Past Session:

1997 FINANCIAL INSTITUTION REFORM

LOWERING THE BARRIERS TO FOREIGN BANKS

Report of the Standing Senate Committee on Banking, Trade and Commerce

Chairman : The Honourable Michael Kirby
Deputy Chairman : The Honourable W. David Angus

October 1996

LIST OF RECOMMENDATIONS

PART II: WHITE PAPER PROPOSALS

The Committee recommends that, if the Government decides to ignore the Committee`s advice and go ahead with the proposed foreign bank entry regime, the existing operations of foreign-owned financial firms in Canada, established prior to the formal adoption of a new policy, be grandfathered.

PART IV: VIEWS OF THE COMMITTEE ON FOREIGN FINANCIAL INSTITUTION POLICY

The Committee recommends that the Government adopt a policy toward foreign banks that will offer these institutions the options of running their operations in Canada through a foreign branch, or through a subsidiary, or through both a branch and a subsidiary.

The Committee recommends that the Government implement a foreign bank branching policy as quickly as possible.

The Committee recommends that OSFI have the power to require a foreign bank operating a branch in Canada to maintain some level of assets in a Canadian financial institution, that meets specified OSFI criteria, to cover the liabilities of the branch. Criteria should be spelled out that would trigger OSFI intervention, and require maintenance of assets in Canada in excess of liabilities.

The Committee recommends that, for prudential reasons, the Government set a threshold on the size of a foreign bank (some minimum level of assets) that would be permitted to operate branches in Canada. This threshold should be quite high.

The Committee recommends that any foreign bank allowed to establish a branch should be subject to regulation in line with international standards and in a manner acceptable to OSFI, before approval is given for the establishment of a Canadian branch. The branch should be subject to all the normal reporting, auditing and supervisory requirements established in regulations.

The Committee recommends that, in order to maintain a "level playing field", foreign branches be subject to the same corporate and capital tax regime faced by domestic banks and the withholding tax on interest payments be replaced by this tax regime.

The Committee recommends that the Government put maximum effort into developing a complete foreign branching proposal in time for the 1997 amendments to the Bank Act.

If, however, it is not possible to accomplish this objective in time for the 1997 legislation, the Committee recommends that the Bank Act be amended, in the set of amendments to be passed by Parliament before March 31, 1997, to include the basic principle that foreign branching is to be permitted for foreign banks that intend to operate in the wholesale market only. The details should be left to regulation.

The Committee recommends that the amended sections of the Bank Act that will deal with foreign branching not come into force until the appropriate changes in the Winding-up Act are made. However, these changes could become law by the middle of 1998 if the Government assigned them the required priority.

The Committee recommends that, in addition, the Superintendent be given the power to waive the capital requirements and the corporate governance requirements for the Canadian subsidiaries of well capitalized foreign financial institutions that meet clearly specified criteria. The Superintendent must be satisfied that the objectives of consumer protection, a safe and sound financial system, and a level playing field would be satisfied if such a waiver is granted.

Chapter 3: Strengthening Consumer Protection

The Committee recommends speedy release of the draft Credit Information Regulations.

The Committee recommends no change in the rules requiring data processing to be carried on in a subsidiary.

The Committee recommends that the government adopt the amendment to section 416(5) of the Bank Act presented by the Independent Dealers Association, and that it amend the Acts governing other federally regulated financial institutions to prevent these institutions from engaging in tied selling practices which involve undue pressure on, or coercion of, the consumer.

Chapter 4: CORPORATE GOVERNANCE

The Committee strongly reiterates its recommendation from that report (Regulation and Consumer Protection in the Federally-Regulated Financial Services Industry: Striking a Balance):

That a majority of the directors of a federally chartered financial institution controlled directly or indirectly by a publicly traded holding company or a publicly traded financial institution be independent (as defined in the Bank Act) of the holding company or the parent financial institution.

The Committee is in full accord with the chartered accountants and adopts the CICA recommendation that

legislation explicitly address the interests of depositors and non-depositors and non-participating policyholders in defining the governance model and duties of directors.

Further, the Committee, having recently completed an extensive study of issues of corporate governance related to modernizing the Canada Business Corporations Act, views it as essential that the recommendations made in its August 1996 report, Corporate Governance, be made applicable to federally regulated financial institutions in Canada (excepting the co-operative credit associations). The standards of corporate governance should be at least as strong as those which apply to companies under the Canada Business Corporations Act.

Chapter 5: CREDIT UNIONS AND THE WHITE PAPER

The Committee recommends that CUCC and the provincial Centrals be permitted to aggregate their individual investments in a financial services provider to meet the control test specified in section 390.

"We should begin by welcoming full-scale

competition in our domestic market from

the banks of any nation that gives Canadian

banks equal regulatory treatment.

Let me repeat that. What was once protection

for the country has become a prison for our

banks. I believe we should throw the doors

wide open in both directions".

Matthew Barrett, Chairman and C.E.O. Bank of Montreal,

Group of Companies, Toronto, October 2, 1996

CHAPTER 1

INTRODUCTION

Following the release, in June of this year, of a Government White Paper, 1997 Review of Financial Sector Legislation, Proposals for Change the Standing Senate Committee on Banking, Trade and Commerce ("the Committee") undertook an extensive examination of the issues raised therein. Numerous written submissions and representations were received and public hearings were held October 1, 2, and 3 at which some forty witnesses appeared.

Three months before the White Paper was released, the Minister of Finance stated:

... we are currently reviewing the legislation governing financial institutions. We are doing so with a view to improving the framework that was established in 1992. We have concluded that the financial sector has yet to fully adjust to this framework. Therefore, the present restriction on banks selling insurance will be maintained.<1>

Subsequently, the Department of Finance made it clear that the present restriction on banks leasing automobiles would be maintained as well.

Canada's current legislation dealing with federally regulated financial institutions was enacted in 1992. It contains a 5-year sunset clause. The Committee held hearings, in 1995, on the functioning of the 1992 legislation, issuing its Interim Report on the 1992 Financial Institutions Legislation , in August of 1995. No major changes to the legislation were called for at that time. The Committee noted however:

Competition is the goal of the deregulation process. Competition means more consumer choice and, ultimately, a more efficient financial services sector. Moreover, rapid and extensive globalization of the world's financial markets means that Canada cannot afford to fall behind in developing the full potential of its financial services marketplace - a sector of Canada's economy that has been traditionally a very important contributor to this country's international economic growth.<2>

The White Paper was released in June 1996. It was very general, largely indicating issues that the Department of Finance intended to develop proposals on, or issues that the Department wanted to engage in consultation on. The issues dealt with in the White Paper are supposedly going to be addressed in amendments to the legislation governing federally regulated financial institutions. There are also a significant number of proposed technical amendments in the White Paper designed to bring the legislation up to date. These amendments must be passed by March 31, 1997, because existing legislation expires at that time.

The following two important announcements were made in the White Paper and may change the timing and pattern of financial services legislative reform going forward.

Task Force on the Future of the Canadian Financial Services Sector will be established to provide advice to the Government on public policy issues related to the development of the appropriate framework for the financial services sector in the 21st century (p.7 and p.14); and,

the Department of Finance will establish an advisory committee to study fundamental issues related to the Canadian payments system. The advisory committee will provide input to the Task Force's work on the development of a suitable framework for the financial sector in the 21st century.

The key policy areas to be addressed by, and the members of, the advisory committee to study the payments system were announced on August 26, 1996. The members and mandate of the Task Force have yet to be announced.

The Committee intends to hold public hearings on the report of the Task Force.

Although it was expected that the White Paper would deal with "technical issues" only, leaving the more substantive questions to the Task Force, certain changes to the foreign bank entry regime were proposed that raised fundamental questions about public policy respecting foreign financial institutions wishing to do business in Canada.

Issues were raised in testimony before, and in submissions to, the Committee that convinced it of the need for a thorough examination of the issues related to the foreign bank entry regime and the need for the development of a new policy respecting foreign banks, wishing to do business in Canada. The Task Force may well have something to say about this issue when it reports. But the current system needs modification now to encourage foreign financial institutions that are currently operating in this country to expand their Canadian operations, rather than curtail them, as a number of them have been doing, and to attract new foreign financial institutions to Canada.

The preface to the White Paper signed by the Secretary of State (International Financial Institutions) states:

In this document, we are proposing a series of important amendments to the legislation ... Consultations will be held with consumers, the financial community and other interested parties to discuss proposals set out in this document.<3>

This document is thus clearly a White Paper; it outlines proposals only and is not formal government policy.

The Committee has approached the White Paper guided by the said statement of the Minister.

CHAPTER 2

Foreign Financial Institutions Policy

Part I: Background

The Foreign Bank Issue: An Introduction

After a careful examination of the written submissions and the testimony, the Committee came to the conclusion that the policy recommendations with respect to the foreign bank entry regime, which are contained in the White Paper, are seriously flawed.

Further, the specific proposals on foreign financial institutions which are contained in the White Paper do not appear to be linked to explicit policy goals. This makes it difficult to evaluate them against other policy alternatives.

Indeed, if there is to be meaningful debate on the direction that policymakers want the Canadian financial services sector to take, a clear set of policy goals, and the link between these goals and the proposed policy, needs to be drawn. We present a set of explicit policy goals and then draw such a link in this Report.

In this Report, the Committee outlines four options for public policy dealing with foreign banks that may wish to set up operations in Canada. The Committee then selects its preferred one of the four - one that will ease the entry of foreign banks into Canada - explains why it is the preferred alternative and discusses the steps necessary to implement the Committee's recommendation.

The Committee has, in the past, made specific policy recommendations that were subsequently adopted, either unchanged or with minor modification, by the Government of the day, regardless of which political party was in power. For example, in its 1986 report, Towards a More Competitive Financial Environment, the Committee recommended that:

where one financial institution has a controlling interest in another financial institution operating in a different pillar, either the institution itself or its affiliate must have 35 per cent of its shares publicly traded.<4>

It also recommended that:

non-financial institutions should be able to engage in financial activities provided they do so through a financial holding company structure. Either the financial holding company must have 35 per cent of its shares publicly traded or else all of its subsidiaries must have 35 per cent of their shares publicly traded.<5>

These recommendations were adopted in their entirety by the Government.

Similarly, most of the Committee's recommendations with respect to the legislation governing the insurance industry, which were developed following hearings into the collapse of Confederation Life in 1994, were adopted by the current Government.

The Committee is hopeful that the recommendations in this Report will similarly be implemented by the Government.

Objectives of Foreign Financial Institutions Policy

To understand why the entry of foreign financial institutions into Canada is important, we must ask what features we want to see in the Canadian financial system; that is, what goals we should establish for public policy toward the Canadian financial system.

In the White Paper, the Government has outlined desired features for the Canadian financial system: efficiency, effectiveness and stability. The Government asserts that the current system offers, for the most part, a good balance between competition and the stability of financial institutions.

Adjustments to the current system are then proposed in the White Paper with a view to strengthening consumer protection, easing the regulatory burden on financial service providers and keeping the legislation up-to-date. Clearly, the latter two are not ultimate policy goals; they are means to achieving the policy goals of consumer protection, systemic stability, and competition (including, a level playing field).

In addition, given the globalization of financial markets and the critical role of the financial services sector in economic growth, government policy must be designed to ensure that the federal government plays the key legislative and regulatory role with regard to the financial services sector.

It is also essential that financial institutions policy foster an environment which enables world class financial institutions to be headquartered in this country. Such institutions are essential to promote economic growth and to ensure that Canadian consumers and businesses have access to a full range of financial services.

With these policy goals specified, questions such as:

Should the entry of foreign banks into Canada be encouraged?

Should the barriers to such entry be lowered?

Should foreign investment in the non-bank financial services sector be encouraged?

Would encouraging foreign entry in the financial services sector give added liquidity or added competition?

can be meaningfully discussed.

Within a policy framework designed to meet the policy goals of consumer protection, stability and competition, there are several objectives, that the Committee believes should be applicable to the regime for foreign financial institution entry into Canada, namely:

ensuring safety and soundness,

protecting consumers,

enhancing service offerings, and

promoting a reasonably level playing field with Canadian financial service providers.

It is against these stated objectives that the Committee believes that the policy proposals in the White Paper, and the alternate proposals outlined below, should be judged.

The Current Situation with Respect to Foreign Banks

The 1967 Bank Act prohibited the establishment of foreign-controlled banks in Canada. The provinces did not, however, impose similar restrictions. Consequently, many foreign banks carried on lending and other financial activities in Canada through wholly-owned, provincially regulated, trust company subsidiaries, finance company subsidiaries and so forth.

The 1980 Bank Act reversed the 1967 prohibition on foreign-controlled banks. It required a foreign bank to conduct financial activities in Canada through a Schedule II bank, incorporated and regulated under the Bank Act.

