Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 31 - Evidence, October 21, 1998
HALIFAX, Wednesday, October 21, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:05 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 Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: This is the second day of our hearings in Halifax, during which we are seeking responses to the report of the Task Force on the Future of the Canadian Financial Services Sector. We are not dealing with the mergers; we are dealing with the issue of which basic changes ought to be made in the financial services sector with respect to the powers of various institutions, and issues such as ownership and regulations.
The President and CEO of the Maritime Life Assurance Company, Mr. William Black, is with us this morning. Maritime Life is a long-established life insurance company in the region, and is one of the larger companies in the country. Mr. Black, you have been before us in the past, and we are delighted to have you back again.
Mr. William A. Black, President and Chief Executive Officer, Maritime Life Assurance Company: The unifying theme of the report is an emphasis on the need to advance and promote competition. I have four comments that I would like to make this morning, and the focus of each of them is the same. That is: what we have to do in order to advance and promote competition.
It is our view that there is a need for much more competition than we have in core banking today. There are lots of services where there are many competitors, but we need a lot more competition in the core banking services. The report does a good job of pointing out that the degree of concentration in Canadian banking is among the highest in the industrialized countries, and therefore inappropriate.
The report talks about removing regulatory barriers to entry in order to further competition. It needs to be stressed that most of the barriers against entry into core banking services are not regulatory barriers. They are technological and marketing barriers. It costs a zillion dollars to go from being a non-player to being a player in core banking services. The consequence of that is that no matter what you do from a regulatory standpoint, you are not going to see many significant, new domestic players in core banking.
The Chairman: Can you explain exactly what you mean by "core banking"?
Mr. Black: By core banking, I mean the major transactional services, such as cashing cheques, making deposits, and interac transactions.
The Chairman: Areas that the individual consumer thinks of as basic banking services?
Mr. Black: Along with retail loans and loans to small businesses. That is what I mean by core banking.
For most of those core banking services you have some non-regulatory obstacles, which means you are not going to get significant new players, no matter what you do from a regulatory standpoint. That is a good reason to facilitate entry of foreign players, but it is a mistake to assume that whatever is done to facilitate that will mean substantive new competition in those services.
The task force said that greater competition would benefit consumers, and observed that there was already too much concentration in core banking. It surprises me that it then went ahead and provided an orange light to bank mergers. To me, the committee had made a clear case -- without announcing it -- that there should not be mergers.
We think mergers would be bad for us, as corporate consumers of banking services, we think they would be bad for individuals as consumers, and we think that it would be bad for the economy as a whole. Having competitive banking is very important for all the different sectors' effectiveness as competitors.
I would next like to talk about banks getting involved in the insurance business. We have never been opposed to that. It has always been our position <#0107> in many ways our position is similar to what the report says -- that the banks should be in insurance as long as we can deal with the issues of privacy, tied or coercive selling, and ensure they have properly and professionally trained staff to do it. We would certainly have difficulty arguing with that.
I would like to stress that the banks are already failing on those issues in the services they provide today, never mind services they might provide in the future. There is already far too much linkage. I would like to provide you with a very modest example of that.
I was in my bank the other day because, like a lot of us, I wanted to spend some money I do not have. I was filling out a credit application. The bank is just down the street and I know the fellows down there pretty well. We filled out all the forms and he said, "By the way, I guess you won't be wanting the insurance." I said, "No, I don't need any more insurance and, if I did, I wouldn't be buying it here." He said, "Okay, but you have to sign this form." I said, "Excuse me?" He said, "You have to sign this form saying you don't want the insurance."
Imagine walking into Eaton's to buy a pair of mitts and having the clerk ask if you want a hat as well, which is okay. When you say, "No, I don't want a buy a hat as well," the clerk says, "You have to sign this form saying you don't want to buy the hat as well." I said that to the fellow in the bank, and he said, "We once got sued." I said, "That's not my problem. You once got sued, so 2.5 million Canadians a year have to go through the negative option marketing." The cable companies should be so lucky.
It was easy for me to say no. For a lot of customers, the situation creates a context where it is difficult to say no. The feeling is that if you want the loan, you sign all these forms.
We have a long way to go yet before the banks -- in terms of the services they do today -- adhere to the conditions that the MacKay report suggests. I do think they should be allowed in to insurance, however, and I do think they should be allowed in if those conditions can be properly enforced.
One of the things that has to be understood about insurance retailing today is that the vast majority of it is done through personal intermediation. We think that that is a great way of doing business. It is the way that we do business, and it has been very good for us over the last number of years.
We need to recognize, however, that a fairly substantial part of the market is not being well served by that. For the low and middle parts of the market, personal delivery of a financial service is pretty expensive. It is not very economical, therefore it does not happen very much. The MacKay report touches on this in banking, but it does really address it in insurance.
If public policy will facilitate other means of delivery, it is attractive. Electronic channels -- such as the Internet and so on -- are certainly one means of delivery, but there are others that may work out. The personal delivery channel will not be effective for large parts of the market.
Insurance companies should be encouraged to do that, but it would be wrong to restrict it to the existing players, because they tend to be a bit wedded to the current system. It would be very attractive if other people with other talents could be encouraged and allowed to service that part of the market.
Consider the people who run Amazon.com. If that kind of thinking could be brought to bear on the retailing of insurance -- again with proper regulation -- that could be very attractive and good.
We would support any policy directions that encourage electronic and other innovations in marketing -- not just for ourselves, but for other organizations and entities as well. Perhaps that is a good way for the banks to get into the business. It would be good for customers.
The next issue I will discuss is OSFI. The report proposes a change in mandate for OSFI. Right now OSFI's job is to make sure that the financial services sector is sound, both in terms of the supervision and of the policies that they prescribe.
The committee proposes adding the role of promoting competition to OSFI's mandate. That is a bad idea for two reasons. This would give OSFI conflicting mandates, and regulatory bodies do not do a good job with conflicting mandates. Further, at a much more pragmatic level, OSFI is not equipped to do the one mandate that it has today, let alone a new mandate.
There was a time when OSFI was one of the very best financial regulators in the world. They were very professional, knowledgeable and very good to deal with.
The Chairman: OSFI is the Office of the Superintendent of Financial Institutions. It was created a decade or so ago. It took a bank regulatory agency and an insurance regulatory agency and put them together.
Mr. Black: Yes, but I do not think the cause of the problems is the fact that they were put together. I want to stress that.
What has happened, however, is that -- especially over the last five years -- we have been through a period where pay was frozen for a lot of civil servants, and it was very difficult to have pay scales at the proper level. OSFI needs people with the skill set to be financial analysts.
With booming markets and so on, the value of financial analysts went up. The consequence of that is that it is extraordinarily difficult for OSFI to hire good people and, when they do, it is extraordinarily difficult for them to keep them. They are not operating at the very high level at which they operated in earlier years.
We pay a fee to be examined by OSFI. That fee is around $75,000 to $80,000 a year. We would gladly pay twice as much if it would mean that knowledgeable and experienced analysts were doing the work. They have a real problem; they are being asked to deal with a whole range of very complex issues, as you well know, and they do not have the people to do that.
I am not trying to criticize the OSFI management or anything else. The constraints they have been under have made it very difficult for them to find and retain staff with the skills required to meet the challenges they face. Even if that problem were solved, it would be a bad idea to put OSFI in charge of promoting competition. The OSFI does need some support in order to be able to better fulfil the mandate that it has today, however.
The Chairman: You indicated that the life insurance industry is much less opposed to banks retailing insurance than the property and casualty industry is. We have certainly had the occasional witness from your industry who is opposed to the retailing of insurance by banks, but you are not alone in being in favour of it.
Is there something unique about either the life insurance industry or the property and casualty industry that would account for such a dramatic difference of opinion? The property and casualty people are, by their own admission, extremists on this issue. That was their word, not mine.
Mr. Black: The P and C business is much more transactional. Our business is much more advice-driven. We do business through independent advisors who typically think of themselves as sitting on the customer's side of the table, and who are looking at different opportunities. They give the customer advice both on choice of company and on the kinds of needs that they have, such as estate planning, tax planning and so on. They do not feel very threatened that that will be replaced by a bank or by something on the Internet.
P and C transactions are often very elementary. That is, you have a car, and the question is what deductible do you want. Do you want $500,000 or $1 million of liability coverage? It is the kind of thing that can easily be replaced by other means.
The Chairman: In other words, a property and casualty transaction such as automobile insurance or house insurance is quite akin to a commodity product. That is, you specify the parameters and you then go and buy it. The transaction can be done in a much less human and interactive way than a life insurance action would, because life insurance is really an advice-driven product. You offer advice and the advice leads to the sale. You tell someone how they ought to manage their affairs for the security of their retirement, their family or their future, and that leads to the sale.
Mr. Black: In our case, the salesman's advice is as important as the actual product that we provide. In the P and C case, I would understand why those companies would be concerned. I do not think the core issue there is whether or not banks do it. If I were in the P and C business, I would be worried about competition from electronic providers, whether or not they were banks.
The Chairman: You are saying that someone will be able to drive costs down through simplifying the selling costs by way of things such as telemarketing, and Internet marketing. In theory, what you are saying is that you could not buy one of your products by going on-line and filling in the boxes, but you could do that with a P and C product.
Mr. Black: That is right. The issue might be driving costs down. The issue may have more to do with customer convenience; if you want to complete a transaction at two in the morning while you are watching the television, you can do it.
Senator Kenny: Mr. Black, your presentation was provocative and interesting.
I would like to explore your comments about access to the payment system. Do you believe that new entrants should pay a fee for access to it and, if so, do you have views on how that fee should be determined? Do you have views on the criteria that should be established for new entrants if they were permitted? What sort of hurdles do they have to get over to become part of the system? What are the downsides of expanding the players in the payment system?
Mr. Black: The payment system is a public utility. I do not think the cost for entry should be much greater than it is if you want to put a new driveway onto the street. It is a public utility, and it serves customers well to have more companies plugged into the payment system, because that expands the range of services that they can provide to customers. You should not have to pay anything other than marginal costs to get into the system.
Senator Kenny: If you take the utility concept, you are saying that you are going to provide a monopoly service, but everyone will be allowed to access that service. However, because the service is already in existence, at some point someone had to pay to create it initially.
Mr. Black: Yes, the customers paid for it originally.
Senator Kenny: Customers pay for everything originally.
Mr. Black: The telephone companies used to use this as an argument. When we had only one telephone company, their argument was that the new entrants who gave us long distance rates should have to pay again for their original set-up costs. That did not serve customers.
Senator Kenny: Their argument was that they could share some of the costs that the other companies had already paid.
Mr. Black: That is right, but the reality is their customers paid for that in the utility environment.
The customers have already paid to set this up, and it is in their interests to let new entrants in. Of course they have to be checked for financial soundness, but let us make sure that the people checking for soundness are not the existing players; let it be somebody independent. If we are already supervised and if we are already certified as being financially sound, what is the need for another level of that? If OSFI has already passed certain companies during the annual inspections of their affairs, why would you do something else on top of that?
Senator Kenny: If you become part of the payment system, is there an extra burden imposed on you, or are extra risks involved? People would be relying on you in a way that they had not relied on you in the past. Should you not have to pass a higher threshold in order to become part of that business?
Mr. Black: De facto, the thresholds for the regulatory soundness of life insurance companies are actually higher than they are for the banks. It struck me as odd that we would have to do something beyond that.
Senator Kenny: So, you would drop your standards.
Mr. Black: No, I would think the standards for the banks should be raised.
Senator Kenny: I am being facetious, sir.
