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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 9 - Evidence

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OTTAWA, Thursday, April 26, 2001

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-8, to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions, met this day at 11:00 a.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: We are meeting to discuss Bill C-8, to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions. Appearing before us are Mr. Roy Cullen, MP, Parliamentary Secretary to the Minister of Finance, and several witnesses from the Department of Finance.

Mr. Cullen, do you have an opening statement you wish to make?

[Translation]

Mr. Roy Cullen, MP, Parliamentary Secretary to the Minister of Finance: Mr. Chairman, I would first like to thank you and the members of your committee for affording me this opportunity to be here today to discuss Bill C-8. I appreciate the scope of the task that faces committee members in reviewing such a large and complex piece of legislation and hope that I can help you in your deliberations.

I will try to keep my opening remarks brief in order to leave as much time as possible for questions and answers.

[English]

Mr. Chairman, the policy objectives of the proposed legislation have always been clear. Simply stated, Bill C-8 seeks to foster a dynamic, strong and profitable financial services sector to the benefit of all Canadians.

It does this by focusing on four broad objectives. The first is that it will promote the efficiency and growth of Canadian financial institutions. Second, competition will be fostered in the domestic marketplace. Third, consumers of financial services will be empowered and protected, and fourth, the regulatory environment will be improved.

Mr. Chairman, all of the measures contained in this bill will contribute to achieving one or more of these four objectives. Bill C-8 strikes a careful balance between promoting the interests of the financial institutions that play such a crucial role in the Canadian economy, and safeguarding the interests of consumers who require and depend on the services those institutions provide.

As a result of Bill C-8, Canadian banks and insurance companies will profit from a new ownership regime that will facilitate joint ventures and strategic alliances. They will be able to take advantage of an expanded list of permitted investments and a new holding company structure that will provide them with greater flexibility to compete with unregulated institutions and monolines. They will also benefit from a streamlined approvals process.

These will give the sector more tools and greater flexibility to compete and prosper in Canada and abroad. This, as we all know, is essential because financial institutions are such important contributors to jobs, exports, and tax revenues, among other things.

[Translation]

The legislation also aims to foster domestic competition by promoting new entry into sector. To this end, at the heart of Bill C-8 are measures that will promote competition by lowering the minimum capital required to start an institution, expanding access to the payment system, as well as measures to accommodate the aspirations of the credit union movement and to promote a greater foreign bank presence. This will result in a greater range of high quality services for the consumer, at the best possible price.

[English]

Mr. Chairman, I would also like to point out that the consumer protection provisions contained in Bill C-8 are a major step forward for Canadian consumers. Simply stated, Bill C-8 goes further in terms of protecting the rights of financial sector consumers than any other legislation put before Parliament. Canadians will be able to rely on the new Financial Consumer Agency of Canada and an independent Canadian financial services ombudsman for oversight and redress. They will also be able to take advantage of the measures to improve access to financial services: minimum identification requirements to open an account or cash a government cheque; the provision of low cost accounts; and a process to govern branch closures.

In addition, a number of measures with respect to transparency and disclosure will promote good business practices and accountability. In fact, as you may know, the government recently announced that it has concluded an exercise to make available plain language model loan contracts. These were developed in consultation with the provinces, the industry, and other stakeholders, and are now publicly available on the Department of Finance Web site.

I firmly believe that bill C-8 achieves what it set out to do. The proposed legislation that you are about to review is comprehensive, balanced, and fair.

It is over 900 pages long, and I decided not to spend too long describing the bill because I think that senators are reasonably conversant with it. I would like more time for questions, comments and responses.

This proposed legislation will benefit Canada, Canadians, and the financial services sector itself. That is why it has generated such widespread support from stakeholders. As I have said, I appreciate the time and energy that the committee members will devote to the review of this bill and I welcome your questions.

Senator Tkachuk: Mr. Cullen, my question concerns the co-operative movement. The MacKay task force report and subsequent Banking Committee and Senate Finance Committee reports recommended that the co-ops should be able to establish a national cooperative bank. The government supported this view in its white paper. It is on record as wanting to provide incentives to increase the competition in retail banking. Why does Bill C-8 not include the necessary provisions to this effect?

Mr. Cullen: Thank you, senator. I will begin the answer, and then perhaps the officials could expand on that. A co-op bank discussion paper will be released this year. Certainly, the members of our caucus, many members of Parliament, and senators, I am sure, want to see a strong credit union movement to provide consumers with alternative products and choices and thus more competition. We had developed a cooperative bank model and some consensus seemed to be emerging. Unfortunately, that consensus fell apart, if I can put it that way. We are prepared to continue, and the department is meeting with the credit union movement on a regular basis. We are trying to encourage them to move forward. The discussion paper to be released later this year will assist us in that respect. We want to see a strong, expanded, and more competitive credit union movement. Our government is totally prepared to work with them to achieve that objective.

Senator Tkachuk: Could you tell the committee when the government intends to bring in legislation that will allow the formation of national co-operative banks?

Mr. Frank Swedlove, General Director, Financial Sector Policy Branch, Department of Finance: We will, as Mr. Cullen noted, put out a discussion paper that will lay out a number of options for how we can proceed with a cooperative bank. We will then hear views from the cooperative movement and also from the provinces. We will work towards establishing a consensus that will allow us to go forward. We do not have any specific date in mind for introducing legislation, but we would like to move on it as quickly as possible.

Senator Tkachuk: I am concerned because the MacKay task force reported in 1998; it is now 2001. The white paper process allows the issue to be studied, but it will take a long time. Meanwhile, this bill allows the mergers of banks and the other part of the industry to move forward. It will perhaps put the credit union movement and the co-op movement a little behind the eight ball. This is a concern of mine. Could some urgency not be developed?

