Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 31 - Evidence, October 20, 1998 (p.m.)
HALIFAX, Tuesday, October 20, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 2:00 p.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Our first witness is Mr. Holland, an entrepreneur in the region, who is active in the securities business.
Mr. Lonsdale W. Holland, President, Beacon Securities Limited: I spoke before this group in Ottawa, about two years ago now. I am pleased to see that one of the things that was near and dear to my heart at that time -- tied selling -- has come out of that. It is very positive for the country as a whole and for the consumer and the people in our industry.
I have been in the investment business for over 40 years. I was 31 years with a national firm, during which I served in Quebec and Ontario and opened branches in Europe and in Atlantic Canada, where I have been living for almost 22 years now. Ten years ago, I started a regional investment firm. Prior to starting my firm, there were two firms here, both of which, for one reason or another, no longer exist. We are doing things differently than they did.
We are Bank of Canada primary distributors. We are involved in underwriting. We underwrite government securities and have syndicate positions from Atlantic Canada from 2 per cent to 8.5 per cent. We have special selling-group positions right across the country, in all provinces except Quebec. We do have a piece of Quebec Hydro. We have been involved with some of the large underwritings. I am thinking of Air Canada, Petro-Canada, CN, and things like that.
We recently helped raise some money for a couple of small local companies, one of which is in the Internet-related business; specifically, a product called "Minder." It works like this: If you are on the Internet and somebody telephones you, a message will appear on your screen that someone is trying to phone you. Minder is being marketed in the U.S. They have a relationship with Cincinnati Bell, Ameritech and Bell Corp. It is being promoted in some of the provinces across Canada.
We have also raised some money for a local regional beer company, Maritime Beer. If any of you have a chance to drink any of their beers, I recommend particularly the dark one. It is called Black Pearl; it has a wonderful taste.
When we started our business, there were 70 investment dealers; today there are 170. This increase has come during a time when the banks have consolidated their thrust and their position in the industry. Hence, there are opportunities out there, in spite of the power of the big banks. What we need are opportunities and a level playing field.
Ten years ago, and maybe before that, but certainly since then, the banks decided that they do not want to lend any money to people like ourselves. To my knowledge, none of the banks has subordinated loans to any of the dealers other than the ones that are captive to them. I do not think that is good for the industry.
Our business is one that is built on greed, whether you are RBCDS or Levesque or Beacon Securities. We all want more. In one sense, that is hard to control, but in another it is what makes the system work. Those who are successful will do well.
We are a regional dealer. We have a niche. For ten years, we have held investment seminars. We bring in the major corporate entities in Atlantic Canada, most of which are too small to be followed on a full-time basis by more than one, if even one, of the dealers in central Canada. This past year, as in the past eight years, we travelled around Atlantic Canada. We had 20 presenters, including the four provincial ministers of finance, the presidents of five public utilities and a number of other companies, of which two were national. This year, we had Air Canada and Maple Leaf Foods. We had 57 Canadian money managers and four American money managers come and talk to some very small Atlantic Canadian corporations.
We see a niche for ourselves in Atlantic Canada. We are all for letting the major banks merge, if, in their opinion, that will allow them to be more competitive and more profitable. They probably know better than someone who is not in the business how their businesses should be run. However, I suggest that there is probably room for a lot more banks in the Canadian banking scene. We should open up the doors. Everyone will find a niche. In this way, the public will be well served.
We deal in bonds and stocks, with institutions and with retail, but we see a need for insurance. Some of our people who are dealing with retail have an insurance licence. As a matter of fact, yesterday we phoned our lawyers and asked them to incorporate a company called BSL Financial Services, primarily to carry on an insurance-type business.
Also, as a fall-out of the on-coming mergers of the large dealers, the dealers are trying to consolidate their operations. In Halifax, for instance, Dominion Securities has merged with Richardson Greenshields, who themselves merged just a couple of years ago. They are now putting those two offices together, and there is some fall-out as a result of that. We had a chap join us while I was away. Another person is also joining us, and we are in contact with two other people. These people do not have enough production to make it interesting for the big firms, who have high overheads, to keep them on, but they are very good in what they do. They have a small clientele. This is our business.
I know a man who has a seven-figure portfolio. I met him last Friday by coincidence. He called me yesterday to tell me that he moved his account from a firm that has been taken over by a bank to another firm. That other firm has recently been taken over by Merrill Lynch. He does not want to deal with the banks or with the Americans. Hence, he has come to us. There are lots of opportunities for individuals. We are willing to serve the individual.
The Chairman: You said that subordinate debt is not being provided to any of the new, small investment dealers by the banks. Where is the debt coming from? Where are you raising the money?
Mr. Holland: From ourselves. We owe nothing. That is true of most of our competitors. We owe nothing to anybody outside of our business.
The Chairman: You said that 10 or 15 years ago there were 70 dealers; now there are 170. The industry has 100 new, small boutiques basically because people did not want to deal with the very large banks or the bank-owned institutions or the American institutions.
Mr. Holland: That is partly it. The business continues to grow. Hence, as the business grows, there is more room for niche players to operate. Firms like Newcourt, who have come from nowhere and become very important players, are capitalizing on that.
The Chairman: When we were in the United States, we heard that in Philadelphia, where the two biggest banks merged, four or five small community banks sprang up the following year. They did well precisely because they could offer personal service, which customers felt they would not get from the new merged bank.
Given what has happened with respect to investment dealers, is there some reason to believe that, as banks grow bigger, a public policy that would encourage the creation of smaller, community, regionally based banks, deposit-taking institutions, would have some hope of success, or are we just dreaming?
Mr. Holland: That is a real possibility, provided the legislation was such that people were encouraged to go into the business.
The Chairman: What do we have to do with public policy to make the incentives right, such that someone could come to you and tell you that they would like to raise $20 million to open a local community bank? What do we have to do to encourage you to go out and find 10 people who want to put up $2 million a piece to create a community bank?