The next area I want to deal with relates to your comment about increasing individuals' control over the release and use of their personal information. You told a story about having to sign the forms saying you did not want to buy a product.
You also have been through the experience of applying for a credit card. When you did that, I am sure you read all of the fine print on the back of the form. Part of the fine print gave the issuer of the credit card the authority to find out just about anything it wanted to about your financial background, and to give that information to just about anybody it cared to, forever. How do you address that?
Mr. Black: I will give you a comment as an individual, rather than speaking as a company. Obviously that is not a business that we are in. I find that amazing and offensive in terms of what happens. When a bank gets a report on you, they should give you a copy of it. Then you can see the same data that they do. That might put some discipline into the system.
Senator Kenny: Under the heading "Insurance Retailing and Auto Leasing" in your brief, point 3 reads: "a strong set of recommendations to increase individuals' control over the release and use of their personal information."
Would you address, as a company, the broader question of that point?
Mr. Black: It is reasonable for a lender to ask questions about an individual for purposes of determining credit worthiness. However, it is not right for a bank to take that information and use it as a marketing database.
We ask people questions about their health as part of buying insurance, but that is the only purpose for which we should use that information. We could have a paramedical subsidiary, take the health information we get, and turn it into a marketing base for our medical services subsidiary. However, that would be wrong, because that is not the basis on which they provided us that information.
Senator Kenny: Would your company ever sell lists of subscribers?
Mr. Black: We do not.
Senator Kenny: Do companies in the industry buy or sell lists?
Mr. Black: Some of the companies that do direct marketing buy lists, yes.
Senator Kenny: Would your views extend to the sale of those lists?
Mr. Black: I have no problem with someone compiling a list from a list of magazine subscribers. I do have a problem with a list that is compiled using data that was provided for credit applications, however.
Senator Kenny: What about selling a list of people who are buying life insurance?
Mr. Black: I am not sure that it would be okay for a life company to sell a list of people who had purchased insurance. I have not thought about that question before. We would not do it, but I do not know whether, in general, that is a good idea.
Senator Kenny: I am trying to determine where the line is.
Mr. Black: Where I am sure of the line is where information has been provided involuntarily. That is, you had to provide it because you had to show that you were creditworthy for the loan, or you had to show that you were healthy for the insurance. People should not be taking that kind of data and turning it into a marketing database. That is what I am sure of.
Senator Kenny: Beyond that, you want to think some more about it?
Mr. Black: Beyond that, it is a line of inquiry that I had not thought of before.
Senator Kenny: In your presentation you talked briefly about merged banks. We are not studying that directly today. However, I could not help but note your comment that merged banks would be bad for your company. Would you elaborate on that for the benefit of the committee?
Mr. Black: All of us think about the $7 a month or $9 a month -- or whatever it is -- that we pay for our individual chequing accounts. As a corporation, we have a chequing account, and we pay approximately $100,000 a month for ours. The level of that charge is a function of the amount of competition that there is for the service.
There are five major banks, but not all five of them compete to work with us. In this city, only three of them do. From our point of view, what drives prices down is competition, not technology.
Senator Kenny: You are a major company. Why do only three banks compete for your business? Why is it that all five are not hustling after your business?
Mr. Black: In this city, only two of the banks are really strong. A third is fairly strong, but the other two are not prominent here, in terms of the amount of business they do. Halifax is not a small city. It is the biggest city in the region.
Royal Bank and Scotiabank are very competitive. The Bank of Commerce is sometimes competitive. The Bank of Montreal and Toronto Dominion are not competing for our business in a lot of service areas.
Everyone thinks there are five banks everywhere, but that is not the case. This region is full of smaller towns. How many banks do you think there are in many of those smaller towns? Not many.
Senator Kelleher: Under the heading "Demutualization" in your brief you say:
Maritime Life cautions that it would not be healthy for the industry or for customers if the four big mutual insurers merged all at once. Rather, the mergers should happen over a period of time...
Could you explain your reasons for that statement?
Mr. Black: We may be a bit ahead of the curve on that, but there has already been some speculation in the industry that, shortly after the demutualizations and this three-year interim period, you may see some mergers among those companies. The issues that apply to the banking industry -- at least the public policy consideration -- should apply just as much to the life industry. Perhaps a better phrasing would be to say that government policy should restrict mergers among life companies when it looks as though our sector is getting too much concentration. That is really the issue we are trying to get at.
Senator Kelleher: It does not have to do with the actual demutualization, then?
Mr. Black: No, it does not. You have already seen Great-West take over London Life. We are starting to get significant concentration in our sector. There are still many life companies, but once it gets down to 10 or 12 -- or once any company has more than 20 to 25 per cent of the market -- government policy should discourage further consolidation because, again, you have too little competition for customers.
Senator Kelleher: You said -- and I do not think a lot of us disagree with you -- that you are worried about a lack of competition in core banking. Obviously, Mr. MacKay is concerned about that as well, and he is suggesting what everyone calls "second tier banking." He feels that the caisses and the credit union areas might help produce second tier banking.
Mr. Knight, the head of the credit union movement of Canada is very enthusiastic about doing something, as are the representatives from VanCity who appeared before us in Ottawa. Many of us felt that this was where our answer would lie, and we were feeling pretty good about all of this until we came here.
Yesterday, the witnesses who appeared before us put a bit of a damper on it by saying that that might be good for the rest of Canada, but here in the Maritimes the credit union situation is a little different. There are not as many credit unions here, and they are much smaller. Our witnesses yesterday were not sure that the credit unions would be able to get into the banking business in any significant way, and felt that it would take many years for them to do so.
You are not a specialist in that area, but you are an interested observer of what goes on in the Maritimes. I would like to have your comments on their concerns. Do you think it is as gloomy as they do, or are you more optimistic?
Mr. Black: I would be equally gloomy. The credit unions do provide a valuable alternative in some parts of the country, including B.C. and Quebec. There are regions where credit unions are not a strong alternative, however, and hat is certainly the case in Atlantic Canada.I do not think there is any prospect of that changing any time soon.
The whole unstated premise in what you are saying is that there is too little competition today. That is probably more true here than in some other parts of the country. We need more competition before we even look at mergers, because we are starting from a point where the degree of competition is deficient. To my mind, anything that moves off in the other direction is a bad idea. We need things that move in the direction of adding competition.
If policy can support the promotion of credit unions in Atlantic Canada, that would be great. I am not optimistic about the outcome, however.
Senator Kelleher: The credit unions and caisses in other parts of the country can provide competition, but you feel this is not a viable option in the Maritimes. Do you have any thoughts as to what might provide increased competition in the Maritimes?
Mr. Black: Increased competition is needed here in the Maritimes even more than it is needed in other places, and the most viable option for increasing competition anywhere is allowing foreign entrants in. I say that because they will have a very substantial marketing bullet to bite in terms of getting themselves established, but a lot of them will bring relevant technology with them.
The barriers to entry for core banking service are very, very large. By all means, encourage credit unions, but the best chance is to encourage the participation of additional foreign players.
Senator Kelleher: You are very open about your competitors in the banking business. You do not mind having them enter into this, that or the other thing. That is very refreshing, and I commend you for it.
As an insurance company, do you have any interest in getting into any facets or parts of the banking business?
Mr. Black: No, and that is because of the barriers to entry in the transaction business. It would require a huge amount of money, and I could not recommend that to our shareholders.
[Translation]
Senator Hervieux-Payette: In Ottawa, a consumers' association suggested that to protect consumers, a form should be enclosed with your bill or insurance renewal, through which a person could pay a $10, $20 or $50 subscription fee to a consumers' association in order to have a national network to support consumer protection. I wonder whether your company would be against including a form offering a choice. We could recognize a certain number of national associations which, as in the United States, would have a sizeable fund to inform and protect consumers. Would your company agree to enclose this kind of form in the envelopes it sends out to consumers?
Mr. Black: If choosing an association is not compulsory, or if the consumer can support any association, it is not a problem. Our job is not to promote these associations, but we have no problem with enclosing such a form with our bills.
Senator Hervieux-Payette: They have offered to prepare the pamphlet. Of course this association is proposing its own form. There should be a pamphlet for a certain number of associations to offer a choice to consumers. Your client would be free to contribute to an association or not.
Mr. Black: If the same rules apply to everyone, we have no problem with this proposal.
Senator Hervieux-Payette: Consumer associations are largely financed by government contributions. The government receives funding requests from associations. If we implement this system, should the government remain a present for a while to allow the associations to get moving and set up a national base? You would not be against a government contribution to help set up these associations?
Mr. Black: I think that the government should help such consumer associations, get on their feet.
Senator Hervieux-Payette: Eventually?
Mr. Black: Yes, senator.
Senator Hervieux-Payette: In your brief, you state that you rank third for the sale of individual investment products in Canada. Yesterday, professor Colin Dodds told us that the savings of Canadians had mostly been transferred from banks to investment products and that there had been a huge change in the role of banks as savings institutions for Canadians. So banks played a minor role and now have vast amounts of money in these various funds. He wondered where the funds were invested and about the absence of any kind of control over these funds.
For registered retirement funds, this committee recommended that the foreign investment component ceiling be raised by 20 or 30 per cent. But when these funds are not registered retirement funds, they can be invested anywhere on the globe and the consumer takes an unknown risk. In your opinion, should the government play a role, in future, in protecting citizens who invest their savings in this way, and should it ensure, when a person retires, either with a registered or a personal fund, that this person does not wind up with an institution that invested in foreign countries and lost everything? Would it be the government's role, or a regulatory institution's role, to see where the funds go and how they are invested?
Mr. Black: First, you do not have to invest abroad to encounter high risk. The Bre-X shareholders can attest to that. We can have safe investments in countries such as the United States and England and we can take risks in Canada. The risks should be well understood by the consumer at the beginning of a contract. But it is not a question of risks involving foreign investments in Canada.
Senator Hervieux-Payette: Do you think your clients understand your investment strategies? In my opinion, a private client who turns to an institution trusts that institution, but he is not a specialist and cannot assess its competence, I mean how wisely it invests his money.
Mr. Black: We have more than 100,000 clients investing with us and I don't know the extent of their knowledge. We aim to communicate frequently with our clients regarding contract risks. Independent intermediaries also offer advice to consumers.
Interest rates, for instance, for guaranteed contracts are 4 per cent to 5 per cent, which is not very viable. Most consumers have no interest in such contracts. They want segregated funds and mutual funds and there is always a risk factor. Provincial of federal governments must see whether communication methods manage to get the risk factor across. This is to help communication, not to restrict choice.
Senator Hervieux-Payette: Experts in your field say that management fees for fund investments are often very complicated to understand and that they are not regulated. You know that there is a lot of criticism of bank service charges. I feel that people are not aware of investment fund management fees. Often, there are penalties for leaving the fund and hidden costs.
Do you agree? This sector is going through explosive growth. Should we ensure that consumers are aware of management fees and transaction fees?
Mr. Black: In English, the "Management Expense Ratio" is well known for all funds in newspapers like The Globe and Mail or The Financial Post. They often publish management expense ratios. This includes all contract fees and they appear in newspapers every week. In my mind, consumers interested in fees can understand the rates quite well.
Senator Hervieux-Payette: I would like to hear the average citizen's opinion. I find that it is easier for me to receive my bank statement and see the monthly fees. This criticism is heard all the time. It is not always easy. You say that it is published in newspapers. But there are some foreign funds and I am not sure that it is as transparent for all fund management fees, nor that newspaper reports inform us about the fees on all funds.