Banks in Canada are today classified into two broad groups: Schedule I, for which no shareholder may own more than 10 per cent of the shares outstanding, and Schedule II, which may have directly dominant shareholders.

The "big six" banks - Bank of Montreal, Bank of Nova Scotia, CIBC, National Bank, Royal Bank, and Toronto-Dominion Bank - are Schedule I banks. ABN AMRO Bank Canada, the Hong Kong Bank of Canada, the Bank of America Canada and Deutsche Bank Canada, are examples of foreign bank subsidiaries currently operating in Canada as Schedule II banks; the Laurentian Bank and the Manulife Bank of Canada are examples of domestic Schedule II banks.

There are presently 45 Schedule II foreign banks operating in Canada, down from a high of 59 nine years ago.

With the exception of the Hong Kong Bank of Canada, the foreign-owned Schedule II banks concentrate on corporate markets, with their core customer base usually comprising companies based in their home countries. The Hong Kong Bank of Canada has chosen to compete with domestic financial institutions for the business of the small depositor.

The term "foreign bank" in the Bank Act is very broad, covering any entity (regardless of what kind of business it is engaged in) that controls, or is controlled by, a foreign bank or any entity that would be engaged in "the business of banking" if it was in Canada. That foreign bank can be anywhere in the world. It can be any size.

Specifically, according to section 2 of the Bank Act, a "foreign bank" means:

an entity incorporated or formed by or under the laws of a country other than Canada that

is a bank according to the laws of any foreign country where it carries on business,

carries on a business in any foreign country that, if carried on in Canada, would be, wholly or to a significant extent, the business of banking,

engages, directly or indirectly, in the business of providing financial services and employs, to identify or describe its business, a name that includes the word "bank", "banque" or "bancaire" ...

engages in the business of lending money and accepting deposit liabilities transferable by cheque or other instrument,

engages, directly or indirectly, in the business of providing financial services and is affiliated with another foreign bank,

controls another foreign bank, or

is a foreign institution, other than a foreign bank within the meaning of any of paragraphs (a) to (f), that controls a bank named in Schedule II, but does not include a subsidiary of a bank named in Schedule I.

Also, according to section 409 of the Bank Act, the "business of banking" includes:

providing any financial service;

acting as a financial agent;

providing investment counselling services and portfolio management service; and

issuing payment, credit or charge cards and, in cooperation with others including other financial institutions, operating a payment, credit or charge card plan.

Such broad definitions of "foreign bank" and the "business of banking" preserve federal oversight over banking and should not, in the Committee's view, be changed at this time.

What matters from a policy point of view is how different types of foreign banks and banking activities are classified, how the classification depends on who the foreign bank is and the business activities which the foreign bank wants to carry on in Canada, and what regulatory regime, if any, applies to them.

In practice, the Canadian government has granted foreign bank subsidiary charters only to foreign banks that are regulated commercial banks in their home jurisdiction (with the one exception of American Express which was granted a Schedule II charter in 1990).

Under the Bank Act, if a "foreign bank" proposes to set up a non-bank affiliate in Canada (such as a finance company), then it must first obtain the consent of the Governor in Council under section 521(1) of the Bank Act and often make specific undertakings to OSFI.

According to section 521:

Unless the consent of the Governor in Council, by order, is obtained, a foreign bank shall not directly or indirectly

...

acquire or hold shares of or ownership interests in a Canadian entity whose principal activity in Canada consists of any activity referred to in any of subparagraphs 518(3)(a)(i) to (v) in such number

acquire or hold all or substantially all of the assets of a Canadian entity whose principal activities in Canada consists of any of the activities referred to in subparagraphs 518(3)(a)(i) to (v).

Subparagraphs 518(3)(a)(i) to (v) include:

providing any services that a bank is permitted by this Act to provide in Canada,

providing fiduciary services,

performing the function of an investment dealer, stock broker, investment counsellor or portfolio manager,

the business of insurance, including the function of an insurance agent or broker .

In practical terms, this means that such "foreign bank" must obtain the support of the Superintendent of Financial Institutions to gain entry, even though its resulting Canadian business is not regulated by OSFI.

The situation is not the same if a foreign entity that does not fall under the definition of a "foreign bank" in the Bank Act (a company like Microsoft , for example) proposes to set up an unregulated financial services firm (such as a finance company); it need not first obtain the permission of the Governor in Council or OSFI. It can simply establish the firm, respecting whatever other federal or provincial laws might be applicable. The legislation governing federally chartered financial institutions does not apply since the parent is not a "foreign bank".

There is another hurdle facing a "foreign bank" if it tries to set up a non-bank affiliate in Canada and if it does not want that affiliate operated as a federally regulated financial institution. In order to obtain OSFI support for an application to the Minister, under section 521, to operate such a non-bank affiliate, "foreign banks" have, as a matter of policy, heretofore been required to agree to a restriction on how such a non-bank affiliate will be able to raise funds. It must not finance itself by taking deposits, or by issuing securities in Canada, other than securities in minimum subscriptions of not less than Cdn. $200,000. Further, the securities, if debt securities, must be in denominations of not less than Cdn. $100,000. These restrictions - the limits of $200,000 and $100,000 - are called the retail funding restrictions.

These restrictions have been in place, or enforced in this general form, since the early 1990s. However, more and more, what was a clear dividing line (between deposits and marketable securities) is becoming blurred in the market place as these entities, for example, issue marketable securities in small denominations (sometimes as small as $2,000).

Definition of Terms to be Used in the Report

Before proceeding to discuss the White Paper proposals, the Committee wants to ensure that the terminology to be used in the Report is clear.

First, there is the term "branch". Section 2 of the Bank Act states that a "branch in respect of a bank, means an agency, the head office and any other office of the bank". (Bank Act, p.2) In "everyday" usage, Canadians think of a branch as one of the many local offices of a chartered bank that takes deposits, arranges mortgages, takes utility payments and so forth. This will be referred to in the Report as an office of a retail bank and not a branch.

A foreign bank branch, in this Report, will mean the Canadian operation of a foreign bank, which is not incorporated as a subsidiary (i.e., a Schedule II bank). Other than the Hong Kong Bank of Canada, which has chosen to compete in the retail market and which has offices in many different locations, most foreign banks have a very small number of offices in Canada.

A bank which restricts itself to corporate markets and does not compete for retail deposits is a wholesale bank. Almost all foreign-owned Schedule II banks in Canada are "wholesale" banks. (The American definition of a wholesale bank could be adopted in Canada. In the United States the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have defined a nonretail deposit, or wholesale deposit, as, in general, a deposit of over $100,000.<6>

The "business of banking" defined in the Bank Act (presented earlier) is very broad and clearly covers a wide range of financial institutions. One of the leading textbooks on the Canadian financial system defines:

a near bank [as] a financial intermediary, not chartered as a bank, which raises a major portion of its operating funds by issuing liabilities that are close, if not perfect, substitutes for the major liabilities of the chartered banks, that is, personal savings deposits and time deposits.<7>

This definition would cover cooperative banks, trust companies, mortgage loan companies and government savings depositories.

Beyond these institutions, there are numerous limited purpose, non-deposit taking financial institutions, such as finance companies and asset-based lenders. The White Paper has defined non-deposit-taking financial institutions such as these as "near banks". We will use the White Paper definition in this Report.

Finally, the Committee will also employ the term "real bank". According to academic economists:

In the most general sense, all financial institutions that accept from the public deposits payable on demand or in a short time are banks.<8>

The Committee will not use such a broad meaning for "real banks". Otherwise, institutions such as trust companies would be included. By "real banks", the Committee means those institutions that accept from the public deposits payable on demand and that are regulated as banks.

Part II: White Paper Proposals

The White Paper Deposit Insurance Opt-Out Proposal

In the White Paper, the Government indicated that it is working on a proposal to permit financial institutions that do not take retail deposits to "opt out" of CDIC coverage, as long as they are not affiliated with another CDIC member. The criteria that the White Paper suggests could be used to qualify for the exemption are the size of deposits and the type of depositor, or some combination of both.

Institutions that specialise in serving large corporate customers whose deposits are well in excess of the $60,000 maximum for insurable deposits would be the target of this exemption.

The Schedule II Foreign Banks' Executive Committee proposes that:

the appropriate threshold above which deposits should be considered "wholesale" is $100,000. [This definition] is consistent with the definition of "wholesale deposit" in the United States, and will be large enough that it is very probable that the depositor is a sophisticated investor who does not require the same degree of protection as the average "retail" depositor.

[In addition] an "exempt institution" will, theoretically be able to accept some "retail deposits" if, in total, these deposits do not exceed a specified percentage of its average deposits [suggested at 5 per cent].<9>

This "5 per cent" is "to enable an "exempt institution" to provide existing private banking services to sophisticated customers."<10>

The Schedule II banks also propose that the Minister of Finance " have a "public interest" veto over the issuance of an exemption certificate to an existing CDIC member."<11>

Both the Schedule II banks and the Canadian Bankers Association address a number of other issues that must be resolved before an opt-out procedure can be put in place.

One important issue is how the CDIC`s accumulated deficit will be allocated to institutions that opt out. An "exit fee"could be calculated by using the premiums received by CDIC relative to its deficit. Another key issue is the issue of membership in the Canadian Payments Association; currently, deposit insurance is a criterion for such membership. What access to liquidity will exempt institutions have?

These questions as well as transition procedures call for the development of specific proposals by the Department of Finance. The Committee supports the principle of deposit insurance opt-out (as it did in its November 1994 Report, Regulation And Consumer Protection In The Federally-Regulated Financial Services Industry: Striking A Balance) but will want to review the proposals once they have been made public.

The White Paper Foreign Bank Policy Proposals

The White Paper proposes several changes in the treatment of "foreign banks" wishing to operate in Canada. Some of these involve welcome deregulation; others cause the Committee some concern.

First, a "foreign bank" which owns a Schedule II bank would no longer be required to hold other financial institutions through its Schedule II bank.

Second, "foreign banks", which operate "wholesale banks" in Canada, would benefit from being able to opt out of CDIC coverage. At this point there is no legislative or regulatory definition of a wholesale bank. The White Paper indicates that the criteria to be applied could include the size of the deposit (e.g., over $100,000) and the type of depositor (e.g., corporation , non-resident ).

Third, the White Paper then defines a new concept, "near banks". These are "entities which do not generally take deposits, are not regulated as banks in their home jurisdiction, but provide one or more banking-type services (e.g., consumer loans)."<12>

Foreign "near banks" would be allowed to hold a non-bank affiliate in Canada which is not a federally regulated financial institution, and "once they have received approval under the Bank Act to enter the Canadian market, no further approvals would be required provided that their unregulated activities remain outside of retail funding [defined as the use of securities in denominations of less than $100,000]."<13>

Fourth and lastly, regulated foreign banks, "entities which are regulated as banks in their home jurisdiction and for whom banking services constitute a large part of their operations," will be permitted to carry on activities in Canada only through subsidiaries that are federally regulated financial institutions. <14> Thus a regulated foreign bank will no longer be permitted to set up, under section 521, a non-bank affiliate which is not a subsidiary and which is not a federally regulated financial institution. An exception is made for securities activities which are subject to provincial regulation.

The Committee supports the initiatives set forth in the White Paper to ease the regulatory burden on foreign financial institutions operating in Canada. But the Committee is concerned with the White Paper proposals for "near banks".

These proposals are not accompanied by a clear policy rationale.

The lack of a clear set of policy objectives against which to judge the merits of the White Paper proposals has led the Committee to propose its own set of policy objectives (as described earlier) and to judge the White Paper proposals, and the Committee`s own proposals, against these objectives.

Impact of the Foreign Bank Entry Proposals on "Near Banks"

The effect of the White Paper`s proposed foreign bank entry policy would be to create four classes of "near banks".

There would be Canadian-owned "near banks" which will not be subject to federal rules under the federally chartered financial institutions legislation. No retail funding restrictions would apply to these "near banks". These "near banks" will, in effect, be unregulated as far as OSFI is concerned.

There would be foreign-owned "near banks" for which the foreign owner would fall under the Bank Act definition of a "foreign bank" and is classified by OSFI as a "real" foreign bank; such institutions would have to set up a federally regulated financial institution in Canada in order to operate a "near bank" subsidiary in Canada (since section 521 exemptions would no longer be allowed for foreign "real" banks). Retail funding restrictions would not apply to the "near bank".

There would be foreign-owned "near banks" for which the foreign owner falls under the Bank Act definition of a "foreign bank" but would be classified by OSFI as a foreign "near bank"; such institutions would be allowed to hold a non-bank financial institution, including a domestic "near bank", without the institution having to be a federally regulated financial institution in Canada. Governor in Council approval would be required and retail funding restrictions would apply.