Mr. Holland: You might encourage public institutions -- and I am thinking of provinces and municipalities and non-taxable agencies -- to deposit some of their moneys in a community bank and directly or indirectly give them an incremental credit for it. In one sense, you are encouraging that.
You might make the income tax treatment different for a period of time. You might make some of the capital tax treatment different for a period of time. I am sure there are many ways to encourage public institutions to deposit their moneys in community banks.
The Chairman: If there were incentives, first you must change the ownership rules anyway, correct? Clearly that type of institution will have to be closely held for awhile. If you change the ownership rules, if the regulatory climate were a little easier, not riskier but less burdensome, and if the taxation rules were somewhat simplified and less costly, would it be possible for public policy to create a set of carrots which would turn this idea into a reality?
Mr. Holland: I think so. People like to deal locally. Next to dealing locally, people like to deal regionally. Next to regionally, people like to deal nationally. There is an interest in everybody to deal from those perspectives.
Senator Oliver: I was interested in hearing about how your company began and the different things that it is now doing. You mentioned that you instructed your lawyers to incorporate a new company, BSL Financial Services, because you have had some requests to sell insurance. In the main, you make investments and give advice. Now you want to get into the insurance business. Your customers make deposits with you and receive interest on those deposits. You are sounding like a bank, if I am correct.
Mr. Holland: People do not leave deposits with us. People buy and sell securities through us, as agents. We also do that as principles, as underwriters. Nova Scotia changed its investment business laws seven or eight years ago to allow dual licensing. Many of our clients had insurance requirements -- primarily life insurance -- that were tied into their investment decisions. It made sense to bring it all under one roof. Some of our people now carry both securities licences and life insurance licences. However, the life insurance business is being spread around. It would be more cost-effective to have our own in-house insurance facility. Also, they would have access to a higher percentage of the commissions earned on these premiums.
Senator Oliver: What type of insurance are you referring to?
Mr. Holland: Life insurance and annuities, not general insurance.
Senator Oliver: Can you tell us what other services you offer, apart from securities, the buying and selling of bonds and of equities? There is a fair amount of opposition to allowing the banks to sell insurance in their branches. Now you are asking for the right to sell insurance in your business.
Mr. Holland: I cannot sell insurance in my business.
Senator Oliver: In Nova Scotia?
Mr. Holland: And in most other provinces. I have licensed representatives in four Atlantic provinces and in B.C. If I had people who were licensed to sell insurance, and they could be the same people, then we could sell insurance in those provinces.
Senator Oliver: So what are some of the other services?
Senator Angus: You are a lender operating market accounts.
Mr. Holland: In one sense, we operate marginally. We really do not. That is not the kind of business we want. We like to have people buy securities and hold on to them. The market goes up and down, but they do not have to buy and sell; the dividend is not cut. If you look at what happens over the long term, the people who make money are the people who buy and do not sell, provided you have bought good management.
We try to help small companies organize themselves to grow, and direct them as to how they might raise money, whether it is through us or through other areas. We know people across the country and outside the country that have helped them do this. We came very close to arranging US$25 million worth of financing for a relatively well-known regional company here in Atlantic Canada. They could not do anything in Canada. We were not able to do it, but about six months later they ended up doing it with some of the people we introduced them to. There was a U.S. dealer involved. We were trying to do it ourselves.
Senator Oliver: In your introductory remarks, you said that there is room in Canada today for a lot more competition in banks. Are you talking about foreign banks?
Mr. Holland: I am thinking of foreign banks. Let them come in and deal on the same footing as Canadian banks. It would be beneficial for the small Canadian investor; not all banks want to lend to a small investor. There will be some banks that will lend to only small investors in Atlantic Canada. People will find a niche in which they are comfortable.
The people we meet in the Boston area when we are down there to sell securities have strong ties to Atlantic Canada. To them, the Atlantic Canadian credits are wonderful. Everybody says what a terrible place Newfoundland is, but try to buy a mortgage in Newfoundland. They do not exist. Newfoundlanders are very good money managers.
Senator Oliver: Do you think that foreign banks will want to come to Atlantic Canada and invest heavily in buying retail branches, or do you think they will look at more niche-type markets; in other words, sell to them using the Internet, the telephone, and so on, without having huge offices and overhead here in Atlantic Canada?
Mr. Holland: The days of branch banking are gone with the dinosaurs. People bank by phone, they bank by credit. The people who are over 65 have a tough time learning to do that. I withdrew money out of an ATM for the first time two summers ago. Now I am just back from a month in Europe, and I went over for the first time in my life with $400 in my pocket; no traveller's cheques. Normally, I would have taken a lot of cash and a bank draft.
Advanced technology and the Web are such that, even if you go into a branch, the bank employee you are dealing with puts the information into a computer, and the computer scores and prices the loan. The bank employee will not go against that because doing so results in a mark on his employment record. Therefore, branch banking as we knew it 30 or 40 years ago does not exist anymore.
Senator Tkachuk: Is that good or bad?
Mr. Holland: It is a fact of life.
Senator Tkachuk: Is it good?
Mr. Holland: It would be better if the employee had a feel for the ability of the customer, but that does not exist anymore. I had some indirect experience the other day with a bank here in Halifax. The account involved has being there since that branch opened, probably in the 1930s or 1940s. The individual in question was trying to call that branch but he got hung up with the call centre -- I am not even sure where the call centre is located -- and could not get a phone call put through to the branch. He ended up having to take his lunch hour to go to the bank.
We are talking about banking and I am here to talk about the investment business.
The Chairman: I wish to take a moment to recognize one of our former colleagues, Senator Finlay MacDonald, who is now retired and living in Chester, Nova Scotia. He was a member of this committee, indeed its chairman for some time.
Senator Meighen: You say you are not a banker, but obviously like all of us you have dealt with banks quite a bit. You are an investment dealer. Your industry is changing as well. Seven years ago there was a change in legislation in Nova Scotia which allowed you to employ people with cross-licences, insurance and security.
