Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 34 - Evidence - Morning sitting
VANCOUVER, Wednesday, October 28, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 a.m. to discuss the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair:
[English]
The Chairman: Our first witnesses this morning are Ms Peggy-Anne Brown, Chair of the Board of Directors of the Canadian Banking Ombudsman, and Mr. Michael Lauber, Canadian Banking Ombudsman.
You will recall, honourable senators, that the MacKay task force report contains recommendations that affect the office of the ombudsman; specifically, the largest and most significant is recommendation 80 on page 213. Senators may wish to look at that when the presentation is made.
Ms Brown and Mr. Lauber, thank you very much for appearing. I know you have an opening statement contained in the material you gave us in the grey folder. Rather than read in detail your eight-page statement, which would reduce the amount of time available for questions, would you simply take us through the highlights, please. Frankly, this committee is quite capable of reading, but we love to ask questions.
Mr. Michael Lauber, Canadian Banking Ombudsman: Honourable senators, we appreciate the opportunity to be here this morning with you and present the position of the Canadian Banking Ombudsman on the recommendations of the task force. We will confine our remarks to those matters that relate directly to the ombudsman process. I would ask Dr. Brown to make some initial remarks.
Ms Peggy-Anne Brown, Chair, Board of Directors, Canadian Banking Ombudsman: Honourable senators, welcome to Vancouver. The Canadian Banking Ombudsman is an independent organization that investigates complaints from individuals and small businesses about financial services. I should like to make the point that the CBO is not part of the Canadian Bankers Association. The CBO is led by a board of directors, the majority of whom are independent of the member financial institutions.
Since we were established two years ago we have undergone a series of bylaw changes to formalize what we feel are the very special powers of our independent directors. These special powers safeguard the independence of the ombudsman. For example, the independent directors must unanimously agree in order to terminate the ombudsman. We as independent directors control the size of the budget to ensure that the office operates effectively. We search for, interview and nominate our successors. They are not appointed by the member financial services. We also look for, interview and select the ombudsman, who may not have worked for a financial institution. We feel we are well equipped to carry out our primary function, which is to enhance, guarantee and protect the independence and credibility of the office of the ombudsman.
What we have accomplished in the last couple of years is to select independent directors who bring a geographic and gender balance to the job. We have listed in our presentation to you a number of the independent directors. I myself, as chair, am a small-business person and my home is Vancouver. We also have on the board the current chair of the Canadian Institute of Chartered Accountants. Jim Savary, an Associate Professor at York University, is also a long-time senior volunteer with the Consumers' Association of Canada. The Honourable Lincoln Alexander comes from Hamilton. We also have the director of the Graduate Business School in Montreal and the vice-chair of the Nova Scotia Securities Commission.
The MacKay task force has endorsed the structure and the operations of the Canadian Banking Ombudsman and how it safeguards or protects the independence of the ombudsman. In fact, if you review his discussion of the CBO, it does not appear to have a single criticism about our operation. I should like to quote a couple of points.
A system that provides a good model to build on is the Canadian Banking Ombudsman.
We are impressed with the spirit behind, and the structure of, the CBO.
-- compares well in most respects with similar initiatives in other countries and industries.
In fact, the research study that supports the report comments on our independence as follows:
The Canadian system performs well on the criterion of independence.
However, despite that, the task force has expressed a concern about what they call the perceived lack of independence. They have recommended that the Minister of Finance appoint the board of directors and that the ombudsman be accountable to Parliament. In the opinion of the CBO board, the proposal of a statutory solution would create many issues in order to resolve what we feel is a perceived problem -- not a real problem.
In our submission to the task force in October of 1997, we suggested that a single independent ombudsman for the financial services sector would provide a seamless coverage for consumers of financial services. We are pleased that the task force concurred with that recommendation, in stating that:
It would be a step backward to establish a separate ombudsman office for each of the former pillars.
Earlier this year, we amended our bylaws to allow membership from virtually all financial institutions, including trusts, credit unions and specialized lenders. We also asked Michael Lauber to approach these financial sectors to determine the degree of their interest and support for our proposal. Obviously, if we attract other financial sectors, banking will be dropped from our name and the industry members on the board will represent all the financial sectors involved, rather than just the bankers; I would also point out that independent directors would remain in the majority.
The bankers on the board have strongly supported the development of the ombudsman process. They have deferred on every single issue to the opinions of the independent directors. In fact, when we recently discussed the MacKay report it was apparent that the psychological transfer of authority was complete and that, truly, the independent directors are leading the organization.
We feel that a board with industry representation from trust, insurance and credit unions would reduce the concern about domination by the banks, which is the perception issue. The consumer and small business groups that Michael Lauber has met with recently have also supported this assessment. Perhaps Mr. Lauber can now talk about the ombudsman process.
Mr. Lauber: Honourable senators, as Canadian Banking Ombudsman, I am involved in resolving disputes in all financial services sectors. We are the independent appeal body from the internal ombudsmen of the banks. Our mandate includes all of the banks' subsidiaries. Therefore, I deal with complaints from the bank, from the trust subsidiary, from the life insurance or general insurance subsidiary of the banks as well as investment products such as mutual funds that the bank may put together. We are all dealing in all sectors at the present time. This year we will conduct approximately 200 investigations; 1,200 people will contact us. That is double last year's activities. We have been in operation for just over two years and our visibility to the Canadian public is 40 per cent -- not the 20 per cent stated in the task force report. They did not include in their numbers people who were "somewhat aware"; it is 40 per cent awareness, and it is very important that that is understood.
It is important to understand what an ombudsman is and what an ombudsman is not. The dictionary definition of "ombudsman" is: "A person who investigates complaints, reports findings and mediates fair settlements, especially between aggrieved parties and institutions." The focus of an ombudsman is on dispute resolution, and we provide our services one person at a time. We do not deal with blocks. Our mandate is to assess the fairness of a situation and, if appropriate, make a recommendation for the bank to take appropriate action. To determine fairness we use good banking practice, codes of conduct, and industrial good business practice. There is no cost to the customer and the parties do not surrender any legal rights. They can proceed to court if they wish.
An ombudsman is neither a watchdog nor a regulator. A number of people who have appeared before this committee have been confused on that fact. The watchdog function is the role of the Consumers' Association people, such as the CRC, the Canadian Federation of Independent Business, and the various chambers of commerce. We do need well-financed watchdogs in this country to protect the interests of the public, but we are not a watchdog.
The self-regulatory function is provided by government or by self-regulatory bodies in industry, such as the Investment Dealers Association. Regulators set standards and codes of conduct and they discipline members for non-compliance. The regulator usually does not have the power to provide redress to the consumer. The redress is our function, dealing with one customer at a time to provide redress when they have been harmed.
I should like to talk about a couple of legal problems that arise. First, there is the matter of federal-provincial responsibilities. In Canada, the responsibility for financial institutions is shared between federal authorities and provinces. For example, banks are federally regulated; our trusts are mostly provincially regulated, except for Canada Trust, which is federally regulated; life and general insurance companies are regulated by OSFI with respect to solvency, but market conduct is the responsibility of the provinces. The credit unions are provincially regulated and the investment sector is entirely provincially regulated.
The ability of the federal government to legislate participation in an ombudsman function much broader than banks and Canada Trust is questionable. Furthermore, any federal pressure to encourage voluntary participation by provincially regulated institutions might result in provinces retaliating by establishing their own ombudsman processes.
Quebec has recently appointed the board of a financial services commission which has the power of redress. Ontario has issued a discussion paper recently for its financial services commission that also enables a redress function. Both of these processes are primarily aimed at insurance.
We run the risk of having a multitude of schemes across Canada. That would be confusing to the consumer and it would be very expensive to the institutions to comply with, with all the different processes and standards across the country. Surely that is not what the task force envisioned. Our advice is that we have a better chance of creating a national, comprehensive ombudsman process on a private-sector basis than on a statutory model. That would be far more acceptable to the provinces and would probably not involve them at all.
Legal considerations under a statutory scheme, decisions and procedures might be reviewed by the courts. It is one of the complications of statutes. The judicial review would require establishing more formal processes in our office for the review of cases, which might provide for different processes of evidence, the possibility of hearings and written decisions. We believe that our private sector scheme provides faster and cheaper results for the customer and is just as fair.
The U.K. has set up a comprehensive national scheme. They have the power to do that; they are a unitary state; they can put it in place very quickly. I believe they have the possibility of jeopardizing the effectiveness of their scheme, and the British and Irish Ombudsman Association has also made that point and has expressed concern over the situation.
I might also add that a lot of people celebrate the structure of the U.K. Ombudsman. I make the point strongly that the structure of the Canadian Banking Ombudsman scheme is superior to the present British scheme, and always has been -- and there is a comparison in the folder. We have a better scheme. It is better structured to protect independence and to work for the consumer. The new government scheme is a different thing.
There are obvious risks to creating a statutory body, both legal and jurisdictional. Remember, I am not a watchdog; that is incompatible with the role of an ombudsman. There is a need for government and regulation of the sector in creating standards for the protection of the consumer; but is there a need for government in commercial disputes between the customer and a financial institution? Can a self-regulatory organization not fulfil that function?
To recap, the task force has supported the structure and operation of the CBO. We strongly agree that having a single financial services ombudsman, a comprehensive national ombudsman, is in the best interests of small business and of consumers. Having board members from all sectors and funding from all of these sectors would minimize the appearance of the "perceived lack of independence." The self-regulatory approach preserves the investigative and mediation approach of an ombudsman; the statutory body would likely require a more legalistic process. Finally, the self-regulatory ombudsman increases the chance of acceptance by the provinces and the ability to create a comprehensive national scheme.
Ms Brown: I want to end our presentation with one message, and that is our request for the time to demonstrate that the CBO can work together with the financial services industry to create an effective national financial services ombudsman that would provide comprehensive coverage to all consumers. With support from the Minister of Finance and parliamentarians, we believe that we can reinvent the CBO as a comprehensive financial services ombudsman.
The Chairman: In paragraph (a) of recommendation 80, the criteria for independence are laid down by the task force. It makes the following points: First, your office should report to parliament; second, your board should have a majority of independent directors -- and as I understand what you have said, it now has that; third, the board would appoint the ombudsman -- and it is my understanding that that now happens; fourth, the board would approve funding arrangements -- and it is my understanding that the board does that; and, fifth, the terms of reference and policy issues would also be determined by the board -- and I understand that that is also the case.
In fact, in respect of paragraph (a) of recommendation 80, there are only two things that do not now happen: the directors are not appointed by the minister and you do not report to Parliament. However, presumably that would be easy to do, because in reality Parliament in this case would mean the Senate Banking Committee and the House of Commons Finance Committee, and presumably there could be a bylaw for that, or we could decide to call you every year. As to issue of the board of directors being appointed by the Minister of Finance, as I understand what you said, the independent directors now appoint the other independent directors. Is that right?
Ms Brown: That is correct.
The Chairman: So the financial services industry has no way of influencing the appointment of independent directors?
Ms Brown: That is correct.
The Chairman: It seems to me other than that slight nuance of the Minister of Finance picking the independent directors versus them picking themselves down the road, you have in effect satisfied all the conditions of paragraph (a). Am I correct?
Ms Brown: That is correct.
Senator Callbeck: My question relates to the legislation that was proclaimed not very long ago by the federal government regarding tied selling. It is my understanding that, if people feel that they have been subjected to tied selling, they can now go to OSFI; is that correct?
Mr. Lauber: I believe that is the recommendation.
Senator Callbeck: So you are not involved at all now?
Mr. Lauber: That is an interesting question. We have taken tied selling complaints from the time we started dealing with consumer issues. If you adopted the recommendations of the MacKay task force and OSFI was involved -- and we have discussed what we do -- I do not think we would change anything for the moment.
If, for example, a customer has a complaint against a bank, he is directed to the complaints section of the bank; he would end up at the ombudsman's office, and presumably the ombudsman would attempt to resolve the issue. If not, the customer would come to our office; we would review it and make a recommendation, if we felt that it was appropriate; we would then tell the customer, "You have a choice. This is in the legislation; this is in the Bank Act; you have the right to go to OSFI."
But I think nothing is really changed, in that the bank wants the opportunity to deal with the complaint, and solve it if it can, and satisfy the customer. As we are the independent body, the customer should have the right to come to us since we can provide redress -- and I doubt that OSFI can provide redress to the customer. Most people want something out of it personally; they are not looking to see the institution punished.
Senator Callbeck: They still go through the same process?
Mr. Lauber: They do not have to, but the process is available for them.
Senator Callbeck: They could go directly?
Mr. Lauber: That is correct.
Senator Callbeck: Do you have figures on how many complaints you had last year?
Mr. Lauber: On tied selling?
Senator Callbeck: Yes.
Mr. Lauber: When I appeared before the House of Commons Finance Committee at the end of March, I told the committee that we had received six complaints on tied selling; one had not been investigated and the others were not tied selling. That was my evidence to the House back in the spring.
Senator Callbeck: You say six?
Mr. Lauber: There were six that came to our office as formal complaints. We had other people calling and asking for information, but in terms of complaints we had had six at that point. Since the end of April, when tied selling has not been in the media, I do not think we have had any calls other than one which I received last week.
Senator Callbeck: Why do you feel you have so few? Certainly this is an issue that comes up time and time again.
Mr. Lauber: I cannot comment on that, unfortunately; we are an appeal level and all we know is what comes to us; we know the people who come to us and that is all. About 40 per cent of Canadians know we are here; that is a high number. The bank ombudsman tells people that they have the right to appeal to our office. I do not know why.
Senator Callbeck: So are there ways that we could make the ombudsman more consumer friendly?
Mr. Lauber: I think we are very consumer friendly.
Senator Callbeck: In the MacKay report, it mentions that 16 per cent of people who were polled felt that they had been subjected to tied selling; yet the complaints do not seem to be coming through the system.
Mr. Lauber: Perhaps people are not addressing their complaints to the institution; or perhaps they are not escalating them, in the sense that they are not taking them to the ombudsman's office. I do not know. We only see what we see.
Senator Callbeck: If we look at the complaints you received last year, I would like to know how many you received, how many you made recommendations on, and how many of those recommendations were carried out by the banks.
Mr. Lauber: We work on an October year-end at this point. Last year, ending in 1997, we handled just under 100 complaints. We resolved about 40 per cent of those in favour of the customer, and all of our recommendations were followed by the banks. To date, every recommendation we have issued has been followed by the bank; that has not been the question. This year we are running at double that number, and we have resolved to date about 25 per cent in favour of the customer.
Senator Callbeck: So there were 100 last year and 40 where you made recommendations. What about the other 60; are any of those still being worked on?
Mr. Lauber: When I talked about the ones we resolved, I meant that they were cases where decisions had been made. Of the 100 per cent we made decisions on, 40 per cent of the decisions were in favour of the customer; we were recommending that the bank do something for the customer. That is a very high percentage; 40 per cent is very high.
Senator Tkachuk: I am interested in the same information as Senator Callbeck. To be a little more specific, you mentioned that you will handle 200 investigations this year, of which 20 per cent will be small business complaints. I assume the rest would be personal banking problems?
Mr. Lauber: Personal banking.
Senator Tkachuk: Is there any trend? Is there anything in that 20 per cent or the 80 per cent that is dominant? What type of complaints do you receive?
Mr. Lauber: In small business, credit is the big issue; probably 60 per cent of complaints in the small business area will be credit. In the personal area, it is much more spread out. Currently, in the last while I have been receiving a lot of complaints on the transfer of RRSPs and the time it takes to transfer RRSPs. Amazingly, we have quite a few complaints from people who lost track of their money 10 or 15 years ago and the bank does not have any records of that. That is a difficult one. There are all manner of transactional issues. There are mortgage issues -- anything that anyone has to do with a bank. We deal with some investment issues, with both full-service brokers and discount brokers. We deal with quite a few trading-type problems with discount brokers.
Senator Tkachuk: When you say that the issue is one of credit, are people coming to you because they have been turned down? Take me through the procedure. Is it because someone is turned down for a loan?
Mr. Lauber: The most difficult cases are in the small business sector. Even in the personal sector the complaints are not so much related to the availability of credit as to the withdrawal of credit. The complaints are from businesses that are in trouble, individuals that are in trouble on loans and credit cards, people whose loans are being called.
Senator Tkachuk: Such as a line of credit?
Mr. Lauber: A line of credit, a mortgage, a business loan.
Senator Tkachuk: If, for instance, a bank in Saskatoon or Vancouver calls a businessman to say, "Your line of credit is gone; you have two weeks to pay," what happens then? And sometimes they are given only two days to pay. What happens then? What is the process for the consumer? I am trying to get an idea of whether it is a difficult process. For example, if it has happened right now to a customer and he is not happy with what is happening, what is the process that that person will take to get to you?
Mr. Lauber: To start with, nothing ever happens that quickly in the first instance. Are you talking about small business or consumer issue?
Senator Tkachuk: The issue is the same.