Mr. Black: It is possible that mutual fund or life insurance companies do not give out the right information with their invoices. Newspapers offer a good service that the consumer can consult and use to compare.
[English]
Senator Tkachuk: Since we began these hearings, I have become very interested in the question of insurance in the banks; tied selling and protecting the consumer. When one of your agents or sales people talks to a customer about life insurance, what do you expect that life insurance agent to tell the customer? What professionalism do you expect?
Mr. Black: I need to stress that the people who sell our product are not tied to us. They are all at liberty to sell whichever product they believe to be in the interest of their individual customers, and I expect that they would identify that fact at the beginning. The second thing I would expect them to identify is the things that they are and are not competent to do. There will be some areas that they are very knowledgeable about, but there will be other areas that they are not knowledgeable about, and they should stay away from them. To give a simple example, they know a lot about life insurance; most of them do not know anything about P and C, and they should stay away from that.
They should try to get a sense of the financial affairs of the customer and what the customer's long-term financial goals are. Then they should probably propose various solutions for achieving those goals.
Senator Tkachuk: When you applied to spend the money that you said you did not have, you said you were offered life insurance. Who offered you that life insurance?
Mr. Black: The branch manager.
Senator Tkachuk: Do you think he knows anything about life insurance?
Mr. Black: No.
Senator Tkachuk: Do you think he would be qualified to tell a customer anything about life insurance?
Mr. Black: No.
Senator Tkachuk: From my experience in having them sell life insurance to me, he would not have a clue.
Mr. Black: That is correct.
Senator Tkachuk: If they sell property and casualty insurance, will they have any more expertise in that area than in this one?
Mr. Black: The same issue that I identified with regards to life insurance should also apply to P and C. Bank personnel should be doing that only if they are properly trained and qualified.
Senator Tkachuk: Consumers want more competition. Banks are in the life insurance business now.
If you are talking about a venue, it would be like giving me the right to sell drugs in a doctor's office. It would look like the doctor gave me permission to sell my drugs and cure cancer. I might not even know whether or not my drugs would cure cancer, but you might believe that the doctor approved of the drug I was selling. I do not see that as fair competition to the other manufacturers of other drugs.
When we talk about a ban on coercive tied selling, you can pass certain laws but you cannot enforce what people do in their own homes. You can only say you want everyone to uphold certain behaviour.
There is a decided advantage both to the person who sells life insurance and to the person who sells property and casualty. When the person selling the mortgage flips up his little computer, he knows how much furniture you have in your house. When someone buys a piece of property, the phone rings or a flyer saying "We heard you bought a piece of property -- give us a call" arrives.
The banker has that on his computer. He is the same person who just sold you the mortgage. This person has the whole form filled out for you, because he knows the value of your home and many other things. Do you think that is fair competition?
Mr. Black: You and I are not far apart.
Senator Tkachuk: How do you stop it? How do you say that that person broke the law, which I think is the case?
Mr. Black: I do not necessarily know the right way to do it. Let me stick to life insurance because that is the business that I know. It would be wrong to refuse to allow banks in, because I do worry that a group of consumers may not be successfully reached by the means of distribution that we traditionally offer. It should be the goal of public policy to expand the range of things to make sure that those customers have some options.
I share your concerns. We should say, as MacKay does, that it is okay to let banks in if these three conditions can be met. I honestly do not know how they can be met. I do not have an answer to your question, and I did tell my story to stress that today the banks fail on those tests. It would be wrong to give a blanket "no," because in principle it is a good thing to have more competition and different choices for customers.
Senator Tkachuk: Did you say that you did not think the life insurance companies would be interested in getting in to core banking?
Mr. Black: That is right.
Senator Tkachuk: You do not believe that there will be a large number of new participants in the banking market?
Mr. Black: Not coming out of the life insurance industry, no. We are not looking to enter into the payment system because we want to start offering chequing accounts on every other corner. We want into the payment system in order to deliver our product to the customer without having to go through one of our competitors.
Senator Tkachuk: Do you believe that to be true of most of the other insurance companies?
Mr. Black: Yes, definitely.
Senator Tkachuk: So, we will not see a lot of competition in the banking business from that particular sector of the financial system?
Mr. Black: That is right. It is not because we are boring people. It is because the barriers to entry are so high.
Senator Tkachuk: Under the heading "Insurance Retailing and Auto Leasing" in your brief, it says:
Finally, we believe the process around the banks' entrance to insurance should be determined by a body external to the banking system to ensure a fair and unbiased approach.
What do you mean by that?
Mr. Black: We are trying to get at the same point that you are, senator. The banks like to talk a lot about their self-regulation system. We should have somebody looking at it from outside of the banking system. We should have something along the lines of what Senator Hervieux-Payette suggested. Such a body would independently inspect whether customers are making a free choice, or whether some of the issues that worry you are intruding on their decisions.
Senator Tkachuk: If the banks use direct marketing, how do we know whether they are marketing from The Financial Post list or whether they are marketing from their own loan list?
Mr. Black: I, as a customer, do not need to know that. Government supervision needs to be able to inspect that and satisfy itself that the bank is working with information that has been reasonably obtained.
The Chairman: Senator Tkachuk asked a question about the desirability of having an outside observer who understands whether or not the rules are being followed. In your response to it, you did not comment on the MacKay report recommendation for an ombudsman for the whole financial services sector. The recommendation says that that ombudsman should not be paid for by the industry, but in fact run at arm's length from the industry. On the basis of your response to Senator Tkachuk, am I right in believing that you would favour that recommendation?
Mr. Black: The term "ombudsman" is fraught with ambiguity. Some people think of an ombudsman as an advocate; other people think the post is quasi-judicial. I do not know what the MacKay report is really saying an ombudsman should do, or where his or her authority should lie. I stay away from that word, because I do not think it is clear.
We are on the same wavelength. There should be a regulatory authority that inspects both banks and industry in order to make sure that customers have real freedom of choice. Further, along the lines of what Senator Hervieux-Payette was asking me about, that authority should also ensure that customers are told what is going on with what they have purchased.
The Chairman: Given your comments about the OSFI and the inconsistency of asking it both to regulate for safety and sound and to ensure enough risk to have competition in the marketplace, do you see this business fair practices regulator as different from the superintendent of financial institutions, because it is clearly a consumer function rather than a safety and sound function?
Mr. Black: It should not be OSFI for a lot of reasons. I am not sure whether it should be federal, but it should definitely not be OSFI.
The Chairman: Are you suggesting that because of the rules of fair trade it may in fact, jurisdictionally, be a provincial function.
Mr. Black: I am not here to argue that.
The Chairman: Clearly, it should not be the safety and sound regulator.
Mr. Black: Absolutely not.
Senator Callbeck: I want to ask questions about the community accountability statement on which you comment in your written brief. You are pleased with the recommendation and you view it as an accountable and responsible approach to community involvement. Then you go on to say what Maritime Life has done in the community. What form should this statement have? What information do you think should be in it? Here you mention only the community. However, for example, if the banks fill out the statement, should they not include information like how much money they invest in small business in that area?
Mr. Black: We did support the recommendation. I want to attach a slight note of caution to it. One should do this stuff should to support the communities, not as a PR campaign. Although we support the direction, we are concerned that the community accountability statement risks turning into an opportunity to brag. People might lose track of why they are doing this in the first place, which is to build stronger communities where we live and work.
The Chairman: One of our colleagues, Senator Stewart, who is not with us today, refers to this as "the annual corporate boast." Are you saying that there is a real danger that what was designed to be a more factual statement could simply become a terrific, boastful PR statement?
Mr. Black: Such a statement is most useful in the area of direct, tax-qualified charitable donations. Because there is a lot of debate in discussions about loans to small businesses, I do not think the statement would be a useful communicational activity. I cannot imagine where the numbers come from that banks sometimes give as their loans to small businesses. Many are not small businesses. The data you receive will not be useful information.
Senator Hervieux-Payette: Perhaps you could explain the program you have followed. It may be very familiar to some corporations, but not necessarily to everybody. It must have some criteria. It is important that you outline them for our group.
Mr. Black: The core goal is to commit to moving toward having annual charitable contributions of 1 per cent of pre-tax profits. We are at that level. Further, one must promote the idea elsewhere, which is why we included it here. It is a good idea to do that.
Contributing to communities involves a lot more than putting money on the table. For example, encouraging employee involvement is equally important.
Senator Callbeck: Should it be a standardized form? If so, who should make it up -- OSFI, the Department of Finance? By standardized I mean that I can come from P.E.I. and compare the contributions of different financial institutions.
Mr. Black: We are talking about charitable contributions that build stronger communities. It would not be hard for OSFI or anybody else to make a form that we would all fill out, which would produce comparable numbers and which we would be required to include in our financial statements.
Senator Callbeck: What do you think this would accomplish? Would it encourage financial institutions to give more?
Mr. Black: Yes.
The Chairman: Why should public policy single out the financial services sector for a community accountability statement? There are communities across the country that are dominated by one sector of the economy, that are essentially one-industry towns, especially natural resource communities. We do not require mining, fishing and lumber companies to produce such statements. Why should we impose that level of regulation on businesses in the financial services sector? If it is so good for the companies, can they not do it without being forced?
Mr. Black: I was not advocating that only the financial services companies be required to do that. If they are, other companies should be as well.
The Chairman: The real question is whether one is prepared to make that a matter of Canada Business Corporation policy as opposed to singling out financial institutions.
Mr. Black: That is right.
The Chairman: Should financial institutions be treated exactly the same as other corporations?
Mr. Black: Definitely.
Senator Austin: The governance and capabilities of OSFI intrigue me. When Mr. MacKay appeared before us on September 28, I took up with him the report's recommendation that OSFI consider in the execution of its role the issue of competitiveness.
I agree with your comment that there are many contradictions, some of them unavoidable, in the objectives of the MacKay report. Creating a more competitive system for the cost of money and the cost of financial services is a good public policy goal. How to do it sometimes creates conflicts. You pointed some out this morning.
What was Mr. MacKay trying to suggest by adding that element of competitiveness? In his answers, he said:
In making this recommendation, we have tried to make it clear that OSFI would remain, first and foremost, a prudential regulator focusing on safety and soundness.
Then he said:
We have tried to suggest that, in the balance, should also come some recognition of the facilitation of new entrants, new products. You would still have to pass a fit and proper person test. You would still have to demonstrate a safety and soundness recognition. However, for instance, we are suggesting that, if you are in a business where the capital needs are small, perhaps negligible, OSFI should have the ability to not be bound by a rigid $10 million figure, or any other number, but should have some flexibility to examine on a case-by-case basis a proposition that is put in front of it.
He talks about competitiveness and about OSFI as a regulator where there is no likely systemic risk. Both the MacKay report and the Senate Banking Committee have introduced the suggestion that OSFI also have an independent board of directors which would essentially consult with and advise OSFI management. If we assume for the moment that it is doable, is the MacKay recommendation desirable?
Mr. Black: If the board were made up of people whose principle reason for being there was their skill at the task at hand, then it might be a good idea. However, that is not always the case with government-appointed bodies. I have a board of directors and I find it very valuable to bounce ideas off of them.
All of the roles that MacKay described for that OSFI board could be valuable, including as a governing structure for OSFI itself. I see a potential for good there, but I also see a potential for nonsense. People who wanted something for OSFI took to lobbying individual board members. It is a big problem.
Senator Austin: The present British government is attempting to set up that structure in its financial services authority. They are bringing in an independent board composed of people who have served in the financial industries to act as advisors. They have of course severed connections with their previous service. They believe that somehow the financial industry stakeholders deserve a role at the table in debating the policies. That is what the MacKay task force is trying to replicate.