Mr. Holland: The legislation allowed people who had security licences to carry insurance licences. The word is dual licensing.
Senator Meighen: Is there anything else that you can think of that cries out to be done in your industry or in the banking industry? If you were an all-powerful finance minister who could change the legislation or implement new legislation, is there anything you would do?
Mr. Holland: Not at this point in time. That is not to say that as you review the Bank Act every so many years there will not be things that will come up. Right now there should be one securities commission in Canada. That is what you are alluding to. It makes sense.
Senator Meighen: You can find nobody to disagree except securities regulators. I would like to find somebody who is against it who is not a regulator, or perhaps a politician for that matter.
You mentioned foreign banks. Do you think the entry of foreign banks -- it seems to be a foregone conclusion, and everybody seems to be in favour of it -- will solve the problem of the retail customer in rural Nova Scotia?
Will that person have to resort to the Internet or the telephone?
Mr. Holland: That is a wonderful opportunity for the co-ops who are close to that type of community, not only in Nova Scotia but right across the country.
Senator Meighen: We heard evidence this morning that the co-op movement in Atlantic Canada is much weaker than in other parts of the country; Quebec and Western Canada, for instance. Can you help us in trying to determine why that is so?
Mr. Holland: Probably for several reasons. The co-op movement in one sense started here, so there are some strong roots. However, the level of wealth in the community is a factor. Our banks in Atlantic Canada have been here for longer than banks elsewhere across the country. There is more long-term inherited wealth in this part of the country. Wealth in this part of the country by and large is very conservative as opposed to Alberta or B.C. where it is first- or second-generation wealth. Out there, they are still accustomed to taking risks; people here took risks four or five or six generations ago.
Senator Meighen: Not even in the grocery business.
Mr. Holland: Grocery business is not a big risk. Margins are much smaller than they used to be.
Senator Meighen: In terms of regulation, you alluded to the perennial question of having one securities commission. In your business, do you find that there are regulatory gaps as between the feds and the Province of Nova Scotia, for example? Or is there duplication?
Mr. Holland: There is a lot of duplication. I do not spend a lot of time with regulators, but we fill out forms galore every year vis-à-vis our customers whereas we could fill out one form and send it to one place.
Senator Meighen: Or send it to both levels.
Mr. Holland: Yes.
Senator Callbeck: You mentioned tied selling, that you were happy with what had developed there. Are you talking about the legislation that was proclaimed or the recommendations in the report?
Mr. Holland: The legislation that was proclaimed earlier this year. I spoke two years ago, amongst other things, about tied selling, and up until about six months ago we were still encountering it. Since then, I have not had an occasion to have any of the people working with us complain about it.
Senator Callbeck: So then you are comfortable with what is there now?
Mr. Holland: Yes.
Senator Callbeck: You are comfortable with the recommendations in this report. We have had various opinions as to whether these recommendations of acceptance should be implemented in a speedy fashion, or whether it should be cautiously done. Some people have said that all the recommendations should be implemented at once; others have said that it should be piecemeal. I am just wondering what your thoughts are on that.
Mr. Holland: I found out about this report only this morning. I have been out of the country for most of the last six weeks. I glanced at it quickly and, as such, cannot comment on it. I was interested in where the report seemed to deal indirectly or directly with the securities industry.
Senator Callbeck: You agree with the mergers. Many people fear that if the mergers take place we will have fewer banks. However, the MacKay task force sets out recommendations to make it easier for foreign banks to come in. How long do you think it would take for a strong second tier to develop in the banking industry?
Mr. Holland: It would depend on what kind of playing field they had to come into. I would say seven to ten years. Branches are closing in any event, and will continue to close no matter what happens. I gave you the example about the bank here in Halifax. That branch, as far as I am concerned, for all intents and purposes is closed.
Senator Angus: You are in favour of the proposed bank mergers that are out there on the table. My understanding is that you are neither directly nor indirectly owned, controlled or in other fashion influenced by the banking industry; is that correct? You are quite independent.
Mr. Holland: Quite independent, and we intend to remain that way.
Senator Angus: I was reminiscing earlier how, when I first met you, you were with Midland Securities. You are still a member of and very involved with the IDA, the Investment Dealers Association. They are coming to see us the week after.
Would you generally subscribe to the views they hold?
Mr. Holland: Not always.
Senator Angus: Having just come back from overseas, you are not aware of what they will tell us?
Mr. Holland: No.
Senator Angus: One of the witnesses who has been very outspoken in the media -- and many have because everyone is preaching for their own parish -- is Mr. Barrett. He said that in his view there is not one scintilla of evidence that these proposed mergers would be good for the public interest of the country. Would you disagree with that?
Mr. Holland: Unless you are in the shoes of whoever is making the decisions, you cannot make as good a decision. If the banks want to merge and blow their brains out, let them. There will be people who will come in and fill the vacuum. It may be from a different perspective and done differently, but the public will be served. The free marketplace dictates that where there is an opportunity, somebody will build a mousetrap, and that is the way it works.
One of the things already happening with the mergers, as I mentioned, is that we have syndicate positions. As these firms merge, we get bigger syndicate positions. This is not only good for us, but also good for the country. By and large, we are dealing with the smaller client. Whereas the guys in Toronto want to write the $50 million or $25 million ticket, we are happy to write the $1 and $2. Many institutions across this country are not covered from the big desks in Montreal, Toronto or New York.
We are providing the service, and the more we have access to the product -- and it is hard for us to get access to the product from the big institutions because they want it all -- the more broadly spread will be the securities, which is in the best interest of the marketplace in the country.
Senator Angus: One of the examples we keep hearing about is that Belgium had an opportunity to permit amalgamation of mergers but did not, and soon all their banking system was foreign owned. It has been implied here that if we do not hurry up and approve these things we will end up in a situation, because things are moving so fast, whereby foreigners will own our banking system.
Does that follow, in your view?
