplace is advice that is informed, timely, free of bias and honest. Seniors will, and are, making decisions earlier than some thought because of that age change, but I can see that they would have had to make them sooner or later.
The day's evidence shows you how complex this whole field is, and, over and over again, one is struck by the complexity of the issue and the presentations of witness after witness. I have had a great day of learning, and I thank you very much.
As well, the product range is complex and the choices are not simple. Some decisions seniors are faced with are irreversible -- that is, if they go on the annuity track. The range of choices, for example, include GICs, mortgage-backed securities, Canada's savings bonds, RRIFs, annuities, mutual funds and reverse mortgages. One problem is that the banks have laid off people heavily and there are not as many people there to give the advice that seniors need.
I want this committee to expand its role. We are not getting enough parliamentary time as seniors. While fully respecting the rights of the House of Commons and without trenching on their historic powers -- I once did a thesis on the Standing Committee on Public Accounts when Mr. McNaughton was the chairman and they changed the rules -- and because you cannot alter financial measures, you could find a way to hear seniors out on matters of concern. At least you could say informally to some people some time, "That is not a good idea." Be the sober second thought that you are said to be.
The budget has been used to effect major changes in the retirement income system, and the financial institutions are enforcing it. That is the link. Seniors have no effective input into the process. The kind of take it or leave it approach has developed with consistent taking.
Our committee meets by phone from time to time. Most of the people are somewhat older than I am. The refrain amongst them is the sense that they have overstayed their welcome in this country. Seniors are disappointed with what is happening and they feel wary and are very distrustful. There is a lot of room here to make up something special. Something has been lost in the last while.
Mr. Chairman, I know how devoted you and your fellow members are to the country. You all have distinguished records of public service. We must restore that confidence.
Senator Angus: I do not have a specific line of questioning, but I am quite touched by the comments you both made in respect to the limited means that seniors have. If it were not for organizations such as yours, things would be a lot tougher.
Do you have specific elements in the white paper that we are discussing today? My perception of that white paper is quite negative. Are there some specific points?
Mr. Armstrong: The notion of the availability of services is too narrow. Seniors are not first-timers. We have a track record and we want something else from those institutions.
Senator Angus: How? Are you suggesting that the government should legislate access?
Mr. Armstrong: They listen and listen. They have moral suasion, but they forget all that stuff. You can say, "You are taking a lot out; put some back."
The layoffs are frightening. They are growing the stock and the profits, but the people on the floor are less and less visible to give you the kind of advice we will need.
Today's hearings have shown how complex that environment is. The product mix is extremely complex. Everyone cannot work their way through that.
I do not believe in legislating wall to wall. I have never believed in that. That is why I think privacy will remain an elusive notion, although you are on the right track. If you can pull it off, great. For seniors, it is not necessarily a life and death issue, although my friend may take issue with that.
Ms Morgenthau: Here is a bank book. Everyone has a bank book. In this bank book, the banks are saying, "This woman pays taxes; she has a house. Good lord! This guy pays for a car. Look at this! There is a cheque going to a brokerage company." What brought the banks into all of this? What are they doing with the depositors' money?
I just read an article the other day which stated that the banks are forgiving over $2 billion in loans to countries which cannot pay. The banks did not ask me if they were supposed to loan that money. Now they are asking me to pay for it.
CARP is saying that if a government does this, we have a vote; if a bank does this, we have nothing. There are only five banks we can go to, and each is very much the same as the other. There should be more of a feeling that a bank has responsibilities, that it cannot go out and do whatever it wants in the open field.
The banks are crying. They are saying, "My goodness, if we do not do this and if we do not do that, all the outside banks in the world will come in and swallow us up."
Seniors are not anti-bank. They have always had great respect for the banks. However, whoever said that the banks should tell us what to do with our money? They are not the best in the world at advising us what to do with our money. As a matter of fact, if you take a bank manager and put him into the business world, he will probably fail 90 per cent of the time; but, he has control of your money and tells you what to do.
I am glad that One Voice brought out the humanity of seniors and the way they feel. Seniors are running. They are not only scared, but they are confused and unhappy. They have saved all their lives so they will have a secure old age. Wherever they turn, they do not have that kind of security any more.
Senator Kolber: What does that have to do with the banks?
Senator Angus: They have to vote Conservative, I think.
Ms Morgenthau: Conservative? Why?
Senator Angus: Well, to get the security.
