Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 28 - Evidence, September 30, 1998
OTTAWA, Wednesday, September 30, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:30 p.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Honourable senators, I call the meeting to order. We are continuing our study on the present state of the financial system in Canada, particularly the Task Force on the Future of the Canadian Financial Services Sector, and our first witnesses today are from the Canadian Fraternal Association.
Welcome, gentlemen. Please proceed with your statement. We will then ask questions on the issues you bring forward.
Mr. Richard May, Vice-President, Canadian Fraternal Association: Mr. Chairman, we appreciate the opportunity to appear before the Senate Committee on Banking, Trade and Commerce to give our response to the Report of the Task Force on the Future of the Canadian Financial Services Sector.
I am the Vice-President of the Canadian Fraternal Association for this our 108th year. This is a voluntary position, and I am employed by the Lutheran Life Insurance Society of Canada as Vice-President and Actuary. With me today are Ralf Hensel and Stephen Taylor. Ralf serves as Chairman of the Canadian Fraternal Association's legislative committee, and is employed as Senior Counsel for the Independent Order of Foresters. Steve is a former president of the Canadian Fraternal Association, and is the President and Chief Executive Officer of Lutheran Life.
The Canadian Fraternal Association represents 20 of the largest Canadian and foreign fraternal benefit societies operating in Canada. The member societies of the CFA protect thousands of Canadian families with more than $8.5 billion of life insurance and administer $1.5 billion of assets in Canada and $10 billion worldwide.
Today, we are prepared to give you our preliminary reactions and to respond to your queries. However, we hope to have an opportunity to communicate with you further in written form in the near future.
Our initial reaction to the task force report is to recognize what a remarkable piece of work it is. It is a well-reasoned and cohesive package that, if implemented, will serve the interests of the Canadian public well. For the first time, it provides Canada and Canadians with a comprehensive vision for the future of the financial services sector.
We believe a few statements from the report are worth repeating:
Taken together, they --
meaning the recommendations and conclusions of the report --
-- represent an integrated and cohesive approach to providing a renewed public policy framework within which governments, institutions and consumers can work constructively to build a strong, vibrant financial services sector that will serve Canadians well into the next millennium.
We would see a real danger to the balance of this vision if legislators decided to pick and choose from among the recommendations.
The report summarizes 18 months of investigation of the financial services industry by non-partisan independent reviewers. Many of the issues identified in the report have been under fierce debate within the financial services industry for some time. The task force report and its focus upon meeting the needs of the Canadian people have presented legislators and regulators with a current and concise approach to resolving these important issues. With this excellent road map in hand, we believe there will never be a better opportunity to take decisive and visionary action.
Again, let me quote from the report:
The changes are inexorable and we cannot ignore them or pretend they do not exist. For financial institutions, their customers and public policy, reliance on the status quo is no option.
...
Because the financial services market-place in Canada, as in the rest of the world, is in a state of rapid change, governments and institutions should respond promptly to this report. In the case of the federal government, the implementation of these recommendations should not await the regular review of federal financial institutions legislation scheduled for 2002.
The task force introduced the concept of "community accountability." However, it is worth noting that fraternal benefit societies are owned by and operated for the benefit of their members. Each fraternal group's mission is to address the financial and fraternal needs of the particular community it serves.
We are most pleased with this message seen through much of the task force report. Indeed, it seems that the entire concept of community accountability endorses the basic and historic principles of fraternal benefit societies. We applaud the task force's recommendations in this key area.
Membership in a fraternal society delivers more than financial services alone. Members also join for the social, cultural and community benefits that our societies offer. The lodges, camps, branches and courts of our society bring members together to carry out good works for their community and share in fellowship. Conducting these activities requires that members be contacted and encouraged to participate. Accordingly, some sharing of and cross-purpose application of basic personal data is necessary to effectively operate and manage these community beneficial programs.
We strongly support the protection of privacy of individuals' confidential information and the prevention of coercive tied selling. However, the crafting of legislation to deal with these issues must also be sensitive to legitimate applications that are in the best interests of individuals and Canadians at large. We believe that legislators and regulators generally recognize these distinctions. However, it is important for us to highlight the difference. An oversight could inadvertently eliminate a legitimate and beneficial application of this information.
Additionally, we were heartened by the consistent support for a financial service environment that fosters and cultivates smaller financial institutions in Canada, promotes the development of successful niche players and encourages the creation of new entrants into the setting.
Key among the observations of the task force is the recognition that a "one size fits all" regulatory regime should be revised for smaller or niche institutions, commensurate with their size and the nature of their business activities and not determined by requirements designed for large multi-product financial conglomerates.
It is perhaps inevitable that those aspects that impact upon the largest financial institutions will garner much of the attention created by the task force report. We hope and trust that developments that address the needs of smaller member-based organizations will not be overlooked.
It is within this context that we were somewhat disappointed by the task force report. While fraternal benefit societies epitomize the characteristics the task force would like to see financial institutions adopt, the report failed to identify the role of fraternals in the financial sector and their potential contribution to the changing financial services landscape.
We make this point because we are unclear about the intentions of the task force respecting fraternal benefit societies. Since the Insurance Companies Act governs most CFA member societies, we presume that the changes recommended for life insurance companies are also intended to apply equally to fraternal organizations. We will be looking for clarification on this issue.
We hope that this oversight does not continue and that the unique characteristics of membership in fraternal benefit societies currently enjoyed by approximately 500,000 Canadians will be acknowledged as legislative changes are considered. We may be able to play a material role working with legislators and regulators in formulating an environment that will help nurture the development of smaller, niche players. Again, we applaud the task force report for recognizing that organizations of our size can provide the competitive options that Canadians would like to have.
Federal and provincial governments have been hearing appeals for the financial services industry for a fairer tax regime. The task force supports the contention that the taxes on capital are unwarranted and potentially damaging to the public interest. The accumulation of capital is an essential ingredient in preserving the safety of members' and policyholders' financial interests. The imposition of capital taxes penalizes those institutions whose operating principles call for higher levels of capital for the protection of their consumers.
We endorse the task force recommendation to eliminate the special capital taxes. We hope that action in this area can now begin.
Honourable senators, I repeat that the Canadian Fraternal Association wholeheartedly supports the report of the task force on the future of the Canadian financial services sector. The members of the task force have done a good job in a short period of time. Even from our preliminary review of their work, it is clear that the interests of Canadians will be well served by the implementation of the report's 124 recommendations.
We believe that fraternal benefit societies have an important role to play in this context and an important contribution to make in the development of any new legislation and regulation. We are committed to helping develop a more competitive financial services sector for the benefit of all Canadians.
Senator Angus: Welcome, gentlemen. It is interesting to hear your views on the task force.
As a preliminary question, you mentioned the $1.5 billion in assets in Canada and the approximately $10 billion in assets worldwide. Is this a worldwide organization, or how does that work?
Mr. May: The Canadian Fraternal Association is a trade association composed of 20 fraternals that operate in Canada. There are approximately 40 fraternals operating in Canada in total. This figure would consist of the combined assets of all of those 20 organizations.
Senator Angus: When you say that worldwide there is $10 billion worth of assets, are you affiliated as a worldwide organization or are they independent in each country?
Mr. May: They are affiliated organizations. This is one entity that operates in multiple countries.
Mr. Stephen Taylor, President and Chief Executive Officer, Lutheran Life: Honourable senators, in order to clarify, the $10 billion refers to those members who actually belong to the Canadian Fraternal Association. However, there are a number of fraternal organizations in the United States that would have much larger numbers than that.
Senator Angus: Canadian fraternal organizations have $10 billion worth of assets, of which $1.5 billion is in Canada and the rest is offshore or in the U.S.?
Mr. May: Yes.
Senator Angus: However, the assets are owned by your organizations?
Mr. May: Yes.
Senator Angus: When you make your written submission, it would be worthwhile having a small section at the outset reiterating that for the benefit of some of us.
Are you in all the provinces of Canada?
Mr. May: Lutheran Life itself operates in Ontario and to the west of Ontario. That is simply because that is where the concentration of Lutherans are. The other fraternals may operate in other provinces.
Mr. Hensel: The IOF operates in all provinces. In the maritime provinces and the Atlantic provinces there are very few members at the present time. However, we are licensed to operate as an insurance provider across Canada.
Senator Angus: You indicated that you were concerned that the task force had not made specific reference to your fraternal organizations. Were you consulted by the task force? Did you make submissions to it? Did you file briefs or appear in person?
Mr. May: We appeared before the task force and sent in several briefs. We are mentioned in the appendices as a contributor to the process, but we were not referred to in the body of the text. Given the nature of some of the comments, we felt there was a tremendous fit between the vision that they were talking about and what fraternals do. We were a little disappointed by that.
Senator Angus: Referring again to the concern you expressed, I would like you to outline the difference. I take it you are not exactly like a life insurance company but are analogous to a life insurance company, and you want to be sure that the environment advocated for life companies should also apply to fraternal organizations. I am sure I am oversimplifying.
However, what is the difference? I see Lutheran Life and am wondering if that is just one small member of your overall organization, or one large member.
Mr. May: If we think back 100 years or so ago about how various organizations may have started, it could have been a collection of people in a community who would work together to protect themselves, their neighbours and their friends. If someone's barn were to burn down, the neighbours would all pitch in and try to help out. It was not a matter of saying, "Here is the money; go build yourself a new barn." Everyone would chip in. That is very much a part of the way fraternals still operate, in the sense of its not being just financial transactions that provide support at the time of death or disability. There is a support mechanism that is human in nature.
Senator Angus: Is it like a kibbutz in Israel, or a commune in the former Soviet Union?
Mr. May: I would not put it quite like that, in the sense that those are specific communities in which all members participate together. Many of the concepts, I would think, are very similar.
In today's environment, it operates more in the form of social gatherings which are organized from time to time. One still participates in society as a whole, whereas the kibbutz may be focused very much upon its own internal operations all the time.
Senator Angus: To prepare ourselves for this report, our committee made a fairly extensive comparative study of the financial systems in other countries, with a view of learning how we might be better or worse and how we might improve things, and so forth. I have to admit that it did not involve fraternal organizations per se, but it did involve some of the supervisory and regulatory systems in effect elsewhere.
In the process, I think it is fair to say that we developed the impression that Canada does not have a very large second-tier retail-banking industry. The field is fairly narrowly occupied by the big banks. I am talking about the caisses populaires in Quebec and the credit unions, et cetera. Do you have a view as to why this situation is prevalent in Canada? Do you feel that people like yourselves who would like to play have not been able to previously?
Mr. May: I am not sure I can comment particularly well on the banks' situation and why we have only a few major players in that industry and not a strong supporting cast there. In comparison, the life insurance industry seems very well diversified. Yes, there are some large players, but each in itself occupies only a very small portion of the market. There are many players. However, I would say that that is changing. A big part of that change may well be because they feel they need to compete with the big banks.
It is interesting for us at Lutheran Life. We find ourselves gradually moving up the scale of the largest insurance-providing organizations in Canada, and not necessarily because we are growing.
Senator Angus: The others are shrinking. It is a relative thing.
Mr. May: Again, I speak for Lutheran Life. Steve Taylor, our president, is here with me. We only market to Lutherans in Canada. That is who we serve. If every Lutheran in Canada were a member of our society, we would still be considerably smaller than the major banks. There are some limiting factors in the sense of how much some of these organizations could grow.
Senator Angus: Although I understand what you are saying, I want to go back and get a wider understanding of what it is. I had the impression from your opening remarks that you were very welcoming to the general thrust of the MacKay task force. For you, it looked like all kinds of new opportunities and horizons were opening up. I need to ask basic questions, such as: Do you want to become a deposit taking organization?
