Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 28 - Evidence, October 1, 1998
OTTAWA, Thursday, October 1, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: As you know, this afternoon our report will be tabled in the Senate. Articles appear in the newspapers today, in both The Globe and Mail and The Financial Post. I want to apologize to the honourable senators for the fact that it is out there. I will do the same on behalf of the committee when I present the report today.
Senator Oliver: Which report is that?
The Deputy Chairman: I refer to the comparative regulation report which I am presenting on behalf of the chairman in the chamber this afternoon. I note that it is out in the paper, and I will mention that when I present the report in the Senate. I apologize for the fact that it has been leaked to the media before the senators have seen it.
Senator Angus: For whom are you apologizing?
The Deputy Chairman: I am apologizing on behalf of the committee. I do not know who leaked it, although I do care. I just do not think it should be out there yet. It should be presented to the Senate before it is presented to the newspapers.
Senator Stewart: There is no question that it is a breach of parliamentary privilege.
The Deputy Chairman: That is right. It is a shocking breach.
Senator Stewart: There was a time when such a leak would have been regarded as a very serious matter in the House of Commons.
May I raise another aspect of the same episode? I have had some calls as to the content of the report as described in the newspapers. It seems to me that if the newspaper report is wrong on serious points, you should make mention of the incompetence of the person who received the leak as a reporter, if indeed the newspaper report badly misses the content of our committee report.
Senator Meighen: I agree with you, Senator Stewart. Perhaps we should make efforts through the committee chairman's office to find out how this occurred.
Senator Angus: Yes, and also to find out when it occurred.
Senator Stewart: Yes. That certainly is the question which springs to mind, but I draw back from that a little bit. I do not think we should waste too much time on it. We cannot rectify what has been done. It is done. Unfortunately we must live with it.
Senator Meighen: It seems endemic in this city.
There is another matter which I would like to raise to get the feelings of colleagues here. I, for one, am quite disturbed by the reports in the newspapers offering different reasons for the dismissal of the chief actuary of the Canada Pension Plan. The chairman of OSFI is reported to say that it was a result of a personality conflict. Mr. Dussault gives a very different version and makes, I think, a very serious allegation.
I have no idea what the truth is, but I think it behooves us to make some formal inquiries in this regard. Would it be in order for us to move to ask Mr. Palmer to come and answer questions put to him by members of the committee as to what happened? We are talking about the Canada Pension Plan, the savings of Canadians, and the role of the chief actuary is obviously a very crucial one.
If the whole office is in turmoil or if there is any truth to what Mr. Dussault says, then we have a serious problem on our hands.
I do not know whether my colleagues agree with me, but I would move that Mr. Palmer, the Superintendent of Financial Institutions, be invited to appear before the Standing Senate Committee on Banking, Trade and Commerce at the earliest opportunity to answer questions regarding the dismissal of the chief actuary, Mr. Bernard Dussault.
The Deputy Chairman: Any discussion on the motion?
All those in favour?
Carried.
Our first witness is Mr. Duff Conacher. Please proceed.
Mr. Duff Conacher, Coordinator, Canadian Community Reinvestment Coalition: Honourable senators, thank you for this opportunity. I am sure you have all received a copy of the recommendations that we as a coalition have made in contrast to the task force recommendations. I will be focusing on that today. Also, we have provided background information about the coalition including a list of the over 100 organizations from every province and the Northwest Territories, representing over 3 million Canadians. Also attached is a list of notable Canadians who are supporters of the coalition's proposals for financial institution legislation changes, and a summary of our recommendations. We have also included one-to-two-page summaries of each of the six position papers released by the coalition through last fall, and specifically the paper on the proposed bank mergers which was released at the end of May. I will be providing the clerk with a full copy of each of the six position papers for further reference.
The coalition was formed in December 1996 and has brought together anti-poverty, social justice, consumer, community economic development, youth, women's, small business and other community groups from across the country. All are focusing on their concerns about financial institutions and how financial institutions are serving Canadians. They are also focusing on the changes that we would like to see to financial institution legislation.
Essentially we are asking what banks and other financial institutions are doing with our money. We also want to know what the federal government will do to ensure that these institutions use our money to support sustainable economic development in Canada, and to ensure that the banks serve all Canadians fairly and well.
We know that our banks are doing very well in terms of profit, but we need much more information about how they are serving Canadians. There is a lot of power in these financial institutions, specifically with banks, but not much accountability. We do not know enough about what banks are doing in terms of serving people. We do not measure it. In particular, when you are considering proposed mergers, if we do not measure how our institutions serve people now, how will we ever judge the truth of their claims that service will be better post-merger?
A wise person once said, sunshine is a good disinfectant. It helps ensure there is no gap between the rhetoric of the leaders of financial institutions and the reality of the over 20 million customers of those institutions.
To give you but one example, in the August 3 edition of Maclean's magazine, there was a brief article about a textbook used by the Institute of Canadian Bankers in training its loans officers. The Royal Bank, in particular, made it mandatory, up to the point when this was disclosed, that all its loans officers go through the training course in which this textbook is used.
Among other things, the textbook says that it has been suggested that entrepreneurs are deviant or marginal characters spurred on by adverse experiences in early childhood. The textbook goes on to say that research has found that male-owned businesses perform better than female-owned businesses in part because women's upbringing focuses on sharing and taking turns, rather than on winning and taking risks.
At another point, the textbook refers to a survey by Multiculturalism Canada. Maclean's checked with Multiculturalism Canada and found that the survey had never been done, but the textbook claims that a survey by Multiculturalism Canada revealed that, among immigrant groups, Greeks and Jews are the most entrepreneurial. It goes on to cite other studies which claim that there is a minimal level of entrepreneurial activity among Caribbean and Filipino immigrants residing in Canada.
When Maclean's contacted the Royal Bank, spokesman Brian Smith told the magazine that he saw nothing wrong with the statements in this textbook. A day later, the senior public affairs advisor -- note, it was not the loans advisor but their public affairs person -- issued a statement describing the book's contents as offensive and stating that they would withdraw the book from the program.
As you can see, sunshine is a good disinfectant. When you shine a bright light on the banks' attitudes and activities, they correct those attitudes and activities if they show patterns of discrimination or poor service.
The power in our banks needs to be matched by accountability laws, because the banks essentially control many areas of the financial sector. They are also operating in over 120 countries, and they are doing very well. One of the banks' claims about the need to merge is that they cannot compete on a global scale. In fact, CIBC is in the top 10 in many major international finance areas. Toronto-Dominion Bank has the third-largest discount brokerage in the world, being the fifth largest bank in Canada. Scotiabank, the fourth largest bank in Canada, is tenth in big-business syndicated financing.
These five banks control 70 per cent of all deposit-taking assets in Canada, a majority of small-business investment brokerage assets, all but one of the large trust companies, and a majority of consumer credit and mortgage lending.
We know that the banks are also very profitable, more profitable than other corporate sectors. This evidence alone, according to an institute at McGill University, shows the lack of competition in the current industry, let alone what would happen post-merger. The level of profitability, on average, for the finance industry was more than double that for non-finance businesses in 1997.
All this power and profit make one think that the banks have economies of scale and would therefore be able to serve Canadians very well and to reinvest in that service.
However, the National Quality Institute, an independent agency based in Mississauga, surveyed over 8,000 Canadians in 1996 and 1997 and found that banks ranked in the bottom five in terms of customer satisfaction among 21 industries.
In addition, over 400,000 adult Canadians do not have a bank account, mainly because the banks often make it hard to open an account. They require customers to provide excessive identification, to have a job or to keep a minimum amount of money in bank.
In February 1997, the banks agreed with the government to lower those barriers. The three surveys that were conducted since then, including a survey by the MacKay task force, found that those barriers still exist. We did a survey as well and found that five of the big six banks were violating the February 1997 agreement. The task force concluded that they were very sceptical that the February 1997 agreement had had any effect.
In terms of lending to small and medium-sized business, yesterday we released an analysis of lending from 1995 to 1997, which I provided to the committee. Among other things, it shows that both the number of small and medium-sized business customers and the amount lent to those customers decreased during 1995 and 1997, despite the bank's claims to the contrary.
As well, of the $90 billion of new lending that was created through that two-year period, over $89 billion -- that is, 89 per cent -- was lent to big businesses, some of which were loans of $5 million or more. This occurred at the same time that the number of big business customers decreased. The banks lent more money to fewer big businesses. They are now disclosing loan losses. The pattern over those two years was that the banks lost almost $200 million more in their lending to big business than they did in their lending to small business.
Our banks claim that the system is better in Canada than in other countries, but that is simply not good enough. When you look at it very closely, as the task force did, you will find that it is not better in many areas.
For example, in terms of service charges, the task force identified four countries where the service charges, on average, are lower for both small business and individual accounts. In one country in particular, the United Kingdom, there are no service charges. You often hear our banks compare our service charges to the United States and say that, on average, they are lower than the U.S; but they neglect to mention that there are four other countries out there in the world that have lower service charges.
Our banks are also claiming that they face foreign competition and that this is a major reason for merging. Once again, that is a false claim. In fact, there are now fewer foreign banks in Canada than there were in 1987 and they only hold 7 per cent of the total banking sector assets in the country. The fact that the CEOs of the merger-seeking banks continue to make this false claim shows that they will say anything to get what they want. It reveals a lack of integrity and should raise questions about every other argument that they make.
Foreign banks have faced significant barriers to entering Canada for over 30 years. They will continue to face barriers even under the changes that Canada has promised to make under the World Trade Organization agreement that was signed in Geneva last December. The cost of setting up branches, training staff and attracting customers mean that it is very unlikely that the foreign banks will ever offer serious competition to our big banks. Evidence for that is in Australia, which has been very open to foreign banks for seven years. Foreign banks have made a concerted effort to enter the market, but only have a 3 per cent market share.
The banks often also cite the appearance of foreign credit card companies in the country and say that this is part of the tidal wave. According to Industry Canada's Office of Consumer Affairs, who compared the prices being offered by these banks, once you get past the six-month introductory offer, for example, offered by the credit card company MBNA, you find that their prices are no better and in many cases worse than the current gouging that is occurring with credit card interest rates and fees by our domestic banks.
The market control of the banks would be quite significant in many areas. As I have already mentioned, it is quite significant with the big five banks and would be even more concentrated if you had two big banks.
The banks' agenda is to focus on multi-billion dollar loans. The evidence from other countries shows that bigger banks lend a smaller portion of their loans to the job-creating sector -- that is, the small and medium-sized business in our country.
Bigger banks want to withdraw service from communities across Canada. Mergers would give them the excuse to do so. They would say that duplication exists and they want to eliminate the redundancy and become more efficient. All of these are very loaded terms and they negate, ignore and downplay the significant cost to individual consumers. The mergers will lead to the closing of at least 20 per cent of the total branches, according to the Dean of the University of Western Ontario Business School. It will lead to job losses of at least 20 per cent of the total number of people employed by the merging banks.
