Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 23 - Evidence - June 18, 1998
OTTAWA, Thursday, June 18, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the present state of the financial system in Canada.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: You are the last witnesses for our institutional investor hearings. We have been intrigued by the effectiveness of two sets of actions taken with regard to guidelines. One was the Dey report. The other was the regulatory change in New Zealand, which stipulates that certain things must be made public. It has had a very significant effect on the governance practices both of directors and of management. It is certainly true in Canada in the Dey report. We had a two hour teleconference with the Governor of the Central Bank in New Zealand, who explained in some detail how it impacted in his case.
In addition to your guidelines, guidelines have been issued by PIAC, the Pension Institute Association of Canada. As well, IFIC has issued guidelines with respect to mutual funds. We would like to have an overview of your guidelines, as well as your guidance on the question of the creation of an amalgamated set of guidelines. Such guidelines would remain as guidelines, but would have attached to them a regulation under your jurisdiction, which would require that the institutional investors whom you regulate report to you annually in a public document how they were or were not adhering to the guidelines. Therefore, you would be able to retain the flexibility that is associated with guidelines, while at the same time using the persuasive power of publicity and peer-group pressure to exhort people to abide by them.
We therefore felt it would be useful to have you tell us about your own guidelines, and to give us your comments on the process we have been kicking around. If such a process were put in place, you would be the regulator responsible for carrying it out. Please proceed.
Mr. John Palmer, Superintendent, Office of the Superintendent of Financial Institutions: Mr. Ron Bergeron has played a very important role in initiating and developing these guidelines. Mr. Richard Webb has been involved with the guidelines, and also with recent amendments to the proposed Pension Benefit Standards Act, which to some extent is an important companion piece for these guidelines, and which represents a fairly significant change in our approach to supervising pension plans.
We have already provided you with a copy of our "Guideline for Governance of Federally Regulated Pension Plans", which came out on May 1 of this year. You also have a copy of our draft guideline on investments. In addition to these guidelines, we have developed a number of other guidelines and advice on topics, such as what to expect from the regulator, risk assessment, disclosure to members, advice on actuarial valuations, and year 2000 compliance. I intend to concentrate on the governance guideline alone. I will describe how it came to be, and how it represents a change in our previous approach to supervision.
We have given you a copy of OSFI's mission and mandate with respect to pension plans. In earlier appearances in front of this body, we talked about OSFI's mission and mandate generally. You have a reasonable context for the role that we seek for ourselves in the supervision of pension plans per se.
We supervise private pension plans for industries that fall under federal jurisdictions such as telecommunications, banking and interprovincial transportation. These plans are established voluntarily by employers, sometimes on an individual company basis, and sometimes on a broader industry-wide basis. Currently though, we are not a big pension plan regulator or supervisor in Canada. We supervise approximately 1,100 plans, varying in size from one-member plans to plans of up to 41,000 members. Some of the larger plans have assets in the $8- to $10-billion range.
Employers establish pension plans voluntarily; they may also terminate them. The supervision of pension plans involves different considerations and requires different approaches than the supervision of financial institutions. However, many of the same principles, including those of good governance, apply equally to each, and we have attempted to encourage pension administrators to adopt the principles and practices of good corporate governance behaviour where appropriate.
In talking about these guidelines, we cannot take credit for any new or innovative work. Much has already been written in the area of governance guidelines in relation to the corporate world, and our task was largely to take those principles and apply them to the pension world with whatever amendments or refinements seemed appropriate. In particular, we looked at the work of the Pension Investment Association of Canada, PIAC, and the Dey report, which you also referred to.
What is corporate governance? In relation to pension plans, we use the term to mean the proper delineation, organization and oversight of the roles and responsibilities of those persons having fiduciary obligation to the plan and its members.
Why did we find it necessary to develop this guideline with all of the other material that has been written on governance? Over the years, our work of supervising and inspecting pension plans has uncovered periodic problems and examples of inappropriate behaviour. Such problems included what we considered to be inadequate professional work by auditors, actuaries and other advisors, inappropriate investments, the taking of investment commissions by planned administrators and actuaries, inexcessive or inappropriate plan expenses, conflicts of interest in connection with investment decisions or the granting of benefits, and plan amendments conferring past service benefits for particular classes of members, often highly placed classes of members, in the absence of adequate funding.
As far as we know, most plans are well managed and well funded. However, some plans could benefit from improvements in governance procedures and from better funding. Most of the problems and deficiencies identified have probably been the result of omission rather than commission. For the most part, the problems did not appear to arise as a result of fraud or other evil intent, but from the failure to follow proper rules of governance.
In many situations, we noted a lack of understanding of what was expected of plan administrators, a lack of any accountability framework, and an absence of proper management controls. Our work suggested that the level of competence and oversight by plan administrators varied considerably from plan to plan, which is not surprising given that many plans are administered by people having little or no professional experience in plan administration. That led us to conclude that we needed to develop a set of standards for plan administrators.
A number of other factors encouraged us to do this. First, it was necessary to give administrators sufficient information to enable them to do their job. It was also necessary to give them some guidance as to what behaviour was appropriate, and what we as supervisors expected of them. In addition, proper supervision requires transparency, which itself requires the development of objectives and publicly enunciated standards against which practices and behaviour can be weighed. We can hardly be in a position to demand compliance with a standard unless that standard is well developed and well articulated.
In keeping with the ever-increasing demands on our limited resources, and consistent with the approach we have adopted in the supervision of the financial institutions that we look after, it is now more necessary than ever for us to rely on work done by others, including plan administrators, actuaries and accountants. Such reliance enables us to focus on those areas of greatest risk.
Reliance only works if it is both informed and knowledgeable, however. If we are to rely on others, we must be confident that such reliance is warranted. As a result, it is important to articulate our expectations and standards to establish an acceptable degree of uniformity in approach and practice.
Our new risk-based approach to pension supervision has caused us to shift our supervisory focus from one of insuring compliance with documentary and filing requirements to one of insuring that plans have the financial capacity to meet their obligations; in other words, we are shifting from statutory compliance to solvency. As we shift our emphasis to planned solvency, we realize that prudent management of plans, their funds and investments, is one of the most important factors in the ability of plans to meet their pension obligations.
As a result, considerable responsibility for the management and oversight of plans has been shifted from OSFI to where it rightfully belongs, on the shoulders of plan administrators and professional advisors. OSFI now relies more on the conduct and accuracy of the work of these parties, and imposes on them a greater degree of accountability.
Plan administrators and professional advisors can also benefit from this approach of informed and knowledgeable reliance, because it can reduce detailed and intrusive supervisory activities by OSFI if everything is working well. For these reasons, we felt it necessary to develop and issue guidelines for governance of federally regulated pension plans, guidelines which would make clear the lines of responsibility and the standards to be applied.
Last November, we gave you an earlier version of the guideline. Since that time, we have completed extensive industry consultations, and have received comments from a number of individuals and organizations, including the Canadian Labour Congress, the Canadian Bankers Association, the Canadian Institute of Actuaries, the International Foundation of Employee Benefit Plans, the Ontario Teachers' Pension Plan Board, and various consulting firms. As a result of these consultations, we are confident that this guideline incorporates generally accepted industry best practices for pension plan governance.
The chairman raised the question of whether the government should be introducing a policy in which pension plans and other managed fund organizations, mutual funds, investment fund organizations, should adopt a set of guidelines like this, and should report to us on an annual basis that they are in compliance.
We should turn first to the pension plans, the investment funds, if you like, that we are responsible for and point out that we have not yet introduced a mandatory system of reporting compliance with our guidelines. That is something that we should consider, however, and there are very strong arguments in favour of introducing that approach. In the area of financial institution supervision, standards of sound business and financial practices are being introduced for each of the industries. Boards of directors will be asked to assert compliance with those guidelines. The suggestion has merit. As a first step then, we need to actively consider that in respect of the guidelines that we have just issued.
