Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 27 - Evidence - Morning sitting
OTTAWA, Tuesday, September 29, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 a.m. to examine the state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, this is the second day of hearings on the report of the Task Force on the Future of the Canadian Financial Services Sector. We have two sessions today. At this morning's session, we will hear representatives from the Canadian Bankers Association. At our five o'clock meeting tonight, we will hear first from the CEO and Chairman of the Royal Bank of Canada and then from the CEO and Chairman of the Banque Nationale.
With us this morning is Mr. Ray Protti, the President of the Canadian Bankers Association. With him is Mr. Léon Courville, CEO of the Banque Nationale. He is here this morning as chairman of the Canadian Bankers Association and will reappear tonight speaking on behalf of the Banque Nationale. In that sense, he is here as an industry representative now and will be back this evening as a representative of his bank. We also have at the table Mr. Alan Young, the C.B.A.'s vice-chairman of policy.
Thank you very much for attending. Please proceed with your opening statement, and then we will turn to questions.
[Translation]
Mr. Léon Courville, President and Chief Operating Officer, National Bank of Canada; Chairman of the Board of the Canadian Bankers Association: Mr. Chairman, I appear before you this morning as Chairman of the Board of the Canadian Bankers Association. With me today are Mr. Protti, who will be making part of the presentation, and Mr. Young.
Thank you for the invitation to provide you with some preliminary comments on the Report of the Task Force on the Future of the Canadian Financial Services Sector. We will also leave behind with you a somewhat more detailed commentary on specific aspects of the report.
[English]
Before I turn to some specific issues, I would note that the comments in this presentation are limited by two factors: First, the task force report released only a few days ago is voluminous, comprehensive, and full of thoughtful information and ideas. In the weeks ahead, we will be thoroughly analyzing and considering the implications of this important body of work. Second, as you are well aware, two pairs of our member banks have a proposal to merge currently under consideration by the government. These proposals are decisions made by individual institutions and, as such, there is no role to play for the industry association. Furthermore, our members are divided on these proposals and what they mean for the future of the financial services sector. Therefore, this presentation does not address issues in the report related to the government deliberations on bank mergers and other public policy issues flowing from that debate.
There are differing views amongst members on the appropriateness of some of the more activist regulatory approaches proposed by the task force. Accordingly, while we will comment in a preliminary way on a number of the issues in the task force report, we have not addressed all 124 recommendations in the report. Our absence of comment on these other matters, however, does not mean that we are necessarily in agreement on the recommendations of the task force.
I note, Mr. Chairman, that the committee has invited each of our larger member institutions to appear before you, and you will be hearing from them on their individual perspectives in the weeks to come.
I will turn now to the task force report itself and our comments on some of its proposals and recommendations.
In our view, the report is a most impressive document -- well researched, well thought out, and comprehensive in its scope. It sets out a clear vision of the future of the Canadian financial services sector, a vision that has, at its core, the empowered sovereign consumer. Everything else in the task force report, including the institutional structures and the regulatory framework recommended, is driven by the task force's focus on the empowered sovereign consumer. We think that this focus on a sovereign consumer is entirely appropriate.
We understand that there are certain issues that are of particular interest to this committee, such as foreign bank entry, the payments system, corporate structure, the regulatory structure across Canada, and supervisory issues relating to OSFI and CDIC. To this list I am adding an issue of great importance to us, that is, taxation. It is our intention today in our remarks to focus on these issues.
In our remarks on September 24 to the House of Commons Finance Committee, we focused on issues relating to consumer protection. In our remarks today, Mr. Chairman, we do not propose to address these consumer protection issues in detail, but we would be pleased to respond to any questions committee members may have on these important matters.
The focus of our remarks today can be characterized generally as issues that are structural in nature. By no means, though, are structural issues removed from the needs of Canadian consumer. This was made abundantly clear in the vision portrayed in the task force report. In large measure, structural issues are about determining who can provide what service to the consumer, and on what terms. Moreover, the structure of the regulatory regime can directly affect the safety, innovation and efficiency of the financial sector enjoyed by the consumer.
I will now turn to Mr. Ray Protti to provide our preliminary views on a set of specific recommendations in the report.
Mr. Raymond J. Protti, President and Chief Executive Officer, Canadian Bankers Association: Mr. Chairman, the task force report recommends expanding the number of participants competing for customers in Canada and suggests ways to break down existing barriers and encourage new entrants. While we believe that the domestic financial services market-place is highly competitive, we welcome the prospect of even more competitors offering even more choices to consumers.
In our October 1997 submission to the task force, we reaffirmed our support for policies that promote competition in financial services, including foreign bank wholesale branching that does not create an unlevel playing field between foreign and domestic banks. This support was also articulated in our appearance before the house Finance Committee in the fall of 1997, and again in our written submission to that committee in January 1997.
We agree with the task force that the Canadian consumer is the beneficiary of more competitors offering more products and services. Therefore, we look forward to the introduction of foreign bank wholesale branching legislation at the government's earliest opportunity.
Let me turn to the important issue of taxation. The MacKay task force hired tax experts to examine very closely how financial institutions are taxed in Canada. What was the task force's conclusion at the end of the day? Their report says that capital taxes are "perverse". Accordingly, the task force recommends eliminating the imposition of capital taxes on financial institutions. Simply put, Mr. Chairman, as you can imagine, we think the task force got it right.
Moving now to the critically important issue of access to the payments system, Canada's banks agree with the task force recommendation that there should be broader access. At the same time, however, we believe that any steps to broaden access to the system must be taken with a view to maintaining the safety, soundness and efficiency of the system, and the interests of Canadian consumers. The task force acknowledges this important point, but let me elaborate.
The Department of Finance issued a discussion paper in July 1998 that proposes criteria for new entrants into the system. If new entrants were not required to meet appropriate regulatory, solvency and liquidity standards as set out in the finance paper, the mutual confidence and expectation of creditworthiness amongst members would be eroded.
If these issues are not addressed appropriately, the result could be a two tier-system, one where customers may find that cheques drawn against riskier institutions will take longer to be cashed and that debit cards issued by such institutions may face lower limits for acceptable payments. Such a result would reduce efficiency and undermine customer confidence in the reliability of the payments system. Access to the payments system is a most important issue, with significant implications for service to individual consumers and, indeed, for the economy as a whole. It will merit very close attention and careful thought on the part of all interested parties in the weeks ahead.
The task force report also recommends certain changes to the governance of the Canadian Payments Association. We agree that certain changes would be appropriate to reflect a broader membership and the greater interest of the public in the operation of the system. We would stress, however, that the success of the system is a result of the efforts of the participants. It is the participants who are responsible for serving their customers, providing the networks upon which the payments system is based, complying with the CPA's rules, absorbing the risks and incurring the costs of system development operations and the settlement of payments. Therefore, we think that participants must have a role in the governance of the CPA and in decisions about risk in the system proportionate to these responsibilities.
If the governance structure of the CPA is changed, it is most important that these changes not result in unnecessary new regulation that would increase the cost and reduce the efficiency of the system. In our view, the existing consultative process through the stakeholder advisory council and the consultative committee has proven to be an effective method of obtaining input from non-CPA members on the operation of the payments system.
The task force report also contains a useful discussion of organizational and structural flexibility, and I would like to address these matters now.
The CBA is pleased that the MacKay task force recognizes that increased organizational flexibility is desirable and attainable without compromising safety and soundness. As you know, the current regulatory system in Canada imposes on banks a single corporate structure model in which retail and wholesale operations are carried on within the bank or a bank subsidiary and are subject to the same type of regulation. In business lines, such as credit cards and lease financing, banks today compete head-to-head against non-bank institutions that do not face the same degree of regulation or taxation.
We recommended to the task force a more flexible approach to the corporate structure. We suggested that individual banks be provided the flexibility to serve their customers in the corporate structure of their choice and that they should be able to choose from a range of structural options, including a holding company structure, a universal bank approach, and a "bank-holding-a-bank" model.
We set out this range of options for the task force to consider and we did not recommend any particular model. We recognize that each institution will have its own strategic business plan. In our view, consumer benefits come not from any particular corporate structure but, rather, from the flexibility that permits each institution to choose its own optimal corporate structure to best serve its consumers.
We are pleased to note that the task force has made some specific recommendations on corporate structure. It recommends, for instance, a holding company model that would be available to all federally regulated financial institutions, and about which I will have more comments in a moment.
The task force also recommends what we have called the bank-owning-a-bank model whereby a bank could choose to separate its retail banking operations from its wholesale banking business. The retail business would continue to be subject to regulation to protect consumers, while the wholesale business would be structured to compete with non-bank institutions that are unregulated and taxed at significantly lower levels than banks. The bank-owning-a-bank model would be available to all widely held federally regulated financial institutions.
We note that the task force does not specifically endorse a universal banking model in which federal financial institutions would be permitted to conduct any financial business in house rather than through subsidiaries. However, the report's broad recommendation that there should be no restrictions on corporate structures available to financial institutions unless required by safety and soundness considerations at least opens the door to discussions along this line.
As I noted a moment ago, we have a number of comments about the holding company model proposed by the task force. First, we endorse the recommendation that the regulatory requirements applied to the holding company and its unregulated subsidiaries should be as non-intrusive as possible. There is little point in offering new organizational options if the end result is the same, or more, regulation.
Second, we agree with the task force that the holding company should be a non-operating passive company that serves as a source of strength for the financial group.
The task force goes on to propose that the permitted investments of a holding company should mirror the permitted investments of an operating regulated financial institution. The task force proposes this because it would be inappropriate to bias organizational choice by permitting an institution to spin off functions in one model that it could not spin off in another.
We believe that this proposal might be unduly restrictive unless the range of permitted subsidiaries of a financial institution is reviewed and broadened. The task force suggests a review of permitted subsidiaries, and we support this.