This is another area where the banks' claims about the mergers should be seriously questioned. They can claim that they employ more people but, as in most situations with our banks and other financial institutions, we only have one number, namely, the total number of people employed by the banks. That one number cannot accurately sum up what is happening. When the banks say employment has increased over the past several years, they neglect to mention that the banks have also taken over about 300 companies in the past several years. Of course, their employment will go up when they are taking over a whole bunch of businesses.
One of the things that needs to be tracked, but currently is not -- therefore, not permitting the government or anyone else to hold the banks accountable to a pledge to preserve or create jobs -- is the number of jobs created and cut year by year for the institutions. We need to track these jobs subsidiary by subsidiary and division by division.
In another area as well, we do not have significant disclosure. Currently, banks are only required to disclose their total foreign income or loss. They do not have to break it down country by country. In a time when they are active in 120 countries, we should be tracking what they are doing country by country so that we can know whether they are losing money in half of those countries and subsidizing those losses by gouging, and nickel-and-diming people here at home.
A U.S. study by a Federal Reserve Board economist reviewed 39 studies of thousands of bank mergers in the U.S. The study shows that even shareholders will not benefit from the mergers because none of the mergers in the U.S. has increased the efficiency or profitability of the bank.
In other words, if the government fulfils the global dreams of these few big bankers, they will create national nightmares for millions of bank customers in Canada. It is a stark choice as to whether the government should blindly follow the rhetoric of the banks or open their eyes and address the concerns of over 20 million bank customers. Canadians are saying, quite clearly, that we need and want better banks, not bigger banks.
How will we get better banks? This committee set quite a good stage and tone in its August 1995 report, which was leading up to the 1996-97 reform of financial institution legislation.
Page 13 of your report states:
The subject of financial reform has too often been addressed in the past solely from an industry perspective. Reform, this time, should reflect a consumer rather than a company-focused orientation.
Unfortunately, the 1997 reforms did not include in the legislative changes any measures that would protect consumers, except the provision on tied selling, which was not proclaimed in 1997 but as you know was just proclaimed a couple of days ago.
All of the other measures were set out in voluntary agreements that were made behind closed doors with the banks, with little or no consumer input. For example, Doug Peters, the Secretary of State of Financial Institutions, between 1995 and 1997, met with 45 industry representatives and spoke at nine industry conferences but did not meet once with a consumer group or speak once at a consumer conference through that period.
We are very happy to see that the MacKay task force has adopted and recommended about three-quarters of what we as a coalition have been recommending. They have made it quite clear that there is no financial institution accountability and that the market-place cannot work and consumers will not be served fairly and well if the following facets of an accountability system are not put in place.
The first factor is disclosure. You must track what the institutions are doing; otherwise, you do not know the problems or extent of them. You need clear rules and rights in legislation. You need an independent agency that has the resources to inspect, audit and ensure that the disclosure is correct and that the rules are being followed. Finally, you need penalties that are significant enough to discourage violations by institutions that often have hundreds of billions of dollars in assets.
I will take you through the recommendations that we have made and the gaps that we see in the task force report. Our first recommendation is that there be a detailed system of disclosure of information on lending investment and service as they have had in the U.S. for over 20 years.
I understand from a story in The Globe and Mail on June 19, 1998 that this committee examined the U.S. system. Senator Kirby indicated in that article that the U.S. banks, when they were under pressure under the community reinvestment act system to look at investment in communities in which they are doing business, found investment opportunities they otherwise might have overlooked. These local opportunities in many cases turned out to be profitable.
This is the system that we are recommending. Unfortunately, the task force has left out a number of the parts of disclosure -- lending activity, investment and service activity -- that we recommend and that we feel are essential to hold banks accountable. Those are detailed underneath that recommendation.
The community that is being served should not be defined by the institutions. The format and content of the community accountability statements that are done annually, which the task force has recommended, should also not be left to be determined by the institutions. The institutions can then very simply draft documents that emphasize the positive and downplay the negatives and poor service records.
In addition, there should be a review system, sanctions and incentives, as are in place in Ontario and in the U.S., including that a poor service record should be grounds to deny application to expand, merge or take over another institution.
On the subject of the bank mergers, our second recommendation is that there be a moratorium on any bank expansions. This moratorium would include expanding their powers by giving them auto leasing or insurance sales from the branches or any other expansions or takeovers of other institutions until community reinvestment legislation is in place in Canada, and also until the promised changes to foreign bank entry laws have been made.
By waiting out this time period, we will know whether foreign banks are providing and will provide significant competition to Canada's big banks. At this point, there is no evidence that they will. We will also know whether our banks are serving Canadians fairly and well. As in the U.S., why would we allow a bank to increase in size it is serving people poorly? It will then just serve more people poorly.
We also recommended never removing the 10 per cent ownership rule. The review process for the mergers and other expansions should take into account a community reinvestment assessment.
The gap we see with the task force is that the proposed ownership rules, especially for holding companies, should be stricter to ensure that the Canadian banking system remains Canadian-controlled and can be regulated effectively.
One of our key recommendations, which the task force has also recommended, is that financial institutions and government cooperate in enclosing a one-page flier with a lick-and-stick envelope that people would receive it in their bank statement, their credit card bill or their insurance premium statement envelope. It would describe the organization and invite them to join. Environics surveyed over 2,000 adult Canadians and found that the majority of Canadians want this. Of those polled, 43 per cent indicated that they would be likely to join if they received the flier; and 64 per cent indicated that if a financial institution refuses to enclose the flier voluntarily, the government should require them to enclose it.
American institutions usually receive a 3 to 5 per cent response rate. In Canada, where 20 million fliers would be sent to bank customers, a group would be formed of 600,000 to 1,000,000 members. According to the Environics survey, people would be willing to spend $20 a year as a membership fee, which would give the group an annual budget of $12 million to $20 million.
This idea alone would be beneficial in helping governments to regulate banks. It would help people shop around. It would do complaint handling and significant amounts of consumer education. It would also level the playing field between the banks and consumers.
The Royal Bank has reportedly spent $7 million on its pro-merger campaign. The banks also donated $1.1 million to the Liberal Party last year and $2.2 million in total to political parties. The Canadian Bankers Association is currently engaged in a $20 million campaign to convince Canadians that what is good for the banks is good for Canada.
There is no way that consumer groups can match this spending power. It is easy for banks and other financial institutions to simply add a nickel here or a dime there to their charges and shift that money to lobbying and advertising campaigns.
This flier would cost the government and institutions nothing, and it would balance the market-place in one easy step. The task force has recommended that the government and financial institutions cooperate and facilitate such an organization's success.
We also have strong recommendations, as I mentioned, with regard to access to basic banking services. The voluntary agreement that the banks made with the government in February 1997 has not worked. Groups have been trying to work with the financial institutions, specifically the banks, for over 10 years, and nothing has happened. There has been no change. The Canadian Bankers Association survey conducted this summer found that four of ten people who were trying to open an account or cash a government cheque were turned away arbitrarily and for an unjustifiable reason.
Without any further delay, as in several U.S. states, deposit-taking financial institutions should be required to provide access to basic banking services. Unfortunately, the task force decided to give the banks and other financial institutions more time. No more time should be given. It has been over 10 years since this issue was raised and documented as a problem.
The fines in the Bank Act of $100,000 a day would be a significant incentive if banks continue to refuse to serve people fairly and well. It is time that this gap be closed.
In terms of branch closures, we agree with the task force that there should be a public review and also a four-month notice concerning any branch closure. However, we feel that, for the community to have full information regarding the reasons for branch closure, the branches should be required to disclose their profit, loss and net income record for the previous few years. Banks often give the fact that a branch is not profitable as the reason for closure. This recommendation would force them to prove that.
In terms of the ombudsman, privacy protection, as well as the tied selling recommendations that have been made by the task force, we see only small gaps. We feel the ombudsman should have the power to make binding rulings, as is the case in Britain. As concerns tied selling and privacy, the task force was not specific. Again, if the fines are not big enough to discourage violations by companies with multi-billion dollar profits and hundreds of billions of dollars in assets, then they will just view it as a cost of doing business and continue to violate people's privacy and coerce them into buying things that they do not want.
Finally, our tenth recommendation is that all these measures should apply to all financial institutions operating in Canada, whether foreign or domestic, whether with branches or electronic operations. The task force has been very strong in stating that these measures should apply to all these institutions.
Overall, these issues of consumer protection and accountability measures are not special interest issues. We have a large broad based coalition that represents over 3 million Canadians. Polls show that Canadians want to be protected and that they want better banks, not bigger ones. All adult Canadians, and many youths, deal with financial institutions in some way or another.
However, to date, the federal government has not taken consumer issues and concerns seriously. Both Doug Peters and Industry Minister John Manley have said consumers should just shop around to protect themselves. The task force very strongly rejects this attitude and says that consumers must be empowered. It states that disclosure and transparency rules must be strict and comprehensive, and that there must be a comprehensive and effective accountability system in order to serve all stakeholders fairly and well.
In conclusion, we have been working to hold financial institutions accountable to serving individuals and communities across the country fairly and well. We will continue to do so as a coalition, along with the individual groups across the country.
Given that the task force has recommended three-quarters of what we want and left it open for almost every gap to be closed, however, if the institutions do not perform well, and if the government does not enact these recommendations, we will hold it accountable. We will hold it accountable for every person whose privacy is invaded; for every person who is coerced into buying something that he or she does not want; for every person who signs a contract that he or she does not understand; for every person arbitrarily turned away from opening a bank account or receiving basic bank service; for every person gouged by excessive service charges and credit card interest rates; for every business that does not get a loan that it deserves when it is trying to create jobs in the country; and for every financial institution that the government gives some favour to, including allowing it to merge or to take over another institution, even though it serves its customers badly.
The task force has set out a complete and comprehensive accountability and consumer protection system. I have noted the gaps that we see. Essentially, we believe that the true test of our democracy will be whether the citizen agenda is finally put before the corporate agenda, and whether a few big banks, who want to get bigger, will come before over 20 million bank customers who want our banks to serve them better.
In your report, we call on you to strongly recommend the consumer protection and accountability measures that the task force has recommended. We also call on you to close the gaps that have been left. They are essential gaps. Many key areas are missing one of the five key facets of an accountability system that is effective and works well.
Senator Angus: Good morning Mr. Conacher, and welcome back to the committee.
I notice since your last appearance that your even-handed, moderate, balanced view about our banks has not changed too much.
I want to ask a couple of preliminary questions about who you really represent. I know we have asked you some of these questions before.
The list, which we received today, shows that you are here representing something called Democracy Watch. As I listened to your evidence, I heard you say that you are representing something called the Canadian Community Reinvestment Coalition, which you talked a bit about.
First, who are you representing?
Mr. Conacher: I am the coordinator of Democracy Watch. Democracy Watch has brought together over 100 organizations from every province and the Northwest Territories. The collective membership represents over 3 million Canadians. I am the coalition's chair and spokesperson, as chosen by the groups in the coalition.
Senator Angus: Is Democracy Watch an association, a legal entity?