The question of extending that process to other investment funds has merit as well. Something along these lines should be in place for every mutual fund, every segregated fund organization. Whether there should be reporting to us depends on legal jurisdiction. For many investment funds, we have no statutory jurisdiction. In the case of segregated funds for life insurance companies, we do have some jurisdiction, although the provinces have some jurisdiction as well. There would be a question of whether OSFI or provincial regulators should receive those reports.
In the case of mutual funds sponsored by banks, again those fall largely under provincial jurisdiction for consumer protection purposes. We have a deep and abiding interest in how well those funds are managed because of the exposure to the banks vis-à-vis the temptation to voluntarily top up losses in order to keep fund unit holders happy. I am not sure to whom the reporting should occur in those situations, but I think the notion of reporting to some regulatory body in terms of compliance with guidelines makes some sense and is worth consideration.
The Chairman: As a committee, the last thing we want to do is to get bogged down in federal-provincial jurisdiction. There is nothing to be gained by stalling progress.
For you to require certain information on how bank mutual funds are governed has nothing to do with federal-provincial jurisdiction, and everything to do with your responsibility for overseeing banks -- since you are the regulator of banks. I would suspect that one could find a hat to do that. I am even willing to start with the smaller set, which is absolutely under your jurisdiction.
I have read your May 1 guidelines. As they stand, it would be difficult to complete an annual report using them. The guidelines would need to be converted from the general to the specific, in the same way that the final version of the guidelines that came out of the Dey report was more specific than the original. How big a job would it be to do that?
Assuming the regulations allowed for this, how big a job would it be to produce a set of guidelines from your May 1 guidelines and the PBSA guidelines whereby all the funds would be required to submit to you an annual report which would become a public document? The fact that the annual report would become a public document is the leverage you need. How difficult would it be for you to develop these guidelines?
Senator Meighen: Is there a difference between guidelines and rules? To me, a guideline is a guideline; there is no sanction for not observing a guideline. On the other hand, a rule is a rule, and if you do not observe the rule, there is a sanction.
The Chairman: The Dey report says that you must report how you are doing vis-à-vis the guidelines. You do not have to obey the guidelines; however, if you do not obey them, you must explain why not.
Mr. Palmer: That is a useful clarification. Your comments are both consistent. These are very much guidelines. Many fall into the category of motherhood or high principle. These are fairly high-level principles. In order to assert compliance with any degree of certainty that it means an awful lot, we probably need much more detailed guidance than we have provided here.
One example where these are particularly light is in the area of independence. What does independence mean, when the trustees of a multi-employer plan represent either the unions or the sponsoring employers so that no one by virtue of his day job is independent? What we are talking about there is really independence of mind, independence of behaviour -- understanding what hat to put on when occupying a trustee's chair. We would need to spell that out in more detail.
There are two ways to do this. One would be to develop and implement a series of detailed standards that would flow from these guidelines. Another approach -- and I think it would be the approach that I would favour -- would be to require the trustees to write a report, setting out how they comply with each of these guidelines; in essence, allow them to develop flexibility to use their own criteria in deciding how they apply. They would have to make a statement similar to the following: "We believe we comply with this guideline because of the following factors..." It may be less than perfect, but it would give us an opportunity to see the holes in our own guidelines, the areas where clarification is needed. At the same time, it would get the process moving early, rather than waiting until we were really in a position to provide the specificity that will ultimately be necessary to give you a high degree of confidence that people are governing their plans well.
Senator Angus: As you know, we have been holding hearings on the varying international approaches to the supervision of banks, in particular, along with other financial institutions. One of the things we have come to hear about is the trend away from rules-based supervision and regulation to a more judgmental approach. What you are describing to us this morning is a risk-based system; is that a fair statement? Is this basically the same thing in terms of pension funds?
Mr. Palmer: Yes; it would be fair to say precisely that. We have found a way of unloading some of the detailed checking onto the shoulders of plan administrators, where we think it belongs, so that we can free up our people to comment on the major risks.
Mr. Ron Bergeron, Director, Pension Benefits Division, Office of the Superintendent of Financial Institutions: One of the challenges for the regulator in supervising pension plans is the diversity and the manner in which pension plans are administered. We have one-member pension plans, but we also have large pension plans that are very well governed. Hence, if we were to formulate those guidelines into a regulation, the danger of developing a piece of legislation that would not cover all eventualities would exist. The danger , of course, is that situations could arise where we would not have the tools needed to intervene on time.
I would prefer a more friendly approach to supervising pension plans. This could be done by, first, making the system transparent -- making the rules clear so that people understand what is expected of them. During our on-site examination, we would discuss with the plan administrators and asset managers the manner in which they would go about meeting those guidelines. There may be a myriad of reasons for not adhering to a particular section of a guideline, but we would look for justification as to why the guidelines are not being met. The challenge for the regulator is that that flexibility is lost once those guidelines are set in legislation.
Senator Angus: Mr. Bergeron, you have completely misunderstood my point. I agree with the need for flexibility. No one is arguing that.
Our point was that the only rule would be one wherein the supervisor of a plan would be required, on an annual basis, to report details about the plan's adherence to the guidelines to you. This takes into account the fact that, in some cases, they may tell you that they are not adhering to the guidelines "for the following reasons." Therefore, the flexibility you are looking for is maintained.
Those reports would be available to plan members, so that if there is a guideline that they are not adhering to, they may offer an explanation, but at least their plan members know that they are not adhering to it. When that is done, the experience has been that both management and directors take the guidelines much more seriously.
Mr. Bergeron: We have moved into a risk-based approach. It means the early identification of risky areas in the pension plan. In order to do that, timely information needs to be available, and you must be able to analyze that in conjunction with the information that comes through year end filings.
We developed some early warning tests. We have communicated those early warning tests to the industry. They are in draft form right now. The industry knows what we do, what we expect, and how we assess the risk in supervising their pension plan. The intent here, we hope, is that they will use those tests to self-measure their performance, perhaps adhering to some of the guidelines or provision that are included in there.
We currently do the front end risk assessments. Staff go through the information, compile the statistics, identify the risky area, discuss the findings with plan administrators and assetmanagers, and then we go onsite. If the pension plan is identified as being a medium to high risk plan, we go onsite to verify governance, controls, and delivery of benefits, and then we again sit down and discuss the findings. Then it comes back to the analysis group who follow up with the management report, and the cycle starts again with additional filings, requirements and further discussions with plan administrators and so on.
In the past, we used to strictly look at plan documents; making sure that there was a meeting of minds between the provision of the plan and the way it was administered. We looked to see whether they were doing what the plan text was saying. We moved to risk-based for significant reasons; one of them because we must focus on the cost delivery.
Senator Angus: We have found that the move to the risk-based system was motivated by a number of things. You have mentioned the phrase "our limited resources". Mr. Bergeron talked about the cost delivery system, and it all adds up to the fact that all branches of government these days have limited resources. First of all, this is the right forum for this discussion. What resources do you have available to you for the supervision of pension plans? What is your internal structure? Are you comfortable? Do you feel you have adequate resources to do the job properly?
Mr. Bergeron: We have 25 staff, including myself, in the private pension plan division. OSFI has regional offices in which we have onsite examiners, or supervisors that conduct onsite examinations in Montreal, Toronto and Vancouver. Most of our employees in Ottawa are doing risk analysis.
Within the division we have five specialized areas. One is onsite examinations. The other are: systems, policy and legislation, administration, and the combined actuarial and investment area.
Senator Angus: Does the figure of 25 individuals include what you have in the branches?
Mr. Bergeron: It does include Montreal and Toronto, but it includes only part of Vancouver.
Senator Angus: There I suppose they have a dual function, or a multi-function?
Mr. Bergeron: In Vancouver they do many other areas, including deposit taking, insurance, and so on.
Senator Angus: Your core complement of personnel on this matter is 25, plus partial help in some outlying areas.
Mr. Bergeron: That is right.
Senator Angus: Do you have a segmented budget for this, or is it all part of your global budget?