Mr. Cullen: I would like to empathize with your concern. We would like to see a credit union movement that offers competition. The bill provides for a transparent process for bank mergers. One of the criteria will be, through the Competition Bureau, what kind of competition would be in place for the mergers, as well as what kind of alternatives for consumers. It is a catch-22. We would all like to see the credit union movement grow and prosper and provide those alternatives. The faster that we can reach that point, the better.

In fact, the secretary of state, when he was at the House of Commons committee some time ago with the CS Co-op people, committed publicly to reacting quickly on this once a workable consensus was on the table.

Mr. Swedlove: The co-op bank model was developed by a number of individual credit unions. As Mr. Cullen noted, some of them decided during the discussions that they did not want to proceed in that direction.

However, the vast majority of the credit union movement has been involved with the CUCC in pushing the concept of a national services entity, which we have adopted in the Co-operative Credit Associations Act. We have made extensive amendments to that act in order to accommodate the credit union movement and to allow them to effectively compete with other financial institutions. For example, credit unions can come together under this act to establish a retail association, which will essentially give them the same powers as other financial institutions and allow them to operate on a national basis.

Senator Tkachuk: The Conservative position is that we see the credit unions and the co-ops becoming major players in the financial service industry. They are powerful in Saskatchewan, British Columbia and Quebec. They will be the competition to the banks.

Mr. Cullen, you mentioned that there is a process for the bank mergers. If the banks want to merge, they should do so if it is beneficial to them. Are you suggesting that you would use the excuse that you have not got this process in shape to prevent the mergers from taking place, or did I misunderstand you? You were hinting at that.

Senator Angus: That is what it sounded like to me.

Mr. Cullen: I would not want to prejudge that process. I am saying that the process requires the Competition Bureau to look at it. It seems to me that one of the main issues is whether there is competition in the marketplace, and so that will happen just as night follows day. As far as the public interest considerations are concerned, the process requires a public interest impact assessment - what it does to the local economies and financial services and products generally in the public interest context. That would be part of the process. I certainly will not prejudge the outcome of that. It is fair to say that the more competition there is in the marketplace if and when the banks come forward, the greater the likelihood that it would be better for them to have more competition. We could all say that.

The Chairman: I would ask Senators to limit themselves to 10 minutes.

Senator Kroft: I look forward to the beginning of a long and fruitful discussion on this subject.

I will continue with the issue of competitiveness in the system. I agree with you that the existence of other, effective competitive elements will make it more acceptable for any one, and specifically the major banks that might make a move in the broad national interests and in their own interests that might have some non-competitive aspects. I take that point; it is valid.

Senator Tkachuk focused on the issue of the co-operatives. I would like to explore two other areas. I recognize that this is the beginning of a process and I am not looking to drive to final conclusions, but rather to open up important questions of inquiry for this committee.

The first area concerns the foreign banks. I have been a member of this committee for three years, and every week of those three years has been filled with pursuing these same subjects. We have heard that the government has taken steps to respond to a number of the concerns of the foreign banks, and the legal status quo, to make it more attractive for them to operate in this country.

The will of the government, and, it appears, of the foreign banks, has been to keep a relatively low level of competition in terms of playing a meaningful role in the banking system of Canada as far as a broad number of Canadians are concerned. I know that they will be happy to pick off the attractive transactions at the wholesale level, but it does not yet bring them within the scope of what I would consider meaningful competition of the type that will preoccupy Canadians when major banks propose to merge.

I would like to register that I still think that we are far short of the role that foreign banks could and should play in this country if we are to enhance competitiveness and also our role as a major player in a globalized world.

In the same context of competition, I would like to turn now to insurance companies. The vision of the MacKay report was that the insurance companies, being the largest pool of capital available for investment that is held in this country, rest next to the banks. I seem to recall that the MacKay report used a figure of about $35 billion annually that the insurance companies had in hand that was available in some form for investment in the system. Measures toward making them part of the payment system are there.

Again, we found a lack of interest. This is part of my question to you, and I will end with same question for the foreign banks. The insurance companies, as we heard them say on earlier occasions, believed that the payment system would be nice. However, turning them into entities more like banks, as in the MacKay vision, did not seem to be embraced by the insurance companies.

I will put my question, after this lengthy preamble. Do you see any prospect of either the foreign banks or the insurance companies presenting any meaningful possibility of becoming a more significant competitive element in the broad range of banking services or financial institutional services in this country?

Mr. Cullen: We talked a few minutes ago about credit unions. This kind of competition will give the co-ops the opportunity to provide alternative products and services.It is one of a number of initiatives in this bill to try to encourage more competition through opening up the payment system, foreign bank provisions, and the new ownership rules. At any point in time, if the banks do look to merge, there are a number of different aspects here that should increase competition.

In terms of the foreign banks, we have taken a number of steps already and Mr. Swedlove can perhaps describe those, although you seem to be aware of what is in place. Ultimately, the government can provide a legislative framework and the legislative opportunities, but foreign banks are finding that the economics do not work at the retail level. The business case is not there as strongly as it might be. It comes back to some extent to this whole bricks and mortar presence in local communities.

The opportunities can be created and the impediments removed, but ultimately these are business decisions. The insurance companies that I have talked to are quite excited about the payment system being further opened up. I think we are excited as a government by the prospect that insurance companies and stockbrokers could suddenly begin to create new products, new opportunities, and new choices for consumers.

Mr. Swedlove, would you expand on the business of insurance companies becoming banks?

Mr. Swedlove: First, we have updated our foreign bank regime in recent years. We believe that we have established a regime that is open and flexible and in which foreign banks can participate. We do recognize the advantage that they can provide with respect to competition in the marketplace.