Mr. Lauber: It really is. Small business is perhaps a little easier, a little better. On the small business issue, there will be a buildup to the calling of the loan, and the loan then will be called. There will be a minimum of two weeks given -- that is in their code of conduct. Usually it is longer than that, being something more appropriate to allow time for the business to find other alternatives and restructure.
If the business feels it is being dealt with poorly -- after all, for many it is perfectly justified -- but if they feel they are being dealt with poorly and their situation has not been properly evaluated, they would normally approach the ombudsman office of the bank, or they could come to our office and we would refer them back to the bank. The bank ombudsman would do an investigation of the circumstances; he would determine whether the process had been handled fairly and whether a complete and accurate assessment of the loan situation had been made and he would then form an opinion. If the customer comes to us, we basically repeat that.
The first thing we would normally do is stop the process. We would say to the bank, while we take a look at this please stop advancing this process. We will take a look at this issue based on the fairness of the situation. Is the process working properly? Is the customer being treated fairly? Has there been good communication with the customer? Have they been given alternatives for a form of financing? Have they been provided with guidance and advice? That is all in the bank's code of conduct and we will make sure that it has provided that information. We would stop the process to give us time to look at it.
We review it and express an opinion and make a recommendation to the bank, if we feel it should take some course of action other than pursuing its collection of the money. If the company is clearly insolvent and the bank has been proceeding properly and has followed its responsibility to the customer, we will not stop the process.
Senator Tkachuk: What happens if you find that the bank has not behaved properly?
Mr. Lauber: We make a recommendation for a appropriate course of action, which may be to give them six months to restructure; it may be, "You are all wrong; we feel you should continue the credit." But usually it will end up being, "Give them time to restructure and rearrange; work with them to rebuild their company."
Senator Tkachuk: You mentioned that 40 per cent of people know about the ombudsman; is that right?
Mr. Lauber: Yes.
Senator Tkachuk: I find that difficult to believe. But polls are polls.
Mr. Lauber: In the Ekos survey that the task force commissioned, you will find that in the research papers all the information is there. The survey shows that 20 per cent of the people were very aware of the ombudsman and 19 per cent of the people were somewhat aware. Our contention is that in a process like ours it is a back-of-the-mind issue. If you have any level of awareness and you have a problem you will find out about the process, and that is all they need to know. I did discuss this when I saw that in the report. I did call Fred Gorbet and he concurs with the manner in which we are interpreting the data.
Senator Tkachuk: It would not be because it seems that there is an ombudsman for everything these days?
Mr. Lauber: It could be. But as long as they believe there is an ombudsman and they have a problem they will find out about the system. There is an ombudsman in the automotive industry. They do not call it that, but if I have a car problem I will find out about it.
Senator Kenny: What you have described to us hits the points fairly well, but I want to underline the remarks of the chairman in relation to the ombudsman coming before this committee and the one in the other place as a means of reporting to Parliament. That is the logical place for you folks to come on an annual basis. The committee should give that further consideration as to a route to follow.
I want to pursue the issue that my colleagues have been dealing with. Very simply, 200 investigations a year does not strike me as being a reasonable level, given the amount of static we are hearing about the banking community. Your response that 40 per cent of Canadians know you exist does not solve the problem. It does not answer the question for me, at least. There is something missing in this picture and I would like you to think about it and give us a response.
If there is this high level of concern among Canadians about the banking process and you are only receiving 200 investigations a year, what is wrong with your process? Why do people not know about you? Why are they not coming to you? Is it something to do with the way you are marketing? Is it something to do with the lack of public confidence in your institution? Help us out.
Mr. Lauber: Let us take it from the ground up. Sixteen per cent of the people have a problem with their institution. It could be anything; it could be a transactional problem that is easily fixed. The banks have a number of levels for dealing with that dispute. It is dealt with in your branch. You then go to complaints groups within the bank, which are volume oriented departments that deal with customer complaints and attempt to resolve them. From there you go to the internal bank ombudsman. The bank ombudsman I regard as a boutique issue. The issues that should be going to the bank ombudsman are really the issues that are tough, unusual or specialized that are not handled properly or cannot be handled by the complaints department. I do not see them as a volume department.
Last year about 3,000 people, in the aggregate, dealt with the bank ombudsman. That is a lot of complaints. The bank ombudsman, I believe, resolved 60 per cent or 70 per cent of the customers' complaints, either fully or partially. The remaining 1,500 or 1,600 people, whose problems were not fully resolved by the bank ombudsman, have the option of coming to our office. This year 1,200 hundred people will call our office. Many of those will be out of that population. Some of them call us and we refer them back to the bank, but 200 go to complaints. It is a large number.
To give you a comparison, the British ombudsman in his present role has been receiving something like 10,000 calls a year. Last year 600 files went to investigation in the U.K. I am sure the environment is not all that different there. They start with 10,000. The difference in the U.K. is that they market themselves as the place to call. What I market is a process. If you have a problem, you approach your bank ombudsman then you come to our office. That is why we are not getting huge numbers calling our office; they are going to the appropriate place; they are going to the bank.
The internal bank ombudsman is a feature we have in Canada that does not exist anywhere else, and it is a strong and very desirable feature of our system. The Australian ombudsman, who has a very successful operation there, would love to have the internal bank ombudsman.
Senator Kenny: Mr. Lauber, I seems to me that the volume of complaints that the bank ombudsman deals with is relatively low given the number of customers, and the volume of complaints or investigations that you deal with is also relatively low. If I hear you correctly, you are saying that the system is working, that there really are not many problems, that people do not have concerns of the order of magnitude that they appear to have.
You did not state this, but it seems to me that the natural extension of what you did say would be that, while 16 per cent of bank customers are unhappy, they are unhappy because perhaps service charges are too high, or the lineups are too long, or their branch is inconvenient; but those are not really the sorts of problems that you could address anyway. Is that the message you are giving us?
Mr. Lauber: I really was not focused on that, but that could well be, if those people were in the 16 per cent. For instance, we do not deal with general service charges that apply to every customer of the bank. We deal with specialized situations. We receive a lot of letters. I mentioned that 1,200 people will contact us this year; that number includes people writing us about bank closures, about tellers, about slack teller service, and all those issues, and they presumably are in that 16 per cent.
Senator Kenny: Perhaps you could take another run at my final question, because I am trying to get a clearer picture of the dimensions of unhappiness with the banking system.
On the one hand, consumer advocates come before us and tell us about a range of problems that the banks are unresponsive to; on the other hand, the banks come to us and say, "Everything is okay. Be happy. Look at the low level of complaints that the ombudsman is receiving."
Something does not fit right in the picture being drawn for the committee. What is it that we are missing? What part of the puzzle am I not understanding in order to know why there is this great perception of unhappiness with the institution, and yet you, who are charged with dealing with the most serious problems, say, "No. It is working well. The level of complaints is appropriate. We are resolving 40 per cent in favour of the customer. That is very high. It is okay, committee. Relax."
Mr. Lauber: I do not know whether I can give you any comfort in that. We are a small operation dealing with what comes to us. Our responsibility, and what we have worked hard on, is making sure that people are aware that we are here and that the help is here if they need it.
I read the newspapers. I read the clipping packages and I hear all the noise out there about difficulties, and people do call me complaining. I cannot account for the numbers. I am quite satisfied that people are aware that we exist. Generally speaking, there is, I am sure, a good awareness that we exist.
For instance, on the awareness side, which seems important here, the U.K. ombudsman has eight financial sectors where ombudsmen have existed for 12 to 14 years, and a survey of their awareness level shows 46 per cent after 12 years; here, after two years, we are at 40 per cent. That is a very high percentage of awareness for something that is relatively obscure because most people do not have problems with their banks. Those who do, however, have a process to deal with it.
Senator Angus: Mr. Lauber, I would like to ask a couple of questions to determine what type of person becomes an ombudsman. I can remember the days when this Scandinavian institution first entered this nation; it was in the last days of my career in law school and had something to do with the process of naming the first Quebec ombudsman.
I agree with your point about this not being a watchdog, not being a regulator, but rather a sort of alternative dispute resolution process. I hesitate to call it "quasi-judicial," but it gets close to that, does not it not?
Mr. Lauber: Not really. That is what we are trying to avoid. We are trying to be open, accessible, informal -- using that in the correct context, as against being legalistic and structured. There are no lawyers. No offence to counsel, but we do not want lawyers in the process.
The Chairman: That is one line that will probably get a huge degree of support from some of us around this table.
Senator Austin: Surely there is an ombudsman that we lawyers can complain to.
Mr. Lauber: If you are a customer of the bank we would be happy to deal with you.
Senator Angus: I can see why you do not want lawyers.
Mr. Lauber: It would be expensive for the customer. The approach is that the customer can come to us unrepresented and unadvised and explain the process or the problem. We will investigate it. We will investigate the bank's side. We will bring them together, if that is relevant. We will talk to them and we will try to sort it out. Once again, our mandate is fairness and not legality.
Senator Angus: I understand that. We have a process in Quebec called the Small Claims Court where a lot of the same criteria apply. The concept is quite clear. However, I am still interested in the anatomy of an ombudsman. You categorize yourself in the document as a small business person from Vancouver, and as "not a banker" and as "not a lawyer."
Ms Brown: That is right.
Senator Angus: Madam Chairman, if you want to add a comment here, please do, because, obviously, this being a new organization, it brings into question the whole issue of which comes first, the chicken or the egg, but I want to ask Mr. Lauber a specific question. Who appointed whom and who head-hunted whom? Perhaps you could tell us yourself. You are not a lawyer; you are not a CA.
Mr. Lauber: I am a CA.
Senator Oliver: FCA.
Mr. Lauber: I was a partner of KPMG for 20 years. I spent another 10 years with that firm for a total of 30 years. Over my career, I was a specialist in anything from mining to securities, dealing with institutional accounts to large public companies; and while all of that took place, probably 50 per cent of my practice involved small-business people, including professionals, doctors, lawyers, manufacturers and trucking firms, and ranged from the hundreds of thousands of dollars in sales to $25 million and $30 million in sales of private companies. That was the backbone of my practice.
Ms Brown: Dr. Fraser Mustard and Holger Kluge of CIBC and I were the individuals who looked for and found --
Senator Angus: You were the search committee?
Ms Brown: Yes. Caldwell was the organization that did the search for us. They told us this was the biggest response that they had ever had.
Senator Angus: Do you mean in the number of applications?
Ms Brown: There was a huge number of applications.
Mr. Lauber: There were 800 applications.
Senator Angus: The salary must be good. I know those banks are pretty good on stock options, too.
Mr. Lauber: It does not pay as well as accounting.
Ms Brown: No, it does not. At that time our mandate was small business. Both Dr. Fraser Mustard and I have been involved in small business and we said that we wanted to be able to sit down with someone who did understand credit issues; that was important to us. We wanted to sit down with someone who could talk our language without having to bring legal representation. We wanted someone who could operate with a sense of immediacy. A concern of my colleagues and I who are small-business people is that sometimes the process takes too long, and we lose the opportunity to do what we wanted or we just give up and apply our energy elsewhere. We wanted something that was not costly, and it cost us nothing other than the investment of our time. We interviewed people. We spent quite some time at this. We were looking for someone who we felt that our colleagues or we would be comfortable sitting down with. We wanted someone who could understand what we wanted to accomplish. Michael Lauber certainly fit that profile. We said we did not want somebody with a bank allegiance, whether past or present. We felt that there was a perception issue, an optics issue, so we did not want someone with a banking background.
Senator Angus: You wanted somebody just like the Senate Banking Committee, independent, objective.
Ms Brown: That is correct. We also did not want a lawyer, because we did not want to get into an adversarial role with our bank. We did not want to be in the situation where we could not go back to our bank. Mike Lauber certainly fit those criteria.
Senator Angus: That was very helpful, Ms Brown. Perhaps you would have, either with Caldwell or on your own, a job description that you would have circulated? Perhaps you could send a copy of that to our clerk. It would be quite helpful, since it was so well designed that it solicited 800 applications.
Senator Kroft: You would like to use it.
Senator Angus: That is correct. I know this is in the task force documents, but just to complete the circle, according to what I see here, this office, which was established within the past two years, is an incorporation without share capital, a non-profit operation with members and a strong emphasis on independence from government. You have described it very well.
Ms Brown: We have worked very hard to move it from what it was to what it is today.
Senator Angus: You mention clearly the governance structure, the directors, and the composition of the administration of the organization. However, you gloss over the membership. I read between the lines that the members are all banks; is that correct?
Ms Brown: That is correct.
Senator Angus: And do they finance the deal?
Ms Brown: We have 12 banking members.
Senator Angus: Why 12 banking members and not 10 or 13? They are the 12 members that have joined at this point.
Mr. Lauber: Pretty well every bank that deals with consumers or small business is in.
Ms Brown: We started with six members.
Senator Angus: Yesterday we had the First Nations Bank before us. Would that bank be a member?
Mr. Lauber: They have not joined yet, but I will approach them. They provide ombudsman service to their customers through the Toronto Dominion Bank where they have some sort of management arrangement at the moment. But I would like to have them as a direct member.
[Translation]
Senator Hervieux-Payette: The Consumers Association of Canada has recommended that we give your organization a chance. I think that at the outset, you can already count on the support of one agency that has some credibility with this committee.
You mentioned the dispute resolution process. If I lived in a small town in Abitibi and was experiencing some problems with my bank branch, how would I go about contacting you? Would I file a complaint by telephone or by fax? How would the average consumer living in a small remote community in Canada go about settling a problem with his bank?
[English]
Mr. Lauber: Senator, I will answer in English.
We appreciated the response of the consumers association. Their support was most encouraging, and I think you will find that some of the other consumer bodies will support the same principle. We have talked to some of them, including some of the business organizations.
We are fairly easy to find. Our 800 number is posted. You can phone, fax, or e-mail us. The main thing customers should do is go into their own bank where there will be a brochure that explains the bank's dispute resolution process and tells about the appeal mechanism to our office and how to contact us. That would be the normal way that customers would get that information.
Our brochures are well distributed. In the spring we provided 25 copies to the riding offices of every member of Parliament and every member of a legislature in this country. We have just sent out material to every member of Parliament to be put in their newsletters. There are many ways to reach us. We just keep trying to put that information out there so that some day 100 per cent of the people will be aware that there is help if they have a problem.
[Translation]
Senator Hervieux-Payette: Would you refuse to investigate a business's complaint based on its sales figures? If the president of a small company -- say a company with sales of $5 million -- were to contact you, would you agree to investigate his complaint or would you direct him to some other agency? Does the time ever come when you tell someone: "We are not the right organization to handle your case"?
[English]
Mr. Lauber: There is a point in time when we will say that our mandate is to deal with small business. On a discretionary basis we include medium-sized business. Loosely defined, for small business we are talking about $5 million or less. We would routinely accept complaints of $10 million or $15 million or $20 million in revenues without any problem, because $5 million in sales in a manufacturer would be equivalent to $20 million in sales in a grocery store. We use our judgment. My board has allowed me to do that.
I have turned down two business complaints on the basis of size. One was a multi-location retail organization with 550 employees. There was $8 million or $10 million worth of debt, but it was clearly not a small-business structure. The other was a situation involved a $50 million mortgage. They are the only two that we have turned down on the basis of size.
[Translation]
Senator Hervieux-Payette: Do you have the necessary resources in-house to investigate complaints? Are your employees able to function in both English and French?
[English]
Mr. Lauber: I have the resources to deal with that internally. I am a chartered accountant. There is another chartered accountant in the office. We have a civil code lawyer who is located in Montreal. We have the resources, plus we will retain resources as we require them. We spend quite a good deal of money with our legal counsel giving us advice on various aspects of complaints.
With respect to dealing in French, I apologise that I am not bilingual. There are six of us in the office at the moment and we are hiring additional personnel. Four are bilingual and three are francophone, so we are well equipped to look after people in either language.
[Translation]
Senator Hervieux-Payette: For those listening to us, it is important to know what kind of staff your organization has.
I examined your annual report and noted that mention is made of independence, impartiality and awareness. I agree with the criteria listed by the chairman. Why are your financial statements not included in your annual report?
Are you prepared to have representatives from trust companies, insurance companies and brokerage firms serve on your board and to act as ombudsmen on behalf of these institutions? If our committee were to make a recommendation, would you be prepared to deal with these issues in the near future?
[English]
Mr. Lauber: As for the financial statements, we did not feel that they were particularly important to people. I can tell the committee here that our budget is quite simple. We are slightly over $1 million in cost, including salary, rent, and a little travel. It is not a big issue on the expenditure side.
With respect to trust insurance and brokers, that is what we want to do. We recommended to the MacKay task force when we appeared last October that we should become a financial services ombudsman covering all sectors. We are here today to say that we want to do that. We think we can do it best on a private-sector basis. We have the best chance of succeeding on that basis.
Handling the other sectors is a resource issue. The budget will be there to hire the resources, and we will put them in place. But remember, right now we deal with the banks' trust subsidiaries, insurance subsidiaries, and investment subsidiaries.
I know you have a background with the IDA. We have handled five or six or more investment-related issues, a couple of which we have referred to the IDA.