Mr. Black: Having interviewed Mr. MacKay, you are probably more knowledgeable than I about his thinking. I think he was looking for normal governance matters, and not necessarily to have stakeholders or former stakeholders in financial services providing oversight to the regulator. Obviously, you like to have people who are knowledgeable. Again, I see potential for good, but also potential for nonsense. I am cautious.
Senator Austin: You have already expressed doubts about the subjectivity of having regulators who are also encouragers of new product development and new competitive practices. I should like you to expand. In essence, a regulator is a judgment test for objective behaviour. Now the MacKay report suggests a whole new set of subjective tests.
Mr. Black: I worry about challenging OSFI with conflicting mandates. That is not a good idea. Competition and more of it is good, and we should always be looking for ways of getting it. But, I do not think OSFI is the place. I can see how it might be good to have a separate entity whose role is to advocate and promote competition. That entity could try to get OSFI to bend their rules, arguing that there is no risk to the system and demonstrating how it will be better. However, let OSFI think only about safety.
Senator Austin: Could OSFI build into its operating structure a person or group at the level of director whose role was to put OSFI activities through that particular competitive sphere?
Mr. Black: It could.
Senator Austin: It might work and it might not.
Mr. Black: Apart from the other issues I mentioned, I would be concerned about the staffing challenges.
Senator Austin: There is also the question of foreign ownership. We have always had foreign ownership in the life insurance industry. I know your company is wholly owned by a very large U.S. group. Do you have any concerns about foreign ownership in core banking?
The MacKay task force, for example, suggests that the level of single foreign ownership be lifted from 10 per cent to 20 per cent and that multiples be raised to 45 per cent of foreign ownership. Do you have any comment on that particular recommendation?
Mr. Black: I have no concerns about that recommendation.
Senator Austin: An amalgamation between a large foreign institution and one of the major Canadian banks would not trouble you as a matter of public policy?
Mr. Black: That is not the question you asked me. You asked me about one foreign moving to 20 per cent and a collective moving to 45 per cent. I do not have a problem with that. I do not know where I stand on the question you just asked. I do not have a very articulate response, but I would be concerned about it.
Senator Austin: Is it important for Canadians to continue to own their core banking entities or does it matter as long as the price of money and services is competitive in the global banking world?
Mr. Black: Logically, having competitive, cost-effective service should be the dominant issue. An orange light is flashing in my head on the question you are asking.
Senator Austin: The question so many of us are wrestling with is whether Canadian ownership has something significant to do with control of Canada's fiscal environment and sovereign authority over what happens in this country. I am wondering where the line is.
Mr. Black: If you have a majority Canadian ownership, I am okay with more foreign ownership than we now allow. I do not know where my threshold is. It is somewhere far short of a takeover by Citibank or something similar.
The Chairman: In our first two or three weeks of hearings, there was a kind of sea change in the financial services sector. Our last go around on the Bank Act was in 1992. At that time, the banking industry was unanimous and monolithic in its views on major questions. Similarly, the life insurance industry was very consistent and cohesive as a unit. That has changed. Now, for example, in the banking industry the question is how big must you be to be competitive. The major banks have sharply differing views. In the life insurance industry there are also conflicting views, for example on the question of whether or not banks ought to be allowed to sell life insurance.
Since 1992, what has caused the fragmentation of that solidarity of the industry players?
Mr. Black: I do not want to try to answer that.
The Chairman: I use the bank illustration only to point out that the fragmentation is not unique to your industry, it is characteristic of the whole sector.
Mr. Black: Our product line is not being delivered as well as it should be to meet customer needs. Perhaps other people perceive that and may therefore be more open-minded about other ways of addressing that.
The Chairman: That perception probably was not as strong in 1992.
Mr. Black: It was definitely not as strong. There is a latent bias for companies to be more thoughtful about what is good for customers. If you work from that end of the telescope in, you tend to support these things more.
The Chairman: That was generally true of all kinds of industries in the 1990s, because companies have become more customer-focused and less company-focused.
Senator Austin: If the banking industry is allowed to sell life insurance directly, would you continue to sell through independent brokers? What is the viability of the independent broker system in the face of direct bank life insurance selling?
Mr. Black: It is no problem whatsoever for the well-qualified professional who keeps up his training and focuses on a sophisticated product with high-end customers. Those are the people we deal with. They have a fabulous future whether or not banks become involved.
The Chairman: Thank you, Mr. Black. Please proceed, Mr. Lipsett.
Mr. Bruce Lipsett, President, Insurance Brokers' Association of Nova Scotia: With me today are Mr. Thompson, Mr. Stevens and Mr. Hyndman.
Senator Tkachuk: This brief is quite critical of some of the analysis offered by the MacKay task force. That view has not been offered much.
Mr. Lipsett: We feel the MacKay report missed certain things. Our biggest concern is that the task force did not fully assess the quality of competition within the financial services sector.
The property and casualty sector tended to be lumped in with the life sector. The uniqueness of our product and the fact that there is extreme competition for consumers' dollars made us feel that Mr. MacKay's view on competitiveness was not fully assessed. We wanted to bring that up to you today to make sure that you understood our uniqueness and that you had the opportunity to ask us where we felt we might be different from some of the other players in the financial services sector.
We believe the members of the MacKay task force did not see the importance of these issues because they failed to grasp the distinct nature of property and casualty insurance. Unlike mortgages, personal and business loans, RRSPs or even life insurance, which allows policyholders to borrow against it, property and casualty is not an investment product. It is a different product. Property and casualty is there to pay for chance events in the event of a catastrophe. It is for a term and it is a very competitive business.
With respect to the issue of competition, the task force did not take into account the number of brokers offering financial services products in the property and casualty sector in local communities. A number of people are employed in grassroots jobs in local communities.
In my submission I mention the town of Bridgewater, Nova Scotia, where I happen to work and live. It is a town of fewer than 10,000 people. There are eight offices, excluding the co-op, with 39 licensed brokers. We are 15 minutes from Mahone Bay and Lunenberg and 25 minutes from New Germany where there are probably 20 brokers competing for consumers' dollars. The situation is no different in St. John's, Newfoundland, or in Charlottetown, P.E.I. There is a lot of competition and consumers now have many choices.
The MacKay report does not address the matter of competition as it pertains to the property and casualty business. We are not surprised by that. The superintendent of financial institutions predicted in 1995 that this mistake could be made, because a lot of people do not recognize our distinctiveness.
There is competition in the property and casualty business. In 1992, the banks were allowed to enter into our business and they have been in it ever since. Let there be no mistake about that. They are allowed to and do own insurance companies. That was a good decision, because it did enhance competition for our industry.
CIBC, for example, have done very well in Ontario and have become the largest property and casualty insurers in Canada. They did $260 million worth of volume last year. They compete fairly with us. The bottom line is that they seem to want more. They want to retail through their branches, which brings us to the most crucial thing as far as my colleagues and I are concerned.
If branches are allowed to retail property and casualty insurance, they will have a distinct, unfair competitive advantage with their customers. No regulation on tied selling or other government regulation will be able to stop that. The consumer will be at a disadvantage when he is sitting with his loans officer, perhaps thinking, "Well, maybe I should take the insurance," because that loans officer knows so much about him. That unfair competitive advantage can put me out of business. We are not afraid of competition, but we want the competition playing field to be a level one.
If that is allowed to happen, there will be job losses in many small communities. In our collective case, we represent over 400 insurance principles and brokers who operate out of 600 offices in Atlantic Canada. There is a distinct concern that jobs will be lost in our industry. Other bodies that I am not prepared to quote this morning have indicated that job losses will be significant. We know there will be job losses if the banks are allowed to take over an already successful industry.
I do not want to belabour the point. You have heard the message before and I hope that you are sympathetic to it or at least understand the difference between P and C and life.
The Chairman: It seems to me, as I listen to you and other members of your industry, that you do not consider yourselves to be part of the financial services industry in the same way that other players are, because you do not collect money for a promise over time. By "over time" I mean 12 months, which is not long term. For the most part, you sell a product. I would say a commodity, but I do not mean that in a pejorative sense. I mean a clearly defined product of a short-term duration. Is it fair to conclude that that is one of the reasons for your arguments?
Many characteristics of the property and casualty business are dissimilar to the characteristics of any other part of the financial services sector. Is that statement correct? Does that fact, if it is a fact, underlie a lot of your position?
Mr. Lipsett: I would have to agree. It is much different from the other financial instruments that are offered.
Mr. Fred Hyndman, Secretary, Insurance Brokers' Association of Prince Edward Island: You are bang on point. We are categorized as financial institutions. The whole property and casualty sector is categorized that way, but there is an immense difference. It is not pejorative to call property and casualty products commodities; it is quite close to being the truth. As you are aware, for the most part, the products are regulated for their financial security by the federal government through OSFI; therefore, the issue of regulation is clearly a matter of concern for public policy on the federal side.
The issues regarding distribution historically have been in the provincial arena. There are numerous regulations to qualify persons to be licensed, and a license is required in all jurisdictions.
The Chairman: Are those provincial regulations?
Mr. Hyndman: Yes. Herein lies one of the other omissions of the MacKay report. In the terms of reference it provided, the federal government asked that the task force address areas where there might be conflict between provincial and federal legislative areas of authority. Unfortunately, it did not address that question whatsoever with respect to our group, the property-casualty group, in the financial arena.
It might be interesting to bring to the attention of the committee a portion of the Insurance Act of the Province of P.E.I., where I live, which states that any person who induces or coerces another, through the influence of a business or professional relationship, to give preference regarding the placing of insurance is guilty of an offence.
Now, an admonition of the provincial statute of P.E.I. says it is an offence to give preference, to influence or to coerce. The act does not even demand that damage be demonstrated to have been caused. I find it rather interesting that the legislature of my province deemed it necessary to legislate provincially for the protection of consumers. That amendment was put through in 1951.
What does that have to do with your question? While we are not like other financial institutions handling long-term contracts with deposit and withdrawal features, we do deliver an intangible to the public. It is a very complex product. Insurance contracts will run from four to eight pages of fine print. Over the years, provincial legislators have found it necessary to ensure through legislation and regulation that the public is not deceived and that the public is served by persons qualified to serve them in that complex area.
The only similarity is that the product is intangible and complex. Beyond that, our part of the financial services industry is very different from that which takes moneys by way of deposit or investment with various outcomes, sometimes many years down the road.
Senator Callbeck: The practice of banks selling insurance is common around the world. Some statistics indicate that in Europe, banks have had a great deal of difficulty penetrating the property and casualty sector. Is it different here in Canada or would it be easier for them to do it here than in Europe?
Mr. John Thompson, President, Insurance Brokers' Association of Newfoundland: Most countries in Europe do not have the consolidation of banks that we have in this country. We have five enormous banks that compete from coast to coast. In most of Europe there are thousands of small banks competing for business. Insurance brokers in other countries are able to compete on an equal footing. That will not happen in this country.
In this country, every bit of information required to write an insurance policy is in the bank's file. There is a copy of the policy in the file right now. In the United States, for example, banks sell insurance through tens of thousands of branches.
Senator Callbeck: In Holland, 86 per cent of the banking business is done by three major banks.
You say that Canadians enjoy one of the most cost-effective property and casualty insurance sectors in the world. What about the rates here in Canada? How do they compare with those in the United States and in other countries? Are our rates a lot lower?