Senator Kolber: You are giving a lot of mixed messages. You say the banks give lousy advice, and Mr. Armstrong says they do not give enough.
Mr. Armstrong: There is no contradiction here.
Ms Morgenthau: They do not give enough proper advice.
Senator Kolber: It sounds very contradictory to me. Where did you hear that the banks are forgiving $2 billion worth of foreign loans?
Ms Morgenthau: I think I still have the article in front of me.
Senator Kolber: I would like to see it.
Ms Morgenthau: I would be glad to copy it and send it to you. What about the billions they lost in Poland and other countries? Whatever they have forgiven, we have to pay for.
Senator Perrault: Mr. Chairman, these have been two interesting and useful presentations.
Ms Morgenthau, you have emphasized the need for greater confidentiality, and I think you made reference to an alleged incident where the bank mailing list was being used to solicit business in another sector.
Ms Morgenthau: That is right.
Senator Perrault: If you could provide us with more details, I would be pleased to learn more about it.
Ms Morgenthau: I have that letter at the office. As a matter of fact, I was going to bring it with me. I will have to get permission from the member who wrote it so I can send it on to you. No permission was granted by the depositor.
Senator Perrault: When the banks come before us, they say, "Look, we can offer a greater range of service with a substantial reduction in costs and fees because we are trying to help the old folks and others." However, you do not agree with that rationale.
Ms Morgenthau: No. I do not think they are properly educated in the field.
Senator Perrault: You are suggesting that they should stay with their specialty.
Ms Morgenthau: That is right. The banks are responsible for a very big area. If they are going to use advice, they should have advisors who know what they are talking about.
Senator Perrault: There is a worldwide trend towards branchless banking. Companies in most of the major countries have been highly successful. They have been successful in Holland and Great Britain. We will now have a number in Canada. You say that your members do not like doing business with branchless banks because you like to see some human interaction.
Ms Morgenthau: Human content, yes. If you ask a number of our seniors, they do not go to the machines. They will not go to the machines and I will not go to the machines.
Senator Perrault: Branchless banks will make the case that they can substantially reduce service costs due to a reduction of overhead. Is there any way that you can meld the two ideas -- in other words, a more automated form of banking but one that might be valuable to your members?
Ms Morgenthau: With all due respect, there are 7.1 million Canadians over 50. Of that number, 3 million are over the age of 65. There are over 9 million baby boomers. As they grow older, those who are not aware of technology will drop off.
I can say that we are dealing with the 3 million people who still like to have human contact.
Senator Perrault: The traditional banking methods and systems.
Ms Morgenthau: Yes. Quite often the only contact an older person has may be a teller in a bank. Many are single people. Their only contact is the person who smiles at them in the bank.
Senator Perrault: Yet the problem arises that there are staff layoffs.
Mr. Armstrong: There are very significant layoffs.
Ms Morgenthau: If you walk into your bank today, you do not have someone there that you even know. They do not know your name and they do not know who you are. The manager changes as often as the other players in the field. How can you have feelings about someone telling you what to do with your life savings if you have never really spoken to them for more than a week or two?
Senator Meighen: I am representative of those seniors who are confused and worried. I was listening to you and thought that if I were a smart banker, I would set up a senior's bureau. I do not know that I could afford to it in every branch. I would be there to help seniors work their way through the din. I thought it was a brilliant idea, and I was about the pass it on to Senator Kolber. However, then I heard you say, "I do not want to get any advice from bankers because they are too dumb."
Ms Morgenthau: Do not put words in my mouth. My kids do that. I will not allow it. That is not what I said.
Senator Meighen: Which do you want? Do you want the banks to say nothing, or do you want them to help, realizing that they will be dealing from a self-interested basis?
Mr. Armstrong: Some banks have a seniors banking centre.
Senator Meighen: Ms Morgenthau said that they were dumb.
Ms Morgenthau: That is not what I said. I said that the people who give the advice should be properly trained.
When I spoke in front of Canadian Bankers Association at their request, the first thing I said when I walked in was that banks are anti-senior. I came with a list of 10 things which would make it easier for banks to talk to seniors. One of them was just putting in a desk where a senior could sit and talk to a financial person.
There are people in banks who are properly trained, but you do not get them when you walk in and talk to a teller. Then when you do want to talk to them, they say that he or she is on the phone or busy or that you must make an appointment. I am not saying that there are no properly trained people in banks. I would love to see more of them and I certainly would love to see a seniors' teller.