I will give you an example of how we work in a case like that where we are dealing with a regulatory body and the technical regulatory part to the complaint. We ask the customer to take the complaint to the Investment Dealers Association to have it reviewed. When that review is finished, the customer has to come back to us, because the IDA will discipline the member or the broker but they cannot do anything for the customer. Presumably, the broker will offer redress if found at fault, but that may not be adequate. The customer can come to us and we will deal with the redress function resulting from that complaint. We do not want to get involved in being a regulator or in second-guessing a regulator, just like we will not second-guess a court. But we would take the regulator's decision and make sure that the customer has been treated fairly as far as redress.
Senator Meighen: It seems to me that this whole process is a three-legged stool of which you are one leg. There seems to be a problem of perception, notwithstanding the very interesting testimony that you gave to my colleague Senator Hervieux-Payette, and I wonder if part of the problem may lie in the lack of coordination between the three legs.
As I recall the evidence we heard, in the United Kingdom, rightly or wrongly, the financial services authority funds a consumer group. The group is very well funded and industry appears to welcome it.
Here you have made the point quite clearly that you are not an advocate -- that is the job of the consumer group; and you are not a regulator -- that is the job of government organizations. You are the ombudsman. But you do say that we need strong, well-financed watchdogs to represent the public. I read an inference in there that I think I agree with which is that right now we do not have strong, well-financed and therefore highly competent watchdogs representing the public.
Do not be shy. I realize that this is not your responsibility. But could you tell us how you would suggest we achieve that? By industry? By government? Would strong, well-financed watchdogs help you do your job?
Mr. Lauber: Let me start with my attitude on advocacy. One of the major things I have done outside of my professional life is be involved in the Board of Trade of Toronto. In fact, I was to be the president of the board when I took this job, but since I could not do both, I stepped down.
Ms Brown: We said no.
Mr. Lauber: I did not even ask.
I believe in advocacy. In that case, we were an advocate for the business community and we really left a few bruises on the premier as we got into the amalgamation of tax and so forth. I strongly believe that government and everyone needs that challenge out there. In that context, I say we need strong advocates. I do not have any problem with strong, responsible advocates. How they are financed is an issue. I do not know. The idea of the government financing an advocacy group in order to lobby against the government does not excite me very much. I would always be more convinced by an advocacy group that had a strong membership base of its own that it could point to that was contributing. But it is important that we do have that advocacy one way or another.
Ms Brown: Presently, we are considering having two consultative committees to assist us. One would be made up of consumers, with representation from some of the groups. The second would be made up of small-business representatives.
Senator Meighen: That sounds to me like a very promising avenue to explore.
Mr. Lauber, you said that you are looking forward to an enhanced role, to becoming busier and expanding your operation. Are you satisfied that the budget will be there? It is presently $1 million. Will you have trouble getting the necessary resources, financial and otherwise, for your enhanced role?
Mr. Lauber: No, it is peanuts. The budget will not be a problem. It is interesting that in our structure the board approves the budget, and independent directors approve the board. The budget never goes to the members for approval. That is an interesting feature.
Ms Brown: We just charge them.
Mr. Lauber: The board approves the budget. I bill the board on a quarterly basis and the cheques come in. I do not see that changing. I am not an empire builder. We are focused on doing the job, but I do not want to build an empire.
Senator Meighen: It is an unusual blank-cheque arrangement.
Mr. Lauber: I am sure there is some limit on it, but that limit is certainly a reasonable amount.
Senator Meighen: I should like to return to what I think is the problem of perception. You have been in operation only for a short time. Presumably, if you continue in this vein, over time, the perception problem will improve. Have you suggested to the financial institutions that they include in their correspondence to their customers a mailing? Would you have any objection to that? It is all very well to send members of Parliament a mailing. But perhaps it would be a good idea if, when I receive my cheques from my bank every month, I received a little piece of paper asking if I have any complaints about the service and telling me who I could contact, presumably my bank ombudsman in the initial instance and then, if I am not satisfied, your organization.
Mr. Lauber: The banks have sent out a huge amount of that information. They have printed and distributed millions and millions of pieces.
Senator Meighen: I find that in politics one must practise the art of repetition.
Mr. Lauber: I am sure that is the case. Initially, material was sent dealing with the ombudsman process. Last spring all of the banks sent all of their customers their statement on privacy. That brochure dealt with the banks' internal dispute-resolution process, the ombudsman, and the appeal to our office. The information is getting out there. However, it is hard to make people read. I am the worst one for that. I open up the mail and throw the shiny stuff away.
Senator Meighen: Maybe it should be written on the bottom of the cheque statement where the bank advertises RRSPs.
Mr. Lauber: I am focusing on that as well, getting the banks to put their brochures about customer satisfaction and the ombudsman in more visible places in the branches.
Senator Meighen: Let me offer you a free bit of advice: Why not publish your successes, like action-line shows do? You never hear about the action-line show people not succeeding, but you always hear about them resolving problems.
Mr. Lauber: We have to be careful of confidentiality.
Senator Meighen: I realise that you have to talk to the banks and to the customers. But like the Senate, perhaps you could use a little PR help.
Mr. Lauber: I take your advice.
Senator Meighen: I do not have any solution.
The Chairman: Our next witness is the Honourable Ian Waddell. May I say that it is a pleasure, and just like old times, to have Mr. Waddell here. Some of us, including Senator Austin and myself, to name at least two, go back 25 or probably close to 30 years. We are delighted to have you before us. Congratulations on being a minister, which you were some distance from when we last saw you in Ottawa.
I know you have a couple of officials with you, so perhaps you might begin by telling us who they are, and then you can present your opening statement. It is wonderful for us to be in the position to ask you questions for a change, rather than the other way around.
The Honourable Ian Waddell, Minister of Small Business, Tourism and Culture: Honourable senators, thank you very much for inviting me. I am very pleased to be here. I must say that this is a little different from my first appearance before the Senate, almost 20 years ago, when the honourable member for Skeena and myself, then member for Vancouver--Kingsway, were thrown bodily out of the Senate. We made up, though, and it is nice to be back in a different role.
Marjorie Griffin Cohen was a member of our three-member British Columbia Task Force on Bank Mergers. She is a professor of economics and head of women's studies at Simon Fraser University here in the lower mainland. Ardath Paxton Mann is from my department, and she was the administrative director of the task force.
I want to give you an overview of the task force. I appointed a task force last June because, after meeting with stakeholders, consumers, and people from small business, labour, the ethnic business association and others, I realized that the proposed merger of the banks was a major issue. It would have a very important effect here in British Columbia.
The task force was chaired by a lawyer, David Rosenberg. He could not be present today because he is in court, but he sends his regrets. I heard your lawyer jokes earlier; maybe it is just as well that he is not here. As I said, Ms Griffin Cohen was a member, and Mayor Blair Lekstrom of Dawson Creek, B.C., rounded out the task force.
The members of the task force were independent. Their mandate was to go and actually talk to people in small communities in British Columbia about what the people thought about the proposed bank mergers. I wish to table a copy of that report, Mr. Chairman.
I will also table a summary that my department prepared of the evidence of Suromitra Sanatani, who is the chair here in British Columbia of the Canadian Federation of Independent Business, speaking for 89,000 members in all sectors of the economy. I have also a summary from Angela Schira, who is the secretary treasurer of the B.C. Federation of Labour. To have business and labour express very similar views was unique for British Colombia.
The Chairman: Those reports will be very helpful. Thank you.
Mr. Waddell: I will make reference to my speaking notes and to a report that I, together with my federal colleagues in Western Economic Diversification, released on Monday. We partnered in this, and it is called "A Profile of Small Business Growth and Employment in British Columbia." I wish to tie that into my brief.
Before I begin, I wish get this off my chest. Last week, Matthew Barrett, the chairman of the Bank of Montreal, was quoted in The Vancouver Sun. He said:
What surprised me was the government would distract itself with this issue when I thought it had a higher-priority agenda.
Then he proceeded to trash our task force. I want to say to Mr. Barrett that that is a bit of a cheap shot. Small business in this country needs the chartered banks to survive and the chartered banks, if they want to survive, need the support of small business in Canada. I would respectfully suggest to Mr. Barrett that he read the task force report, because the task force members actually talked to real people; they held 11 public hearings in eight communities over a three-month period this summer. Those hearings were well-attended. The task force also commissioned and prepared a number of independent research reports on this issue. Mr. Barrett, listen to what they said, because there is an important message out there.
The task force reflects what a number of people, including small-business people, said about this important issue. This issue is crucial to small business in British Columbia. It is their agenda, not my agenda, not the agenda of the Government of British Columbia. I am reflecting and advocating their agenda. I want to make some reference then to what the report said.
We started out by having Informetrica Limited prepare a study. We asked them to have a look at what is happening in other jurisdictions. The study indicated that Australia does not allow bank mergers; there have been bank mergers in the United States; the United Kingdom does certain special things for small business and banking, like SWAT teams dealing with crisis situations. The study concluded that already Canadian chartered banks were the most concentrated in the world and expressed some concerns about competition. We put that on our Internet Web site and we circulated it to as many people as we could in the community in British Columbia. Then, as I mentioned, we held hearings in different communities. We tried to hit small-town British Columbia.
At the same time, we commissioned three other reports, and the findings of those reports are reflected on page 2 in the executive summary of our report. I will cite four points from that. First:
The most likely impact of the proposed mergers would be to reduce direct employment by 2,600 to 3,400 people in BC.
In other words, we would lose 3,000 direct jobs in British Columbia. There is concern about job loss.
Second:
Overall, 75 per cent of BC communities are vulnerable to branch closure as a result of the proposed mergers. Of these BC communities, 119 are served by three or fewer financial institutions. This group has the most to lose and more than half of them are at risk of a branch closure due to the proposed bank mergers.
We tried to study and document the potential effects of branch closures on small communities in British Columbia.
We are also concerned about the area of financing for small business, which leads to the third point:
The proposed mergers would have a negative impact on small business financing in four areas: less local decision-making on loan applications, difficulties in obtaining approval due to greater risk aversion by the merged banks, increased service charges, and increased turnover of account managers.
Small businesses like to deal with people; they like to know whom they are dealing with. They were concerned about that.
The final point is that:
The research does not support the contention that bank mergers (or increased bank size) increase bank efficiency.
The researchers told us not to confuse cost-cutting with bank efficiency, and Ms Griffin Cohen will address that later if you have questions in that area. I read the report and talked to the task force and I want to give you a little bit of the flavour of the hearings. I think going to the communities gave us an advantage.
In Peachland, British Columbia, in the Okanagan, a bank branch closed. There were no banks in the town and the residents had to travel 12 kilometres to Westbank. They told the task force that they lost something in that community. It hurt them directly. It took away business from that community, because people go and shop in the other community. That is an example of how bank closures in a small community, for the sake of efficiency, hurt that community.
A fellow from Dawson Creek told the task force that he tried to get a loan from a bank but was turned down. He said that he could go to the bank next door. He went to three banks, and he finally got a loan and got a small business going. If there is only have one branch in a community, you will not to be able to do that.
These are simple stories, but they are the real stories of what people are concerned about.
I mentioned, Mr. Chairman, a new study that we released on Monday, and this just shows you how small business is so important to the B.C. economy. Between the years 1990 and 1997, small business in B.C. grew by 7 per cent, and that beat all the other provinces in the country. At a time when we have had a lot of gloom and doom news here, that is exciting news, very good news. Ontario and Alberta both had 5 per cent. It meant 17,500 new small businesses, defined as under 50 employees, each year. It also showed that 98 per cent of all businesses in British Columbia are small businesses; 82 per cent of those are micro-businesses, with fewer than five employees. They are creating 26,500 jobs per year.
I say to you, Mr. Chairman, and to Mr. Matthew Barrett through you, that these are crucial issues. I know Mr. Barrett makes about 30 times your salary, but these are crucial issues, not only to me, but also to small business in British Columbia, because that is the fastest growing sector of the economy. Small-business people do not want to lose local bank branches. They do not want lose jobs, and they do not want to lose access to capital. In fact, they need more access to capital. So, Mr. Barrett, what are you doing for them? They want to know, and that is why your bank merger proposal is not going anywhere.
I wish to outline for the committee some of the recommendations of the task force. They are on page 17 of the brief that I gave you. The task force recommends that the provincial government actively oppose the mergers in order to prevent job losses, branch closures and other negative impacts in British Columbia. It recommends that the 10 per cent single-shareholder rule be maintained to prevent foreign takeover of Canadian chartered banks. It recommends that an act of Parliament be required before a proposed merger of Schedule I banks can proceed. Finally, it recommends that Parliament convene public hearings throughout Canada as part of any Schedule I merger request, and that the federal government consult with the provincial governments on any proposed merger.
The report also made a number of recommendations relating to improved customer service in banks. Those include the appointment of an independent body to adjudicate consumer complaints and a requirement that banks reinvest in the communities in which they do business.
I will conclude there. You have the reports and the summaries. Let me stand back and say what I think the report tells me as Minister of Small Business and what my stakeholders tell me. I am meeting with them after this meeting and we are going to figure out where we go from here in this very important debate. They are saying, I believe, that it seems to the small businesses in British Columbia that the proposed bank mergers benefit the banks, but the banks have not convinced other people, in particular small-business people, that it is going to benefit them. That is the key here, and that is what we picked up from the hearings. That is what our research reports indicated. I think that is one of the keys of the public debate.
I am proud of the task force. I took the report to Finance Minister Martin about three or four weeks ago in Ottawa, and he told me that we are the only province in the country that went out to consult people at a grass-roots level.
I do not wish to belabour the point, but I should like to tell Mr. Barrett again to listen to the people. I know you will use a big stick now to try to get this bank merger through, according to The Globe and Mail today. Listen to the people and deliver for the people. Small business needs the banks; the banks need small business. That is the message I wish to deliver to Mr. Barrett through you today.
I am pleased to present the report of our task force and we would be pleased to answer any questions that you may have. I say that with some trepidation, because I know some of the backgrounds of the people here and you have a lot more expertise than I have in this area. That is why I brought Ms Griffin Cohen and Ms Paxton Mann along with me.
The Chairman: Senators Tkachuk and Austin will leave shortly to participate in that time-honoured British Columbia tradition of doing an open-line show, so this is their warm-up, you understand, where they get to ask the questions for the next few minutes, rather than answer them after eleven o'clock.
Senator Tkachuk: We are only concerned about survival. I come from Saskatchewan and have a lot of the same concerns that you have expressed regarding access to banking services for small business and regarding competition in rural areas.
The task force recommends both that the proposed mergers of Schedule I banks not occur -- Recommendation No. 1 -- and that an act of Parliament be required before a proposed merger of Schedule I banks can proceed -- Recommendation No. 14. Is it your position that the mergers should not occur right away or that they should never occur?
Mr. Waddell: That is a matter of policy, so I will answer it. It is the position of the Government of British Columbia that we accept the recommendation of the task force that these bank mergers, as proposed, as outlined, do not proceed. Maybe there will be another proposal; I do not know. People in British Columbia were consulted regarding this proposal and they told the task force, and the task force told the government, that this bank merger should not proceed. However, we do not have constitutional authority over that. That is the federal government and the finance minister. In the old days, the bank boys would just go and see the finance minister and make a deal. In the new society, in the new democracy, one needs the support of the people, and that is why we had a task force. We accepted the recommendations of the task force and that is our government policy. But it is up to Parliament to make the decision, not me. The task force recommended that there be an act of Parliament so that there would be public debate and senators could vote on it.
Senator Tkachuk: You state, and I quote, "I have never suggested that mergers in themselves are completely wrong." When would they be right?
Mr. Waddell: They would be right if they benefited the people that I represent, especially as a minister of small business. Show us, Mr. Barrett and others, how it will help small business. Then maybe small business will have a different view of it. I am just reflecting what my stakeholders have told me.
Senator Tkachuk: What do you personally think? I know what your stakeholders have told you, and as a politician you respond, but as a minister you also would show some leadership. Is this also your personal opinion?
Mr. Waddell: Yes, it is my personal opinion. I have to speak as a minister now. I am not a bank basher. I do not believe in getting out and bashing banks. We need the banks. If anything, these hearings actually say that people like the banks. I know that is amazing. You might tell the banks that and they would look at you and say, "You mean they actually like us?" I think people like the banks because they need the banks and I think they see the merger as a threat because of what is happening to their way of life now. I think they would like to see better service from the banks.
After I issued the report, I met with the bank vice-presidents in British Columbia. I was very pleased that they came to a meeting. It was a good meeting, and we tried to figure out some way that we can work together to help small businesses with, for example, access to capital. Small businesses need access to capital, and they need local service. Those are some of the things that, if I were proposing a merger, I might want to convince the community would happen. I am not sure my personal view matters. I am just reflecting what the task force said.
Senator Tkachuk: I think it matters a lot. I think Minister Waddell is the only minister from a provincial government that we have had to date.
The Chairman: That is correct.