Mr. Lipsett: Rates in the United States are probably higher based on their litigation techniques. However, I do not believe the American property and casualty insurance is legislated or is as good as ours.
For example, last year I had case in Lunenberg county in which an American from Florida, driving with $10,000 of liability insurance, hit and injured a client of mine. Down there they are only required to carry $10,000 U.S. to drive a vehicle. I offer the consumer coverage for $1 million worth of liability insurance, but maybe my price will be higher. I cannot compare prices because their limits are not as high and there is no regulation saying they must buy as much.
Senator Callbeck: You commented in your brief that you have never heard customers say they would like to buy insurance through a bank. One of the background papers indicates that there is a problem with low-income people and insurance and that when the industry is opened up and deposit-taking institutions can sell insurance, then the insurance market will increase, and more people will buy. Do you have any comment on that?
Mr. Hyndman: I am aware of the point the MacKay report makes. It says the whole market would expand because certain services would be offered where they are not offered now. I hope that would be the case. It probably would be to a degree, but I would caution you to not let that overwhelm the fundamental issue here. The issue is simple: In this country, power and privilege exist in the hands of chartered banks that have been created by public policy. We stand here suggesting that public policy which gives privilege must also circumscribe and limit it.
The point about the expansion of the market may be valid, and I do agree with it. Even so, there must be agreement that more people enjoying the protections of insurance is a good outcome. However, that is a very small point compared to the much more fundamental issue I suggest.
Senator Tkachuk: When the changes were made to banking and to the insurance business in 1992, did the brokers and the insurance companies oppose that legislation?
Mr. Lipsett: That was before my time on the board, but I expect they would have. We were looking for a fair playing field and we accepted that that was a reasonable conclusion, because it did enhance competition for consumers. It also put us on notice that we had to be more technologically driven and smarter if we were to stay in business. We had to bring down our cost to consumers. So we probably did oppose it at that time, but we have seen it work and it is working well.
Mr. Thompson: At that time, and still today, our concern is the issue of a level playing field. That is our argument today. We are against the banks being able to have the information necessary to compete in an unfair manner. I believe we all agree that the 1992 legislation was fair. It allowed the banks to enter the business, but not to retail from the branches where all that information exists.
Mr. Hyndman: I was there in 1992. We did not oppose the change, but we were greatly concerned that it would spill over into the issue that we are presently discussing, which is the retailing of insurance products through charter bank branches. The fact that banks brought their capital into the property and casualty insurance business was a good thing for Canadians because it brought more capital to risk in a competitive environment. Any time new capital is brought into the arena it increases competition, which is a good thing. Our issue is with the distribution, not with the underwriting.
With respect to the underwriting side, someone should be keeping an eye open for prudential concerns regarding the capital of banks that may be committed to the underwriting of insurance. That is not our case. We are not underwriters; we are not distributors.
We are speaking here today about distribution issues. In the privileged confines of its branches, a bank chartered by Parliament possesses certain privileges not enjoyed by lesser corporations. That is the point that I should like the committee to focus on. The presence of bank-owned insurers is something we cannot oppose.
Witness the success of CIBC. On the level playing field, they have carved out for themselves, through creative distribution techniques, a significant market share. Other non-bank people who compete with us have done the same, using different or alternative distribution methods. It is a very competitive environment out there.
We are here as ardent supporters of free and open markets. Paradoxically, we want to have the doors shut on banks capitalizing on the inherent privilege that exists inside their branches. I find that an uncomfortable suit to wear. I must welcome free and open competition.
Banks are not like other corporations. It is not a situation like that of Wal-Mart. When Wal-Mart comes to town, people are fearful that established business patterns will be upset. In my town, a Wal-Mart is to be constructed next spring and certain of my neighbours are very worried about its impact. There should be no law in the world to prevent Wal-Mart from trading in the community. Wal-Mart is not a bank. Wal-Mart is not chartered by Parliament with certain privileges. Wal-Mart can compete on an even ground using talents and experience without privileges granted by Parliament. That is the nub of the public policy issue that we must focus on.
Parliament created banks with certain special privileges in order that they might do their banking duties effectively across the breadth of this very wide country. Surely Parliament must also limit that which it gave.
Even Mr. MacKay does not recommend opening the door for the banks to do whatever they choose. There are many areas where he would circumscribe them: for example, the matter of ownership referred to in the earlier presentation. I do not think we should find it offensive to talk about what appears to be a restraint of trade of a bank retailing insurance in its branches, because banks are different from Wal-Mart.
In the interests of consumer privacy, consumer freedom and competition, it is entirely proper that the Senate Banking Committee look carefully at how far should banks be allowed to extend their types of business. Even Mr. MacKay's analysis suggests that any benefit of competition to consumers would be only in the short run. That is one of the key issues one must remember.
Chartered banks can bring consumers a cost advantage in the short run, because they have the power of great wealth. They would be able to lowball or buy themselves into market share. Our parliamentarians need to think about what would happen after a concentration occurred.
Senator Tkachuk: I have a lot of sympathy for the arguments of the brokers. I could not have said it better myself, so I am done.
Senator Austin: I served as non-executive chairman of a British Columbia P and C called Elite. I know a little bit about the industry but not a lot.
On page 95, before outlining a set of constraints, the MacKay report argues that:
On balance, we believe that consumers will benefit from more choice and that to deny choice would be contrary to the public interest.
However, the report does not point out that the result of two separate recommendations could end up handing the banks a stranglehold on selling property and casualty insurance. The other recommendation would give the banks full and unregulated access to automobile leasing, thus allowing them to bundle two products. The conventional P and C industry, on the other hand, would not have that opportunity, unless there were market shifts.
In 1992, you responded to changing market conditions. You had to seek non-bank financial institutions that allowed you to sell equivalent leasing products. That was another search because some of them did not have that capacity.
Am I stating accurately a concern of the P and C industry regarding competition? This is an issue apart from tied selling or undue pressure and so forth. In a market opportunity, the customer comes in and wants a lease and needs insurance. One stop shopping -- the banks can do it, nobody else can. May I have your comments?
Mr. Lipsett: At this point we are at a distinct disadvantage. You must recognize that our business is made up of many small-business people in every little nook and corner of the country. It is pretty hard to argue against the fact that it would be nice to bundle this up and make it cheap and attractive for the consumer. My argument is that in the short term that may be possible.
One MP suggested to us at the House of Commons committee two or three weeks ago that it will not be too long before the bank takes us over and we will be gone if they are allowed into the business. How is eliminating the choice good for the consumer? You are talking about putting small-business people out of work in a very competitive business.
Mr. Thompson: For any debt instrument that requires protection from a lien holder, if the bank, or whoever provides funds to purchase an asset such as a car or house, can bundle that with insurance for that asset, they have a tremendous advantage over other distribution channels.
I do not think an insurance broker could make up that advantage even if we were allowed to lease a car or to put a mortgage on a house or on a commercial property. We cannot compete in that industry. If you went to your bank tomorrow to lease a car and they could retail insurance, you would not even think of your insurance broker. You would sign the form and walk out of that office with your car and your insurance.
Senator Austin: Would you shop for a competitive insurance rate? The bank says, "Sign here, you have a deal." The rate may be higher than one you would quote, but the convenience of the customer and maybe some other factors would reduce competitive price shopping.
Mr. Thompson: Senator Callbeck made a comment earlier about low-income Canadians. If they are inside the four walls of their bank and they are looking for a car lease, they will not argue about insurance premiums at all. As long as that car lease is approved, they will accept whatever insurance premium is offered to them.
With tied selling, the consumer has the perception that rules will be looked after and so on. Once I am inside the bank, I buy the product that is in front of me.
Mr. Stevens: How well will the person providing the loan and the insurance in a one-stop shop serve the client? Will they have professionalism and knowledge about the product they are selling, or will it simply be like it is now -- you go in, sign the form and move on? There are varied risks. People travel much more than they ever did before. A lot of those things must be taken into consideration when a product is sold. Each of those items is separate.
Mr. Hyndman: There is, as the MacKay report identified, a serious potential for cross-subsidization, that is, one business line subsidizing another business line in the overall interest of achieving market share, whether in auto leasing, auto insurance, home mortgages or home insurance and so on. The possibility of cross-subsidization increases the more lines of business there are. As a citizen, I am concerned about that, although as a broker, I have no comment.
Surely public policy demands that the actual security of the banks be as transparent as possible. We have seen instances in the last 20 years where bankers have failed or have come close to failing in their duty where they strayed away from the primary focus, which is the security of their depositors. In the broader sense, this is an issue Parliament should be concerned with.
I have been anxious to make a further point, and this is not frivolous. If a bank were also leasing cars, the bank would be both the owner and the insurer of the car. So much of our discussion is focused on the sale of property and casualty insurance. Public policy should be much more concerned about the implications of a claim, because it is at that moment that insurance delivers what it is intended to deliver. It is also at that time that the claimant is invariably vulnerable. The claimant has suffered a loss, and is, therefore, hurt, harmed, weak, vulnerable.
The position of the consumer must be added into the discussion. If the consumer is a debtor to the bank and is insured with the bank, the bank, either by right of mortgage or by right of automobile lease, is actually, fundamentally, the insured person. It does not take a great imagination to see a consumer with no cards sitting before a bank which has ventured into other lines of business and which is holding all the cards.
Who determines what is in fact adequate settlement? I believe strongly that a consumer who may be in some financial distress -- and most are -- will be greatly compromised when it comes to deciding whether to have the house rebuilt or to take a cash settlement. Who will make that decision? Those are inherent conflicts of interest, which are adverse to the consumer. Surely it is your duty as parliamentarians to protect consumers by not allowing the law to put them a position of vulnerability.
Senator Austin: In your professional situation -- with policies that are not sold by banks -- what is your role? Do you run into conflicts of interest because of your position between the insurance company and the claimant you advise?
Mr. Hyndman: I do not believe so, because I work for my client. The client might well be confronted with two choices and there could be a significant dip.
Senator Austin: Is an adjuster called in by the insurer?
Mr. Hyndman: Correct.
Senator Austin: Perhaps you could explain to this committee how the adjuster and you work in a non-bank claim situation?
Mr. Hyndman: An incident happens, a house fire, let us say. The insured person, the consumer, usually will notify the person from whom he has purchased the insurance; in my case that is a broker, but it might be from a direct writer -- for instance, the Co-operators, who are very dominant in this market area. In other words, the normal place for an insured person to go is where he paid his money. In any event, he reports the fact that his house has burned down and asks for help in making an insurance claim. The insurance company will engage the services of an adjuster to establish the loss and expedite settlement proceedings on behalf of the insurer.
The insured person, the consumer, then is negotiating with the insurance company through its adjuster, bilaterally, nose to nose. There may be questions where there are choices. It is commonplace for the consumer to go to the person from whom he bought the coverage, and with whom he discussed various other options a year or two previously, to seek advice. A professional, independent broker, which I have tried to be, will advise him as to the merits of either of the choices.
These choices can be very significant. For instance, in the case of a home, standard home insurance policies will offer two bases of settlement: replacement cost if the building is replaced, or depreciated value if a cash settlement is to be chosen. I have seen numerous cases where it is not clear which is the most beneficial. One runs into people who perhaps are getting along in years and it is not in their interests to replace a house, especially if its replacement value may exceed its market value, perhaps for reasons of location; therefore, it may be desirable for them to take the lesser cash settlement and apply it to their future in a more beneficial way.
Senator Austin: Let me stop you there. Now that we have the case study, if you like, replace yourself with an officer of a chartered bank who has played the role of marketing that property and casualty insurance, and then speculate for me whether there are any changes in the circumstances.