Mr. May: That is a difficult question to answer at the present time, because we do not know what all the implications of that would be. It is something we would certainly want to look at very closely. It depends upon what the regulatory regime is like for that. If there are high corporate costs associated with delivery, or high regulatory compliance issues, then I think we would probably have to say we cannot afford to do that. On the other hand, if it is at a manageable level, yes, we would want to look very closely at that. But it must make sense as a business plan for our organization.
Senator Angus: Would you want to get into the credit card business?
Mr. May: Possibly.
Mr. Taylor: Perhaps I could add a few comments here. Richard is speaking for Lutheran Life. If we take it back to the organizations that make up the Canadian Fraternal Association, there are some that are larger, but there are many that are very small. I would say that the very small organizations are very likely to want to continue to do much of what they are doing without getting into things like credit cards, deposit taking and so on. It is quite possible that for some of the larger organizations credit cards and deposit taking could be something in their future. This is especially true with the advent of electronic commerce and even smart cards. I could see some of these as real possibilities in the future.
Senator Angus: We learned in our study that in the financial services area one of the big deals is to get ownership of the market. From listening to you, you have ownership of a very well-defined market. For example, grocery stores and supermarkets which have banking facilities and which are deposit taking would be germane to you. I am wondering if that is on your agenda. If so, do you want to be members of the Canadian Payments Association?
Mr. Taylor: Some of us would like to do that, yes.
Senator Angus: Do you deem this new era of deregulation or anticipated deregulation of the sector to be attractive?
Mr. Taylor: Yes.
Senator Angus: I am very interested in your organization, although, as I confessed earlier, I am not up to speed on it.
I come from Quebec. We have the caisses populaires, which are analogous to credit unions. Are you analogous to credit unions in a cooperative aspect?
Mr. May: In some senses, yes, in that we are a member-owned-and-operated system. We work to serve the members of our organization. However, there are some differences.
Senator Angus: What regulation are you subject to at the moment that gives you a problem?
Mr. Hensel: I would not say it gives us a problem, necessarily. The majority of members of the association are regulated by the Insurance Companies Act. The majority of them are federally incorporated or federally organized. The difficulty is not so much that the legislation creates a problem, as with the way in which the legislation treats fraternals on the whole. In many ways it is the same treatment as the task force's, in that we are overlooked. That tends to be a problem because we are forced to do a bit of soul-searching as to what this means for us.
Yes, the larger member organizations would certainly like to parallel themselves with the insurance companies and say, "We have a significant number of members, and it would make sense, based on what our members want, to be able to provide services like that or products like that."
With respect to some of the smaller organizations, and I go back to your analogy about the grocery stores, the majority of those stores that would want to participate in the payments system would be chains and not the independent grocer on the corner. That particular owner would not have the resources. I imagine there is a significant cost to joining the system. It would not make any economic sense to do so.
For the same reason, it would make economic sense for the larger organizations represented at this table to do so. They could probably avail themselves of that. Some of the smaller organizations only have one full-time employee, and that would not be feasible.
Senator Stewart: Would it be accurate to say that the members of the Canadian Fraternal Association, as a service to their members, primarily provide insurance coverage, either life insurance or health insurance?
Senator Angus: And property and casualty too?
Senator Stewart: Yes, that too.
Mr. May: In terms of financial benefits, I would say yes.
Senator Oliver: Yes to what?
Mr. May: They would provide life insurance, savings products, but not property and casualty insurance, at least not at this time.
Senator Stewart: Consequently, if some of your members were to get into deposit taking, for example, this would be quite a new departure for the members of the association. That might be a good thing. That is not the implication of my question. It would put a new character on the members of your association who did that new kind of business.
Mr. May: It certainly would.
Mr. Taylor: That is true. However, I believe the two organizations represented at this table, Lutheran Life and IOF, have been involved in the marketing and sale of annuity products, such as GICs and segregated funds. We do have some experience in that area.
Senator Callbeck: On the second page of your submission you talk about community accountability. You say you applaud the recommendation of the MacKay task force that financial institutions should have community accountability statements. What information do you think should be on those statements?
On page 170, the items listed include, the amount of money that they donate, investment in community development, supporting community activities, participation of employees in community service, taxes paid to all levels of government, and employment provided. Do you have any problem with those? Do you agree with them? Would you add more?
Mr. May: All of those things are worthy items to be considered. There is no harm in providing more information as opposed to less.
One aspect we need to consider is the impact on the community. That is not just a matter of how much money was thrown into it, but what has actually been done and how it affects the community in providing what we refer to as good works.
Perhaps the measure of employee volunteer time is significant, but if it is not accomplishing much within the community, perhaps that is not a fair measure. Perhaps another approach would be to consider the involvement of those in the community in support of whatever aspects those organizations might choose to encourage. I am thinking of the volunteer powers of those who work with them. That is commonly measured by fraternal benefit societies in the United States.
Senator Callbeck: Do you do it here?
Mr. May: We do not operate in the United States.
Senator Callbeck: But do you do it in your organization here?
Mr. Taylor: We measure certain things. The Independent Order of Forresters and the Knights of Columbus are also members of the Canadian Fraternal Association. I believe there are very extensive statistics on volunteer work done in Canada.
Senator Callbeck: Do most of your organizations sell insurance?
Mr. May: Yes.
Senator Callbeck: I take it from your comments that you do not have any objection to the recommendation by the MacKay task force about banks being able to sell insurance?
Mr. May: There is a bit of concern about fraternal benefit societies carrying on what they have traditionally done and being able to work with that into the future as we introduce more players of the calibre and size of the banks, but I do not see that as a major hurdle in and of itself. More significant is our concern about how they operate.
Mr. Hensel: The key point we are making is that the recommendations in the report would have to be implemented in total as opposed to in a piecemeal fashion. To permit the banks to sell insurance without the other protections proposed in the report would be dangerous. Frankly, I do not think we have had enough time to consider one without the other. We were taking this as an entire package, although to dissect it and to take it piecemeal would be an interesting process, in that we could see what would occur if we let them sell without the protections for privacy and coercive tied selling.
Senator Callbeck: You mentioned that in your brief. What about leasing cars? Will you get into that?
Mr. May: We have never considered doing so in the past. If it is something that we have the ability to do, if it made sense to us as an organization, and if our members felt that it would be beneficial, I do not see why we would not consider it.
Senator Angus: You can do it now, if you want, can you not?
Mr. Hensel: We could do it through a subsidiary. Again, I think it is a factor of the focus of the organizations and the fact that there are only four that are of a size large enough to even contemplate implementing another organization to do such a thing. It would also depend entirely upon the membership's desire to have such a service. How could we be competitive? That is probably the first question.
Senator Callbeck: What are those four large organizations?
Mr. Hensel: Independent Order of Foresters, Knights of Columbus, Lutheran Life, and ACTRA Fraternal.
Senator Callbeck: Roughly how many members would be in those?
Mr. Hensel: Of the 500,000 Canadians represented by the association's members, probably 400,000.
The Deputy Chairman: Would you be kind enough to provide a list of your 20 members when you submit your written report? That would be helpful.
Mr. Hensel: Yes.
Senator Angus: What was the last one?
Mr. Hensel: ACTRA Fraternal. It is the fraternal side of the union of actors. They have a fraternal association.
Mr. Taylor: It looks after the pension and insurance needs of the members of the ACTRA association.
Senator Angus: Whether Lutheran or not?
Mr. Taylor: Lutheran Life is a separate organization from ACTRA.
Senator Oliver: Senator Angus, being the good lawyer he is, has asked almost all the questions on my list. I have only one very specific question left to ask, which arises from your paper.
You mentioned that you favour the MacKay task force report, but you have only one small caveat. This is what you say in your paper:
While fraternal benefit societies epitomize the characteristics that the Task Force would like to see financial institutions adopt, the report failed to identify the role of fraternals in the financial sector...
If you had been writing the MacKay task force report, what would you have put in it about your fraternal benefit societies? What would you have liked to see, specifically?
Mr. May: We could have been used as a very good example of how a financial institution can work with the communities in which it operates to provide them with value.
Senator Oliver: In terms of taking deposits or giving life insurance or what?
Mr. May: Not simply in the matter of financial transactions themselves, but by way of participating and helping them be of service to their neighbours and friends around them, and by coming together to do deeds that are beneficial to the community at large.
Senator Oliver: Such as?
Senator Angus: The way they want banks to become.
Mr. Hensel: You asked the question as to how fraternals are different from credit unions. Both are member-owned. The difference with fraternal benefit societies is that there is another aspect to them, and that is that the members gather together in what are called lodges, courts or camps, depending upon the organization, and at those meetings, which are primarily social meetings, these camps, courts or lodges organize community service. We call that good works. They go out and do everything from cleaning parks to fund-raising and so on. That is the fundamental difference.
The members who belong to fraternals are not simply policy holders, and not simply members; they are actually involved in doing things for the community as part of that organization.
Just to answer another question from Senator Callbeck as far as what we would like to see on the community accountability statements, we do not stop at the contributions made by our employees. We could talk about the more significant contributions made by our members, because, again, many organizations that belong to the association have very few employees but a lot of members. If all those members are out there doing good works, we would like to publicize that.
Senator Oliver: If you were writing the task force report, what language would you use to be different from what it said? "Please take us into account"?
Mr. Hensel: Certainly that, but also that there are smaller organizations out there which are doing a lot of this right now -- for example, the fraternal benefit societies. In some sense, we were perhaps an unrecognized model for what ended up in the task force report, because we do this already.
As far as financial services are concerned, that is only one aspect to a fraternal benefit society. To answer whether we want to be banks and whether we want this or that, it takes some time to think about whether that is something our membership would want.
Mr. Taylor: To further answer that, I think I know what you are getting at.
Senator Oliver: I am asking you to elaborate on what you mean when you say they failed to identify you.
Mr. Taylor: Yes. We would have liked the report to have been clearer about what powers and so on fraternal benefit societies would be able to have. Could we count on being able to issue credit cards, or to belong to the payments system if we wished? I would like to have seen comments with respect to that, perhaps saying that, yes, fraternal benefit societies and life insurance companies should belong to the Canadian Payments Association, that we should be able to have broader powers than we now have. As it now stands, it would appear that legislation could be written and we could be left behind in offering some of the things like deposit-taking, membership in the Canadian Payments Association, and the leasing of cars. Not all of us will get into those areas, but we would like to have the opportunity.
Without trying to say exactly what wording I should like to have seen in the report, I should like to have seen those types of things covered so that we would know whether or not we would be able to have those powers. I realize that the legislation, when written, could be expanded to include fraternal benefit societies. We do not want to be left behind.
Senator Oliver: Do you not think Lutheran Life would be included in the way the task force report is now written about insurance companies?
Mr. Taylor: We are treated quite separately in the Insurance Act. We have our own separate section. We do not know the answer to that question.
The Deputy Chairman: On pages 167 and 168, the report talks about partnerships with the volunteer sector and also accountability in communities. You probably would have been a good example to use as to how this is done.
Mr. Taylor: Yes.
Mr. Hensel: At a basic level, it would be nice to see the words "fraternal benefit societies" in the report once. Perhaps that answers your question.
Senator Meighen: I think you put it very well. That sums it up. Presumably you want as many doors as possible left open to you, and want to have the ability to decide whether you will go through them, alone or in the company of others in a strategic alliance or whatever. Is that a fair statement?
Mr. May: Precisely, yes.
Senator Meighen: I wish to have your reaction to the question of regulation in the financial services sector. Do you feel that you are over-regulated at this point? If so, do you think the MacKay task force has made some useful suggestions along the road towards greater or less regulation?
Mr. Taylor: One of the things that we were very happy to see was the suggestion that organizations be regulated according to their size and the business that they carry out. We fear that, as it is written now, the act could impose some real regulatory burdens on the very small fraternals. We are here representing all sizes of fraternals. We are talking about some fraternals with only $1 million in assets. For a small fraternal to be regulated like a bank or like Mutual Life does not seem right. You will regulate them right out of business.