Third, the CBA agrees with the task force that the option of a financial holding company structure may permit more nuanced regulation, without serious risk to safety and soundness. It is important, in a more flexible regulatory framework, that corporate groups have the ability to carry on retail and wholesale activities in separate entities, with a level of regulation that is appropriate to each. We support the task force recommendation that, within a holding company structure, lending activities carried on outside the regulated financial institution should not have to conform to Bank for International Settlements or minimum continuing capital and surplus requirements capital rules on a consolidated basis.
Finally, I would simply note that we fully agree with the task force that structural options can create the scope for lighter regulation of some activities, which would provide benefits to Canadian consumers and to competition.
Mr. Chairman, I would now like to offer a few observations about the regulatory system in Canada. The task force has recognized the negative impacts of the overlap and duplication in Canada's current regulatory structure. In our view, the task force's recommendations, such as provincial delegation of prudential regulation to OSFI and the harmonization of rules, constitute useful first steps but do not go far enough in streamlining the system. In our view, the key to addressing the issue of overlap and duplication in the Canadian regulatory system is to achieve national regulation of all financial services for those provinces that choose to participate.
It is interesting to note that, internationally, through our trade obligations in NAFTA, the WTO and the upcoming Free Trade Area of the Americas discussions, Canada is moving toward a common market in financial services with our trading partners. Internally, however, we still face a welter of overlapping and conflicting provincial rules.
A second observation I would make relates to the level of risk in the regulatory system and the financial system as a whole. We agree with the task force's emphasis on more competitors in the market-place, but we also caution that policy makers must take care as they pursue this goal. Fostering the creation of more deposit-taking institutions can result in additional risk in the system since there is the greater potential for institutional failures. Indeed, the task force fully expects and accepts that there would be failures. However, failure does have its costs, particularly when institutions are deposit-insured. Although the new risk-related premiums being introduced by CDIC may help to better allocate risk among CDIC members, there remains a concern that sounder institutions will bear a significant part of the costs of any failures in the future.
Since the creation of CDIC in 1967, there have been more than 30 failures of deposit-taking institutions. The cumulative cost of these failures to the remaining CDIC members was $5 billion. The vast bulk of that $5 billion was borne by Canada's banks, not by taxpayers. Ultimately, these costs are borne by our customers and our shareholders, the one in two working Canadians who own shares in Canada's banks. This is not an argument against the vision of the empowered consumer set out in the task force report. It is an argument for policy makers to ensure that proper prudential safeguards are in place and that undue levels of risk are not introduced into the financial system.
Still on the subject of deposit insurance, we support the report's recommendations to eliminate the overlap between the roles of the regulator and the deposit insurer. While CDIC does not directly supervise banks, it has developed standards of sound business and financial practice that in many cases overlap with regulations or guidelines published by OSFI. Moreover, while OSFI assesses the risks an institution carries in conducting its business, CDIC is also developing risk-based premiums, and this will require deposit-taking institutions to provide duplicative information at considerable cost.
We agree with the task force that OSFI should be the single-window collector of information and act on behalf of CDIC in monitoring compliance, while working closely with CDIC in developing risk-management policies.
Finally, we note that the report also recommends the integration of deposit insurance currently provided by CDIC and policyholder protection plans currently provided through CompCorp. We believe that it should be clearly recognized that the nature of deposit-taking and insurance and their concomitant risks are different. If it is decided that the two plans should be integrated, it is essential that the funds supporting the two insurance schemes be completely separate and that there be no cross-subsidization. Deposit-taking institutions should not have to bear the costs of a failed insurance company, and vice versa.
In the areas of privacy protection, tied selling, reporting on financing for small- and medium-sized businesses, and consumer-redress systems, the task force has recommended that whatever measures are put in place to protect consumers should apply to the sector as a whole. We are pleased to see that the task force clearly understands that the consumer-protection measures should not apply solely to banks but should cover the broader spectrum of the financial sector. To do otherwise would be to work against the interests of the consumer.
Similarly, it is clearly in the interests of the consumer to level the playing field in the area of who can provide what service to consumers and on what terms. Using consumer preferences and needs as its guide, and bolstered by substantial and impartial research, the task force has recommended the removal of the current restrictions preventing federal deposit-taking institutions from retailing a full range of insurance products through their branch networks and offering lease financing services for light vehicles. The task force not only concluded that consumers will benefit from more choice and lower cost in insurance and automobile leasing, but has also cautioned that to deny choice in these areas would be "contrary to the public interest."
It is unclear, however, why the task force does not feel the same degree of urgency in providing consumers with the benefits of greater competition in insurance-retailing and lease-financing areas as it does in urging broader access to the payments system. Further, if appropriate consumer safeguards are in place, why should consumer access to these products be delayed?
Let me note at this point that you will hear from those who claim that bank involvement in insurance retailing or auto leasing will cause economic disruption and massive job losses. The task force has conducted extensive research and, without emotion or rhetoric, has examined the issue for close to two years. Their assessment of jurisdictions where deposit-taking institutions are allowed to sell insurance and offer lease financing shows that traditional insurers, lease-financing companies and auto dealers can and indeed do co-exist, compete and thrive in the market-place alongside deposit-taking institutions. The task force's research is compelling and its conclusions clear.
Before concluding, I would like to note that, on the important issues of tied selling, privacy and consumer redress, we agree with the task force's objective of protecting the consumer. We are putting on the table, however, an alternative way of achieving that objective, and that is to continue the approach of responsible self-regulation under the watchful eye of government.
I would like now to turn to Mr. Courville to offer a few concluding remarks.
Mr. Courville: It is clear that the sector is at a critical turning point, mostly because of changes in the market-place, the range of public policy issues currently under discussion, as well as the proposed mergers. It is also clear that, in the words of the task force report, "...for financial institutions, their customers and public policy, reliance on the status quo is no option."
[Translation]
We hope that our comments on the public policy issues addressed in this presentation assist committee members in your deliberations on the future policy and regulatory framework for Canada's financial services sector.
Yours is not a simple task, but it is a fundamentally important one -- not just to the financial institutions we represent, but, more importantly, to Canadian consumers.
The Task Force on the Future of the Canadian Financial Services Sector has provided you with a substantial and impressive body of work from which to seek the advice of Canadians and from which to draw recommendations.
We wish you well in your deliberations and we stand prepared to provide whatever assistance we can to you in the preparation of your report. Mr. Chairman, we would be pleased to respond to any questions you and your colleagues may have.
[English]
Senator Oliver: I have a question for each of the presenters. I will begin with Mr. Protti. Why is it better for the consumer if we leave regulation on privacy matters up to you rather having them legislated, as Mr. MacKay suggests? Mr. MacKay said that privacy standards governing the use of information Canadians provide to financial institutions should be found in legislation rather than leaving it to the whim of an individual bank. How do you think Canadians are better protected under what you are proposing?
Mr. Protti: We have a view on privacy, tied selling, on consumer redress. The industry has demonstrated -- particularly vis-à-vis some of our competitors in the financial services -- that we can move aggressively, and have moved aggressively, through self-regulation to put in place a privacy code that meets and exceeds, in most respects, the CSA model code that was proposed. We have had that code up and running for a couple of years now. We have educated our people with respect to how it should operate, and it is indeed operating.
On the specifics of the privacy issue, we have demonstrated that a self-regulatory approach can work. That is true as well with respect to tied selling, where we were the only ones that responded to the government's question to develop a code of conduct on tied selling. Furthermore, we are the only players in the financial services industry to have a consumer redress mechanism in place. The task force made it quite clear that it was a good model to build on. In fact, they regretted the fact that other players in the financial services industries were not participants in it.
Basically, we are an industry that has demonstrated that the self-regulatory approach is in place and is working. We should be given the opportunity to make that system work. We think we have demonstrated our bona fides on that issue.
I wish to comment on an issue that is of some concern to me, particularly with respect to consumer redress. If we have a legislated, industry-wide solution on consumer redress -- that is, the creation through legislation of a Canadian financial services ombudsman <#0107> my concern is that that institution will turn into a quasi-judicial tribunal. There is an enormous tendency -- and I know this from my own 25-plus years in the public service -- to let these institutions grow into something not originally intended by legislators. If we go to a quasi-judicial tribunal for consumer redress issues -- and, I say this with all respect to the legal community -- there will be lawyers lined up on both sides and the consumer, who is trying to resolve an insurance claim, will be caught between these two warring sides.
Senator Oliver: Would that not be better than the present system of the banks owning, buying and controlling their own impartial ombudsman?
Mr. Courville: First, on privacy, confidence is part of our business and is an issue that banks would like to improve to the utmost; therefore, it is in our own private interest.
The ombudsman issue involves practices and redress. If the ombudsman is kept within the confines of the industry, there will be better cooperation in redressing some of the problems that may have occurred. Banks are related to the ombudsman in a way, and they must work it out. If redress is to be made, it is the responsibility of the individual bank that has done something "wrong" to redress it. If banks feel responsible for their customers, then the redress mechanism is much better handled by someone who will provoke and manage the redress instead of having the issue out in the public limelight, causing tension and becoming adversarial.
We would prefer to give individual banks and financial institutions an opportunity to work on redressing potential harm to a customer and to ensure that the information is publicly defused afterwards on a number of complaints that have not been subject to successful arbitration on the part of the consumer. This is what we do currently. A process is in place whereby all complaints are tabulated as well as the cases where redress has not been received from individual banks. The system works very well that way.
Senator Kenny: Some representatives from the American Bankers Association said, "Tied selling is terrific. We are providing the customers with all the services they need. This is a good way to do business. We have satisfied customers. They are very happy." Are you responding to government pressure when you are telling us that you are taking steps to deal with tied selling, or is this really how you feel the system should be structured and set up?
In other words, would you like to see more pressure from the government to ensure that there is no tied selling? Or would you like to see more opportunity to provide a more complete basket of services?
Mr. Protti: I make a distinction between cross-selling and tied selling. Cross-selling is where services are bundled to the benefit of the consumer, either at the specific wish of the consumer's or at the suggestion of the institution itself. Concerning coercive tied selling, we agree with the government and others who have said that coercive tied selling should be illegal. We are not uncomfortable with that as a statement of principle.