Senator Tkachuk: Before you get into that story, because this has been very helpful, when the cheque is written, who does the cheque get written to? Does it get written to the bank or does it get written to the person who suffers the damage and then he or she pays the bank?
Mr. Hyndman: It will be written to the insured consumer and may have a bank joined as a co-payee if the bank has either a mortgage or a joint interest in the property.
As in the case with leased automobiles, the automobile would actually be owned by the bank, the same people who insured it, which clearly poses an incredible conflict. In the case of a dwelling, the bank may have an interest by reason of a mortgage.
Senator Tkachuk: It has two interests; it must pay the least amount possible and only cover the mortgage, right?
Mr. Hyndman: Until we get to the point where the bank manager, who is managing the credit, is looking at arrears that have been chronic and consistent for years -- a problem account perhaps in his opinion -- and he is confronted with a cheque in cash that will retire his mortgage and see that client gone; or the client may have the interest to rebuild the house, wherein there is no cash for the bank, because the cash is for the carpenter. The mortgage carries forward and the banker may still have his problem account.
Once again, there is an inherent conflict in the settlement of the claim, which is the essential purpose of the insurance. Public policy should recognize that. Nothing in the MacKay report speaks to that issue, which I believe is fundamental.
Senator Kenny: Mr. Hyndman, you caught my attention when you started talking about cross-subsidies. For the benefit of the committee, would you clarify what you were referring to? Cross-subsidies might come from the different ways in which companies allocate overhead, or they might come from a willingness to accept different profit margins on different products. Are you against cross-subsidies in principle or are just against cross-subsidies for federally charted institutions?
Mr. Hyndman: I would make two points. First, under the Bank Act there is a responsibility to do everything possible to ensure the ultimate safety of our chartered banks. The whole area of safety for depositors and security of banks must, in my view, be the primary consideration in any legislation that causes a deposit-taking institution to exist. If a cross-subsidy were ever seen to be in any way corrosive or seen as putting to risk that most fundamental trust, then of course it would be bad public policy. If, for instance, the cross-subsidy in the capital of the bank, through insurance underwriting or distribution, in any way impaired the capital requirements of that bank, clearly that would be very bad for the nation.
There is that side of it, and I am sure the regulators are trying their best to ensure that such a thing would never happen. Nonetheless, it should be stated that that is fundamental; it is the most fundamental thing of all.
Second, cross-subsidization occurs in many industries, when people use the word "invest" to develop a new line of business or a new market share or a territory, and so on. It is commonplace for any commercial enterprise to anticipate losses when they enter a new field of business or a new geographical area or a new channel of distribution. Is that a cross-subsidization or is that an investment? Let us be sure what we are talking about.
In the case of the chartered banks, and in the specific narrow issue of distribution through bank branches and the difficulty in allocating costs, there is the opportunity for cross-subsidization, be it in the allocation of overheads or in the staff development training and so on. That stuff could be buried so far down in their tax-deductible billion-dollar profits that it boggles the mind.
The level of capital and the degree of income that our chartered banks have been enjoying invites massive cross-subsidization -- or, to be more fair perhaps, investment. We are extremely fearful of the power that flows from those very large financial numbers.
Senator Kenny: Would I be misinterpreting you then, sir, to say that you accept cross-subsidization as just a normal fact of doing business, but are just uncomfortable with the scale of the banks and the fact that they are federally chartered?
Mr. Hyndman: Yes.
[Translation]
Senator Hervieux-Payette: I am wondering about the following question: What is the use of protecting the distribution method that the broker represents, and I understand his role well? We are told that banks offer a large part of their services through automatic tellers, over the telephone or the Internet. I am talking about the next ten years, because our role is to evaluate the legislation over a certain period of time. Does the brokerage sector use modern methods for underwriting insurance policies or do you follow the well-known method of knocking at each client's door to offer your services? There is the whole matter of modernization, of using new sales instruments. You do not need a broker to buy property and casualty insurance. It can be bought directly from the company, on the Internet. In the property and casualty insurance sector as a whole, what percentage of the market do you hold and distribute through brokers?
[English]
Mr. Stevens: In Canada right now, through brokers, we distribute approximately 75 per cent of the total property and casualty industry. Since the rules changed in 1992 from a technological point of view, all of the brokers across Canada, large and small, have become very aggressive in their technology. Very few brokers at this point do not have computers and do not have the ability to transfer information through wire rather than through actual paper. There are brokers who even distribute insurance through the Internet.
We have been able to hold on to our 75 per cent of distribution simply by the fact of our professionalism, our knowledge of our product and the fact that, because of the rule changes in 1992, we have had to become more aggressive in technology in order to meet those changes. So far with this level playing field we have been able to maintain our market share based on those things.
[Translation]
Senator Hervieux-Payette: It is important that the consumer understand your position based on the method of distribution. You do not want an office occupied by someone responsible for property and casualty insurance in every branch or in every bank. But if banks want to move into this sector, they will have to have an independent network and product, and you will be able to access the product for your clients. In other words, your associations are opposed to banks distributing property and casualty insurance. Did I understand that properly?
[English]
Mr. Stevens: Actually, as far as the distribution of banks is concerned, it was stated earlier in the day that not every community has every bank. First of all, in Bridgewater, the number of competitors in a local area is quite high. In New Brunswick, we have 260 insurers who are competing for that particular dollar. We do not foresee the banks will be doing it branch by branch. They are not in every community to begin with. It will be done perhaps from outside through telephone-call centres, which removes those jobs directly from our communities.
In New Brunswick, as in the rest of Atlantic Canada, our jobless rate is quite high and we have fewer of those positions. We have had concerns with forestry and fisheries in these last few years. The government way to satisfy much of that is to retrain into other programs such as the service industry, which is our industry. Therefore, a loss of those jobs would drive the rate even higher. Moreover, I do not feel that the distributing of insurance by banks will be done in the same fashion as brokers are doing it in at present.
[Translation]
Senator Hervieux-Payette: We are inclined to make comparisons with securities brokers who, on the one hand, are an institution separate from banks and do not carry on business on the physical premises of the branches. On the other hand, they are in competition with independent brokers who have not joined the banks. We have experienced this. I wondered what the big difference was after hearing Mr. Hyndman. If a loss occurs, a settlement must be made. Is that the difference? This is a subjective matter and the person can get professional counselling to obtain a settlement. A securities broker operates independently from the bank. There is no relation between them. The banks are proposing a kind of holding service that would sell securities, banking, and insurance services. These three entities are different and financially independent from each other. Then there would be a fully integrated system. Is this model also rejected by the Brokers' Association?
[English]
Mr. Stevens: It is quite important to remember that we are happy with the way that banks are in insurance at present. It is a distinct entity as far as the banks are concerned and I believe they have the ability to do quite well at it on a level playing field. To go any further than that would not, I believe, be of any benefit to the consumer; to merge this product into the entire bank and not keep it distinct would, I believe, be disastrous to the consumer.
[Translation]
Senator Hervieux-Payette: To be the devil's advocate, I would say that if they sell the product in their branches, they w ill not have additional management fees to pay. They will use the same office, the same telephone and will not have additional management fees. The client will not have to pay because he has already paid for these expenses. We will have to decide whether the saving on management fees -- because it is the same establishment -- is offset by the broker's independence, his capacity to represent a client and the absence of conflict of interest for the banker when the time comes to settle loss claims.
[English]
Mr. Stevens: It must be remembered that we have several people who do not distribute insurance through insurance brokers. Their expense ratios are very similar to companies that do. CIBC was mentioned earlier today. Their expense factor actually is in the middle of the pack compared to the majority of the companies.
A point that has not been made so far today is the fact that CIBC, even though they have branches in the different communities, have found it to their advantage to outsource the management of their insurance to a company from the United States. It is important to look at items such as that. With respect to expense factors, in distributing insurance, everyone must be much more aggressive in that particular field -- and they have been in this last while.
CIBC, by going through a management company in the United States, have their own method of looking after that aspect. There are others. Insurance brokers, I believe, have been able to maintain it quite well.
Mr. Thompson: I wish to briefly add to that. The CIBC, who are in the middle of the pack, have an expense ratio that does not include the use of the bank's computers. So their expense ratio could be much higher than the regular property and casualty industry, if you factor that in along with the fact that they have outsourced business into the U.S.
Our national organization represents 60,000 insurance brokers from coast to coast and none of our business is outsourced outside this country. When the Bank of Nova Scotia, who are into car leases, call our office to confirm coverage for their car lease customers, that phone call comes from Dallas, Texas. They outsource that to reduce their expenses into the United States.
We have made our points, but we also wish to make the point on jobs, that our industry provides 60,000 jobs from coast to coast. If the banks are allowed to retail this product, what will happen to those 60,000 jobs?
Senator Oliver: One phenomenon that the MacKay task force indicates is taking place in the financial services industry is mono-lining. They talk about niche players in the field of credit cards and in auto leasing and in other aspects of financial services. I am just wondering, in respect of P and C, have you started to differentiate between commodity type P and C products and more complex products where you might have a distinct advantage over anyone else who might come into the area? In other words, have you looked at what it is that makes you unique and what is it that you would always be able to hang on to and start developing so that you, too, could become a mono-line or a niche player, which seems to be taking place throughout the financial services industry?
Mr. Lipsett: I happen to believe we are a pretty good mono-line distributor right now. Every business requires its different levels of professionalism in order to properly advise its clients and stay in business. Property and casualty business is a very complex business. It is somewhat different, as we were trying to get our point across this morning, from perhaps some of the other financial service instruments that are out there. We have an educational and professional standard that we must meet in order to do that. We have been a very competitive mono-line producer for quite some time and feel that we do it very well.
In order for us to take the next step and develop other niches, assuming we wanted to, all I can say is that I would not be able to do it personally. I will use myself as an example, if I may. I find the property and casualty industry is so complex that it requires my full attention in order to be professional at all times. I do not want to overextend myself. Perhaps I could hire someone to do that, but what we retail is certainly distinct from everything else that is out there, and I feel we do a good job at it because it is what we have concentrated on. We have not been looking to get into other areas at this point.
Mr. Hyndman: I should like to answer that question more fundamentally, if I may. That is not the issue. Multiple channels of distribution exist for various types of insurance products today, and there will be even more tomorrow. The industry keeps evolving. Not all insurance is distributed through independent insurance brokers, nor would that be appropriately the most effective channel. Clearly, anyone would find certain segments of the business very difficult to distribute and service and give counsel about. One thinks about the small business sector and particularly the medium-sized business sector, where the needs are extraordinarily complex.
If, for instance, a good insurance broker has a construction company as his client, the file never leaves his desk, because something is happening each day about one thing or another, since there are complicated problems in a high-risk industry. In that example, a broker will probably be servicing that client for as long as one can imagine.
The issue is not how it is distributed -- whether it is by Internet, call centre, direct mail, or a community insurance brokerage sales office. The issue is whether an option should exist for it to be within the walls of a bank branch. That is the fundamental issue, and it is the only issue we would dare to bring before the honourable Senate, because that is public policy. Our view is that the very banks that have been given the privileges of discharging their banking duties must have those privileges circumscribed. That is Parliament's duty. That is your duty. Because of the power and the influence that is potentially there, we believe it is adverse to our interest and will be adverse to the consumers' interest.
To get back to the earlier point in Senator Hervieux-Payette's question, yes, there would be less overhead, because there is no sales process necessary if you are sitting holding the loan and you say, "Sign here." Intimidation is the talon.
Senator Oliver: That is tied selling.