I really appreciated what the MacKay task force said, but even if, as someone suggested, we really liked the report, I did have some concerns with it. On first glance, there are many good things in it and we commend the task force for coming up with a very cohesive report; but, as we dig into it, there are areas that could cause us some concern.
I saw some suggestions concerning things which I think could add more regulation as opposed to less. I think particularly of some of the areas involving privacy with the minimum requirements. It is not that these are not good, but again I think of the very small organizations that possibly will have to cope with more regulation rather than less.
When we submit our brief, we will go into detail in some of those areas. We have had a very short time, as you can imagine, to read the report. We are all volunteers, in the sense that we have to run our own businesses, yet we are here representing the Canadian Fraternal Association. Hopefully, when we do bring a brief together, there will be some areas on which we can elaborate.
Senator Meighen: With regard to regulation, do you have any particular problems with overlapping federal and provincial regulations, that is, any more or any less than anyone else?
Mr. Taylor: I think it is about the same as everyone else. If the overlap could be removed, that would be the most wonderful thing I could think of.
Senator Meighen: At the bottom of page 3, you state:
We strongly support the protection of privacy of individuals' confidential information and the prevention of coercive tied selling. However the crafting of legislation to deal with these issues must also be sensitive to legitimate applications which are in the best interest of individuals and Canadians at large.
Can you elaborate on that or put it in other words so that I may understand? You believe in the protection of the privacy of individuals' confidential information and you are against coercive tied selling, but you want to be sure that, in having those things put into effect, what does not happen?
Mr. May: In the community activities in which our members participate, if the branch that we have in a particular location does not have access to the identity of new members, to at least be able to call them and say, "Come on out on Tuesday night," then that branch cannot function. At least a name, a phone number and an address must be communicated. However, that certainly does not include any personal information as to their financial records, their state of affairs or their medical history.
I am not clear on what the distinction might be in the minds of legislators here; where do we draw the line on what is considered private information and what is not?
Mr. Taylor: Certain information has to be available to us for our membership structure to work. Mr. May has mentioned the case of being able to supply to our groups of members who actually form lodges, courts, and groupings to do their good work, the names and addresses of individuals who will make up part of that structure.
Senator Meighen: You mean lodges within the same organization.
Mr. Taylor: Yes.
Senator Meighen: Not, for example, the Knights of Columbus to the IOF.
Mr. Taylor: No, within the same organization. That is what the reference was. In many of the organizations, you have to be a member in order to purchase the product. We would hate to see that type of thing removed, but I do not know if that might fall into coercive tied selling or not.
Senator Meighen: Coercive volunteer work.
Mr. Taylor: We do not force people to do volunteer work, if they do not want to.
Those are some of the questions we have. Could someone who is not a member say, "You cannot force me to become a member, but I want to buy your product." We feel the membership aspects of the organizations are very important. That is what we are concerned about; we are membership organizations.
Those are two areas that occurred to us. I am sure if we considered it there are other areas where we could say, "Membership organizations, fraternal benefit societies are unique organizations." Let us be very careful that we do not throw out the baby with the bath water and end up with blanket privacy regulations that would prevent us from operating and doing the good works that are very much a part of what we are.
Senator Meighen: At the present time, you have no difficulties in those areas, do you?
Mr. Taylor: No.
Senator Stewart: I want to return to the question that Senator Callbeck raised concerning the proposed community accountability statements. Just for clarity, I will read two or three sentences from page 170 of the report:
We therefore recommend that all federally regulated deposit-taking institutions and life insurance companies be required to produce annual Community Accountability Statements informing the public about their contribution to the community through activities such as those enumerated above, or about other issues that may be relevant. We also recommend that provincial governments consider similar requirements to apply to financial institutions within their jurisdictions.
At first glance, this looked to me like a good proposal; but then a certain amount of scepticism arose. What will we have? We will have boasting statements. They will be advertisements: "We did such and such. We contributed so many hot dogs for the local highland games." That is the sort of thing we will have, and it will be done annually. We know what annual reports generally amount to. They are written pretty much in a standard form, and they are dealt with in a pretty much standard form. They are filed.
To get to the problem, I want to ask you two or three questions. The purpose of the questions I will reveal after I have had your answers.
Why should those in the financial services sector, as described in the report, have to do this? Surely, they are not in the business of philanthropy. The Royal Bank of Canada is not an incorporated group of philanthropists. Why is it that these people in the financial services sector are to be subjected to this additional burden? I understand that your case is rather different because you are involved in philanthropy, but why should the Royal Bank or the Bank of Montreal be required to boast about all they have done?
Mr. Taylor: May I comment on what the report was trying to do? I think it was trying to bring to light those areas in which the banks, and others, were falling short in respect of their community duties. If we feel that any organization has a responsibility to the community in which it operates, then it is probably a good thing for them to relate that information.
In applauding this situation, it was not so much that we said that it necessarily had to be done with respect to banks and insurance companies, but we felt that our organizations were all about participating in the community. This is very important for financial and other institutions.
You may ask, why just financial institutions and why not everyone? I would reiterate that if we feel it is important that organizations be part of their community and that the community is important to those organizations, then they should tell us about it.
Senator Stewart: You anticipated my next question. How is the role of the financial services sector so different from that of other sectors of the economy that they should be expected to do these annual reports? Why is the banking services sector being treated differently from Sobeys down east or any other major organization? I do not mean to be argumentative. I am looking for your analysis of the difference.
Mr. Taylor: I think that it is because financial institutions are such an integral part of our lives. If they did not exist, we probably could not operate. If Ontario Hydro did not exist, you could make the same analogy. However, you raise a good point.
I can only go back to the report itself, which is trying to say that there are basic services that a financial institution should provide in the community, and that somehow or other we want to know that those things are being done.
Senator Stewart: You will remember, Mr. Chairman, that on Monday I asked Mr. MacKay to explain the peculiar nature of the financial services sector such that it justifies our heavy regulation, allegedly, in the national public interest. Mr. MacKay, in effect, declined to answer that question. Until we have an answer, I do not think that we have a basis for many of the new requirements, including the ones with which we have been dealing. Why do we have a right to impose those? We should have a rationale in mind before we go ahead and assume that these institutions are different from big chain stores or big steel companies. For the sake of clarity, we should understand and be told in this committee by the authorities what is the difference.
Mr. Hensel: Stepping back to the public expectation reflected in the report, you could argue philosophically that every individual in the community has an obligation, moral or otherwise, to participate and give back to the community in which they live. That would apply equally to corporate citizens. For that reason, it appears to be a growing trend for organizations -- even Sobeys -- to give something back by joining organizations, such as Imagine, and by giving away a minimum percentage of their profits, on their own initiative.
The difference with the banks is that they are such an integral part of everyday life that Canadians have expectations.
Senator Stewart: Now we are told that they need to be bigger so they can be true global players. How is that relevant to the public interest, when we hear about these annual community accountability statements?
Mr. Taylor: Are you asking us that question, or are you just being rhetorical?
Senator Stewart: I was hoping that you would give me the definitive answer.
Mr. Taylor: I am not sure we want to get into a discussion of some of the bank mergers at this time.
Senator Stewart: Surely you will agree that it is relevant to the position you are taking on the community statements.
Mr. May: We are heavily into supporting our communities and doing everything we can. We see having more organizations doing this kind of thing as a big plus.
The Deputy Chairman: You do not think it would be legislated.
Mr. Hensel: Hopefully they would do it voluntarily.
The Deputy Chairman: Is it volunteerism, or is it legislated work for free?
Mr. Hensel: That is the next question. Sufficient controls could be built into the statements, which are required to be filed for the legislative part, so that they do not become advertising. I suspect it will probably begin that way, and we will see competition amongst the players, with each one saying that they are able to do more than the others.
Senator Stewart: We have all made declarations against certain forms of tied selling. Suppose I am a young person seeking a job with a bank. Do they say to me, "Do you understand that you are supposed to suddenly become highly charitable, engage in all sorts of community work, otherwise we will not have a good report at the end of the year?" That may not be a form of tied selling, but it is certainly tied.
Senator Oliver: It is like the pro bono work the lawyers all do.
Senator Angus: And the senators.
Senator Stewart: It is virtually legislated pro bono work.
The Deputy Chairman: Think of all the discrimination cases there will be with people who have five kids and do not have as much time as single people.
Thank you very much, gentlemen. If you are submitting a report, perhaps you could have it in to us before November 15. That is when we will begin work on our report. If you wait until later, it will not be part of our report. Please do not forget the issue of membership.
Our next witness are representatives of the Consumers' Association of Canada.
Ms Gail Lacombe, President, Consumers' Association of Canada: Honourable senators, our association is the only national consumer group in the country. The CAC was founded in 1947 as an independent, not-for-profit, volunteer-based organization. Our mandate is to inform and educate consumers on market-place issues, to advocate for consumers with government and industry, and work with government and industry to solve market-place problems in beneficial ways.
The CAC focuses its work in the areas of food, health, trade, standards, financial services, communications industries and other market-place issues as they emerge. All CAC policies on specific issues are framed within a set of general consumer-oriented principles. Eight such principles govern consumer associations belonging to the worldwide federation of consumer groups, Consumers International. Among these principles are the right to choose, the right to be heard, and the right to redress.
I will now present Ms Jennifer Hillard, our Vice-President on policy and issues, who will respond to the report of the task force.
Ms Jennifer Hillard, Vice-President, Policy, Consumers' Association of Canada: CAC has reviewed the recommendations of the MacKay Task Force on the Future of the Canadian Financial Services Sector. We believe that the task force has done a remarkably thorough job of examining the topic; it has produced 124 comprehensive recommendations. CAC is, on the whole, pleased with the report and impressed with the detail. It is clear that task force paid particular attention to the impact of any possible future changes in the financial services sector on Canadian consumers. There are, however, some issues on which we believe more detail and clarity are needed.
The Consumers' Association of Canada welcomes new entrants to the market and applauds the pro-competition proposals in the task force report that affect foreign banks and credit unions. These provide greater scope for strategic alliances and holding companies. We believe, however, that potential entrants to the market have been excluded by the high cost of entry. There are still many regulatory hurdles to creating alternative financial institutions, and while we would not be agreeable to a lessening of regulations that protect consumers, these regulations make it more likely that new entrants will enter the market-place in urban areas rather than in rural and remote communities, which have the greatest need.
While CAC welcomes new and innovative methods of delivering financial services to Canadian consumers, we are also concerned with the cost and the risk to consumers. If the service charges for new entrants are significantly higher than those levied by existing institutions, will the consumer be given adequate information? Will any deposit held by these new entrants to the market be insured? If the risk is increased, will consumers be given adequate data to enable them to make an informed choice?
CAC strongly agrees with the task force recommendation that privacy and tied selling issues must be dealt with prior to allowing deposit-taking institutions to venture into the areas of retailing insurance and vehicle leasing. Tied selling is a major concern, and reports of non-conformance with corporate policy on this issue are rife. Albeit the legislation to deal with this is in place, we believe it requires some strengthening. This legislation has not been proclaimed, and that should be done.
Increasingly, bank employees are compensated or evaluated on the basis of meeting sales quotas, rather than on customer satisfaction. While that has always been common in the financial services industry, individuals used to be licensed and had to comply with a code of conduct. Recent changes to financial services legislation is shifting the licensing to the business, which removes the constraints imposed by individual codes of conduct. That raises the following questions: Who will provide the consumer with unbiased information, when everyone is a seller? And when the sellers control the information, what will make them act in the best interests of the consumer?
Regimes to deal with this problem must be put in place before the business powers of deposit-taking institutions are expanded.
Banks, like any other organization, will be governed by the federal privacy legislation, which we trust will be forthcoming soon. We are, however, concerned that this legislation will not have sufficient provisions for oversight. Privacy is one of those areas in which a complaint-driven process will not work because of asymmetric information problems. Generally, the consumer does not know the privacy has been violated until too long after the event to identify the violators. Redress issues will be difficult owing to the problem of quantifying damages that may be largely qualitative.