Mr. Conacher: Yes. It is a non-profit incorporated citizen advocacy group based here in Ottawa that focuses on government and corporate accountability issues.
Senator Angus: Is there a president and are you it?
Mr. Conacher: I am the co-coordinator. No, there is no president.
Senator Angus: Are there other officers or is it just a one-man show?
Mr. Conacher: No. We have a small board of three, along with an advisory committee made up of four people, including Ken Dryden, David Baker, Mary-Lou McPhedran and Lise Blanchard.
Senator Angus: Are those four you just named in addition to the three on the board?
Mr. Conacher: Yes, they make up the advisory committee.
Senator Angus: Are there three other individuals who work with you?
Mr. Conacher: No. There is myself, Erin Freeman and Craig Forsey.
Senator Angus: You talked about these 3 million Canadians being part of the Democracy Watch organization or the coalition. Should I just assume that you are speaking for both entities and that those 3 million Canadians are members of both?
Mr. Conacher: No. They are members of the groups within the coalition.
Senator Angus: How do you get your funding? Do you send out a bill or do you have fundraising campaigns?
Mr. Conacher: Democracy Watch is funded by a combination of foundations and individuals from across the country. We have a policy of not accepting government or corporate donations.
The coalition is funded by foundations, including the Trillium Foundation, of which you may have heard; the J.W. McConnell Family Foundation; the Atkinson Charitable Foundation, and the Samuel and Sadie Bronfman Family Foundation.
Senator Angus: Do you feel that you are duly mandated and a legitimate spokesperson for Canadian consumers on all issues?
Mr. Conacher: On all issues? We speak on the issues on which the groups in the coalition have shown concern and which we have addressed in the six position papers. The coalition certainly has the broadest and largest membership of any consumer group in the country.
Most consumer groups that will come before you -- I know the ones that work on financial services issues -- have memberships of, at most, 3,500 Canadians. Taking into account the overlapping of the membership groups, the coalition has a total membership of over 3 million Canadians. I believe we are the broadest and, therefore, the most representative.
On some issues, our position papers cite polls that have been done either by us or by other consumer groups. For example on this issue of the flyer going out, that was a poll of 2,000 Canadians. To the extent that you take into regard any polls, you would regard that as a representative sample of Canadians accurate to plus or minus.
Senator Angus: So in your office you have, I assume, a list of the names of these 3 million people? Is that right?
Mr. Conacher: No. Through the coalition groups we do. You can see several very large organizations, including the National Action Committee on the Status of Women, the Canadian Labour Congress, the Council of Canadians, the National Anti-Poverty Organization. These are all involved, along with many others who are active and who have members more at a provincial and local level.
Senator Angus: To complete my questions on the financing, you indicated you get no funding from governments but you do get substantial funding from foundations. However, if I understood you well, the individual members of the different bodies which you claim belong to your association or coalition do not pay a membership fee.
Mr. Conacher: We wanted to have the coalition be accessible and open to all groups, regardless of their financial resources. We especially wanted to involve disadvantaged groups, groups that work with people with low incomes. As I am sure the National Anti-Poverty Organization will tell you quite clearly when they appear, such groups often do not have the resources. We have a sliding scale based on the income of either an individual or an organization. It is voluntary as well. We have received some of our funding, a very small percentage, from the groups involved in the coalition.
Senator Angus: Would you mind if I asked about your annual budget, just to get a general order of magnitude?
Mr. Conacher: The coalition's annual budget is about 1/1000th of the amount that the Royal Bank has spent on its lobbying campaign for the mergers, according to Southam News.
Senator Angus: You do not want to give me a number specifically?
Mr. Conacher: We have received, over two and a half years, $290,000 in funding.
Senator Angus: This coalition was founded in December 1996. What about Democracy Watch? What is its budget? Does it have a budget?
Mr. Conacher: Yes, it does. Our annual budget is about $35,000 to $40,000. I know you may have missed this opportunity with Mr. Cleghorn, but I hope you will ask the other heads of banks how much they are spending on their lobbying and advertising campaign for the mergers and on their salaries, as well, pursuing the line of interest that you obviously have in the resources on either side of the debate.
Senator Oliver: We are not studying mergers in this committee.
Senator Angus: I would like to just get your answers to my questions. Are the ideas outlined by you today in your testimony your own personal ideas?
Mr. Conacher: No. In each case the staff has drafted the paper after doing research and canvassing the member and supporter groups of the coalition. In each case, a draft of the position paper was sent out. The member and supporter groups had five weeks to respond to the draft and to suggest changes. Then we would finalize the draft and send it back out to them before it was released.
Senator Angus: Was it send to Democracy Watch, too, or just to this coalition?
Mr. Conacher: It is pretty easy to send it to Democracy Watch since I am the coordinator of Democracy Watch and also chair of the coalition.
Senator Angus: I was interested in the list, the difference between the bold-type writing and the italics. What is the difference between a member and a supporter in terms of your understanding?
Mr. Conacher: The members have agreed to put time into the coalition and have the resources to do so. The supporters are supporters in terms of not having as much time. They still review some materials, the ones in which they are particularly interested, but they have not agreed to put in what the members have, which is a few hours per week.
Senator Angus: Bearing in mind that I admonished you earlier, sotto voce, that it is always dangerous to assume anything, and therefore I need to have some affirmation from you, would it be fair for me to conclude that the names on the list that are not in bold would have had no significant input into your comments this morning?
Mr. Conacher: No. They have actually.
Senator Angus: Have all of them done so?
Mr. Conacher: I am reflecting the content of the position papers and the news releases; they are also reviewed, in some cases by the executive committee and in some cases by all the members and supporters.
Senator Angus: So it is your testimony to this committee that, if we asked any one of those organizations listed, be they in bold or not in bold type, about the views that you expressed this morning, they would be be ad idem? They would agree with you 100 per cent?
Mr. Conacher: Yes.
Senator Angus: So then you do represent, and it is your evidence to us that you are a legitimate spokesman for, a very broad range of Canadians on these matters -- roughly three million people?
Mr. Conacher: Yes.
Senator Angus: It has been said, and it would appear from your evidence, that you are an anti-bank person, but I hear through the grapevine that in fact you are not anti-bank? Could you set us straight on that?
Mr. Conacher: Our coalition is advocating better banks, not bigger banks, based on the evidence.
Senator Angus: So you do not want to answer my question directly. Earlier it sounded as though you really hated the banks: they are not accountable; they are perverse; they should be fined -- I made a list while you were speaking; they make false claims; they are not significant disclosers; they are gougers and nickel-and-dimers; and there was a plethora of other pleasantries that you outlined.
And yet I understand that, really, you think the banking system in Canada "ain't all bad." I refer to the status quo, subject to these certain new disclosures to which the banks have all agreed and which they bought into right here before our committee this week.
Mr. Conacher: The task force, with 9 out of 10 members representing industry or business and only one representing the consumer, agreed with three-quarters of what we are recommending and left it open for the fourth quarter to be obtained if the banks did not cooperate. As we mentioned in the preamble to the comparison of our recommendations and the task force recommendations, we agree with the vision and framework set out in the task force report in recommendations 53 to 55 and 57 to 63, which make it clear that financial institutions would only serve all Canadians fairly and well if consumers are empowered. They make it clear that disclosure and transparency rules are strict and comprehensive; that a comprehensive accountability system must be enacted; and that financial institutions, especially banks, must serve all stakeholders fairly and well because they have benefited historically from regulatory protections and provide essential services to Canadians.
Senator Angus: Is there anything good about our banking system? Everything can be improved. The banks came here quite openly and said that they agreed with these task force recommendations. They are aware that the world is changing and that changes should take place.
Mr. Conacher: We have approached all the banks individually and the other federally regulated financial institutions and asked them to enclose this flyer voluntarily and they have refused to do so. If they agree with the task force recommendations, I assume they will be calling me soon and saying that they will be enclosing the flyer, since the task force says that governments and financial institutions should facilitate such an organization's success.
Senator Angus: Do you think that they should call you about that? Maybe they have other kinds of flyers that would be even better than your flyer from South Dakota, or wherever it is from.
Mr. Conacher: Correct me if I am wrong, but you said that they came before you and agreed with these recommendations.
Senator Angus: I will put it as accurately as I can.
Mr. Conacher: Recommendation 56(a) states that governments and financial institutions should facilitate the organization's success. They specifically mention our fourth position paper and cite its contents in the sections of the report to do with this particular recommendation.
Senator Angus: We are here to listen to what the citizens have to say about the MacKay report. We heard from Mr. MacKay and some of his colleagues on Monday morning. We also heard from the Canadian Bankers Association and the Consumers' Association of Canada, who claims to represent many Canadian consumers. I assume they are a member of your group, are they not?
Mr. Conacher: No, they are not. They accept money from the Canadian Bankers Association and other financial institutions and associations. As coordinator of Democracy Watch, I find it unacceptable for a consumer group to be taking money from industry, as do many other consumer groups in the country.
Senator Angus: As far as the Consumers' Association of Canada and the views they express, you would dissociate from those views?
Mr. Conacher: I would dissociate from their policy of taking funding from industry.
Senator Angus: What about the views they express? Are you aware of the views they express?
Mr. Conacher: They have focused mainly on tied selling and privacy in the past. I am very aware of those views. If you open the borders to foreign banks, they feel that that will solve all problems for consumers. The groups in the coalition do not agree.
Senator Angus: You have been fascinated by and interested in the MacKay task force. Did you go before that task force as one or other of your mantras, namely, Democracy Watch or the coalition?
Mr. Conacher: Actually, they are not my mantras; they are the organizations that I represent.
Yes, we met with the task force three times and corresponded with them significantly. We filed all our position papers with them.
Senator Angus: They were interested in hearing you? You did not have any trouble making your case?
Mr. Conacher: We did initially, with the initial chair of the task force, who refused to meet with us. However, when the chairman of the task force changed, we had no problem getting a fair hearing.
Senator Angus: Do you feel that you had a fair hearing?
Mr. Conacher: Yes.
Senator Angus: I take it from your remarks that the task force did not buy into all your ideas because you feel that they were biased towards the banks. Is that what you said?
Mr. Conacher: No, I did not say that. I said that nine of the 10 members of the task force were representing either financial services sectors or business and that only one had worked with consumer representatives. About eight of the 12 research staff of the task force had worked with a financial services institution association and the other four had never worked or dealt with financial services issues from a consumer perspective. Given all that, we are quite pleased to see that they were convinced by our arguments that Canadians would not be served fairly or well by financial institutions unless the five key factors of an accountability system were put in place in all different areas.
Senator Angus: Apart from that, they were not convinced by some of your other arguments, is that right?
Mr. Conacher: They were convinced three-quarters to four-fifths and they left it open that, for example, if the ombudsman in the institutions do not follow the rulings, the rulings should be made binding with access. If the institutions do not change and start serving people fairly and well, then it should be a legislated right, which we recommend. In several areas, they left it open to closing the gaps if the institutions do not change.