There would be foreign-owned "near banks" for which the owner will not fall under the Bank Act definition of a "foreign bank" or a foreign "near bank". In this case, the foreign "near bank" would be able to operate a non-bank financial institution or a domestic "near bank" without Governor in Council approval. There would be no retail funding restrictions.

Impact of the Proposed Foreign Branch Policy on Other Financial Institutions

The reality is, as detailed below, that there is a wide spectrum of types of financial institutions that want to come to Canada, ranging from fully regulated foreign banks to largely unregulated foreign financial service providers. Any one of these types of financial institutions may wish to conduct various types of businesses in Canada ranging from full service retail and/or wholesale banking activities, to limited purpose operations with or without taking deposits from the retail public.

This creates a range of cases for policymakers to deal with. The priority to be attached to the objectives of foreign bank policy outlined earlier differs among these various cases. For example, consumer protection is of less relevance for limited purpose entities with no retail deposits. However, level playing field issues vis-à-vis Canadian banks may be very important in cases where the foreign financial institutions are owned by foreign banks that are fully regulated in their home jurisdiction.

At one end of the spectrum are the cases of foreign "real" banks that want to own full service retail and wholesale banking operations in Canada. They were not an issue addressed in the White Paper or in the hearings before the Committee. As well, "real" foreign banks, with regulated Schedule II banking subsidiaries in Canada, but who do not take retail deposits (generally defined as deposits of less than $100,000), will benefit from the White Paper proposal to exempt them from CDIC coverage and the attendant CDIC rules (because they only take wholesale deposits over $100,000). The Committee strongly supports this proposal (which was discussed in more detail earlier in the report).

At the other end of the spectrum are emerging situations where foreign banks or other foreign financial service providers may wish to provide financial services in Canada having only a minimal a physical presence in Canada. The Committee heard testimony from one such financial institution. This raises issues that go beyond the options described in White Paper; they are discussed later in the Report.

Much of the testimony before the Committee concerned the treatment of a limited part of the spectrum - those institutions identified as "near banks".

Impact of the Policy Proposals on Selected Financial Institutions

A. Finance Companies

The finance company industry in Canada will be discussed first. This industry includes firms such as Trans Canada Credit, Associates Financial of Canada, Avco Financial Services of Canada, Beneficial Canada, Household Financial Corporation, Transamerica Financial Services and Superior Acceptance.

For those owned by foreign firms that fall under the Bank Act definition of a "foreign bank", whether or not the parent firm is required to set up a Schedule II bank in Canada appears to be arbitrary in that the White Paper proposal leads to firms in the same business in Canada being treated markedly differently solely on the basis of their parentage.

Consider the following examples:

1. Norwest Financial, Inc., a U.S. consumer finance company, acquired Trans Canada Credit Corporation from the insolvent Central Guaranty group in 1992. It needed the permission of the Governor in Council to complete this transaction because Norwest Corp (parent company of Norwest Financial) and Norwest Financial are registered and regulated under the Bank Holding Company Act of 1956 in the United States; Norwest Financial owns a bank in the United States; Norwest Corp. owns a number of banks in the United States. Therefore, Norwest is a "foreign bank" under the Bank Act.

According to Norwest Financial, Inc.:

Based on our correspondence from and discussions with representatives of the Department of Finance and OSFI, it appears that Norwest Financial would be treated as a "regulated foreign bank" rather than a "near bank". The result is that Trans Canada would be required to become a regulated federal financial institution, either a Schedule II bank or a loan or trust company under the Trust and Loan Companies Act. <15>

This is an example of a Class 2 "near bank".

2. Household Financial Corporation (HFC) has been operating in Canada since 1928. It is ultimately owned by Household International, Inc., a publicly owned multinational corporation. Household International is defined under the Bank Act as a foreign bank principally because of its credit card operations which, under American law, must be undertaken through a limited purpose bank.

According to the HFC submission, because Household International does not involve "true commercial banking operations, a significant branch network and the gathering of retail deposits from individuals ..."

Household International ... would be defined, quite appropriately, as a near bank and its principal operations in Canada would be subject to the proposals outlined in the White Paper for near banks.<16>

HFC believes that, under the proposed policy, it will be a Class 3 "near bank", although a case can be made that it belongs in Class 2 since Household International is a "foreign bank".

3. Beneficial Canada is a subsidiary of Beneficial Corporation, which is covered by the definition of "foreign bank" in the Bank Act. Beneficial Corporation owns banks in the United Kingdom, in Germany and in the United States. According to its submission to the Department of Finance, Beneficial expects to be covered by the definition of a "near bank" and thus will not have to set up a regulated foreign bank.

Beneficial expects to be a Class 3 "near bank" under the proposed policy. It is not at all clear why it would not fall into Class 2.

4. Avco Financial Services Canada has been operating in Canada since 1954 and has been controlled by Avco Financial Services of Costa Mesa, California since 1964. The latter is a subsidiary of Textron Inc. of Rhode Island. Textron is classified as a "foreign bank" under the Bank Act because Textron owns a bank. This could cause Avco Canada to become a Class 2 `near bank`,although there is a very strong case that it should be in Class 3.

Avco expects to be a Class 3 "near bank" under the proposed policy.

B. Financial Service Providers other than Finance Companies

1. GE Capital Canada is a subsidiary of General Electric Capital, an American company which has operated in Canada since 1937. It engages in financial services such as equipment leasing and financing, auto leasing, railcar leasing, retail sales financing, commercial and industrial project funding and commercial real estate financing. It owns several regulated financial institutions in the United States and Europe, including banks. Its Canadian subsidiary, GE Capital Canada, offers a wide range of financial services.

According to the Norwest Financial submission,

... because GE capital is owned by an industrial conglomerate, it apparently will be a "near bank" and, accordingly, would not be required to offer its services through a regulated financial institution. <17>

GE Capital expects to be a Class 3 "near bank" under the proposed policy. Given the treatment of Norwest however, GE Capital could fall into Class 2.

2. Capital One Financial Corporation is in the business of issuing credit cards in the United States and in the United Kingdom. Capital One owns a bank in the United States and in the United Kingdom. In March of 1996, Capital One received Governor in Council consent to operate a credit card business in Canada. It was granted a certificate of registry under the Investment Companies Act (Canada) to enable it to qualify for membership in MasterCard. The statute was subsequently repealed, but Capital One was "grandfathered" by MasterCard.

Now, however, "Capital One has been given preliminary notification by officials of OSFI that it may be a "regulated foreign bank" for purposes of the proposal contained in the White Paper ... and thus will not be permitted to offer credit card services through a non-bank affiliate. Instead, it will be required to establish federally regulated financial institution such as a Schedule II bank (or trust company under the Loan and Trust Companies Act) if it still wished to offer such services in Canada." <18>

Thus, Capital One is under the impression that it will have to become a Class 2 "near bank" under the proposed policy. An argument could certainly be made, however, to assign it to Class 3, which is what Capital One expected when it was given Governor in Council approval to operate in Canada in March of this year.

3. CoreStates, a bank holding company in the United States which owns CoreStates Bank, controls two financial sector players in Canada, Congress Canada and Cashflex.

Congress Canada, an asset-based lender, is a direct wholly-owned subsidiary of Congress Financial Corporation, a California corporation which is controlled by CoreStates. Congress U.S. (which operates independently of CoreStates Bank) and CoreStates received Governor-in-Council approval for the establishment of Congress Canada in 1994.

Congress Canada is not a bank; it lends to businesses that are unable to obtain sufficient credit facilities from conventional lenders. Thus, Congress Canada is in a situation which is similar to Avco with respect to the U.S. parent.

Cashflex is a wholly-owned subsidiary of CoreStates which also operates independently of CoreStates Bank. CoreStates received Governor-in-Council permission to establish Cashflex in December, 1995.

Cashflex processes financial information but does not directly engage in the business of financial services. For example, it physically sorts and records payments made to a Schedule I bank's customers, such as cable, gas and hydro companies, and updates customer records. It does no cheque clearing.

CoreStates believes that it will have to set up a Schedule II bank in Canada if it wants to continue to operate Congress Canada and Cashflex. However, Congress' major competitors, GE Capital, Penfund, CCFL, and First Treasury, will not be subject to such a requirement and thus will not have to incur the same costs as CoreStates to operate as an asset-based lender in Canada. This will place Congress Canada at a competitive disadvantage.

Similarly Cashflex would be placed at a competitive disadvantage to its competitors such as EDS and FiServe.

Congress Canada and Cashflex argue that these restrictions are inconsistent with Canada's obligations under the NAFTA and have obtained legal opinions to support their position. The Committee did not explore and, therefore, took no position on this issue.

Further, each company undertook a considerable investment to set up operations in Canada based on the regulatory policy in place prior to the White Paper. Each argues that it has been operating "in good faith" and that the policy change proposed in the White Paper imposes unreasonable costs on it. Thus they argue that, at the very least, they should be grandfathered. But they appear to believe based on the type of business they are in, and the rules governing their competitors, that Cashflex should be in Class four and Congress Canada, in Class 3.

Nevertheless, it appears that, under the White Paper, Congress and Cashflex will be Class 2 "near banks".

4. Valley National Bank is an American retail and commercial bank that is particularly interested in retail lending, especially automobile lending. It indicated an interest in participating in Canadian consumer markets and was advised by OSFI, in 1994, " that we should consider simply establishing a finance company rather than a Schedule II bank since our Canadian business plan was very focussed on consumer lending." <19>

In November of 1995, Valley National received section 521 consent and immediately commenced Canadian business. It appears from the White Paper that "the consent that was recently given to us will be revoked and we will be forced to carry on business in Canada through a Schedule II bank." <20> Valley Bank proceeded in good faith based on the advice it was given. A reversal of the initial decision could have a significant negative impact on the organisation.

Again, Valley National would argue that if the proposed policy change is made, its current business should be grandfathered. Moreover, it believes it should be in Class 3 rather than Class 2, which is where the White Paper policy would appear to put it.

5. Wells Fargo, a major American bank, is interested in making an application under section 521 of the Bank Act for permission to set up a small business lending operation in Canada. The business would be carried on almost entirely from Wells Fargo's home office in the United States mainly through mail and telemarketing. There will be no branches or significant physical presence in Canada.

In its response to the Wells Fargo submission, OSFI stated:

"... the June 1996 White Paper does address a proposed modification to the entry policy pertaining to regulated foreign banks that wish to carry on financial services activities in Canada. The entry policy would permit Wells Fargo to carry on its proposed financial services activities in Canada only through a subsidiary that is a federally regulated financial institution. Consequently, OSFI is not prepared to recommend that Wells Fargo be permitted to establish a non-bank affiliate pursuant to section 521 of the Bank Act."<21>

Clearly, under both the existing policy and the proposed White Paper policy, Wells Fargo is a Class 2 "near bank".

The Committee is not satisfied that a meaningful distinction can be made between a number of the companies which would be assigned to class 2 (Norwest, Congress and Cashflex, Capital One) and others which would be assigned to class 3 (Avco, Beneficial, HFC, GE Capital). The Committee believes that this inability to make a meaningful distinction would result in a playing field which is less level, rather than more level, when compared to the existing situation.Thus the proposed policy fails to meet one of the objectives of foreign financial institutions policy described earlier.

However, if the policy proposed in the White Paper were to be put into effect, the criteria that are used to decide whether a foreign financial institution is a "real bank" or a "near bank" should be made clear by OSFI. Moreover, these definitions must be seen to be fair and reasonable to all concerned.

If, in spite of the arguments made in this report against the White Paper proposal on foreign financial institutions, the Government decides to proceed with the proposals anyway, the policy should not be applied retroactively. The Committee has consistently expressed its opposition to any retroactive application of policy. Those institutions that proceeded in good faith to establish operations in Canada, satisfying all the rules that they were faced with, should not subsequently find that the ground rules changed, and find that they have to incur significant added costs that they did not expect when they made the decision to enter Canada.

Issues Raised by the Policy Proposals on Foreign "Near Banks"

The preceding nine illustrative examples show, among other things, that the White Paper proposals fail to meet the level playing field objective of foreign financial institution policy, as well as restricting the range of financial services available to Canadian businesses and concerns, thus failing to meet another of the Committee`s objectives of foreign federal institution policy. It is for these reasons, in addition to others given below, that the Committee rejects the White Paper`s foreign bank proposals.

The White Paper proposals also raise the following six important issues:

Can a meaningful distinction be drawn between companies offering the same type of financial service in Canada just because their owners are in different types of business?

The definition of "foreign bank" in the Bank Act covers a wide range of foreign financial institutions from "real" banks (deposit takers whose customers can write cheques on their deposits) to non-bank financial service providers under the policy proposed in the White Paper, who provide very limited services. Whether a "foreign bank" will be required to set up a Schedule II bank in Canada in order to operate a non-bank company will depend on whether OSFI classifies the "foreign bank" as a "real bank" or a "near bank"? Are there criteria for making this classification that make sense?