We would welcome stronger legislation to apply to federally regulated financial institutions that would provide for outside audit and an oversight agency to make enforceable decisions. A satisfactory solution to these issues is essential prior to expanding the business of these institutions in order to allow them to retail insurance or to lease vehicles.
With respect to consolidation and mergers, CAC is very supportive of the proposal for a public interest review assessment to be performed before considering consolidations and mergers. We also agree with the community review and analysis required during the four-month notice period for a branch closing. We do, however, have some concerns as to the possibility and the probability of the public's participating in this review process.
We believe that without public input, these assessments would be written by industry, for industry, and would incorporate only a global perspective rather than a domestic perspective. This shifts the reports away from concentrating on the financial industry's role in Canada. This is a critical shortcoming and we need to examine the possibility of domestic harm to consumers.
It is essential that Canadian consumers have a say in the "scoping" phase of public interest review assessment to ensure that the process adequately addresses the right questions. It is essential that the banks pick up the cost of this review process and that these costs are not passed on to the users of bank services.
On the matter of empowering consumers, it is essential that the ombudsman remain independent. Any possibility of the board that supports the ombudsman position becoming political appointments would give us cause to doubt this independence. Care will have to be taken to ensure that OSFI is not put in a conflict of interest situation. The OSFI has the task of ensuring the long-term viability of the financial services sector. CAC would be concerned if this duty were allowed to override the consumer protection function of the office. For this reason, it may be useful to consider setting up a special arms-length office of OSFI to deal with the consumer protection aspects of the recommendations. That office could also be assigned sufficient resources to enable it to take on some more proactive roles, such as development of plain-language documents, redress systems, model codes, et cetera.
Responding to expectations about business financing, CAC believes that the community accountability recommendations are going in the right direction. We believe that any attempts to influence the composition of a financial institution's portfolio should be moral rather than by fiat. We would like to give the market-based solutions suggested by the task force time to work before advocating interference in the market. CAC has not seen adequate evidence of serious market failure to suggest a different solution at this time.
Regarding disclosure and transparency, CAC would hope that consumer representatives would be part of the multipartite working group, which is suggested as the oversight body to ensure the production of user-friendly consumer information. This would also help to reinforce the suggestion of strengthened partnerships with the voluntary sector to help financial institutions find innovative solutions to meeting consumer demands.
In conclusion, we believe it is dangerous to assume that the more competitive environment envisaged by the task force will necessarily protect the interests of small business people and consumers. The literature does suggest economies of scale up to $1 billion in assets. It will take time, possibly a long time, before a reasonable number of competitors of sufficient size to realize these economies of scale emerge. The major banks are realizing maximal economies of scale right now. That is why the industry is not contestable, despite the excess profits being earned. It is worth asking the question: Is the public better served by having a small number of technically efficient oligopolists earnings excess profits or is it better served by having a large number of competitors earning normal profits but below efficient size? If is answer is the former, what is the right number of oligopolists to have?
CAC would recommend the implementation of the recommendations of the task force first, and then an evaluation of the impact of the recommendations. If the changes to the financial services sector have reduced consumers' reliance on the big banks, then the mergers could be considered.
The MacKay task force has produced much better results than we ever expected, and it is difficult to do them justice in a short presentation.
Senator Oliver: Thank you for an excellent presentation. It has been both interesting and stimulating.
I would begin with some questions that arise from your presentation. You said that one of the big problems is that you think many of these new entrants might go to urban areas. What was there in the MacKay task force report that leads you to believe this?
Ms Hillard: I think it is the fact that there will still be a lot of regulation. Consider ATMs, for example. The big banks will not put in an ATM unless it will get 4,000 hits a month. Some small companies are coming on the prairies and putting in free-standing, non-bank-tied ATMs. They are going into corner stores and hotel lobbies. However, there is $1.25 charge for using them plus a $1.25 Interac charge to make up for the added risk they are taking because they might only get 40 hits a month.
Although the MacKay task force report is very good and has tackled many things, I do not think it has yet cleared the way to providing financial services, not necessarily banking ones, in many of the smaller communities.
Senator Oliver: You know from the task force report and from your other reading and research that most banking today in 1998 is not being done by writing a cheque and going into a bank branch and doing your banking. It is done by telephone, electronically, or through ATMs. These new entrants will be using the modern technology, not setting up branches.
Ms Hillard: Not necessarily, but probably the people who live in rural and remote areas are the people who have the least access to all these alternative methods. Many of them do not have decent telephone service.
Senator Oliver: Canada has the highest telephone penetration rate in the world.
Ms Hillard: We also have the thinnest density of population. There is a major CRTC hearing going on right now concerning the issue of just plain old telephone service that is of reasonable quality in some of these very remote areas. They are not even tackling the idea yet of toll-free Interac access.
There is some innovative stuff going on in other countries. In the U.K., you can now bank with one of the grocery stores.
Senator Oliver: We have the same thing in Canada, in Ontario, with Loblaws.
Ms Hillard: I apologize. I am from the Prairies.
Senator Oliver: I am surprised that you say rural areas will suffer. If you send us anything else, I should like it if you could elaborate a bit more on why you think that is. As you know, the report talked about giving a lot more strength to credit unions and caisses and so on throughout Canada so that they can become more of a second tier to take over from the banks.
Ms Hillard: I do not think we said that the rural areas would suffer. The paper says that we think that more of the new entrants will come to the urban areas. It is always tough to get people to go into an area where they have a limited amount of business.
Senator Oliver: Many of the companies in the United States are highly specialized. Perhaps they will just deal with credit cards or auto leasing or mortgages on residential houses and so on. They could do that through a computer or telephone or perhaps one of their representatives coming to your home to talk to you. That again does not mean that that could not be done in a rural area as well as in an urban area.
Ms Hillard: One would hope not. However, the telephone companies just told us that they cannot repair telephone lines in remote areas in less than 24 hours.
Senator Oliver: I was interested when you talked about a number of people becoming sellers. You made a most interesting comment about who will help the consumer and that the regimes to deal with this problem must be put in place before the business powers of deposit-taking institutions are expanded.
I found that fascinating because one of the things that happens when you introduce competition from other banks and financial institutions is that they will all be trying to keep their prices down so that they can get your particular business. Will not the fact that the task force report is strongly recommending a lot more competition in financial services overcome your problem about people being sellers?
Ms Hillard: That will overcome the issues of pricing. Whether it deals with the issues of selling the person what they really want as opposed to what you want to sell them is another story.
Senator Oliver: How is that any different from going to a regular retail store or grocery store where there are several different kinds of the same product? How do you know that people are buying what they should be buying? How is it any different for that than financial services?
Ms Hillard: It is usually not such a large outlay, for one thing. It is more reasonable to compare financial services with buying a car or a house where you can get considerable detailed information. Yes, people are trying to sell to you, but you are getting a lot of information. They are self-regulated organizations, but perhaps they are more openly self-regulated than some of these financial systems are right now.
Senator Oliver: The task force report talks about legislating privacy standards and so on. Are you in agreement with the task force's recommendations that say this should be legislated?
Ms Hillard: Yes, absolutely.
Senator Oliver: You said that the legislation has already been drafted but it needs some changes. What are the changes it needs, in your opinion?
Ms Hillard: The privacy legislation is not completely drafted. It is being worked on. It is gradually being strengthened. We have been very active in the process. Canada is the leader in this. We seem to be ahead of many other countries, which is good.
Senator Oliver: You said that the legislation to deal with this is in place, although it requires some strengthening.
Ms Hillard: That was not the privacy legislation.
Senator Oliver: It was the tied selling legislation. What strengthening does the legislation in place need in relation to the tied selling? What changes do you recommend?
Ms Hillard: I could not give you details. I will write them into the report. That was put into the recommendation by our financial services committee, none of whom could be here in person. I will note the question and ensure that it is inserted into the final report before November 15.
Senator Callbeck: In the task force report, at the bottom of page 208, it says:
The Task Force urges consumer advocacy groups to work together to pursue the concept of the establishment of a Financial Consumers Organization to ensure that there is effective consumer advocacy in the sector.
What are your thoughts on that?
Ms Hillard: We actually met last week with most of the consumer groups. The other consumer groups are regional; we are the only national one. We try to work with all our provincial branches so that we work in the same direction. Industry Canada has been helping us to work together to respond to this particular document. In fact, we were all in Ottawa when it came out last week.
It is a useful solution. All the consumer groups are suffering financial restraints, as is everyone. Key alliances must be made for us to be effective in some areas, and one of those areas is the financial institutions.
Senator Callbeck: You did not give any thought as to what the mandate might be or how it might be financed?
Ms Hillard: We have not sat down and discussed it with the other groups. As I said, we were together last week commenting on the report. It has actually been a scramble just getting it read since it came out.
Senator Callbeck: I appreciate that. Thank you.
Senator Hervieux-Payette: You were talking about consulting the bankers as something you would like to do. In the creation of the ombudsman, the system in place, were you consulted by the banks?
Ms Hillard: Not to my knowledge. I have only been the vice-president for two years, but I have not seen any record of us being consulted about the ombudsman.
Senator Hervieux-Payette: We were informed yesterday by the Canadian Bankers Association that they have a two-tiered system. They have one in each bank, and if you are not satisfied with that decision, there is an outside ombudsman. There is an independent board of directors, which can remove the ombudsman by a unanimous vote. That allows the ombudsman a lot of freedom. Since there is the possibility of changing the ombudsman system, are you willing to test the actual system in place -- which is quite a new one?
Ms Hillard: We have agreed with the system that is now in place. In fact, one of our members is on the board for the ombudsman presently. The concern was that the task force seemed to be directing that appointments be more political than the present system of appointing independent people.
Senator Hervieux-Payette: Speaking for myself, I do not think we need more problems to solve. We can test the present system, and if it does not work, we will address the problem.
Ms Hillard: It has not been in place very long. We do not have a record of people, either provincially or federally, empirically testing it.
Senator Hervieux-Payette: You were talking about the relationship with the bank, the location of the bank and, of course, its staff. You spoke of the fact that their remuneration is linked to the profits of their branch. In the capitalist system, it happens quite often when you are in a financial institution that there are links with other areas. For example, if you are a stockbroker, there is a link.
Yesterday, we were told that Quebec is the only province in which people must pass an exam, become certified, to become a financial consultant. These exams are similar to those of the Investment Dealers Association of Canada. They are not easy. You must study and be knowledgeable.
Those who call themselves financial consultants can work in any of a number of financial service organizations. They could work in the insurance industry or for a trust or bank. Would you recommend that these people should have the proper training and recognition, even though it is an area that does not fall under federal jurisdiction but under provincial jurisdiction?
I have the feeling that an association like yours might suggest that, for the benefit of the consumer, these should be reliable people with the proper training who can advise on financial matters.
Ms Hillard: I would say that for close to 10 years we have been lobbying for education, training and an organization for financial planners. There are some certified voluntary groups in some of the provinces with which some financial planners do their training. We advise consumers who want to go to a financial planner to find out what sort of training the planner has or to which organization he or she belongs. In that way, the consumer can check the code of conduct, et cetera, of the financial planner.
Obviously, it would be desirable, in a country like Canada, to harmonize those things across the provinces, because people move around so much. From an employment perspective, if a financial planner were to seek employment in another province, or a consumer were to move to another province, harmonization would make things much easier.
Senator Hervieux-Payette: Do you feel that your association, and others that deal with consumer protection, are financed well enough to carry on the terrific mandate that is on your shoulders?
Ms Hillard: No. Ms Lacombe and I are both volunteers. Neither of us is from Ottawa. This volunteer work is almost a full-time commitment, and still we cannot keep up with the issues. This is why we have none of our financial services people here today. They are off doing other things. Even the amount of money required to conduct the necessary research on this issue is becoming almost impossible to raise.