Approximately 18 months ago, in response to allegations that tied selling was occurring, all players in the financial services sector were asked by the House committee to put together a code of conduct on tied selling. The recommendation was that it should be put in place and run for a period of time to see if there were any further complaints. We were the only ones who did that. We put in place a code, we spread it across the country, and we educated our players.
The House committee then held another set of hearings and, without any real evidence of any genuine problems associated with coercive tied selling, they decided to incorporate into the Bank Act a provision stipulating that coercive tied selling is illegal. That is the reality of the situation that we are in today.
We remain of the view that a self-regulatory approach, of the sort that we were requested to undertake, is the best way to deal with this situation. We are the only ones who put it into place.
Senator Kenny: I am trying to discern whether you are making a great effort here to be politically correct; I am trying to determine what your real economic interests are here.
If it were not for that committee, where would the banks be going? What sort of regime would you like to see? Would you favour a regime that encourages you to provide a variety of services and allows these services to exchange information, so that a variety of alternatives can be suggested to a customer? Or would you like to have Chinese walls around you, so that one part of your operation cannot communicate with the other?
Mr. Protti: We would definitely like a market-place in which we can respond to what consumers are asking of us. Today's consumers are far more sophisticated than they have been in the past. They are far more inclined to negotiate hard bargains with their institutions. They may be coming to us and saying, "It is time for me to renew my mortgage. My mortgage is my single biggest relationship with you. I do not like your posted rate; I want a different rate. If I bring you some additional business, could I negotiate something off the posted rate, for example, 50 or 75 basis points?" That is cross-selling.
We would like to be in a position to respond to those sorts of initiatives. We would like to be able to say to a consumer, "Bring us a bundle of product and we can negotiate a favourable understanding here with respect to something off the posted rate or something off a service fee package" -- or anything else that the consumer might have in mind. That is cross-selling and that is advantageous to us.
Senator Kenny: You draw the line at who asks. If the customer asks, it is okay, but if you offer, it is not okay?
Mr. Protti: No.
Mr. Courville: In the real world, sir, this works together. Is it push or pull? We do not know.
In practice, we offer products, and we would like to offer as many products as we can, and we like to bundle them. Some consumers like that. They like to feel important to their own financial institution. They feel it creates a leverage for them with respect to negotiation of the various products. It also saves some time. They have a personal relationship with an individual within the bank and, therefore, the bank knows their business. They feel that we know what they are about, and we are able to offer not only products but counsel about various situation. We like to do that.
You raised another point. The term "tied selling" is a very poor term. In fact, it is a "tied offering". You take it or you do not take it. It can be parcelled out. It is not tied selling in the sense that it has to be bundled together. You can take it by the piece, or you can take it in conjunction with other products.
You mentioned the exchange of information about products between some of our subsidiaries. This is an important issue. We have brokerage subsidiaries as well as traditional financial products. In practice, we are not able to exchange information between one or the other unless the consumer allows us to do so.
Most banks offer their consumers the choice of allowing information to be shared or the consumer can specify that it is not to be shared. If the consumer chooses not to share information, we ensure that their wishes are respected.
Senator Kenny: In a perfect world, you would like the opportunity to analyze all the information you have about a customer, and then give that customer different options about different products you offer that would maximize that customer's opportunities.
Mr. Courville: Of course.
Senator Kenny: How do you go about that in a way which does not somehow abridge the customer's rights?
Mr. Courville: Do you mean privacy rights?
Senator Kenny: Yes.
Mr. Courville: They must consent to it.
Senator Kenny: Do they consent to it by signing the sort of form we sign when we fill out a credit card which allows you to get any sort of credit information that you want?
Mr. Courville: They must consent to it.
Senator Kenny: You give consent any time you apply for a credit card.
Mr. Courville: Yes, you do.
Senator Kenny: That consent allows the bank access to any sort of information that the bank wants to have.
Mr. Courville: That is not necessarily so.
Senator Kenny: It is pretty close.
Senator Oliver: I have a supplementary question on privacy and then I want to ask about the leasing of light vehicles.
On privacy, the task force recommends that the banks be allowed to sell life insurance in the branches. That would be new. It would mean that life insurance policies, and private medical information will, for the first time, be accessible to branch banks. Are substantive changes required to the present privacy codes to deal with this sensitive medical information which you will have access to if the task force proposal goes through?
Mr. Protti: The answer is no. I believe Mr. Young has the actual wording.
Mr. Alan Young, Canadian Bankers Association: I am reading from the CBA's model privacy code. Paragraph 5.4 states that each bank will collect health records only for specific purposes. It will not disclose health records to subsidiaries or affiliates and vice versa. For example, a bank will not be able to use its subsidiary's customer health records to assess a loan application.
Senator Oliver: There is a Chinese wall in the branch?
Mr. Young: Yes. It is right in the code.
Senator Oliver: My next question deals with auto leasing. A report was prepared for the task force by DesRosiers Automotive Consultants. That reports asks whether the market can sustain high residual values assumed in most leases. For example, after a three-year lease of a BMW, the car has a residual value, they say, of $70,000 to $80,000. The DesRosiers report states that, after five years of rising values, statistics show these levels are dropping quickly. Lower residual values mean higher monthly payments on new leases. This, according to DesRosiers, will lead to a slide in leasing to 40 per cent of new sales this year from 47 per cent last year.
The report also states that the huge numbers of leases in recent years will push many of the existing lenders into loss positions when leases expire. We have already seen that, in the U.S., some banks have left the auto leasing market precisely because of residual value losses.
My question, Mr. Courville, is: Has your bank has looked at this; and do you really want to get into this kind of leasing?
Mr. Courville: Yes. We would like to get into leasing. You are quite right about what DesRosiers has said. I met with the GE Capital people last week. Two years ago, they made a profit of $500 million in auto leasing. This year they will barely break even on the business.
Senator Oliver: Is that because of residual values?
Mr. Courville: It is because of residual values and falling car prices. With the changes in the currency, you will see a major movement between domestic cars in the U.S. and Japanese cars. That will put downward pressure on prices. It will come in the form of the add-ons that they put into cars which they will almost give for free. Those are, in fact, price reductions. This creates intense competition. This quite lucrative market which existed six to eight years ago made all the components of the industry bid up the residual value so as to lower the actual lease cost to the customers. Now they will have to bear the brunt of their practice.
Senator Oliver: The chickens are coming home to roost.
Mr. Courville: You are quite right. When you are in a business like leasing, like all other types of business, it goes through a cycle. This is one of the characteristics of the financial industry. Some products and some aspects of the financial industry make profits during certain parts of the cycle. At some other parts of the cycle they will not make as much profit or they may even suffer losses.
We are in it for the long run, I guess. Our potential regarding auto leasing is to increase competition in Canada. Because we are fairly supervised and because we have a code of conduct, we think more candid information will be passed on to the customers. Car dealers, themselves, will have access to broader sourcing for the funding of their leases. Therefore, eventually, while this may not be a good time to enter the market, we are in it for the long haul.
Senator Oliver: Mr. Protti, did you want to add anything to that?
Mr. Protti: There are two points. To clarify, for quite a number of years now, Canadians have been led to believe that this is really a car dealer issue. I thought that the work of the task force had put an end to that particular myth. They demonstrated that 80 per cent of the car leases in this country are written on behalf of the foreign financing arms of the automobile manufacturers. In particular, three -- GM, Chrysler and Ford Credit -- have 70 per cent of the business. Ten per cent of the business goes to firms like leasing companies. GE Capital is the example that Mr. Courville used. Only 10 per cent of vehicle licences currently written in this country are written by car dealers. Of that 10 per cent, only 1 per cent of the dealer community -- about 45 dealers across the country -- have more than 200 cars in their portfolio. The average dealer is writing something like 20 to 25 leases per year. Therefore, this is not a dealer issue.
The Chairman: Mr. Courville, in responding to the question of whether it was desirable to continue the office of the ombudsman as it is set up now or whether you believed it should be completely and utterly separate from the banks, you defended retaining the status quo on two grounds.
To paraphrase the first ground, you told us that, as it is now structured, because the ombudsman is part of the club, that ombudsman will be inclined to get a better response from the banks than would a more arm's-length ombudsman. Second, you believed that a more arm's-length ombudsman would result in a more public process which, in turn, would lead to confrontation.
The task force has not envisioned a more public process. They have envisioned the same kind of private process that now exists. I am not sure that your concern about publicity is a good reason for not moving to a more independent ombudsman.
Your comment that the ombudsman is, in effect, part of the club is the precise reason many people are concerned about the objectivity and usefulness of the ombudsman. The perception is, rightly or wrongly, that if you are part of the club you are less likely to be tough on club members than if you are not part of the club. My reaction to your answer is you have given a very compelling reason, in fact, for the ombudsman being independent.
Mr. Courville: I did not use the word "club."
The Chairman: I agree. I said I was paraphrasing, but that was the essence of your statement.
Mr. Courville: You can use the word "club" in any part of self-regulation that exists anywhere, be it in the financial industry or elsewhere, so I do not know what being a "member of the club" means in that context.
I meant that the redress mechanism is more important than the adversarial approach. We are concerned about customers and the way today's ombudsman structure works. I will be more specific on that. In practice, when there is a complaint from a customer, each of the banks has within its own structure someone who is appointed to oversee and to ensure that the customer is given a fair hearing, quite apart from the traditional hierarchical delivery mechanism. It leads to redresses that are less costly and that are, probably, more satisfactory.
With respect to the ombudsman structure, I would point out that, starting this year, the members of the ombudsman board are people from outside the banking and the financial industries. They provide us with guidance on how we should operate; they oversee the mechanism; they monitor the number of cases that have been put before the ombudsman; and they analyze not only the occurrences but of the type of occurrences that gave rise to some complaints. This is self-regulation. You call it "a club."