Senator Angus: So that I am clear, could you give us two or three, or whatever number you feel appropriate, things in the MacKay task force report that you do not agree with?
Mr. Conacher: The MacKay task force did their own survey with respect to what has happened with access to basic banking services, since it has been a voluntary system with no inspection or enforcement. They sent out a researcher to seven branches of institutions in Toronto and in four of the seven he was turned down in terms of trying to open an account or cash a cheque. That was their own survey.
Based on that, we feel that that gap should be closed and that deposit-taking institutions should be required to give people access to an account. There should be a right, as there is in several U.S. states, to a low cost, no frills account. The task force closed all the gaps in accountability in their recommendations with regard to tied selling and privacy. There is disclosure, auditing and strict rules that they recommend. They recommend independent enforcement and significant penalties. In other areas where they have left out rights and rules, as is the case with access, we see that there will continue to be a problem.
In the area of the disclosure on community accountability statements based on the Community Reinvestment Act in the U.S., again, they have left out inspection, and there are no rights or rules in terms of performance standards, no review and no penalties. The same problem that has happened with access will happen there.
Essentially, the banks have proven, in the area of access to basic banking service, that unless these services are required of them and they are inspected and face penalties if they do not, they will not serve people fairly and well. They have proven that themselves by their own actions. We want those gaps closed in every other area.
Senator Kenny: I have a supplementary question on the first item. Mr. Conacher, I raised precisely the question that you have brought up now with the chairman of the task force and asked him: Is it time to legislate right away? His response was, "No. The banks have arrived at an accord. They recognize that there are problems. They have done further surveys themselves that indicate that there are problems, and they are addressing them." His impression was that it would be more appropriate to give them some more time, in light of the fact that they had only relatively recently arrived at an accord to try to enforce it at some point in the last 18 months. If they did not show clear signs of progress in a reasonable period of time, then, yes, some form of legislative action would be appropriate. Until then, he thought it was better to proceed to see whether they would do it on their own. Do you care to comment on that?
Mr. Conacher: We think that the reasonable period of time has passed.
When the banks' mortgage rates change, as they have many times in recent days, somehow every teller in every branch across the country knows that the next day. When a customer walks in and asks what the mortgage rate is, somehow the tellers are able to answer that question.
Eighteen months after the banks agreed to change the policy with regard to access to basic banking services, somehow four out of 10 tellers are giving the wrong answer when asked by someone. That is according to the Canadian Bankers Association's own survey.
How is it that mortgage rates can be communicated within 24 hours or even less but this policy of access to basic banking services takes more than 18 months to be communicated to all their employees? It defies belief. The reasonable period of time has passed.
The National Anti-Poverty Organization reported on this in 1987. Groups have been waiting for over 11 years for Canadians to be served fairly and well and not discriminated against on the basis of income.
Senator Angus: Do you have a bank account; do you deal with a bank yourself?
Mr. Conacher: I do, yes.
Senator Angus: Do you hold any bank shares?
Mr. Conacher: No, I do not.
Senator Angus: Have you had any problems with your own service at the banks or the cost of the services?
Mr. Conacher: Myself, no, I have not. I have maintained the same account for many years and because I have not changed, I have not been subject to the new service fee.
Senator Callbeck: Your first recommendation deals with, or proposes, community reinvestment legislation. When this committee was in Washington, the federal reserve indicated that legislation to that effect had been effective in the United States. However, the MacKay report says that there is no strong evidence in Canada to have that type of legislation. They therefore recommended a community accountability statement. You indicated that you appeared before the task force several times.
To support your recommendation, do you have any strong factual evidence that the task force would not have had?
Mr. Conacher: A survey was released just at the end of July by a group from Montreal. They surveyed the branch closure pattern of institutions over the past 30 years. They found that in disadvantaged communities more branches have been closed, proportionately, than in other communities.
Banks would say that is just closing branches. That is not the term they use in the U.S., which is "red lining," where they draw a red line around a particular community. They take deposits out of that community, refuse to lend or provide access to basic banking service. The ultimate form of red lining is withdrawing from the community completely.
In 1990, when I first started to look at this issue, I surveyed institutions in Parkdale, an area of Toronto. Parkdale is mostly a low income and multicultural area. With one Royal Bank branch in the area, there was no loans officer, according to the manager. The manager indicated that it was not that the bank felt that the people in that area did not deserve a loans officer, it was just that the people in the area were not of the quality or scale that the bank felt that they needed to have a loans officer on the premises. This was in 1990. I asked him if there were other Royal Bank branches in Toronto that did not have a loans officer, to which he responded that Parliament and Wellesley was another branch without a loans manager. Parliament and Wellesley is just north of a low income area that is populated mostly by visible minorities.
In addition, given that over 400,000 people do not have a bank account in Canada, that is evidence as well that there is a problem with service. We want to have service tracked. We want complaints to be tracked. We also want lending to be tracked.
The surveys of the Canadian Federation of Independent Business also provide detailed information on difficulties of businesses and particularly women-owned small businesses in getting access to capital.
There is as much evidence in Canada of discriminatory patterns of providing service and loans as there was in 1975 through 1977 when the community reinvestment legislation was put in place in the U.S.
Essentially, we are saying that if the problems are not as extensive as the banks claim, then that will show up in the statistics. Until we track it, they have all the information of who they are serving and who they are rejecting. No one else does and you cannot hold the banks accountable as a result.
Senator Callbeck: These statements would give the statistics. Then you would be able to really indicate if there is a major problem here.
Mr. Conacher: The task force is very vague. They say that more information is needed on small business lending. They do not say what information. We have set out what we feel is needed: that you track the number of applicants, approvals and rejections by size and type of business, the location of the business, and the gender of a small business owner.
That is what they do and have done for over 20 years with mortgage lending in the U.S. We are not suggesting that it be extended to mortgage lending in Canada because the housing groups that are involved in the coalition and others have never documented problems in the mortgage lending area. However, in the business lending and small business lending area, they have.
If they mean by the small business lending disclosure what we are recommending, then that would close that gap. We also feel that complaints, and also lawsuits, should be tracked.
In the U.S., branch openings and closures must be disclosed systematically and they can be tracked easily. Therefore, the statements may close some of the gaps, but the format and content of the statements are all up to the bank, as is the definition of "community." They can define the communities and put into the statements whatever they want. Obviously, as they have done in the access area, banks will emphasize the positive and downplay the negative. That should not be allowed. There should be a standardized content for those statements.
Senator Callbeck: You mention giving financial institutions a mark. Who do you think should give them that mark? Is it the Bank of Canada, OSFI or an independent group? Who should be responsible for that?
Mr. Conacher: We propose that it be the Department of Finance. Given the changes that the task force recommends in terms of OSFI's role, it could be OSFI as well, because it would fit more under OSFI if they were given these consumer protection and accountability responsibilities that the task force recommends.
Senator Callbeck: I take it you support a financial consumer organization. How do you see that being financed? You mentioned in your brief about the banks sending out an information page to all their customers. Would you see it being financed by these individuals?
Mr. Conacher: As in the U.S., where it has worked well, the group starts with either a loan or grant, if the government decides to give it a grant. Otherwise, it would go to a financial institution for a loan. To print 20 million of these would cost about $300,000, based on the U.S. experience, about 1.5 cents each. They would be sent out to the 20 million financial institution customers who would be required to join. There is no requirement. They would simply be invited to join.
According to the survey, they would be willing to pay $20 per person. These would not be sent out in every monthly mail-out, but usually three times in the first year then once a year after that. Let us say in the first round only 1 per cent were to join. That would be 200,000 people joining, giving $20 each, which amounts to $4 million. It would have cost $300,000 to print the first flier, and let us say another $100,000, according to our estimates, to set up an office to handle the responses. Therefore, $400,000 out gets you $4 million and 200,000 people in. You pay back the loan or grant, and from then on it is self-sustaining. There are no costs to the government or to the institutions. The group also pays the costs incurred for inserting the flier in the envelope.
It would be completely voluntary, democratically structured, broad-based and, obviously, well resourced. That is why the task force recommends it. It is the way to empower consumers in the country.
Senator Hervieux-Payette: Who will receive the money? There could be a foundation and money could come from other sources. Which organization would be qualified to do this?
I guess you are experiencing the same problems as the Consumers' Association, and there are others. How would the money be distributed? I do not like the government approach of subsidizing these organizations, but that is the only alternative for certain organizations in remote communities, which do not have access to any funding whatsoever.
Perhaps you have a way of redistributing to those who would represent a certain code of conduct or at least a certain mandate. Do you have any mechanism you could suggest to us in this regard?
Mr. Conacher: It is detailed in our Position Paper No. 4.
People would be invited to join. They would also be invited to donate to a fund. From the $20 membership fee, one group would be created. In the U.S., when this has been set up with utilities, the government has appointed an interim board from representatives of consumer groups that work in the area, as well as from citizens' groups that also work on other issues in the area.
The interim board would handle the first mail-out. In accordance with the by-laws of the U.S. organization, when a certain threshold of membership is reached, which is usually about 20,000, they then cause the first election of the board to be held. The board is elected from among and by the members with a nomination process under which any member can be nominated. The $20 membership fee would go to the one group which would act as an umbrella group for the whole movement.
In addition, people would be invited to donate to a discretionary fund. We asked people in the survey whether they would be willing to donate above the membership fee. Over one-half said they would be and that they would be willing to give up to $30 to a discretionary fund. Based on a 3 per cent to 5 per cent response rate, that would form a fund of $1 million to $1.5 million. That money would be granted to existing groups working on a local level. According to the model that we have proposed, the board of the umbrella group would act as the granting body making those decisions.
It would support existing groups, but it would also create a very large, broad-based organization with the resources to really help consumers in the way that no consumer group can currently help consumers in Canada.
Senator Spivak: I want to ask a question about accountability. You said in your remarks that the losses in lending to big business are greater than those to small business. More important, you also said that the bigger banks want to concentrate on multi-billion dollar loans. One can almost have no faith in any institutions these days, including the Red Cross, the Senate and so on. The big banks, for instance, have been fingered as being responsible for the Asian financial crisis by sending all that money in there and then pulling it out.
Do you think that what is being proposed here in terms of accountability and transparency is enough to ensure that the banks lend more prudently in terms of these multi-billion dollar loans? Is this sufficient? Is it something that the task force addressed at all?
Mr. Conacher: The task force only recommends that small business lending be tracked. They are vague in terms of how it should be tracked. We believe that all business lending should be tracked in terms of the number of applications and the number of approvals and the number of rejections. That is really the only way to determine whether small business is being turned away more than big business.
Currently, in any of their annual reports the banks may highlight particular countries where they are making money, but there is no requirement, according to the accounting rules, for them to disclose, country by country, their exposure in respect of assets in their operations and their income or loss.