Senator Kolber: Is this the wrong place to make this submission?
Mr. Armstrong: No. Why?
Senator Kolber: Banking is a business. They try to run their business profitably, I assume. That is what their shareholders want them to do. Should you not be making these submissions to the banks?
Ms Morgenthau: I have.
Mr. Armstrong: She does.
Most of the money which they redistribute is coming from seniors. We heard that this morning, very eloquently, from the gentleman from the Maritimes.
Senator Kolber: How can we legislate the banks to --
Mr. Armstrong: Where else do you want us to go? Give us another committee then.
The Chairman: Senator Kolber, in defence of the witness, it is fair to say that this committee has always allowed a considerable degree of latitude in witnesses. We have also been frequently sympathetic to the positions taken by seniors over the years.
Senator Kolber: I am sympathetic, but I do not think it is efficacious to come here.
Ms Morgenthau: Senators, we addressed the regulation. You are really looking at regulations and how to regulate the financial industry so that it works in Canada. We addressed that. However, I am very pleased that my colleague addressed the human element. When you talk about regulations, you are talking about regulations which touch the little person who walks into a bank with his $10 or $30 or whatever. He deserves as much respect as the person who walks in with his $100,000. That is all we are saying.
When you look at your regulations, look at them from a human point of view. You are really the only ones who can do that because we do not have to elect you.
Senator Stewart: These presentations have been quite good. Senator Kolber says the banks have a very specialized role to perform and that I can see. However, when I look back to the small town near where I grew up, I think it is fair to say that the local bankers provided a great deal of astute and reliable guidance to people, some of them not all that old.
I suspect that for reasons of technological change, increasing complexity and the globalization of financial activity, local bankers no longer are in a position to provide that kind of assistance to clients, both seniors and others.
It may well be, Mr. Chairman, that this problem ought to be addressed in some way, perhaps not through regulations or legislation with regard to banking. I suspect in my own case that I need the guidance of some reliable person who does not have a financial interest in giving me that advice. The complexity of our society is such that we may well need that kind of service made available.
Ms Morgenthau: Good for you, Senator Stewart.
The Chairman: Thank you to our witnesses for appearing here today.
Our final witnesses are from Power Financial Corporation.
Mr. Burns, following our discussions last week, I would request that you focus on the issue which has not come up thus far in the hearings. This issue is on page 20 of the white paper: Financial institutions will no longer need to keep data processing companies as subsidiaries, but in fact they will be able to do it in-house. If you would deal with that issue today, we may be able to find time later for the more comprehensive presentation on the growth of the various segments of the Canadian financial institutions sector. You have reduced that information to two or three charts which frankly do not do justice to the subject.
Mr. Jim Burns, Chairman, Power Financial Corporation: If members would care to read our written submission at some time, they will find it really only sets out three areas. Part of the submission has been referenced by the previous witnesses.
If you are only looking at the question of control of confidential data and the movement of confidential data, that is one thing all by itself. However, you should look at the combination of three things which are now the reality in Canada; they are likely unique in the world.
The charts in the submission demonstrate the market shares of the five or six chartered banks while looking only at consumer products, both household assets and household liabilities. Market share figures show an overwhelmingly powerful position by the chartered banks, all of which is legal. However, it clearly means that the entry of the banks into broader areas results quite quickly, as the charts demonstrate, in an overwhelming dominance in that particular field by the banks. There are many reasons for that.
Second, combine that with the pure economic power of the six institutions, demonstrated best, we think, by the run of four or five years wherein the net profits after tax of the banks were slightly higher than 50 per cent of the combined net income of the TSE 300 companies. This coming from institutions which, for that period, had a market cap of around 15 per cent, you have a combination of two things representing market share and economic power. If you add in the information base that by the nature of their business is now under their control, you have, probably unique in the world, an oligopolic power which would seem to us to be now irreversible.
I understand that the government proposes to establish a commission to take a year or so to look at the financial marketplace of the country, going ahead in the new age. One wonders what it will come up with. I am sure that it will come to the conclusion that there is a lot of power vested in a small group.
The second question is what they will do about it. That is an interesting question with which the commission will have to deal if they worry about a competitive marketplace.
Senator Kolber: Can you suggest what they should do about it?