A foreign bank establishing a subsidiary in Canada has all the same rights and privileges as a domestic bank. There are no distinctions in treatment whatsoever. Indeed, our trade obligations require that.

Senator Kroft: Are they still seeking anything? Is there something important that they still need in order to become an effective competitor?

Mr. Swedlove: In 1999 we allowed foreign banks to establish direct branching into the country. In other words, they could establish a branch operation that would be a branch of the parent company without having to set up an incorporated entity. There are no restrictions on a foreign bank establishing an incorporated entity and having as many local branches as it wishes. However, it is only since 1999 that they have been permitted to establish what we call a "direct branch" in the country.

We do not allow such direct branches to take retail deposits. That decision was taken in recognition of the fact that the regulator could not oversee a branch of a foreign company like it could an incorporated entity as a subsidiary in Canada. Consequently, we do not permit any taking of deposits under $150,000.

Senator Kroft: Do not many other countries rely on the regulation of the home country in some way or another?Is there not a concept operating elsewhere that is more hospitable to the foreign banks in this regard?

Mr. Swedlove: Increasingly, there are arrangements among regulators to ensure that information is provided, but the same ability for oversight does not exist when it is a branch situation as opposed to an incorporated entity. That situation occurs in the United States, where foreign branches are not allowed to take deposits. It is also the situation in Australia, I believe. A number of countries do not allow retail activity to take place. However, a number of foreign banks have decided to establish incorporated entities, which we do not believe is an onerous requirement, such as HSBC and ING. They operate retail banks in Canada.

We have been seeing an increase in the number of foreign bank participants in this country. Many of them are providing significant competition to Canadian banks, and I am sure you are aware of many of them. ING and MBNA are foreign banks that provides significant competition to Canadian companies. We have attempted to ensure that the playing field is level, and that foreign banks do have the same kinds of opportunity as Canadian banks to serve the market.

Insurance companies can indeed compete with banks on many bank-like products. They too can establish subsidiary banks or trust companies to compete with Canadian banks. However, the major thrust of the proposed legislation is through the payment system and the opportunities for them to offer deposit-like services to their existing customers.

Senator Hervieux-Payette: I would like clarification of the difference between a Canadian bank and a foreign bank. It is confusing when you say that they have the same rights.

They do not have the same rights. They are not necessarily covered by schedule 2. They must file with provinces. The provinces want to keep this jurisdiction, as we know from previous discussions.

I want to raise that issue because they have not been considered the same as Canadian banks. They have a special status. They have an expanded role in our system. The problem that we raised before has not changed. Moreover, the provinces seem to be more inclined to want to interfere and intervene in this sector.

I want to be sure that we do not disagree on that. When you state that they are treated in the same manner, it gives the impression that they are covered and that they are indeed treated the same. However, that is not the reality in their day-to-day operations.

Mr. Swedlove: The senator is referring to the fact that a number of the banks, when applying for a bank branching licence, would prefer to carry out activities that the provincial securities regulators believe involve securities activity. An exemption is provided to Canadian banks and to foreign subsidiaries that are established in Canada. However, the securities authorities have not extended that exemption to foreign bank branches.

They indicated that they would review applications on an individual basis until they have the opportunity to establish an overall policy on review and acceptance of these applications.

A number of foreign branches have already received approvals from the securities commissions to carry out those activities in which they have an interest. Thus the system is working, but the senator is correct in the sense that it has taken some time. The securities commissions have assured us that they will work as quickly as possible to review the applications. We are not aware of any current problems in the actual acceptance of the applications.

Senator Oliver: I raised both of my questions in my second reading speech in the Senate two days ago. First, what is the rationale for the public policy statement on bank assurance? There is no change in the policy allowing banks to own life insurance companies. However, two of the largest converted assurance companies have been set aside as institutions that cannot be part of a bank conglomerate.

The second question deals with Canadian control and the 20 per cent rule. We were all given a briefing book to read with questions and answers at the back. I would like to ask about your answer in the briefing book on the 20 per cent rule. It states as follows:

Q. Will the increase in the ownership limits to 20 per cent have an impact on Canadian control?

A. No. The government is committed to maintaining strong Canadian-controlled institutions. The Bank Act will continue to preclude anyone, including foreign institutions, from controlling our large widely held institutions.

In addition, for greater certainty, the government will be developing, in consultation with stakeholders, a set of guidelines that will clarify the factual criteria and policy objectives to be taken into consideration in assessing control.

Could you tell us how far along you are with those guidelines and how they will ensure Canadian control of our major financial institutions?

Mr. Cullen: Senator, I will lead off and then Mr. Swedlove will continue.

Our government is committed to maintaining strong Canadian control of financial institutions. We believe that moving to the 20 per cent or 30 per cent maintains that position. The guidelines, in terms of board composition and other subtle things that can go on, will address that. Any owner who comes forward after reaching the 10 per cent threshold will have to go through a proper review, including a review of these kinds of controls. They will be assessed against the control guidelines.

Mr. Swedlove: We are still developing the guidelines and working on the concepts. Perhaps I could ask Mr. Salembier to talk about our thinking at this time.

Mr. Gerry Salembier, Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance: We have had one or two rounds of discussions with the financial institutions on this issue. Those discussions essentially focused on the types of factors to be included in the control guidelines.

For the most part, we are discussing factors that are taken into account in other public policy contexts in which the issue of corporate control is decided. Examples of that are telecommunications, broadcasting and transportation.

We would likely include, dependent upon consultations with the sector, the size of the equity stake, the percentage of voting interest, total equity, any restrictions on the ability to sell the shares, board representations, rights to appoint management that go along with the shareholding, and representation on key board committees.