Senator Hervieux-Payette: That is the feeling I have, but I wanted you to express it. If the whole system is to be changed and balanced, as well as having a strong focus on consumer protection, you need to be well equipped. I do not know what are the appropriate mechanisms. Yesterday, someone suggested that the banks, when sending out their statement, should include a leaflet asking for voluntary donations to consumer associations. However, I have the feeling that in terms of the global scene you might need some help. I feel that it would be appropriate to have more funds allocated to the consumer protection budget.
Ms Lacombe: I agree. I do believe that there is naturally a lack of funding. I believe that many things can be done with financial institutions in terms of carrying out projects. I can say that the Consumers' Association of Canada has worked with the CBA in doing projects. I think there is a future to this for the benefit of all Canadian consumers.
As Ms Hillard has said, I live in Quebec.
[Translation]
I live in Montreal; Ms Hillard is from Winnipeg. And it is more and more difficult for us to come to make presentations simply because we get many requests. The funds are not there to pay for the travel costs of the voluntary people like us who have to come from Vancouver or the Maritimes to Ottawa in order to make those presentations.
In the future, we will become a different CAC. We will have to say: We know that we are credible, we have been in existence for 50 years, there is a reason for that. But in the future, if we do not have enough money to get at least the resources required to give our opinion, we will have to decline.
Senator Hervieux-Payette: When you talk about the excessive profits of the banks, I would simply like to add that our banks are making less profits than the big banks in several other countries. Yesterday they were saying that they felt like the ones people don't like in the system. But I still want to do some advocacy for them. There were bad years when we didn't really feel sorry for them, in spite of the difficulties of the past. It is because the investment dealers were merged with the banks that the latter were so successful.
The stock exchange is not doing as well and according to the last financial reports, profits are decreasing. This is not directly linked to banking operations, but to the transactions in the area of investment dealing.
I wanted to clarify that because you have to make the distinction between the two just as we have to. As soon as the banks were able to be active in other areas, they took advantage of it. But the securities sector is certainly more volatile than the mortgage and the personal loan areas. I just wanted to make that comment.
[English]
Senator Callbeck: What is your budget and what are the main sources of your revenue? For example, you spoke about the Canadian Bankers Association. Do they contribute to your budget? As well, what are your other sources of revenue?
Ms Lacombe: CAC primarily works with project funding in many different areas with Industry Canada. Ms Hillard could tell you about what issues we are working on today. She is the "issues" person; I am the administrator.
There is project funding. We are doing a project with Health Canada this year. We do projects with people like the Canadian Bankers Association. We do a significant amount of work with the Literacy Secretariat and have recently produced some major pamphlets on consumer responsibilities -- their rights and responsibilities. Another pamphlet focuses on food tips.
In difficult times, our membership help us.
You asked us about our budget. I could not give you an exact figure, but I would say approximately $600,000 to $700,000 per year.
Senator Callbeck: Would roughly 90 per cent of that be from projects?
Ms Lacombe: Yes, that would be a fair estimate.
Senator Stewart: My question may have been implied in something that was already said. It is a bit of a background question.
We know that the financial services sector has had a very different history in various leading countries. Canada is different from the United States, France and the United Kingdom. Do you have any evidence or impression as to whether, relative to the financial services sector, Canadians are worse off than their counterparts in the United States, France, the United Kingdom or any other countries about which you know? If so, could you be specific as to where we are worse off and in which aspects of the sector?
Ms Hillard: I deal with general V.P. issues, not issues with respect to the financial services sector. However, I shall wing some of this.
Canadian consumers are the biggest users of automatic banking -- debit cards and credit cards. In some ways, that is an advantage to the banks. It is a convenience for us, but the banks reap some advantages as well.
I cannot think of another country with such a large interest rate spread between things like credit cards and what we get on an account at the bank -- 18 per cent on a credit card and 2 or 3 per cent when we put our money in the bank. In that case, I would say we are disadvantaged.
Many of our bank charges here seem very high when compared with consumers from other countries that I might meet at consumers' meetings. However, these are impressions, not evidence.
The Canadian system is much different from that which can be found in the United States, which is where Canadians tend to go most often. As Canadians, when we go into an American town and find 15 little banks with different names, all doing different things, we think that it must be nice to have this choice. We do not have the choice.
One of the toughest things for Canadians to do -- and I am speaking specifically about the banks rather than the other financial services -- is to select a bank and the services we want from it, because they all call the same thing by different names. It took our association years to get butchers to call cuts of meat by the same name. We are now going through the same struggle with the banks. There is a different name for this and that. In fact, you are comparing apples and apples, but you are think you are comparing apples to oranges.
You were asking questions about social responsibilities. In the United States, many of the banks are required to reinvest back into their own communities. We are not supportive of that kind of legislative measure, but that really changes things as well. In a way, that makes banks feel more a part of the community.
I am from the Prairies. In a small Prairie town, one sometimes gets a community with a credit union where the financial institution is part of the community. There is the recent case in Manitoba where a credit union invested in and underwrote, with the help of the federal government infrastructure plan, the extension of a natural gas line into a small town, which otherwise could not have afforded what it took to get the gas line to where it is now located. That makes a significant difference in a community. It is up front and it touches everyone. It gives a very different community feel.
Senator Kelleher: I am looking at page 5 of your brief, which deals with the recommendations. It says:
CAC would recommend the implementation of the recommendations of the Task Force first and then an evaluation of the impact of the recommendations. If the changes to the Financial Services Sector have reduced consumers' reliance on the big banks, then the mergers could be considered.
When I read that, thinking as a lawyer, I say to myself, "My goodness, there are 124 recommendations. Does that mean that all 124 must be implemented? Do we then evaluate the impact?" I do not know what sort of period you are envisaging to evaluate that impact. If there has been reduced reliance, then we could consider the mergers.
Senator Angus: In 20 years.
Senator Kelleher: Knowing the way things move in Ottawa, as my colleague Senator Angus says, it could be 20 years. Could you elaborate on how long you expect this process to take? I am not trying to favour anyone here; I am just trying to get at the substance.
However, I can tell you that if the process you envisage were to take five years before you recommend we even look at considering the mergers, I do not think that would make the banks very happy. I am not suggesting that we have to make them happy, but I think that is a period far beyond what they are thinking.
Senator Oliver: It may not be in the public interest.
Ms Hillard: We were thinking more in terms of two to three years. The banks can respond amazingly quickly when they want to. As soon as the mergers were announced, a lot of branches started closing and many services were integrated into one centre. They can move fast if they want to.
Within about a week of the mergers being announced, the banks had new television ads, featuring people dancing to music from the 1960s. The banks began to promote a lot of the things that the experts said had to be done before they could look at mergers. Ottawa may move at a glacial pace, but if the banks want something, they can move very quickly. If the banks want the mergers, then we want something from them in return.
Senator Kelleher: However, you envisage the process, assuming the banks are in there pushing and shoving, taking three years.
Ms Hillard: Probably. It will take some time for competition to come in and get established in a realistic fashion. Canadian banks have years of development and adaptation under their belts, years of refining everything to where they want it. They have moved quickly to do more of that in the last six to nine months. These other new entrants will have all kinds of hurdles to jump over. They must establish themselves and build consumer trust. Although Canadians love to hate the banks, they also trust them. They put their money in them. I think it will be two to three years before there is any real competition.
It may be spotty in other areas. It happened in Quebec with the Caisse Populaire, just as it did in Manitoba with the credit unions. As soon as the mergers were announced and everyone started decrying the banks again, the credit unions also began a very aggressive advertising campaign. They said, "Switch over to us." This sort of thing will happen.
Industry can move as fast as it wants to if it wants something. The legislative pieces of this may take longer, but industry will get moving.
Senator Kelleher: I think that is a given.
Ms Hillard: The industry will move as much and as fast as it is allowed to.
Senator Angus: Your point of view seems open to some interpretation. The task force says that the status quo is not an option. Do you agree with that, or would you be happier with the status quo than with some of these scary, unknown things that you want to have implemented and tested before some of these other unknown things happen?
Ms Hillard: We have lobbied for competition in the financial sector for a long time. We have been really keen to have many different options coming in as quickly as possible.
Senator Angus: You tied it to urban centres, but it seems to me that, generally, for the new entrants coming into this unknown environment there must be some reason that they were not here in the past. We know that the regulatory environment was hostile and uninviting to them. For them to be induced to come in, be it to urban areas or other places, there must be a compromise and a risk taken on both sides.
I am a consumer and I should like personally to see other options to what we have now. However, you cannot just expect people to start-up and lose their shirts.
Ms Hillard: And you cannot expect consumers to lose their shirts.
Senator Angus: They are not losing their shirts.
Ms Hillard: They are not now.
Senator Angus: They will always have those options. Let me try to use one specific example. It may be the wrong one because you said you are not financial services representatives.
The report suggests that we open up, to some extent, the payments system, which is a very complex operation. I am wondering if there is not a balance to be struck between competition and safety. We have a payments system that I gather the evidence shows is one of the best, if not the best, in the world. A cheque can be deposited in Halifax in the morning and someone in Los Angeles can be walking around in the afternoon will that money. In my other life, when one of my bills gets paid with a cheque from some other jurisdiction, we have to wait for two weeks before I can even draw on that money. It makes you realize how good our system is here. Safety and soundness is also a big criterion in Canada.
Since you represent consumers and have studied the issues from the point of view of the consumers, do you not feel that there may be a halfway measure in some of these matters?
Ms Hillard: Why not let some of the insurance companies into the Canadian payments system if the banks are going to go out and sell insurance?
Senator Oliver: Let us recommend it.
Ms Hillard: We agree with it. Many small towns have insurance brokers. What do you have to put in place to allow them to access that? If the only bank branch in a town is closing up, and not even leaving an ATM, perhaps the insurance broker can take over delivering some of these services.
Senator Angus: That is one example. You can open up the payments system and you can open up the payments system. There seems to me to be a halfway measure there. I think even Mr. MacKay, when he was here, agreed with us.
We all agree that this is a marvellous piece of work that these folks on the task force have done. It is a voluminous series of documents. Obviously it is not something that any of us can grasp and fully digest in all its aspects overnight. However, you say, "We represent the consumers and we are too nervous about this thing to allow the market forces to work for a while." You are saying we should implement all the recommendations, test them, and see what happens for perhaps two or three years. I agree with Senator Kelleher that that is, to some extent, dreaming in Technicolor. Just to implement all the recommendations might take a little longer.
I think you see my point. It seems to be a bit extreme. We are here feeling our way along. We are hearing from all interested groups. The more the merrier for us, because we are like you -- we want to understand it and then make our own recommendations about it.
However, I am not persuaded that we should put it all on ice. We have a good banking system here. All the evidence points to that. We have a good insurance system and financial system. However, because of the very nature of our demographics and things such as our regulations, we have not engendered the growth of a second-tier banking system. We have maintained a division between finance and commerce, for valid historical reasons. Suddenly, now, we cannot control it anymore, as a result of changes in technology and the new concept of globalization, much of which has occurred not just in the last ten years but in the last two or three years.
Five years ago, there was no such a thing as e-mail. Now, the Internet allows you to book airline tickets.
I am asking, somewhat rhetorically: If this is about opening up things and deregulating and letting the market forces work, and waiting to see what happens, would that not be pretty good?
Ms Hillard: We would like to see competition in the market-place, but we do not think that will happen unless things are done in the right order.
One of the things I found most interesting in this whole document was the concept of having a public interest review assessment. It is the first time that I have seen anyone from the economic end of the spectrum of government do anything that I would say fits in with the federal government's commitment to sustainable development. Healthy communities are a key. The task force is recommending a public interest review assessment, which hopefully will help you deal with the financial services and still have healthy communities. The same is true with the smaller community review for the bank closings.