Mr. Holland: It could. I am not a banker, so I do not know. I did business in Belgium from 1962 until 1976. I know how fragmented the system was. I remember when one of the Canadian banks tried to establish itself over there but for whatever reason it did not work. The system did not change. In Germany, it was very fragmented; in the meantime, not only the banks but also the stock exchanges are being encouraged to come together. If we are to have viable exchanges, it is probably better to have one strong one than four or five that will disappear because they do not have the technology, buying power and training capabilities that are required.
Senator Angus: The general tenor of the MacKay report and many other briefs that we have seen is that the status quo is not an option and that it is really changing on its own anyway. If the governments and the public policy-makers do not catch up, it will move forward in any event; changes are taking place so fast.
Against that you have the caution that we have a very unique set-up here in Canada. Canada has a relatively small demographic mass against a large physical landmass; as well, having six major players marks Canada's banking system as unique. We should move very cautiously before we mess around with it because it is time tested. It has evolved over the years, it has shrunken and increased and contracted and expanded. It is a finely tuned thing. Issues of safety and soundness and the integrity of the overall system are at stake. I am hearing you say that we should not worry about that, but I would like to be sure I am hearing you accurately.
Mr. Holland: I am aware of the concerns of everybody, but the banking industry will not disappear. If there is a community that requires banking, somebody will supply that service. The co-ops were the first to have ATMs. I am not a banker, but I am aware of some of the things that banks do.
Senator Angus: Does your business engage in investment counselling?
Mr. Holland: I am licensed to do investment counselling. I am the only one in our firm who is, and I do a little bit of it, but that is really not our business.
Senator Angus: So it would not trouble you if bigger organizations were getting into that as part of their new franchises?
Mr. Holland: They are already directly or indirectly there. Trust companies have always been investment counsellors. The banks own the trust companies and own other money managers right across the country, directly or indirectly, to greater or lesser amounts.
Senator Angus: One last thing, and that is the demutualization of the mutual life companies. Much of it is quite controversial -- for instance, what stock options should be available to management, how long the moratorium should be, and even what capacity is needed. One of the companies has backed off a little bit; Manulife has.
Do you have any comments on whether that would be helpful to us?
Mr. Holland: If they want to demutualize, I do not have a problem. They know their business better than I do. As to stock options, you should reward people for value-added. You must write the options in relation to target performance, not just because the price of the security goes up, because the market goes up or, conversely, goes down and they are not rewarded. If you have profit targets and benchmarks, there are all kinds of ways.
Senator Angus: I probably should not have highlighted stock options. Demutualization means that the policyholder still has his policy. He has a security that will trade in the capital market, in the securities markets that you are involved with. Do you see that as something that is eventful in the Canadian securities business or not? Is it like the regular IPOs?
Mr. Holland: I do not see it. Again, several of the institutions who lend mortgage money in the U.K. have just gone from being mutual companies to being publicly traded. They gave shares to their shareholders, like a co-op, and they all make money. The Royal Automotive Club just sold off part of its business. The people who kept their memberships are very happy. Again, this is part of what makes the commerce go.
The Chairman: This committee has favoured demutualization and has been pushing the government towards that for a long time. There was an interesting article in yesterday's Report on Business which stated that the Michigan insurance regulator, which is essentially the regulator for all Canadian insurance companies doing business in the United States, has expressed serious reservations about the proposed demutualization rules. His grounds were that the rules propose to attribute ownership of a mutual company to those who have the right to vote at meetings -- which means participating policyholders <#0107> and the regulator thinks that it should be a much larger class than that.
I have asked our researcher to get an analysis of the regulator's objections, because demutualization cannot go forward in Canada until they also receive the approval of the Michigan regulator. For example, in the case of Manulife, the majority of policyholders are in the United States, not in Canada. Therefore, it is important to understand what the difference is, and our researcher will get us that.
Senator Austin: I want to continue on a theme that you and Senator Angus were discussing; that is, that the securities pool available to you would be larger if bank mergers went forward. Can you explain why that would be?
Mr. Holland: XYZ province has a syndicate of three or four managers and another 10 or 12 participants, ranging from 20 per cent to 1 per cent liability, say. Historically, if you put two and two together you do not get four, you get 2.2, because the borrower wants to spread out his risk. So as the syndicates have fewer large players, they look to the people who are further down the syndicates, and they bring in new members of the syndicate. The smaller ones who have demonstrated their ability to place the paper are --
The Chairman: If a bank that has 20 per cent of a particular bond issue merges with a bank that has 15 per cent, the result will not be 20 plus 15, or 35 per cent. The new bank will probably only get 20 per cent, or some number like that, and therefore there will be more money available for everybody else.
Mr. Holland: Since the Midland and Merrill Lynch merger, we have already seen our syndicate positions go up. Percentage-wise, by total syndicate, it has gone up by a lot. It is more product for us to sell, and the more product, the more money we make.
Senator Austin: That would be at the primary distribution level that you are speaking about, the first transaction. However, in the secondary money market, would you have the same role to play or would the large institutions aggregate the positions in that market and begin to play a more dominant and normal role?
Mr. Holland: I do not think so. Again, the institutions across the country -- we are talking now about the institutional market as opposed to the retail market. The big institutions have big lines, and the small- and medium-sized institutions have smaller lines. More and more institutional accounts are opening all the time. Pension funds are getting bigger, hospital endowments are getting bigger, insurance companies, which are merging to some extent, are becoming larger. As they become larger, in one sense they become more active and they can take a broader spread of risk.
Senator Austin: In the original model, you had a number of dominant players, and they took dominant positions; and then in the secondary market, they traded positions and some of them assumed very large positions on behalf of a very large client. If in the primary market you get a broader distribution of product to dealers, I presume that the same demand cycle in the secondary market as existed before would exist still, and therefore you would see a very rapid trade up into large positions. I am talking about money market transactions.
Mr. Holland: We are not money market dealers. We do some business in the under one year scenario, but not a lot. The bulk of our business is probably three years and out -- two and a half to three years.
Senator Austin: Can you speculate one more time on what would happen to the secondary money market?