Another important factor is the extent of any outsourcing arrangements between the owner of the minority stake and the institution in which it has the stake, or any marketing or operational alliances that might exist, to the extent to which the shareholding provides a veto on any day-to-day decisions or decisions related to organizational business plans. We will also consider the extent of any financing arrangements between the financial institution and the shareholder. Some of the items considered are: large lines of credit provided to the shareholder; restrictions on the use of the name of the financial institution by the shareholder; and any public statements and representations to other regulators in respect of the shareholder. These are some of the items taken into account in other policy contexts. We will likely use the same sort of list of indicia of control.

Senator Oliver: The concept of the difference between control in law and control in fact is at their base.

Mr. Salembier: We are talking about control in fact. Control in law is a higher standard, but we are talking about situations that would constitute control in fact and indicia that will be taken into account in determining whether or not that is the case.

Senator Oliver: After this passes, what if there were 20 American companies wanting a 3 per cent interest in a Canadian financial institution? What are your guidelines, and what kind of thought have you given to that?

Mr. Salembier: The Bank Act and the proposed legislation will contain a provision on acting in concert. Therefore, if those 20 American owners with the 3 per cent stake were in any sense cooperating, or if they had shareholder agreements on the exercise of the voting interest, they would be treated under the law as if they were a single shareholder.

Senator Oliver: I am assuming they were not acting in concert and have passed that test. Would it not be foreign control?

The Chairman: It would be, but there is nothing you can do about it. Or is there? That is a very good question and I would like to hear the answer.

Mr. Swedlove: Currently, there are no restrictions on levels of foreign ownership under the existing legislation or the proposed legislation. However, since none of those shareholders would actually be controlling the institution, foreign control would not be exercised. The majority of the shares would be owned abroad. I believe there have been no restrictions on foreign share ownership in our legislation since 1992. I am not sure of the exact date.

Senator Oliver: Do you not have concerns about that?

Mr. Swedlove: The issue for us is whether it remains in Canadian control. The foreign ownership question has not turned out to be a problem. We have no reason to believe it will be a problem in the future.

Senator Oliver: Mr. Cullen, can you answer my first question about the public policy rationale for the insurance exclusions?

Mr. Cullen: While some smaller to medium-sized insurance companies will be demutualized in January, 2002, and will be in play, we wanted to ensure that the two very large insurance companies maintain some stability and sound structure in the insurance industry and remain separate. We want to ensure that they do not merge with our major Canadian banks.

Senator Oliver: What is the rationale for that? We have brought down the pillars. What can possibly be the rationale for singling out two companies?

Mr. Cullen: We want to ensure that we have an adequate level of competition and that the system is sound and safe for all Canadians.

Senator Oliver: Are you saying that if a bank bought one of the two companies, it would not be sound and safe?

Mr. Cullen: It is more a question of concentration. You create that kind of potential every time you limit the number of players. It is also a question of maintaining some independence between the banking sector and the insurance industry. That is important.

Senator Oliver: However, an insurance company can buy an insurance company, so you would certainly have that independence. I cannot find a rationale, and I was hoping you could give me one.

Mr. Cullen: I thought I gave you one or two reasons. Perhaps Mr. Swedlove could expand.

Mr. Swedlove: Essentially, the objective is to assure a strong, independent insurance sector. A clear statement that the two largest de-mutualized companies will not be subject to takeover by the banking sector accomplishes that.

The Chairman: As a follow-up, is there any other country in the world that does this?

Mr. Cullen: Could we get back to you on that?

The Chairman: Would you, please?

Senator Oliver: There is a long list of other countries that support the position I am trying to promote.

Senator Fitzpatrick: I want to ask you about the smaller, closely held banks with reduced capital requirements. It sounds like motherhood and apple pie. I am wondering if that era has passed.

It seems to me that the trend is towards larger, more highly capitalized banks, mergers and acquisitions. We have had experience in Western Canada in particular of new banks being established with larger capitalization that have not been that successful. I think that you put forward the suggestion that they might be more competitive or provide better service. I do not come to that conclusion. I wonder if we are creating a problem for the industry and for consumers who rely upon these banks. The history of new banks in Canada has not been that successful.

I would like to know what you have done in modelling and establishing a level of confidence on the viability of these smaller banks, because I certainly do not see it the way it has been suggested.

Mr. Cullen: We are not aware of any evidence that suggests a link between the size of a financial institution and the probability of failure. Confederation Life and Central Guarantee Trust Company are examples of large institutions that have failed. Real estate problems were probably at the core.

The 1986 report of the Estey inquiry into the collapse of CCB and Northland noted that a shortage of experienced senior management staff and a poor loan portfolio were the root causes. Neither bank failed as a result of size. The report concluded that both banks collapsed due to overly aggressive growth strategies.

There are also a lot of built-in controls in how the regulatory agencies deal with smaller banks. I will ask the OSFI people or Mr. Swedlove to respond further.

Mr. Swedlove: The MacKay report noted that very few Canadian banks were established over the last decade. It expressed a great deal of concern about that and the threat to a vibrant, open, competitive market. All of the new activity in the banking sector had come from foreign institutions. We believe that is a positive development, yet we felt it was appropriate that there should also be opportunities for Canadians to establish banks.

A number of measures in this bill are aimed at establishing new Canadian banks, as well as introducing the possibility of community banks.

Much has changed since the mid 1980s when the difficulties you refer to occurred. In 1995 we introduced legislation that changed the regulatory regime with respect to financial institutions in difficulty. It gave more authority to the regulators to take action at an earlier date and established a more effective process. Both OSFI and CDIC feel that the current regime is more effective in dealing with companies in difficulty, if indeed some of these smaller institutions do get into financial difficulty.