When the Asian crisis hit in January, it was only after significant pressure was put on the banks by their shareholders that Toronto Dominion Bank finally came out in late January, a few Mondays after the melt-down had begun, and disclosed its exposure in Asia. They did not do it country by country, but just for the whole region, and it was only after the shareholders had pressured them significantly. The other banks followed because Toronto Dominion Bank had broken ranks and disclosed that information. However, prior to that, they were uniform in refusing to tell their shareholders what their exposure was in Asia, let alone what their profit and loss record is on an annual basis. All of that should be disclosed.
Many other industries that have operations in other countries are required to disclose, country by country, their exposure, along with their profits and losses. We need that to hold them accountable to ensure that they are not losing money in many operations overseas and subsidizing them by gouging us here at home.
Senator Spivak: That is why I asked the question. I think there is a relationship between huge flyers taken for large companies, such as long-term credit capital which has a $10 million initial fee, and the charges that are given to ordinary people.
I want to get back to the question of the community reinvestment program, which you seem to indicate has operated very well in the United States. The previous questioner asked you what you thought was the difference between your approach and that of the MacKay task force.
I understand that there was a private member's bill in the House of Commons that was not accepted. Do you believe that these recommendations go far enough, or do you think it would be desirable, if the recommendations of the MacKay task force are not implemented, that that avenue be explored again in terms of legislation that would implement a community reinvestment program?
Mr. Conacher: I agree with Senator Kirby that the system in the U.S. has worked very well and would work very well here; it should be enacted, merger or no merger.
The system that was set out in the private member's bill by Réal Ménard involved setting a quota on the lending that any institution should be putting back into the community from which it takes deposits. As a coalition, we do not agree with that system, because we do not think there is any way to set a quota or that a quota is a good idea. That is not the way it is done in the U.S. In the U.S., the system does not apply only to banks. It applies to any institution that does mortgage lending and business lending of a certain size. Demand, and whether the institutions are meeting that demand, is tracked community by community. In the U.S., it is also categorized by race, gender and income level, in addition to neighbourhood.
It would be very beneficial for the government and consumers in Canada to know whether the institutions in their communities are meeting legitimate demand. We also want loan loss and loan default rates tracked to determine whether there is legitimate demand; in other words, to track the risk of lending community by community.
One of the purposes of the U.S. act is to give you, the consumer, the right to know in order that you can put your deposit in an institution that supports your community. Currently, no one knows, community by community, which institutions are supporting the community and which ones are not. Another purpose is that government will know which institutions are performing well and which are not, and can put in place incentives to encourage better performance. A third purpose is that the government will know where no institutions are performing well; thus, the government will be able to put subsidies in place and, for example, will be able to direct the Business Development Bank of Canada to fill a niche left by the banks, which is its role, or complement them by filling gaps in lending. Other institutions such as credit unions can be encouraged to do so as well.
It serves those three purposes very well in the U.S. and would serve it well here in Canada, but not by setting a quota. You simply track demand for lending investment and service and then you track whether the demand is met and whether it is legitimate. If legitimate demands are not being met, you require corrective action, as they do in the U.S and, also as they do in the U.S., you do not let an institution get bigger if it is serving people poorly. That is the way to make the system work here.
Senator Oliver: The witness began today by reading from a Maclean's magazine article about a Royal Bank textbook. I wonder whether that article could be tabled with the committee in order that we can have the benefit of the entire article.
Mr. Conacher: That is no problem. Also, I would be happy to come back before you at any time.
Senator Joyal: Following your suggestion, Mr. Chairman, I would like to have the witness return at an appropriate time, because I do not want to impinge on the right of anyone around the table to question the witness, but while some members of the committee have had ample opportunity to question the witness others have not. In all fairness, there are other issues that I would like to talk about on the MacKay report and I believe that we should have the opportunity to do so.
The Deputy Chairman: Is that agreed?
Hon. Senators: Agreed.
The Deputy Chairman: Therefore, we will invite Mr. Conacher back.
Mr. Conacher, you have raised many interesting and thought-provoking issues.
We will now hear from the representatives of the Canadian Automobile Dealers Association, Mr. Huw Williams and Mr. Gord Hoddinott.
Senator Kelleher: Mr. Chairman, on a point of order, I wish to disclose a conflict of interest before we hear from the next witnesses. Our law firm acts for Chrysler Credit. We do all the legal work for Chrysler leasing in Canada. Therefore, I will refrain from the discussions for this part of the hearing. I would ask the clerk to please note my conflict for the record and to note that I am withdrawing from the discussions on this topic.
The Deputy Chairman: We are in an open hearing and it would be all right if you did comment, but, if that is your wish, I accept it.
Senator Kelleher: I would be happier with that. They are a very big client of ours.
The Deputy Chairman: Mr. Huw Willliams is Director of Government Affairs for the Canadian Automobile Dealers Association. Mr. Gord Hoddinott is the President of Campbell Ford in Ottawa as well as an officer with the Canadian Automobile Dealers Association.
Mr. Gord Hoddinott, President, Campbell Ford, Canadian Automobile Dealers Association: Mr. Chairman, I am on the committee studying banks and leasing. That is my involvement with the CADA.
The Deputy Chairman: Please proceed.
Mr. Hoddinott: Thank you, senators, for giving us the opportunity to talk to you about our views from the perspective of dealers and small business persons regarding the changes in the Bank Act as they pertain to car leasing.
I am sure you all know car dealers personally. I would hope you do, and I am sure you know a lot about them. Briefly, there are about 3,700 car dealers in Canada. We employ over 100,000 Canadians. We generally donate tens of millions of dollars a year to charities and community events in our various locales.
There are several worthwhile recommendations in the MacKay report. Provisions for tied selling and consumer protection are worth examining. There is also little doubt that the work of the MacKay task force will have a great impact on the future shape of the Canadian financial services sector. Indeed, the entire goal of the mandate of the task force was to develop a vision for the financial services sector for the coming century. The problem, however, for automobile dealers and their employees is that this vision for bank greatness does not take into account what is good for the entire range of Canadian interests.
In sum, the MacKay report is all about a vision of what is good for the financial services sector and the banks. It is not about what is good for small business, not about what is good for small communities, not about what is good for the auto industry, and not about what is good for consumers in the long run.
I am not here to blindly attack the MacKay report. That would be unhelpful and misdirected. However, I need to point out that the task force was established at the request of the banks and from the outset focussed on the needs of the banks. The banks set the agenda.
I think it is important that your committee focus not simply on the banks' agenda but rather on the broader impacts on all sectors of Canadian society. Having said that, I will indicate where I think the MacKay report made some mistakes.
The MacKay report relies heavily on U.S. market comparisons, saying that bank entry into leasing in these markets has worked, so it should be able to work here. We do not live in the U.S., thank goodness, and there are clear-cut examples of the differences between the Canadian banking sector and that in the U.S. that make lease market comparisons misdirected.
First, there are far greater banking choices available to American dealers than to Canadian dealers. Second, Canadian banks have an unprecedented control over domestic financial services as compared to the U.S. Finally, the Canadian vehicle lease market has a far greater percentage of dealer-owned, independent lease companies financed by the banks than does the United States.
The MacKay report also makes an argument that caisses populaires in Quebec lease vehicles directly to the consumer, so why not the banks? Well, this is not so.
In Quebec, the caisses populaires have a written agreement with the dealership community not to lease directly. This is because they understand the conflict-of-interest position and, therefore, seek to be partners with small businesses and not their competitors. The report goes to great lengths to criticize the manufacturers' finance arms as foreign companies, but what the report does not mention is that companies like Ford Credit have played a crucial role in financial support for dealers through all economic cycles, whereas the banks traditionally abandon the dealers during economic downturns.
I can refer to this personally, having been in the business since 1978 through the downturn of the 1980s when many dealers would have been out of business if it had not been for the support of the manufacturing finance companies. Basically, the finance companies have an ulterior motive to keep the dealers open so they will distribute the manufacturers' product. Obviously, the banks do not have that motivation. Many dealers would have lost their businesses; dealers which today are very profitable and employ a lot of Canadians.
The report stated that they did not hear from the Consumers' Association on the issue of leasing. During the last Bank Act review, the president of the Consumers' Association of Canada stated that normally they would welcome a new competitor. However, after looking at both sides of the issue, they found that letting in the banks would incur a long-term risk.
Let me ask all the senators around the table, how many of you have been approached by Canadians demanding that banks be allowed to lease cars? How many have felt any public pressure to let banks expand their powers, for that matter?
In their paper on leasing, Background Paper #2, the task force argues basically that if leasing is so competitive, the banks will not be able to dominate or take over. But the bottom line is that the banks, with their size and deep pockets, have the power to dominate the market, and consumers will pay in the end.
Similarly, the task force is dead wrong to say, as they do on page 108, that factory-leasing programs will be the hardest hit, rather than the dealers. Dealer leasing companies will be starved for credit on one hand and undercut on the other as the banks buy short-term market share. Independent-dealer leasing companies will be the first to go. We depend on the banks for our source of capital in order to lease vehicles directly from our own leasing operations, which are very viable, and a very crucial part of our dealerships, especially in economic downturns. They provide a steady flow of business and are not as cyclical as the sales end of things.
We also take exception to the view offered by MacKay and the Canadian Bankers Association that letting the banks into leasing really will not hurt dealers because our in-house house market share is small. The technical report on leasing that accompanies MacKay makes it clear that there are well over 1,000 dealers running in-house lease companies, which rely on the banks for financing. The argument that only 50 dealers lease more than 200 in-house cars a year and that the other 1,000 lease an average of 25 units a year only demonstrates that we are truly small-business people. What the banks forget to mention is that the average dealer in Canada only sells 350 units per year. The point is, does giving nearly half the dealers' business to banks serve the small business community and Canadians?
I think the committee should also be aware that bank entry into direct auto leasing could add undue risk to the stability of Canada's financial architecture. In a recent Financial Post, the headline read, "Japan Leasing Drowns in a Sea of Bad Debt." As you may know, Japan Leasing was Japan's second-largest leasing company and it has now filed for court protection, becoming Japan's largest post-war bankruptcy.
Should we expose Canadians to the same threat of overextended credit and miscalculated residual values? That is something for you to debate.
In fact, in the United States, MacKay's technical paper on leasing described bank activity in leasing as a roller-coaster ride. The banks are in and out of the business because of huge residual losses. In the end, the customers and small businesses pay the price.
Finally, let me state for the record why banks really want to get into the leasing business. The banks want the tax benefit of the capital cost allowance so they can shield billions of dollars of profits from taxation. That is it. It is that simple.
The Capital Cost Allowance tax benefit, or CCA, is currently distributed across Canada, as thousands of dealers use CCA to reinvest in their business. The role that CCA tax savings play in allowing small business to reinvest in their continued growth is significant.
By giving the banks the right to direct lease, the federal government would be taxing this ability to reinvest in small business and transferring it to the banks' ability to shield approximately $3 billion in profits from taxation every year.
I think customers are happy with the way things are. I know that customers at Campbell Ford tell me so. Even a study by Goldfarb found that most consumers would lease again and that the process they went through was simple and straightforward.
The U.S. magazine Consumer Report in their December 1997 issue stated that Canadian consumers enjoy clear advantages over their U.S. counterparts in terms of lease disclosure. The MacKay report failed to mention this.