Mr. Bergeron: We have a budget, and we charge back to the industry. We do have a separate budget for operation purposes.
Senator Angus: This change has occurred in some areas of bank supervision, but in others -- such as in the U.S. -- they are quite against that system. There, they are more compliance-oriented and rules based, and perhaps they have greater resources. I am trying to figure out if the main driver here is the lack of funds and resources to do the job properly, and if you are setting up a new, less stringent, model.
Mr. Palmer: I do not think that we are doing so. We are doing a significantly better job in protecting pension plan members today than we were two years ago when Mr. Bergeron took over responsibility for that division. Our solvency focus was overdue. We are here in the pension area to protect members. We are not really here to check that every phrase in a pension plan document complies with the PBSA, for example. I think we are doing a better job.
Are we doing a good enough job? We will not know that until we have had a chance to work with the new system. One of the constraints -- and it is a healthy constraint on us, because it forces us to be more creative and cost effective -- is the comparison of our costs with those of the provincial pension plan supervisors. Our costs are higher than the costs of all but one province, and this is a subject of some concern to the pension administrators who process those costs.
Unlike all but one jurisdiction, we do onsite supervision. We actually go onsite and carry out examinations. Many of the provincial pension plan supervisors are still operating what we would consider to be a compliance-based system, as distinct from a solvency-based system. We think that we know more about the financial health of the plans we supervise than at least some pension plan supervisors do. That drives the costs. We must be mindful of the need to keep our costs within roughly the same area as the provincial supervisors.
We are also finding ways to work with the provincial supervisors. Most of them understand the importance of shifting to a solvency-based approach. Provincial supervisors have an open invitation to attend any of our training sessions. They have copies of all of our material, including our early warning system. Mr. Bergeron and some of his colleagues are doing training for some provincial supervisors. We will be doing some contract examinations for the first time; some contract onsite work for some of the provincial supervisors at their cost. We are enthusiastic about that because, in order to do a better job, we need a bigger base over which to spread the costs that we are incurring in developing some of these early warning tests and supervisory methodologies which do not exist elsewhere.
Senator Angus: Am I correct that the pensions of Canadian National, Canadian Pacific, and Air Canada would all be under your jurisdiction?
Mr. Palmer: Yes.
Senator Angus: In your general supervision, do you get into issues in terms of the funding and the issue of surpluses, and how they are dealt with? As you know they are quite contentious in areas such as labour negotiations. Do you make statements, or is this something you just take into consideration privately?
Mr. Palmer: Our work on the issue of surplus distributions or contribution holidays, which is another part of this, is carried out in the background. Our work there is primarily not so much on the issue of whether surpluses should or should not be distributed. That is a question of the governing legislation and the plandocuments.
We do want to be sure that a sufficient cushion remains to protect the obligations to pension plan members. They must not be too aggressive in deciding the amount of the surplus to be distributed or the amount of the contribution holiday, given the fact that that surplus is very often the result of actuarial calculations which can change. The calculations are revised every three years. Key assumptions such as the rate of return are often revised, and today's surplus can become tomorrow's deficit with factors such as a change in markets, or a change in inflation assumptions. We are increasingly looking to ensure that appropriate cushions are in place.
Senator Angus: In terms of the directors or the administrators of these plans, we have heard the difference between governance by professionals, stakeholders, and lay people. We have had a number of groups come in here and talk to us. Some of them have been under provincial jurisdiction, such as Ontario Municipal Employees, OMERS, and Teachers'. We have seen different systems.
Personally, the weight of the evidence has probably been that a professional governance system is better than one by stakeholders, but this is just a sense that I have so far. Do you have a view on that?
Mr. Palmer: It really depends on the circumstances. The big plans can afford to put an entire management structure in place; a group of professional managers to operate the plans. In the case of the very small plans, they have two choices. They can use volunteers, or they can subcontract. They can outsource to someone else, and very often the outsourcing party is the plan actuary. We have some concerns about conflicts in that respect, but those conflicts are manageable with appropriate professional disciplines.
In balancing the case of the small plans, we do think they should have access to some independent professional advice, because some of the decisions are terribly important and do require some expertise.
Senator Angus: Mr. Palmer made a point on the reliance on third parties as part of the new approach. Are you comfortable with that?
Mr. Palmer: We are comfortable with the principle of reliance. The question is ensuring that we do not rely on it in situations where it is inappropriate to do so, and that we have a basis for reliance in each case. We are working quite actively with the professional bodies upon whom we rely to ensure that they have the internal disciplines to give us a basis for reliance. I have just come from the annual meeting of the Canadian Institute of Actuaries, and we spoke about a peer review or practice review system which they are now adopting, and which we have been encouraging in order to increase our capacity to rely on the work of actuaries.
Senator Tkachuk: You mentioned you had 25 people in your division. Is that actual compliance officers, support staff, research staff? Could you give us a little more information? These people are in Toronto, Ottawa, and Montreal. When you say you have access to people in Vancouver or other centres across Canada, would they be half-time or quarter-time to your division? What would your complement be? This is confusing if it is not properly outlined.
Mr. Bergeron: We have one on-site examiner in Montreal. We have a small three person division in Toronto -- a director and two on-site examiners. The use of the staff of the Vancouver office is based on the need to conduct onsite examination in Western Canada. The legislation does not prescribe a regular cycle for on-site examinations, so it is done on a risk basis. If there is no need, then we do not use these people in Vancouver. The rest of the staff is in Ottawa, including support staff, system, administrative managers, research, and all the rest.
Senator Tkachuk: How many people would there be?
Mr. Bergeron: Twenty-one, including myself.
Mr. Palmer: The people who Mr. Bergeron has been talking about are largely focused on pension plan supervision. In addition, when we get into legislative issues -- legislative changes, and changes to the regulatory side of pensions -- that group also has access to some of our regulatory people who are not included in those numbers, so we have access to additional resources. Occasionally they are helped by other people like me who are not included in those numbers.
Senator Meighen: With your shift in emphasis and your move away from the compliance basis of proceeding, is there also a shift in the type of personnel you require, or are you retraining?
Are all your staff under the normal public service guidelines? Do you have a high turnover rate? If you had a partial exemption from those guidelines, would it make your life any easier in terms of hiring and retaining talented people?
Mr. Bergeron: Effectively, you are right. That is a fair comment. Over the last year we have gone through a significant retraining program to make sure that the core competency of our staff meets the new expectation in terms of refocusing on risk and getting away from compliance. We have, in fact, gone through an extensive program, both internally and externally.
Our staff are subject to public service guidelines. My staff is part of the public service. Our staff complement is adequate for now. Once we become very focused and have a system that is reliable in detecting risk in pension plans, the complement may decrease rather than increase.
Mr. Palmer: There is a competence issue. We are carrying out higher level and more complex activities than we were two or three years ago.
Senator Meighen: Individual competence?
Mr. Palmer: Exactly. We found that not everybody who was working in the division three years ago was able to carry out the responsibilities with which we now deal. There has been some turnover as we have attempted to move people to tasks that are better suited to their skills. We have attempted to shift people to the division who have the skills to deal with the higher level challenges that they are now addressing. There has also been a very significant training issue.
We have not lost a lot of people in the PBSA division to the market-place. That is different from what has happened with our examiners, who are supervising banks and insurance companies. That is partly because most are based in Ottawa, and partly because they are not exposed to the banks and insurance companies who are looking for the type of staff that we have.
OSFI would be better able to retain and engage talented staff if we were freed up from some of the rules influencing public servants. Recently we have gained a good deal more flexibility than we had in the past in that area. We are in the process of addressing some of the issues that have been causing us a great deal of concern in the non-pension areas.
Senator Meighen: That issue of exemption in terms of pay scales is something that has come up. We will be able to talk to you about that later. We have uncovered this in other jurisdictions, where very often there is an exemption to some degree or other, and they have found that to be very useful.
In your paper, you alluded to extensive consultations. I have not had the opportunity to read those guidelines, but I will do so. Were there any that were particularly controversial, or that could have gone either way? Do you perhaps want additional input from this committee or any other body?