Trans Canada Credit, Avco, Beneficial and HFC carry on the same activities in Canada, yet it appears that the owner/parent of Trans Canada Credit will have to set up a Schedule II bank while the parents of the others will not need to do so.

Norwest Financial argues that:

the source of the problems with the real bank/near bank distinction is that it attempts to impose a pre-conceived institutional classification on competitors rather than regulating them by the services that they provide in the relevant market. It is difficult to see the relevance of the fact that a financial service provider in Canada is owned by a financial services provider in the United States, rather than an industrial company, to the proper form of regulation in Canada. ... What should matter is the type of financial services that the company offers in Canada. <22>

Does the proposed policy of imposing different conditions on the foreign owners of non-bank companies offering similar financial services in Canada create competitive imbalances?

For those foreign institutions that are required to set up a Schedule II bank, even though their intention is to offer limited, non-deposit-taking services, the costs are significant (e.g., initial capital requirements, corporate governance provisions, etc.). This will put them at a competitive disadvantage relative to institutions offering the same services that are not required to incur similar costs because they do not have to be Schedule II banks. On the other hand, domestic federally regulated federal institutions must also compete with the unregulated non-bank firms. How to ensure that a level playing field exists in all segments of the financial services market is an extremely complex matter.

For those institutions required to set up a federally regulated financial institution, and whose operation is critically dependent on low costs of delivering the service, such as Capital One or the Wells Fargo small business operation, the regulatory requirement to set up a federally regulated financial institution in Canada can make the operation non-competitive. The question then becomes; do the benefits of imposing the federally regulated financial institution requirement offset the potential costs of not having these operations go forward in Canada?

Further, in the case of Capital One, institutions such as Canadian Tire and GE Capital have been granted rights to issue Master Card credit cards in Canada but they are not subject to regulation as financial institutions, and hence not subject to the costs which Capital One would face.

Will the application of the proposed policy create problems for firms that have been acting in good faith, making investments based on commitments made to them by the Canadian Government? And, also, should existing operations be grandfathered?

Norwest Financial argued that Norwest has expanded its operations "in good faith reliance on the approval granted by the Canadian Government." It received approval of expansion of its activities as recently as February of 1996. "Never once was there any suggestion made by the Department of Finance or OSFI that the ground rules would be changed in the manner suggested by the Foreign Bank proposals in the White Paper to create a massive distinction between Trans Canada and all of its major competitors and, indeed, reduce the regulatory burden faced by others while increasing it so dramatically for us." <23>

Is the proposed policy, as outlined in the White Paper, consistent with our international trade obligations?

Both Norwest Financial and Capital One argue that:

"the proposal violates Canada's obligations under the North American Free Trade Agreement to provide equal treatment to domestic and foreign investors in unregulated services." <24>

According to the Capital One submission:

Canadian banks proposing to carry on financial services businesses, including credit cards, in either country would face only a level of regulation similar to that imposed by the Canadian provinces on these sorts of activities. They would not face any requirement to carry on such activities in any particular institutional form.<25>

....As the proposed changes would impose a regulatory burden on Capital One to which domestically owned institutions are not subject, and the effect will be to significantly diminish the competitive opportunities open to Capital One in Canada, they would violate Canada's national treatment obligations in NAFTA.<26>

What is the rationale for the retail funding restriction ( the requirement that a foreign-owned "near bank", operating in Canada, not finance itself in Canada by taking deposits, or by issuing securities in Canada, other than securities in minimum subscriptions of not less than $200,000 and in denominations of not less than Cdn. $100,000)?

The retail funding restriction:

stems from a perception at OSFI that the debt instruments issued by "near banks" could be perceived by the public as substitutes for deposits. <27>

...

The securities field already has safeguards to protect investors [securities regulators].

...

The Association believes that the restriction on the activities of "near banks" governed by the Bank Act should be limited to the taking of deposits. The concept of "retail funding," as it has been explained to the "near bank" community does not appear to be a solution to any specific problem in the marketplace and, therefore, is not justified.<28>

What impact will the retail funding restriction have?

The proposals would create a non-level playing field between the foreign-owned "near banks" that are governed by the Bank Act and domestic "near banks," or "near banks" that are owned by a foreign entity that does not fall within the very broad definition of a foreign bank under the Bank Act. <29>

According to CIBC Wood Gundy, foreign near banks (which for them includes both consumer finance companies and automobile finance companies) currently constitute over 20% of total Canadian commercial paper outstanding and approximately 50% of Canadian corporate medium term notes outstandings.<30>

CIBC Wood Gundy concludes:

the proposed restriction ... would be expected to have significant and negative consequences for all of the following groups:

* the foreign near bank issuers in Canada;

* individual and institutional investors; and

* the registered investment dealers which deal in foreign near bank securities.

In addition, we believe that Canadian provincial securities regulators and other regulators internationally would have concerns regarding the proposed restriction.

Given the overall and ongoing significance of foreign near banks in the new issue and secondary markets, in our view, the proposed restriction could have more widespread effects to the extent that it diminishes overall liquidity in the Canadian capital markets at a time when considerable advancements have been made in this respect.<31>

In testimony before the Committee, a witness for the Investment Dealers Association of Canada stated:

We believe the proposed $200,000 minimum funding threshold will have serious repercussions on the liquidity and efficiency of domestic money markets, be disruptive to the lending and leasing operations of these near-bank institutions and have disadvantageous consequences for individual investors and borrowers alike.<32>

The Association argues that retail investors are protected by provincial securities laws and hence further regulation is unnecessary.

The Canadian Bond Rating Service suggests that there be some flexibility in the retail funding restriction; it proposes that an exemption to the restriction be granted to near banks whose debt securities are rated at least investment grade by two approved rating organizations.

Part III: Foreign Bank Branches and Foreign Bank Subsidiaries

Before proceeding to present the Committee's proposal for dealing with foreign financial institutions. This Report provides the following background information on the rules governing foreign bank branches and foreign bank subsidiaries in Canada, the United States and the United Kingdom.

Foreign Branches vs. Foreign Subsidiaries

If a "foreign bank" wishes to operate as a commercial bank in Canada, including accepting deposits, then it must satisfy, with few exceptions, the same rules applicable to domestic deposit-taking institutions. This involves domestic capital (a minimum capital base of $10 million, and compliance with the Bank for International Settlements (BIS) capital adequacy standards on a stand-alone basis). It must also follow the prudential rule relating to lending (exposure to one company or group of associated companies restricted to 100% of its capital base) and corporate governance requirements. These requirements could be quite onerous for a relatively small foreign bank subsidiary.

Further, foreign banks are not allowed to use parental guarantees to obtain relief from the prudential lending limits imposed by the regulator. In addition, Canada imposes a withholding tax on interest payments to affiliated companies. Because of this tax, there is virtually no parent funding of Schedule II banks at this time. Thus, these subsidiaries are effectively precluded from access to funds raised globally by their parent corporations. <33>

Consequently, the subsidiaries of foreign banks have raised the majority of their funding in the more expensive Canadian commercial markets. As a result, the Canadian Government receives little revenue from the withholding tax and the foreign bank subsidiaries compete with domestic banks who face lower borrowing costs. The playing field is not level. Having a world class financial services centre in Canada, with adequate depth and liquidity in key markets, requires that there be changes to the current set of policies affecting Schedule II banks.

The Institute of International Bankers in their September 1995 Annual Global Survey of Regulatory Developments and Market Developments in Banking, found that of forty countries responding, Canada and Mexico were the only ones to require international banks to carry on their activities strictly through subsidiaries; neither permits direct branches of non-domestic

banks. <34>

The American Situation with respect to Branches and Subsidiaries <35>

In the United States, foreign banks may operate a U.S. bank as a subsidiary of their parent bank or they may establish branches and agencies, which are legal and operational extensions of the parent bank. As of December 1994, 82 percent of the U.S. assets of foreign banks were held in branches and agencies rather than subsidiaries.

Foreign branches and agencies operate almost exclusively in the wholesale banking markets in the United States - serving primarily their home country and U.S. corporate customers and engaging in transactions with banks and other financial institutions.

U.S. banking regulations regarding capital adequacy apply to U.S. chartered banks and bank holding companies, including those owned by foreign banks. They do not apply to branches of U.S. banks or to branches and agencies of foreign banks because these entities hold no capital of their own.

However, federal and state regulators attempt to address this difference by requiring foreign branches and agencies to maintain capital equivalency deposits or asset pledge agreements from their parent institutions as additional protection to U.S. depositors. (For example, federal branches are required to establish a capital equivalency deposit equal to the greater of 5 percent of the branch`s liabilities to nonaffiliates or the minimum capitalization required of a national bank in the same location. State regulators use asset pledge agreements, in which the foreign owned-entity must maintain deposits or pledge securities in an approved depository institution within the particular state.)

The parent foreign banks are also responsible for meeting their home country`s capital requirements and the capital levels of the parent are monitored by federal and state bank regulators.

Thus, in the U.S., although branches are heavily regulated, they are not subject to as many laws and regulations as a separate subsidiary bank. For example, they do not require separate capital as subsidiaries do, nor are they required to become members of the federal reserve system. The costs of setting up and operating a branch are significantly lower than those of a subsidiary

The Situation in the United Kingdom with respect to Branches and Subsidiaries

Foreign banks may operate branches and/or subsidiaries in the United Kingdom. As of February 1995, there were 176 deposit-taking branches of foreign banks and 73 subsidiaries operating in London. Most of the subsidiaries had ownership links to one or more of the branches. Nearly all the major U.S, Japanese and Canadian banks have London branches.

Most foreign banks' branches are primarily wholesale banks that raise their deposits in the money market and lend money to business and commerce.

The Current Canadian Situation with respect to Branches and Subsidiaries

There are currently 45 Schedule II banks in Canada - down 14 from just a few years ago. Two more are expected to withdraw imminently.

total assets of foreign bank subsidiaries expressed as a percentage of total Canadian bank assets declined from 8.1% in 1990 to 7.3% in 1994.

for the period 1990 to 1994, the foreign bank subsidiaries had a cumulative net loss of $176 million.

the average return on assets in 1990 to 1994 for foreign subsidiaries was -0.05%. The average return on assets from 1990 tom 1994 for Schedule I banks was 0.54%.

the average return on equity in 1990 to 1994 for foreign bank subsidiaries was -0.9%. The average return on equity from 1990 to 1994 for Schedule I banks was 9.6%.

the number of foreign bank subsidiaries active in Canada has declined from a high of 59 in 1987 to 46 as at December 31, 1995. <36>

Foreign banks want the flexibility to establish, in Canada, a branch, a subsidiary or both, subject to prudential regulatory considerations. Essentially, they want the same treatment in Canada that Canadian banks get in foreign countries.

Every major world financial centre has an international banking centre that complements its strong domestic banking sector. A common thread found in each of those centres is the ability of international banks to choose the form of establishment or operation. Canada stands out as the only advanced eeconomic power that does not allow international banks to operate through a branch structure.

...

... the subsidiary requirement is a major reason why Canada does not have a more vibrant international bank community and why there is not more competition from foreign banks in the domestic banking sector. <37>

Part IV: Views of the Committee on Foreign Financial InstitutionS Policy

Before proceeding to present the Committee`s views and the details of the Committee`s proposal and implementation plan with respect to foreign bank subsidiaries and branches, we first present the Committee`s views on the proposed retail funding restriction.

A: Views of the Committee on the Proposed Retail Funding Restriction

With respect to the proposed restriction on retail funding by "near banks", the Committee sees no justification for the proposed policy.

Provincial security laws are there to protect investors in the securities markets. Unless the Government is prepared to make the argument that provincial security laws are not providing adequate protection for the retail investor, then consumer protection cannot be invoked as the basis for the proposed policy. (The Government has not put that view forward in the White Paper)

If the Government is making the argument that securities issued in denominations of less than $100,000 are "deposits", then the proposed new retail funding restriction should apply to all institutions that are not empowered to take deposits, not just the non-bank affiliates of "foreign banks". Further, this concern could be addressed with "complete disclosure", a requirement that the securities issuer state that the securities are not deposits, for example, and that they are not CDIC insured and that the entity issuing them is unregulated, rather than through the proposed retail funding restriction..

If the concern is about a level playing field for financial services firms competing with "near banks", how does the proposed retail funding restriction accomplish the goal? Is it the best way to achieve what is wanted?

If the Government has a specific concern - protecting the consumer or ensuring a level playing field - it should state the concerns explicitly and decide how the retail funding proposal addresses the problem. In the absence of such a statement, and given the objectives of foreign financial institutions policy set out earlier in this Report, the Committee urges the Government to abandon its proposal with respect to retail funding.