The superintendent has stated that he believes that there is some added risk in opening the market to new institutions. However, he also believes that he has sufficient tools to deal with many of those risks and any contagion issues.

Senator Fitzpatrick: I have a comment. Some of the large banks are sometimes over-aggressive, and I would also suggest that they do not always have perfect management. Perhaps they survive because as larger banks, they have a larger capitalization.

It is a risky proposition, and I think it is very important that there be regulations and that the superintendent has ways to watch this. We may be causing communities some real difficulties by establishing community banks with small capitalization. We all know that it is not an easy business these days.

Mr. Swedlove: I will ask Mr. Bergevin to describe the steps taken to deal with this.

Mr. Normand Bergevin, Director, Legislation and Regulations, Department of Finance: OSFI is sensitive to the issue you raise. That is why this legislative package, Bill C-8, gives additional powers and more flexible authorities to OSFI to react to problem situations, especially if we were to have a flurry of new incorporations of banks and smaller institutions.

Bill C-8 introduces an administrative money penalty scheme whereby penalties can be imposed on people in the industry who misbehave. We are also introducing the concept of binding administrative agreements with institutions that need to clean up their act, so there will be "contracts" between the office of the superintendent and the institution that it will undertake certain steps.

It is not that we do not have powers today, but we are trying to introduce intermediary powers. Taking control of the institution and closing it down is tantamount to an atomic bomb. We want to have intermediary steps that would have less drastic impact on the institution, but that would nevertheless catch their attention.

We also have powers now to veto the appointment of board members and cause the removal of board members and senior officers within institutions. Those are all designed to give the superintendent more comfort.

As Mr. Swedlove mentioned, the superintendent did mention that he thought that if there were an onslaught of new institutions, it would put pressure on the office and certainly introduce some risk into the system. However, in order to balance that with the government's initiative to try to introduce more competition, if we were to get the necessary new authorities that we are asking for, we would nevertheless be able to carry on our duties. That is our position.

Senator Fitzpatrick: The issue will be what you do about a series of bad loans, if community banks are established. It is probably too late at that stage to do very much.

Mr. Bergevin: That is part and parcel of what we do. We look at the lending and investment policies of institutions. That is part of the superintendent's job. It is sometimes part of his headache, but that is what he is paid to do.

Senator Meighen: Mr. Cullen, you are becoming a familiar face here. We hope that perhaps someday you will come with your minister, and we can have a full discussion. We appreciate your willingness to appear before us. Perhaps you can slip a word to him that we would like to see him too.

You indicated Bill C-8 is designed to foster a dynamic, strong and profitable finance services sector to the benefit of all Canadians. Certainly that is an objective to which we can all subscribe. You then outlined the four objectives of the bill.

The one thing that concerns me a little, I think Senator Oliver, Senator Tkachuk and Senator Angus mentioned yesterday. It is the wide ministerial discretion given under this bill. That concern has been reinforced this morning by an indication that we can look forward to guidelines rather than regulations, as I understood it.

When might these guidelines be in place? Are guidelines different from regulations? Why not more regulations and fewer guidelines in order to provide greater certainty? There is nothing that the finance sector abhors more than uncertainty. I am sure the more certainty there is, the more dynamic, profitable and strong our financial sector will be.

Mr. Cullen: Generally, Senator Meighen, this legislative package is intended to create balance. Senator Fitzpatrick commented that we must recognize that creating competition also creates more risk potential in some cases. That risk needs to be managed, but there are trade-offs and balances that we need to work towards.

I will turn it over to Mr. Swedlove in a moment to respond to your questions.

I would note that it is a mixed package based on legislation, regulatory regimes, and guidelines. On balance, giving the minister and the government some flexibility to deal with a very rapidly changing financial services sector market required some trade-offs.

The devil is in the details. How far should you go to provide that flexibility? We feel that this package provides a good balance, but perhaps Mr. Swedlove can describe some of the trade-offs that have had to be made, and why we have chosen to go the regulatory route, or with guidelines in certain cases. You might also explain the difference between those two approaches.

Mr. Swedlove: Senator, we have stated that we will be issuing guidelines in a few areas, including the merger review process. That process determines where the minister will consider re-categorization of existing schedule 1 banks and the areas of control.

Generally, we prefer to have guidelines instead of regulations when we want to provide guidance on interpretation or direction, yet we do not believe there should be a hard and fast rule. In other words, flexibility would be appropriate. The merger review process is an example. If we were to establish that as part of regulations, we would not be able to change the process if a financial institution got into severe difficulty. One would have to deal with the existing process, even though it might be inappropriate under the circumstances.

Guidelines are generally preferred over regulations where one will need to potentially adjust to the specific circumstances of the case or a situation.

Senator Meighen: Did I hear an answer as to when they might be forthcoming?

Mr. Swedlove: The control guidelines?

Senator Meighen: Yes, and any others you might care to tell me about.

Mr. Swedlove: The merger review guidelines have already been released, as have the re-categorization guidelines. As Mr. Salembier noted, we are working on the control guidelines now and having discussions with stakeholders. Once the bill is passed, we hope to proceed with that as quickly as possible.

Senator Meighen: Would by the end of the year be a realistic deadline?

Mr. Swedlove: I think that would be realistic, yes. I am sorry. I am not providing you with a date because we are in the midst of discussions, and I simply do not know the precise answer.

Senator Meighen: Fair enough. If I may proceed with this for one more moment, if I were an entity interested in acquiring 20 per cent of a bank, I now know that I would have to pass a "fit and proper" test. Correct?