Mr. Holland: If there is an opportunity, you will have people come in and be just money market dealers. This is a function of the ability to carry inventory, the money market is. Some of the institutions, or some of the dealers, use it as a lost leader to secure syndicate positions or underwriting positions with some of the corporate accounts. However, most of the people try to make money on all the product, including the money market.
Senator Austin: Would your answer in anyway change if, in the event of a bank merger, the investment dealer components of the existing banks were divested? Assume the Bank of Montreal and the Royal Bank each have their own major investment houses and that for competition reasons they were told, "We will let you get together, but you cannot amalgamate your investment dealer business." You would not get the concentration, and therefore there would be the old regime in product.
Mr. Holland: I am not sure how it would happen that you force one bank to sell and let them make the choice. If that is the case, one of the underwriting positions would be up for grabs, and we would probably get some of that as well.
The Chairman: Mr. Holland, thank you very much. We appreciate your attendance here today.
Our last witness this afternoon is Mr. Terry Shea. This committee is very familiar with what a mutual company is. We even understand some of the nuances of defining and we are familiar with the arguments pro and con of the issue that concerns you, which is the retailing of property and casualty insurance through bank branches.
Please proceed, Mr. Shea.
Mr. Terry Shea, Secretary Treasurer, PEI Mutual Insurance Company: We have a recommendation with regard to the retailing of insurance by banks and their branches and the ability of banks to use personal customer information to target policyholders or whatever in the sale of the insurance product. PEI Mutual wants the current insurance retailing powers and the restrictions on banks applied in the 1997 federal services legislation to be maintained. In particular, the status quo should apply to the restriction on the banks to retail insurance in their branches and to use personal information about their customers to better target the marketing of insurance products.
In our opinion, the large majority of Canadian consumers would respond negatively to the concept of banks retailing insurance if they were aware of the potential drawbacks. The task force background paper quoted Canadian opinion as having more Canadians express dissatisfaction with their insurance company or their insurance company broker than those who expressed satisfaction with their deposit taking institution. We do not interpret this to mean that the public or the consumers would like to see banks retailing insurance. The product of insurance is intangible and immediately puts the consumer in a position where they feel that they are not getting value for their dollar.
Consumers pay for and get a promise in return with insurance; they do not get a tangible product. Customer satisfaction is a result of the characteristics of the insurance product.
Should banks retail insurance in their branches? Consumers will feel an implicit pressure to respond positively to offers of insurance products made by the banker. The onus of maintaining a good relationship with the banker would fall on the consumer. If the task force proposals on privacy and tied selling are legislated, banks will pursue cross-selling, using reduced prices to attract policyholders. Banks will bundle products and give small discounts for cross-selling. The deep pockets of our Canadians banks will put exorbitant pressure and unfair competition on the insurance industry.
Consumers who are trying to obtain a loan or a mortgage often find themselves at a power disadvantage with a banker. If banks are allowed to sell insurance in their branches, this power disadvantage will increase because the consumer will feel pressured to buy insurance from that bank. The perception will be that the consumer will have to support the bank products when seeking credit.
Since 1990 banks have, for all intents and purposes, taken over the security and trust sectors. We do not want this to extend to our insurance sector. Diminished competition brings reduced product variety and services, as well as higher prices.
Increased competition in the financial services sector is not the result of market forces, but rather the result of government actions undertaken to create a strong banking sector. The task force reports that, while competition is in the interest of consumers generally, it is likely that lower- and middle-income Canadians will be the principal beneficiaries of it.
In our opinion, increasing banks' power to retail insurance will not result in low- to middle-income Canadians having a larger insurance market from which to purchase their insurance products. Our feeling is that the banks will use the current customer information to select a niche market of better-than-average insurance customers -- customers who have low claim records and above-quality properties. The less desirable risks will not be targeted by the banks, and therefore these consumers will be left with no alternative as to where they can purchase their insurance coverage.
PEI Mutual, along with Canadian mutuals in general, has always been, and will continue to be, a fair player in the marketing of our insurance product. Identifying and insuring the best risks and leaving the rest has never been a high priority for our company. Our position is that we are an insurance company for the public at large, not for just a select few.
The task force continually discusses competition and the fact that increased competition will bring about a better marketplace for our insurance products. It is our opinion that the marketplace for insurance at present is at an all time competitive high. Increased competition will result in job losses among existing players in the insurance industry. The objective of almost every insurance company is to increase its market share.
In 1998 consumers are getting great value for their insurance dollars. Most companies are operating with an underwriting loss. Increased competition will result in job losses where we least wish to see them -- in small communities or smaller insurance companies, and in brokerage offices which will be forced to close. The new jobs will be in larger urban centres, where the national banks are located.
Should the banks obtain the insurance retailing powers they seek, the Canadian companies that originally helped develop the Canadian market -- including companies like Prince Edward Island Mutual -- will be the first Canadian casualties of the new insurance environment.
We understand that this report has taken a significant amount of time to develop, and it does contain a large number of recommendations that are good for the future of the Canadian financial services sector. We strongly oppose recommendation number 18, however. This recommendation will adversely affect companies such as ours.
Our sole purpose is to provide protection to the public for a reasonable price. As a mutual company we employ local people, spend money in the local community, make donations to local charities, and keep local economies vibrant. Companies such as PEI Mutual invest their dollars locally in the form of purchasing bond indemnities in the Government of Canada, the provinces, municipalities, and local corporate companies. Much of our investment portfolio is invested locally in the Prince Edward Island economy.
Increasing the power of banks will result in job losses in rural communities and in new jobs going to the urban centres where banks centralize their operations. Decisions will be made in the cities with less regard for the faceless consumer in the rural communities. Consumers will end up with less competition rather than a more competitive marketplace. We ask that recommendation number 18, which deals with the retailing of insurance by deposit-taking institutions, be stricken.