Mr. Burns: I guess that is not the business of this committee at this time, but I think they would have to look at more ease of entry for foreign institutions. I do not think it is possible that any combination of domestic institutions could, as a business proposition, break into that circumstance. I do not know very many investors who would look at that kind of a circumstance in another country and be interested in putting up very much money to see if they could crack it because, unless they go for a niche position in one area or another, it is game over.
Senator Meighen: Mr. Burns, are we comparing apples with oranges? Your charts show that the banks have a dominant and growing share of the market.
Mr. Burns: Yes.
Senator Meighen: The banks which appeared before us today said that their share of the market is dropping. Is it a question of what we are comparing, or is someone more accurate than someone else?
Mr. Burns: The chairman has admonished us not to dwell on this, so I will not get into it. That work was prepared by Bain and Company, who I think are pretty good at market valuations. They had no axe to grind. We just asked them to tell us.
We were really interested in looking at 1984 and at 1994-95 and showing what happened in the meantime, recognizing that most Canadians did not appreciate how it has shifted. We had the collapse of the investment dealers; basically they are all gone. We had the collapse of the trust companies; they are all gone. All that business shifted. Of course we saw tremendous growth, and most of it has taken place in the last four years rather than 10.
Senator Meighen: It may have been a comparison of deposits.
Senator Angus: No, they had mortgages and all of that.
Mr. Burns: As everyone knows, they live off the spread on their retail deposit business. The Royal Bank probably has $60 billion in retail deposits on which they pay only 1 per cent at the most, while it goes out the door at 8 per cent or 9 per cent.
Senator Meighen: The more they have, the more they make.
Mr. Burns: On January 1, when the chairman of the bank gets up, he has it covered for the year because those retail deposits do not go away. They shift some of it to money market funds, but basically they stay there.
Senator Kolber: Are you sure of those numbers? We are told that the spread that Canadian banks make on their business is 100 basis points less than the American banks.
Mr. Burns: With respect, senator, I do not know what that has to do with anything. I do not know what the American bank spread is. It is probably 100 times bigger than theirs, but in the United States there are not five banks controlling the universe; there are 1,020.
Senator Kolber: I do not know what that has to do with anything either.
Mr. Burns: Are you referring to the fact that they make money?
Senator Kolber: You are here to bash the banks. You have to tell us what you think should be done.
Mr. Burns: Actually, the chairman started out by admonishing me not to bash the banks.
Senator Kolber: Well, you have done a very good job of doing that.
Mr. Burns: I refuse to bash the banks.
Senator Kolber: Well, you are fooling me.
Mr. Burns: The only thing about banks that we do not like is that you cannot buy one. It is the limit of 10 per cent.
Senator Kolber: Now we are getting to it.
Mr. Burns: If someone wants financial advice, probably the best single franchise that exists in the world is the shares of a Canadian chartered bank. Look at the Fortune 500, a copy of which is in your submission. Look at assets and then at the profitability. They may say they are fiftieth in assets, but look at the profitability. They have a very protected market position and they are good at developing it. The government has been consistently, over 25 years, adding more and more powers. They take advantage of those powers. I don't knock them. They don't do a single thing that I would not do if I was running them.
The Chairman: I remind colleagues that the issue of switching powers is not an issue dealt with in the white paper. Therefore, I would prefer to leave that issue for the moment.
Second, as one of the witnesses pointed out today, there is a significant amount of conflicting data. That is not to dispute the data that Power Financial Corporation is presenting, but merely to make the observation -- and I say this as someone trained in statistics and not unfamiliar with the use of data for all kinds of purposes -- that there are conflicting sets of data with respect to the relative market share of various Canadian financial institutions and various elements of the market.
I said to the witnesses at the outset, recognizing that their opening charges would be modestly provocative to my colleagues, that in light of the fact that switching powers is not at issue in the white paper, I would like to move to the important point, which directly relates to the white paper.
Mr. Burns: With regard to accumulation of data and private information in pockets here, there and everywhere, such as a magazine list, one could ask whether they should be in the business of selling that list to someone else. I do not think that represents a serious threat to humanity at all. Maybe they should not do it, but it goes on all the time, as you know. People develop lists and sell them.
However, they have a comprehensive accumulation of information about people or companies, particularly small companies which are vulnerable. That list is totally all-inclusive; there is nothing missing. I commented to one of my associates the other day that the only thing they do not have is health data, and he said, "Oh yes, they have."