I took these documents back to Manitoba last week, straight to the Minister of Rural Development, and said, "Look at this report. This is great. This is the sort of thing we should be supporting. We have an act dealing with sustainable development. We are fighting for healthy communities, sustainable communities. Let us do it." It should link everything together that the government claims to be doing.
Senator Angus: That is fair. I also find the ideas in the report to be progressive and good. Frankly, I wonder if they go far enough. Although some of the recommendations seemed modern and avant-garde at first, in June the members of the task force got around the table and said, "What are we going to tell the editors to write in the report?" Three months have gone by and there is a lot of new stuff out there already. I think what we want, as Canadians, is to be out in front with leading-edge stuff, but without undue risk.
I know what you are saying, but I think what you are suggesting is really what I accuse MacKay of doing. He has two or three big chapters, on deregulation, liberalization, suggesting that we open the doors so that we can give Canadians some choice and competition. Then he ties the hands behind the backs with some of the restrictions. It appears that so many new regulatory barriers may be put up that we might not achieve the benefits.
Ms Hillard: If a new car design comes in, you would still want it to meet the safety standards.
Senator Angus: Absolutely. That is a key criteria.
The Deputy Chairman: Thank you very much. We appreciate your presentation.
We now have with us, from the Canadian Association of Insurance and Financial Advisors, Mr. Robert Fleischacker, chairman, and David Thibaudeau, president. Please proceed with your presentation.
Mr. Robert Thibaudeau, President, Canadian Association of Insurance and Financial Advisors: The Canadian Association of Insurance and Financial Advisors, formerly the Life Underwriters Association of Canada, is a not-for-profit professional association. Our 18,000 voluntary members provide financial advice and market and sell products from many types of financial institutions in Canada, from life insurance companies to banks. CAIFA members sell the majority of life and health insurance products in Canada.
Before I get into the substance of our recommendations on the MacKay report, I would publicly thank Harold MacKay, his task force, and their staff for a wide-ranging report on the future of the financial services sector. We may not agree with every recommendation in the MacKay report, and you will not be surprised to learn that we do not, but we must recognize the report as being comprehensive, forward-looking, and sincerely attempting to put the consumer first. As the report is so comprehensive, however, I wish to urge committee members not to feel bound to either accept or reject the report in its entirety but to pick and choose recommendations that you believe make sense for Canadian consumers.
While CAIFA will deliver to the committee next week a written submission addressing a number of the MacKay report recommendations, today I should like to briefly address some of the MacKay report's recommendations that are of particular interest to CAIFA members, and those are tied selling and insurance retailing.
CAIFA has long urged the federal government to protect consumers from tied selling, particularly by banks. We appeared before the House of Commons finance committee this spring to present our research on tied selling and to recommend the proclamation of the anti-tied selling provisions in the Bank Act. We also provided the committee with a list of consumers and small business owners who believe they were tied selling victims and were gratified that the committee invited some of the Canadians on our list to testify in person about their tied selling experiences.
We were also pleased that the committee recommended in its June report on tied selling that section 459(1) of the Bank Act be proclaimed. I understand that this section of the Bank Act will be proclaimed today, and we thank Minister Peterson and his colleagues for taking such decisive action on behalf of consumers.
I believe that these actions, combined with the MacKay report's polling data, speak loudly to those who have long denied that tied selling exists in the financial services market-place.
The task force reported being surprised at the number of Canadians who reported that they felt that a loan or a mortgage might not have been approved unless another product was purchased from the same institution. One in six Canadians and one in four self-employed Canadians felt that over the past three years one of their loans or mortgages may not be approved unless another product, such as insurance, was purchased from their institution.
According to Ekos Research, which did the polling for the MacKay task force, there is little doubt that many Canadians think that they experience tied selling. If anything, Mr. Chairman, we believe that the Ekos poll may have understated the extent of tied selling in Canada and contributed to some mistaken conclusions by the task force with respect to insurance retailing.
There are a number of reasons for this belief. First, the definition of "tied selling" used in the Ekos questionnaire refers only to a loan or a mortgage and excludes credit cards, a common source of credit for consumers, in particular small business. According to the Canadian Federation of Independent Business, about one in eight of their members uses a credit card as one of their major sources of business credit. For businesses with four employees or less, that number rises to more than one in six. Had the Ekos question on tied selling included credit cards, we suspect that the reported rate of tied selling would have been higher among both consumers in general and the self-employed in particular.
Second, the Ekos question gives insurance as the only example of a product that might have been tied to a loan. Since banks cannot sell most types of insurance in their branches, this example is not likely to trigger incidents of tied selling in the minds of respondents. In our research at CAIFA, banks were six times more likely to tie an unwanted mutual fund or other RRSP product to a loan than they were to insurance. We believe that the reported rate of tied selling would have been higher if the Ekos question had instead asked: Have you personally ever felt that one of your loans or mortgages may not be approved unless you also purchase another product, such as a mutual fund, from your institution?
I make these points not to diminish the task force conclusion that tied selling is a problem but, rather, to emphasize that tied selling may be more of a problem than the task force realizes.
CAIFA believes that the Ekos polling data supports at the very least the task force recommendation for a stronger and broader ban on coercive tied selling than now exists. A stronger and broader ban should include as a minimum an expanded definition of tied selling, a disclosure statement, and access to certain legal remedies in the case of tied selling. We believe these measures are a step in the right direction; but we do not share the task force optimism that they will make a significant difference in the near future.
As indicated in our March submission to this committee, tied selling is ingrained in bank culture and will take some time to yield to any new regulations no matter how strict. The fact that tied selling has been illegal under the Competition Act since 1976 does not seem to have impeded the growth of a tied selling culture within some deposit-taking institutions.
Furthermore, it is not only the culture of banks that must change; Canadians' attitudes must change as well. According to Ekos Research, almost half of those who say they experience tied selling gave into the coercion. Mr. Chairman, the most severe anti-tied selling regime in the world will have limited impact if Canadian consumers continue to feel powerless sitting across the desk from a bank loan officer. Therefore, we must seriously question the likelihood that the entrenched tied selling culture will change significantly by 2002, as hoped by the MacKay task force.
Having discussed tied selling, I wish now to turn to the related issue of insurance retailing by banks or "bancassurance." The MacKay report recommends that the current policy of prohibiting deposit-taking institutions from retailing insurance in their branches should be overturned effective 2002 for deposit-taking institutions with shareholder equity above $5 billion, and sooner than that for those below that threshold.
In terms of benefits to consumers of bancassurance, the report argues that the main benefit of bancassurance -- in fact, the only benefit -- is that it would expand the opportunity for Canadians to purchase insurance. This is an important point that deserves emphasis.
According to the MacKay report, Canadian consumers should not expect lower prices or better service if banks can sell insurance in their branches. To support its conclusions that Canadians may not have enough life insurance, the report cites figures from Ekos Research that indicate that 71 per cent of Canadians report owning some form of life insurance. The figure for couples and individuals with children is higher since these are the groups that have a higher than average need for life insurance.
A 1998 survey by the Life Insurance Marketing Research Association, LIMRA, actually found a higher level of coverage than did the Ekos poll. The LIMRA poll found that 82 per cent of Canadian households are protected by life insurance. This is up from 80 per cent in 1994.
Why the difference? We suspect that it was the different methodology used by the two research firms. The LIMRA survey was conducted with the financial decision-maker in each household, the person most likely to know about such matters as life insurance coverage. By contrast, the Ekos survey was conducted with anyone over the age of 18 and a permanent resident of Canada.
According to LIMRA, therefore, eight out of ten Canadian households are covered by life insurance, and two out of ten households feel that some member is likely to purchase a policy in the near future. Again, both figures would almost certainly be higher for couples and individuals with children.
While I would be the first to acknowledge that our industry has work to do to increase the level of life insurance ownership among lower-income Canadians, I want to dispel the notion that seems to be implied in the MacKay report that the Canadian life insurance market can be considered underserved unless 100 per cent of Canadians own life insurance. The task force even admits as much in their report, noting that their survey did not identify why different respondents do not have insurance. The task force is cautious about concluding that there is an underserved market in Canada.
If the life insurance market in Canada is already well served and the level of coverage is already increasing, this would seem to undermine the task force's primary argument for bancassurance.
Furthermore, on the question of serving low-income Canadians, there is no reason to expect that banks would serve that market any better than the life insurance industry currently does. The bank's track record in providing low-income Canadians access to basic banking services led the task force to conclude that notwithstanding the stated policy of the banks there is still a considerable problem on the ground in serving a class of customer that is not likely to be profitable to the branch. The task force went on to observe that the major problems preventing further progress are attitudinal and cultural, not problems of process.
If low-income Canadians have a hard time gaining access to even basic banking services that they are willing to come into the branch and line up for, so-called pull products, why would anyone expect banks to do the hard work involved in persuading these so-called unprofitable consumers that they need life insurance?
I should like to turn now to the considerable costs of lifting the ban on banks retailing insurance from their branches. The primary risk of bancassurance identified in the MacKay report is tied selling, but the task force believes that its proposals will effectively address this issue.
Why is the task force so optimistic? When the task force observes that they have seen no evidence that markets have been seriously disrupted in countries where banks retail insurance, they do not factor in the price consumers may have had to pay. The MacKay report offers no evidence from any of these countries that tied selling can, in fact, be controlled with the regulatory package they are proposing. No parallels are offered between Canada's uniquely concentrated banking sector with its entrenched culture of tied selling and any other jurisdiction in the world where banks now retail insurance.
Furthermore, we believe that the task force in addition to underestimating the tied selling problem in Canada may also fundamentally misunderstand it. The task force observes that the potential for coercive tied selling exists whenever multiple products are delivered through the same retailer. It goes on to suggest rhetorically that, perhaps, insurance agents should not be able to sell other products, such as securities or provide financial planning advice, for fear that they would engage in tied selling or abuse personal information.
Mr. Chairman, this line of thinking misses the point that the financial advisors who belong to CAIFA do not grant credit and have no economic power whatsoever over their clients. They, therefore, could not attempt to tied sell even if they wanted to. Under the current regime, the consumer is in the driver's seat, not the financial advisor, and switching life insurance agents is much easier than switching banks, in particular for small businesses.
Banks, on the other hand, have the power to grant, increase or deny credit to individuals who may desperately need that credit to purchase a first home or to small business owners who need to bridge their accounts payable and their accounts receivable. Consumers are acutely aware of that power, as the Ekos numbers indicate.
Mr. Chairman, given our belief that the task force has both underestimated the extent and misjudged the nature of the tied selling problem in Canada, we believe this committee should think twice before accepting their assurance that their tied selling solution will have substantially cured it by 2002.
What about the other main risk of bancassurance -- the misuse of personal information? According to the task force's polling data, 56 per cent of Canadians "expressed concern that banks would have too much credit and personal information, which they would use for inappropriate purposes if they were allowed to sell insurance from their branches."
This is consistent with past research and, if anything, it understates the concern of Canadians. For example, a 1995 Compas survey found that 83 per cent of Canadians support a ban on banks scanning their credit card and cheque-writing transactions to market insurance to them. Eighty-five per cent support a ban on banks using their customer account information related to large deposits or inheritance to market insurance to them.
The CAIFA therefore supports the MacKay report's recommendation that the federal government move beyond voluntary privacy codes and legislate privacy provisions that will apply to private sector entities.
We also welcome the Prime Minister's recent announcement regarding on-line privacy. We would note, however, that the task force recognizes that it may take some time to develop a consistent and comprehensive approach to privacy legislation for the private sector. The CAIFA sees the absence of such a privacy regime as just one more argument against lifting the ban on life insurance.
In conclusion, we believe that the benefits to Canadian consumers of bancassurance are sketchy at best, but the risk to consumers in the form of tied selling and privacy violations are very real. We believe these very real costs clearly outweigh the alleged benefits.