The Chairman: Back in 1970, when I first became involved in the Government of Nova Scotia, there were approximately 33 telephone companies in this province. Maritime Telephone had most of the area, and there were 32 or 33 small mutual telephone companies -- some of them only had four or five miles of lines. They disappeared over the 1970s, and were taken over in the end by Maritime Telephone.
In 1970 I could have had very much the same presentation from some of the owners of those mutual telephone companies that you just gave. How do you deal with similar types of problems where small institutions, such as the old corner grocery store, disappear and are replaced by other entities -- for example, convenience stores? That is the public policy dilemma that many of us face. The question is, should public policy be intervening to prevent that, or should we be allowing market forces to do whatever they wish?
Mr. Shea: It is our opinion that public policy should be intervening. I do not believe that bigger necessarily means better. The mutual philosophy is a great philosophy; policy holders own the company, and the decisions are made locally. If a policy holder is looking for an answer to a question, or has a question regarding an insurance policy, he or she can speak to the manager of the company right in the local community. Prices are competitive. Our market share has been increasing, and we now compete with major insurance companies across Canada. Our market share has been increasing by a small amount every year, which is the way we wish to see it.
The Chairman: I wish to read you a quote from your paper, because the property and casualty industry has made this pitch to us for a decade now. It says:
The deep pockets of our banks will result in reduced prices for the short term...
I assume that is good for consumers, but it does not say that here.
...resulting in forcing smaller insurance companies and brokerages out of the market. When competition decreases, prices will increase again and the insurance consumer will pay long-term increased premiums. This will result in a short-term gain and a long-term detriment to the public.
Do you have any evidence of that? Consider the U.K., Australia, or a variety of other jurisdictions with deposit-taking institutions of various kinds -- be they credit unions or building societies in Europe or England, canton banks in Switzerland or community banks in the United States. When these institutions have participated in the retailing of insurance -- particularly property and casualty insurance -- prices have gone down. They have been in insurance for a long time, and there is no evidence whatsoever that prices have gone up.
One of our dilemmas is that your industry frequently makes the claim that prices will go up, but we have seen no evidence in support of that. We only get conjecture. My question is: Do you know of or have any evidence that shows that this has been tried and does not work? All the evidence we have seen goes in the opposite direction.
Mr. Shea: No, I do not have any evidence today that will back up that claim. It is our opinion that the insurance industry is operating very efficiently right now. Consumers are certainly not subject to price gouging, because most companies out there are operating at an underwriting loss.
The Chairman: It is true that the margin is very small.
Mr. Shea: Yes. A market like that is not normally targeted by other companies. We can see no reason for the banks wanting to enter this market other than to increase their market share of financial products. That is our opinion, and I do not have any concrete backing for it.
Senator Kenny: My impression is that property and casualty insurance brokers are very powerful people. They get into the roots of the community, they are involved in service clubs, they have local knowledge, they get into the homes and the offices of their customers, and they know a great deal about the people to whom they are selling. As a consequence, it seems to me that they have a terrific advantage in carrying on their business. Is that a fair statement?
Mr. Shea: Yes, it is a fair statement.
Senator Kenny: Banks are already selling insurance through subsidiaries, and their telemarketing approach is hugely effective. They have taken great chunks of market share simply by calling folks up on the telephone and selling insurance to them.
Given this fact, why are you concerned if they take the next step and sell insurance from their branches? They are moving into territory in which you have a real advantage. You go to your customers' offices, you go to their homes. Knowing people well enough to get into their living-rooms and explain a policy to them gives you a real edge over someone who must sell it out of a branch downtown.
Mr. Shea: In your statement the one thing you did not mention is price. Consumers today are very price conscious. We do not sell our products through brokers; we have captive agents. They do a very good job, and we are very proud of the job that we do in educating our policyholders on the products that they purchase.
The banks, on the other end, are not investing in education. They are only interested in selling the product. They are not interested in educating the policyholder or going through the policy booklet with the policyholder. The banks' method of selling -- direct writing and Internet selling -- is attractive for policyholders right now because the banks can do it more cheaply. They do not need to put the dollars out and to have people out there explaining the coverage.
The MacKay task force has said that policyholder education, transparent and easily-explained policies, and policies written in clearer language are all very important to government in this day and age, and important to the task force. Allowing banks to sell insurance through their branches, thereby increasing their power, will diminish that rather than make it better.
Senator Kenny: You may well be right, but we both agree that consumers are pretty canny, and if they want someone to come to their houses and explain something to them, they are prepared to pay for that. If they are willing to do it without the explanation, do you feel they should have the choice?
Mr. Shea: Yes, and I believe they have that choice now.
Senator Kenny: Do you have a study that says most consumers want it the way it is?
Mr. Shea: I do not believe I said that consumers want it the way it is. I believe the task force states that consumers' opinions with regard to the insurance industry are not as good as their opinions with regard to the banks.
Senator Kenny: I thought you were actually referring to a study that you had done.
Mr. Shea: No.
Senator Kenny: You were referring to the task force comment?
Mr. Shea: Yes.
Senator Kenny: That being the case, why would you not be comfortable with letting those consumers who have a low opinion of banks avoid them, and those who have a high opinion of companies like yours choose you?
Mr. Shea: We see that allowing banks to sell insurance in their branches will result in unfair competition. That is, the banks will try to bundle their products when a customer purchases a loan. It will be an implied pressure, but the bank will be putting pressure on consumers to buy all their products through the banks.
In the long run, once the banks have that in place and realize that it can be done, price will no longer be the big thing for them, and they will increase their prices or charge more than what we charge now. Customers will still purchase from the banks because they will feel the implied pressure.
Senator Kenny: What would your position be towards a customer who went to a bank and stated that he or she liked the idea of one-stop shopping, and wished to come to the bank, open an account, and buy some insurance? That is, this individual is sick of going all over town to deal with these things, and wishes to receive all his or her financial services in one place. Not only that, this person has a feeling that one-stop shopping might result in a better price. If the consumer went in and said that, would you say that is okay?
Mr. Shea: I guess so, if that is what the consumer wants.