Besides the reasons I have already mentioned, auto dealers are against letting the banks into leasing for the following reasons: one, bank entry into leasing will cost Canadians thousands of jobs in communities across Canada. I may say that fewer dealers mean fewer facilities to support the motoring public.
Second, banks already enjoy a significant piece of our business, including up to 50 per cent of the auto leasing business. What they want now is not just the interest on their money but the capital cost allowance, too.
Three, the banks have access to our most confidential information, including current lease portfolios, customer renewal dates and lease payment information. To let them compete with small businesses would create a serious conflict of interest. There would be an unfair advantage and one might wonder about tied selling issues at that point, knowing all they do about a consumer's financial and purchasing background.
Four, dealers are required to maintain showrooms and service facilities. The banks will not be required to make any further investment into the community. They will not construct dealerships and they will not create employment. They will not be there to support the customers in their after-sale activities, like warranty claims, parts and body shops, which are needed, especially if they get in an accident.
Five, banks and leasing are not about equipping the banks for global competition. It is part of their objective of total vertical integration in the domestic market. There must be more, not less, diversification in the financial decision-making process in Canada and less dominance by financial institutions in the domestic market-place.
In closing, I would like to quote the former assistant deputy minister for financial sector policy, Nick Le Pan. When he testified before this committee during the 1990 Bank Act review, he stated that, fundamentally, the government had been driven to devise this policy of limiting bank lease powers by the view that there exists a large potential for conflict of interest at the very local level. There is no confidence that those conflicts could be addressed through regulations and limitations if banks were also in the leasing business.
He expanded with an example of a bank manager in Perth, Ontario, who happens to be financing short- or long-term credit for the guy down the street who is leasing automobiles. Mr. Le Pan could not conceive of how to deal with a banker who is making credit decisions related to the auto leasing operation of the car dealer down the street while running the same business in the back of the bank.
Please remember that to prohibit the banks from consuming more powers is to protect jobs in small communities, to protect consumers from less choice, to protect strong and healthy competition and to protect the livelihood of small, independent business people.
Senator Stewart: I had a question earlier which was prompted to some extent by Senator Callbeck's question. It would be interesting to have this witness's reaction to the problem.
You mentioned earlier that the automobile dealers make community contributions -- that is, they help to support community activities. We are told in the MacKay report, beginning at page 168, about the importance of accountability to communities. Towards the conclusion of that discussion, it is recommended that federally regulated deposit-taking institutions and life insurance companies be required to produce an annual community accountability statement.
That sounds good, but I have some doubts. I was hoping that the previous witness could dispel those doubts but, given the fact that your organizations engage in some of the same community activities, you can go a way toward dispelling my doubts. I look at what the annual reports would contain. We would be told about support of community activities. There would be participation of employees in community service and philanthropy. If we followed this recommendation, is not what we would have here simply a law requiring what I will call "the annual boast"?
My question is: Who pays for "the annual boast"? Do not tell me that it is the president of the banks. Do not tell me that it is the shareholders of the banks. No. An effort will be made to increase community contributions and then the cost -- whether it is the cost of reconciling the employees to participate in all this good work or the cost of philanthropy -- will be passed on to the consumers. We will end up with a new tax on consumers in order to make the banks look better. That is my problem. I like the end, but I think the means is badly flawed.
Given your experience in this area of community support, can you give me any reason to set aside my doubts?
Mr. Williams: In the dealership community, we are proud that our dealers contribute to local communities. On average, that contribution is $7,000 per dealership. It is done on a very local level. The heart of your question is: What is the difference between those kinds of contributions and what the banks do? You have said it very well. The banks' contributions come from these large organizations in a different way than the car dealers' contributions. They are small family-owned businesses helping out local charities, for example, from Summerside to Sherbrooke. It is a very different kind of giving. When you look at the banks, contributions, dealers would not be against that. If there is one underlying theme we would leave with you, it is that we are not against banks being part of the community. They do a lot of good work. We are saying: Do not let them dominate the market-place so that others cannot be part of that process as well.
In terms of deciding whether that will be a tax on the consumer or whether they will raise service charges to pay for those kinds of contributions, that is a question that you will have to address. We may not be the right people to give you that opinion.
Mr. Hoddinott: There is one big advantage in that dealers are all independent businessmen in their own community. They have connections with a lot of civic groups, hospitals and organizations. These charitable organizations all reach out to them for support. We do not do it generally for the publicity; we do enough of that on our own. We do it because we are part of the community. There is a lot more done than you probably know about.
Senator Oliver: The most compelling part of your argument and your presentation to us was the issue of conflict of interest. Your quotes from Nick Le Pan are pretty persuasive. I will think about it. When other witnesses come before us, I will put questions to them on the issue of conflict of interest because I do not know the answer to it.
The MacKay report itself does not say that banks should get into the leasing business immediately. They talk about January 1, 2002. Is this not a reasonable length of time for manufacturers to adjust to the new reality?
Mr. Hoddinott: We are opposed to them getting into leasing at all. That is getting into the retail sector of the market. Whether they do it now or then, I do not think there will be much change with the way the manufacturers do business. The manufacturers are already heavily involved in the leasing business and they have standardized it quite a bit. It could not get any better for the consumer than it is now. The rates are very low and the residuals are very high. These are people who have a lot of experience in the industry. I would not see a change that would benefit the consumers over the next three years that would make it easier for the banks to get into leasing as a result of that.
Mr. Williams: The loss of credit that dealers will feel from running their own in-house lease company will be significant. For example, Campbell Ford averages about 100 units per year on their in-house lease company. In 2002, they will be caught between the ham and the sandwich. The credit will go missing from the banks to fund that as the banks start to compete directly in that business.
Senator Oliver: That does not necessarily follow.
Mr. Williams: How so?
Senator Oliver: He can still apply to the bank for credit or go to some other source to get the credit to run his leasing business.
Mr. Williams: One of the things that dealers tell us consistently is that there is a growing lack of choices on who will provide lease financing to your in-house company. I have an anecdote to share with you on this point.
We had a dealer in B.C. who, because of various financial arrangements with various banks, said: "I want to source my in-house lease company with a non-bank." Consequently, National Trust financed the in-house leasing company. Sure enough, one month later National Trust was taken over by the Bank of Nova Scotia. Following that, they went with a lease portfolio that was with Canada Trust, who then sold their lease portfolio to CIBC in that particular instance. That dealer said to me: "My choices are becoming more limited in terms of sourcing my in-house leasing. Also, I will be experiencing competitive pressure because the same people who will be making credit decisions and ratio decisions on my in-house leasing committee will be in competition with me." The point is that it does not change between now and 2002.
Senator Oliver: The heart of the MacKay task force report is, "Let us strengthen Canada's financial services sector by bringing in more competition in many forms." Let me give you a couple of statistics.
Automakers' financing arms control about 80.2 per cent of all retail vehicle leases signed last year compared with 10.1 per cent for auto dealers and 9.7 per cent for commercial leasing companies. Is this not a case of the manufacturers protecting their protectionist position? The Big Three are obviously dominant players. Why not open up the market for more competition? That is what MacKay says we should be doing.
Mr. Williams: Concerning those statistics, it is important to take into consideration a snapshot of the market-place at a certain point of time. Right now, there is an oversupply of vehicles worldwide. Factories are producing too much product, so they are trying to push product through as fast as they can. That is why when you look at the paper you find 1.9 per cent financing and zero per cent financing. Basically, they are supporting the sale of those vehicles with as low rates as possible. If you are running your own in-house lease company, you cannot compete with the high residual values that the factories are setting and the low interest rates at the same time. The consumer is the one who wins under that scenario, when the factories are being aggressive.
The other thing to remember is that there are 21 manufacturers competing in that market. It is not just a matter of one manufacturer dominating it as opposed to three banks.
Another point I would make to you concerns the false impression that the banks are not into leasing. We talked about how the banks finance a dealership to run their in-house leasing company but they are also there very aggressively with a program that is called a near-lease program. An example of that would be the Scotiabank Dealer Value Lease Plan. It is a carbon copy of GMAC's lease or Ford Credit's lease, with the exception that the bank does not take title of the vehicle because they cannot do so under the Bank Act. As a result, the dealer maintains title of the vehicle. The bank can provide the financing and the money for it but they are not buying and selling vehicles. Dealers are happy with the status quo because it keeps the banks out of the car business. However, if the banks do want to be out there aggressively putting lower interest rates in the market place -- and, they have 450 dealers out there using the Scotia Dealer Value Lease Plan -- they still do not get the title in the CCA. They are not in the car business. That is to say, they are not merchandisers, if that makes sense.
Senator Joyal: Thank you for your brief this morning. I should like to refer you to page 4, where you say:
The MacKay report also made an argument that caisses populaires in Quebec lease vehicles directly, so why can't banks?
Then you say:
In fact this is not the case in Quebec. In Quebec the caisses populaires have a written agreement with the dealership community not to lease directly. This is because they understand the conflict of interest position and therefore seek to be partners with small business not competitors.
If the government is able to come to an arrangement whereby the banks would have more or less the same kind of agreement as the caisses populaires have with dealership communities, would you accept that? In other words, the question of conflict of interest that you have raised would be addressed in a proper way. Would you agree if it was solved in Quebec in that fashion?
Mr. Williams: The interesting part of the Quebec example is that the caisses populaires have made that recognition, but they operate in the same fashion as the banks do with the Scotia Dealer Value Lease Plan.
Our dealers across the country tell us that under the status quo -- and, it is not just the Scotia Value Lease Plan; CIBC and the TD also have one -- the banks have all kinds of ways to offer consumers financing indirectly as the Bank Act stands right now. That effort to offer these plans directly is simply a tax grab and an ability to capitalize on their consumer lists so that when you go into a bank branch you will be able to lease a vehicle and put insurance on that vehicle while at the same time you are in there to get your mortgage. I hope that answers your question.
Mr. Hoddinott: First, the capital cost allowance is a big part of allowing businessmen of our level to save capital and reinvest it in our own businesses. It is a capital intensive business and we would lose it under that scenario.
I also worry about the cost of credit. If the banks are permitted to enter into the leasing market, they could easily increase the price of the credit offered by pushing the interest rates up to match whatever they wanted -- even if they were permitted to enter the market on a second-hand basis like that. Presently, they must keep the cost very competitive for dealers because there are other sources of capital. If they were doing it on the other end, I would worry that the cost would go up. It will result in higher rates for everyone.
Senator Joyal: When you say that the caisses populaires do not lease directly to customers, would it not be possible for the banks not to lease directly but to have an arrangement similar to the caisses so that the market will be largely open and the consumer will have the opportunity to have it if he so wishes but he would not be submitted directly to the pressure that you described?
Mr. Hoddinott: We need access to the funds. That is basically what is happening now. We have access to the funds through our own leasing operations and we lease and keep the vehicle ownership in our name. That keeps the caisses' rates competitive, too, because they know that, although the banks do not lease directly, they can go out and lease through the dealers.