Mr. Bergeron: Interesting issues were raised throughout the consultation process. We prefer to be on the conservative side when we first introduce a document.
Senator Meighen: That is wise.
Mr. Bergeron: At the outset, we know which issue or topic we must give in and which one we will hold on to. There were some one-sided comments. We like the consultation approach, because we get to understand each other. The consultation process was good in the sense that we listened to what they had to say and were able to reach a common ground where everyone looked at it, and agreed that this was a piece of paper we could live with.
Mr. Palmer: Which areas were the most controversial?
Mr. Bergeron: One comment came from a professional organization that wanted to know what OSFI was doing in writing best practices guidelines. That is, we set out guidelines and expectations and hope they behave accordingly. They said given that OSFI are not practitioners, this should be left to the industry. The answer to that is yes, we are not practitioners. We also see a lot of things. We are there onsite, and we see all kinds of horror stories. We have a responsibility to fill the void out there.
The fact is that no document on governance that could do the job existed, so we feel the need to issue this document. Later on, the ACPM, the Association of Canadian Pension Management, also came up with its own version. That association primarily represents the sponsors, so I believe it generated activities that were not in existence in the past, and there was a fair need for that.
There were some comments with respect to presentation. We were asked: Why do you not present a document that shows the big picture up front? There were editing comments. There was a question about defined contribution plans. Some administrators wanted more specific guidelines about how to behave or what to do with the defined contribution plans. We tried to build this guideline to be general enough to cover all situations. I have a note here that says, "We applaud your efforts to stimulate and debate the matter of governance."
Mr. Palmer: We got one good comment, then.
Senator Meighen: At the very least, the CLC, the CBA, the Canadian Institute of Actuaries, the International Foundation of Employee Benefit Plans, the Ontario Teachers Pension Plan Board and various consulting firms all would support this?
Mr. Palmer: That might be a bit too strong. There has been fairly widespread support and recognition that this sort of document should have been produced by somebody. There were some concerns about whether we were the right body to put this forward, however, I think there is widespread agreement that something like this is necessary.
Senator Meighen: There is nothing specific in here that you wrung your hands and tore your hair out over, worried and fussed over, debated and considered, and came up with a decision you knew would be a controversial one since there was considerable opposition to it in the industry?
Mr. Palmer: That is a fair statement.
Senator Meighen: There is nothing there that would meet that.
Senator Kelleher: We are all experiencing the effects of globalization these days. Of course, OSFI is too. Foreign banks have to be regulated here, and there are the problems of trying to persuade them by going back to their home countries and their home regulators. Has globalization set in on pension fund managers? Not everyone manages their own pension funds. I am assuming that sooner or later, if not already, offshore companies will be managing pension funds here in Canada. Is that happening? If so, is this causing supervisory problems for you? Your experiences with financial institutions might be an example.
Mr. Palmer: It has not really had a big impact on our particular inventory of pension plans, which tend to be smaller than those of some of the provincial supervisors. Within the provincial jurisdiction some of the plans are using non-Canadian investment advisors, non-Canadian custodians. Those situations can be covered by the outsourcing elements of our governance paper, so I do not think those aspects of globalization are particularly threatening to our capacity to supervise. However, globalization certainly does offer challenges in other areas. Those other areas will enter into the pension field in due course.
Senator Kelleher: Will we be ready if that occurs? Do we have plans to move in that direction if this occurs?
Mr. Palmer: I hope so. The changes occurring within the financial sector generally are posing a real challenge for us to keep up; to understand the products, to understand the risks, to understand the risk mitigators, and the controls that are put over risks. We are generally playing catch up, but we are doing our best to keep up. Certainly, as long as I am around we will be attempting to close the gap.
Senator Stewart: You are in this field because of the provisions of the Pension Benefits Standards Act. What was the rationale for the enactment of that statute? Businesses are allowed to conduct their own business, and they fail if they are badly run. What is the public's interest in intervening to ensure the health of pension plans, if they are under federal incorporation?
Mr. Palmer: I am probably not the most knowledgeable commentator on the history of pension legislation. I would speculate that there were enough examples in the early days of companies establishing pension regimes which did not produce benefits for the members due to inappropriate and inadequate funding. Owing to that, governments in many jurisdictions felt it necessary to put legislation in place to ensure that rules governed benefits, the increasing of benefits, and the funding of plans, to ensure that those benefits could be paid.
We are talking about a very important part of the savings of Canadians; the capacity of Canadians to finance their own retirements. I cannot think of much that is more important than insuring that somebody's pension will actually be available when that person retires. That should be insulated from the failure of the company that has established the plan, and that has put those benefits aside.
Senator Stewart: So now you are moving away from detailed regulation to a guideline approach. I gather the statute is written in language which enables you to make that shift. This suggests that the statute used pretty general language. Is that correct?
Mr. Palmer: That is fair. We do have a responsibility to ensure that the provisions of the statute are observed. We have the discretion as to how we carry out that responsibility. We could do so, as we did in the past, by a great deal of checking, and checking of planned documents in particular. We are accepting a risk by shifting some of that responsibility to plan administrators and their advisors, however, hoping that we can address some greater risks, particularly those risks arising from funding and management issues of the plan. We are redirecting our efforts from an area that we think is relatively low risk in respect of the impact on planned benefits and the ability of a plan to meet those benefits, to an area of higher risk.
Senator Stewart: In your opening statement you mentioned the diversity of the plans that you supervise, and also some of the difficulties which were there in the early days, the periodic problems and examples of inappropriate behaviour. Is there any correlation between the problems and inappropriate behaviour on the one hand, and the size of the plans on the other hand?
Mr. Palmer: Very large plans which are able to afford professional, full-time management are better able to deal with some of the challenges of operating a pension fund than are some of the smaller plans which rely on volunteers or non-specialists or administrators; advisors who may well be conflicted.
Senator Stewart: In following your guidelines, you are more likely to focus on the smaller pension plans, is that correct?
Mr. Palmer: I might amend that to medium and small plans. Some of the plans we have had difficulty with are not small; 1,000 members, 500 members, 100 members. It is the medium- to small-sized plans that we would be having to spend more time on in our risk-based approach.
Senator Stewart: Your act does not change, but you are changing the way you carry out the powers given to you by Parliament. If for some reason some plans get into real trouble, and it is alleged that you did not stick to your detailed regulation approach, to whom are you accountable?
Mr. Palmer: That is fundamental and strikes right at the heart of what we do, because we are making judgments all the time. We do not microsupervise. We do not do the detailed checking that supervisors in some jurisdictions do. We run a reliance-based system. We run a risk-based system in which we try to focus our efforts on those of the greater risk.
Our risk analysis may be flawed. We may make mistakes. There may be areas which we ranked as low risk which in fact were of higher risk. We will never be able to make judgments that are perfect, and we will make mistakes or judgments that could have been better.
Who will look over our shoulder to make sure that we are doing an appropriate job? We have been spending a lot of time thinking about that. Under the OSFI act, the Minister of Finance is ultimately accountable for our actions, but at the same time we have been given a measure of independence vis-à-vis the minister. We have a legislative mandate against which our performance can be tested. To some extent, this system has been designed so that we may have to say no to the minister.
The accountability framework for OSFI could be strengthened. The minister could use some additional oversight for OSFI's actions than exists today. Other agencies such as ours have a governance process above them independent of ministers, such as a board of directors or a commission. That is an interesting area that deserves further exploration.
The Chairman: Let us consider a system in which there was a rule that required funds -- pension or mutual -- to report annually to OSFI with respect to a set of guidelines. That report would, in fact, be a public document, meaning that it went to the plan members. Would you support such a change?
Mr. Palmer: That suggestion has significant merit.