Senator Tkachuk: We really appreciate that, and we hope that the other provinces would take the same initiative. I have a couple of questions on the MacKay task force report itself. We have had quite a discussion on the questions of banks, tied selling, banks selling insurance, property and casualty insurance, and car leasing. What is the position of your government on those questions of bank branches actually being able to sell those products?
Mr. Waddell: We do not have a government position on that. We are discussing some of those matters right now. We do have a position on the general mergers. I will ask Ms Griffin Cohen if she would comment, not so much on our position, specifically, but on what people said to the task force about that.
Ms Marjorie Griffin Cohen, Professor of Political Science and Women's Studies, Simon Fraser University: We heard a great deal of commentary about tied selling, and people seemed to make a distinction between the type of thing they experience and what the MacKay task force is talking about. The MacKay task force talks about coercive tied selling. What people felt they had experienced was implicit tied selling; that is, that it was not coercive in a nature that you could prove in a court or before an ombudsman but that it did exist and that they felt the pressure, even if it was not explicitly stated and was coercive in nature.
We made a recommendation about implicit tied selling. While we do not have specific detailed recommendations, because this was not in our mandate, we did feel that a lot more attention had to be paid to tied selling and that a lot more regulation had to be put in place around the ways in which this occurred. What we were talking about in our study was that we did not see any benefit accruing to the people in B.C. as a result of the proposed bank mergers. We did see, as we were going around to communities and as our research studies were accomplished, that there were things that needed to be improved. Certainly tied selling and the problem of that in B.C., particularly with regard to securities and insurance, was a major issue for all the people in every community that we discussed.
Senator Austin: Minister Waddell, it is good to see you again. We have been parliamentary colleagues, and I have always enjoyed working with you. What I want to look at is the area of competition from fostering the growth of so-called second-tier financial institutions.
I wonder what your vision is of the growth of the credit union movement in British Columbia, of the provincially chartered trust company system, and other financial institutions that are deposit-taking institutions? And second, if the bank merger in some form is permitted, would it create a market opportunity for second-tier institutions to serve small and medium-sized businesses and the individual consumer? Do you have any evidence in your hearings or expert evidence to describe that sector? If the mergers were not permitted, what would happen in this area? Can we see a future in either of those alternatives, which would see second-tier institutions create a service capacity that is larger than we see today?
Mr. Waddell: Let me begin, and then I will ask Ms Griffin Cohen to comment.
They are second-tier institutions. They are not the first tier, so they do not have the power or the ability of moving across provincial lines in the same way that the chartered banks do. I think that is the place to start; we should not forget that. It is a bit of an elephant and a mouse. The B.C. government is committed to helping credit unions in any way we can. The co-operative and credit union movement we see as a good movement.
Obviously, they do. Have you seen the ads with the two muskox hitting each other? The credit unions of British Columbia are using this to try to get some business away from the chartered banks as a result of the proposed bank merger.
Mr. Martin asked me the same question, actually, interestingly. I guess my answer is the same: We are looking into it. I know it is not a satisfactory answer, senator, but we are going to try to determine how much competition the credit unions can really be. I have heard from credit unions that there are some barriers there, that they can only give loans to so much then they have to pool their resources, and that they are stopped from pooling their resources, and so on.
It may be that we can free up some of those regulations to help them compete because one of the clear messages from my stakeholders, small business, is that they want competition. They reckon that with competition they can get a better deal, like the guy in Dawson Creek who went from bank to bank until he got the deal he wanted.
To summarize, they are different institutions. They are not Schedule I banks; they do not have that power. Two, we are looking into it.
Now I will ask Ms Griffin Cohen to discuss what was reflected in the committee.
Senator Tkachuk: Let me just offer one comment before Ms Griffin Cohen answers. From Halifax to Vancouver, we have heard from a number of smaller financial institutions that they do not oppose the merger in one aspect, that is, in terms of competition. They believe that one plus one probably equals 1.6 or 1.7 but that market opportunity will open up for the second-tier financial institutions to compete. Of course, in the report there are suggestions as to enhancement of the powers to offer financial services, and I believe that we all share the objective of enhancing competition and consumer choice. We are looking for policies that will do that.
Ms Griffin Cohen, I just wanted you to hear that background before you responded.
Ms Griffin Cohen: The B.C. credit unions are somewhat different than in other provinces in that they are much stronger here. We do find that, among the credit unions that presented to us and the people who we heard from in general, there was considerable anxiety about the mergers of the two largest banks. They felt that this would not enhance their ability to deal, that this would more or less hive them off to the smaller and less lucrative markets. What they anticipated is that they would have market openings in areas where they were likely to make not very much money. They encouraged us to make recommendations about strengthening the credit union movement's ability to operate in B.C. However, generally, we did not see this as a way in which the larger Schedule I banks would be replaced in the event they leave smaller communities and rural communities.
So the credit movement here is different and has a different position I think than the credit union movement elsewhere, if they are in favour of the bank mergers, because they definitely are not here. They do not see that this will improve their position; rather, they see the large banks taking away markets because they will simply be bigger and stronger and have a larger monopoly than they already do.
[Translation]
Senator Hervieux-Payette: We have not talked about the fourth recommendation on page 63 of your brief concerning foreign banks. You do not appear to be in favour of allowing foreign banks to operate in this country because you believe they will only serve a very restricted client group.
However, some witnesses from Wells Fargo said they were prepared to set up shop as early as tomorrow in any community in British Columbia and to grant loans to small and medium-sized businesses. Another foreign bank, the Bank of Hong Kong, has also helped SMEs, particularly in British Columbia.
Can you explain to us your position on foreign banks? The MacKay report maintains that foreign banks can increase competition and provide better service to SMEs.
Mr. Waddell: There already are a number of foreign banks in British Columbia and elsewhere in Canada. I have discussed this matter with Mr. Martin and with officials from his department in Ottawa. We agree that foreign banks cannot fill the void. Nor do we expect foreign banks to serve the same purpose as Canadian banks.
[English]
Senator Austin: I was going to say that the evidence that came from the Caisses Desjardins, which has a strong rural presence, was that they had no trouble with the concept of merger, that they believed that it would even increase their opportunity for service to the membership.
Mr. Waddell: I would like to add that I think where the Canadian banks are going is that they want to get into wealth management, and they want to do business overseas and make a lot of money. The Canadian people, as reflected in the B.C. people here, look to the banks as helping them at home in their community. They see them as having a social community role and a business role, whereas I think the banks now see their future differently. That is a pretty fundamental split.
Senator Austin: It is a difficult thing in a discussion or question-and-answer session like this to discuss the nature of the special franchise that is given by the national government to Schedule I banks and the privileges they have, and therefore, the responsibilities they have in dealing with the public. I do want to ask you to take a look at the issue of international competitiveness, technological competitiveness, and competitiveness in profitability, which is essentially the argument that the major banks are making in public-policy terms to justify the proposed mergers.
What is your response to the argument that if the mergers do not take place the large Schedule I banks will fall behind in profitability because they will fall behind in technology and in service capacity and that therefore, essentially, the Canadian banking sector will, over time, become less competitive and carry higher costs and the consumer, therefore, will eventually be the payor of that higher cost?
Did you address that specific argument, which is what has been put before us in various ways by the MacKay task force and by the major banks?
Ms Griffin Cohen: We did address that question in our research. It was one that was more difficult for people in rural communities to address, but we tried to determine the argument that there was contestability of markets locally and whether or not it would be essential for banks to merge in order to have access to international markets. Essentially, what we could discover through our research was that the size of the bank was not crucial to profitability in international markets. Certainly, the Bank of Nova Scotia has put forward this idea that they have performed very well in international markets without being the largest. So that seemed to be not an essential argument, certainly not one that was really convincing to use around a need to merge.
Usually what we tend to see from bank mergers in other countries is a confusion between efficiency and cost-cutting. Generally what banks referred to as efficiency was merely cost-cutting. That resulted in poorer service to their customers. Usually it meant closing banks, laying off people, increasing service charges, and making less service available to people. What was deemed efficiency was often simply just cost-cutting, not more efficient behaviour on the part of banks.
The Royal Bank indicated to us that it intended to have 40 per cent of its assets in international markets as a result of the merger. That was their objective, to have a larger proportion of their activity in foreign markets. We heard a lot of people tell us that they found that very dangerous, that it would put Canada in a precarious position if its largest bank in fact was so connected to international markets in that sense.
Mr. Waddell: Honourable senators, this is Small Business Week in B.C., as well as the rest of Canada, I believe. Yesterday and the day before, I actually walked down the street to Gastown, to a number of small businesses. They are doing really well; they are into improved technology. We have even got a new phone company starting here. We have improved technology, we have innovations, we have joint ventures happening. We did not find any evidence in our task force that the banks could not improve their technology. They cannot do joint ventures or all sorts of things without having the mergers.
You have just made the bank's argument, basically. I suggested to you that there is no evidence that that necessarily will flow, and the banks have not proved that, certainly. Also, the banks are open to all sorts of innovative things, as other businesses are doing, as modern business is doing, without thinking they get bigger and bigger. People do not believe, and it is shown from what I have learned in Small Business Week this week, that bigger ain't necessarily better.
Senator Austin: I put the bank's argument simply to test you for your answer. I am not advocating that argument.
Mr. Waddell: No, I understand that, and you put it very well.
Senator Austin: In fact, my colleagues have no idea what I think or whether I do any thinking at all.
Senator Angus: Except those who had dinner with him last night.
Senator Austin: What I do want to say in conclusion is that obviously being the devil's advocate is the role of everyone here, but there is also -- and I would say this assertively -- no evidence to indicate that the marketplace is incapable of filling space in the market that may be under-served. In other words, we have seen the growth of financial institutions to serve needs, and we have seen attempts at growing regional financial institutions. There is one very substantial Schedule I bank now based in Vancouver -- and we will be hearing from them -- the Hong Kong Bank, which is a very active service provider in British Columbia. Whether British Columbia's capital requirements need the current major banks is a question I would like to see evidence on.
Ms Griffin Cohen: What we did notice from our hearings was that retail banking and small business banking is local. However much the banks say that markets are contestable because of the Internet and because of on-line banking and because of foreign servers outside the country that in fact is not the case in small areas for retail banking and for small business loans. This is local banking and this is the way people want it. When a local bank leaves, its customers have to go to another community because that bank is not replaced by the things that the banks would have us believe are part of the contestable market.
Senator Austin: I really appreciate that. I hope some of my colleagues will deal with the interest aspect of the risk-financing concept in smaller communities, the bank-to-risk system.
Senator Oliver: I would like to continue the line of questions that Senator Austin was pursuing. I have not read your task force report -- which is an inch thick -- because I just received it about 30 minutes ago. As such, because I do not know what it contains, I hope I do not contradict myself in asking some questions.
One of the things that your report is based on is empirical evidence. You went to the people and said, "Look, four banks want to merge. What do you think about it, and how is it going to impact on you?" They said, "I am afraid that if the banks merge I will have difficulty getting credit," or "I might lose my job." You have this kind of parochial evidence.
What is lacking is that we have not had evidence in Canada of large banks merging and thus we do not have that data. If we look at the United States, where they have had that experience, there is a lesson to be learned. I would like to read two statements of fact from the United States and ask you to respond to them, because these statements of fact are opposite to what you have in your report.
The US Federal Reserve Board, in looking at the impact of mergers on small business lending found that, after a transition period, they have not been harmed in any significant way. For example, a study which examined the reactions of other banks in markets where mergers occurred found that increases in the supply of small business lending by these other banks tend to offset much, if not all, of any initial negative effects of mergers on small business lending.
When we were in Halifax, for instance, one small business person indicated to us that he cannot wait for them to merge because there will be a spin-off that will help his small business grow. We heard the same thing in Montreal, and we heard the same thing in Saskatchewan.
Based on the American experience, where they have had large mergers, they have found that in fact there was no detrimental effect in the community. What do you say about that?
Mr. Waddell: I will turn that over to Ms Griffin Cohen. That is not an accurate statement of American experience. Their experience is mixed. There are studies that go the other way.
If you look at our report, there is a study by Scott Sinclair, "Bank Mergers and Consumer Protection in British Columbia." In that study, he quotes Stephen Rhoades, who wrote the "Consolidation of the banking industry and the merger guidelines," and some American studies that go the other way as well. So be careful when you say that. Bank mergers were turned down in Australia. You might want to look at some of the studies there. In fact, our report was not just parochial, in a sense of just listening to local people; it contains actual research that bank loans to small and medium enterprises, except for the Royal Bank in B.C., have fallen. Hence, there is some actual statistical data here.
Senator Oliver: But have loans through, say, VanCity increased?
Mr. Waddell: I do not know about that. I am dealing with banks in terms of some of their legitimate gripes.
Senator Oliver: If the corresponding business has been picked up by VanCity, then the field is still level.
Mr. Waddell: I will ask Ms Griffin Cohen to comment on your perceptive questions.
Senator Oliver: Before you do, perhaps I could give a second example and a second quote:
The US Federal Reserve Board has approved the mega-merger between Citicorp and Travellers Group. The combined company would offer US consumers one-stop shopping for everything from credit cards and chequing to insurance and investing. According to a Fed statement, "the cross-marketing and consumer-data-sharing arrangements proposed in this case are not likely...to result in any significantly adverse effects."
Ms Griffin Cohen: As you know, the U.S. banking system has been quite different from the Canadian system. Until very recently you could only have a bank within a particular state. What you have are very small bank mergers, which actually do have efficiencies and do have improved positions within the state, but the large bank mergers that have occurred have been fairly detrimental. We have discovered through the research that the bank mergers where the assets are less than $500 million, which is a small bank merger, do indeed result in efficiencies and better performance for customers. Over that, it has been shown that there have been no efficiencies and in fact customer service and access to money has decreased.
Senator Oliver: What study is that?
Ms Griffin Cohen: This is a study that was done for us by Scott Sinclair. He looks through a variety of American studies, and his is the most up-to-date. It looks at the latest kinds of things that have been done in the U.S. He has done a considerable amount of work in looking, not just at the U.S., but at other jurisdictions where there have been bank mergers. It does appear that efficiency and improvement in customer service depend very highly on the size of the mergers. If the mergers are very large, which ours would be, the effect is likely to be detrimental. The one thing that is useful in the U.S. vis-à-vis something like the Citicorp merger is that people can do banking across the country. In Canada, our system is a national system. They are trying to get an efficiency that we already have. We will not get that kind of advantage because we already have that particular advantage.
With regard to VanCity taking up the slack, by and large VanCity operates in the city. Since its inception, it has been a virtual bank, in which there is no presence in local communities. There is some access to people in other areas, but by and large it does not operate in rural areas. Therefore, in Peachland, for example, when a bank pulls out, it pulls out. So VanCity is not taking up the slack, as much as it would like to. It does not have that kind of capability.
Senator Oliver: We were told by one of the witnesses from Canada Trust that, if the big banks were to merge, they should have to get rid of some of their lines of business, some of their branches. Canada Trust indicated that IT and other Canadian financial institutions would love to buy them and operate them, so they could become stronger. This would provide that strong second tier or first tier to ensure protection of Canadian banks.
What is your comment with respect to that?
Ms Griffin Cohen: We did look at this because the banks favoured divesting themselves of some of their branches, which would really serve the banks' interests better than it would the customers' interests. Many places where banking services are most needed would not be taken up by the trust companies because it would not make financial sense for them. The banks want to divest. They will close branches should they merge. They simply will. They have told us that; that is not speculation. For them then to be required by the Competition Bureau to get rid of branches is exactly what they want.
Senator Oliver: Minister, I would love to hear your comments.
Mr. Waddell: I think Ms Griffin Cohen has answered the question. I want to reiterate that I do not believe our report was parochial. We looked at bank mergers in every part of the world, and the study that I quoted by Scott Sinclair has the latest up-to-date studies. I draw your attention to page 7 of our report, where we quote Stephen A. Rhoades, an American, in an article he wrote in the Journal of Banking and Finance (1998). In that article, he summarizes the experiences with bank mergers in the United States.
Senator Kroft: I would like to add my voice to those who have expressed appreciation at having both a minister here to give a policy view as well as the basis of research that the report contains. It is a great help. We have been having a wonderful tour across Canada, but within the next few days, we are going to have to sit down and decide what it is we really think. I will take advantage of you being here to help me focus on some of the decisions I personally will have to make. I would like to deal with a question of fact, and hopefully you will have thoughts out of the research, and then perhaps, minister, we will delve into a bit of a philosophic area, if we can do that.
I am confused, and I think there may be a general confusion around, on the issue of branches and what is likely to happen in the future in regard to the branches. Ms Griffin Cohen, I think you were getting close to it at the end, but we seem to come at this idea of what is going to happen in the future with branches in a way that is not clear to me. Let me ask you what your understandings are. On the one hand, if we are contemplating the issue of mergers, closings, as we have heard generally, would seem to arise in a case where the merged entities find themselves each with, in effect, two branches, because each of the merged entities had a branch in the same town or district or neighbourhood. That would be sort of a merger-driven duplication-elimination process.