I am worried that when the banks are doing the same sort of thing, that pressure to keep the rates down will not be there because there is another source of capital and they will raise the rates again. We need access to well-priced funds.
Mr. Williams: From the consumers' perspective, when a consumer goes into a dealership -- and I will use Bélisle Automobiles here because I know they are a Scotiabank Dealer Value Lease Customer here in Ottawa -- the customer has the choice of a GMAC lease, a Scotiabank lease or the independent in-house lease company of Bélisle's, which is funded by a bank. At that point in time, the dealer must put the customer into the best contract possible -- whether it is the Scotia Value Lease Plan, the GMAC lease or their in-house lease company. If they do not offer the customer the best of those three choices, the GM dealer down the street will offer it to that customer to take that sale.
The way it is now, the banks have their avenue to compete as they do in Quebec. That is why it is important to take the clothing off the lie that the banks are not into the leasing business. The question is not whether the banks should be in leasing, because they are in leasing; the question is how they are in leasing. They want it all.
The lines that have been drawn by government traditionally protect car dealers from the banks becoming merchandisers that are buying and selling cars by taking title. That is the bottom line.
Senator Joyal: One of the arguments we were given by the president of the Royal Bank, who was here earlier this week, is that other countries do it, so why not Canada. That is an overwhelming statement, but from your brief it seems that the situation in Canada is not exactly comparable to the situation in the United States.
Could you tell us how the banks in the U.K. are permitted to enter the leasing market in comparison to what happens in Canada?
Mr. Williams: First, in the United Kingdom the lease levels are negligible. People are not leasing their automobiles. That is one example.
Second, the lease rate in the United States, which is probably the most important one that we hear about, is about 23 per cent. Here in Canada our lease rate for automobiles is closer to 46 per cent of the market-place. Why is that the case? There is an industry term called the vehicle affordability index, which is also used by Statistics Canada. It sets out how many weeks it takes to buy a car. In Canada, because our disposable income is not as great as it is in the United States and our tax level is higher, vehicles are cheaper but it is harder for the consumer to purchase them. In order to finance them, leasing is a more attractive option in Canada. As a result of some of those factors, in Canada the independent in-house dealer leasing companies have represented a greater percentage of the market-place. Currently, about 1,200 dealers -- that is, about one-third of them -- have substantial portfolios in the area of in-house leasing.
The other point concerns how the experience is different for dealers in the United States. We did some numbers a few years ago. I stand to be corrected, but I think you will find that they are roughly accurate. It is often stated that we have five banks in Canada and there are 10,000 in the United States. We went into various markets to find out what the choices were for American dealers. In Chicago, the dealer had about 1,500 banks from which to choose; in Los Angeles, there were 700; and in Toronto there were seven.
To answer Senator Oliver's question, the problem is that there are fewer financial choices available to dealers in terms of the banking community here. That is a significant part of the equation here. Dealers in the United States are not suffering from the same competitive pressures from the banking industry. They have a lot of choice; they hold the cards.
Mr. Hoddinott: In the U.S, there is a lot more selection. Although the banks are clamouring to get into leasing now, I have seen them reverse field before. I do not know that they would be in leasing in the long term. It would not be a good thing for either the dealers or the consumers. However, manufacturers will stay in it because that is their core business.
I wish to point out to you that manufacturers use leasing and their finance companies as a merchandising tool to sell their products. With regard to competitiveness, it is not needed in the leasing financial sector because it is already there in the automotive sector, which is extremely competitive. All the manufacturers compete for the automotive business. Furthermore, leasing is used as a tool to sell our products; so with our franchising system, where we, as dealers, represent only one manufacturer, there is no need to add more competitiveness in the leasing industry. It is there through the manufacturer and the banks getting into it through the dealers with in-house leasing as they compete with each other for funding.
Mr. Williams: For example, in Ottawa you have 50 independently owned car dealers. Probably 13 are General Motors dealers that are independently owned, all competing with one another in this city. Car dealers compete with one another on deals.
I do not know anyone who has bought a car without checking prices elsewhere. Bank branches do not compete with each other in the same way.
Senator Meighen: It continues to bother me a little bit that much concern is being expressed about the banks assuming a dominant position if they were allowed to merge. Notwithstanding what you just said, here we have three large, money-making companies -- the Chrysler, Ford and GM finance companies -- dominating the leasing market to the extent of about 80 per cent, I believe, with 10.1 per cent for the auto dealers and 9.7 per cent for commercial leasing companies.
Mr. Williams: In the technical report, there is a more diverse spread than that. They give us 16 per cent of the market. It depends when you take it. They have taken the worst-case scenario in the body of the recommendation.
Senator Meighen: I suppose that is not dissimilar to the banks' argument that we should look not only at banking activities but at financial activities across the board, and then the concentration percentage is far less.
That is what I cannot get out of my head. If we support your position, we are saying "no" to competition in a market dominated 80 per cent plus by three players. My information is that the dealer's share of 10 per cent or 16 per cent is not a rising share but a diminishing one.
How can I say that I am against increased competition?
Mr. Hoddinott: I am a dealer and I can speak from a dealer's perspective. I cannot speak for the manufacturers. They have their own organizations and they know it from their own perspective. However, in my opinion, they are a victim of their own success in this regard. They have used leasing to make vehicles more affordable as the price has gone up for Canadians. You mentioned that it takes longer to pay for a vehicle, that vehicles cost more than in the U.S., when you factor in available income. One of the ways they have got around that is to "incentivize" leasing. They have steered customers away from purchasing into leasing because it is more affordable for them. They have invested considerable amounts of revenue to make it affordable. They just paid up for it, frankly. They bought that market share.
The manufacturers' finance companies have been so successful at this because their deals were so good that even we dealers could not compete with them in our own in-house dealerships. We have put the lease where it best suits the consumer, which, in this case, is with the manufacturer.
Senator Meighen: How could a dealer be expected to compete with Ford Credit? I would be surprised if you could give me a better deal.
Mr. Hoddinott: They are willing to reduce their interest rate to well below prime; they are willing to take very high residual values, which reduces the payments; and they are assuming the risk. The leases are open-ended. The customer may bring the vehicle back without any obligation.
Senator Meighen: Yet they still make a lot of money doing this, and I am not against that.
Mr. Hoddinott: That is yet to be seen because, with leasing, you have to wait until all the vehicles come back before you find out if you have made any money.
Senator Meighen: According to the figures I have, Chrysler Credit made $51.6 million last year, versus $8.4 million in 1983.
Mr. Hoddinott: My information is that, this year, they are having quite a different experience.
Mr. Williams: The question is whether letting the banks into the market will make it more competitive. Let us take that 85-15 per cent market share.
Senator Meighen: The assumption is that the rates would come down.
Mr. Williams: The banks already have the ability, through Scotia Dealer Value Lease Plan and other products that we talked about, to offer a 1.9 per cent interest rate instead of 8 per cent. The first market share they will take over is the in-house leasing companies which they are currently financing, because they can compete with them. Campbell Ford cannot offer 1.9 per cent financing unless Ford Credit is backing them. They will go after the dealers' slice of the pie. Those will be the first guys to go.
The question really is whether you want dealers to be in the business of running small financial institutions in terms of offering the customers good leasing services on an independently owned basis, or whether you want to give that business to the banks.
Senator Angus said something of note. I am not here to defend the factories, but the factories in Oshawa and Windsor have made significant investments in Canada. When our dealers cannot get hail insurance, Ford Credit insures them because Ford Credit is in the business of keeping small businesses alive. The independent businessman does not care where Ford Credit is headquartered; he only cares that they are keeping their business alive.
Senator Meighen: The banks can write leases on heavy equipment, as I understand it.
Mr. Williams: Yes, they can, on vehicles over 21 tonnes.
Senator Meighen: That has not always been the case. Does anyone know when that came into being?
Mr. Williams: I think they were allowed to do that in 1980.
Senator Meighen: Before that, presumably, I could walk into my friendly tractor dealer and lease a tractor through him. Now the tractor dealer either offers that facility or has given it up and it is done by the bank, but the tractor dealer is still there and, I presume, depending on the state of the economy in general, making a good dollar or not. Is there not an analogy that could be drawn?
Mr. Hoddinott: The manufacturers' finance arms are not involved in the financing. I do not know whether you mean farm tractors or heavy trucks when you say "tractors." They are involved in both.
Senator Meighen: I will bow to you on that; any heavy equipment.
Mr. Hoddinott: Heavy trucks, tractor trailers and that sort of thing are not involved, and the competition is needed there for access to funding.
We were involved in the heavy truck business for a while but are no longer. The problem there is that there is a heavy concentration of capital and very few customers. You do not need too many losses to be turned upside down because big trucks cost $60,000 to $100,000 and you just do not do a large volume of business in them. Ten or 20 a year would be a lot. Three or four losses can upset your whole portfolio. A dealer cannot assume that risk. He wants a bigger organization like a bank to do it in the case of heavy equipment.
Senator Meighen: Do you have one or more people in your dealership dedicated to leasing?
Mr. Hoddinott: We have two types of leasing. For in-house leasing, we have a manager who takes care of the portfolio.
Senator Meighen: Is that all that he or she does?
Mr. Williams: All they do is take care of our in-house leasing. There are three individuals in our dealership who do that. However, in our new vehicles showroom, the managers, business managers and salesmen are all intimately familiar with retail leasing.
Senator Meighen: If the banks were allowed to get into leasing, do you believe that you would have to let all those people go?
Mr. Hoddinott: I think that there would be a migration of the business from our showroom into the banks and we would end up with fewer salespeople, less management and a much lower margin, and I think that would be very bad for a small business like ourselves.
Mr. Williams: One of the things that I find inherently unfair about that is that a dealership invests in people to show the vehicles and takes all the risk of buying those vehicles from the factory. Dealers do not take cars on consignment. You have to buy them from the factories and you get the money for that from the banks. You have to borrow the money to bring in the inventory and pay interest to the banks. You have to carry a mortgage on your building. Yet, if we let banks into leasing, people will walk into the showroom, kick the tires, go for the test drive, and then go down the street to lease from the bank. There is something wrong with that scenario.
Senator Angus: I had some of the same concerns and questions that Senator Meighen did. You have helped to answer them. Until about 10 years ago, when you leased a car, the lease was with the dealers' leasing company. Today, if it is a GM dealer, it is GMAC leasing; if it is a Ford dealer, it is Ford Credit; et cetera. It is only if you ask a dealer to bring you in a foreign model car, for example, that they seem to have the facility to buy that car on your behalf and do a lease through their in-house company. I understand that this is a very limited activity.
In your opening remarks, you made one statement that I found curious. You said that the MacKay task force was set up at the request of the banks. Do you have any evidence of that? That was news to me.
Mr. Hoddinott: I am just giving you my personal opinion on that. I cannot give you any more than anecdotal stories. The agenda looked as if it were pro-bank from the beginning. This may be an assumption, but it is my opinion nevertheless.