Mr. Hyndman: Of course it is, and it is contrary to public policy and it should be contrary to law.
Senator Oliver: MacKay deals with it in an even stricter way than the current amendment to the Bank Act.
Mr. Hyndman: Yes, but he does it after the fact, after the sin has occurred. It is like going to the pearly gates.
The Chairman: None of us will dare try another line after that.
Although I am a parochial Maritimer, may I say that all of you, and particularly Mr. Hyndman, have made a far more compelling case for your position than your national association did in Ottawa.
Our final witnesses of the morning are from the Atlantic Provinces Chamber of Commerce. We have Mr. Steve MacMackin, their president, and Sean Cooper, the executive director, and I assume that Mr. MacMackin will begin with a statement, following which we will ask our questions.
Mr. Stephen MacMackin, President, Atlantic Provinces Chamber of Commerce: The Atlantic Provinces Chamber of Commerce is a regional body that represents approximately 125 chambers across Atlantic Canada and approximately 17,000 businesses. The dialogue that went on here a few moments ago certainly served to highlight the road we must walk within our constituency as a grassroots organization that represents all industry sectors in their many forms and variations of opinion.
There is one thing I can tell you about our constituency: we have a love-hate relationship with the financial services sector. Some days it is good and some days it is bad. I believe that applies right across the spectrum, whether it is insurance, trust companies, credit unions, banks or whatever. As a business operator in Saint John, New Brunswick, I can personally attest to that.
What needs to be said, though, is that we do have a healthy industry and we have very professional players within the whole realm of that industry. I would never wish to question the quality of service that we receive from these institutions and I believe they all strive at all times to serve both the consumers and their business customers to the highest level. That point needs be reiterated. The hate side makes us sometimes tempted to come out and really stomp on them, but when we go back to public opinion surveys, again, our ongoing relationship is often a good one.
Our position on the task force report is that it is certainly heading in the right direction in respect of what we need to see done within the financial services sector. We believe that increasing competition has always proven to be healthy. What has gone on in our telecommunications industry in this country is an example of what competition can do; consumers and businesses have benefited from the competition there. We believe that increasing the competition in financial services can only help this sector to be better in the future. However, protection of consumers and business interests must always be put first, and obviously that is where Parliament and the Senate must enter the picture.
Mr. MacKay has done a fair job of empowering consumers and trying to protect them through his report; I believe he has given good attention to those details and it is important to remember that. Every day we are bombarded, as business people, by other competition. I listened to Gordon Pape on CBC radio yesterday talking about how I could put my savings in the ING Bank over the Internet and get 4.85 per cent interest. It is ironic that at 7:20 in the morning you can get that kind of feedback about what you should be doing.
There are choices out there and the sector is evolving whether public policy keeps up with it or not. That is really the issue that must be addressed. Public policy must move forward on the competitiveness issue. We have had a healthy industry that has delivered good benefits in terms of jobs and investments in our communities. Will our communities benefit from that in the future? If we simply sit back and wait, I would say that we will put that at risk.
The current face of financial institutions is changing by the day, right in front of us; we know that. We also know that how it looks tomorrow will be different, and we accept that. However, we at least wish to have the opportunity to see some of that investment taking place in new areas, particularly in Atlantic Canada.
That sums up my thoughts at this time.
The Chairman: I will ask a broad-based question. Are there any elements of the MacKay report, while you support its broad direction, which would be uniquely harmful to Atlantic Canada? In other words, one of the difficulties in this country with developing national public policy is that many national public policies have quite different regional impacts, just as they frequently have different urban and rural impacts, for example. Are there any parts of MacKay that are either particularly helpful to the Atlantic region or particularly harmful to it?
Mr. MacMackin: Access to money by small business has always been the issue for us. That has been the issue for 100 years, regardless of the number of competitors. The MacKay report addressed financing to small- and medium-sized enterprises. The micro-sector and all those areas are areas we have always struggled with within public policy. How do we get money? How do we get businesses to start and be successful and grow?
Mr. MacKay has made suggestions, and there have been responses in the industry as to what they would do as they see their futures evolve. I believe that for us that remains the number one issue: do we have good choices in competition out there to receive what we need. We need money and insurance. Money and insurance go hand in hand when you are at the bank; I cannot insure my assets, and the bank will not lend against them. Therefore, as business people -- not insurance brokers or a bank -- we need both these sides.
Mr. MacKay has been helpful in focusing on the problem that, no matter how many competitors or options we have out there, we still have to struggle with how to get money into the hands of people with small- and medium-sized enterprises in order to help them grow and flourish, because that is where our job creation has been in this country; it is from those businesses.
The Chairman: During the summer, this committee held hearings in various parts of the country on the Small Business Loans Act, which is up for renewal this year because it expires at the end of March. In response to your comment that small business needs money, we heard different points of view as to whether the money that was really needed was equity money or debt money. In order words, what does small business really need, investment or loans?
In a sense that goes beyond these hearings. Other than the fact that banks and deposit-taking institutions, and indeed life insurance companies, only provide loans, they are not fundamentally seen as a source of equity capital at this point. Do you have any view on that question?
Mr. MacMackin: First, we need to teach business people how to prepare the business plans that they present to financial institutions. That is a role which a chamber of commerce should and can play in a community.
The Chairman: That is a current weakness in the small business sector?
Mr. MacMackin: That is the No. 1 weakness: people go to the bank and then cannot articulate a clear vision or show a viable plan. Whether it is debt or equity, that is the complaint I have had with the venture fund side in Atlantic Canada. Venture funds are typically looking to hit the big home run -- knowledge-based industries and those types of sectors. When you look at the typical profile of a small or medium-sized enterprise, such as a service business or a clothing store retailer, for instance, debt is the route that the financing has come from. Giving up equity in a business of that type just does not seem to make sense, or bringing in reasonable equity. If you give up equity you had better be getting a good chunk of money into your business to make a significant impact.
The traditional focus in this country is still on debt as the route for growing our businesses. The equity routes just do not seem to hit the mark, particularly the venture fund, and as we look to moving over to a knowledge-based economy, trying to grow those businesses, obviously that is more important because they have no assets generally. If we are talking of ideas that someone is attempting to exploit in order to grow and develop a business opportunity, what then is there as the basis for a loan? So you are back to the position that equity is what you need in those circumstances.
In other words, when we look at what has been used traditionally for growth in our business sector, debt still is the choice we fall back on as a business community.
The Chairman: I have one last question on the debt side. Is the life insurance industry, which obviously has large pools of capital to invest, into the business of providing loans to small businesses, or are they fundamentally investing in market equities?
Mr. MacMackin: I will profile my own business for a minute. My long-term debt is not held by a bank. My long-term debt is financed by pension funds and life insurance companies out of the Ontario market. I could say from my perspective, yes, the life insurance companies are funding my business. They hold 50 per cent of my debt over one particular company. That is how I financed my business, but you do not hear a whole lot about that aspect.
The Chairman: Implicit in the data and in the discussions before this committee, and sometimes stated explicitly, is the assumption that the only source of debt money is deposit-taking institutions generally and banks in particular. That is why I was curious. I keep hearing anecdotal evidence that the insurance industry is starting to take a reasonably significant chunk of that market. Are you unique?
Mr. MacMackin: We are unique within Atlantic Canada. The company we work with, which brought the syndicate players together for our loan, has been trying to grow this in Atlantic Canada. You will hear nothing about it other than my personal experiences and the experiences of a few other companies within Atlantic Canada. However, it is certainly an option that is in between bank financing and venture capital, and it is debt-focused.
Senator Oliver: I wish to ask about the role of government in the financial services industry. First, you mentioned that you heard Gordon Pape on the radio talking about investments with ING. Did he indicate whether or not, if you invested, say, $60,000 with ING, your money would be insured and protected?
Mr. MacMackin: Yes, it was insured and protected and there were no restrictions as to when you could leave. If you wished to, you could leave tomorrow. Hence, the interest rate was not fixed either; so it was a two-way street.
Senator Oliver: Insured by whom?
Mr. MacMackin: CDIC.
Senator Oliver: In 1996, this committee, as you probably know, studied the role of government-run financial intermediaries, things like the Business Development Bank of Canada, Farm Credit, Export Development Corporation, Canadian Commercial Corporation, Atlantic Canada Opportunities Agency, Federal Office of Regional Development, et cetera. During our hearings concerns were raised on the change in mandate of the Crown financial corporations and agencies from complementary organizations to self-sustaining, and we made a number of recommendations; but essentially nothing has happened.
I do not believe the MacKay task force dealt with the role that the government actually plays in this type of financial institution. Do you feel that it should have? Was this a major oversight? Is the role of Crown corporations a barrier to the entry or expansion of private-sector financial institutions apart from the large financial institutions?
Mr. MacMackin: We discussed earlier this morning the issue of ensuring that lenders have access to and provide money to small business, and I came back to the role of federal Crown corporations, BDCs, and it seems like an oversight. They exist. The BDC is a fairly significant player in the Atlantic economy for small businesses, and it is a teacher of the skills which we have talked about -- business plans and the basic business skills needed to grow a business. They have certainly helped many small businesses get started and move up.
While it is not mentioned in the report, and that may be an oversight, I certainly suspect the federal government would not move away from using those types of tools. It would be a shock to us if they did, because it would be a complete surprise. On some days it might be a pleasant surprise, but on other days it would not. It could be an oversight, but I would presume that Mr. MacKay is comfortable with the roles those institutions have played and maybe that is why there is no comment.
Senator Oliver: Let us take ACOA here in Atlantic Canada as the first example, and then, if you like, you can deal with Farm Credit and the other organizations.
ACOA used to give away money and so on, but ACOA is not meant to be self-sustaining. However, when it runs out of money the government seems to put more money into it. As with the banks and other financial institutions, do you not think that that would have been a good thing to have been looked at by MacKay?
Mr. MacMackin: The members of the Atlantic Provinces Chamber of Commerce have clearly stated that we wish to debate the future outlook for economic development in Atlantic Canada. We need to enter into a new debate. There are various questions: How have we done this in the past? Will it serve us well in the future? We have put a great deal of money into these instruments; have they given us good results? Has it been the right way to stimulate our economy?
There are some hard questions we would like answered, but today is not the day to do that; nevertheless, we certainly are questioning ourselves on whether the way we have done it over the last 20 years has been the right way. Have we made a difference? If not, then let us talk about heading in a different direction. We might possibly need to trade off a dollar's worth of ACOA for a dollar less in business taxation.
Senator Oliver: I am raising the matter now in the context of the entire financial services picture, because surely the government kind of financing is something that we should look at when we are looking at the life companies and the trust companies and the banks and so on. It really should be all part of one picture.
Mr. MacMackin: Certainly, the money that ACOA has put into businesses is an investment that obviously other institutional lenders do not feel they can risk. Mr. MacKay addresses that in his report from the standpoint that, while we should invest in those more risky ventures, it should be reflected in the interest rates at which we are willing to lend that money. I feel that that would be a fairer way. We do not have that in our system right now.
Senator Oliver: That is the way they do it in the United States.
Mr. MacMackin: If you are willing to take the risk and pay the extra rate, then we are willing to lend you the money.
Senator Oliver: How do you think small business in Atlantic Canada would react, for instance, if the banks were prepared to lend them money for things that were risky at prime plus 8 per cent? What would be the reaction of business?
Mr. Sean Cooper, Executive Director, Atlantic Provinces Chamber of Commerce: The short answer to that is that they would react very positively to it in view of the fact that they are now not necessarily using banks alone in their financing. If you have a business idea and you wish to start a business, you will find the financing somewhere, and they are finding it. There are many ways of financing businesses, and that is what is happening here in Atlantic Canada.