On the other hand, there is a type of branch closing that arises from this apparently inexorable drive toward efficiency that raises the question of whether or not electronic connection with financial institutions will indeed replace face-to-face connection and personal interface. We have had that issue called into question by Canada Trust when they stated that their front line of business building is still the branch and the interpersonal relationship, and always will be, and they hope they can do more and more branches.
We do have some conflicting thoughts on this. I would like to get a very clear idea from you about what you think will happen, if there are no mergers, in terms of the branch structure in the community. I do not know what happened in Peachland. Does the situation in Peachland refer to one branch of one bank, or are there multiple branches?
Ms Griffin Cohen: Only one bank, one branch.
Senator Kroft: One bank, one branch. I am not clear why the issue of merger is at all relevant in Peachland. That bank is going to make a decision about its efficiency on whether or not that branch is sustainable, on what drives its own operations. You will have to help me as to why the merger issue is relevant to the example that you have used, or that the minister has used.
Ms Griffin Cohen: That is important, because two weeks after the bank mergers were announced the Peachland branch announced that it was closing. That announcement followed the bank's assurance that no branches would be closed. Therefore, the example is important because it did impact on that particular community.
Senator Kroft: What makes you think it had anything to do with the merger?
Ms Griffin Cohen: The Bank of Montreal in anticipation of the merger --
Senator Kroft: Why in anticipation of the merger? If that Peachland branch is non-viable, why will the merger make any difference to that?
Ms Griffin Cohen: Viability is an interesting concept. What it means to the people in a particular community may be quite different from what it means to the bank. As was said earlier, banks have a different responsibility because of the extraordinary privileges they had in this particular area. Their effect on the local economy is profound. Without access to a bank, enormous problems can befall a local economy. In effect, a local economy can be destroyed. A ghost town can result fairly easily if there are no financial institutions.
Secondly, we talked to mayors and we talked to councillors in small towns, and they were absolutely horrified by this notion of what they referred to as big holes in the middle of their small communities. They said that if a branch closes it looks bad for the community; it sends out a signal that the town is going downhill. In a province that is as highly non-urban as B.C., this is incredibly important, not just for the perception of economic well-being, but the actual economic well-being of the community. So it has a much, much bigger impact.
Senator Kroft: I understand that. I come from Manitoba, and I understand small towns and the need to maintain viability.
Mr. Waddell: Manitoba is a little flatter, senator.
Senator Kroft: A little flatter. So you are telling me we have more of a level playing field. I will accept that.
Other than the fact that there were announcements made a couple of weeks apart, I do not understand why the proposed merger has anything to do with whether or not a single branch in a town is likely to close.
Mr. Waddell: Let me respond by saying, first, that someone who appeared before the task force used that example as an indication of what they thought could happen in the future to vulnerable communities in British Columbia. There goes the financial institution; there go the people to shop elsewhere; there goes the centre of the town. There are 119 communities in British Columbia served by three or fewer financial institutions. In our study, the professor actually constructed a vulnerability index of our province. He concluded that 75 per cent of B.C. communities are vulnerable to branch closures. People are concerned.
Senator Kroft: I understand that exactly. You still have not made the connection as to why, if there is a multiple branch situation -- I am not talking about a Prairie community where there are grain elevators or a community with critical economic elements, say, a mine. However, in the case we are talking about you still have not convinced me at all. I begin with my premise, and I want to understand this for my own decision-making. I can understand where there is duplication and a merger will do away with the duplication, but where there is a single branch of a bank, I would like to know why your studies tell you that the merger will make it more likely that that branch will close.
Ms Griffin Cohen: I did not understand the question.
The Chairman: Let me put the question in a different way. There have been roughly 120 bank branch closures in 1997, when the merger issue was never on the table. Therefore, the issue of bank branches closing is a fact of life whether or not we ever had any mergers in this country. The impression I am getting from your responses to Senator Kroft are that in some sense there ought to be a public policy which prevents bank branches from closing in small communities. It is essentially the railway abandonment line problem; it is the grain elevator problem; it is some of the rural telephone issues. I am trying to understand whether or not that is your position, or whether you think only branches related to mergers should not close.
Ms Griffin Cohen: We have two different and distinct positions on this. First, we recognize that branches close in towns where there is only one branch. What we do feel is that the banks should mitigate this in some way and that there should be some compulsion on the part of regulatory bodies to see that this occurs. We make a recommendation to that effect.
The second issue is this: Will there be closings whether or not there are mergers? Obviously there will be. However, we do think that with mergers you are going to have more closings, and that is our extraordinary concern here. We believe that basically because the banks have told us that. When there were mergers between trust companies and the banks, there were closures. That was very clear. Take the Royal Bank and Royal Trust situation; nothing was more evident than that.
The other issue is that the Royal Bank has told us that they want to get into wealth management. They want to shift out of the kind of retail business they are now doing. We know they are going to close various branches if they can get greater access to and greater activity in international markets. That is their intention.
That explains our concern, and there are several recommendations that address that concern.
Senator Meighen: Are you saying that banks are a public utility? I do not deny that all business has a degree of social responsibility in our society today, but to what extent are they a "public utility"? Should the banks bear the entire cost of closure of one of their retail outlets, or should somebody else share in that responsibility?
Ms Griffin Cohen: Our task force looked at the extraordinary privileges that the banks have had over a very long period of time. They were set up and performed under extraordinary privilege. They experienced deregulation, which has given them even stronger monopolistic positions in our economy. They are not like other businesses. Banking is an essential service in our society. People cannot get by without it.
We have also made recommendations, aside from the small business ones, dealing with access for individual people. Other countries have provided models where people should have access to banking, minimal kinds of access to chequing and savings accounts. In Britain and France, banks have to let people have chequing and savings accounts. It is not required here. We are making those recommendations. Banks are very different from other kinds of businesses.
Senator Meighen: It is access that you have to find a solution for?
Ms Griffin Cohen: Yes.
Senator Meighen: Perhaps the post office.
Senator Kroft: Let me get a clear answer from you to a very distinct question. Is it the findings of your task force that there will be more branch closings, other than duplication situations, if mergers are allowed than if they are not allowed?
Ms Griffin Cohen: Yes.
Senator Kroft: I will ask you for a brief opportunity to explain that, because it is totally unclear to me at this point why.
Mr. Waddell: Senator, she said three times that the banks said that.
Senator Kroft: The banks have also said to us, Mr. Minister, "If you do not let us merge" -- to quote a famous leader in this country, "Watch me." There are other things they will have to do to respond to the demands of the marketplace. It would be a first for this committee to suggest that the banks will be more passive in their drive to cost-cutting if the mergers are denied than if they are accepted. You seem to think that if the mergers are denied then this whole thrust to cost-cutting and reduction to infrastructure will be stopped. That is just not a logical conclusion.
Ms Griffin Cohen: That is not a logical conclusion, and it was not our conclusion. That is why we made another whole series of recommendations. While we were looking at the bank mergers we did uncover other things that needed to be done. We are making very strong recommendations in other areas.
Senator Kroft: Returning to Senator Meighen's area of the obligation?
Ms Griffin Cohen: The obligation on the bank, yes.
Senator Oliver: Matthew Barrett told our committee, when he appeared before us a couple of weeks ago, that if he cannot merge he can no longer be a full-service bank across Canada. He is going to have to make many changes.
Mr. Waddell: I hope he was reminded that he has made a lot of money out of the pockets of Canadians, a record amount of money. He is privileged, he is protected as a Schedule I bank, and he was allowed to do so by privilege. Many small business people are concerned about what he does. Rather than threaten the committee with that perhaps he might try to work together with small business and meet the concerns of the Canadian people. That is the way to go and I hope you told him that.
[Translation]
Senator Hervieux-Payette: No doubt you recall that during the 1980s, the U.S. deregulated the telecommunications sector and it took Canada 10 years to realize that it had an edge over the Americans. However, we lost considerable ground during the 1990s.
We opened our markets up to competition in 1990. Some organizations forged alliances with U.S. companies. The fact remains, however, that SMEs, in British Columbia and elsewhere, benefit from a broad range of services that cost anywhere from seven to ten times less than they did in 1990. Foreign banks are knocking at the door. They want to provide a narrower range of services to businesses, rather than direct services to consumers. For now, they would confine their operations to businesses. As the minister responsible for small business, would you not agree that these foreign institutions have a dynamic role to play in Canada?
Mr. Waddell: If foreign banks want to come into Canada and provide services to SMEs, then I welcome them. However, I do not think that this will ever come to pass in small communities in British Columbia. SMEs have told me that they do not think this will ever happen either.
[English]
I am not sure of all the reasons for that, but the best information I have is that they cannot fill the void. It is a bit of a red herring that the Canadian banks have brought in, that suddenly we have this foreign competition come in. They will not fill what the Canadian banks can do, and they are not really interested enough. They are not going to provide full banking systems in rural communities in British Columbia.
[Translation]
Tomorrow, I have a meeting scheduled with officials from the Bank of Hong Kong to discuss initiatives for the Chinese-Canadian community. I am going to help them prepare a pamphlet for small business. It is the same thing as --
[English]
I do not think that small business is convinced that the foreign banks will come in and fill the void in those small communities. There are some exceptions.
In conclusion, Mr. Chairman, I appreciate that these are very penetrating questions. I wish I had a longer time; I know what you are struggling with. I am the Minister of Small Business, Tourism and Culture for British Columbia. My job is to advocate for small business. I have the extraordinary situation where I have small business and labour coming together before a task force that I set up, an independent task force, and saying they oppose the bank merger. I am bringing those concerns and reports to the committee.
I want to file the report of the task force. I will give you the summary of Ms Sanatani and Ms Schira's evidence before the task force. I will give you my new report on small business, how important it is to British Columbia.
I reiterate that the banks have not made the case on this merger proposal, this general proposal, that small business will benefit from this. Small business thinks it is going to be hurt. That is the challenge the banks have. I am reflecting here what small business is telling me and I hope the committee will consider that when making its report.
Senator W. David Angus (Deputy Chairman) in the Chair.
The Deputy Chairman: Mr. Tarr, would you introduce the others with you at the table and outline how you plan to proceed.
Mr. Mike Tarr, President and CEO, Northern Savings Credit Union: Honourable senators, with me today are George Scott, Senior Vice President, Marketing and Corporate Strategy, Vancouver City Savings Credit Union; Linda Crompton, President and CEO of Citizens Bank of Canada, Canada's first fully electronic national bank. It is a VanCity company. Also with me is Cathy Manson, General Manager of Grand Forks District Savings Credit Union, located in the Kootenay region of B.C.
The Deputy Chairman: You are going to walk us through the circulated document, Mr. Tarr, on behalf of your colleagues?
Mr. Tarr: We have been asked to dispense with the reading of this document. It is relatively short. We simply reiterate the key points in our proposal document, which the committee received at the October 8 meeting in Ottawa. I will identify the other credit unions involved in our group. Twelve credit unions from across Canada are proposing the establishment of a national community bank. I listened to the interchange between the senators and Minister Waddell. A number of the questions certainly related to some of the key issues that we have also been discussing.
The credit union group includes the following companies: Astra Credit Union, which is based in Winnipeg; Capital City Savings & Credit Union of Edmonton; Credit Union Atlantic, which is based in Halifax; Delta Credit Union, which is located here in the Lower Mainland of B.C.; Grand Forks, which we have already introduced; Gulf & Fraser Fishermen's Credit Union, again in the Lower Mainland of B.C.; Metro Credit Union from Toronto; my credit union, which operates in the north coastal region of B.C.; Richmond Savings Credit Union from the Lower Mainland; Sherwood Credit Union from Regina; The Civil Service Co-operative Credit Society Limited, headquartered in Ottawa, but with membership throughout the country; Vancouver City Savings; and Citizens Bank. This group represents about 25 per cent of the total assets of the English Canadian credit union system, leaving out the Desjardins system. It represents about 800,000 members across Canada. There are between 140 and 150 branch locations across the country. Small and large credit unions are represented, including the largest credit union in Canada. We operate in both rural and urban markets.
The group represents a cross-section of this tier of financial service companies and outlets in the country. Much has been said about second-tier financial institutions. It is important to recognize that in B.C., Quebec and Saskatchewan, a very active and successful second-tier financial system already exists in the form of the credit-union system. The key factor that has allowed those second-tier organizations to exist in those provinces has been enabling legislation. Successive governments of all political stripes have consistently provided those organizations with the opportunity to offer consumers a full range of services.
A lot of the discussion earlier today, and throughout the hearings, had to do with the lack of competition. People are concerned about a reduction in competition, particularly in light of proposed mergers and other issues. Certainly, our position is that the credit-union system generally, and our group in particular, represents a viable, credible option for the federal government to provide, fairly quickly, a second-tier financial organization.This organization will exist from coast to coast and will deal with people in all kinds of communities.
I will not go into the full presentation here, but open up the hearing to questions and answers. The last presentation was dramatic and exciting and was very much focused on certain key issues. Our proposal for the establishment of the national community bank is well documented. You have those documents. I hope you have had an opportunity to read them.
We feel that we can provide two things by combining our efforts: first, we will be able to create a national system of consumer-based, community-tied financial institutions; then we will be able to provide a tier-two banking system that is not only tied to the community but is accountable to the community. The proposed national community bank will be owned by cooperatives. They, in turn, will be subject to the customary democratic-control structures of cooperatives and credit unions in Canada.
With that introduction, I hope we can respond to any questions you have.
The Deputy Chairman: Do your colleagues have any introductory comments?
Mr. Tarr: They certainly can comment. However, I was to make a few brief comments and then my colleagues would take some of the lead in responding to questions.
The Deputy Chairman: Will we be hearing from Ms Crompton on the Citizens Bank, the first national electronic bank. We want to hear about that. As you have anticipated, Mr. Tarr, having seen the last session, we have developed a sense of the issues, and some of the conflicting points of view, during our travels in this country and abroad. We will have some questions. There are conflicting views even within the credit-union system. In Ottawa, we did hear a slightly different view from Mr. Knight of the Credit Union Central. In Saskatoon, the Alberta and Saskatchewan Credit Union Centrals and the Lloydminster local credit union had yet another view. We will be fascinated to hear your views on reconciling the different approaches.
Mr. Tarr: After listening to the committee's interchanges with Minister Waddell, I was put in mind of another group of Ottawa Senators, but I look forward to your questions.
The Deputy Chairman: For a while, he thought he was back in Ottawa.
Ms Linda Crompton, President and CEO, Citizens Bank of Canada: I do not have any prepared remarks, because we had arranged for Mr. Tarr to review the organizational proposal that you received today.
Citizens Bank is a wholly owned subsidiary of VanCity Credit Union. We have been in operation for two years, having received our charter in January 1997. I am an 11-year VanCity employee. In 1991 we acquired Citizens Trust, a federally regulated trust company. That was when VanCity, in planning and researching, began to identify future changes in the competitive landscape. We identified a need to begin expanding beyond the existing charter.
I do not know if you are familiar with federal regulation of credit unions. There is one view of credit unions that is mainly Ontario-based. The important distinction here is that within British Columbia and Saskatchewan you are looking at institutions that go beyond the closed, bond-operating parameters. They compete in the open marketplace against the banks and other financial institutions. We saw the need both to expand beyond the existing geographic constraints of VanCity and to diversify the asset base. That led to the acquisition of Citizens Trust in 1991. In 1994 and early 1995 we began working on the electronic component and conversion of our charter to a bank charter, so that it could become the national electronic arm for VanCity Credit Union. We applied for that towards the end of 1996.
We received the charter in 1997 and have been in operation for two years. It is still very early days. We are regulated like any other bank. We operate like any other federally regulated bank. We are still in a building-and-acquisition mode. I do not have any other prepared remarks, but I will answer any questions you have for me.
The Deputy Chairman: You mentioned an acquisition mode. Since you are an electronic bank, that begs the question.
Ms Crompton: We are still growing, acquiring members and customers. We are expanding through partnership arrangements with the voluntary sector and the NGOs. I was referring specifically to member acquisition and growth.
Senator Meighen: What is the commonality between the unions in this group of 12 or 13? What brought you together, and is this a static group?
Mr. Tarr: It is an unusual association of diverse members. We came together as local, provincially regulated, financial institutions that are primarily still in the savings-and-loans and transactions business. We believe we are facing a very grim future in this country, because the financial services business is not only nationalized, but is becoming globalized.
We face restrictions because we are provincially chartered. We came together because we all believed that in order to move to the next stage of our development we must be able to provide services to our members across the country in a seamless manner. That is not going to happen through provincial regulatory changes. Even if it were possible, a great deal of time would be lost.
Second, the federal government made it clear that they were not interested in promoting or developing national credit-union legislation. They felt that would create significant jurisdictional conflicts with the provinces. That is why we are considering what we are calling a "national community bank." We are 12 organizations with a long history of functioning as credit unions, and our business planning clearly states that we will continue to base our business on the principles of credit unionism.