Senator Kenny: Why, then, would you not leave it up to consumers to decide whether or not they want one-stop shopping? Why not have the option?
Mr. Shea: If the legislation is changed to allow banks to sell insurance in their branches, the options eventually will not be there for the consumer. Small companies such as ours and the brokerages will eventually be closing their doors, and those opportunities will not be there for the public. You will be forcing the public to use the banks for one-stop shopping.
Senator Kenny: You do not believe there will always be a core group out there who will want to have someone they have grown to trust over the years come to their homes or their offices, sell them the policy, and later, if necessary, help them through the process of making a claim? Do you not think that is viable in the long term?
Mr. Shea: I believe that core group will always be there. People out there want that service, and the people with whom we deal want that service. They very much like the service that we provide. If the banks are allowed to sell insurance in their branches and use customer information, however, I believe that many of the current players in the industry will be eliminated.
Senator Kenny: You mentioned a couple of times in your presentation that this would result in lost jobs. I can see where jobs might be lost in telemarketing; that is, the telemarketing jobs which stem from banks selling insurance through subsidiaries.
If in fact bank branches are selling insurance, however, surely someone in the branch will be doing the same job that one of your people is doing now. Someone in the branch must be able to sell the product. In Charlottetown, for example, the job will move from one block to another block, but it will stay in Charlottetown.
Mr. Shea: Some insurance jobs will stay at the branch, but it will be a different type of job. The banks will centralize the main decision-making and executive jobs to the larger urban centres. There will not be as many jobs at the bank as there currently are in the P and C industry. Jobs will be moved, and the remaining jobs will not be the jobs that the insurance companies currently offer the public. They will be lower-paying jobs.
We see that now in banks all the time, including the bank in our own local community. They are continually taking the decision-making authority away from the bank that our company deals with. When I started working with PEI Mutual ten years ago, the bank manager at our local branch had a great deal of power. Now any decisions we want must first go to Charlottetown, and then to Halifax. Banks have a way of doing that. If they are allowed to sell insurance in their branches, the employment they create in their branches will not be equivalent to the employment that we create.
Senator Meighen: I do not wish to prejudge this issue at all. Would it be a fair statement to say that from your perspective and in your industry, the horse got out of the barn, or that the barn door was shut after the horse left, at the time when banks were allowed to sell insurance, albeit not through their branch network?
Mr. Shea: That was the opening of the floodgate, yes.
Senator Meighen: Can we put the water back above the dam?
Mr. Shea: No. It is working fine the way is it is right now. Banks cannot use their personal information to target policyholders. They cannot sell insurance in their branches, they must sell it through an insurance company separate from the bank itself that they own. It basically keeps it as a level playing field, I believe.
Senator Meighen: You feel that it is a level playing field. If you were appointed the head of banking for one of our chartered banks in Atlantic Canada tomorrow morning, you would get all the banking people responsible for selling insurance together. You would tell them that they must demonstrate that concern for the customer and take the time, do all the things that your captive agents are doing. With the advantage of the one-stop shopping that Senator Kenny was alluding to, could you not drive your present company out of business if you did it well?
Mr. Shea: The one-stop shopping is not there right now because they cannot sell insurance out of their branch.
Senator Meighen: It will be just around the corner and there will be that nice Mr. Shea who will sell it to you and explain the whole policy.
Mr. Shea: This will be done without them being able to sell it directly in their branch, and not being able to basically promote it within their branch, other than a brochure or whatever.
Senator Meighen: Do you feel that the playing field is more or less level?
Mr. Shea: It works okay with us because they must retail their insurance in the same way we do. The competitive forces are the same, the information that they have versus what we have is the same. It has worked okay for you.
Senator Meighen: We have mentioned on a number of occasions this afternoon the "insurance industry." Would I not be right in saying that the truth of the matter is that the insurance industry is not monolithic? For example, we talk about this idea of banks selling insurance, Bancassurance as it is called. The property and casualty industry, which I believe you are speaking for, is very strongly opposed, yet the life and health of people are not opposed. There are three possible reasons for this in my view. Which one is right, if any? One, the life insurance firms do not wish to rock the boat because they want increased powers to be granted by government to themselves. Or two, they do not see the banks as a threat; they can continue to sell their life and health notwithstanding the banks' competition. Or three, the banks will only end up dealing in retail products, the very simple type of insurance, the P and C variety?
Mr. Shea: I believe number three would be my answer. Also, in conjunction, the products that the bank sells, such as mortgage loans and things like that, lend themselves more to the property and casualty side of it because they are giving mortgages on property. You have your mortgage here; would you like your insurance here, too? They kind of go hand-in-hand and they are more intertwined than life insurance with the bank products.
Senator Meighen: If you were with the life and health industry, you probably would not be saying the same thing as you are saying this afternoon. Is that correct?
Mr. Shea: I cannot answer that question.
Senator Meighen: Fair enough.
In principle, and perhaps the exception is your own industry, do you have any problem with the bundling of services as an ethical matter, assuming that the end result is that the consumer gets a better deal?
Mr. Shea: No, as long as it is not done in a tied-selling way: for example, we will sell you this product but only if you purchase this product.
Senator Meighen: You may have been here for the previous witness, Mr. Holland.
Mr. Shea: Yes, I was.
Senator Meighen: I do not know if you heard him saying that two years ago he appeared before this committee and spoke out quite forcefully against what he saw as rampant, coercive tied selling. He said that since the legislation has been adopted, he has not had complaints from his employees that they run up against this any more. In your experience, have you noticed any difference since the legislation was enacted?
Mr. Shea: No, not in that short time period. Tied selling in the past, to this point, has not been a big problem on our records, for the amount of tied selling we could identify. We would see tied selling as a very big problem if the banks were allowed to sell in their branches, or not even tied selling but cross-selling, where they offer the second product at a discount.
Senator Meighen: Just for clarification, did you say that in your sphere of activity you have not run up against much tied selling?