They are implementing a system in the province of Manitoba for clearing cheques to doctors and so on; in other words, managing the administrative end of the health system in that province. Clearly, that business could be very attractive to an administrator who would collect a fee for managing it. I am sure they do it very well and probably at a much lower cost than the government did it. However, the fact is that they now have access to that kind of information.
One must ask this question: Where is that and who has access to it? We tried to emphasize what we think is the root of this entire issue; that is, what do you do in-house and what do you do in a subsidiary? Our attention was attracted in the white paper by the two-liner at the bottom of page 20. It reads:
The government proposes to permit financial institutions to carry on both information processing and specialized financial activities in-house.
One could read that pretty quickly and not think very much about it. However, I submit that there is an unbelievably big difference between doing something in a stand-alone subsidiary and doing it in-house. In-house means anyone in the place has access to it; it is on their system. If it is in the subsidiary, you know it is the simplest provision in the world in regulation or law to say you cannot transfer it between the subsidiary and the parent or another subsidiary.
Senator Kolber: Are you telling us that you do not have access to your subsidiary's information?
Mr. Burns: Power?
Senator Kolber: Okay, Power.
Mr. Burns: No. There is no way that anyone in the world, myself included as the chairman, could go down there and find out the state of someone's health, period. They would not give that information to you, any more than the trust company. The trust company would not tell anybody, including the CEO or the chairman, the status of trust accounts.
Was that in law? No, it was not in law; it was the custom. I think it was abided by at least by the substantial institutions. I am sure it is the same thing at Sun Life or Manulife or anywhere else; they would not give that information to you. Certain people had to know, such as the underwriters, but apart from that, who would have it?
There is a group plan with a bad disability experience and a high average disability claim experience. One would know that in block, but it does not give one the right to go down and find out which teacher or employee is goofing off and which teacher is not. One deals with the block numbers because that is how you set your rates. It is nobody's business to know the individual.
Is this to suggest that it goes into another institution and they start sticking their nose in there to find out? Does someone have a free hour or two in an afternoon to poke around looking up everyone's account position? I doubt it.
An article that I find interesting came out of the Vancouver Province of May 31.
Senator Perrault: A good story.
Mr. Burns: They said, no, we would not do anything like this without permission. I would have to ask, well, what is the status? How do you get permission?
Senator Perrault: It is a shocking article.
Mr. Burns: I would find it interesting and easy to get permission because I would say to Senator Angus, who is in for a loan and has various accounts with the bank, "Would you like us to provide you on an ongoing basis with pertinent financial information that would be useful to you?" Senator Angus, who is anxious to get the loan, would say "yes", or even if he was not anxious to get the loan, he would say "Yes, let me know what is going on." That is a carte blanche to bundle all of this stuff together.
That was very theoretical 10 or 15 years ago because you would have a mass of information here and pockets there. As you know, in a microsecond, you can put it all together and put it in any form or nature you want. You have got "where do you spend your money?" Another example is the permitted in-house activities of the banks. They now control the payroll management systems.
At our own place, I asked the administrative people to give me a list of everything the bank asks for and gets in managing and paying out the dues on our payroll. It was three pages long with just about anything you wanted to know. They could develop a group proposal right off of this. They would not need to come near you. They would have absolutely everything they need, and, furthermore, they would know exactly what you were paying for your present carrier because they would get that on the clearance side.
We can make copies of this available to you. We are not making it up. This is our own paper. This is what we give them for developing the payroll -- all the voluntary deductions, savings plans and RRSPs. They say, "Well, look, you want this for your employees and you have to give it to them." I have no objection to that. They have to have it to do the job. What I worry about is where else do they use that?
The Chairman: Given the fact that under the law as currently stands they get it and run it.
Mr. Burns: Payroll can be done in-house.
The Chairman: Your view is that moving it from a subsidiary to in-house substantially increases the risk of the data being used inappropriately. Is that because you think you can establish a different set of rules for a sub than you can set for in-house?
Mr. Burns: Absolutely. It could not be easier.
The Chairman: We produced a long report on privacy which has led to a number of the current changes.
Mr. Burns: With respect to our proposal at that time about banks going into the insurance business, we said that they should go into the insurance business on the same basis as everyone else. Therefore, if you go into the insurance business, you should do it in a subsidiary, not in the bank. There were financial reasons for doing that because you are mixing many different kinds of assets and liabilities with two kinds of businesses.
The same applies to the casualty business. They should never do a casualty business inside the bank. They should do it inside a subsidiary. It should be stand alone, and they should be able to finance it appropriately and operate it the same way as everyone else.