Ms Cathy Manson, General Manager, Grand Forks District Savings Credit Union: As the smallest credit union in the group, we were particularly interested in trying to influence some of the decisions that relate to service in the smaller communities. We jumped on the bandwagon rather quickly, and have had some success in demonstrating to our colleagues what services are like in the smaller communities.
Senator Meighen: I notice there are not many Ontario credit unions in your group -- for example, Niagara Credit Union, which is a large one in parts of Ontario. Can people apply to join this organization?
Mr. Tarr: We have held it at the current number because we are in a formative stage. The complexities of bringing in new partners as we go through this process would be enormous and would slow us down. What we have stated very clearly is that we are inclusive. When it is certain that legislation allowing our business case to proceed is forthcoming, then we intend to open the doors to any credit union in the country that meets minimum standards of acceptance. We hope to significantly increase the number.
As I travel around the country, I am aware that a number of credit unions that are not on this list are watching and listening carefully and have certainly not rejected this particular option at this point.
Senator Meighen: You said you wanted to be a credible, viable option. No one around this table would oppose that. You will find that this committee is unanimously in favour of strengthening a second-tier financial institution in this country. What effect, if any, are the proposed bank mergers having on your outlook? Give us both scenarios, whether they go forward or do not go forward.
The Deputy Chairman: Was your proposal for a national community bank up and running prior to the tabling of the two merger proposals?
Senator Meighen: Can you comment on Minister Waddell's assertion that, to put it in the vernacular, "you ain't going to fill the void." Minister Waddell did not think that the credit union was going to fill the void in Peachland, or anywhere else.
Mr. George Scott, Senior Vice President, Marketing and Corporate Strategy, Vancouver City Savings Credit Union: If the bank mergers go ahead, there will clearly be both an opportunity and a threat for us. It is an opportunity, inasmuch as one stated intention of the banks, particularly in the smaller communities, is to have branch amalgamation. That will provide us with opportunities in the marketplace. Because, like ours, their current focus is on the retail members, if our proposal succeeds, there certainly will be, if not immediately then over time, greater opportunities for us to serve people in B.C. -- and, hopefully, other Canadians too.
On the other hand, we are very aware that some of the banks, particularly the Canadian Imperial Bank of Commerce, have been quite open about what they intend to do with any savings that they achieve. Much of that will go into competition in cost reduction on the street. Because of our current size, we do not have a lot of opportunities there. That is one of the driving forces behind our proposal.
Nevertheless, we did start down this road before the mergers were discussed. Comments from Minister Waddell and Matthew Barrett suggest that, if the banks are not allowed to merge, it is not going to be business as usual. They are going to target certain market niches where they think opportunities exist. To some extent, we see that as an opportunity for us. What is likely to happen, and indeed is happening today, is that service to the average Canadian will be abandoned. The banks do not see that area as likely to produce significant profits.
Mr. Tarr: I think Minister Waddell was referring to the provincial credit union system. Certainly in his main area of concern, small business, he is quite accurate. Provincially regulated and constrained credit unions are probably not going to be a good alternative to the chartered banks in all cases. A major part of our proposal reflects on that, and it fuels our desire to be able to deal with that market on a national basis.
My credit union is a perfect example of what happens currently. We have one of the largest proportional commercial loan portfolios of any credit union in B.C. But our business members reach the point where they have to go to a chartered bank because it gets beyond our capacity to fund them, or they begin to deal interprovincially, and that is where we hit a wall.
Senator Callbeck: Mr. Tarr, you mentioned your desire to set up community banks from coast to coast within a relatively short period of time. What do you mean by "short period of time"? We have heard various points of view from various witnesses on how long it would take to achieve a strong, second-tier banking system in Canada.
Mr. Tarr: We are all up-and-running organizations. With the appropriate legislation, we can begin an implementation plan tomorrow. Like every other start-up organization, we want to wait until the year 2000 to put everything on a common technology platform, for obvious technical reasons. We are functioning and profitable organizations. We can move tomorrow if the legislation is in place; but it will not happen all at once. We will begin with back-room operations, where we can do things quickly, and then it will roll out. In five years there would be a national brand that people would think had always been there. It will take three years to five years to develop a mature organization.
Senator Callbeck: On a different topic, do credit unions sell casualty and property insurance in B.C.?
Mr. Tarr: Yes, we do.
Senator Callbeck: What percentage of the market do credit unions have there?
Mr. Tarr: About 36 out of 89 credit unions have insurance agencies. The market shares are different, of course. In the automobile insurance business, the market share is probably 20 per cent to 25 per cent. In the P and C business, my guess is it is probably slightly below that 20 per cent level, but it is growing very quickly. Some of our credit unions, such as Pacific Coast and Thompson Valley, have really focused on that business and are doing extremely well.
Senator Callbeck: How many years have credit unions been able to do that in British Columbia?
Mr. Tarr: The provincial legislation was passed in the late 1960s and we opened an insurance office in our Prince Rupert branch. My credit union, which was then known as the Prince Rupert Fishermen's Credit Union, was the first in B.C., and maybe in Canada, to have an insurance office in a branch. I think we were a year ahead of the legislation, because provincial regulators rarely travelled to Prince Rupert. A number of credit unions have been in the business for 25 years to 30 years.
The Deputy Chairman: When you say "in the business," does that include automobile, fire, property, and home insurance -- the regular homeowner's insurance?
Mr. Tarr: Yes. That has been the mainstay of our insurance business. There has been significant growth in the last few years in what we call the "financial planning or asset-management business," which includes life insurance, annuities and other life-insurance products. That is a very fast-growing part of our insurance business, and we believe it will continue to be a major part of our business into the future.
Senator Callbeck: What percentage of life insurance would you have?
Mr. Tarr: It would be very small at this point.
Senator Callbeck: Do you lease cars?
Mr. Tarr: Some credit unions do. We have in the past. It is not currently a business we are particularly interested in. Our investment and lending policy allows us to do so and we have done car leasing in the past. We also do equipment leasing for small businesses. In fact, the number of credit unions involved in that business is growing. Our credit union also has a provincial trust licence, so we do certain types of trust business as well, particularly related to estate planning and administration.
Senator Callbeck: Why are you not interested in leasing cars?
Mr. Tarr: To do so effectively, it has to be done on a very large scale. As in other areas, to be successful, we need to find partners who operate in the mainstream Canadian business communities. Finding those partners has been part of our strategic plan for the last five or six years. We hope we have found these partners with this proposal. Our credit union is a $250-million institution in a part of the country that has 27,000 people. We are a huge organization in our region of the province, but, comparatively speaking, we are a very small financial institution. We need to find a way to partner with other like-minded organizations, and that is what this proposal is really all about.
Senator Kelleher: Senator Meighen adequately reflected the opinion of committee members, when he said we are certainly favourably disposed toward your interest in becoming a form of a bank. We heard with interest about the community banking situation in the United States and the conversion of the building societies in Britain. There is a third element here. I am sure that government, particularly the Department of Finance, has some knowledge of your proposal. Do you have any indication of whether they, too, are favourably disposed?
Mr. Scott: I have not been personally involved in the discussions, but the feedback to date has certainly been extremely positive. A couple of issues have yet to be worked through, one being the deposit insurance limit. According to the federal regulations, we would come under CDIC. Currently, there is a $60,000 limit. The limits for credit unions in most of the country are quite a bit higher than that. For example, it is $100,000 in B.C. and unlimited in Manitoba. As part of our proposal, therefore, we are trying to get that limit of $60,000 raised to $100,000 so that our members would suffer no loss in that regard.
The other issue is with OSFI and the capital formula. They have a two-tiered approach. First, they favour following the generally accepted BIS standards, under which we operate in B.C. and which we are proposing to continue following. Second, they favour a multiple based on the leverage. Now, credit unions in this province can have assets up to approximately 35 times their capital ratio. The current minimum requirement with OSFI is 20 times. We are proposing that we go to the BIS standard, which is basically the risk-weighted average. Other than that, our idea has been very well received.
Senator Kelleher: I am sure you have all read the MacKay report, particularly as it pertains to your business and what you want to do. Since this committee may be of some assistance in this matter, do you feel that the MacKay report's discussions or recommendations missed anything that would have been useful to you? I am sure the MacKay report did not necessarily cover every aspect of your interests. If there are important areas that have not been adequately covered, we hope to hear from you. You can do that by giving a short answer now or by sending us something in writing; if you have some helpful documentation, we would love to have it. However, as I am sure our chairman would remind you if he were here, sending us something written would be great, but we will begin writing our report in about the middle of November, because we have to submit it by December 1.
Mr. Scott: I think the MacKay committee has done tremendous work and should be congratulated. I think everything we ask for is contemplated in there to some extent. The MacKay report mentions micro-lending, which is a big part of our organization and of a number of other credit unions and is quite critical to our work in the community. There is a reference to fostering that, perhaps in legislation. Our thinking on that is not yet fully developed, but it is something we would like to look at. We do not have a specific proposal today, but we would certainly like to explore that area. We are very proud in VanCity of some of our successes there. There is certainly a lot of opportunity for growth across the country.
Senator Kelleher: This is a question about timing. Assuming that the government sees fit to grant the requested bank mergers, would you like to see that occur after your legislation was in place and you had had an opportunity to get up and running? Or do you feel it would be acceptable if the mergers went ahead now, and your legislation was passed a year or so later?
Mr. Scott: Obviously, we would like to move as quickly as possible. In terms of timing, we are prepared to begin today, and have done some of this work already, in looking at a common technological platform organization and laying out a transition plan. We would much prefer it to happen sooner rather than later.
Senator Kelleher: That is not quite my question.
Ms Crompton: Your question relates to the decision around the banks. Mr. Scott has said that, given the speed at which things are happening in general in the competitive marketplace, as soon as we got the approvals that we are looking for, we could push ahead quite aggressively. We need to do that. It would place us at a significant disadvantage if the approval for the mergers went ahead of the approval for our proposal.
Senator Kelleher: That is what I wanted to know.
The Deputy Chairman: Mr. Tarr, did you want to add something?
Mr. Tarr: At the risk of saying too much, which is always a risk.
Senator Kelleher: You are not the prime minister.
Mr. Tarr: And Mr. Scott is not Andy Scott either. I think the timing question is an interesting one. I do not think our timing is tied so much to a bank merger decision as it is to obtaining the business powers that we are asking for. These would be significantly different from the powers the chartered banks currently have, although they contemplate also having these powers in the near future. We certainly agree with the MacKay task force that there needs to be a new-entry approach to this. That is, new entrants who are creating a tier-two structure need to have a head start in getting established, in order to be at a point where they can compete effectively.
From that point of view, we are asking for some degree of head start before, in particular, the chartered banks would receive similar powers in all areas. We expect that within three years to five years the playing field will be level, and we will have to compete on an even basis with any other financial institution in the country.
The Deputy Chairman: Are you also asking for a tax holiday or special dispensation, which we understand has been proposed in some other community bank start-ups?
Mr. Tarr: No, we are not asking for a tax holiday at all. We are asking to retain the current tax treatment of credit unions, which is based on well-established arguments that were made before the Carter commission several years ago. We are asking for a continuation of that. Under that regime, you are protected under the small business rate only until your capital reaches a certain level. There are a number of credit unions in Canada now that pay the normal corporate tax.
The Deputy Chairman: Are the credit unions subject to the same capital tax impositions that the banks have been complaining about so much?
Mr. Tarr: I am not an expert on this, so maybe I will ask Mr. Scott to help. We are subject to capital tax, but I believe it is at a preferred rate compared to the chartered banks.
Mr. Scott: Yes.
Senator Oliver: The essence of the MacKay task force report is competition: If the financial services in Canada are to compete with the world and grow bigger and better, we have to ensure, first and foremost, that there is competition. Competition protects consumers, helps our economy, and helps business generally.
The four or five questions Senator Austin and I put to the minister were on that issue: "If those banks merge and become very, very big, what will be there to ensure that the public still has somewhere to go to obtain their financial services?" The minister seemed to say, "Well, look, there are the tier-one banks, the big ones who want to get bigger, and there are the tier-two banks." He implied that the credit unions will never be big enough and strong enough, and never have sufficiently deep pockets to really compete with these merged super-banks. If that is the case, who else will provide the competition that the MacKay task force says we need in order to have a good and viable financial services system in Canada? That is my first question.
Mr. Tarr: That is the basis for our proposal. We agree that provincially constrained and regulated credit unions will not provide the level of competition that MacKay contemplates. We provided the committee with a public policy paper that John Evans produced for us that speaks very clearly to that issue. Our proposal ensures that we will not be the only participants in the tier-two banking system. We do not believe in that. Our proposal, and proposals like ours, will provide that tight level of competition if they are national in scope. If institutions are locked into regions of the country or provinces, there is a tendency to become marginalized. Certainly, it would be very difficult to provide the kind of competing services that more and more Canadians are demanding.
Senator Oliver: Will the national community bank be able to compete one on one, eyeball to eyeball, with the super-bank resulting from the proposed merger of the Royal Bank of Canada and the Bank of Montreal?
Mr. Tarr: In the business that we choose to be in, yes, we will. My credit union on the North Coast has 50 per cent to 60 per cent market share in our communities. There are five national banks operating there. Ms Manson's credit union has about an 80 per cent market share in her community. Yes, the credit union approach to providing services actually does work and it does win consumer confidence, but you must have the requisite powers and abilities to transfer capital and to spread your risk. Our biggest concern is that, because we operate in a small region, the risk that we carry on our balance sheet is concentrated. We need the ability to move that risk around the country as we think appropriate.
Senator Oliver: My second question deals with another current phenomenon, the so-called "monoline banks" or "category killers." These are institutions with very low costs and expertise in things like credit card products, new, low-rate residential mortgages, certain forms of mutual funds, auto leasing, and certificates of deposit. The products have no associated heavy overheads, are very low-cost, and are marketed directly.
Credit One, a company that appeared before us, markets a credit card, and has only two employees in Canada. It has no overhead, no costs, and does not pay taxes. How are you going to compete with some of the monoline category killers that are entering Canada in great numbers?
Mr. Scott: We certainly have opinions about Credit One, and the Wells Fargo operation, which did not employ any Canadians but entered the market. Obviously, we do not support that. It will be very difficult to compete against the monoline suppliers. As yet, they have not made a huge dent in the market, but they have incredible marketing budgets. In the spirit of the MacKay commission recommendations on increased competition, I think we have to ask whether this business is being retained in Canada and whether Canadians are employed to do that? There is no doubt that this is going to happen. It has happened in many other industries as well. It will be formidable competition.
Senator Oliver: I know it is already formidable competition, but what effect will it have on you as you try to compete simultaneously with the banks? How can you compete with them?
Mr. Scott: I can give you one example. We are a Visa issuer and we have issued a family of credit cards to our members. Last year, we went into a partnership with Desjardins to offer our card products to credit unions across the country. That provides economies of scale that we could not achieve in this business on our own. We will have to do that increasingly. There are many opportunities to form partnerships, within the co-operative sector and outside, to battle that kind of competition.
Mr. Tarr: It is certainly not going to be through us creating greenfield competition with that kind of operation. We would probably be incapable of doing that for a number of years. What we certainly can do is seek out partners. We have something very valuable to offer; we offer one of the best distribution systems in the country for providing and delivering a large number of products to consumers. That is the kind of trade-off you make in this business.
We recognize that in a lot of business areas we are not going to be competitive at the start-up. We will have to seek out partners. For example, in commercial and small business lending, we are contemplating a relationship with the BDBC. It has some strengths and weaknesses, like every organization. One of their key strengths is they are experts in business advice and small venture capital placement. Credit unions do not have a lot of experience in that area. It makes a lot of sense to use partners who have such existing business strengths.
Senator Oliver: Senator Kelleher asked you a very important question about timing. You talked about technological advances. I want to know if you have considered the effects of the year 2000 problem on your technology. If you start making a lot of changes now, can you do very much about consolidation and this national community bank before the year 2000 problem has fully manifested itself?
Mr. Scott: We do not want to move the platforms until after the year 2000, when we will see what the issues are. Obviously, one of the potentially big advantages for us is to migrate to a single system. That work has started now. We want to defer the actual installation and implementation until the year 2000. There are many other promising opportunities where we could move more quickly, such as treasury functions, HR, and marketing.
Senator Oliver: It is 1998 and you want to wait until after the year 2000 for some of the technological changes?
Mr. Scott: We will have prepared our technological solution and have made those decisions. It is a very fine window. If we try to make changes and miss the boat, we risk incurring Y2K problems.
Senator Kenny: Mr. Tarr, I understand your point about geographic risk when you and some of your colleagues have 50 per cent or 80 per cent of the market share. On the other coast, we heard of situations where only one or two of the Big Five are operating in a community. Small and medium-sized businesses do not have much choice. What is the answer for consumers in your part of the world? You were addressing it from your perspective, which is geographic risk. Can you please address it from the perspective of consumers who, for some reason, feel that they cannot go to the Big Five because they are not providing the services. If someone has 80 per cent of the market share, obviously the folks with 20 per cent are not offering the same product.