My understanding, and perhaps it is written somewhere and you can help me find it, is that a 20 per cent stake is supposed to favour an alliance as a stepping stone to an acquisition. Am I correct?

Mr. Swedlove: Yes.

Senator Meighen: How do I know that? Has the minister said that? Is it in any of the guidelines or regulations?

Mr. Swedlove: If you are talking about a bank with over $5 billion capitalization, the maximum level is 20 per cent with no control. It cannot be a first step towards an acquisition. The bill does not allow it.

Senator Meighen: What about as a passive investment rather than an alliance? Let me give a specific example. Could a Canadian pension fund, or any pension fund, buy up 20 per cent?

Mr. Swedlove: That would be possible, yes. A fit and proper test is only an assessment of whether the purchaser is of good character. That is the only test.

Senator Meighen: If I were a solid, financially sound manufacturing concern, I would not be excluded?

Mr. Swedlove: No, you would not be excluded from holding that passive investment.

Senator Meighen: Where did I get the notion, if it is correct, that moving to 20 per cent was to help our financial institutions enter into alliances with other financial institutions and strengthen their clout in the marketplace?

Mr. Cullen: Joint ventures, strategic alliances and share swaps provide more opportunities and potential for that sort of transaction.

Senator Meighen: I understand that, but what is encouraging another financial institution, such as a bank or an insurance company, as opposed to a pension fund to do that?

Senator Oliver: Or Nortel?

Senator Meighen: Yes, or IBM? I hear you saying that you want to encourage other financial institutions to enter into strategic alliances - with a bank, for example. What in this bill encourages the bank, as opposed to a pension fund or a Nortel, to do so?

Mr. Cullen: As I said earlier, you create a framework and an opportunity for more flexibility. It is not the government's mandate to determine who the shareholders should be.

Senator Meighen: It is up to the marketplace to produce the result that we want.

[Translation]

Senator Hervieux-Payette: Considering the establishment of other agencies such as the Financial Consumer Agency of Canada and the Canadian Financial Services Ombudsman, I come to the conclusion that the industry is going to finance those two organizations. The industry already finances the Office of the Superintendent of Financial Institutions. We already have an Office of Consumers Affairs in the Department of Industry.

Is it realistic to create two new entities from financial services? Why have we not retained the Office of Consumers Affairs which is already there and which is not financed by the industry but by public funds? Why did we choose to have all those agencies paid for by the industry?

I would also like the Department to give us the business plan, the costs and the operational structures of those two agencies. Because, if we add both up, I want to know the estimates and the projections which have been made, as well as the number of complaints expected and the services which will be offered. It is important to know that because, in the end, it is the consumer who will pay the bill.

Why has it been decided, at the financial level, that the Financial Consumer Agency of Canada will be treated differently from the other consumer protection agencies, concerning all the other industries in Canada?

Mr. Cullen: The Financial Consumer Agency of Canada is a consolidation of different staffs in the Department of Industry, the Office of the Superintendent of Financial Institutions, as well as in the Finance Department. It is a consolidation without any cost increase. As far as the Ombudsman is concerned, the financial support of the industry does not change and the budget will be about of the same order as before.

Senator Hervieux-Payette: Clause 18 says the following:

The commissioner shall assess a portion of the total amount of expenses against each financial institution to the extent prescribed by regulation.

I am sorry. At the present time, Industry Canada does not send a bill to the banks for dealing with the existing complaints. I understand that the Office of the Superintendent of Financial Institutions already sends assessments, but I have never heard the Office of Consumers Affairs is sending bills to the banks when it receives complaints in that sector.

I understand that you will have employees who have a jurisdiction in that area, but you are going to put them in a separate institution and the banking sector will cover the costs. And this, in part, since in any case, as soon as we have other institutions which are not a federal jurisdiction, the consumer will have no recourse. It is thus only the banks. And there, the bill will be passed on to the banks. They are businesses and if they have additional costs, the consumers will have to pay. Why therefore should the operating budgets of the Financial Consumer Agency of Canada not be paid from public funds?

[English]

Mr. Swedlove: The major role of the Financial Consumer Agency of Canada will be to take over responsibility for the parts of the legislation that relate to consumers. This function has been the responsibility of the Office of the Superintendent of Financial Institutions. The superintendent has, in the past, expressed a great deal of concern about a conflict between his responsibilities and administering the consumer provisions of the legislation.

The government decided to create a separate agency which would have responsibility for the consumer provisions of the legislation. The principal task that the new agency will be responsible for is something that the superintendent has been responsible for in the past. Mr. Cullen was referring to the fact that both are funded in a similar fashion when he said that he thought that the costs would not be significantly different.

The Financial Consumer Agency of Canada will also be involved in providing some information to consumers regarding the wise use of financial instruments and such. Some of that work has been done by the Office of Consumer Affairs at Industry Canada. However, the major activity will be its responsibility as a regulator, and regulation is paid for by financial institutions in all jurisdictions of which I am aware.

Senator Hervieux-Payette: Could you tell me about the structure and the business plan? When you are within a certain structure, normally all the overhead costs are born by that structure. Separate structures will need separate management - the staff and finances, et cetera - for each of those different sections. The overhead costs will then be added to the services that were already provided, whether in Industry Canada or in OSFI. How many people will be required, and how much will it cost to set up the mechanism? How much will the overall cost be to the consumer?

Mr. Swedlove: We anticipate that the agency will have from 25 to 30 employees and will cost about $7 million per year. These are rough estimates.

Senator Hervieux-Payette: Who will prepare the study and how was that decision made?

Mr. Swedlove: It was our internal assessment of the activities to be undertaken, and the experience of the superintendent, who will carry out some of these responsibilities.