If that option were there, it would be an option open to a business owner or a person starting a business to explore. Again, it is a matter of the number of options or choices that are out there. It is something additional, so it is a good thing.
The Chairman: May I add a parenthetical note, Mr. MacMackin, to the point you just made.
The question of what is an appropriate regional economic development policy in the 1990s, as opposed to the 1960s, is something that many of us on this committee have been asking ourselves for some time. If in fact your organization decides to do an exploration in that area, and you decide to get involved with it in exploring what the options ought to be, please let us know. As individuals and as a committee we would be delighted to provide any help we can, but, more important, we wish to participate in the policy development process. Clearly, we think it is also important to have a complete rethinking of what regional development economic policy ought to be as we enter a new century, given the history of ARDA and DREE and the success of such organizations. If we can help you, let us know.
Mr. MacMackin: Clearly our marching orders are to deal with that.
[Translation]
Senator Hervieux-Payette: Could you explain to me why banks would not adjust interest rates according to risk? Why would not a bank dare do that if the large banks are not all doing it? Why would not these people be ready to assume higher risks by asking for higher fees?
[English]
Mr. MacMackin: It is interesting that in all my discussions with banks I have never asked them that question. I suspect it may be tied to the fact that they are lending out money from savings accounts, RSPs, and the amount of risk they are willing to put on the line relative to where their money actually comes from, for the base they are borrowing on, may be what drives that, but I do not have a clear answer for that.
Mr. Cooper: I have asked that question of some of the bankers to whom I have been talking and quite frankly the answer has been that it has been an area that they have not serviced properly in the past as far as they are concerned and now they are starting to pay more attention to small- and medium-sized enterprises and getting into that kind of risk management. There has been some success of late in some of the equity financing that they are prepared to do, because a little while ago they would not even look at that. Now they are and that is coming around.
I believe they see that there is a niche there, and a need for it, because businesses have been finding that capital elsewhere. They are seeing that they can get into it and do it as well, so they are exploring that avenue now.
[Translation]
Senator Hervieux-Payette: Especially with a prime rate of 6 per cent! Even if at 6 per cent prime, it is still less than the interest rates ten years ago, which were 15 per cent. This can be included in a company's price structure.
The Chamber of Commerce has a role in putting these suggestions to banks. This will certainly be in our report. Products were not offered because people were not responding to the demand. You no doubt have received many tourists during the summer. My colleagues and Senator Callbeck in particular are interested in this matter.
As your region is very attractive, do the banks respond to the expectations of the tourist industry? Do you have the necessary funds to develop this industry which, in my opinion, could be further developed in the Atlantic provinces?
[English]
Mr. MacMackin: From an Atlantic perspective, tourism is one of our growth areas. It is an area in which truly small businesses are starting up -- whether it is a small kayaking firm in St. George, New Brunswick, or a bed and breakfast somewhere else. Those are the types of people who are getting into this sector and are really trying to make an impact.
The Business Development Bank of Canada has taken a hard look at that, and so has ACOA. When we sit back and look at the overall strategy in Atlantic Canada, however, our concern is that it is a real mismatch of priorities, focuses and spending. I know we just focused quite a bit of money into attracting cruise lines into Atlantic Canada through ACOA, and the first argument was on where they would locate the office. Through the good work of port corporations those cruise ships have been docking in Atlantic Canada. Just how, I am not sure, but that extra money should make a big difference. However, you sit there and you question. We were already doing the job well and now we will, we hope, do it better -- or at least not waste money again.
The issue is that the focus is increasingly on that sector, which the whole industry sees as a growth sector. The remarkable thing is that we have been able to develop from a one-season industry into a very good three-season industry in Atlantic Canada. It has come and there has been much emphasis put on development for the whole year, and I believe it has been reasonably well looked after.
[Translation]
Senator Hervieux-Payette: You are emphasizing the BDC and ACOA and you are not saying much about the financial institutions we are currently looking into, namely banks and other companies in the financial sector. You said a moment ago that the knowledge-based industry, the venture funds, will tend more toward that side and less toward tourism. The same applies to financial institutions. You are sure that you have the necessary funds to continue developing this sector which, in my opinion, offers great development potential in the Atlantic provinces. Are the financial institutions dynamic in that sector? Must you depend solely on federal funds?
[English]
Mr. Cooper: If I may speak to that for a moment, the reason we allude to the fact that ACOA and the Business Development Bank have been used for the tourism sector is that that has been their focus. One thing about Atlantic Canadians is that, if the focus is on tourism, then they will concentrate on getting the cash out of tourism. That is the reality.
If you start a business in the tourism industry, you know that ACOA is there and is focused on that so you will approach them for financing; if successful, you will take that financing and then try to get further financing through the commercial lending institutions.
I agree with you that the chamber of commerce is a proactive organization that is constantly telling the banks where they are lacking. As Mr. MacMackin said earlier, we do have a love-hate relationship with financial institutions and they do hear from us.
This sector has been gaining strength in Atlantic Canada. It has been the focus of the four provincial governments, which have come together recently in a co-operative agreement with the four provincial tourism associations to promote Atlantic Canada as a destination for the whole of North America. It is working and it is expanding.
With proper training, people who wish to start a bed and breakfast operation, for instance, can put together a good business plan and get financing from the appropriate institutions. That is where organizations such as ACOA and the BDCs come in, and that is why it is important that the federal government is putting money into the other economic development agencies out there, the community development corporations, and into the private sector through the chambers of commerce. Doing that helps to educate people in developing good business plans so that when they go into a bank they can actually get the cash they need to start their operation.
Mr. MacMackin: It would be interesting to see the actual statistics, but, when a bank says that it has lent so many millions of dollars to small- and medium-sized enterprises, it does not break those down and say how much went into each sector. At least I have not been privy to those numbers to be able to say what they are really.
Senator Callbeck: I wish to make sure I understand. Are you saying that, with respect to businesses in the tourism sector borrowing money from the chartered banks, there has not been any difficulty here with small business getting access to capital?
Mr. MacMackin: I did not say that. I am saying the breakdown does not appear. If you look at the growth of the tourism sector in our communities, at the small businesses that are starting up and at the infrastructure, that breakdown does not appear; however, I am not hearing complaints from people saying they are not getting financing, although I am sure there are people who have gone and presented a good plan to the bank which has been rejected. That happens every day. Obviously, of course, a bad plan can be submitted to the bank and it also gets rejected.
We seem to be having tremendous tourism seasons every year, and our provincial governments are well focused on the benefits of tourism and on the dollars they are putting in to make the base infrastructure of tourism feasible. Now it is the turn of business to go and make those jobs.
For example, the government creates the Fundy Trail in southern New Brunswick leading into Fundy Park. It is not then the responsibility of the government, federal or provincial, to set up two more bed and breakfasts or a restaurant; it is now the time for businesses to step in and say, "Here is an opportunity. I believe I have a good idea. I believe I can convince someone to lend the money." Then the banks and the businesses must deal with each other to make it happen.
Senator Callbeck: The reason I bring this up is that this past summer we had hearings on the Small Business Loans Act and certainly in Atlantic Canada we heard from many businesses in the tourism and hospitality sector that spoke of the difficulties of getting financing. If my memory serves me correctly, the tourism association in Nova Scotia said that this whole industry would be in a crisis situation by the year 2000 if the chartered banks did not change their thinking.
Mr. MacMackin: Looking at the current way banks lend money and how they finance a seasonal business and put loans in, I believe the banks have a reasonable right to sit back and wonder how they will be paid. There is some risk in the seasonality of these businesses. You must be very careful how you look at that. Because it is important that we have money there, ACOA and the BDCs have focused their efforts on getting money into that sector to help those businesses get started, but you must be very careful in turning around and putting policies in place that require financial institutions to lend money to an institution simply because it is a good idea and not because it makes economic sense or will be a profitable business.
I have heard many good ideas about tourism but making them pay and making them work is still a challenge on the best of days, and most tourism operators will tell you that. They will not all die rich.
Senator Kelleher: The members of the MacKay task force obviously are concerned that if the bank mergers go through there would be a lessening of competition. They have been looking around to see what alternate source of competition can be supplied in that event. They have explored what they call a second tier of banking. They have looked at, for example, the caisses and the credit unions as a possible source. Certainly the credit union representatives who have appeared before us to date support this. They are ready to move in and feel they can provide pretty good competition. What we have been told here so far is that, in the Maritime region of the country, the credit union movement is small and fragmented, and there is doubt as to whether or not it could in fact supply an alternative second-tier.
Do you believe that is a correct assessment? Assuming it is, what do you suggest as a possible alternative for second-tier banking in this region?
Mr. MacMackin: Your assessment of their position is accurate; they are small and fragmented. The way I see it, they are very fierce competitors within my communities, and the challenge for them will be to pull together a stronger network. I believe they can see their way through that. They will step up to the plate and take their chance. I feel there is a good opportunity for them.
We all choose our strategies to grow our businesses. As much as Bank of Montreal and Royal Bank say this is the strategy they wish to follow, there is risk with it, just as there is risk for the credit unions to grow. However, the consumer will be the ultimate judge and I feel that the credit unions have had good reputations with their client base. If they can pull together some cohesion in the Atlantic market, I believe they will grow just as well. The individual players in the organization are quite strong. I know there are a couple of players within the Saint John business community that are very strong. It is a big opportunity for them; either they take advantage of it or they let it pass by. If they choose to pass it by that is their prerogative, but other lenders are out there right now. Wells Fargo is around; ING Bank is around. There are many choices out there right now for business and that second tier will filter in here with or without any changes being made. Business people will be provided opportunities and choice. Quite often I have heard it said that the world evolves faster than government, and I believe we are seeing that now.
The credit unions have a good opportunity here and I hope to see them step into Atlantic Canada, because there are many communities with just one bank, one of the big five. Competition is great.
Senator Kelleher: I will tell you what the Credit Union Central of Canada is telling us in Ottawa. They recognize that the so-called back room operations are pretty expensive. They are prepared to provide this service for credit unions across Canada so that each credit union does not have to set up its own office, even regionally. Some of us believe that that should relieve them of quite a burden of concern.
Assuming that that goes ahead, do you think that it would facilitate and help the growth and expansion of credit unions in the Maritimes?
Mr. Cooper: Quite possibly, but the people who could best answer that question would be the credit union people themselves.
In Newfoundland there is a fairly strong credit union movement in most communities. The caisse is fairly strong in New Brunswick. There is a large credit union presence in those two provinces, but it is not quite as strong here in Nova Scotia.
The other part of the report that we have kicked around at our board table as a possible opportunity -- and when business people get together they constantly look at opportunities -- is the establishment of new and very specific banks. We see that there could be an opportunity in that area down the road in Atlantic Canada. If there is a niche where someone could get in and start a bank -- whether it is in the Maritimes or anywhere else across Canada -- that will happen. You will see business people step up to the plate, as well, and try to take advantage of any opportunity that they can to promote their businesses.
The Chairman: Mr. MacMackin, I would like to thank you for one of the more candid assessments we have had of the role of government in business. Frequently we hear evidence where people are looking for things. For example, we hear complaints about loan applications being turned down. Your comment on the weakness of business plans as being one of the reasons is interesting. You give a much more balanced two-sided discussion of the issue than we have frequently received.
I would like to repeat our offer to help you in any way we can as you go through that policy development process.
Mr. Cooper: We will be in touch.
The committee adjourned.