Ms Manson: We take our responsibility very seriously. We do not take 80 per cent of market share lightly. We work hard to make sure that we stay current and that we keep providing businesses with the products and services they need.
The difficulty, as Mr. Tarr explained, is that once they become sufficiently successful to need more credit than we can extend, they have to shop for another provider. We live in a small town. We see our consumers on the street and talk to them constantly. They tell us what they need and we attempt to provide it.
Senator Kenny: The Big Five banks would say that to us. If any of them said they had 80 per cent of the market share in a community people would be running around with placards.
Mr. Tarr: My credit union operates two branches in the Queen Charlotte Islands for the 6,000 or 7,000 people there. There are no other financial institutions on the Charlottes. We provide services to 100 per cent of the population there. That does not mean that the chartered banks do not have clients on the Charlottes. They do. But they pick those clients very carefully. They are picking them because they feel they will provide the biggest return for their investment. But they do not have a branching structure over there. They do not have any employees. They do not pay property taxes in the Queen Charlottes.
My board made it very clear to me, when I came on as their CEO, that they expected that every type of service provided in our larger centres in Prince Rupert and Terrace would also be provided on the Queen Charlotte Islands, and that is a commitment on which they hold my feet to the fire.
Senator Oliver: At the same cost?
Mr. Tarr: At the some cost. We have the same cost structure on the Queen Charlottes as we do in Prince Rupert and Terrace, with a few exceptions which are a little technical. Generally speaking, there is exactly the same cost structure. We have been able to make a success of it. We make money in those operations. We have been able to expand our services there over the years, so it is doable. But not if you are trying to satisfy a stock market. We have to take a lesser return on our business than do the banks. That is part of the drill for a credit union and part of the deal.
The Chairman: Honourable senators, our next two witnesses are Professor David Bond and Professor Maurice Levi from the Faculty of Commerce and Business Administration at the University of British Columbia. As many of us are aware, David Bond was once an ADM in the then Department of Consumer and Corporate Affairs in Ottawa; subsequently he became Deputy Minister of Consumer Affairs in British Columbia, and, as I have just mentioned, he is now a professor at UBC. I know that Professor Bond has to leave before 1:00 p.m.
Professor Bond, you have given us a two-page statement; would you be good enough to go through that statement, please. Following that we would like to ask you some questions. I am not sure exactly when Professor Levi has to leave, but we would like to avail ourselves of this opportunity to pick your brain and Professor Levi's as well.
Mr. David E. Bond, Adjunct Professor of Finance, Faculty of Commerce and Business Administration, The University of British Columbia: Mr. Chairman, I was not the Deputy Minister of Consumer and Corporate Affairs in British Columbia. I am, however, the co-author of the largest selling textbook on money and banking in Canada and for 10 years I was the chief economist and now am the chief consulting economist for a little-bitty bank called the Hongkong Bank.
The report of the Task Force on the Future of the Canadian Financial Services Sector clearly stated what it thought all consumers of financial services wanted.
It should be competitive, with markets being served by domestic and foreign institutions offering a broad range of choice in products, levels of service and price.
The task force went on to say that one of the chief structural features should be ease of entry for financial institutions, both from abroad and for new domestic start-ups.
That structural feature is absolutely essential if we are to have greater competition within the sector. The problem is that the major barrier to entry -- distribution -- is not just something which arose yesterday.
As far back as 1923, in testimony before the House Standing Committee on Finance, the Weyburn Security Bank of Weyburn, Saskatchewan, then the newest entrant into the banking industry, complained that expanding its branch network was exceedingly difficult. There were, in the opinion of the senior officer of the bank, few locations that were not already served. And even in the larger towns capable of supporting more than one branch, the market was saturated.
What was true in the 1920s is still true today. Canada has per capita more financial institutions' offices that accept deposits than any other nation on earth. So there is no obvious under-banked or non-banked region where a new entrant could hope to establish a beachhead.
The economics of branching are quite stark. A new branch of modest size will normally cost $750,000 to outfit. The rule of thumb in the business is that it takes about three years before you can expect the operation to begin to earn a profit. So a new entrant wanting to start off with even 10 branches would be required to invest, at a minimum, $7.5 million with no expected return for three years. Even then, the return would not be spectacular. No wonder there is not a long line-up of people looking for new bank charters.
When the Bank Act was changed in 1980 to permit foreign banks to enter, there were those who anticipated that the large U.S. banks would gain a lion's share of the business. Those worry-warts forgot about the extensive branch network -- the existence of nationwide systems that permitted you to withdraw funds in B.C. while your home branch was in Newfoundland. They forgot that while a branch might be small, it could provide every bank service even if it meant bringing in specially trained people.
The foreign banks soon realized the barrier to entry posed by the branch network and concentrated virtually all of their efforts in the major urban centres. The one foreign bank with a nationwide branch system, and then only 117 branches strong, acquired the largest portion of its network via mergers. The few branches it opened on its own focused on a particular niche market. Therefore, while the task force and the people at large may want more entrants, it will not happen until something is done to overcome that existing barrier of entry. No competition will occur.
Fortunately, as the task force realized -- and my co-author was the executive director of the research -- technology has provided a solution to this problem. The proprietary network of automatic bank machines can easily be fitted to provide what is called "full functionality."
If you go to an automatic bank machine operated by your own bank, you can transfer funds, make deposits, pay bills and obtain the balance for each of your accounts. In the banking world, that is called full functionality. However, if you go to most bank machines now and they are not from your own branch, the only thing you can do is withdraw money, period; they are not fully functional.
Imagine if they were all fully functional. Any new entrant into the financial services sector that wanted to accept deposits and participate in the payments system would suddenly have 14,000 points where it could gather deposits and pay out cash. It is an instant branch system of 14,000. Presto, the barrier to entry is gone and the choice becomes truly limitless.
Undoubtedly, there would be entrants, perhaps not all would provide the full range of services. The panel of witnesses who preceded me stated that they would not provide them all. But they would provide many of the services that we have come to expect from our big banks and there certainly will be new entrants to cherry-pick the best customers or go after one particular market segment. In short, these new entrants would provide meaningful competition in virtually every market very, very quickly.
No wonder the task force recommended the full functionality of networks; it was its second recommendation. The problem is that the networks are the property of the banks and why would they want to increase competition? I mean, they are not absolute idiots.
It seems to be that part of a rational policy that would permit the banks to merge -- something which I personally strongly support, senator -- would be a requirement that they reduce their workforce by attrition and early retirement and not by layoffs and that they agree to make their own bank machines fully functional.
That would permit the best of all possible worlds: strong competition and strong institutions capable of playing a strong role in the North American economy.
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Thank you, Professor Bond, for the type of ambiguous statement for which you are quite famous.
Senator Angus: I agree that it was a very ambiguous and mystical presentation, which we have trouble understanding. It is very refreshing to hear your comments and I would like to pursue the issue of full functionality with you because it does sound like a wonderful thing. On the other hand, I would ask you, is it really doable, in terms of security?
Mr. Bond: Yes. The bank I work for, the Hongkong Bank, is a member of the exchange system, the exchange network, and that is a fully functional network. In fact, one of the joys of the Hongkong Bank is that, for Linda Crompton's bank in Ontario, the deposits all come through us because they are members of the exchange. The only group in Ontario with exchange branches is us -- and that is a fully-functional network. It is not difficult to do; it exists now.
Senator Angus: There is no issue of security? There is proprietary protection?
Mr. Bond: I do not think there is any more issue of security, senator, than there is with a normal bank card.
Senator Angus: I gathered towards the end of your comments that you favour the merger, or a rational policy that would permit the merger. Therefore, do I understand that you would agree with the banking industry that if we cannot permit mergers they will no longer be able to provide a full-service operation?
Mr. Bond: I agree with them, senator. I think it is essentially a question of the capital they will need over the next 15 to 20 years. They will need a substantial amount of capital to invest in the systems work, far more than they have done in the past. The task force points out that the American banks of comparable size are spending three to four times as much. To raise that capital, they have to have a rate of return which is comparable with their peers. They would be the British and American banks and unfortunately they are far behind. They have to improve their return on assets and that can be done one of two ways. They can either get a lot more business, which is virtually impossible. Even if they were given the right to sell insurance and lease cars, it will not be enough. Or they have to substantially decrease their costs. If they do not, then my submission would be that Mr. Barrett, as he stated to the committee, would have to drastically reduce investment in Canada. I think Toronto's place in the financial firmament of North America, which is now quite good, would decline to something equivalent to what Des Moines is in the United States.
Senator Angus: That is the bottom line. My next question was going to be, so what? There are those who say, and we have heard many of them, so what if Mr. Barrett has to cut back? If he cuts back, other folks will fill the void. We have a peculiar demography in the country. We have a unique banking system here that is tailored to our geography and our demography, and if we start tinkering with it and doing what the mergers would do, we will muck up the whole thing.
Mr. Bond: I do not believe that the banks are public utilities like Minister Waddell does. I believe that the banks are profit-making institutions. If bank shareholders find that the rate of return is not adequate, they will go elsewhere. If the banks are unable to raise the capital they need, then they will, in relative terms, decline in importance and size. Think of the impact that the headquarters of the five major banks have in Toronto. They generate business on everything from printing to the fees that are paid lawyers. Some of my best friends are lawyers, right, Senator Austin?
Mr. Bond: The point is that it will decline and it is a major growth centre, just like banking is a major growth centre in New York City for the same reason.
Senator Angus: In terms of ownership, given that we see where you are coming from on that, do you agree with MacKay's recommendation as to ownership?
Mr. Bond: I do not think that ownership is a particularly grievous problem. If the two mergers go through, there is a question about the Bank of Nova Scotia and one of the possibilities recommended on page 91 -- I refer to it as the Godsoe escape clause and I am being a little facetious -- is the possibility of being taken over by a foreign bank.
I work for one of those institutions. The Hongkong Bank of Canada is part of the world's largest financial service organization. It is also the most profitable service organization in the world and it has the highest ROE of any bank in the world, so I think that that shows that size has some importance.
Senator Kenny: Welcome professors. I noted your comment that you do not believe that banks are public utilities like the minister does. But it seems to me that what you are proposing vis-à-vis full functionality requires an approach similar to having a common carrier. Would you visualize some form of newly regulated entity that would be developed to provide this common service across the country so that all the banks could have access on an equal footing?
Mr. Bond: No, sir, I do not think that is necessary. After all, the Canadian Payments Association is the ultimate authority on the terms of how value is transferred in institutions. I think that the recommendation under the existing standards, but more importantly by the task force on the Canadian Payments Association expansion of membership and its accountability, would more than cover it. You want to have these four majors institutions that are involved in the mergers go for full functionality, and that alone would end the barrier to entry. It really is very significant; it is the key to ending barrier to entry. Otherwise, why would anyone start a branch?
Senator Kenny: I am accepting your premise. I am trying to visualise how you put it into effect and your answer so far is just get the Big Four to agree to cooperate.
Mr. Bond: I would make it a condition of the merger, senator.
Senator Kenny: If the merger does not go ahead?
Mr. Bond: Then you do not get full functionality. That is a separate question. Because it is owned by the institutions themselves; they invested in it and it is not in a sense a public utility. I do not think that it is comparable to the way in which phone services were opened up in this country. I think it is a very difficult legal point, but I would defer to a lawyer on it.
Senator Kenny: I was thinking more of pipelines, frankly.
Mr. Bond: It is a very difficult argument indeed.
Senator Kenny: I can understand if you are making it a precondition of mergers to do it. But what if the mergers do not go ahead?
Mr. Bond: The question is under what head do you go after it under the Constitution?
Senator Kenny: And the answer is?
Mr. Bond: I do not think there is one, sir. Because banking is a federal responsibility. But nothing has been said about the payment system and this is a subpart of the payment system. I suppose you might be able to do it through the Canadian Payments Association. I am getting way beyond my expertise in terms of the legal question.
Senator Kenny: Are there questions of cost of entry and are there questions of hurdles as to who can join the club?
Mr. Bond: Right now, you can join Interac. The competition tribunal's ruling on the Interac case made it easier to join. But there is no requirement that it has to be a fully functional system. You can join Interac, which means that if you are bank X, Y, Z, I could take my bank card and go to the Canadian Imperial Bank of Commerce in Yellowknife and get money. The full functionality is the proprietary thing, which will be very difficult to enforce in the legal sense, but I would defer to a lawyer.
The Chairman: Forgetting about the constitutionality and assuming for the minute that the federal government could either legislate or make it a condition of the payment system or make it a condition of a Schedule I bank licence, and take the mergers out of the picture entirely, would you favour requiring that all bank machines in Canada, all ATMs, be fully functional?
Mr. Bond: Yes, of course I would.
Senator Austin: I am curious, Professor Bond, who would pay the cost of rendering that system fully functional?
Mr. Bond: Senator Austin, the costs would have to be apportioned among the banks in proportion of the size of their bank's networks, or the state itself would have to compensate them for the costs involved in doing. The costs involved in doing so are mainly programming. There is not a big physical requirement. You are further supplementing the switching, which goes on now. It is like a debit card in many ways, Senator Austin, but you will be adding further supplements to it. It is a one-time programming cost, and after that, it is absorbed within the system.
Senator Oliver: There is also an education cost for the elderly.
Mr. Bond: Yes, sir. The elderly do not like to use bank machines anywhere.
Senator Meighen: I do not know that I am entirely clear on that. It may well be a trade-off. You say to the four banks that wish to merge, that they can only merge if they make these ATMs fully functional, take it or leave it. You say that they will then agree. There must have been tremendous costs of development.
Mr. Bond: The costs are sunk costs, Senator Meighen. We teach in economics that bygones are bygones are bygones. There is a cost to further programming to allow the full functionality. The branch networks exist. The ATM networks exist now, sir. The point is, it is just a one-time programming cost.
Senator Meighen: I appreciate that, and is it a cost which presumably the entrants could be forced to pay, for example?
Mr. Bond: It is not only the entrants. Part of the cost will be recovered by fees. The Hongkong Bank accepts the deposits of the Citizens Trust. There is a fee levied by Citizens Trust on its depositors.
Senator Meighen: Is that another example of the other side of the coin of letting in foreign banks: that they get a free ride? We have heard the argument that, by opening the doors, these foreign banks will not make much of an investment in Canada. They will come in electronically over the border and cherry-pick the most remunerative high-margin ends of the business and have a wonderful time. Those who have put branches in Peachland and other centres around the country will pay the price.
Mr. Bond: The particular advantages of the mergers are more than sufficient to offset the costs. That is a decision each one of the four participants would have to make.
Let me point out another thing, senator. If you do not do this and if you expect a significant increase in competition, it will not happen. I work for a bank that has some pretty good references and pretty good connections around the world. I can tell you that, for example, when you mention the Hongkong Bank of Canada in Barrie, lots of people will say that they do not want to work for a Chinese bank. It is run by a group of Scots and owned by widows and orphans in England, but it does not matter. I can tell you that when people go down the main street in Chicoutimi, they will say, "Pas encore la Banque Hongkong du Canada, il n' y a pas personne ou presque pas personne qui veut cette banque."
I can tell you that there will not be a raft of foreign banks coming in. I know that this was something that tormented the soul of the former Minister of Finance, the late Walter Gordon, but it did not happen. First, the rate of return on capital in Canadian banking is lower than banks can get in the United States. What rational institution would want to buy a bank in Canada?
Senator Meighen: I do not think that you need to convince us. You do not need to convince me. There has been ample evidence before this committee that it is unlikely that foreign banks could come in and set up in Peachland or in Barrie for a whole lot of reasons. The primary reasons are cost and the fact that the Canadian chartered banks are there and have been there for a long time and, may I say, are not doing too bad a job.
Mr. Bond: No, I think they do a good job.
Senator Meighen: I agree with you entirely that they are not going to come in. But they are going to come in and cream off the high margin stuff.
Mr. Bond: Sure they are. The point is that the Canadian banks, by merging, certainly want to be able to compete in the North American market, not just the Canadian market. They will do to their American counterparts what their American counterparts do to them. It is called competition and it is a healthy thing. I am not really terribly worried that the Canadian banks will be grievously wounded by this increase in competition. I think it will be good for Canadian banks, for the Canadian economy and Canadian consumers. I thought that was what the task force wanted.
Senator Meighen: You said in your submission that one of the conditions you would put on is that they reduce their workforce by attrition and early retirement and not by layoffs. Did they not agree to do so?
Mr. Bond: I am just saying, let us hold their feet to the fire and make sure they do that?
Senator Meighen: Finally, they say they want the mergers so that they can reduce their costs, as we have discussed. What else will it do for our system if we permit the mergers to go ahead? We will have two bulked-up banks able to compete in a North American context where they are perhaps now at a disadvantage. They would be able to invest more in technology. To what extent is it important that they do that in North America and around the world? Will that give us a complete new banking system, assuming that the second tier comes in to fill the bottom end?