Senator Hervieux-Payette: Do we have a comparison with other countries where there are similar services? In other countries there might be 500 employees in such a system. I want to know where we will end up in two or three years.

Mr. Swedlove: It is difficult to make international comparisons because the laws are different. The United States has a statute called the Community Reinvestment Act, which is administered by the regulators. There would be hundreds and hundreds of employees of the regulators who are paid for by the industry involved in that type of consumer regulation.

We could make a comparison with the costs assigned to the consumer provisions of the U.S. regulation, but it would not be appropriate in understanding the Canadian situation because we do not administer a community reinvestment act, which is a complex and intrusive regulatory system.

Senator Hervieux-Payette: In conclusion, if you were to ask the six major banks to provide you with the employee and cost figures for their consumer complaints departments, they might suggest that your $7 million should be about $50 million; and instead of having 25 employees, you should have 150 or 200 or perhaps even 250 people.

We need to have a real, down-to-earth assessment and confirmation by the industry that our plans are appropriate for the current needs of the sector and that we are not creating a monster that will not serve anyone. Actually, as you said, there was a limited service in OSFI, but why not do it within the consumer protection office of Industry Canada and have all the taxpayers share the costs, not just the industry? It is creating a distortion in the service industry.

The Chairman: Could someone come to give testimony that what you are suggesting is not what Senator Hervieux-Payette is suggesting?

Mr. Cullen: I was a little confused in one sense. On the one hand, I think you are arguing that cost could be passed on to consumers. I think that the consumer agency will be very lean and mean. We need to be careful about confusing compliance with regulations with customer complaints.

We have a consumer agency that will deal with regulatory compliance, and the ombudsman will deal with complaints that cannot be solved through the normal banking system. That will be a lean operation as well.

The impact on consumers will be negligible. We could come back with numbers.

We think that this organization will be able to meet the objectives of the regulation and compliance. If you want to make a comparison with a bank that requires x people to handle customer complaints, you need to aggregate the ombudsman activities. Perhaps you need to look more at their compliance section, which would ensure that their banking system is complying with the laws and their own internal regulations.

We could come back with some analysis, if you like.

Senator Hervieux-Payette: When I look at the role of both, I wonder at which door consumers would knock if they were dissatisfied. How will it be handled? Are they going to knock at both doors to determine if they were treated properly? How will it be handled? If half of the requests are referred to the other organization, it is already creating unnecessary work.

The Chairman: Can someone come to give us information about Senator Hervieux-Payette's concern?

Mr. Cullen: We could try to do that. Consumers of the banking system who have a concern with a particular bank would use the normal channels. If it was a breach of a regulation, and assuming that the consumer knew that this agency existed, the normal remedies would be available. It would depend on the type of problem that a consumer has and what the redress would be.

Many people who feel that their loan requests are not being adequately considered by the bank go through the ombudsman. Unless there were a breach of some regulatory issue of which they were aware, it would not come into the domain of the consumer agency. We will try to come back with some clarifying points about that.

Senator Angus: Mr. Cullen, I have a few questions. One is a policy question as a general follow-up on Senator Oliver's. I have a technical question that perhaps officials could better answer.

Mr. Cullen, every one has heard the criticism of this bill in the media that it is out of synch with other countries with which we do business, such as the U.K., the U.S., Germany, and our major OECD trading partners.

Let us look at the merger review process. I realize that the bill was a long time in gestation. A lot of work went into it over the past five years, but today, everyone seems to think that the merger review process is cumbersome, overly involved with political process, and complicated by the Competition Bureau. People think that it will inhibit rather than enhance mergers.

Would you tell me the policy reasons behind putting up all these roadblocks? Are we truly in favour of mergers? Has the ball game changed sufficiently since this bill was drafted that perhaps you or the government would be prepared to reconsider the process to make it more in synch with other countries?

Mr. Cullen: It is not our objective with this bill to second-guess what the appropriate business strategies of the financial institutions should be. We wanted to provide a framework for banks that felt that a merger was in their best interests. We needed to provide a transparent process to deal with that and give Canadian consumers some assurances that there would still be adequate competition and that we have a safe and sound system.

There is a broad public interest question. Not to get too philosophical, but it seems to me that we need to tailor our policies to be uniquely Canadian. We have a large country and a relatively small population. There tend to be few highly capital-intensive industries. We see it in banking, insurance, and the oil companies, where we have somewhat of an oligopoly. Due to the capital requirements in the smaller market, unless one can take advantage of export opportunities - which many do - one has a relatively high concentration in some sectors.

The government's policy intent or theme running through this bill is that if the banks believe that it is in their best interests or in their business strategy to merge, then the government should ensure that there is still as much competition in Canada as possible. We described earlier some of the measures to try to encourage that competition.

Ultimately, if a merger comes forward, it will have to be assessed on its merits and in the public interest. The government is anxious to provide the framework within which mergers can take place.

The last time the issue came up, the level of concentration at the retail deposit level would have ended up around 70 per cent. That is, 70 per cent of retail deposits would have been in these four, or now two, banks. I think as Canadians, we need to ask ourselves if that is going to be good for consumers.

The government is striving to get the insurance companies and brokerages into the payment system. The government wants to encourage the start-up of smaller banks and the credit union movement to try new products. We want to allow foreign banks as much flexibility as possible.

We need to look at Canada and design our policies to fit our unique needs. When Australia studied bank mergers, the two areas that were most problematic were small-business lending and retail banking at the service levels, and in a whole range of things.

My constituents tell me that small-business lending and retail banking are the two most important factors. We must manage that for the benefit of all Canadians and ensure that consumers come out no worse, and hopefully better, off in terms of the choices available to them. We do not want them to be subject to the kind of domestic dominance that could result in policies and practices that are not conducive to positive outcomes for them.