Mr. Williams: I do not want to bash the MacKay task force. The reception we received from the MacKay task force was somewhat different. It was: What is wrong if all the banks took over the car dealerships and ran them like Walmart? That is a great question. However, if you look at the background of the people on that task force, there is nobody from the automotive industry and nobody with a retail background. Are they studying the banking and automotive industry, or all industries, and making recommendations?
It is fair to say that it was a vision for the financial services industry. It starts to get dangerous when they discuss the distribution channel of automobiles. Perhaps there is not the same broad perspective that they should bring to the table on that.
Senator Angus: You may find the same situation here. We are not experienced car dealers. We value your coming here, and you do so on a regular basis. It helps us understand.
You are here representing the interest of the car dealers in Canada and not the consumer.
Mr. Williams: I would not say so.
Senator Angus: Senator Meighen's questioning would follow. Car leasing is another form of lending money, instead of going out and plunking down $50,000 or whatever is the price of the model you choose, you can get these car leases now at incredibly low rates because interest rates have recently, at least, been low. It seems to me that the consumer would be the one to benefit if the MacKay recommendations were put into effect. Am I wrong on that? In other words, I sense that you folks are antibank for a different reason than Mr. Conacher.
Mr. Hoddinott: I am antibank in leasing. I will admit that I am a little defensive on that because I see it as a threat to our business. I am not against banks; I deal with them all the time.
Senator Angus: You need them.
Mr. Hoddinott: We have to have a source of capital. Manufacturers will not provide it to the same extent and we would not want them to. We need the competition.
First, I do not think that the rates or the deals will get any better if the banks get into leasing. They are outstanding, half of prime, 25 per cent of prime, interest rates of 0.9 per cent -- they are almost ludicrous. The residual values are extremely high from all the manufacturers. They have assumed an enormous amount of risk because their objective is to put the vehicle over the curb. There is enormous competition within the automobile industry, using leasing as a merchandising vehicle. The net benefit there is to the lessee, to the consumer who wants to lease.
The other thing I foresee that may be a problem would be that if the banks get into leasing, it would not be unusual for them to dominate that area. It would not be unheard of. They could absorb even as much as half of the market. After that happens, there would be fewer dealers involved in leasing to service customers. There would be a monopoly situation, or very close to it, where the banks would have so much of the industry they could push the rate back up.
I refer to the quote from the president of the Consumers' Association and I feel that is what he was referring to when he said that, in the long term, there is a danger there. That is my concern.
Senator Angus: In your business, then, in your view, anyway, the status quo is the only option.
Mr. Hoddinott: That is what we would prefer to see. We think it works well for all parties concerned, even the banks.
Senator Angus: You went into the minds of the banks for the motives of why they want to get in there and you talk about capital cost allowances, and you make a good point.
Is there some other motive on your side? Again, not knowing much more than that as a customer about that business, is there something in the used-car business tied in here? These two-year leases and the dealers are getting these cars back at these interesting buy-back prices; is there something there that we should know?
Mr. Hoddinott: With Ford, specifically, the risk is borne by Ford, not by the dealer. Right now, you can buy the vehicle back from Ford at substantially less than what they have invested in it.
Senator Angus: You, meaning the dealer?
Mr. Hoddinott: Yes. The vehicles are coming back at too high a residual. There is no benefit to us to have leasing contained within the manufacturers. They have taken on too high a residual price to begin with. Should we choose not to buy it, it goes to auction and they sell them for considerably less.
Senator Oliver: Do Budget, Hertz and Tilden buy those cars?
Mr. Hoddinott: They are too high for them, too. They would depreciate the vehicle faster than the leasing company would as a rental. Often those vehicles show up at the auction and it drives the price that much further down for the lease vehicles.
Mr. Williams: As I understand it, leasing is just another form of lending. That is the crux of the issue; it is not another form of lending. When you lend money for an automobile, the customer has ownership of that. When you lease a vehicle, the key point is that the lessor, in this case the dealer, has ownership of that vehicle. So the dealer is taking the residual risk on it.
You are buying that car from the factory, lending it or giving the customer use of it while they pay you a fee for it and, at the end, you take the car back as it is and are in charge of disposing of it.
If the banks get into the leasing business, they are in the business of buying and selling the vehicles. They are merchandisers of goods. That is the fundamental difference.
As it is now, they are allowed to be in the business of providing all the financing options they want for leasing and near-lease products, except that they do not take title of the vehicle. They are not buying and selling vehicles. That is the fundamental difference that the banks have failed to appreciate before your committee.
You also said something about consumers. I will not pretend that we are here as the pro-consumer group. However, if you are going to lease a car, you should probably take a look at it.
In 1989, leasing was 4 per cent of the car market. Today, it is 45 per cent of the market. Nobody teaches you about how to lease a car when you are in high school. As an industry, we have an obligation to help teach people about that.
During the last review, we were criticized for not having the level of disclosure that we should have. Since that time, we have moved voluntarily to full lease disclosure. There is a checklist of the items to be disclosed at the back of this booklet.
The majority of leases last year in Canada were full disclosure. That is not the case in the United States. In 18 months, the provinces will have signed an agreement that full disclosure lease agreements will be the law in Canada in every jurisdiction. It is something we are proud of.
Senator Kenny: I am sympathetic to what I am hearing you say, gentlemen, but I am also confused. When you gave the example about leasing, you said that leasing is different from lending. You described how the car dealer continued to own the vehicle.
What was going through my mind was that car manufacturers can compete in terms of leasing. Car dealers can compete in terms of leasing. You do not want banks to compete in terms of leasing. Yet, I think you would recognize that another entrant in the market means more competition, which would be better for the consumer. Banks are already in leasing. You seem to be saying you do not want them selling cars. Yet, it is okay for you guys to make loans, or it is okay for GMAC to make the equivalent of loans. The fact of the matter is that, if banks are leasing aircraft or heavy equipment, they are taking the ownership of the vehicle or the piece of equipment. They are handling the risk. If they are taking collateral, that is what they are stuck with if the loan does not pan out.
I am not sure I follow the logic of the argument you are making. I wonder if you could walk me through it once more, please.
Mr. Hoddinott: As a dealer, no, we do not want the banks selling cars, just like I am sure department stores do not want them selling pots and pans. It will be competition from our point of view.
We have a lot of investment in our buildings because we are full-service organizations. We not only sell cars; we service them and warranty them. We administer the dealer's warranty. We have a lot of administrative costs. We have big facilities to store the cars. We have parts, body shops, and all those extras that the banks will not offer. We need all the parts of the business to make our business work because it is a very competitive industry.
Take away a part of the business and we will be uncompetitive. The result will be fewer dealers, less competition and less service for the customer.
I am worried that should the banks take the leasing business away from us and the manufacturers' finance companies, eventually there will be less competition in leasing, too.
Senator Kenny: Are the banks not saying the same thing to us?
Mr. Hoddinott: That they think they will offer more competition?
Senator Kenny: Yes.
Mr. Hoddinott: I do not think so. I cannot say from the point of view of a finance company versus a bank, but I assume their access to capital is a lot lower than it is for a manufacturer's finance arm. I am sure their capital is tied up in the manufacturing end. That is what they do.
Mr. Williams: If I have your question right, it is: "What are we complaining about?" There are 1,200 car dealers out there running their own independent lease companies and borrowing money from the banks. The banks have a role in our society to lend money so the car dealers can buy cars from the factory, take out mortgages, and enter into leasing lines of credit. They get all of that from the banks. Now the banks want to circumvent the process and be the same people who lend you money to run your business and at the same time have a list of your customers.
Senator Oliver: That is a conflict of interest.
Mr. Williams: Absolutely. They have a list of the renewal dates of those customers.
Take any small town, such as Summerside, P.E.I. A bank manager there will be in direct competition with the guy he is doing all the business with down the street. Those 1,200 dealers will not be in the business of leasing automobiles because the banks do not have to say, "We will not give automobile dealers credit to run their companies any more."
All they have to do is change the lending ratios. They get a little nervous and say, "We are going to change the lending ratio here and there." The next thing you know, you are out of the leasing business.
The point is that there will be less competition. You will replace 1,200 independent guys, who are out there trying to offer the consumer more choice, with five banks that will not offer the same choice.
Senator Callbeck: At the top of page 5, you say that the report does not mention that companies like Ford Credit played a crucial role in financial support for dealers throughout all economic cycles, whereas the banks traditionally abandoned dealers during economic downturns. Certainly there are many stories of banks walking away from small businesses when the economy is in a downturn. Is this your opinion, or is it based on any type of factual evidence?
Mr. Williams: It is not statistical evidence, but it is real evidence. With respect to the story I gave you about Ford Credit supplying insurance to dealers, that saved real jobs and real dealerships.
In the eastern provinces in the 1980s, more than any other part of the country, banks got nervous, and said, "We are pulling our lines of credit." Literally hundreds of dealers -- and I would be happy to have them all come to see you, senator -- can give you personal stories. The banks called loans on 24-hour notice, and said, "Listen, we are out of this game." The only companies that kept those dealerships in business were companies like GMAC and Ford Credit.
When those dealers talk about those times today, tears well up in their eyes. I thought my business was going under. I was 40 years old, and now I am 60. I have about 208 employees in two different dealerships. I would not be here today if it were not for GMAC.
If you need statistical support for that, we would be happy to provide it. It is a good point. We should probably document that in a clear way.
Senator Callbeck: The other point relates to tied selling. The task force feels that they addressed these areas adequately by recommendations. I assume you have looked at those recommendations. How do you feel about them?
Mr. Williams: Tied selling is obviously a fear, particularly if you give them the right to lease. If they are allowed to lease, there becomes a slippery slope.
One of the things we are most concerned about with tied selling is that you can outlaw it but there is always a softer type of tied selling that goes on. When you go into a bank, you are grateful to the bank for giving you the mortgage on the house. They are not making you take the car loan or the other insurance products, but you are so grateful that you are not in a position of power to deal with them. It is unfair to put bank managers in control of all levels of financial services in this country.
Mr. Hoddinott: I do not think it would be unrealistic to say that in some cases you are beholden to your bank. You depend on the manager's largess for your credit line and your operating line. You would hate to be in a position where he now needs the dealer to do something.
With regard to consumers, they sell their own products, and I can only assume they will take advantage of that.
I think the MacKay report did have provisions for tied selling and consumer protection. I did not read the report in detail, I must admit. I stuck to the part regarding automobile leasing. If the report covers those things, it would be worthwhile following up from our point of view.
Mr. Williams: To be specific about the MacKay report on tied selling, it goes back to what Senator Oliver said. It is a question of timing. If you could have proof for the next 10 years that tied selling could be outlawed, and have 10 years' worth of experience that new tied selling provisions would work, maybe that would change the perspective small business has of the banks. However, to say that you will holus bolus throw small business and consumers to the wind without having some track record to prove that these tied selling provisions work, that is a real question mark.
The Deputy Chairman: As much as I would like to have Senator Oliver rewarded for his good works, we will adjourn this meeting. Thank you very much.
The committee adjourned.