This unfavourable equation may explain the low level of consumer interest in bancassurance found by the task force. While it is true that three out of four Canadians told Ekos Research they wanted a choice of where to buy their insurance, this should come as no surprise. Few people will voluntarily waive their freedom of choice. The more important figure in our view is that about half of Canadians said they "are not concerned about whether banks can sell insurance products from their branches." In other words, half of Canadians will not be disappointed if we opt for consumer protection and maintain the ban on insurance retailing, and another 21 per cent are undecided.
Given the clear lack of urgency among Canadians for seeing banks sell insurance in their branches any time soon; and given the likely considerable net cost to consumers if the government gives banks that power; CAIFA would recommend subjecting the MacKay task force bancassurance recommendation to considerable additional scrutiny before considering its implementation.
Mr. Chairman, I want to thank you for the opportunity to participate, and Mr. Fleischacker and I will be happy to answer any questions.
Senator Angus: It is good to see someone who is not falling down all over the MacKay report. Obviously there are things you like and things you do not. I am sure the people in the car-leasing business will have a view as well.
I want to review the concept of tied selling and cross-selling. Sometimes the terms get confused, and it is important that we have the right perspective.
In terms of the legislation that is being proclaimed today, which I think makes you happy, we are talking about improper, coercive tied selling of the kind that should not happen and should not take place. That will be dealt with in the legislation. I appreciate your statement that, notwithstanding that legislation, you feel there is an entrenched culture of coercive tied selling.
If I read the MacKay report properly, he is saying that all of these things have to happen together for the recommendations to make any sense. In other words, the task forces is not saying that we should let the banks sell insurance, lease cars and open up the system without saying at the same time that there must be more competition, other deposit takers and other loan givers around so that there is not this very narrow field. Would you agree that the environment will be different if all these recommendations are implemented?
Mr. Thibaudeau: I agree.
Senator Angus: It would be an environment which would not be conducive to what you call a bad culture.
Mr. Thibaudeau: The key issue is the power a lender has, no matter what kind of a lender you are, no matter whether you are a big or a little bank. If you control the situation, you can control the marketing of other products. That affects the consumer more than anyone else.
We do not come here representing an industry, per se. We come here representing people who give advice to others, whether it is a life insurance company, a bank or a mutual fund company. However, the minute you create this lending situation and also have other products available, it can then lead to coercion.
We were talking about history, but the evolution of products coming from a bank has grown tremendously from taking deposits and lending money. It has grown into all sorts of offerings to the public. In doing that, we might have lost sight of the lever banks possess.
We were also very supportive of the credit information regulations. If an insurance company or a non-bank were lending money on a mortgage, they should not have a tied situation.
In our written report, we are very supportive of expanding and opening up the payment system. We think that will open up access to people to get at money, whether it be in a mutual fund or an insurance company, and not just have it in a bank account. A person will be able to electronically move money around.
Senator Angus: I agree with you, except that we all tend to be conditioned by the status quo, which, we are told, is not an option. If Canada wishes to stay up to date on the leading edge and give our people the benefits of all these new products, we must take some risks. We have to be bold and move fast.
You were very good when you came here earlier this year and gave us examples of tied selling. We called in some witnesses specifically as a result of what we learned from you. We then went off on a comparative study to the U.K., the U.S. and to some other jurisdictions. We talked about all of these things. We would say, "What about tied selling? It is a terrible thing." They would say, "What do you mean, tied selling?" They did not know why we were so worried. They said that consumers want one-stop shopping. They thought it was great. If a financial institution is able to offer a myriad of products and only offers one when it has the customer right there, the institution is out of its mind. There is always an option if there is a proper competitive environment.
Would you not make a distinction? You have come down hard on banks getting into insurance in their branches in today's restricted and not-that-competitive environment.
Do I make myself clear?
Mr. Robert Fleischacker, Chair, Canadian Association of Insurance and Financial Advisors: I was with you until the last part about the non-competitive environment.
Senator Angus: It seems to me -- and correct me if I am wrong -- that when you only have one or two options for getting your loan, you are at a disadvantage. Let us take the example of the consumer who goes in for a loan and the lender says, "Okay, Charlie, I want you to get my credit card and my insurance, and so on," which may be a bit coercive. That really leaves the poor consumer -- unsophisticated as he or she may be because he or she is not being represented by you sophisticated folks -- in a bit of a bind. Everything in the MacKay report, it seems to me, is contingent upon the fact that there be a lot of options. The cross-selling per se, which I believe is another word for tied selling, is not necessarily all bad. It provides the consumer with an advantage.
Mr. Thibaudeau: It certainly could.
Mr. Fleischacker: There is an important distinction in terminology, as you pointed out. What we are talking about is coercive tied selling. Tied selling goes on, and it works in the appropriate environment. Cross-selling works and is acceptable with the appropriate regulation. It is coercive tied selling which is objectionable. What is in MacKay goes a long way to creating the appropriate environment for that to start happening. We do not understand why at this point the banks should know that in 2002 they will have the ability to retail. We have evidence now -- and you have the evidence -- that coercive tied selling does, in fact, go on. So we say, let them prove that they have cleaned up their act and then let us talk about it again. There is no stick. Once you give it to them, you have no recourse.
Senator Angus: I hear you but I think, with all due respect, it is somewhat self-serving. Here the legislators have agreed with you that coercive tied selling is a bad thing. As of tomorrow, once this legislation is proclaimed, I do not think they are going to go out willy-nilly and break the law.
Mr. Thibaudeau: I hope not.
Mr. Fleischacker: Absolutely not, but culturally it will take time for that to move its way through their organization. That would apply to any organization. You cannot change behaviour by changing the rules.
Senator Angus: We are all feeling our way along here. We are talking about an environment that does not exist yet, and I do not want the government or ourselves to be conditioned by your description of an entrenched, coercive tied selling culture that will ipso facto disappear by the emergence of all these active competitor institutions.
Mr. Thibaudeau: It is difficult to imagine how it will unfold. The issue is that there is very little to gain for anyone else but the people who would be getting the new right. That is in the report. There is very little gain here. If we talk about an underserved market, I do not know how underserved it needs to be. Does it have to be 100 per cent? What is the win for Canadians right away, and what could they lose? I think that they could be affected by this tied selling and also by the privacy issue. Privacy is a big issue because of the ability to target to you, based on what they know about you.
I do not like the idea that if I made a big deposit in my account yesterday, two days from now, after not having heard from the bank in months, I will get a call. That means someone is looking at that account. It is not a loan account. It is a savings account. You may say, "Well, that is good service."
Senator Angus: I might say that it is bad cash management by you and that the bank is just trying to help you get it out there in 90 days at 25 per cent.
Mr. Thibaudeau: There you go. However, I do not like the idea that they are looking. I would rather figure out what to do with the money myself and then tell them.
It is difficult to imagine how this could happen right away. If we get the new coercive tied selling rule and if we get some privacy legislation, then we can see how it works. If the climate we create for different banks to come into our country and operate is one that shows that this is a good place to work, that will then give a lot of choice to people. However, it raises some difficulties to say, "Here is what will happen," and at the same time say, "Oh, by the way, the two biggest can get together and then the next two can get together." It is hard to imagine this open concept.
Senator Angus: Did you make these points to the MacKay task force?
Mr. Thibaudeau: Yes.
Senator Angus: And they did not buy them 100 per cent. The point is that they are trying to strike a balance. No one seems to be a big winner. We are talking about a systemic change in our financial services sector.
May I offer a little anecdote? We were over in the U.K. talking to all the types in the business, particularly with respect to banking and what they should be allowed to do and what they should not be allowed to do and asking if we should change our system. At one meeting, after about two hours of chit-chat back and forth around the table, one chap stood up and said, "My dear senators, I am an observer of Canada. There is not much I like about Canada except banking. They do that very, very well and my advice to you is, "Don't muck it up.'"
That is why yesterday we were suggesting that if it ain't broke, don't fix it. However, I think the MacKay task force found that it is broken, in the sense that technology and globalization will pass us by. We have to do something to keep up with the times and we must have compromises on all fronts. That is how I read it. Do you agree with that?
Mr. Thibaudeau: I agree with the fact that there must be compromise, and that the status quo is unacceptable. I agree with all of those progressive thoughts. The key issue, though, is how do we do it? How do we get it done?
I do not think we should go out holus-bolus and say, "Hey, you get this now because we are going to give them that." We are in the middle of this thing; in other words, we are not the insurance company nor the bank.
Senator Angus: But this is where I would be, if I were you.
Mr. Thibaudeau: I must ask: What is this going to do?
Senator Angus: I think you fellows should be worried for other reasons. I go through the Internet and there are chaps on there, who are not members of your association, trying to sell me life insurance. They say, "You are over 60 and I see you are still smoking, but do not worry. I can get you this policy with XYZ company." I do not need to call you up at all.
Mr. Fleischacker: There is a distinct difference, though. You have the choice to respond. They have no lever. If you put that into a credit-granting environment, then someone has a stick. We do not believe that anyone should have a stick.
Senator Angus: And that has been made illegal.
Senator Callbeck: You mentioned in your opening comments that the tied selling legislation was proclaimed today. I should like to get your comments on that because the group who was here before you -- the Consumers' Association -- and probably you heard them -- indicated that they felt this legislation should be strengthened. Do you have any comments on that?
Mr. Thibaudeau: You mean that the legislation that was proclaimed today should be strengthened?
Senator Callbeck: Yes.
Mr. Thibaudeau: I am not sure that I have a good enough comprehension of that legislation to be able to suggest whether that should be strengthened or not. I do not know what they were referring to specifically, nor what they felt ought to be changed. Certainly, if they felt that the consumer was not going to have a fair shake, then we would be supportive.
Senator Callbeck: Tied selling seems to be a big concern of yours, so I was wondering if you were happy with the legislation that has now been proclaimed.
Mr. Thibaudeau: We are happy that it was proclaimed. We had been pushing hard on this one.
Senator Callbeck: And you are happy with the content?
Mr. Thibaudeau: Yes.
Senator Callbeck: Yesterday we heard from the chairman of the Royal Bank. He indicated that the Canadian Banking Association has a code of conduct that he felt should take care of this tied selling concern. Are you aware of that code, and what is your comment?
Mr. Thibaudeau: I can only refer to the evidence. It has happened, and it is happening. The code may be there. I do not know why it is not working. If it does work, it is not working all the time.
Senator Kelleher: Gentlemen, I would refer you to page 9 of your brief, the second to last paragraph. You say:
Given the clear lack of urgency among Canadians for seeing banks sell insurance in their branches anytime soon and given the likely considerable net cost to consumers if the government gives banks that power ...
That strikes me as a rather bald statement. What is your basis for that statement? How do you back that up? If you let more people sell insurance, that is, the banks, why would this be a considerable net cost to consumers? Would it not create more competition and hence drive down the cost?
Mr. Thibaudeau: I should like to address the last part of your question on the cost. In the MacKay report, they do not suggest that there would be an impact on price if the banks were able to retail insurance, so I did not see that as an impact. The cost is this ongoing, coercive tied selling.
In the Competition Act in 1976, they said that you are not allowed to do this, and it has been going on because the Ekos research suggests that it happens and our research demonstrates that it does. If it is happening and we have had a law against it, is it a penalty to give them a further opportunity now to add another product line? Before, it might have been just a mutual fund that they could encourage you to buy from them. Now there will be a life insurance product, too.
Senator Kelleher: How does that result in a considerable net cost to consumers?
Mr. Thibaudeau: Do you mean in a price tag?
Senator Kelleher: Yes.
Mr. Thibaudeau: It is not a price tag. I think it is a cost in privacy and in options.
Senator Kelleher: I would then take you back to page 6 of your brief. You must understand that we just received this brief, so we must cherry-pick with respect to our questions.
The middle paragraph reads:
Mr. Chairman, if the life insurance market in Canada is already well served and the level of coverage is already increasing, this would seem to undermine the task force's primary argument for bancassurance.