The Chairman: You use the word "adversarial." Why must having an independent ombudsman result in a more adversarial process than having a non-independent ombudsman? I do not believe it does.
Mr. Protti: I wish to add two or three points to clarify the record. One, just to support what Mr. Courville said, there are now more independent directors on the board of the ombudsman than there are bank people. Second, to show the independence of the ombudsman, if there is ever a question of dismissal, the only way an ombudsman can be dismissed is by a unanimous vote of the independent directors. Third, I further understand that, with respect to the complaints that have already been handled, every one where the ombudsman has found on behalf of the consumer has been handled by the banks in line with what has been recommended by the ombudsman.
On your point on the use of the word "adversarial," I would caution that, if we move into a legislated scheme there is a real danger, it seems to me, Mr. Chairman, of ending up -- and you may not begin with it, but you may very well end up with it given the nature of bureaucracies -- with what will amount to a set of lawyers on one side and a set of lawyers on the other. That prospect worries me. If it did, it would be, ultimately, to the detriment of the individual complainant.
The Chairman: Every change has potential downside risks which we can always conjure up as a reason for not making the change.
Mr. Courville: What is the problem we are trying fix here with respect to the ombudsman? I believe that there is a presumption, based on the fact that there is self-regulation, that there will be less intensity with respect to the attention we give to customers who complain.
The Chairman: That is the perception.
Mr. Courville: That is a presumption, not a perception, because I do not believe we have heard any evidence today of bad redress mechanisms with respect to the ombudsman, so I believe we are trying to fix something that has not occurred up to now.
Senator Kolber: I asked this question yesterday but I did not get an answer. Perhaps you can assist. We have just started hearings on a very far-reaching and potentially complicated issue, the financial industry in Canada. I take the attitude that: "If it ain't broke, don't fix it". However, the task force has stated that, for financial institutions, their customers, and public policy, reliance on the status quo is no option.
I am trying to enter this debate with a basic premise. All debates are useless unless you have a basic premise because the conclusions are illogical if we do not agree on a basic premise. Be that as it may, what is our challenge? Is our challenge systemic or are we nipping at the edges? It is interesting to discuss automobile leasing. That should be, in my opinion, an option the banks have but do not have. Whether it is a good or bad business is really up to you. However, when you consider the huge profits that banks have been making, when they report a return on equity between 15 and 18 per cent, why is the status quo not an option? I am having trouble dealing with that.
If you were telling me that it is a pretty good system but it can be improved, I would understand that. If the bank representatives were telling us that, within 10 years, banking will be a marginalized industry, that, as a senator and legislator, would really worry me because it is very important to have a home-grown, home-owned financial business. When I read in the paper that the government went out for a bid on credit cards and most of it, except for your bank, went to the American Express company, I feel there is something wrong.
Is our challenge here to make a fundamental systemic challenge, or are we just trying to improve what is already a pretty good system. I believe our attitude on what we do will be governed by that kind of decision. Remember, we have only just started.
Mr. Courville: That is a good question that will probably require another task force report.
Being an industry spokesman I must remind you that we are not all in agreement on this. You are touching on the future, not the past, and "the future is not what it used to be". You are right in saying that the system has been quite efficient. In fact, the task force report recognized that. The task force provided detailed information about the efficiency of the system both from the customer's point of view, looking at spreads, and from the point of view of the financial health of the participants in the industry. In that sense, looking at the past, the record is pretty good, but what you are saying is that it will not go on like that.
As I said, the industry is a bit divided on how to perceive the future, and some of our firms have positioned themselves with respect to a future that is not the future others anticipate. When you plan a strategy and when you write public policy, you must anticipate the future and how it will evolve so that current domestic participants do in fact become enabled to cope with tensions that will occur in the market-place which are different from those that have occurred in the past.
You raise a dilemma. I would put the question back to you because it is for you to answer since you are part of the process of addressing this issue and making final recommendations to the government. You are part of the government process. You cannot look at the current environment and the status quo, whether it be amended marginally or all broken up, from the point of view of the past only. You must make up your own mind with respect to how the future will evolve and whether or not Canadian institutions will be able to withstand the new waves that might arise from the new storms of the market-place.
Senator Kolber: There are plenty of storms, so why are the banks not making a case for what the future might hold?
Mr. Courville: Representatives of individual banks -- and I am speaking for my own bank as well as other banks -- will tell you that they have taken a position for a certain reason. We are all looking at the future, not the past.
Our view of future conditions is our strategy. Your view of the future should concern public policy, and that is the same as strategy, in a way. You must ensure that you enable institutions to do whatever must be done in a changing environment. We have different view on whether this environment will, indeed, change dramatically or not. We are withholding any presumption of the future, but we are offering our view of the future because individual banks do not agree on what the future looks like.
Senator Kolber: Mr. Protti, in the example of the holding company, did you say that one subsidiary could be a retail bank which would be regulated, and the other could be a wholesale bank which would not be regulated?
Mr. Protti: Yes.
Senator Kolber: If it is all owned by the same person and the wholesale bank gets into big trouble, where will the wholesale bank go to be rescued? When we were in New York, we learned that a capital company nearly took the whole banking system down. They had to come up with a private sector solution, a $3.5 billion solution.
How can you say that, within one basket owned by the same holding company, parts should be regulated and parts should not? I must say that escapes me completely.
Mr. Young: We are saying that we must return to the fundmentals of why we have erected an entirely separate regime to regulate financial institutions. We do not have this for other types of businesses in Canada.
The task force found that the reason we have this separate regime for regulating is that we are institutions that accept deposits from retail customers or we are institutions that take money from customers to purchase insurance policies.
If we accept that as the basic proposition as to why government is concerned about regulating financial institutions, and that is our position, then we believe that there should be flexibility in the regulatory system to permit government to occupy its rightful place, to ensure that the retail depositor's interests are protected. However, large corporations that do not fall into the retail deposit field should be able to access financial services from a different organization that is not regulated or taxed to the same degree as an institution that is regulated for deposit.
Senator Kolber: What do you mean by "to the same degree"? It is like being a little bit pregnant; either you are regulated or you are not regulated.
Mr. Courville: OSFI has suggested that, if there were a financial institution holding company, they should organize the holding. I do not know how, in practice, you would regulate holdings because it has never been done in the past. The premises under which you will regulate are not known. For instance, what kind of capital requirement provisions will be exacted?
If you have a holding company which has regulated companies under it, and if something happens to the wholesale bank, then, if the bank is regulated and supervised, the bank will survive and the deposits will be honoured. All the obligations of that bank will be honoured, and the holding company will fall off and the shareholders of the holding company will have problems.
Senator Kolber: That depends on how much money the retail bank has put into the wholesale bank.
Mr. Courville: Under these conditions, there is a ban and strict rules related to rated party transactions.
If you are able to solve the rated party transactions problem and if you regulate each one as a life insurance company or a bank, then you protect each component, and they will be able to survive any failures that occur in the other parts of the holding company.
Senator Kolber: Are you saying you will have to regulate how much the holding company can put into each sub-category?
Mr. Courville: I am referring to the loan of the banks to the wholesale bank, the insurance company, the leasing company or any other part of the holding. This will ensure that the transmission of any asset from one part of the regulated companies to the non-regulated companies will not injure the bank as such.
Senator Kolber: Did you say they do not injure the bank?
Mr. Courville: Yes.
Senator Kolber: In other words, it should be regulated.
Mr. Courville: The related party transactions should be regulated. We know how to regulate a bank or a life insurance company -- at least it is presumed we know -- but I am not sure we know how to regulate a holding with a number of transactions among themselves This model does not exist.
Senator Kolber: I have two further questions that you might wish to reflect on and get back to us. First, do you believe there are impediments created by public policy that are hamstringing our banks; second, are our banks lousy strategists?
Senator Angus: The task force made a big fuss about public interest. That permeated the report. Mr. Mackay has said numerous times that if the private interests of the institution are in conflict with that of the public interest, then the public interests will trump the private interests. Mr. MacKay also told us that banks, other financial institutions, and players in the sector operate by privilege. It is a privilege to be there and, therefore, they have special obligations that other commercial establishments do not have.
Do have you a view generally that the task force is correct? Do they perhaps go too far in the general area of public interest?
Mr. Courville: Our view is that there has been a balance in the past between public interest and regulation as well as ministerial discretion with respect to the conduct of the industry.
The task force is shifting that balance to some extent. It proposes tighter regulations with tighter laws in some areas. We alluded to these issues before. It also proposes increased ministerial discretion in certain areas. The task force would probably advise more interventionism than has been evident in the past. More focus is also being placed on the so-called "public interest" with respect to the mergers. Other issues could arise that would probably call for a wider approach to resolving these issues with public consultation.
Certainly, while the report addresses most of the issues that financial institutions have raised, it also changes the balance between regulation, discretion and rule making. Does it go too far? It is difficult to say now. At this point our comments are preliminary. We have to read through exactly what it means for the future. Certainly, the balance has been shifted.
Senator Angus: Yesterday, it came to our attention that the report goes into a lot of detail about liberalization, deregulation, more flexibility, the kinds of things that we have been hearing from your association over the years -- for example, "Remove some of the shackles." -- and then, almost as if by magic, the task force seems to close the book there, open up a new one, and put all the shackles back on. Obviously, this is an oversimplification.
What is your comment?
Mr. Courville: You are right in saying that we recognize more flexibility. We will not open up the market, yet at the same time we feel some of the consequences. As well, some new rulemaking is on the way with respect to privacy, the ombudsman, and ministerial discretion respecting certain issues that exist today and others that might come up in the future.
In this respect, increasing ministerial discretion means that we are introducing another element into the process. Not only do we have broad rules, but also I would say that we have a game for which we know the rules and if someone does not like the score they can come back and say that they do not like it. Ministerial discretion is introducing politics over regulation or public policy and public interest concerns over specific issues. Certainly, this should be part of your debate because it is something that concerns the industry. I am sure it is something that concerns individual banks as well.