B: Views of the Committee on Foreign Bank Branches and Foreign Bank Subsidiaries

Four Options for Public Policy Dealing with Foreign Banks in Canada

We consider now four possible policies that the Government could adopt to deal with foreign banks that wish to offer financial services in Canada:

a foreign bank could operate only through a subsidiary (status quo);

a foreign bank could operate only through a branch;

a foreign bank could operate through either a branch or a subsidiary, but not both; it could choose only one of these vehicles to offer financial services in Canada;

a foreign bank could operate through either a branch or a subsidiary, or could use both vehicles simultaneously to offer financial services in Canada.

Which option the Government chooses depends on what it is trying to accomplish. The fundamental objective of Canadian public policy toward foreign banks should be to provide maximum benefits to the Canadian consumer. Encouraging the entry of new entrants to the financial services markets will increase the level of competition and improve access to low cost funds for consumers and for small and medium-sized businesses. Therefore, public policy should encourage new entrants.

Analysis of the Four Options

The first option is the status quo. It has led to relatively limited participation by foreign banks in the Canadian economy. Capital and corporate governance requirements together with the withholding tax on interest income paid to affiliated companies has had a significant dampening effect on the activities of foreign banks in Canada. The Committee rejects this option as meeting neither the level playing field objective (as foreign banks are treated differently in Canada than Canadian banks are treated in foreign jurisdictions) nor the consumer benefits objective (as it has the effect of severely reducing the number of foreign banks which decide to operate in Canada).

The second option is branching only. It will reduce the entry barriers to foreign banks, but it will guarantee that no foreign banks will ever serve the retail depositor, those with less than $100,000 to deposit because such branches will be restricted to wholesale depositors, those with more than $100,000 to deposit. Further, foreign branches will have little interest in serving small and medium-sized business, since the costs of processing a large loan and a small loan are of a similar order of magnitude, but the returns are significantly higher on a large loan. The Committee views this as an unnecessary restriction to increasing competition in the small and medium-sized business market, and hence rejects it as not meeting the consumer benefits objective.

The third option, giving the foreign bank the choice of either a branch or a subsidiary, but not both, will make the work of the Superintendent easier than the next option, permitting the foreign bank to have both a subsidiary and a branch. However, what this option does is to force the foreign bank to choose which market it wants to operate in - the retail market or the wholesale market. If it chooses the branch option, it will be restricted to the wholesale market; if it chooses the subsidiary option it will not be competitive in the wholesale market and will compete only in the retail market.

As discussed earlier, because of the statutory and regulatory requirements imposed on a subsidiary and the withholding tax on interest income paid to affiliated companies, the subsidiary faces higher costs than a branch that can draw directly on the capital of a foreign parent. The subsidiary would therefore not be competitive with a branch under this option.

The Canadian consumer loses because competition is effectively reduced in either the retail or the wholesale market, depending on whether the foreign bank decides to operate in the retail market as a subsidiary or the wholesale market as a branch. Thus, this option does not meet the consumer benefits objective.

The fourth option, giving the foreign bank the choice of operating either a branch or a subsidiary, or both, will provide the maximum flexibility to the potential entrant.

The foreign bank that wants to enter both the retail and the wholesale markets will use a branch to enter the wholesale market and a subsidiary to enter the retail market. The rules and regulations will be designed so that the Superintendent can readily monitor the subsidiary and the branch as separate entities.

The Committee is aware that this option does not present a serious problem in other countries where it is offered, such as the United States. Further, the Committee has full confidence in the ability of the Superintendent to carry out his responsibilities under this new foreign bank entry regime.

The Superintendent currently regulates insurance companies and Schedule I banks which have far more complex and diverse corporate structures than would be expected for foreign bank operations in Canada. This option would ensure that competition in both the retail and wholesale markets for deposits is encouraged and would provide the most benefits for the Canadian consumer.

Foreign Branching Meets the Objectives of Foreign Financial Institution Policy

Foreign branching and the conditions under which foreign-owned "near banks" may operate in Canada are related issues. They are also related to the issue of potential mergers of Schedule I banks.

As has been explained earlier, foreign branching refers to the situation in which a foreign bank can set up operations in Canada without setting up an entity that is incorporated in Canada (i.e., without setting up a Schedule II bank). The Canadian entity would simply be a branch of the foreign bank, able to rely on the capital and corporate governance structure of the foreign institution. The initial costs of setting up a branch are substantially less than those of setting up a subsidiary, since the subsidiary must satisfy capital requirements, corporate governance structures and other regulatory requirements.

With the exception of Mexico, none of our major trading partners imposes a requirement that a foreign bank must operate through a subsidiary rather than through a branch.

Historically, prudential concerns have been invoked to justify the requirement that foreign banks operating in Canada be required to establish domestic subsidiaries if they wished to operate in Canada. However, the regulator, OSFI, has stated publicly that a branch system would not be a problem. The former Superintendent expressed his views of foreign branching:

I have noticed ... that the world has changed, particularly in the United States, where, while they allow Canadian banks and other foreign banks to operate as branches down there, they are now imposing on those branches, branch by branch, virtually the same regime, if not a tougher regime, than we would put on if it were a separate subsidiary. ... I would have no particular problems moving over to a branch system ... <38>

By continuing to create barriers to the entry of foreign banks, the Government is making it difficult to introduce increased levels of competition for the Schedule I banks.

The Canadian Bankers Association stated before the Senate Banking Committee and the House Finance Committee that the Schedule I banks support a foreign branching policy and welcome the competition.

Further, if the merger of some existing Schedule I banks is to occur, as has been called for by some CEOs of the major Canadian banks, then it is inconceivable that such mergers could be permitted without first creating an environment in which at least the existing levels of competition among banks will be maintained. That is, if competition among Schedule I banks is to be reduced by allowing bank mergers, then the lost competition must be replaced by increased activity by foreign banks in the Canadian market. This increased activity can only be achieved by allowing foreign banks to operate wholesale banking branches in Canada.

Given (1) that prudential issues can be adequately addressed in a branching regime for foreign banks operating in the wholesale funds market in Canada, and (2) that discussion is now underway about whether the Schedule I banks should be permitted to merge, and, if so, how adequate competition can be maintained in the financial services sector,

the Committee recommends that the Government implement a foreign bank branching policy as quickly as possible.

A foreign bank branching policy clearly meets the four objectives of foreign financial institution policy described earlier:

OSFI has said that, under branching, safety and soundness of the financial system can be maintained;
consumers are protected since branches would be restricted to the wholesale market;
enhanced services would be available due to the presence of new branches in the marketplace; and,
the level playing field with Canadian financial service providers would be promoted by ensuring that the regulatory burden borne by all financial service providers is comparable (as will be explained later in the report).

Thus, a foreign bank branching policy meets the Committee's policy objectives whereas, as discussed earlier, the White Paper's policy proposals do not.

Foreign Branching: Prudential Concerns

There are, however prudential concerns that must be addressed if foreign bank branches are to be permitted to operate in Canada. Canada has established an enviable record of financial sector stability that must not be compromised. The gatekeeper to, and monitor of, the federally regulated financial services sector is the Superintendent of Financial Institutions.

As stated earlier, OSFI has stated publicly that a foreign bank branching policy does not present a regulatory problem. Neither does it present a problem in other countries, such as the United States.

However, clearly, the foreign branching option that is selected must be one for which a set of rules (embodied in statute) and regulations can be developed that will enable the Superintendent to provide the oversight expected of his office. But, given the fact that all Canada`s major trading partners have such rules, adopting these rules - particularly the U.S. rules - to Canada could be done quickly.

Indeed, the rules facing a branch need not be substantially changed from the current rules facing a Canadian subsidiary of a foreign bank. Foreign branches, however, should be restricted to taking wholesale deposits only (that is, deposits over $100,000).

he Committee urges such a restriction in order to ensure that there is complete protection for the small unsophisticated depositor; there should be no possibility that a retail depositor would ever have to resort to a foreign court if he/she ran into problems with a foreign-owned deposit-taking institution. This is how other countries, such as the United States, treat foreign branches.

Canadian policymakers should draw upon the rules and regulations imposed on foreign branches in the U.S. as a good starting point in their development of branching rules and regulations to be used in Canada. In the United States, for example, the legislation requires that a branch maintain a capital equivalency deposit (a specified per cent of assets) at all times with an unrelated approved financial institution. This ensures that there are assets available, in the United States, to meet the liabilities of the foreign branch. There is no reason why a similar regime could not work in Canada.

There are a number of other issues that will have to be resolved before the foreign branching option is implemented, such as what type of access to the payments system foreign branches might obtain. This issue should be addressed by the Advisory Committee to the Department of Finance Studying the Canadian Payments System. Entry, direct or indirect to the payments system, should only be granted in such a way that the integrity of the system is never compromised. Given that deposit insurance is currently a condition of access to the payments system and given that these institutions may be given the right to "opt out" of deposit insurance, it may well be not appropriate to give foreign branches direct access to the payments system.

The Committee is confident that a foreign branching policy can be designed that will not compromise the safety of the Canadian banking system while adding a significant level of competition to Canadian financial services markets.

Steps Required To Implement the Committee's Proposals

The Committee recognizes that it is proposing a significant change in policy toward foreign financial institutions wishing to operate in Canada. What is involved in a foreign branching policy?

the Bank Act will need to be amended to introduce the foreign branching options;

the Winding-up Act (the insolvency act for financial institutions) will need to be amended to allow for procedures such as the separate liquidation of a branch;

regulations related to the operations of foreign branches, as opposed to foreign subsidiaries, will have to be developed and the day-to-day operations of OSFI will have to be changed to deal with foreign branches and their head offices.

The Committee recommends that the Government put maximum effort into developing a complete foreign branching proposal in time for the 1997 amendments to the Bank Act.

There are a number of models, such as the American one, that the Government can draw upon to develop the details of a foreign branching proposal. The rules exist in other jurisdictions; the task of Canadian policymakers is to adapt them to the Canadian context.

Indeed the Legislative Reform Task Force of the Schedule II Foreign Bank Subsidiaries argued, before the Committee, that:

changes [needed] would be for the most part, ancillary and would follow naturally from the decision to permit direct branches. Furthermore, direct branching is not a question of new powers. We simply need more flexibility to exercise our direct powers. If the federal government is willing to consider direct branching as part of the 1997 reforms, we would be prepared to work with officials to ensure that the inclusion of direct branching did not delay other changes already underway. <39>

This is similar to the approach that was taken to demutualisation in the Insurance Companies Act in 1992. In 1991, the legislation for federally regulated financial institutions was submitted to Parliament for consideration. At that time, no consensus existed on the specifics of permitting a mutual insurance company to demutualise, that is, to change from a mutual company to a "stock" company. The Insurance Companies Act, which came into effect on April 1, 1992, embodied the principle of demutualisation and left the details to be worked out in regulations.

A similar approach to the implementation of a foreign bank branching policy would enable detailed regulations to be developed so that branches of foreign banks in Canada contribute to the efficiency and effectiveness of the Canadian system, while at the same time, maintaining the stability of the Canadian financial system.

There is no reason that needed changes in the Bank Act to enable foreign branching to be undertaken cannot be accomplished in time to be included in the 1997 amendments to the Bank Act. Regulations can then be developed later in 1997.

The Committee would hold hearings on the proposed regulations before they are proclaimed. By late 1997, the process should be complete.

The Committee recognizes that changes in the Winding-up Act may take somewhat longer.

Even with branching there will be some foreign "real" banks that will wish to have a Canadian subsidiary financial institution (such as a Schedule II bank) even though they are operating only a limited purpose "near bank" operation in Canada. The Committee is concerned that certain regulatory requirements, such as the requirement for an initial capitalization of $10 million and the full corporate governance requirements, are inappropriate for such institutions. Therefore:

Conclusions on the Foreign Bank Issue

The Committee recognizes that the distinction between banks and near banks is an art and not science. It is also aware that it is institutions, not functions, that fail. Consequently OSFI must ensure that the applications of foreign financial institutions wishing to establish operations of any kind in Canada must be scrutinized carefully to ensure that the soundness of the Canadian financial system, and the interests of the Canadian consumer, are not compromised.

Once the foreign branching sections of the Bank Act take effect, foreign banks wishing to set up non-bank affiliates in Canada will no longer face the regulatory burden they now face.

In the interim however, before the foreign branching sections take effect, foreign "real" banks will be constrained in the same way as they are today. But, for those foreign financial institutions that fall into the "gray" area (and who want to set up limited purpose, non-deposit-taking financial institutions in Canada), the Committee's proposed flexibility on key regulatory requirements, such as initial minimum capital and corporate governance structure, should be used to ease regulatory burden until the foreign bank branching policy goes into effect.