The Chairman: The committee will be working on our report over the summer. Mr. Bergeron said a few things about the need to make sure that the guidelines are the right ones. It would help us if you could think through the process, and then give us a letter which would indicate what would be required to go from a recommendation from this committee to actually putting that kind of a process in place. How long would it take to get the guidelines? What is the step? What regulation would be required? What time-frame would be required? That would be helpful.
Mr. Palmer: Yes.
The Chairman: This committee is meeting on July 30 and 31 to finalize our report to you on international study, so you will get that from us in the first 10 days of August.
Mr. Palmer: We look forward to receiving that.
The Chairman: The institutional governance issue will be coming down at the beginning of September. That is why we need this reply from you. Thank you for coming.
Our next witnesses are from the Department of Industry. I asked them to take us through the questions that they would like us to get answered when we do our hearings. The purpose of our hearings is to provide information to the department on what changes -- if any -- ought to be made in the SBLA. We are holding those hearings during the early weeks of July, and then we are reporting to the department, or meeting at the end of the month to finalize our recommendations.
We will be meeting in subgroups across the country, and it would be helpful if the department could enumerate for us the issues on which it would like our guidance. Some of those suggestions would be general in nature, and would relate to the way the program works, and some would be very specific in the sense that they would relate to some specific changes they had in mind. Please proceed.
Mr. Peter Sagar, Director General, Entrepreneurship and Small Business Office, Department of Industry Canada: I thought I would walk through a bit of the history of the Small Business Loans Act, how it works, what we have been doing to review it, the key issues that have arisen in the review, and the time lines that we face, which are unfortunately quite severe.
The Chairman: When the government extended the SBLA loan deadline barely in time for March 31, that act contained a provision which said that the extension and review of the act itself would expire on March 31, 1999. That was for reasons I do not understand. I am not sure the department understands anymore. They only gave themselves 12 months to handle an extension to the act, so there is another deadline looming out there. This attempt that Mr. Sagar is about to take us through avoids putting us in the position which annoyed us last time, which was having to deal with an act 48 hours before it expired. The current SBLA does expire on March 31, 1999, however.
Mr. Sagar: This act is now about 37 years old. The most important part of its history has occurred in the last five years. The act was opened up enormously in 1993 with liberalization of the lending terms, the size of eligible companies, and the size of loans that could be made. We saw lending increase from $800 million annually, to $2.2 billion, to over $4.5 billion -- all within a two-year period.
The government moved to put the program on a cost recovery basis starting in 1995, but the full impact of those changes was not felt until loans were made in January 1996. This is a critical point to bear in mind because it means that our history under this program of cost recovery loans is actually very short. It is just over two years, and claims typically come in between three and five years after a loan is made. Our trend lines and data sets are quite limited in terms of cost recovery.
In December 1997 -- and this was what triggered the request for a one year extension -- the Auditor General released his report on the Small Business Loans Act. It was the first such report in about a decade. It reflected his new concerns, and the evolving emphasis placed by the Auditor General on program reviews. He had key findings in the areas of the objectives and evaluation of the program, cost recovery, monitoring and forecasting work done by the department, whether or not we were effectively delivering the program, and issues related to accountability of it and accountability to Parliament in particular.
As a result of that, we launched a comprehensive review of the SBLA and sought through Bill C-21 a one-year extension. We would thank this committee in particular for expediting approval of it in March of this year. We have been working away -- both before and since then -- on the review.
Three years ago when I first assumed policy authority for the program -- my colleague Serge Croteau has the responsibility for actually administering it -- I came and looked at this program. I thought it was one of the simplest, most elegant programs I had ever seen in government. As we dismantled it, we found it to be a complex program, in the sense that a number of levers are built into it that affect the performance and effectiveness of it.
Borrowers under this program must have less than $5 million in annual sales. They can borrow up to $250,000, but that can not exceed 90 per cent of the value of the project they are undertaking. So if your truck is worth $100,000 you cannot borrow $100,000, you can only borrow $90,000 from the program. The borrower is required to come up with some equity somehow for the project.
The Chairman: To me, the term "asset" implies a hard asset. Suppose I am in a knowledge-based business. I am trying to start a business based on an idea. When you say asset, you mean that you do not lend to a knowledge-based business?
Mr. Sagar: We do consider that, but not for what amounts to working capital in that business, or what would traditionally be described as working capital. We can come back to this question later in the presentation.
Under the act, a borrower may be required to place up to 25 per cent personal security against the borrowing. Now that is not personal security -- for example registering the title to your home. It is more in the form of a personal pledge against it.
Senator Oliver: Personal guarantees.
Mr. Sagar: Yes. Many people think we are locking up people's assets right off the start. That is not the way it works. We request a 2-per-cent registration fee up front. That can be financed in the body of the loan. There is a 1.25-per-cent administration fee which the lenders in fact pay, but they may build it into the interest rate which they charge. The interest rate may be up to 3 per cent above prime.
Under the program, lenders are required to assess the borrowers' applications and make the credit decisions. They disburse the moneys, administer the loans, collect the fees, and remit their fees to Industry Canada. They are also responsible for recovering the security on the loans, and then submitting the claims.
We will cover up to 85 per cent of the losses on a loan. We will not cover an individual lender for more than 90 per cent of the first $250,000, 50 per cent of the next $250,000, and 10 per cent of the remaining loans. For large lenders this means that their insurance coverage is limited to 10 per cent plus a small per cent above of the total lending. That is an important safeguard, because it means that lenders cannot go wild on this program and expect to get 85 per cent of their losses covered. They are limited to 10 per cent of their total lending.
You will notice that the list gets shorter as we go along. Our responsibility is limited to registering the loans. We insure up to 85 per cent of the value. We collect data and prepare reports, and we audit claims and submit those claims for payment to, in effect, the Receiver General. The Receiver General receives the fees, and they make the payments for the program. In effect, there are four partners in the program. Key roles are played by the lenders. It is a third party delivery. In going back 37 years, we have now alternate service delivery.
The Chairman: The third parties are exclusively the chartered banks?
Mr. Sagar: No, there are over 1,500 lenders.
Mr. Serge Croteau, Director General, Programs and Services, Department of Industry Canada: Thirteen thousand points of service.
Mr. Sagar: Each individual Caisse Populaire is a lender under this program. Credit unions are lenders. Big banks do between 60 and 70 per cent of the loans.
The Chairman: So a third of the loans come from small community-based institutions?
Mr. Sagar: Plus groups like Caisse Populaire, yes.
Senator Meighen: How is that determined; by the market-place?
Mr. Sagar: Pure supply and demand. If a smaller lender decides to become very active, then it can wrap up its proportion.
We launched a comprehensive review. It is outlined in a document which we tabled before the Public Accounts Committee, and which we also offered to your committee when we appeared previously. It is a comprehensive review of the Small Business Loans Act. It covers the history of loan loss patterns, and our initial response to the Auditor General's report. It is a useful reference document for the future.
Cost recovery is a key issue. Are we on target? What do we know about that? Are we overlapping other government or private sector initiatives? Is there really a gap in the market-place for a program like the Small Business Loans Act? How well are we administering the program?
We looked at an issue raised in two aboriginal reports, including the Royal Commission on Reserve Financing for Aboriginals -- which is currently excluded by a clause in the Indian Act. We looked at extending the scope of the program to capital leasing and to the voluntary sector, and the issue which is probably related to the Chairman's question earlier of working capital and eligibility of that under the act. We have spoken to borrowers, lenders, associations, and key interest groups on this issue, including focus groups across Canada. We also consulted members of the voluntary sector.
You have received copies of the consultation documents that were used for this process. I hope you will find them useful. Those questions focused on capital leasing, and voluntary sector and other issues that I have mentioned. Maximum loan size is high enough; is it too high? Security provisions under the act, the taking of personal guarantees, other issues that have been raised by members of Parliament, borrowers, lenders, lobby groups that occasionally have attacked us for the program or provided praise for the program. We have looked at the eligibility of fees charged by lenders which are currently excluded under the act, whether we should exclude certain types of financing that may be higher risk or less incremental to the program.
The Chairman: Can you give me an example?