Senator Angus: We have just been talking about the structure, that is, the universal bank concept, the holding company or the one-bank-owning-another concept. On the one hand, you appear to applaud the direction the task was taking, the apparent increased flexibility. On the other hand, however, I sense in your remarks that here is an example where they suggest more flexibility but then almost prevent it by putting conditions on it. Do I have that right?
Mr. Protti: In the end, with respect to more flexibility in terms of corporate structure, Senator Angus, the devil will be very much in the details. We would like to see a variety of options available to individual institutions. If the upshot of that should lead to an increase in the regulatory burden, then you are quite right, it reduces any degree of flexibility that we would have sought in the first place. We will need to iron this out both with the government and more specifically with the regulator. There is little point in having flexibility unless it will lead to a reduced regulatory burden. However, we will only know this in the months to come. The devil will be very much in the details on this one.
Senator Angus: I was interested in the comments Mr. MacKay made to us yesterday as well as comments he made in a public speech in Toronto last week. It concerned the issue of privilege on the one hand begetting obligations on the other hand.
He said in his remarks that over the years the main chartered banks in Canada have enjoyed a protected status and that for decades there has been legislated protection against foreign bank intrusion and competition. In effect, this has led to stagnation, if you will, and a lack of imagination, as Senator Kolber was suggesting, along with a lack of innovation and competitiveness. This comes through in the report, where it says that mergers are not the only way, that there are probably other ways, and he points to some road signs.
This committee has heard in its travels that the Canadian banking system is looked up to in many other areas for having served us very well over the years, and that it is something that should not be tampered with lightly.
A natural consequence of having this overly protected system has us in a box. One of the reasons we are behind the curve and not in the big global game as much as we would like to be is because you folks have been sort of lulled into a sense of comfort.
Mr. Courville: Your question has to be answered by taking a long-term perspective, as well as a look back. In the past, there has been competition in Canada. It came in particular from the trust companies, which were favoured to some extent by regulation as being alternatives to banks in the deposit-taking business. Unfortunately, we know what happened. It has been a public policy interest to reduce the importance of banks in Canada by putting home-grown competition into the mix. As a result, if we have this privileged status, which is a term I do not like, then so be it. Abolish the privilege and open it up to foreign competition. We do not mind that. We would like to compete.
In fact, there are factual grounds in the MacKay report that tell us that we are fairly efficient both in terms of delivery of service and in terms of the prices consumers pay for those services. This is not the CBA speaking -- I could quote directly from the MacKay report, which notes that our prices are lower. It is also noted that our production costs are lower. Therefore, if we are privileged, then Canada has been privileged as well. If you want to ensure that we are not privileged, then open it up to competition.
As Mr. Protti said in his statement, we welcome competition. In fact, it would probably be a good indication that we are good performers and that we would like to acknowledge that the proof of the pudding is in the eating. However, you must ensure that if you open up the mix to competition, the rules are the same for everyone.
Mr. Protti: To add to the remarks of my chairman, the phrase "If it ain't broke, don't fix it" has been used with respect to the subject we are discussing. I heard Mr. MacKay interviewed about five or six days ago and he was asked that specific question. I remember his response, and I will share it with senators because I thought it was an excellent one. He said that the important issue here is not to focus on the present, but to focus on the future. He said that it is quite clearly the case that we have a stable, secure, effective and -- to echo Mr. Courville's remarks -- a highly competitive industry. There is no doubt about it; Canadians are well served by their banking system.
Mr. MacKay also said that the task force was concerned about was this: Faced with the pressures from globalization, the integration of financial markets around the world, and very much so in the North American context, and faced with the pressures from technology, the pressure from demographic changes and an increasingly demanding consumer base, what can we do in the future to ensure that the nature of the banking and the financial services system as a whole continues to be Canadian owned and controlled and continues to offer a highly competitive environment? He said that it is not about "if it ain't broke, don't fix it;" it is about ensuring that it does not get broken in the future.
Senator Meighen: You have just answered Senator Kolber's question.
Senator Angus: Both our questions.
Mr. Protti: I should like to make one other remark on this question of privilege, so that it is clear for the record. We addressed this issue last year in our submission to the task force. The point we made is that we do not believe that we have and are not requesting any special privileges on the part of Canadian banks. In the past, we have been accused of having half a dozen different privileges. The position we took in front of the task force was that some of the things that are being described as privileges reflect a deliberate public policy decision by the government of the day. We asked the task force to examine each one of these so-called privileges and said that if it thinks there is a public policy reason to have it, then please articulate it as such and do not describe it as a privilege for the banks. They did that with one issue, the 10 per cent ownership rule about which they said there is a clear public policy interest here.
Senator Angus: I think we have that issue out on the table now. In your view, gentlemen, do you feel that as of today, September 29, 1998, the system itself, along with the governments of the day and your own industry, has been too cautious in terms of allowing real and effective competition into our banking market, with the result that we have failed?
It is probably a fact that we do not have an effective second tier, in the retail area at least, of financial institutions that would have provided more opportunities for consumers and more competition which would have allowed the bigger banks to be more bold in the global sense.
Mr. Courville: Again, we cannot reconstruct the past. I have already said that I think that public policy, implicitly, over the past 25 years, has been to promote home-grown institutions to compete with the banks in sectors other than traditional banking. Obviously, this has not worked. Should we replace it by competition from outside? Our answer is that we do not mind competition at all and we will face it.
Senator Angus: Why do you think those so-called "efforts of the past" have not worked?
Mr. Courville: This will involve a long dissertation. There has been a lack of supervision. Many of the institutions that failed were regulated provincially but had federal deposit insurance, and the federal government was hit with the problem when it was too late to some extent, and provincial supervision was probably lacking to some extent. We created holding company structures that were not regulated at the top. We have also restricted the investment of the these trust companies into real estate because real estate had been, for the past 45 years, the best, most secure asset you could have on your books and, by being so concentrated in real estate and creating a tradition of real estate investment in trust companies, we in fact put them in a cage, and when the cage was rocked, the problem was too big. Had they been more diversified and less regulated in their opportunities for business ventures, some of them would probably still be around today.
There is no single element to explain the demise of the non-bank competition in deposit-taking institutions for consumer activities. There is a host of reasons that could explain that.
I think that the opening up to competition, whether it is home-grown or now foreign, will leave a balance, and we can meet the market test. We appreciate that this could be opened up, albeit with some restriction with respect to systemic risk and participation in the payments system which is a serious problem we must examine carefully. We recognize we might be privileged in a way because you do not want everyone in the payments system. You want to ensure the rules are sound. Safety is important, but aside from that qualification, I think opening up competition is not something the CBA and the industry would like to forestall.
Senator Meighen: I believe you said that the home-grown competition has not solved the problem. Now we are looking at permitting foreign competition. I am doubtful that the goals of the foreign institutions would be the same as the goals of the home-grown institutions that did not succeed. The trust companies, credit unions, and whatnot are essentially second-tier deposit-taking institutions. I mean no disrespect by that. I do not mean in quality, I mean in the range of services they can provide. They are local. They are active, perhaps, generally in smaller communities.
If there has been some lack of success in providing the competition we want, why do we think that the introduction of foreign institutions will solve that problem? There seems to be a general consensus that foreign institutions coming to this country -- I may be wrong and I stand to be corrected -- will go for the top-margin businesses, not the base business of deposit taking. It is said they will be category killers, they will be looking at the high-margin end of the business, not taking deposits in community X that is inadequately served today.
Mr. Courville: In the area of non-bank competition, Quebec is probably a model to be studied, and I think the task force alluded to that. They would certainly like to lower the capital requirement for initiating a deposit-taking institution, and they specifically addressed the community aspect. I think this is a model that would serve us well. A lot of banking is local in nature, and it will always remain local in nature. Whether you are a very big or a very small bank, you have to be grounded to your customers. Customers relate to individual banking as a "people business", not a "product business."
In addition, foreign competition makes us aware that someone with potentially lower costs, and with a different strategy, could enter our industry and make it less lucrative for us, which will force us to be more alert and to ensure that we do shape up, so to speak, if we have not shaped up already. We have to shape up to ensure that the delivery of our services will be cost-effective; otherwise, we will lose a lot of our potential profits. The 80-per-cent/20-per-cent rule applies there as well as in other areas.
You call them "category killers.".They may start that way, but eventually they progress. Allowing foreign entities access to a broader range of services than in the past is a way of opening up competition. In all fairness, I think the task force does not know which will succeed. As a student of the industry it seems to me that they are trying to get at opening up the system in various ways, hoping that one or two of them will succeed more than in the past. Not putting all the eggs in one basket is probably good from their point of view because trying to identify a set of institutions that will be the answer to all the competition concerns we have could be a mistake.
Mr. Protti: If I could just add some specifics to the foreign bank competition issue for the record, two institutions have a retail presence: the Hongkong Bank of Canada, which of course has a strong national presence in retail banking, and Banca Commerciale Italiana of Canada which has a branch network focused in southern Ontario and partly in Quebec. There is a relatively new entrant in the last 18 months in ING Bank of Canada which, of course, is now offering retail services without any bricks and mortar. It is a virtual bank, and it is attracting deposits from Canadians across the country. It is a complete technology bank with no branch network. Monoline providers are arriving, providers such as MBNA Bank which is a second largest credit card issuer in Canada. That is physically established here in Ottawa now. It will be joined very shortly by the largest mortgage-issuing bank, Countrywide Credit.
Finally, there are now foreign banks such as Wells Fargo which are soliciting small business in Canada. It does not have any presence at all within Canada. The nature of foreign competition is changing dramatically.
[Translation]
Senator Hervieux-Payette: I want to come back to the matter of the ombudsman, and here I would like to suggest something to your association. If the ombudsman were part of the association, we might have the best of both worlds. Not only would people know that there are no direct links between employers and employees, but the ombudsman could share his experiences with file A, B, C and D, and would at least have some knowledge of that area. He could even develop expertise in that area. I agree with the association's wanting to develop a bureaucracy. At the present time, files are piling up at the Human Rights Commission. I would not want people to have to wait years for a financial case to be resolved. I am wondering whether the association could not act as an arbitrator should conflicts arise between a client and a bank.