The key thing for the 1992 provisions was that the regulations set out that they could not transfer information between the subsidiary -- in this instance, the insurance subsidiary -- and the bank or another bank subsidiary. In other words, if they were going to be in the insurance business, whatever they had there had to stay there, period.
Now, I do not think it is an exclusive event at all that the Canadian chartered banks have done zip in the insurance business. It is very unusual. They wanted to be in it very badly. In 1992, the government permitted them to be in the insurance business, but the government permitted them to be in the business on the basis that the business had to be in a subsidiary and they could not transfer it.
Senator Kolber: And not sold through branches.
Mr. Burns: That is correct. I think, senator, selling through branches is the buzzword. It is the cover word for "in-house". To me, whether they do it in a branch or not is immaterial because people do not go in to buy insurance anyway.
The Chairman: In the past, you were the CEO of Great-West Life, a major insurance company. Suppose at the time you had been required to have your data processing not in-house but in a subsidiary. Forgetting for the moment about the marketing issue you have raised, would being in a subsidiary have cost you more, less or the same as having it in-house?
Mr. Burns: Exactly the same. However, the question is not where the data processing is done. It is a question of what do you do with the stuff that you have in the system. That is the question.
The Chairman: I will tell you why I ask the question.
Mr. Burns: I can answer the question. In the United States, in our operations, all of our data processing is in a separate company because we sell the service to all kinds of other companies. We did it as a sub. The company itself is just a client of the sub.
The Chairman: I want to read you a sentence from the white paper which I do not understand on the basis of your answer, and I suspect you may not be clear on it either. I am quoting from page 20.
Financial institutions have asked that the requirement to establish subsidiaries for certain activities be removed to reduce costs to their operations.
My question is this: How does switching from a subsidiary to in-house reduce costs? I ask that because you have run a big financial institution.
Mr. Burns: I would be very interested to know why they say that.
The Chairman: You are puzzled like I am puzzled; there is no obvious business answer.
Mr. Burns: I am puzzled. In Investors Group, we shifted the entire computer operation out to ISM. We do not do it at all.
The key thing is that there is no way ISM will use the data for anything else than to supply Investors Group. They do not own it. They own the system that produces the numbers and the client statements and all the rest, but they do not own the data. The key is who controls the data and what are the disciplines against that.
The Chairman: I understand that. I am making the assumption for the moment that there is a rationale for the proposal at the bottom of page 20, and the stated rationale in the white paper is that it reduces the costs of operations. I am trying to understand why someone who can run a financial institution can understand where the savings are. That is the statement in the white paper. You are telling me you do not see the rationale either. I understand you see another issue arising from it.
Mr. Burns: I think someone is opening a door without realizing what it means. It is not for me to recommend what senators do about their business, but it might occur to someone to call them back in here and ask them to tell you more about it.
Senator Perrault: That is a good idea.
The Chairman: Aside from the door that is being opened, you do not understand the explanation for the rationale in the first place, which has nothing to do with the door being opened; it has to do with cost savings.
Senator Kolber: It may be that they will use one system instead of two. I do not think they put that statement in gratuitously without knowing what they are saying.
Mr. Burns: I will try to make this as a single, simple point. The simple point is that government, in designing regulations and laws in the computer age, should be very sensitive to whether something is done in-house or whether it is done in a subsidiary. You may say, "How are we ever going to stop this thing?" I have suggested to you that the easiest way is to say, "Go into any business, but you have to do it over here. You have to put a line around it, and you cannot transfer the information you got over here back in there." You know perfectly well, as I do, that sooner or later they would be itching to get that information. If you were a marketing manager, you would take your right arm off to get at that information.
Senator Angus: Mr. Burns, I am puzzled by this whole issue of data. I have been wrestling with it for over a year. I keep reading in the Wall Street Journal and the London Daily Telegraph or the Financial Times every single day about how this data is proliferated one way or another. At the end of the day, does it really matter?
Senator Kolber: Good question.
Mr. Burns: I think at the end of the day it matters a great deal.
Senator Angus: Every kid on the block, including my daughter and your granddaughter, have modems and they are on the Internet. I think maybe we are running up against a cyclone.