In fact, Australia put a moratorium on mergers after their experience. Australia is similar to Canada, in that it is a big country with a relatively small population, and perhaps there are some lessons to be learned there. We are trying to design unique policies to meet Canadian needs.

Senator Angus: That is an interesting answer. I am grateful for it.

Clearly, from what you say, it is inherent in this policy that we are uniquely Canadian, and we have a banking system that is based on traditional paradigms.

We are told that paradigms have changed and that our banks simply will not survive in the real world unless they are allowed to grow. Does this policy that you have articulated take that into account? Perhaps we are cutting off our noses to spite our faces.

Mr. Cullen: To some extent, it comes down to the business strategies of the individual banks. On the one hand, many banks are now looking at the holding company option, the ownership regime, and growth outside Canada. Some banks argue that the domestic market is saturated and they are being beaten up by the monolines. I am not sure if that is totally true.

When they came last time to talk to our caucus committee about the need to merge, although there was a notion that it was to be more competitive internationally - support our multinational businesses and create a larger capital base - they talked about a strategy that was basically designed to consolidate their domestic strength, because they were being chipped away at by these monoline players.

If it is a matter of consolidating domestic strength, as parliamentarians, we need to ask ourselves how we can ensure that this is also good for consumers. We should be proud of our strong and internationally renowned banking sector. The ultimate outcome would be to maintain a strong sector, allow it to grow and prosper, and at the same time look after Canadian consumers. The bill is crafted with this in mind. It is never a perfect world, but that is the policy intent.

Senator Angus: The proposed legislation recognizes a merger as a legitimate business decision, if individual banks decide to do that. In other countries, if banks determine that it is in their best interests to merge, they go ahead and do so. Then the notice is given, and the review process takes place, after the fact.

Whereas here, if I understand this system, we are asking these banks to divulge all their personal information, their secret balances, all the information that is not already in the public domain. We ask the banks to provide all that information without their knowing whether the merger will ever happen.

The alternative is to allow them to proceed with the merger, and then have them provide the appropriate information as per the "in the public interest requests" after the fact. That seems to be the big objection, and it will inhibit banks. Even though we agree to contemplate mergers, they will not, in fact, happen.

Mr. Cullen: There is a certain logic to going through the process first before getting too far down the line. In many countries where it happens the other way around, such as the United States with its thousands and thousands of banks, there are remedies: you need to divest, for example.

However, we have a very short list of major banks in Canada. If they get too cosy and intertwined, the government could suggest that the Competition Bureau believes that competition is significantly reduced and that the remedies are not that effective or numerous, or it is not really in the public interest. Then the banks have to "unwind" the transaction.

Mr. Swedlove: Countries deal with mergers in different ways. For example, the United States has a specific law that restricts any merger that would lead to retail deposits in any one bank being greater than 10 per cent nationally. If you applied that same rule in Canada, any merger amongst the five largest banks would not be possible; they would be automatically offside. We have taken a very different approach because we believe that decisions on mergers should be made in light of individual circumstances.

All countries have a process that needs to occur before a merger is approved, and particularly in banking, because of the sensitive, prudential and competition issues that arise in all jurisdictions that I can think of. The banks are not in a position to actually start the process of merging and consolidating until they get final approvals. We have found those generally take five to six months. For that reason, we have added to our merger review process, and we expect that process to be complete within a five-month period. Thus, it would be comparable with international standards.

The Chairman: Thank you.

You have before you a copy of the budget. There are actually two budgets, one for special study and one for legislation. Senator Tkachuk, Senator Furey and I reviewed them yesterday. If there are any questions, I would be happy to take them. If not, would someone make...

Senator Hervieux-Payette: Do you want to discuss both?

The Chairman: Yes, of course. The budget for special study is $30,000. The one for travel and other items is $222,200. Are there any questions?

Senator Tkachuk: Must we pass each separately? Which one are we dealing with now?

The Chairman: Let us deal with the special studies one for $30,000.

Senator Tkachuk: I move that we adopt the budget to get it on the table; then we can discuss it.

The Chairman: We do not need a seconder.

Could I have a motion on the one for $222,200?

Senator Tkachuk: I so move.

The Chairman: Everyone in agreement?

Senator Angus: May I ask a question now?

Senator Tkachuk: Yes, that is why I moved it.

Senator Angus: What kind of study can you do for $30,000?

The Chairman: It is a contingency fee.

Senator Angus: It is in addition to other funds that we have? It does not relate to Bill C-8; is that correct?

Senator Tkachuk: No, that is in the budget of $222,200.

Senator Angus: This is just a rainy day fund, is it?

The Chairman: Yes.

Senator Tkachuk: We noted in our discussion yesterday that if we were to travel on the special study, we would go back to the Senate because we did not have an order of reference for any other study.

The Clerk of the Committee, Mr. Denis Robert: You have an order of reference right now for a special study. It is the order of reference that you have had for the last few sessions. This is just an interim budget until the committee decides whether it wants to travel or precisely what it wants to do. It is an interim budget.

Senator Oliver: Could I ask Senator Kroft, if we decided to go back to the Senate later, would there still be money in the bank?

Senator Kroft: Senator Furey is the chairman of the budget committee.

Senator Furey: Each budget will be looked at individually. Currently there are requests for something in the range of three times what is in the budget for all committees.

Senator Tkachuk: It should also be noted that our budget is lower than last year.

Senator Poulin: Lower than what was approved or what was requested?

Senator Tkachuk: Lower than what we spent.

The Chairman: Are there any other questions? No. We will then go in camera. Staff may stay.

The committee continued in camera.

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