Mr. Courville: That is pretty well what is occurring now. In practice, it is not the association, but rather an independent organization put in place by the banks as a whole that performs this role. The basic structure is one whereby each of the banks has an ombudsman who keeps in touch with the independent ombudsman, who is not linked to any one bank. There is a certain tension between the need to ensure that complaints are well-articulated and, most importantly, successfully resolved within each of the banks by their individual ombudsman, and the work of the independent ombudsman, who is not linked to any individual bank but rather to the banks as a whole. With independent directors, he almost plays the role of a judge: why was not the complaint resolved in favour of the consumer? He asks those kinds of questions and collates information about each of the banks individually and the reasons for the complaints.
Mr. Protti could certainly tell you how the system works at the present time. I am not sure we are quite as familiar with it. The report seems to assume that this could lead to a conflict of interest, although I certainly have not seen any so far. I am one of the board members who established the position of Canadian ombudsman. I see this as a major step forward for us individually and for the industry as well. There are very few problems with it. The current structure is able to respond to the tension you are seeking: on the one hand there is a personal interest in ensuring that complaints are resolved, and on the other, there is a certain independence in relation to the individual banks.
Senator Hervieux-Payette: As a consumer-based on what the banks have been telling us about their ombudsmen -- I was under the impression that this ombudsman was linked to each of the banks individually and was not part of a broader structure. I have discovered this morning that there is an independent structure in place and that this ombudsman is not a bank employee. That is completely new and if that is, the case, I must say I am inclined to favour that approach over one involving a technocrat ombudsman with a whole infrastructure supporting him across the country. That sort of approach holds very little appeal for me.
Mr. Protti: There are two steps.
[English]
The first step in handling a consumer complaint is to approach the individual bank. The customer has a series of steps that he or she can follow within the structure of the bank. If the customer is not satisfied with the response that he receives, then he will go to the individual bank ombudsman. Every bank has one. That person is independent from the operations side and will try to resolve the customer's complaint.
If the customer is still not happy, then there is this brand new ombudsman that was set up 20 months ago, called the "Canadian Bank Ombudsman". That is what Mr. MacKay was talking about. There is a third step in the process where the individual consumer can then go to the Canadian Bank Ombudsman and say, "I could not get my complaint resolved within bank A or bank B. Will you please have a look at it?" He has a degree of independence, which I tried to explain today. I would be concerned to take back to the association the view that the majority of Canadians do not feel that there is independence. That is why it was set up outside of the association with an independent board.
[Translation]
Senator Hervieux-Payette: I have just learned this morning that we actually have two ombudsmen: one in each of the individual banks and one to deal with appeals. Personally, I would be very reluctant to set up a whole administrative structure to support that.
Senators Kolber and Angus have already briefly referred to the reasons for the reform. Occasionally the report refers to one of the major reasons for this reform: the cost of computer systems, software and all the related equipment. Is that the real reason for looking at this whole area? Restructuring is needed to allow you to acquire very costly systems that will allow you to provide more or better services or to compete more effectively with Wells Fargo or INGs, and so on. That is one of the major points. Is technology one of the areas that could pose the greatest threat to the future of the current system?
Mr. Courville: Some banks say yes, but others say no. The banks proposing the mergers make a specific argument in that regard. But I think it is important to also put the question to those who are not proposing to merge in order to have another viewpoint.
Senator Hervieux-Payette: That is a good answer. When we talk about the potential sale of insurance in bank branches, are we only talking about life insurance or could it also be general insurance -- in other words, all the different kinds of coverage you might need in anticipation of the next ice storm, or to protect your swimming pool or obtain appropriate coverage against any other kind of risk. Are we talking about life insurance -- in other words, a specific amount of coverage for every thousand dollars of insurance, something that is fairly simple to administer -- or comprehensive insurance that would cover all risks that could affect either a business or an individual?
Mr. Courville: No, we are obviously talking about life insurance. In some ways, the life insurance sector is much like the savings sector. You are not just insuring someone's life, you are providing protection after death and even a little bit before. Life annuities are considered to be insurance products and cannot be sold by banks at the present time. They are an alternative to certain products we currently offer and in that sense, yes, we are talking about life insurance, but also general insurance. Some banks are interested in moving into that area. They claim -- rightly so -- that they are particularly well suited to providing seamless protection against material risks and that they are in a position to provide this product at a lower cost to many Canadian consumers, including some small businesses and, of course, individuals.
Senator Hervieux-Payette: You did elaborate on that point when you talked about how we can ensure there is more competition and how we can better serve the interests of consumers. Should we be looking to the smaller Canadian institutions to do this by giving them more flexible regulations or, rather, considering opening up our market to foreign banks, thereby providing them better access but with the same ground rules? Are you opposed to the idea of allowing the small institutions mentioned in the report to operate under different rules, for example with respect to the 10 per cent rule?
Mr. Courville: That concerns specific institutions. You can always put the question to them. But obviously if we want to promote competition -- and this is a personal view that my colleagues also share -- we must be content to identify one model only. We have to let the market sort things out and try to eliminate the traditional obstacles wherever possible, while at the same time ensuring that control does remain in Canadian hands to a certain extent, and that important Canadian institutions remain Canadian. In that way, we will be sure to have some control when it comes to supervising the institutions operating here in Canada.
I am thinking of the need to reduce potential or actual competition, because there is also potential competition. Very often we are in competition with one another, but it is not because there are a lot of us. If we go too far, someone will step in. The action of potential competitors is important, especially in our industry. We have to ensure that there are several points of entry into the financial system. And that is pretty well the approach in the MacKay report. The only clarification I would make has to do with the payment system, which requires special scrutiny, because even a slight derailment in the payment system can lead to major problems.
We have to be sure we have solvency and participation rules that allow us to maintain payment systems that are fluid, efficient and give a sense of security. System risks only occur once. But it can take 30, 50 or even 100 years to compensate for them. We have to ensure that we are not overly exposed to such risks.
Senator Hervieux-Payette: If I understand you correctly, you would not be opposed to the idea of there being different regulations for the smaller banks, as long as that does not jeopardize the rest of the financial sector.
Mr. Courville: In one of the supplementary papers -- I do not remember whether it is number six or number four -- the point is made that it is important to have "mind management" institutions in Canada because there are ripple effects from any major aboriginal activity not only for the financial institutions, but for non-financial institutions. Knowledge is passed on, technology is brought in and there is a major spill-over effect in other industries. The report contains several pages of very interesting commentary on that issue.
Senator Meighen: On that very point Mr. Courville, I understood from your answer that you are in favour of a Canadian presence in the financial system for the small-, large- and medium-sized players. My question is this: do you believe that the task force recommendations will actually lead us where we want to go? Are you satisfied with the recommendations and if not, which ones do you see as undesirable, given the kind of solution we are seeking here?
Mr. Courville: As Mr. Protti mentioned in his opening remarks -- and that implicitly covered ownership rules, a rather delicate matter -- allowing other institutions to operate under different rules in terms of ownership or initial capital requirements, compared to institutions already in place, is probably one way of fostering increased competition. But if the rules are not the same for everyone, there will be problems. Ensuring, as a first step, that certain institutions or other potential institutions have greater flexibility in terms of their operations is surely one of the ways of fostering greater competition. Will that lead to significant competition? Well, we will see what happens, but this is probably the first time -- again, as an industry analyst -- that we are seeing not a single approach taken to the challenge of increasing actual or potential competition, but a series of approaches. That is the purpose of the MacKay report. As far as the industry is concerned, our preliminary position is that we are in favour of increased competition.
The 10 per cent rule is a legacy of the past which was not intended to protect against foreign competition but, rather, to separate the business from the finance. Later it became an obstacle to financial control of one institution by another; if you remove the 10 per cent rule, you have no choice but to merge the business and finances because it could be a bank acquiring a Canadian bank, but that foreign bank could also be acquired by a commercial group, and then you would no longer have any control. It is a little like a bag of cement: if you pull on the cord, the bag opens all of a sudden. The first transaction is all right, but you have no control whatsoever over everything that follows.
Senator Meighen: Given your answer, how important is it for you that all the task force's recommendations be implemented simultaneously? Do you think it's important that they be treated as a package or can we pick and choose recommendations and implement them at different times?
Mr. Courville: I do not believe we have any particular opinion on that for the time being. It has happened in the past that comprehensive legislation has been brought in that affects all institutions. However, over the last fifteen years, innovations have been introduced on a piecemeal basis. It is up to you to decide whether the process of restructuring the financial system should be a comprehensive one, whereby all the pieces are put in place at the same time, or whether you can begin now to make certain specific changes.
There again, every bank will have its own view on that. For the time being, the industry has no particular preference for one approach or the other. As the debate evolves, we will be in a position to clarify our views on the subject.
Senator Meighen: I have always believed that the 10 per cent rule came about when the Chase Manhattan Bank decided it wanted to buy the Toronto Dominion Bank. That is why Minister Gordon came up with the idea of establishing the 10 per cent rule.
Mr. Courville: The extension originates with the separation of the business and the finances because the 10 per cent rule was created with that in mind and applied to foreign banks.
[English]
Senator Meighen: Mr. Protti, Senator Kolber has a favourite question to which he sometimes feels he does not get an answer. I guess I have such a question as well, and it may be a bit off-topic. It deals with pricing for risk.
First, we keep hearing from small and medium-sized businesses that the banks just will not make them a loan, even at a higher rate of interest. Why not? The answer seems to be that they will not price for risk. If that is so, why will they not price for risk?
Second, does that account, in some part at least, for the growth in activity of the Business Development Bank and the Farm Credit Corporation? They seem to be getting into this area of activity to an increasing degree.
Finally, will the recommendation of the task force, particularly with respect to foreign competition, alleviate this real or perceived problem?