Implications of the Committee Proposals for the Nine Specific Cases Described Above

The foreign branching policy recommended by the Committee will not affect those cases discussed above in which the foreign financial institution expects to be treated as a "near bank" (that is, their current Canadian limited purpose financial company would be a class 3 "near bank" as defined earlier). This includes Avco, Beneficial, HFC and GE Capital.

For those facing the requirement to set up a federally regulated financial institution however, the foreign branching policy will ease the cost of entry into Canada by giving them the option of setting up a foreign branch to conduct their operations in Canada. This includes: Capital One, CoreStates, Valley National and Wells Fargo.

Although Norwest falls into the classification requiring it to set up a federally regulated financial institution in Canada, Norwest has made it clear that it has no interest in operating a Canadian branch, even with a minimal regulatory burden. Because the Canadian non-bank affiliate of Norwest, Trans Canada, has been in operation, in Canada, for many years, as a sales finance company only, with an extensive network of offices, special transition arrangements should be worked out.

The Wells Fargo type of proposal raises some further interesting questions. There is no question that Wells Fargo is a "real" bank in its home country. However, Wells Fargo does not intend to set up a physical structure in Canada at all. It intends to carry out its business completely by mail.

In this case, it is not clear whether Wells Fargo is subject to Canadian financial institutions legislation since, under the law, a financial institution is subject to regulation only if it is "doing business" in Canada.

Is Wells Fargo really doing business in Canada if it proceeds with its plans? Would active solicitation of business constitute "doing business" in Canada? What if agents other than Wells Fargo sought the business?

Is Wells Fargo taking any funds out of Canada? Are there issues of protection for Canadian depositors or creditors?

If such an entity is not established here, are there issues of privacy involved with respect to the small businesses that choose to do business with Wells Fargo? If there are, how should they be dealt with and how should any rules be enforced?

Are there disclosure issues involved with respect to the terms and conditions of credit?

If Wells Fargo sets up procedures so that its Canadian clients will deal with a regulated financial institution in Canada, how do we ensure that the client does not infer that he or she is doing business with the Canadian financial institution?

Under current rules, to escape the designation "doing business in Canada" Wells Fargo may have to undertake actions which would make its proposed loan program no longer profitable. The foreign branching recommendation, if implemented, will facilitate the provision of innovative services for Canadian consumers, such as those which Wells Fargo proposes to offer. Situations, such as the Wells Fargo case, highlight the need for change in the current policy toward foreign banks. Innovative policies, which are likely to be beneficial to Canadians, such as the small business loans program of Wells Fargo, will present new challenges to the regulator, but they will also enhance competition in the financial services market and provide clear benefits to the Canadian consumer. Thus, they must be encouraged. It is Canadian public policy, not the foreign institution's proposal, which is most in need of change.

Chapter 3

Strengthening Consumer Protection

The Government dealt with five specific issues in the area of consumer protection: privacy safeguards, the cost of financial services, the availability of basic financial services, tied selling and the right to prepay mortgages. The Committee heard testimony on all of these issues. However, because there was little in the White Paper in the way of specifics, testimony was at a relatively general level.

Privacy Protection

With respect to privacy safeguards, for example, the Canadian Bankers Association and the Canadian Life and Health Insurance Association submitted that they have made considerable progress in this area. The Canadian Bankers Association (CBA) indicated that current bank practice is consistent with the proposal in the White Paper. However, the CBA went on to say:

The banks support a regulatory framework that allows self-regulation and avoids imposing onerous or multiple government compliance and monitoring regimes.<40>

The Canadian Life and Health Insurance Association stated that:

the White Paper`s proposal to impose privacy regulations on federal financial institutions raises serious concerns about potential regulatory disharmony on two fronts:

There is the potential for jurisdictional conflict between the federal government and the provinces that have exclusive authority over contractual matters and related information with respect to insurance.

Having in place privacy regulations for federal financial institutions while, at the same time, applying federal privacy legislation to the private sector generally (as recently proposed by the Minister of Industry) raises the possibility of overlap and duplication within the federal sphere itself.<41>

Others, such as the Life Underwriters Association of Canada (LUAC), the Consumers' Association of Canada, the Association co-opérative d'économie familiale du Centre de Montréal (ACEF Centre), and Power Financial Corporation disagreed with the proposition that no government action was necessary in the area of privacy safeguards. They argued that the potential for abuse of personal information held by a large financial institution was so strong, and the competitive advantages gained by the large institutions using this data, so great, that regulation is needed. The Committee agrees with the basic point that is being made, but it nevertheless regards some of the arguments about the potential abuse of personal information by large financial institutions as exaggerated and overstated.

The Consumers' Association of Canada argued that the Canadian Standards Association Model Code for the Protection of Personal Information should be mandated as the minimum standard and that a mechanism for auditing compliance with privacy regulations and sanctions for failure to comply be adopted.

ACEF Centre argued that:

the banking industry's attempts at self-regulation in recent years ... are not entirely convincing. For instance, the model code of privacy published in March 1996 by the Canadian Bankers Association does not conform to the corresponding model code established by the Canadian Standards Association. The purposes for which information may be gathered are described in rather vague terms and there is practically no limit on the information that may be collected from third parties without the consent of the person concerned.<42>

ACEF Centre argued for strict regulation of the methods used by institutions to collect, use and transmit personal information. Further there must be effective remedies available to persons affected.

ACEF Centre argued that voluntary codes of conduct are not adequate. The Committee agrees.

Finally, Power Financial argued for increased regulation with respect to the protection of consumer privacy, and commented on the Government's intent to require financial institutions to seek consent if information is to be used for a new purpose or if it is to be disclosed to outside parties. Power Financial argued that:

we doubt that in dealing with a large financial institution an individual consumer can ever give genuinely free consent to the manipulation of information about him or her or its use for a purpose other than that for which it was originally disclosed.<43>

Power Financial recommended that, once the government develops specific regulations, such draft regulations should be submitted for review by the Committee before they are enacted. The Committee agrees.

The Committee supports the Government proposal, in the White Paper, to introduce regulations governing the collection, use, retention, and disclosure of customer information by all federally regulated financial institutions along the lines of the Canadian Standards Association Model Code for the Protection of Personal Information.

Moreover, the Committee intends to hold hearings on the proposed regulations before they are enacted.

LUAC also addressed the Credit Information Regulations under the Insurance Companies Act, regulations that LUAC participated in the drafting of, but which have not yet been implemented. These regulations are designed to guard against the abuse of personal information that a consumer gives to an insurance company in the course of applying for a mortgage or other loan. The regulations have not yet been implemented however. However, LUAC did receive a letter from the Department of Finance on 16 April of this year indicating that work would resume on the Credit Information Regulations, but it has heard nothing since.

The Committee recommends speedy release of the draft Credit Information Regulations.

The Committee also intends to hold hearings on the Credit Information Regulations before they are enacted.

Power Financial drew the Committee's attention to a proposal in the White Paper designed to ease the regulatory burden on financial institutions - to permit financial institutions to carry on information processing in-house rather than through subsidiary operations. Power Financial suggested that this proposal has serious implications for the protection of personal information by financial institutions:

It is not clear whether this [proposal in the White Paper] is intended to cover the broad definition of "information processing services" - which under the Act includes " the collection, manipulation and transmission of financial or economic information" - or the even broader range of activities permitted by an "information services corporation" - which includes providing advisory services related to the design and implementation of information management systems and the design, development and implementation of computer software and ancillary hardware.<44>

Power Financial added that because of "the tremendous potential for abuse" this issue should be thoroughly examined by the Task Force or the Senate Banking Committee. Until such an examination is completed, no changes should be contemplated.

The Committee does not understand the motivation for the proposal in the White Paper to permit financial institutions to carry on information-processing in-house rather than through subsidiary operations. None of the witnesses who addressed this issue indicated that moving data processing from a subsidiary to an in-house operation would save costs. In the absence of a clear case being made for the change,

The Committee recommends no change in the rules requiring data processing to be carried on in a subsidiary.

The Cost and availability of Financial Services

With respect to the cost of financial services and the availability of basic financial services, not surprisingly, all who addressed these issues supported developments that would benefit the Canadian consumer, by making information about financial institutions' fees and services as clear as possible. The Committee agrees with the witnesses and the White Paper.

The Committee urges the Government to address this question immediately and to develop specific proposals. The Committee is willing to undertake public consultations to facilitate the attainment of this important goal.

Tied Selling

The Government has also proposed consultations on the issue of tied selling. Tied selling is a selling arrangement in which a customer is required to buy one product as a condition of purchasing another (the customer must purchase life insurance to get a mortgage, for example). If coercion is involved, or if tied selling lessens competition, the Competition Tribunal may intervene to restore competition. While no witness argued that anti-competitive tied selling should be permitted, there was disagreement about whether coercive tied selling posed a real problem.

The Canadian Bankers Association argued that there is some confusion about the difference between the cross-selling of products and services and anti-competitive tied selling. Cross-selling of products and services involves offering the customer different combinations of products and services with different prices for each of the components, depending on what package the consumer opts for. As the customer adds additional products or services to the package, the financial institution often lowers the price of individual components of the package. This is tied selling. In order to get a lower price for one product or service the consumer must take another, but there is no coercion involved.

The CBA is strongly of the view that new measures are not required. Banks place a priority on their customer relationships and would not want to jeopardise them. Furthermore, it is difficult to imagine how coercion can be applied in a market as competitive as the financial services market in Canada .<45>

The Independent Investment Dealers disagreed; they argued that tied selling by the chartered banks is a real problem. In fact, they presented the details of three incidents that they claimed were "real life" examples of tied selling. The Committee did not find the examples convincing. The Independent Investment Dealers argued that:

we not seeking to outlaw beneficial cross-selling or relationship pricing. We are seeking to outlaw coercion by precluding the use of credit granting power to pressure or coerce consumers into buying a product or service from a supplier that the consumer would not freely choose.<46>

They go on to argue that:

section 416, subsection (5) of the Bank Act currently prohibits coercive selling of insurance products by a bank. This section provides that a bank may not pressure a borrower to place insurance for the security of a bank with any particular insurance company. ... now that the banks can operate in all areas of financial services, the section should be broadened to prohibit banks from the coercive selling of any financial service or

product.<47>

Specifically, they suggest amending section 416(5) to read:

No bank shall exercise pressure on a borrower to purchase or obtain any financial product or service from any particular supplier, but if a financial product or service is required in connection with a loan, a bank may require that a supplier chosen by a borrower meet with the bank's approval, which shall not be unreasonably held.<48>

The Committee is aware that there have been concerns expressed about the use of the term "pressure" in this section of the Bank Act, because it has not been precisely defined. However, this is why the Committee urges the Government, in implementing the above recommendation, to make it clear that what is being banned is undue pressure and not the legitimate cross-selling of products, since the latter is in the consumer's interest.

The Committee is also aware that there may be "federal-provincial jurisdiction issues" involved in this section of the Bank Act.

The Committee recommends that the Government adopt the amendment to section 416(5) of the Bank Act presented by the Independent Dealers Association, and that it amend the Acts governing other federally regulated financial institutions to prevent these institutions from engaging in tied selling practices which involve undue pressure on, or coercion of, the consumer.

The Committee expects that the Government will resolve the issues related to federal-provincial jurisdiction and to the definition of the word "pressure" before it acts on this recommendation.

The Committee further notes the link between the issue of "tied selling" and that of full disclosure of the options available to the consumer. The issue is not merely that of coercion or pressure. When consumers are required to purchase a specific good or service as a condition of being able to purchase another (such as the requirement to purchase life insurance in order to get a mortgage), they are not always aware that they can purchase the mandatory product from someone other than the financial institution imposing the requirement. They should be fully aware that this option is open to them. The Committee expects to see this issue covered in the proposals dealing with the cost of financial services.

Prepayment of Mortgages

The Committee awaits more details about proposals regarding prepayment of mortgages.

The CLHIA argued that:

the industry is concerned that fundamental changes to the current system could be very disruptive to what is now a very competitive industry. Currently, consumers have a wide variety in choice of mortgage terms, ranging from six months to five years.<49>

It is possible that if the financial institutions are unhappy with what results, there could be unexpected changes.

It is interesting that the Consumers' Association of Canada argues:

the right to prepay mortgages and the conditions under which the right exists should not ... depend on the term of the mortgage.<50>

Yet, the Consumers' Association also notes that:

the current regime, limiting the prepayment penalty for mortgages longer than five years to a maximum of three months' payments, has effectively eliminated mortgages greater than five years in

length.<51>

While it is important to develop policies that will provide consumers with the flexibility that they seek, the financial institutions must also be able to profit from the mortgages they are being asked to offer. Financial institutions will be reluctant to enter a contract in which maximum prepayment penalties do not allow a lender to recoup something close to the present value of the potential loss incurred as a result of the prepayment. Such a contract

would cause the lender to face major interest rate risk resulting from a significant asset-liability mismatch. The cost of this added risk would, ultimately, be passed on to the consumer in the form of higher mortgage rates .<52>

It is important that any change in prepayment rules not have the unintended effect of reducing options for consumers such as, for example, causing financial institutions to offer mortgages which are no longer than, say, three year, or even one year, in term.