Mr. Sagar: Lease hold improvements, for example. We looked at the aggregate lending ceiling, which is how Parliament currently controls the volume of loans we make under this program. A number of people have questioned whether that is a useful measure of the government's financial commitment under the program.
The Chairman: What would the options be?
Mr. Sagar: There are options. One would be to move to an annual lending ceiling, for example. Another option would be to limit the government's liability based on the 90-50-10 rule I referred to earlier.
Could we ask lenders to certify incrementally? Can they swear on a stack of bibles that they would not have made this loan had we not had the insurance available? Referring to a stack of bibles amongst major banks is not a good idea.
The issue of interim claim payments goes to the question of how we actually administer the program. There are also the issues of due care on the part of lenders, compliance audits and so on. We have examined those key issues. Minister Manley, in writing to your committee, referred to five key issues, four of which are noted here. He wrote about the role of the Small Business Loans Act, or SBLA, in a knowledge-based economy. He wrote about the program evaluation framework and performance measures, about cost recovery in a risk-sharing program. The two issues that got rolled into one in this are the leasing and voluntary sector options, and whether or not pilots in these areas would be useful under the SBLA.
If anyone would like me to stop for questions on history, operations and review, that would be fine. Otherwise, I would like to go into those five areas in a bit more detail so that you can have a sense of what, in effect, the minister suggested would be interesting areas for you.
The Chairman: I will ask you one question. In your two previous pages before the one that discusses the minister's letter, you have some broad-based consultation questions. Am I correct in saying that any comments we can give you on those broad-based questions would be helpful, but that you would like us to be quite specific with respect to the specific issues raised in the minister's letter? Is that a fair summary?
Mr. Sagar: Yes.
Senator Oliver: There is another document in the file about the questions and options. Will you come to that?
Mr. Sagar: Yes, I will in the consultation paper.
Senator Oliver: You have a series of questions here with options.
Mr. Sagar: Today, I tried to enumerate those without going into detail. I am happy to speak to any of the options.
The Chairman: I just wanted to be sure that we understood.
Mr. Sagar: It would also be advantageous to your committee in the context of your review of what the government brings forward in the fall.
As you know, the terms of program evaluation and performance reporting measures have become a standard issue for the Auditor General in the context of virtually all the elements he has examined. It has evolved out of the value-for-money concept into a much more rigorously determined approach to program measurement.
We have engaged professional advisors on this because it is very technical, particularly as to how you measure the impact of programs. We have also consulted with our clients on it. I would point out that, in terms of program evaluation and reporting, two particular elements need to be borne in mind. One is response burden and burden on participants in this program: how much information you can actually drag out of them, and how often.
The second issue goes to the program's broader objectives, which the Auditor General suggested we look at. It goes to the point of whether this should be a program, for example, that could be targeted at employment creation, technology adaptation or export development. At this stage, it is a program which, for over 30 years, has had the very general objective of increasing the amount of financing available to small and medium enterprises, or SMEs. To make it a much more targeted program would require a very significantly different program and approach.
With respect to cost recovery, when government moved the program towards cost recovery in 1995, it set its cost-recovery targets based on the program's historic loss rates. Typically, they ran between 5 per cent and 6 per cent. Our fees collected cover about 6.3 per cent. This gives us a small cushion to be in a cost-recovery zone.
The Chairman: Is that between 5 per cent and 6 per cent of new loans granted in a year, or of outstanding loans?
Mr. Sagar: Historically, over the life of the program, claims paid have amounted to about 5 per cent or 6 per cent or less of the total loans made.
The Chairman: Is that in a given year or outstanding?
Mr. Sagar: Historically, it is over the whole life of the program. In a given year, it has been as high as 8 per cent. It goes up and down.
That variability, in fact, is part of the question that we think needs to be addressed in some way. How do you define cost recovery in a program where, implicitly and explicitly, the government is assuming a portion of risk above the fees it collects? I said before, for a large lender, the government's exposure is on the order of 10 per cent of all a major bank's lending. We are only going to collect 6.2-per-cent fees. At any point in time, the government is exposed. How do you define cost recovery in that context? When the claims will not be received for a number of years, and when you would expect to recover your fees over the full business cycle, perhaps over 10 years, how do you assess, monitor and define that as a cost-recovery program?
The Chairman: In other words, you can have a program that meets cost recovery but may not meet it in a specific given year, because it makes a profit one time and loses another. Historically, cost recovery has been taken, by the Auditor General and others, to mean every year.
Mr. Sagar: Yes. We have to look at this over the life of the cycle, and also in the sense that pricing to achieve full cost recovery would mean that the government was no longer risk sharing in any way. You would have a very serious impact on the benefits that would be derived in the volume of lending under the program.
Senator Callbeck: You said that, historically, it is 5 per cent to 6 per cent in claims, and then you used the 10-per-cent figure. Could you explain that?
Mr. Sagar: Historically, we have usually paid around 5 per cent to 6 per cent. The reality is that our contingent liability is higher than that, the maximum amount that could come in. However, it has never approached that contingent liability maximum and, in fact, very few lenders have ever approached their maximums.
The chairman raised earlier the question of the SBLA's role in a knowledge-based economy. This is an intriguing question. As physical assets in a knowledge-based economy have relatively less importance, is the SBLA still fulfilling the role and could it better serve the knowledge-based economy? At this stage, the SBLA, with its ceiling of $250,000, does serve knowledge-based firms. It will buy the office equipment, the computers, some software, and so on, to get the firm up and running. Because it does that with a guarantee, it frees up other sources of equity for the firm to do other types of financing. Virtually every small business loan is accompanied by the presence of working capital lending, line-of-credit financing by the lending institution that is doing it.
The challenge is: Could the SBLA be opened up more to provide types of research and development funding for a knowledge-based economy? There are really two questions there. First, is a $250,000 ceiling meaningful in that sort of context to the serious, knowledge-based economy firms? Second, is debt financing appropriate for that type of activity?
Generally, the literature suggests that equity financing is really needed for knowledge-based firms, and very patient capital, because it will be a number of years before repayment occurs.
However, we are examining that issue, and I think the government will have a response coming back in September. The Auditor General raised the question.
With respect to the voluntary sector, this is a very new concept for us to examine. The voluntary sector is composed of registered charities, and can include religious organizations, hospitals, teaching institutions, non-profit organizations -- even political parties, so you may want to dust off your application forms now. We know that this voluntary sector is a growing force in the economy. It is emerging in the context of the civil-society debates in Canada. There is a real issue as to whether the SBLA, in its effort to support economic development, should also be supporting the voluntary sector.
We discussed this with a number of voluntary organizations and, frankly, the results were mixed. Quite a number said that they saw no need for it, that they finance themselves through donations and through the Income Tax Act and other ways. Others said that it might be of use.
When we asked lenders, the responses we received were also mixed, but generally, there was a sense that these might be higher-risk loans where realization on security could be more difficult.
We have outlined here some issues that might be raised in the context of the voluntary sector, and I will come back to the first one in terms of leasing as well: Is there a gap here? In other words, if we extended SBLA-type financing to the voluntary sector, would we be creating incremental economic activity in Canada, with benefits to Canadians socially and economically?
Second, is there a meaningful definition of the voluntary sector that could be applied? I understand, in fact, that even the definition of a charity is not well defined. It relies on very old English law, and when I say "very old," I am referring to centuries-old English law. It has been studied recently by task forces. It is a tough question as to how you would define and limit it. Would you want to include religious organizations and political parties? Would you want to exclude some? Where would you want to focus your efforts here?
There are issues related to technical aspects of the act, for example, the definition of "revenues" under $5 million. Should that be done on a branch-only basis? For example, should each unit of a church group be considered separately, or should it be the church as a whole?
Security requirements are an interesting issue. Under the SBLA, we can take 25 per cent personal security. Would we require security from directors, for example, under these loans? Is that a reasonable thing to do? Finally, there are issues related to cost recovery and how we would manage our risks under this new type of financing.