Mr. Protti: Thank you for the question. I will make a couple of remarks. My first general remark is that this is very clearly an operational decision. It is a question that I encourage you to put to the individual institutions who will all be appearing before you.
Senator Meighen: We are hearing it from customers of all the institutions.
Mr. Protti: We certainly had some spirited discussions with the task force on the issue. I must admit, though, that on small business financing as a whole, our level of knowledge and understanding as to what is available in both the debt and equity markets is horribly incomplete.
The Conference Board did a piece a study about 18 months ago which fairly definitively established that banks represent about 50 per cent of the debt side of small business financing. There are a whole host of other players providing the other 50 per cent in the market place.
We know a great deal now about what banks are and are not doing with respect to their share of that debt side of the market because we produce very extensive quarterly statistics, and we are the only ones who do. We know virtually nothing about the equity side of the market. We do not know anything at all about the other 50 per cent of the debt market. We were pleased with what the task force recommended in terms of turning over to the government the responsibility to more precisely figure out what is going on in small business financing because, quite frankly, the public policy decisions being taken here and the discussions we are having are based on incomplete information.
On the risk issue itself, each bank must look strategically at what it wants to do in that area. Certainly, the task force had a strong recommendation. I would venture to say, though, from wearing an association hat, that I would not be surprised, if my member banks decide to move aggressively into this area, Senator Meighen, that you or your colleagues in the other chamber do not have me in front of you at some point in the next three to five years with complaints from the small business community because of the rates they have to pay. That is my expectation. On this issue, each member must decide.
Senator Meighen: It was suggested to us yesterday, to borrow Mr. Courville's phrase, the proof of the pudding will be in the eating. We will wait and see how Wells Fargo does. If they do well, they are obviously meeting a need. All your members will then jump into the closed breach and try to create a niche for themselves. Thank you.
Senator Kroft: Gentlemen, we have invoked the words of the great American philosopher Yogi Berra often this morning by saying, "The future ain't what it used to be." I do not know whether he said, "If it ain't broke, don't fix it," but he might have. That phrase has also been used quite a bit this morning.
There is one area in which I do not think that applies, because perhaps it is broke, and that has to do with the image of the banks and the appreciation of them, their leadership and management by the Canadian public.
In that context, I should like to come back to the ombudsman issue. We have had an effective and articulate defence of the present position from the association, and not an unreasonable one, but I would ask you to step back and answer two or three questions. Do you accept -- and I will say in advance that I think it will be very hard not to -- the comment of the task force that there is a striking antipathy toward financial institutions, and in particular toward the banks and their leaders? This is immediately following the observation that, by and large, the banks seem to be providing efficient and, in some cases, outstanding service which is reasonable within the range of spreads, costs and so on. You are still left with this very difficult problem.
Senator Angus: Just like the Senate.
Senator Kroft: Just like the Senate. If there is a sense of warmth, compassion and understanding around the room, you will understand that we are the community of shared frustration.
It leaves me a bit bewildered as to why in some areas, such as the ombudsman situation and others, even though you believe that what you are doing is all right, you are not searching as aggressively as you could for measures that might deal with this antipathy problem which will help provide a better context for public policy formation and for politics, large "C" and small "c", as we go forward.
I would have thought that, even though you think what you are doing is good, unless some of the other ideas are terrible, you would be prepared to reach out and try to find some accommodative and innovative measures to come to grips with this problem. Frankly, my impression is that you sail on, ignoring the fact that the Canadian people clearly and frequently express the fact that they are not equals in a power relationship. In my view, it is the sense of inequality in a power relationship that lies at the root of much of the problem the banks have with image. Things like the ombudsman, which would not be huge give-ups for you, might be useful steps in the direction of creating a better public policy environment.
Mr. Courville: To follow up on Senator Angus' remark, people love senators but do not like the Senate as much. It is the same with the banks. I think that our clients love their bankers, although they do not like the banks as much. I do not know how to resolve that. This is a serious problem.
Polls show that in individual banks, as well in the association, people have quite good relationships with their bankers, both in the regions and in big urban areas. They relate to someone and like that person, but yet they do not like the banks as a whole.
This is something we are trying to address because it is public perception. This is the case as well in other professions, including politics. People vote for and like their politicians, yet they do not seem to like politics as much.
If you have the answer to that, I would appreciate hearing it because it is a problem for us.
With respect to the specific issue of the ombudsman, our point today is to alert you to the fact that we think that what we are doing is not that bad. If there is a presumption that it could get worse, you must be aware of and understand what we are doing today, and then it is for you to decide. We think that having a legislative process with respect to the ombudsman will worsen the case, that it will help neither the banks nor the clients.
You say it is a small give-up. No, it is a big give-up. The ombudsman was implemented 20 months ago because it was felt that a more candid process, a better redress mechanism, and information about complaints was in order.Now you want us to give more. It is not a question of giving; it is a question of ensuring that we have the appropriate mechanism to deal with the specific issue. We think we have started something that is on good grounds. I appreciate that it could be improved, but it is not a give-up. It is something that we feel is at the heart of what we do and that will regenerate the confidence of consumers in banks.
If individual customers are satisfied, that is what counts in the end. If banks and their leaders are badly perceived, so be it, but we want happy customers who feel that they are grounded with their individual bankers.
Mr. Protti: I wish to reiterate what Mr. Courville said. Our own research very clearly indicates that Canadians give their individual banks and branches high satisfaction ratings. They also give us enormously high marks for doing what we are supposed to being doing, which is being safe, stable and secure institutions.
There is an antipathy for the things called "banks" in the industry. We have known that for some time. That is the reason the banks have been the leaders among financial services providers in privacy codes, tied selling, consumer redress mechanisms and the small business file.We recognize that that is not sufficient which is why, for the first time, the industry put in place at the beginning of this year a massive public affairs campaign. It is not primarily television ads, although that is the best way for us to begin to reach Canadians. We have listened to Canadians and they have told us that we must do a better job in communicating more effectively with them as individuals and with their communities. They told us that they think the banks have a lot of financial and economic information in an increasingly bewildering world, and that we should do a better job of giving it to them. You have seen our advertisements which outline our commitments to Canadians on that score.
We have produced about a dozen basic pieces of economic and financial information for Canadians. We have had requests for almost 800,000 of those. We have had about 700,000 hits on our website. We receive an average of 3,000 to 5,000 calls at our call centre per week. We have also started partnering with small business across the country in the Canadian Chamber of Commerce to offer seminars on the Y2K problem. Next year we will do that on a whole range of small business issues. Therefore, we are reaching out in an infinite number of ways to deal with some of this antipathy.
I am new to this industry. This industry has a culture of service to the community which is unparalleled by anyone else in the business community. You can speak to the chairmen of the United Way in every community across this country and they will tell you that they could not operate their system without the volunteer work of bank employees, and without the contributions of bank employees and the banks themselves, but we have never taken credit for that.
It is part of the industry's culture, the expectation that you would make that sort of contribution and not get the credit. We need to be more aggressive in taking credit for some of the things that we have done. We recognize the issue and that is why we are moving aggressively on it.
Senator Kroft: As one who has raised funds for many years, for many causes, I would underscore an appreciation for what the banks have done in many areas.
Turning to another area, if I could, where I was not able to get much from Mr. MacKay yesterday because it was not an area to which they turned much attention.
Because I am from western Canada, I am very sensitive to the long background of competition and difficulty between private trade, particularly in the area of agricultural trade operating under a normal corporate tax regime, and co-operative-style business organization, and there is a long history of difficulty in reconciling competing tax systems. To what extent is this a problem for the banking industry in terms of the credit union movement?
On a separate tax question, what you call technology banks -- I think of them as virtual banks, in terms of Wells Fargo or others who have no Canadian presence whatever -- are these areas of concern for you?
Mr. Protti: On taxation, the uneven playing field is an issue for us. We have done a fair amount of work over the last 18 months in which we have looked at our tax burden relative to the corporate sector as a whole. I cannot lay my hands on the numbers right here, but we can get them. There is a tremendous disparity between the resource sector and financial institutions as a whole, banks included, in terms of the level of taxes paid. We are delighted with the Mintz report. The disparities are very significant. It is an issue that the government should spend a fair amount of time addressing, because the growth sectors are increasingly in service-oriented jobs, certainly in financial services jobs, and the sort of disparities that exist need to be addressed. I do not have it here but I will get back to you with the numbers that will show the disparities.
Within the financial services industry as a whole, we have completed some work, which we sent to the Minister of Finance about a year ago, documenting the current unfairness in terms of the playing field. The rules governing credit unions give them an approximate 44 per cent advantage over the banks. We also conducted a comparison with U.S. and U.K. banks, and the tax rules in those nations favour their banks relative to how Canadian banks are treated by the federal government.
I missed your second question, Senator Kroft.
Senator Kroft: There was really only one question; it was related to the various areas where you may feel disadvantaged in tax terms.
Mr. Protti: Essentially, on the tax side.
Senator Callbeck: I wish to mention something that has concerned me for a long time and ask whether there is anything you see in this task force report which might address my concern. I am referring to the way that banks charge interest on credit cards.
In order to illustrate this point, I draw your attention to a September 26 article in The Ottawa Citizen where a Mr. Côté, at the end of August, had a credit card balance of $13,839.19. He paid all but $1 of his balance. When the September statement came in he was charged interest of $211.61.
I have been aware of this for some time. I am at a loss to determine how banks can justify that. His unpaid balance was $1, yet he was charged $211 in interest. Do you feel this practice is unreasonable? Is there anything in the task force report that, in your opinion, will help this situation?