Mr. Bond: The primary benefit is that it gives a distinct possibility of Toronto remaining a major financial centre in North America. If we do not have those mergers, that possibility goes down the drain. I understand that when the committee went to Chicago and met with the man from Harris Trust, they were told that in Chicago you could not branch across the street. Continental Illinois Trust literally had to have a tunnel under the street to go to the other building; you could not come out that building except for fire doors. Illinois and Chicago should have been a major financial centre. The reason Los Angeles and San Francisco became major financial centres is because the State of California allowed unlimited branching. The big powerhouse outside of New York was the Bank of America based in Los Angeles, along with Wells Fargo, which in those days was Crocker. That is why it was a major financial centre and not Chicago, which was always amazing. That is why North Carolina is so powerful now.
It is vital to understand that if we allow these mergers to go, they will be able to compete in a North American market and that they will, as a consequence, generate a large amount of employment in Greater Toronto. That is where they are going to be centred unless the financial capital of Canada moves as it did from Halifax, when Senator Kirby was a boy, to Montreal and to Toronto at the present time.
Senator Meighen: Senator Oliver was not even born then.
You might add that they are highly paid jobs.
Mr. Bond: They are highly paid and highly skilled jobs, and they will be on the leading edge of a lot of the technological innovations in the sector.
Senator Austin: I would like to go to the flip side of your comments and look at the reasons for the large Canadian banks wanting entry into the U.S. market. What is happening in the U.S. market that makes you feel that our banks will be able to compete for those higher rates of return that exist in the U.S. economy?
Mr. Bond: There are two things happening. There is a vast amount of consolidation taking place in the United States, even with the antiquated federal legislation. The point is that the state legislation is changing to allow interstate banking. As those banks become larger and larger, Canadian banks will be able to participate in a much more integrated economy, which is what is occurring. For example, 60 per cent of GDP of Ontario is now being sold in North America; it is not only being sold in Ontario. It will be imperative for the Canadian banks to be able to match the capital needs of their clients the way these major American banks will.
Second, there are some markets in the United States where I think the Canadian banks compete and compete quite effectively. Because of the very size of the nation, and the fact that we operate in six time zones concurrently, we have developed some expertise in systems. This expertise allows for the fact that you can go to your branch in Newfoundland or your branch here and get your balance just like that. That kind of instantaneous access and all the real-time clearing facilities are things that we should be able to sell in the United States. We are also developing expertise in certain kinds of finance, one of them that I am particularly aware of is the Royal Bank's group on agricultural finance, based in Winnipeg. I think that there is a good opportunity for us to compete across a wide range of services in the United States.
If banks do not have that capacity in this country, because the mergers are not allowed, then I would think that one of two things would happen. Either they will shrink the size of operations in Canada or increase their investments overseas. As they increase investments overseas, there will be a greater and greater tendency to move many of these operations overseas as well. So we would see Harris Trust growing with the Bank of Montreal at the expense of the Bank of Montreal in Canada.
Senator Austin: What will the competitiveness of Canadian banks in the U.S. markets do for Canadian consumers?
Mr. Bond: It will improve the rate of return on assets because of the more diversified business. As it does, that allows them to generate the capital, which allows them to improve the systems, which will be spread across all of their clients, including their consumers. It would provide stronger, more resilient banks in terms of the kind of risks that banks face. That is an advantage that is passed on to consumers in the fact that CDIC will have to charge a lower rate of insurance to cover the risk, because the risk will be reduced. That then goes forth into the service charges the banks make.
Senator Austin: Your argument more or less says that they will remain extremely competitive in the Canadian market.
Mr. Bond: They will. After all, my proposal of opening up the ATM network to competition really forces their feet to the fire of competition in Canada.
Senator Austin: In the MacKay report there is this vision of tier-two growth in service, but I do not see that vision here.
Mr. Bond: I think it would come because I think that there would be a large number of entrants with one or two products. They will do some cherry-picking, The entrants would be the national bank that we just talked about, like Ms Crompton's bank. The ING bank and some other virtual banks will become extensive. You and I may be different. My stepson is 32 and the last time he was in a bank branch might have been four or five years ago. He does all his banking by bank card or by computer. He does not go to any branches any more. It is not a question of not getting service. People today will get service from a wide range of different companies and they will shop. They will go around looking for the best price.
Senator Austin: What will full functionality and the programming that is behind it do to the viability of branch banking in Canada, and particularly community banking?
Mr. Bond: Community banks certainly would provide the capacity to compete on a wider range than just the small community where they might be located. I do not think it will radically change in the short run the number of branches in the system. I think Minister Waddell and his study group were wrong on that. I think over time, however, there will be some consolidation of branches. But the major consolidation of a merger will occur in the urban centres. It will not occur in small towns. Near our homes we have the Bank of Montreal, TD and the Commerce. We are on the fourth corner but we are not going to merge. The other one is just down the street and I would think that two of those will probably merge. That will be in the urban centres, it will not be out in Peachland.
Senator Austin: On a completely different point, the report also deals with the question of holding companies and of medium-sized financial institutions, such as the one that you work for, migrating its control to a holding company so that that holding company can participate in other financial services that are either non-regulated or otherwise regulated. Is that a practical device from your point of view?
Mr. Bond: I would submit that yes, it is. The parent corporation is HSBC Holdings PLC and it owns HSBC Security Manager. James Capel used to own all of the Hongkong Shanghai Banks and HSBC Banks around the world, insurance companies, trust companies and underwriting companies. I think it would be a good thing. I agree with the basic recommendations of the task force.
Senator Austin: So you have no fear of universal banking as far as Canada is concerned?
Mr. Bond: No, none at all.
Senator Kroft: I am interested and impressed by the power of your suggestion on the full functionality. We have listened to those who have expressed concern about banking becoming concentrated in the hands of a limited number of players in Canada. This does not relate to full functionality. Consumer transactional functions would take place there, but I do not see how they address the concern that would arise more at the negotiation of corporate credit lines or the investment banking function. There are a whole range of things that are not addressed that would still bring about this massive consolidation of power that so concerns so many people.
Mr. Bond: If a bank wants to go after a certain kind of commercial account, full functionality will allow it to go after it quite effectively. Wells Fargo is doing its lending now. I know this was pooh-poohed by some others. I can tell you that the Hongkong Bank does its clearing for Wells Fargo because of a strategic alliance with it around the world. Wells Fargo must be doing something because they have certainly been pushing cheques through the clearing system. I do not see why they would be discouraged from going after certain kinds of markets in terms of small and intermediate-sized business. If they can offer the full functionality, it means that there is a way for them to get the cash into the system and the cash out of the system. Negotiating would be not unlike what we used to have back in the 1960s, which was called "suitcase banking." A classmate of mine who graduated came up to Canada and travelled in Northern Ontario and Saskatchewan and Manitoba. All he did was travel and call on people saying, "Hi, I am from Morgan Guarantee and I would like to be your banker." He used to have people fall off the chair with surprise. Here was a New York banker coming to see them. Why? They wanted the business and they were able to do some of it.
I do not think it is a problem, sir. I do not know how else you are going to get entry. We want a competitive, viable system. When there was no fear that the foreign banks were going to come in and run over the Big Five, the Big Five responded in a very effective way. That is why the Hongkong Bank has been quite successful at it. But it has been tough sledding every day.
Senator Kroft: I understand the strength of the case in terms of the viability of the system. I am not sure that it addresses in any way the fact of more significant corporate banking transactions and obviously you do not have a concern with greater concentration at that level.
Mr. Bond: No, I do not.
Senator Kroft: Finally, what about the whole issue of percentage ownership, the 10 per cent rule? Do you have any thoughts you would like to share with us in that area?
Mr. Bond: The disadvantage of the 10 per cent rule causes concern. I really do not know the way around it. But it is not unlike almost having mutualized the banks. Think back to the 1960s when several of the banks made significant sovereign debt loans to countries in Latin America and as a consequence had to write those off. You and I as taxpayers got to share in that joy because the taxpayers absorbed half of the loss. If a company had lost that kind of money, I would have thought that the shareholders would have risen up and put the management out the door. That did not happen and in large measure it did not happen because of that 10 per cent rule. If two people own 10 per cent, are in the same city and look in the same direction, bang, you are colluding. On some things you want to collude -- and I think they should have colluded to fire some of the management. That is what bothers me, sir.
At the same time, I do not want to have a bank controlled by one group that could abuse that privilege. It is a dilemma. There should be some way in which the shareholders can throw out bad management and not be in violation of this limitation of working together. In other words, if three or four of the major pension funds decide that the management is incompetent, they should be able to vote together and throw them out.
The Chairman: May I say that you could have used all manner of examples without going out of the country. One only needs to think of certain corporate loans that were made in Canada in the 1970s, which would meet all the same tests.
Mr. Bond: Were there some made in the 1970s?
The Chairman: Professor Levi, before we close, I realize that all the questions went to Professor Bond. Are there any comments you wish to make?
Professor Maurice Levi, Faculty of Commerce and Business Administration, The University of British Columbia: Honourable senators, I would introduce myself by saying that, like Professor Bond, I am an author of a textbook, in this case in international finance. It is the leading college and university text globally, and is a McGraw-Hill text.
I would like to focus on that area of expertise, international finance, and particularly on the off-balance sheet activities of the banks, the clearing banks. I would like to argue that this is really the exclusive domain of our large clearing bank. We cannot count on competition from the near banks and other levels. I will focus particularly on currency exchange, letters of credit, acceptance of trade bills, making them into bankers' acceptances and on collections of foreign accounts receivable. These are activities which involve very large costs that represent very big fractions of mark-ups for small and medium-sized businesses when they are doing international activities. I believe that this is an area where we should pay attention because there is a lot of job growth in that area.
I will start with the currency exchange. The interbank market has some unique characteristics. I characterize it as a decentralized, continuous, open-bid double auction. The key words are "open-bid double auction." These are bank-to-bank markets where a bidder has to be willing to quote a market and they call each other to quote that market. It introduces a lot of market-making risk at the foreign exchange level, so we do not have any participation at any other level in that in Canada, other than from our clearing banks. Even the largest credit union in this city speaks about trading through brokers as opposed to actually market-making itself.
This is important because it is a very competitive level and the costs at the interbank level are extremely low. If you actually look at the spreads between buying and selling exchange rates, we are talking of an order of sometimes a tenth of 1 per cent. I will tell you what happened recently with a royalty cheque from this textbook, which I took to two banks. It was a US$7,000 cheque and I checked the two exchange rates. At that time, the sheet was sitting in front of me. The medium rate was 1.54. The buying rate was 1.52 and the selling rate on the U.S. dollar was 1.56. I suggested that was a rather high spread but I was told that is what it was. I checked a second bank and it was exactly the same. On a $7,000 cheque, that represents $280 or four per cent. If half of that was viewed to be the cost of buying or selling, since that is a buy and a sell, that is a little over CAN$200 for the purchase of a cheque. I am going to relate that afterwards to the costs and profits of a small business that does not have the privilege of using anything other than a clearing bank for the purchase and sale of those currencies.
In principle, the bank mergers should actually result in very large cost savings in the foreign exchange activity. A very large fixed cost is the barrier to entry of the other participants at the other levels. That fixed cost entails having a trading room and having people there making markets and keeping track of things. I see no need for the merged banks to keep anything like their current staff levels with a merged trading room for foreign exchange. They will be running it out of something that is comparable to the size of the larger of the pairs in both cases. That means a major cost saving. But will that cost saving be passed on to consumers?
I know what was involved in clearing my $7,000 cheque and it was simply an electronic message to move those funds out of the McGraw-Hill account, which wrote my cheque, into the account of the bank that purchased my funds. Those funds were not sold. They did not have to enter the foreign exchange market; they do that at the wholesale level as they watch their inventories of foreign currencies change. I paid $200 simply for this electronic transaction.
The mark-up on that has to be huge. I ask committee members to think of those fees. There is a long history of spreads in foreign exchange. It goes back to temple times, Jesus overturning the tables of the money changers. If you actually go through what is involved in each transaction, and I do that with my students, it is very little. It is simply a clearing in the United States of dollars between two depositors, that is it. It does not seem to me to be worth $200.
Senator Oliver: Is that a standard spread in the industry?
Mr. Levi: It was a spread on $7,000. I actually had a friend who had a U.S. dollar cheque to cash. I suggested that that cheque be put into my account. I will give you an example of a larger amount of money -- $15,000 -- and we will get the spread on that. It was exactly the same spread, so that would have cost about CAN$400 for conversion. We tried two banks on this.
If your business involves only money coming in and money coming out, you have the option of maintaining a foreign currency account. But if you are in the export business where you actually have to meet a payroll in Canada in Canadian dollars, you have no choice but to sell your funds.
It might seem like 2 per cent is a relatively small amount for currency conversions and, admittedly, it gets smaller. The next skip over is $25,000 and it becomes substantially smaller. I was told that at that price I could bargain with the bank. They would not bargain on this particular cheque. If you are operating in a business with an 8 per cent margin, it is a competitive world and you can make a product and sell it for 8 per cent more; 2 per cent is 25 per cent of your margin. That is a great discouragement for doing business internationally.
It is also a problem with other currencies as well as the U.S. dollar, but that is 80 per cent of our activities. But it represents quite an important impediment. It is an area where there is not much choice. This is a case where basically branching again represents the limitation. If you are a small company working in Peachland, you do not have much choice but to go through your local bank when you are selling or buying foreign exchange. I will move to that quickly and talk about the other side of trade, which involves imports, which typically is based on credit. The whole notion of credit in import activity has a long history. I tell my students that The Merchant of Venice is actually about a problem in securing trade credit. We have procedures for doing that now with a letter of credit that is issued by a bank.
That bank has to be a very reputable bank. A letter of credit that will be presented to a foreign firm states that the bank guarantees the credit of the X, Y, Z company. It has to come from a well-recognized bank, otherwise it has to be confirmed in the other location as well. It is a potentially high cost for small firms. I cannot go to VanCity or Richmond Savings to get my letter of credit for doing my import business. It is an off-balance sheet activity of the bank, as is the foreign exchange. I imagine that it is a very profitable off-balance sheet activity and it is an impediment to trading companies and to people locating themselves in Canada doing this type of thing, unless of course you have some viable alternatives.
Big companies can go abroad for both of those services. Foreign banks can be used. We have heard of the suitcase banks. Of course, a very large company can shop around with its foreign exchange and use a bank in Chicago, pick Harris Bank and its relationship with the Bank of Montreal and probably then get better quotes. Small and medium-sized businesses are stuck doing their businesses locally. My neighbour makes shafts for boats. He works across the border in Washington State. He gets U.S. dollar revenue with no U.S. dollar costs. It is a cost for him doing business on that side, however.
I shall mention another activity where you cannot count on competition from the near banks to keep it competitive and fewer banks would seem to me to suggest more concentration, and that is accepting trade bills. Now bankers' acceptances arise from a trade bill that is a cheque for payment, which an exporter will receive. That exporter needs to finance the production of the goods and would like to sell that bill at a discount in the market. Of course, if it is simply a trade bill from a corporate issuer, the importer, it is not a very secure trade bill. So the importer gets that accepted by the bank and pays for the acceptance of that bill. Ninety-five per cent of bankers' acceptances arise from trade bills. They are not just issued corporate paper that has been accepted by a bank. Having it accepted for sale in the market does not give a great deal of scope.
As with the other activities I have mentioned, you are pretty well limited to your clearing banks in having your trade bill accepted for sale. That is a very important way of exporter financing, exporter supply-based financing. You are selling a good; the good has to be delivered; they send you your bill. You provided trade credit. This is normal for an exporter. You will receive a time draft. That is, you give the buyer three months to pay so that they have a chance to sell the product that you are providing and generate that revenue. But you need the money right now to produce the goods, so you need to sell that draft and that draft has to be accepted and the fees for those acceptances again can represent an impediment if there is not much choice. Again, big businesses are probably okay.
It is the same thing with collection services, if you are a smaller firm and you need to have collections done. There is a receiving bank and a collecting bank that goes through international transactions. I, of course, do not know and I suspect that maybe this committee has looked at where the banks are actually making their money. I have not focused on the deposit-taking and lending activities of the banks because I believe there is a choice there. I can choose where I get a mortgage and where I place my deposit. I do not think that these things, especially for small and medium-sized business, provide any choice.
The Chairman: Thank you for those comments. That issue has never been raised with us. Your point is extremely helpful. The question that logically leaps to mind is what the public policy solution is to the problem. I cannot see us regulating spreads, which is getting into micromanagement of the first order. We would like you to think about and talk to Dr. Goldstein, our researcher, about whether there is a public policy solution to the problem. You have certainly identified what is clearly a significant barrier to smaller Canadian businesses exporting and it is also a business, as you pointed out correctly, where there are huge barriers to entry. I do not know what we can do about it. If you have some thoughts on it, they would be helpful.
Mr. Levi: My main thought is that we need competition. If I felt there was free entry in providing these services, I would feel whatever price I paid was fair.
The Chairman: You will also agree that micromanaging by means of us attempting to regulate spreads in some price control system is not the way.
Mr. Levi: My Ph.D. is from the University of Chicago. It is very much a free market view.
The committee adjourned.