The storyline under "capital leasing" is very similar. As you know, capital lease is very much like a loan, in all senses, for the business. There is a regular stream of payments that have to be made in order to acquire an asset. At the end of the lease, the small business has either total or high-percentage ownership of the asset. It has deployed the asset as it would any other asset it acquired through a loan.
The leasing industry argues that they should be included. The evidence is fairly strong that this is an issue. The Auditor General raised it. It is a rapidly growing source of small business financing -- you will see some numbers here. There is, arguably -- and, I say that because the data is very questionable -- $6.7 billion of lease contracts in 1996, which is almost double that from 1994.
The Canadian Finance Leasing Association's point is that there is a leasing gap in parallel with the gap for lending and that they are not making certain types of leases available, especially to a company that has only one or two years of experience or is in its start-up phase.
They also argue -- and, this is an interesting argument -- that because we are supporting loans, we are creating a bias against leases. For some small businesses, leasing may be a better option for them than a loan but they argue that we are distorting their decision making.
Some of our associations say, "We need and want leasing support." However, other associations simply say that their members have not asked for it. People are not knocking down doors asking for leasing; the gap has not been proved.
The Chairman: If people have not asked, it is because they assume, automatically, that, given the name of the act, it is not on. The fact that people have not asked does not tell you that there is not a market.
Mr. Sagar: There probably is an incremental market, not unlike what exists for small business loans. The challenge would be to define a program which did not result in massive shifting of existing leases on to the SBLA table. In other words, for a relatively small percentage, if the leasing industry could get a higher rate of guarantee, would we see a lot of non-incremental lending also included? It involves the two sides of that coin, namely, can we get to the incremental loans without picking up a lot of non-incremental stuff along the way?
There are a number of technical issues for leasing as well. Definition of a "loss" is an issue. When a leasing company leases something out, often it is a product for which it has not paid full value. It was acquired at a discount or, in the case of a captive leaser such as IBM, is part of their sales financing scheme. When they recover that product and then resell it and we repay on the loss, we would be paying up a portion of their profits, as well as their actual loss on the lease recovery.
Would we discriminate between captive lessors -- that is, the IBMs or the Hewlett-Packards of the world who use a leasing arm to sell their equipment -- and third-party independent lessors? Should we look at covering only certain types of assets, for example, high-technology issues? Would that be an option in addressing the knowledge-based economy, in which we focus down on high-tech equipment?
What sort of guarantee rate would we have to impose? That goes back to the earlier question. Would $250,000 be a reasonable limit, or could it be lower under a leasing program?
That concludes my enumeration of the history, operation, options, review, and virtually everything I know about this program. I appreciate your patience with me.
The Chairman: Your last page is "Next Steps". Do you just want to take us through that?
Mr. Sagar: This is taking me into the part that I do not know.
We are on a tight time line, as I said before. In September, the government plans to introduce new legislation to the House of Commons. We will conduct our briefings of Parliament in September and October and we hope to have Royal Assent in December. That is a critical hope.
When you realize the number of lenders involved in this program as it is constituted -- and, there are over 13,000 branches involved -- we have a lot of training to do on the new program between the time it is promulgated and the time it comes into effect. We are going for a December approval because, first, we have typically promised in the past to give lenders 90 days to get up and running on new program changes.
Second, the way the parliamentary calendar works, if we are not through in December, it will be March before it can go through. It is the reality of life here. We are targeting a December passage, a review of the regulations in February, and its coming into effect on March 31. On April 1, the new lending would begin. In effect, we are asking for consideration and approval of the new legislation within the four months, September to December, this year.
The Chairman: The regulations would return to this committee in February, which would be consistent with the delay?
Mr. Sagar: Right.
The Chairman: Thank you for that overview.
Are there any questions? Our staff will prepare a briefing book for each of us, which will include this brief, the consultation document and a couple of other documents that are available, along with a synthesis. We will all have the same material when we embark on our hearings.
Senator Meighen: It will incorporate the very helpful information from this morning, will it?
The Chairman: Yes. If there are any questions for our witnesses, we would be happy to have you raise them at this time.
Senator Kelleher: On page 5 of your briefing book, I note that all the money you get is paid into the Consolidated Revenue Fund. That is a favourite ploy of every Minister of Finance since Confederation. The minister wants to get his grubby little hands on every cent that is available. He then pays out any loss claims. You have your own act, your own organization. In my mind -- and, I would like your opinion on this -- given your set-up and the way you are supposed to operate, I am afraid that the revenue being paid into the Consolidated Revenue Fund is lost in the shuffle. It is hard to see it. The loss claims are paid out of the Consolidated Revenue Fund.
Would it not be better to have your revenue come in and then you pay out the claims and the losses? Would that not be a better way to operate? It forces you into a more responsible position and focuses on to you the moneys going in and the moneys coming out. May I have your opinion on that? What would you prefer, assuming that you have a preference. We will forget what the Minister of Finance wants for the moment.
Mr. Sagar: You could contemplate doing something like that. However, as I said earlier, we would then have to have the right to automatically draw on the CRF at any rate because, in any given year, the fees and the payments do not line up. Therefore, you would have to endow this operation with some line of credit to start out and to carry on.
You would also be faced with creating a special operating agency to do all this, and all of the work, legal structures, and so on associated with it. There has not been a lot of support for this type of move in the past. People come back to us and tell us to keep a clean set of accounts and to report them annually, whether it goes into the CRF or into a separate pot. You can accomplish much the same effect in terms of transparency and accountability in that way. I know my colleague here likes to be accountable for the collection of these things. You would accomplish much the same thing that you would accomplish by creating a separate account.
Senator Kelleher: I hope and trust that you are not straying into the jurisdiction of the EDC, and in effect getting into export financing projects.
Mr. Sagar: No. We are financing exporters, but not their exports.
Senator Kelleher: You are not doing any export financing, is that right?
Mr. Sagar: Yes. It is physical equipment and fixed asset financing only.
Senator Kelleher: That is a rather sophisticated area.
Mr. Chairman, I have a piece of free advice for these witnesses, which is worth exactly what they are paying. Having done a lot of work in the voluntary sector in my days, I would strongly urge you to stay away from getting involved with that sector. By that I do not mean that I am not in favour of the voluntary sector. I will tell you it will be one political mess if you ever attempt to collect against the good nuns in a certain religious organization, the principals of the Red Cross, or other people. I think that loan enforcement would be a horrible thing for you. The best way to avoid that is not to get into it. Hence my lesson for the day.
Senator Callbeck: You said that the banks do roughly 60 per cent to 70 per cent of the lending under this act. What per cent of the total amount of money that the banks lend under this act account for their loans to small business? Do you know?
Mr. Sagar: This is a question we have tried to address.
Mr. Serge Croteau: We do not have access to their overall lending. Thus, it is not a figure we can really judge. Lately they have been reporting their overall lending to small business. It is possible that they are using different definitions as well as the one we use under the act. It is not an answer that we can provide.
Senator Callbeck: What is their definition of a small business? Is it the same for all the banks, or does it vary in their reporting?
Mr. Sagar: Technically, the banks do not define a small business. They will define the loan sizes. When they report out quarterly to us, it is by the size of the loans, and not by the size of business. They have different levels in that area.
The banks do on the order of $50 billion of financing of loans under a certain size. I think it is under 500 or 750. Our total new lending under the SBLA is on the order of $2 billion. The likelihood is that we are a small portion of total bank lending to small business. We cannot assess what proportion we are of their lending for fixed assets, or their lending to businesses under $5 million because we do not have that sort of apples and apples comparison available to us.
The Chairman: Not meaning to put him on the spot, but hoping I might, Mr. McInnes from the Canadian Bankers Association is here. I assume you do not know the answer to the question, sir. It is a very intriguing question. It gets at the issue of to what extent the SBLA is truly being helpful or not. Do you want to see if you can get us an answer to Senator Callbeck's question?