Mr. Protti: Mr. Côté is a good friend of mine. I have not had a chance yet, but I certainly intend to speak to him. He certainly knew exactly what he was doing. What I found fascinating was that Mr. Côté went off to Europe with $13,000-plus in his bank account but decided that he would not use the money that he had available to him to buy travellers cheques to pay for his bills. He decided to use his credit card. I know why he did that. He is a very effective money manager is the answer. Every time he used his credit card, he was using not his own money but someone else's money; in this case, a particular bank's money. As he travelled around Europe, bought things, paid for his hotel rooms, and so on, he was using the bank's money. He knew he could use it free of charge for up to 30 days. The bank was not charging him interest because the bargain in his credit card is very clear: For up to 30 days, you can use someone else's money free of charge, as long as at the end of the 30 days you are quite prepared to pay the balance off.
While he was using someone else's money, his own money was earning him a return. He probably had it in GICs or treasury bills or government bonds or mutual funds or bank stocks, or something, and he was making money at someone else's expense. He knew, when he wrote his cheque less $1, exactly what would happen.
He could have written his cheque for the full amount, had use for 30 days of someone else's money interest free, and would have been, as a consequence, an effective money manager. He knew that precisely. Why he chose to demonstrate his point at this particular time, I am not certain, but I would like to ask him. The payment details are all laid out in a customer's contract with his or her credit card company, whether it is a bank credit card or another company's.
In reality, if a consumer faced with this situation, that is, a bill of $13,463, but mistakenly wrote a cheque for $13,462 to pay off the balance, I would be very surprised if the interest charge of $211.61 was not rectified.
Senator Callbeck: Not all consumer credits cards work this way. Some of them are calculated on the unpaid balance. I understand what you are saying, but it seems to be very unreasonable.
Mr. Protti: We are not certain of the number, but 40 to 60 per cent of Canadian consumers using bank credit cards pay off their balances at the end of every month. That is an enormous advantage to those individuals. As I say, they have in the course of that period of time the opportunity to use someone else's money, which frees up their balances. That is the way that system works. I find it effective. The important point for consumers is to not carry a balance, pay it off.
Senator Hervieux-Payette: You seem to be conveying the message that, if a consumer does not carry a balance, there is no cost to that consumer. That is not accurate. It is not free because everyone knows that when you use a credit card there is a charge of 5 per cent, 3 per cent, no matter what the merchant. Some stores offer a discount for paying cash. There is already some profit made on the card even though you pretend it is free. Someone is paying for it.
When I buy from the store I have already paid 25 per cent. You say that it does not cost anything, but we are charged twice. We are charged the interest and the 5 per cent that we pay to use the card. It is not the same percentage for each one.
Mr. Courville: There are two elements. The card is a payment device as well as a credit device.
When the merchant comes to the bank with the VISA or MasterCard slip, the bank pays the merchant. For a period of 20 to 30 days, the customer gets free money because he can benefit from having his own money in savings accounts or mutual funds. He receives free credit for 20 to 30 days.
If he pays a total balance at the end of 30 days, he is home free and he can benefit from that. If he pays less than that, then the principle is that at the time the bank issues you credit and pays the merchant you will start paying interest.
Senator Callbeck: I take it that you feel this practice is fair, reasonable and you do not see it changing.
Mr. Courville: The case demonstrated is dramatic. We will probably make our point on the money he earned while not paying. It does not occur very often. In practice, if it creates problems, then individual banks will respond to that.
It was not as clear-cut as the article may have portrayed. He also had some advantages that we can calculate for you.
Senator Callbeck: My other question pertains to recommendation 167 regarding partnerships with the volunteer sector.
Banks are large contributors to charitable organizations. However, this recommendation suggests an avenue that they think should be explored; that is, the linking of contribution opportunities to financial service products. For example, in the United States, if you buy a certain mutual fund, you can stipulate that you want a certain percentage of the return going to a certain charitable organization. What would be the view of the banking association on this subject?
Mr. Protti: That is one of the issues we have not considered in any detail yet. As you can appreciate, there is quite a volume of recommendations. We have not had an opportunity to look at it. We will come back to you on the specifics of the issue.
There is no corporate sector in Canada that is as aggressive and as leading a contributor to the voluntary sector as Canada's banks. We believe very strongly in the notion of partnerships. What you can expect to see in the future is a growth in the partnerships with the voluntary sector, not any diminution. We will get back to you with respect to the specifics of that.
Senator Angus: I have not heard you say anything negative about the report. Are there three or four points that you could enumerate today that you are against in that report that might help us set the parameters for the debate?
Mr. Courville: Maybe I should be less diplomatic. On the ombudsman issue, we were quite clear. On the issue of regulation, you must be aware that there is a shifting balance between the set of rules, the broad regulation aspect, and the discretionary powers of the minister which is an issue that is very important for our industry and for individual banks as well. We are not sure that the balance that is proposed by Mr. MacKay is necessarily one that addresses your concerns.
With respect to the payment system or the opening up of competition, we said we welcome it. However, on the payments issue, we would raise a red flag. These may have been overlooked and you should be aware of this. These are three areas that I can highlight for you. Am I being blunt enough?
Senator Angus: That is good. I recognize what you said earlier on those three subjects, however, I thought there might be others. You have not said much about car leasing, for example.
Mr. Courville: We welcome the opportunity to be selling insurance and car leasing as well.
Senator Angus: Are you against anything? You have raised red flags, but there are not four or five things that you are against.
Mr. Protti: I cannot add very much to what my chairman said. I would note that, in the weeks to come, you will receive clear views from the member institutions.
Senator Meighen: As an association, are you able to discuss the ownership proposals?
Mr. Protti: With respect to the 10-per-cent rule, we are comfortable with what the task force said. Some detailed aspects of the structure of ownership have been proposed, and the member banks have different views on those issues.
The Chairman: On page 5, you make the observation that you are in favour of increased competition from foreign banks, provided that wholesale branching does not create an unlevel playing field between foreign and domestic banks.
The phrase "unlevel playing field" is used as a code word for saying that there are certain things that they do not like, but that they do not want to articulate. It seemed to me that the wholesale banking provisions for foreign banks contained in the MacKay report and in the report of this committee a year and a half ago did not create an unduly unlevel playing field, if it created one at all. It appeared as if you were reserving the right to return here and complain.
Mr. Protti: We are anticipating the legislation very shortly. I am not anticipating difficulties with that legislation. I am anticipating we will see a branching regime that is not dissimilar from the U.S. or U.K. models.
The Chairman: On page 7, on your comments on the CPA, you use other phrases of which I am suspicious.
You are in favour of opening up the Canadian Payments Association, which again this committee has advocated in the past, but you insert qualifying phrases. You say that you would stress that the success of the system is a result of the efforts of participants. Farther along, you talk about the members who built the system having incurred the costs of system development.
Would your inclination be to say that there should be a significant charge of some kind for new members to, essentially, pay part of the development costs of the system which they have not paid for? Would this be the equivalent of a franchise fee if this were a professional sports team?
I have heard rumours to that effect. One could easily come out in favour of opening up the Canadian payments system and then argue very strenuously for a sufficiently high entry fee if that meant that the opening up that was designed could not be achieved without it.
Mr. Protti: The salient point we make in that regard is that the whole set of issues surrounding the payments system opening up will require some detailed discussion in the weeks and months to come. We stand very clearly behind what we say here, which is that, if you want broader membership, then that is fine with us. However, the reality is that we have a system designed for 143 players and we want to look carefully at the methods and modalities that will be put in place to open it up. I will reserve my position on that.
The Chairman: You have just confirmed my concerns.
With regard to your comments on holding companies in general, will you give us a concrete example in response to the following question? In theory, what is it that a holding company would be able to do that the parent subsidiary company model cannot do? We talk about organizational structure, as does Mr. MacKay, without anyone giving concrete views as to what would be the real benefits of the change. I am not opposed to the change.
Mr. Young: As I said much earlier, the main objective here is to try to have a corporate structure that focuses on the real reason we are regulating those activities that government policy determines should be closely regulated. Quasi-financial institutions that provide some financial services are not caught in the Bank Act, under that regulatory net. To a certain extent, our member institutions want to have that choice and explore different choices, to see if they can structure their affairs so that the deposit-taking functions or the underwriting or selling of insurance will be hived off, ring-fenced.
The Chairman: That does not answer my question. My question is: Why can't you do all of that with the parent subsidiary model?
Mr. Courville: A parent subsidiary model is a holding company.
The Chairman: So you can do it, then.
Mr. Courville: No. The difference is that with the parent subsidiary you would allow for related party transactions. The holding company model ensures that things are carved out, and that there is no relation among the units. But you can do it because a parent subsidiary is in fact a holding company.
The Chairman: That is why I asked the question.
Mr. Courville: That is because of the transactions that can occur between subsidiaries of the same parent or between the parent and one or two subsidiaries.
You could have subsidiaries such as brokers and those which take deposits and do wholesale banking. You could regulate each of them, as well as the parent. The only other difference is that with a holding company you may not have to regulate the holdings.
The Chairman: This is an important question in the sense of whether the structural changes are worth the agony of trying to make them. In your original proposal there is a series of different models proposed for holding companies, or universal bank models. Can you just give us in bullet point form the pros and cons of each? Can you try to give us an illustrative, concrete example rather than making a generic statement?
Mr. Protti: We would be delighted to do that.
Senator Kolber: In your mind, is a holding company just a shell or could the holding company actually do something? If, for example, the holding company incurs debt and needs dividends from the others to make it whole, will that not create insurmountable complications? Is that not what happened with Edper and Royal Trust?
Mr. Courville: We will try to clarify this point and present it to you.
Senator Kolber: It is one thing to say that we should not regulate the holding company itself; but, if we do not, that could cause major problems, as we have seen.
Mr. Courville: As I said earlier, the holding company can fail on that concept while each of the individual components will not, if they are regulated and sound. The holding company and the parent could fail. The bank that is a subsidiary of the parent could be whole and transferred to someone, and all the depositors would be protected.
Senator Kolber: By the time you get to it, there may be too much damage. I would refer to the case of Royal Trust.
Mr. Courville: In the trust company structure, they had interrelations in their transactions. You have to forbid those; close them up.
We will come back with an illustration of the various components.
The Chairman: Thank you very much for attending. You have been very helpful.
The committee adjourned.