Ideally, a truly competitive mortgage market would generate the widest range of mortgage options available to consumers. The Government should, therefore, establish conditions that will encourage lenders to enter the mortgage market. Competition should be encouraged.

If, however, the Government decides to change federal policy regarding loan prepayment,

the Committee is of the view that such changes must be designed carefully. A balance is needed between consumer needs and the right of institutions to make a profit from the mortgage. There are two sets of interests which must be balanced. The White Paper does not strike the appropriate balance.

Chapter 4

Corporate Governance

The corporate governance discussion in the White Paper also drew extensive comment in the brief the Committee received, and in the testimony of witnesses before the Committee. Particularly strong in its negative reaction was the Canadian Life and Health Insurance Association. The CLHIA "strongly objects to the Discussion Paper proposals."

Given the intense analysis and the major alterations done in 1992, as well as the costs associated with making changes, the existing regime should, at present, remain intact.<53>

CLHIA was, for example, unhappy with the discussion of policyholder rights, "including fundamentally altering the proxy solicitation regime and allowing individual policyholder to make proposals on the ordinary business and affairs of the company." CLHIA argues that policyholders are not shareholders and the corporate governance regime relevant for shareholders is not necessarily relevant to policyholders.

The CLHIA is also concerned about proposals that would expand the circumstances under which an individual is considered to be affiliated with a financial institution. In particular, the CLHIA objects to proposals that would limit the use of "mirror" boards (the situation in which a parent and its subsidiary have identical boards).

The Canadian Bankers Association supports the drafting of a paper by the Office of the Superintendent of Financial Institutions (OSFI) that would present a "best practices" guideline for corporate governance, but argues that "as a general principle, organizations should be free to choose the governance structure that best suits their needs." <54> The CBA also expressed concern about the reference in the Discussion Paper to increased regulatory assessment of board effectiveness. It awaits details.

With respect to the expansion of the definition of affiliated director and the limitation on the use of "mirror" boards, the CBA expressed the same reservations as the CLHIA.

The Trust Companies Association objects to the proposal on "mirror boards" and indicated that it will await the details of the "affiliated person" proposal before commenting.

When a financial institution and its financial institution subsidiary have identical boards, the boards are called "mirror boards". The Committee has, over the years, consistently opposed the use of "mirror boards" by financial institutions. The use of "mirror boards" raises the question: which creditors or depositors is the board representing when it transfers assets between the parent and the subsidiary? This is a question that should never have to be asked. The board of each institution should have a majority of members whose focus is the interests of that institution only. There should be no ambiguity about the responsibilities of each board.

The Committee has consistently opposed mirror boards. In its 1994 Report, Regulation and Consumer Protection in the Federally-Regulated Financial Services Industry: Striking a Balance, the Committee stated

Current legislation governing financial institutions states:" ... no more than two thirds of the directors may be persons affiliated with the company." (Federal Trust and Loan companies Act, sec. 167(1)) This allows excessive overlap between the boards of financial institutions and holding companies, as well as between management of a financial holding company and the board of the financial institution that it owns. Neither of these outcomes is desirable. <55>

The Committee strongly reiterates its recommendation from that Report (Regulation and Consumer Protection in the Federally-Regulated Financial Services Industry: Striking a Balance):

The Committee urges the Government to prohibit the use of mirror boards by financial institutions and their parents and by financial institutions and their subsidiaries.

With respect to the White Paper`s reference to OSFI drafting a "best practices" paper on corporate governance, the Trust Companies`Association expressed a concern "about the increasing trend toward "micro-management" and regulatory compliance at the board level in the financial services sector".<56>

The Committee will hold hearings on the best practices paper when it is released in draft form.

There were calls for "fine-tuning" the legislation. The Canadian Institute of Chartered Accountants (CICA) points out that:

the classic corporate governance model currently focuses on protecting the rights of owners of the corporation ... ; however, the degree of protection for depositors and non-participating policyholders is less clearly defined. The CICA believes that it is important that the legislation explicitly address the interests of these [stakeholders] because;

- protecting the interests of these stakeholders is a stated public policy objective

- it will ensure that the parties involved with corporate governance have a clearer understanding of their responsibilities

- it will provide an important frame of reference for additional legislative changes relating to information needs of various stakeholders and the extent to which these needs should be met

- it will also facilitate the implementation of private sector corporate governance initiatives such as those suggested in the TSE Report on Corporate Governance in Canada.<57>

The Committee is in full accord with the chartered accountants and adopts the CICA recommendation that:

legislation explicitly address the interests of depositors and non-depositors and non-participating policyholders in defining the governance model and duties of directors.

Chapter 5

CREDIT UNIONS AND THE WHITE PAPER

Credit unions are consumer-owned financial institutions whose powers are governed by the laws of the province of incorporation. The Central in each province (B.C., Alberta, Saskatchewan, Manitoba, Ontario, and Nova Scotia) is a Central Co-operative Credit Society to which the Cooperative Credit Associations Act (CCAA) applies; Credit Union Central of Canada (CUCC) is the national organisation of the co-operative system. The credit unions are the principal providers of retail financial services, while:

the principal business objective of CUCC is to provide financial and financial support services to the Centrals and through and on their behalf to and for credit unions, with that of the Centrals being to provide financial and financial support services to and for their member credit unions. ... increasingly CUCC and the Centrals, directly or in association with credit unions, are being requested by credit unions to participate in the delivery of retail financial services.<58>

Included among these services are the delivery of mutual fund and securities services.

The position of OSFI with respect to CUCC and the Centrals is that these entities are restricted to providing services on a wholesale basis (within the defined co-operative/credit union community). Their ancillary business corporations are similarly restricted.

The White Paper suggests proposed amendments to subsection 390(1)(m) of the CCAA to specifically limit the services that may be provided by an ancillary business corporation invested in by CUCC or a Central.

CUCC argues that such a change:

has the potential of significantly limiting the ability of CUCC and the Centrals to assist credit unions to provide effective and competitive services to their members. ... Many of the financial services provided by credit unions require national programs. The issuance of credit cards to credit union members is an example.<59>

Ancillary business corporations are the instrument used to deliver such services. Further, in some cases, the provision of retail services by CUCC and the Centrals may be the most efficient way to provide an effective national program.

CUCC also argues that, because of the demonstrated economies of scale in the provision of financial services, it should be permitted to provide ancillary services to organisations other than credit unions. This "will assist CUCC in providing services to credit unions at an economically competitive cost."

The cost incurred by CUCC and the Centrals to develop financial services programs is substantial. The inability of CUCC to provide services, even on a wholesale basis, to other than the co-operative/credit union communities has proven to be an additional cost disincentive for the development or participation in certain financial services.<60>

Section 390 of the CCAA requires that,

if a financial services provider was to be invested in to provide services for credit unions, one of either CUCC or a Central must control that entity, even though the entity was to provide services for a national program. ... [Further] one of either CUCC or a Central must put up the controlling capital.<61>

CUCC and the Centrals want to be able to aggregate their individual investments to meet the control test specified in Section 390. The Department of Finance suggested that CUCC and the Centrals structure an association incorporated under the CCAA to hold the individual investments of CUCC and the Centrals. They have been unable to

satisfactorily to develop a structure that will appropriately recognise the varying capital interests had by CUCC and the Centrals in the underlying corporations owned by the holding association.<62>

The White Paper also indicated that the federal government was prepared to discuss ending federal regulation of provincial credit union centrals. According to the witness for CUCC:

we believe that the proposed elimination of the federal regulation of regional centrals, which was in the White Paper, is heading in the wrong direction. Upon examination of federal regulation, we strongly believe that federal regulation of our provincial Centrals and Canadian Central should continue. The federal regulation brings common rules and understanding to doing business across our system.<63>

The Committee is supportive of the federal government maintaining a presence in the regulation of provincial credit union Centrals.

CUCC has made it clear that the credit union movement wants to be a significant player in the evolving financial services market. The Committee strongly supports the credit union movement because of the way it serves small business customers and small depositors, particularly in smaller communities in rural Canada and is therefore supportive of the positions put forward by CUCC in its brief.

However, the Committee is also cognisant of the fact that, as credit unions grow to become wider and wider based in terms of the services they provide and the categories of people who are eligible to become members, it may be necessary to reconsider some of the special privileges credit unions have (e.g., preferential tax treatment in certain jurisdictions) in order to keep a level playing field covering all financial service providers.

APPENDIX A -- PRIVATE WITNESSES

ISSUE NO.	DATE	WITNESSES
9	October 1, 1996	From the Credit Union Central of Canada: Mr. William Knight, Chief Executive Officer. From the Canadian Bankers Association: Mr. Gordon J. Feeney, Chairman, Executive Council and Vice-Chairman, Royal Bank of Canada; Mr. Raymond J. Protti, President and Chief Executive Officer; Mr. Douglas W. Melville, Director, Commercial and Regulatory Affairs; and Mr. David E. Phillips, Vice-President, General Counsel and Secretary. From the Insurance Brokers Association of Canada: Mr. Rod Jones, President; Mr. Rick Frost, Chairman, Financial Institutions Committee; Ms. Joanne C. Brown, Executive Director; and Mr. André Bois. From Norwest Financial, Inc: Mr. John van Leeuwen, President, Trans Canada Credit Corporation; Mr. Nick Scarfo, Assistant Vice-President and General Counsel, Trans Canada Credit Corporation; Mr. Steve Wagner, Assistant General Counsel, Norwest Financial, Inc.; and Mr. Richard C. Owens, Partner, Smith Lyons. From the Capital One Financial Corporation: Mr. David M. Willey, Vice-President and Treasurer; Mr. Christopher T. Curtis, Associate General Counsel; and Mr. Richard C. Owens, Partner, Smith Lyons. From the Association des intermédiaires en assurance de personnes: Mr. Denis Savard, Chairman of the Board; Ms. Anne-Marie Beaudoin, Senior Counsel; and Mr. Alain Poirier, First Vice-President. From the Canadian Institute of Actuaries: Mr. Harry H. Panjer, President Elect; Ms. Claudette Cantin, Vice-President; and Mr. Morris W. Chambers, Chairperson of the Task Force on Insurance Legislation. From Beneficial Canada Inc: Mr. Jean Bédard, Vice-President, General Counsel and Secretary. From Avco Financial Services Canada: Ms. Diane Wolfenden, Director, Communications and Community Relations; and Mr. Scott Furlonger, Vice-President and Controller. From Household Financial Corporation: Mr. Terry Cretney, Treasurer. From the Canadian Association of Retired Persons: Ms. Lillian Morgenthau, President; and Mr. Rolf Calhoun, Chapter Head. From One Voice - The Canadian Seniors Network: Mr. Robert Armstrong, Member, Issues Committee. From Power Financial Corporation: Mr. James W. Burns, Deputy Chairman of Power Corporation of Canada and Director of Power Financial Corporation; and Mr. Edward Johnson, Vice-President, General Counsel and Secretary.
10	October 2, 1996	From the Insurance Bureau of Canada: Mr. George Anderson, President; and Mr. Alex Kennedy, Vice-President, General Counsel and Secretary. From the Canadian Institute of Chartered Accountants: Mr. Graeme Rutledge, Chair, Financial Institutions Reform Study Group; and Ms. Diane R. Hillier, Director, Auditing Standards. From the Investment Dealers Association of Canada: Mr. Andrew G. Scace, Vice-President and Director, RBC Dominion Securities Inc.; Mr. Peter K. Marchant, Vice-President and Director, CIBC Wood Gundy Inc.; and Mr. Ian C. Russell, Vice-President, Capital Markets. From the Canadian Federation of Independent Business: Ms. Catherine Swift, President; and Mr. Garth White, Vice-President, National Affairs, Research. From the Canadian Life & Health Insurance Association Inc.: Mr. Mark Daniels, President; and Mr. Bob Astley, President and CEO, Mutual Group. From Beacon Securities Limited: Mr. Lonsdale W. Holland, President. From Independent Investment Dealers: Mr. Robert Schultz, Chairman and CEO, Midland Walwyn Capital Inc.; Mr. Peter Bailey, CEO, Gordon Capital Corporation; and Mr. Lorie Waisberg, Partner, Goodman Phillips and Vineberg. From the Canadian Fraternal Association: Mr. Richard May, Director and Chairman of the Legislative Committee; and Mr. Ralf Hensel, Member of the Legislative Committee. From the Congress Financial Corporation Canada: Mr. William R. Davis, President and President of Congress Financial Corporation; Mr. Albert Mandia, President of Cashflex L.P. and Cashflex Inc.; Ms. Ruth Brader, in-house Counsel to CoreStates Financial Corp.; and Ms. Jean Anderson, of McMillan Binch. From the Consumers' Association of Canada: Dr. Robert Kerton, Chair, Financial Services Committee and Professor of Economics, Department of Economics, University of Waterloo; and Ms. Marnie McCall, Director, Policy Research. From Democracy Watch: Mr. Duff Conacher, Coordinator. From the Service d'aide au consommateur: Ms. Madeleine Plamondon.
11	October 3, 1996	From General Electric Capital Canada Inc.: Mr. Michael Davies, Vice-President & General Counsel; Mr. Bob Weese, Vice-President, Government Affairs; Ms. J. Diane Hébert, Vice-President, Legal Affairs, Equipment Financing; Mr. David S. Brennan, Vice-President and General Manager; Mr. Leslie J. Battrick, Vice-President and Counsel; and Mr. Armin Sachse, Vice-President, Marketing, Equipment Financing. From Wells Fargo Bank, NA: Mr. Gadi Meir, Project Leader and Senior Financial Consultant, Business Banking Group; and Ms. Louise S. Pelly, Counsel from Gowlings, Strathy & Henderson. From the Co-operators Group Limited: Mr. Terry Squire, President and Chief Executive Officer of The Co-operators Group Limited, Co-operators Financial Services Limited, Co-operators General Insurance Company and Co-operators Life Insurance Company; Mr. Lorne Motton, Vice-President Finance and Controller for Co-operators General; and Mr. Frank Lowery, Vice-President, General Counsel and Secretary. From the Canadian Real Estate Association: Mr. Pierre Beauchamp, Chief Executive Officer; Ms. Shirley A. Taylor, Manager, External Relations; and Mr. Martin Laplante, Consultant, RES Policy Research Inc. From Life Underwriters Association of Canada: Mr. Hal D. Couillard, Past Chair; Mr. David J. Thibaudeau, President; and Mr. William T. Babcock, Vice-President, Public Affairs. From the Task Force of Schedule II Foreign Banks : Mr. Fred Buhler, Chair, Legislative Reform Task Force of the Schedule II Foreign Banks and Chairman and Chief Executive Officer, Bank of America Canada; Mr. Willem Veger, President and Chief Executive Officer, ABN AMBRO Bank Canada; and Mr. Kenichiro Tanaka, President and Chief Executive Officer, Fuji Bank Canada. From Deutsche Bank Canada: Mr. Stephen Frhr. von Romberg Droste zu Senden, President and Chief Executive Officer; and Mr. Barry Munholland, Senior Vice-President and Managing Director. From the Association coopérative d'économie familiale: Ms. Louise Rozon, General Manager; Mr. Eric Fraser, Responsable du service d'aide aux consommateurs; Mr. Jacques St-Amant, Research Counsel; and Mr. Sidney Ribaux, Project Coordinator. From the Task Force on the Churches and Corporate Responsibility: Mr. Bill Davis, Manager, Task Force's dossier on Banking Access for Low-income groups; Rev. Dalton Jantzi, ordained minister, Mennonite Church of Eastern Canada; and Mr. Bernard Dufresne, Co-Director, Social Affairs Office, Conference of Catholic Bishops of Canada. From the National Anti-Poverty Organization: Ms. Lynne Toupin, Executive Director. From the Retail Council of Canada: Ms. Diane Brisebois, President and CEO; Mr. Ken Morrison, Banking Consultant and President, Ken Morrison Consulting Inc.; and Mr. Ray Bird, Chairman, Banking Committee and Vice-President, Credit, Sears Canada Inc. From Trimark Investment Management Inc.: Mr. Brad Badeau, Senior Vice-President and Chief Financial Officer.