Forget the MacKay task force for a minute, which I know is difficult for all of us to do. To my way of thinking, which may be warped, just because something is well served and the level of coverage is increasing, is not a valid reason to keep someone else from entering a market, whether it be insurance or retail stores. For example, we have had the influx of these large stores from the U.S., the super stores. Quite frankly, I thought in many ways we seemed fairly well served by K-Mart and Zellers and all those people. I am not a great shopper, but it seemed to me that we were reasonably well served. However, I do not think it would have been logical to argue, "Do not let these big stores come into Canada because we have many stores here and we are well served."
It seems to me that that is what you are saying here. "Do not let the banks in. The market is well served, and the customers are well served, and we do not need this extra competition." That is what that paragraph says to me. To be honest with you, I have a little trouble with that. Perhaps you can explain it to me in a different light.
Mr. Thibaudeau: Earlier, I suggested that when the MacKay team did their study, they said that the real reason why we should have the banks retailing insurance in their branches is that the market is not highly served. I do not know if they thought that the 71 was not high enough. It starts there, because that is where the premise we are working on comes from. That is why they were suggesting they should get into retailing. It had no relationship to driving price, developing a more competitive product or better service. If that is the reason, we ask, on the other side of it, what will allowing them in really do for anyone?
I have no problem with Wal-Mart coming in or a bank coming in to sell insurance and competing with whoever else makes the product, because our members will sell that bank product. It has no bearing on the fact that I make a product and now someone else will sell the product, because maybe I can sell their product. The key issue here is that if I can hold the string on you to sell you the product because I have your credit, I can coerce you to do business with me. I do not think that is like walking into Wal-Mart or Zellers. It means that I must go to Wal-Mart because otherwise they will burn my house tonight.
Senator Kelleher: Let us try this another way. Your big problem or argument seems to be this ugly spectre, as you see it, of tied selling.
Mr. Thibaudeau: I lived it.
Senator Kelleher: Let me give you an analogy. Years ago, when I was a young lawyer trying to build a practice, I realized I would have people coming to me wanting to get a liquor licence in Ontario. This was back in the days when the only bar in Ontario was the Silver Rail. The liquor board had a theory. They said, "If we just give out a few liquor licences, just a few, the person who has them will really make a lot of money and will not be tempted to short the drinks or to sell to drunks or to kids under age. This will be great, because it will be easy for us to enforce, and everyone will be happy."
That is not the answer. Finally, they opened it up. They saw the senselessness of that theory in Ontario with respect to bars, and today there are all kinds of bars. I can get licences for a client today without a problem. Really, what they had to do was tackle the problem of short-selling and this and that. Sure, they had to get more inspectors, and sure, they had to have more vigilant enforcement, and sure, they had to add new rules to the liquor laws.
I am saying to you that my feeling is the same here about insurance. The key thing must be more competition, and let the chips fall where they may. If there are abuses, you do not stop more competition for that reason. You tackle the problem and get after the banks if they are doing tied selling and really nail them to the wall.
Because you see potential abuse here, to me, is not a reason not to have more competition in the market-place. The way to go at it is to enforce the law as it should be enforced. Like my friend Senator Angus, I am having trouble with your argument.
Mr. Thibaudeau: I appreciate that. What we are saying is something much like your liquor example. Let us get the rules in there and open it up. Let us not open it up and say, "We will make some rules." What comes first? What we are saying is that one thing should come before the other, and let us see if that works and then do it.
Senator Kelleher: I am glad we are having this little discussion. I get the feeling from your brief that you would really like to keep the banks out of it. I do not hear you saying, "Put the legislation in place and then there will be no objections to opening it up." I get the feeling from what you are telling me that you would be just as happy, thank you very much, if the banks would stay home, regardless of what legislation is put in place.
The Deputy Chairman: This is a bit confusing. Allowing the banks to sell insurance does not mean that we will have more insurance companies. They already have insurance companies. What it really means is that we will have more salespeople, who will be able to operate out of the branches. I agree with you, I do not think that there will be any difference in price nor any benefit to the consumer. It will mean that the loan officer will also be able to sell insurance. The people who do not have insurance companies have not been saying that they will have insurance companies if you allow this to happen and offer all these wonderful products. That has not taken place here. You sell all their products, so you know all their insurance, is that not right?
Mr. Thibaudeau: The thing is, they have every way of selling insurance now. They own insurance companies.
The Deputy Chairman: That is what I mean.
Mr. Thibaudeau: They want them in the branches in order to tie the two together. That is what we are trying to avoid. I do not mind the bank having a life insurance company; that is not the issue.
The Deputy Chairman: I do not think that they will have an insurance desk. I think that they will have a whole bunch of salespeople that do other things.
Mr. Thibaudeau: That would be very difficult on consumers.
Senator Kelleher: I think you have a bit of a hurdle here. If I were advising you, I would take a look at some sort of a period of time in which to get the new legislation in, rather than trying to have an absolute ban on this at any time in the future. I hate to tell you this, but I just do not think this will sell.
Mr. Thibaudeau: At the end of my opening remarks, we recommended that you take a really long, hard look at this.
Senator Angus: Like in 20 years.
Mr. Thibaudeau: We are not saying that is it. We are not in that mode. Certainly, we do not want it the way it could happen if we use the chairman's example.
The Deputy Chairman: The point is that you sell a lot of insurance products. They sell their own insurance products. There will be no more new life insurance companies or casualty companies, as far as they have been able to tell us. There will just be more salespeople. I agree with you that they have an advantage because they sell the product and extend credit. I think that anyone who extends credit and has the power of credit definitely has a decided advantage, even if it is psychological. It may not be overt, but there is no question in my mind that if you are asking for a big loan, you might be prone to buy another product.
Mr. Fleischacker: I am a practitioner, so I am in the ditches every day with people who make these decisions. It is a real issue. I mean, you can do all the research and gather all the statistics and everything else. A small-business owner who is dependent on bank financing to run his business is very sensitive to the "nudge, nudge; wink, wink" and "What about your RRSP?" That is a real fact of life and that is not a level playing field. That is the essence of why we object to this. We are not saying no, not ever, but why, when we know that the fox has been in the hen-house already, are we giving him this wholesale privilege to do it at a predetermined date?
Senator Kelleher: Royal Assent is not being given tomorrow to rather tough legislation.
Mr. Fleischacker: Let us see how they respond in that environment and revisit the subject at another date in the future.
Senator Kelleher: What does that mean? That was the question I put to the Consumers' Association when they were here.
Senator Stewart: Earlier, the witnesses dealt with the problem of the future, as Senator Angus opened it up before them. I wish to do something quite different. I want them to look back. The experience of the past is immediately relevant to the question before us.
What is your view as to the merger of the four pillars, particularly in the case of insurance and banking? It seems to me that what we are talking about now is, in a sense, a follow-up on that merger of insurance and banking. We are going farther than we went before.
There are strong arguments for the merger of those two pillars. However, in your view, what are the disadvantages of merging banking and insurance?
Mr. Thibaudeau: That is a very interesting question. You say two pillars and that is what is left, in a sense. We did have a pillar that we called the securities industry. We had a pillar called the trust industry, or trust companies. Banks and insurance made up the fourth. Now we have two pillars because the banks have already taken over the securities people. They have taken the trust companies out and they are now working on the insurance companies.
We are concerned that if it becomes one pillar -- just the banks -- which provide a few services, rather than a financial institution providing many services, then that is just a matter of culture. It is hard to define it, no matter whether you use structure and different types of holding companies or whatever, in order to create this entity.
However, take the two pillars: banks and insurance. The banks became so strong because they got loaded up with the trust and the securities. They are very overpowering financial institutions. There is a heavy push there.
It has affected the insurance industry to a certain extent. I do not sense that a whole lot has happened to the practices of our members at this stage of the game, but if we end up with one or a few institutions in Canada providing financial services to people, there will be very little choice for consumers and very little role for advisors.
Senator Stewart: I have the impression that buying insurance is increasingly like buying stamps. There is a standardized product, and you go in with your money in hand. You may not go in at all. You may just use your phone to call in. You give your age, perhaps, and they tell you what is the standard product. Is that the future?
I think 35 per cent of insurance in the United States is sold by telephone from Jacksonville, Florida. Is that the insurance business we are being pressed toward, not willingly, perhaps -- standardized products?
Mr. Thibaudeau: There is a myth out there that life insurance can be a transactional product. I do not know who are the big proponents of that myth.
Senator Kelleher: Telephone sellers.
Mr. Thibaudeau: They are likely alternate distributors, so we have a vested interest. However, I think that our interest is based on experience.
If you phone my number and say you want to buy a policy, I will ask you how old you are. If you are on the Internet, you are asked how old you are. The machine says to you, or the person on the other end of the phone asks, who you would like to be your beneficiary. You may say, "I am not sure, what do you think?" If the person on the other end of the phone is not a trained professional, or if you are dealing with a machine, I do not know what the response would be. They may come back to you and say, "Well, who do you care about?" They will go through a litany of choices. However, is there any advice as to what could happen if you name a certain person as beneficiary, as opposed to your estate, or a whole bunch of other options? That is one situation relating to beneficiaries, let alone the conditions of the contract, which vary. There is no stamp. There is no normal product because they vary according to the conditions you want.
Senator Stewart: While I am having breakfast in the morning, I am plagued by ads from Norwich Union. They say, "Just call in; there are no examinations." You just have to be within the time bracket. I use that as a specific Canadian example of what I am told is increasingly the case in the United States.
You, of course, are giving me the ideal problems that may arise from these kinds of standard proposals. I gather you conclude that there are very good reasons why this kind of standardized policy should not be encouraged.
I will tell you why I am asking this. I am trying to bias your answer. I suspect that the banks, not having a long experience in the insurance business, will tend to resort to what I call the stamp approach. Is that right, in your opinion?
Mr. Thibaudeau: I believe that would be the first step. That would make it much easier to distribute without using a trained professional. My belief is that that would be the first place they would go.
I will go back to Senator Angus' comment about New England. The life insurance business in Canada is very sophisticated relative to almost any other country I know. Perhaps it is most similar to that of the United States. The development of a product, how it is used, where it can apply and the different options you can choose is very advanced compared to what you might be able to buy in England, for example, or Australia. Product development in those countries just has not been there. I do not know why, but I have seen examples of that in dealing with other associations in those countries. That is part of it. The bancassurance issue, whether it be in France or in England, is a different product situation. Their standard product is likened to an RRSP with a life insurance death benefit. Therefore, a whole lot of people buy it because it is part of their retirement savings plan. It distorts the figures and the numbers that you read and see.
It is difficult to compare apples and apples in an environment where we have five or six big banks, a whole lot of life insurance companies and sophisticated life insurance products, and a country that says if you die, we will pay this, and if you retire, you will get a few bucks.
Going back to the no-agent-will-call situation, you need to experience that to understand it. It has an application and a place.
Mr. Fleischacker: A certain percentage of the population are do-it-yourselfers. No matter how cheap the oil change may be, they will get under there and change their own oil. They will buy their own insurance, as well. In other words, there is a niche market opportunity. However, to suggest that the industry is moving to boiler-plate solutions is regressive. I think our profession has moved towards process instead of product push. In fact, our association is way out in front in trying to develop and elevate standards of education and the quality of work that people do. If people are buying insurance in a vacuum, whether it is direct or someone is just coming and talking about insurance, they are being done a disservice. It must be a holistic approach to financial management. That is where the industry is moving. Internet providers will get some percentage of the market.
Senator Stewart: You believe that the banks will not be able to conform to the high criteria, which you have just now described.
Mr. Fleischacker: It has certainly been our experience with some work we have done with the Financial Planners Standards Council in Canada.
The Deputy Chairman: Thank you very much. This has been a very interesting afternoon.
The committee adjourned.