Of all the loans made to companies that would be eligible for the SBLA, what percentage are under the SBLA, versus what percentage are being done by the banks without SBLA assistance?
Mr. David McInnes, Canadian Bankers Association: Senator, I will look into it.
Senator Angus: We did a report a year or two ago about the functioning of the various federal agencies that were involved in lending money one way or another, such as the Business Development Bank or the Farm Credit Corporation, et cetera, including the SBLA. Have you had occasion to look at that report?
Mr. Sagar: Yes, very closely.
Senator Angus: We spent quite a bit of time on our study, and we had people in, including some on the SBLA. One of our recommendations was considered and rejected. I refer to the one about trying to bring ACOA, or the western diversification office, EDC, CCC and the Farm Credit Corporation altogether under one roof so that there would be an element of coordination among these bodies. We got the impression that there were political reasons for keeping them separate. Can you comment on that? In the hearings we will have on this matter, do you think we will be getting into that territory? Does it appear this is a departure from the direction that we showed in our report?
Mr. Sagar: You are right when you say that, in general, the issue is whether or not this act overlaps or duplicates what is already being done by those agencies. I am a little hesitant to go on to the second part of your question. It is a question of whether the Small Business Loans Act duplicates or overlaps the other work. The review we have been looking at says that, no, in effect the SBLA is recognized as a sort of baseline program from which other things get built, rather than get laid into.
Your previous report had two broad pieces, one of which is a suggestion that efficiencies and improvements could result from merging the Crown corporations together, and the other that such a merged entity could replace the regional agencies -- and I will not address that second part.
As a result of your report, the lending institutions, such as the CCC, the Farm Credit Corporation, the Business Development Bank and the Export Development Corporation have come together and are working much more closely. I am sure that the minister would be happy to answer questions on that development.
Senator Angus: It seemed to me we found that at least three departments were involved.
Mr. Sagar: There are three ministers responsible for the four organizations. Responses would have to reflect --
Senator Angus: An interdepartmental ministerial consultation?
Mr. Sagar: I am trying to avoid the jargon, but, yes.
The Chairman: We will have an opportunity to discuss that with the minister when the act comes back in the fall.
Senator Angus: It is relevant to this study.
The Chairman: Senators, do you have any other questions for the witnesses?
Senator Stewart: Let me make an observation on the parliamentary timetable. Unless you have had a guarantee -- and I do not know what agency will go for it -- it seems to me that your expectation of Royal Assent before Christmas is probably overly optimistic. I am afraid that the bill will arrive here at about December 15, and we will be told that in order to get the new version of the act in place by April 1, it should be put through the Senate in one day.
Senator Oliver: Perhaps the bill could be introduced in the Senate.
Senator Stewart: I do not know whether appropriation is involved. That would be the only consideration. If not, then it is a good idea.
Senator Angus: A money bill.
Senator Stewart: "Money bill" is too vague a term.
The Chairman: I share your concern about the timetable, which I have expressed both to our witnesses and to other senior people in the department. However, hope springs eternal, which is an important element of running anything.
One ought to understand that it is unrealistic, unless your minister is able to get some considerable assurance from the House that they will handle the bill expeditiously. Your department had a very recent experience in relation to the Competition Act, which we were ready to handle in a reasonably efficient way, provided one left the wiretapping section aside. It has been sitting at report stage in the House for at least six weeks. The result is that nothing happened to it. If I were your minister, I would try to get some assurances that that does not happen to this piece of legislation.
Senator Stewart: Does this bill entail appropriation?
The Chairman: I do not know.
Senator Stewart: If it does not, it could start in the Senate.
The Chairman: That is an issue you might wish to think about. We would be inclined to deal with it more expeditiously because we will have gone through all the details of the bill.
There is another thing significant thing you should understand. In the House of Commons, your bill will go to the industry committee. In the Senate, it will come to the Banking Committee. We are likely to have far more available time in the first two weeks of the parliamentary session than we are likely to have in November, once we are into the task-force report. At that point, the practicality of the bill being considered by this committee becomes almost zero because our work on the report of the Task Force on the Future of the Canadian Financial Services Sector will, even as an understatement, be all-consuming for a period of about two months. That will not begin until after Thanksgiving.
I think that Senator Oliver has a terrific idea. In the House of Commons, the task force report will go to the finance committee and this bill will go to the industry committee. They are separated.
Senator Kelleher: Mr. Chairman, this is a question more to you and to the clerk, but I would like the witnesses to hear it too, in case they may have to get involved.
When we wander out across the country in July, I am hoping that we will be given some pieces of paper to assist us.
The Chairman: There will be a briefing book for everyone. Gentlemen, thank you very much for appearing this morning. We will get back to you in early August.
Senator Tkachuk: Mr. Chairman, before the committee moves in camera, I would like to discuss one item of business.
On June 8, I moved a motion in the Senate on the CPP. The motion is adjourned in the name of Senator Carstairs and has been sitting on the Order Paper for two weeks now. I would like to move a motion in committee that the Standing Senate Committee on Banking, Trade and Commerce urge the Senate to immediately adopt Motion no. 73 on the Order Paper.
The Chairman: I am in favour of the motion you presented in the chamber. I do not have a problem with that. I had not paid attention to who had adjourned debate on the motion. I would be pleased to speak with Senator Carstairs before the Senate sits today and suggest that we pass the motion.
Senator Tkachuk: It would be a good idea if I made my motion here. Then I could respond to it. I want to bring it up in Question Period, ask the deputy leader about her intentions, and go from there.
The Chairman: I have no problem with that.
Senator Tkachuk: I so move.
The Chairman: Senator Tkachuk's motion in the Senate chamber asks for a response from the government to our report on the CPP. We have always asked governments to respond to our reports, which is a very reasonable request. We gave it to them in March and it is now the end of June. We would, in effect, be asking them to give us a response in 90 days, by the time we return in September. That to me seems very reasonable.
Senator Angus: Furthermore, this is more than just the usual report. A specific deal was made.
Senator Tkachuk: A specific task force.
The Chairman: Absolutely.
Senator Angus: I second the motion.
Senator Stewart: What are the terms of the motion?
Senator Tkachuk: The motion is as follows:
That the Standing Senate Committee on Banking, Trade and Commerce urge the Senate to immediately adopt Motion No. 73, which has been on the Order Paper since June 8, 1998, standing in the name of Senator Carstairs and which reads as follows:
Then my motion is read, which is paraphrased perfectly by Senator Kirby. If you want me to read the entire motion, I will.
Senator Stewart: I do not know what authorization we have to coach the Senate because that is what we are doing when we say "urge".
Senator Tkachuk: We will find out.
The Chairman: My understanding of what Senator Tkachuk will do in Question Period is say to the Deputy Leader of the Government, Senator Carstairs, that the issue of his motion has been discussed in the Banking Committee, and the banking committee endorses the view that it would be desirable for the minister to respond.
Senator Stewart: That is fine. I do not know where I have a basis for being picayune on this issue, but what is our authorization? When were we empowered to tell the Senate what it ought to do?
Senator Tkachuk: We are not empowered to do such a thing. We are simply urging the Senate. We present reports to the Senate. We are presenting a motion, and I so move.
Senator Stewart: Let us suppose that all committees start doing this sort of thing. That is a ridiculous extreme, but you have to test these things.
Senator Tkachuk: This will be a good test, Senator Stewart.
Of course, I had discussed this with the chairman. I would not have brought it up except that today is one day before we might be leaving this place for the summer break.
Senator Stewart: I understand that. I have no problem with the substance of the motion, just the propriety of it.
Senator Meighen: Perhaps Senator Stewart should abstain.
Senator Stewart: I will go along with it.
Senator Meighen: Is there another word to use other than "urge"?
Senator Tkachuk: We urge the Senate, I think. We cannot tell the Senate what to do, but we can certainly urge it to deal with the matter. That is all I am asking.
Senator Tkachuk: Can we consider this motion passed?
Hon. Senators: Agreed.
The Chairman: Carried.
The committee continued in camera.