Mr. Shea: We have not run up against a large amount of tied selling that we could identify, because we do track it if we know of it.
Senator Meighen: Ironically, that ties in with the evidence from some bankers, who said that, for whatever reason, there have been very few complaints about tied selling filed with their ombudsman, or with the bank industry ombudsman. There may be more of a perceptual problem than a reality.
Mr. Shea: There could be tied selling going on where the public -- the policyholder -- is not prepared to advise of it. If they feel that they have received a discount with the benefit of tied selling, they will probably not report it.
Senator Meighen: Do you have any particular opinion, since we are on to one question which generally goes with another but which is not your industry, about leasing and the possibility of banks entering into the car-leasing business, as recommended by MacKay?
Mr. Shea: This is not something that is part of my background. We are not involved in leasing.
Senator Meighen: Do you have a car?
Mr. Shea: I have a car. I do not lease but leasing is the way to go now. If the banks are given the authority to start leasing, I see it as another area where the banks will grow bigger and bigger. I do not think that in the long run the consuming public will benefit from it.
Senator Tkachuk: I wish to add that we too, in our province, had dozens of telephone companies and we were told how wonderful it would be if we only had one. We ended up paying almost as much to phone Regina as it cost to drive there. We are discovering now the benefits of competition with deregulation. Of course, in our province, our telephone company has fought that for longer than in most provinces, so we are just now experiencing the benefits of competition and realizing the terrible mistake that was made 30 or 40 years ago, and the tremendous amount of money that was taken from the pockets of consumers.
I wish to ask you some questions about P.E.I. It is a small province and a small market. How many casualty insurance companies are there that would hold policies and would sell them in Prince Edward Island?
Mr. Shea: I am guessing, without the booklet here, but probably 50 to 60. Some of them would be very small. That is a guess.
Senator Tkachuk: You would have a brokerage service in most small towns?
Mr. Shea: Within a small radius, yes, there would be an insurance brokerage company.
Senator Tkachuk: You have a very competitive environment at present and that is why we are here, to make sure that it remains so. You have strong competition in Prince Edward Island with only how many people there?
Mr. Shea: We have 120,000 people.
Senator Tkachuk: The population is half the size of Saskatoon. How many banks?
Mr. Shea: There are five or six large banks with branches in most communities.
Senator Tkachuk: I wish to address the questions directly. We have discussed this issue of tied selling; the banks already can sell insurance, right? They can sell insurance through their own companies, in their own way, by telemarketing or in any way they wish?
Mr. Shea: Correct.
Senator Tkachuk: Why do you think that they want the person in the bank to sell insurance rather than the person just outside the door?
Mr. Shea: They know that it will be more effective to sell the insurance within the branch because it is just another product that the branch personnel will be able to sell to the customer. They will have the customer right there, rather than trying to refer them or try to have someone else in another company that the bank owns contact that person. It is more efficient, more effective and less costly for the banks. If they are allowed to use their customer information, everything is right there for them.
Senator Tkachuk: This concept of tied selling has been bothersome to all of us and we have had much discussion about it. Once a customer has received his mortgage and property insurance from the bank, even if he felt he was tied sold, there is no real physical evidence of it; it is mostly emotional. One of the witnesses told us, and I believe it was one of the other insurance people, that it was an emotional thing, that people felt that they must buy insurance in order to get that mortgage or get that loan. That is really your concern, is it not?
Mr. Shea: That is our concern. Even if the tied-selling legislation, which is addressed in the task force, provides penalties for coercive tied selling or if privacy laws do, there will still be the implied pressure on the customer to purchase their insurance from the bank. In many situations, the customer, when they go to a bank looking for a loan, are a little bit nervous and they are wondering if they will get the loan. If the bank asks if they would like to buy your insurance, they are not apt to say no. They are apt to ask what the price would be, or whatever, and they will probably end up leaving with their insurance.
Senator Tkachuk: Like they ask you now when they sell you life insurance on your mortgage, right?
Mr. Shea: Yes.
Senator Tkachuk: We were told by the industry that they charge three times as much for that life insurance, but they never tell you that?
Mr. Shea: No, that is correct.
Senator Callbeck: With the present financial services, the framework that is already set out, are there things there that have constrained your company from getting into certain activities in which you would have liked to have been involved? Has there been anything there to hinder you from doing what you wish to do?
Mr. Shea: Not in the regulation end of it, no. There is nothing really, as yet, that has hindered us from doing what we wish to do to expand our business.
Senator Callbeck: With the MacKay task force, I know certainly your concerns about banks selling insurance. But apart from that, are there recommendations here that will help Prince Edward Island Mutual?
Mr. Shea: Yes. As you know, a number of the regulations really would not have any effect on PEI Mutual. There are some taxation recommendations specifically that would help PEI Mutual. The one that I really keyed in on is the one that I am unhappy with. I suppose that is natural.
Senator Callbeck: Generally, are you comfortable with the others?
Mr. Shea: Yes.
Senator Callbeck: Getting back to the one that you are not comfortable with, that you do not like, regarding insurance in Background Paper #2, it mentions that there is a problem with the amount of income low-income Canadians have, or with the number of low-income Canadians who have insurance. Yet, statistics in that report show that when deposit-taking institutions sell insurance, the size of the insurance market increases. In other words, more people are buying, and I assume many of those are low-income Canadians.
Do you feel that you are doing everything possible to encourage low-income Canadians to buy insurance?
Mr. Shea: Yes. As a mutual, I believe that we are an excellent example to the insuring community out there. We would insure risks that probably would not be considered by other companies. Many companies move in and pick up a niche market of the above-quality property that they wish to insure, or the higher value risks. They stress those and they insure those. PEI Mutual does not target that way; we are generally an insurer for the public. That is the way we have always operated. That is the way the mutual philosophy evolved back when it first started and it is something which is discussed on an ongoing basis at our board table.
The Chairman: If there are no other questions from senators, we will adjourn for the day and reconvene here tomorrow morning at 9:00 a.m.
The committee adjourned.