Mr. Burns: When you are reading the Wall Street Journal, you have to be guarded. What might be an acceptable practice in the United States is not one in Canada. Our market, as we have tried to demonstrate, is totally different from theirs. Their market is not dominated by five institutions all based in Toronto. They have big banks down there. They have Citibank but so what? NationsBank has more customers. If you do not like NationsBank, you have 25 different competing institutions that you as a client can use. They still have big S&Ls, small banks and medium banks. They have many opportunities that would not get anywhere close to allowing any one of those single entities to get any kind of monopoly or oligopoly power.
Senator Angus: At the beginning of this evening, a senator interjected and you said the answer is to open up to the foreign banks and then there will be alternatives. We hear of all these institutions coming in here: near banks, foreign banks, Schedule II banks, Newcourt Financial, Beneficial Finance, Household Finance. They all have products which appear to be fairly safe. I wanted to say that to the witness from CARP earlier. They are not limited to those five big banks.
Mr. Burns: I think, senator, they are not limited. We have 5,000 full-time career people out on the market all across Canada offering advice. You can get advice from all kinds of places. However, I think that what this commission will find is that the banks in Canada compete on everything very actively, except price. If you want real competition, you are probably talking about price competition. To get price competition against an institution that big, you have to be as big as Tarzan.
Senator Angus: That is probably the answer, but what if we let in the foreign banks?
Mr. Burns: Maybe they are not banks. Maybe they are institutions of another kind. I do not know. I take note that a chairman of one of the banks has been making speeches saying that maybe it is time to get rid of the 10-per-cent rule.
Senator Angus: I took note of that too.
Mr. Burns: I think he wants to do that to cut a deal with a foreign bank. That is my guess.
Senator Angus: You may be right.
Mr. Burns: He cannot cut a deal if they are limited to 10 per cent because they are not attractive.
Senator Kolber: Out of pure curiosity, I have one question. What is the return on equity in Great-West Life?
Mr. Burns: It is higher in the U.S. than in Canada. Combined, the two would be about 17 per cent last year.
Senator Kolber: It is almost exactly the same as, or slightly higher than, the average bank return.
Mr. Burns: We are increasing our fee business.
Senator Kolber: Nobody is complaining about your profits.
Mr. Burns: I do not complain about their profits. I think that is the kind of money they should make when they are that big. My guess is they make a lot more than that in reality.
Senator Kolber: They are only making a reasonable return on equity.
Mr. Burns: It is not a question of ROE, senator. It is a question of pure size. If you are making $1.8 billion a year and you are paying out 35 per cent dividends, you have approximately $700 million a year in play money. If they want to do something, they can do it. They will keep doing it until everyone is gone. I think it is a sheer question of size in a small marketplace.
Senator Kolber: Should Canada not be grateful for having an exceptionally strong banking system?
Mr. Burns: Absolutely. We have a great banking system. We have a better banking system than the Americans, from a customer's viewpoint. If you go to Georgia, it takes up to 10 days to get a cheque cleared, whereas in Canada, it is almost instantaneous.
Senator Kolber: We are almost in a bit of jeopardy because if we let the government get too involved, we could follow the French pattern where you see huge bankruptcies because of the government involvement.
Mr. Burns: I think so, but if you focus on the question of privacy, the reason it is becoming such a big issue is that the transfer of this information, and the manipulation of it, is so easy. We did not worry about it before because if someone had to comb through 6 million names to find one, they would not do it. Now it can be done in the bat of an eye. That gives whoever has that information an enormous advantage over everyone else.
Senator Kolber: It is a great marketing tool, but you are really not abusing anyone.
Mr. Burns: I do not know if you are or you are not. However, I think you are certainly giving them the potential for that.
Senator Kolber: Is there not something about caveat emptor? If you offer someone something, they do not have to take it.
Mr. Burns: I do not think the buyer has any choice.
Senator Meighen: That is the question, Mr. Burns. There is potential to do all kinds of evil, and what we as a society try to do is to prevent the commission of that evil. It may be we are better off to focus on what you do with the information rather than preventing the concentration of that information, which may or may not be inevitable.
Mr. Burns: I would not quarrel with that. I think whatever regulations are put down should be done even-handedly. We are not just talking about the banks; we are talking about everyone. I agree with that. In our companies, we have never had any difficulty thinking about abiding by it because that is what we do at any rate. Would we like to be in a position to have access to it? You better believe we would.
Senator Meighen: It is really a matter of the competitive advantage it gives, the knowledge it provides to he or she who has it.
The Chairman: Mr. Burns and Mr. Johnson, thank you very much for appearing here today.
The committee adjourned.