APPENDIX B - PRIVATE BRIEFS

Briefs received from organisations who did not appear before the Committee:

Association of Canadian Financial Corporations

Automotive Finance Affiliates

Canada Trust

Canadian Bond Rating Service

CIBC Wood Gundy Securities Inc.

National Trust

Privacy Commissioner of Canada

The Canadian Bar Association

The Mutual Group

The Trust Companies Association of Canada

Valley National Bank

ENDNOTES

<1>The Hon. Paul Martin, Minister of Finance, House of Commons Debates, March 6, 1996, p. 379.

<2>Standing Senate Committee on Banking, Trade and Commerce, Interim Report on the 1992 Financial Institutions Legislation, p. 12.

<3>1997 Review of Financial Sector Legislation: Proposals for Changes, June 1996, Preface.

<4>Senate Banking Trade and Commerce Committee, Towards a More Competitive Financial Environment, 1986, Recommendation 43.

<5>Ibid., Recommendation 46.

<6>U.S. General Accounting Office, Foreign Banks, February, 1966, p. 17.

<7>R.A.Shearer, J.F.Chant, and D.E.Bond, Economics of the Canadian Financial System, 3rd ed., Scarborough, Prentice Hall Canada, 1995, p.343.

<8>Ibid, p.294

<9>Schedule II Foreign Banks Executive Committee of the Canadian Bankers Association, Letter to Department of Finance, 30 April 1996, p. 2.

<10>Ibid, p.3.

<11>Ibid, p.3

<12>White Paper, p.22.

<13>Ibid, p.22.

<14>Ibid., p.22.

<15>Norwest Financial, Inc., Submission to the Department of Finance, August 26, 1996, p.6.

<16>Household Financial Corporation, Submission to the Department of Finance, September 23, 1996, p.2.

<17>Norwest Financial Corporation, Submission, p. 13.

<18>Capital One Financial Corporation, Submission, August 29, 1996, p.7.

<19>Valley National Bank, Submission to the Senate Banking Committee, 30 September 1996, p.2.

<20>Ibid, p.1.

<21>Wells Fargo , Letter from OSFI, September 24, 1996.

<22>Norwest Financial Corporation, Submission to the Department of Finance, August 29, 1996, p. 13.

<23>Ibib, pp.14 , 15.

<24>Capital One, Submission, August 29, 1996, p.2.

<25>Ibid, p. 21.

<26>Ibid, p. 23.

<27>Beneficial Finance Corporation, Letter to the Department of Finance, 29 August, 1996, p.3.

<28>Association of Canadian Financial Corporation, Submission to the Department of Finance, August 30, 1996, pp. 3, 4.

<29>Ibid, p.4.

<30>CIBC Wood Gundy, Submission to the Department of Finance, August 29, 1996, p.7.

<31>Ibid, p.3.

<32>Andrew Scace, Investment Dealers Association, Standing Senate Committee on Banking, Trade and Commerce, October 2, 1996.

<33>Schedule II Foreign Banks Executive Committee, Submission to the Department of Finance, January 29, 1996, p. 7.

<34>Alfred P. Buhler, Chairman of the Legislative Reform Task Force of the Foreign Banks' Executive Committee, Letter to the Hon. Doug Peters, September 9, 1996, p.1.

<35>United States General Accounting Office, Foreign Banks, Assessing Their Role in the U.S. Banking System, February 1996, pp. 2, 3.

<36>Schedule II Foreign Banks Executive Committee, Submission to the Department of Finance, January 29, 1996, p.2.

<37>Legislative Reform Task Force of the Schedule II Foreign Bank Subsidiaries, Opening Remarks to the Senate Standing Committee on Banking, Trade and Commerce, October 3, 1996, pp.7, 8.

<38>Michael Mackenzie, Superintendent of Financial Institutions, Minutes of Proceedings and Evidence of the Standing Committee on Industry, Issue No. 25, May 31, 1994, p. 41.

<39>Legislative Reform Task Force of the Schedule II Foreign Bank Subsidiaries , Opening Remarks to the Senate Standing Committee on Banking, Trade and Commerce, October 3, 1996, p. 10.

<40>Canadian Bankers Association, Response to the White Paper, August 1996, p. 6.

<41>Canadian Life and Health Insurance Association, Submission to the Standing Senate Committee on Banking, Trade and Commerce, September, 1996, p.21.

<42>"Association coopérative d'économie familiale du Centre de Montréal", Submission to the Standing Senate Committee on Banking, Trade and Commerce, October 1996, pp.6, 7.

<43>Power Financial Corporation, Submission to the Standing Senate Committee on Banking, Trade and Commerce, October 1, 1996, p. 9.

<44>Ibid, p.8

<45>Canadian Bankers Association, Response to the White Paper, August 1996, p.13.

<46>Independent Investment Dealers, Presentation to the Senate Banking Committee, October 1996, p.4.

<47>Ibid, p.5.

<48>Ibid, p.5.

<49>Canadian Life and Health Insurance Association, Submission to the Standing Senate Committee on Banking, Trade and Commerce, p.26.

<50>Consumers' Association of Canada, Submission to the Standing Senate Committee on Banking, Trade and Commerce, September 1996, p. 5.

<51>Ibid, p.5.

<52>Canadian Life and Health Insurance Association, Submission to the Standing Senate Committee on Banking, Trade and Commerce, p. 26.

<53>Canadian Life and Health Insurance Association, Submission to the Standing Senate Committee on Banking, Trade and Commerce, September 1996, p.7.

<54>Canadian Bankers Association, Response to the White Paper, August 1996, p.24.

<55>Regulation and Consumer Protection in the Federally-Regulated Financial Services Industry: Striking a Balance Report, 1994, p. 78.

<56>Trust Companies Association, Comments on the White Paper, August 1996, p.12.

<57>Canadian Institute of Chartered Accountants, Submission to the Standing Senate Committee on Banking, Trade and Commerce, October 2, 1996, p. 2.

<58>Credit Union Central of Canada, Submission to the Department of Finance, August 2, 1996, p. 3.

<59>Ibid, p.6.

<60>Ibid, p.7.

<61>Ibid, p.8

<62>Ibid, p.8.

<63>William Knight, Chief Executive Officer, Credit Union Central of Canada, Evidence, Standing Senate Committee on Banking, Trade and Commerce , October 1, 1996, p.2.

Banking, Commerce and the Economy

1997 FINANCIAL INSTITUTION REFORM

LOWERING THE BARRIERS TO FOREIGN BANKS

LIST OF RECOMMENDATIONS

PART II: WHITE PAPER PROPOSALS

Chapter 3: Strengthening Consumer Protection

Chapter 4: CORPORATE GOVERNANCE

Chapter 5: CREDIT UNIONS AND THE WHITE PAPER

"We should begin by welcoming full-scale

competition in our domestic market from

the banks of any nation that gives Canadian

banks equal regulatory treatment.

Let me repeat that. What was once protection

for the country has become a prison for our

banks. I believe we should throw the doors

wide open in both directions".

CHAPTER 1

INTRODUCTION

CHAPTER 2

Foreign Financial Institutions Policy

Part I: Background

The Foreign Bank Issue: An Introduction

Objectives of Foreign Financial Institutions Policy

ensuring safety and soundness,

protecting consumers,

enhancing service offerings, and

The Current Situation with Respect to Foreign Banks

Definition of Terms to be Used in the Report

Part II: White Paper Proposals

The White Paper Deposit Insurance Opt-Out Proposal

Impact of the Foreign Bank Entry Proposals on "Near Banks"

* the foreign near bank issuers in Canada;

* individual and institutional investors; and

Part III: Foreign Bank Branches and Foreign Bank Subsidiaries

Foreign Branches vs. Foreign Subsidiaries

...

Part IV: Views of the Committee on Foreign Financial InstitutionS Policy

Chapter 3

Strengthening Consumer Protection

Privacy Protection

The Cost and availability of Financial Services

Tied Selling

Prepayment of Mortgages

Chapter 4

Corporate Governance

Chapter 5

CREDIT UNIONS AND THE WHITE PAPER

APPENDIX A -- PRIVATE WITNESSES

ISSUE

NO.

DATE

WITNESSES

From the Credit Union Central of Canada:

From the Canadian Bankers Association:

From the Insurance Brokers Association of Canada:

From Norwest Financial, Inc:

From the Capital One Financial Corporation:

From the Canadian Institute of Actuaries:

From Beneficial Canada Inc:

From Avco Financial Services Canada:

From Household Financial Corporation:

From the Canadian Association of Retired Persons:

From One Voice - The Canadian Seniors Network:

From Power Financial Corporation:

From the Insurance Bureau of Canada:

From the Canadian Institute of Chartered Accountants:

From the Investment Dealers Association of Canada:

From the Canadian Federation of Independent Business:

From the Canadian Life & Health Insurance Association Inc.:

From Beacon Securities Limited:

From Independent Investment Dealers:

From the Canadian Fraternal Association:

From the Congress Financial Corporation Canada:

From the Consumers' Association of Canada:

From Democracy Watch:

From General Electric Capital Canada Inc.:

From Wells Fargo Bank, NA:

From the Co-operators Group Limited:

From the Canadian Real Estate Association:

From Life Underwriters Association of Canada: