Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 12 - Evidence
OTTAWA, Wednesday, May 9, 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 3:50 p.m. to give consideration to the bill. Senator E. Leo Kolber (Chairman) in the Chair. [English] The Chairman: We are here to hear testimony on Bill C-8, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions. Our first witnesses today are from the Consumers' Association of Canada. Please proceed. Ms Gail Lacombe, President and Chief Executive Officer, Consumers' Association of Canada: The Consumers' Association of Canada, the CAC, is a 54-year-old, independent, not-for-profit, volunteer-based organization with a national office in Ottawa and provincial and territorial branches. Our mandate is to inform and educate consumers on marketplace issues, to advocate for consumers with government and industry, and to work with government and industry to solve marketplace problems. [Translation] CAC deals more specifically with the areas of food, health, trade, standards, financial services, communications and industries, and is also interested in other fields depending on emerging consumer-related issues. [English] Ms Jenny Hillard (Vice-President, Issues and Policy, Consumers' Association of Canada: In our 54-year history, the Consumers' Association of Canada has appeared numerous times before House of Commons and Senate committees on a variety of consumer issues related to financial services. We are pleased to know that our voice has been heard and that the provisions included in Bill C-38 regarding enhanced consumer protection are also now included in Bill C-8. Canada needs a financial services sector that serves consumers. This is an important moment for CAC because part of this bill is a direct response to proposals made by CAC. When the MacKay task force on the future of Canadian financial services sector began its work, the first group to meet with Harold MacKay was CCAC. We asked for competition in the consumer portion of the marketplace, understandable documents in the financial services sector, contract terms that showed more balance between the interests of sellers and consumers, and more expertise to handle consumer issues. Consumers benefit from a healthy and competitive financial services sector. CAC worked with the National Quality Institute to create the original list of services to be examined in NQI's service quality survey. The survey of 10,333 Canadians conducted in 1997 found, for example, that banks rated 18th out of 21 services rated. Insurance companies performed only slightly better. After studying the results of two surveys, we are convinced that there is a relationship between competition and the quality of services in Canada. The top performers in these surveys were retail pharmacies and hotels. The only service providers that performed worse than banks were monopolies from public and private sectors: the post office, cable companies and government departments. CAC believes that the provision of effective consumer information enables consumers to protect themselves and provides a more satisfactory balance between consumers and providers of financial services. Bill C-8 addresses these issues by establishing a Financial Consumer Agency responsible for providing ongoing expertise. A comparable office in the U.S. has had much success in designing model contract terms that are balanced and understandable. Such an office in our Ministry of Finance can significantly assist consumers by facilitating informed decisions. The MacKay task force commissioned research on selling practices in eight countries. This research demonstrated that Canada is a long way from using best practices. Contract terms are unnecessarily unfriendly and readability tests found that, in order to understand insurance contracts and ATM agreements, the consumer had to have a university education. Contracts in French were equally obscure to the average Canadian. On the other hand, U.S. contracts could be understood by people with a Grade-11 education. The Financial Consumer Agency will improve conditions for Canadian consumers by bringing the activities of Canadian financial institutions closer in line with best practices. Such improved selling practices will also make these institutions more competitive in the international marketplace. The financial services industry had established self-regulatory initiatives that they claimed were intended to protect the interests of consumers and small businesses. It is important for consumers to know that the government has stepped in where these initiatives have failed and has introduced regulations to ensure that the interests of these two important sectors of Canadian society are treated more fairly in the financial marketplace. Although we have not yet seen all the regulations that will be used to implement the consumer-related clauses of Bill C-8, those that we have been privy to and consulted on are a marked improvement over existing practices. CAC is also following with interest the creation of the Canadian financial services ombudsman. It is critical for consumers and small businesses to have a forum where they can get a fair and impartial hearing should they have complaints about financial institutions. The difficulty with the CFSO is that it is a federal initiative. We doubt that a sufficient number of provincially regulated financial institutions will join it. As a result, the level of industry participation would not likely be much different from that which consumers are already assured of through the Canadian banking ombudsman. We are hopeful that the initiative of the Joint Forum of Financial Regulators will bear fruit. This forum is working to develop a comprehensive dispute resolution service to encompass all financial institutions wherever regulated. We understand that they expect to have a draft proposal as early as January 2002. In light of this, we ask your committee to recommend that the establishment of the Canadian Financial Services Ombudsman be delayed until it becomes clearer whether these efforts will indeed succeed. CAC believes it is important that this process not appear to be pre-empted by the creation of a federal CFSO. Should the financial forum fail, we believe that the cost to consumers of the brief delay in the creation of the CFSO would be minimal. We stress that, like the Canadian Banking Ombudsman office, the CFSO office needs to operate at arm's length from the government and the financial institutions. The ombudsman, like the commissioner, needs to have proven experience in consumer issues. The ombudsman office must also be accountable to an independent board. Representatives of financial institutions must comprise less than 50 per cent of the board membership and the board must include consumer representatives. We recognize that the federal government is taking significant action to ensure that all Canadians get fair access to banking services. A significant number of Canadians either do not have access to basic financial services or are not able to access services in a manner that adequately meets their needs. In September 1996, CAC appeared before the Standing Senate Committee on Banking, Trade and Commerce. During our presentation, we recommended that appropriate institutional practices be developed so that access to basic financial services such as chequing and savings accounts is not restricted. We also recommended that policies be developed so that those who do not wish to open accounts are not forced to do so in order to be able to cash cheques or receive funds due to them. We therefore wholeheartedly endorse the proposed regulations that require financial institutions to open accounts for any individual without a credit check and to cash federal government cheques for non-customers provided these consumers meet certain basic identification requirements. We applaud the government for consulting with consumer organizations, including CAC, to ensure that acceptable items of identification included in the schedule are appropriate. In addition to making basic banking services available to all Canadians, it is important to ensure that low-cost accounts are accessible to those in need. CAC is satisfied that the government has successfully negotiated memoranda of understanding with individual banks regarding the provision of low-cost accounts and that the proposed Financial Consumer Agency of Canada has been charged with monitoring the banks' compliance with these memoranda. However, the banks should also make it easy for consumers to learn about the existence of these accounts. They can achieve this transparency by making information about the accounts more readily available to consumers. This transparency should be monitored along with MOU compliance. Additionally, the results of these monitoring activities should be made publicly accessible and discussed with consumer groups to ensure that the self-regulatory approach is indeed working. We ask you to consider a technique used in Germany to make German financial institutions internationally competitive. The German ministry of finance provides funds for Finanztest, a bimonthly magazine that publishes test results for services sold in the financial sector. These tests are designed by stakeholders, including the financial institutions, and are conducted by the national consumers' association. In monitoring the activities of financial institutions, we trust that the work currently performed in the Office of Consumer Affairs, Industry Canada to monitor and publish credit card interest rates and financial service charges on a regular basis will be continued, either by that office or by the new consumer financial agency. CAC supports the inclusion in this bill and its regulations of a process to enable the public to comment on plans for bank closures. Apart from the inconvenience to many consumers in urban areas, especially those with mobility problems, the impact of a bank closure in rural and northern regions of Canada can be devastating to the community. We trust that the commissioner will be given adequate power and resources to ensure that these impacts are minimized and creative alternatives can be implemented to enable small communities to survive a bank closure. Greater transparency and awareness are beneficial to both business and consumers. To this end, CAC supports the development of regulations to govern the disclosure of risks associated with index-linked deposit products offered by federal deposit-taking institutions, and disclosure of bank policies regarding hold periods on deposits and cheque clearing. Additionally, CAC supports the federal and provincial governments' joint efforts to promote enhanced transparency in several consumer loan contracts through the development of model plain-language disclosure documents. In CAC's September 1996 presentation to the Standing Senate Committee on Banking, Trade and Commerce, and its subsequent March 1998 address to the House of Commons Finance Committee, CAC recommended that the Bank Act be amended to prohibit coercive tied selling. CAC also recommended that all legislation within federal jurisdiction be amended to include an equivalent provision that applies to all financial service providers. We are pleased that, in this bill, the existing tied selling prohibition will be extended beyond loans to include other products. CAC considers the proposal to provide necessary consumer expertise in the Consumer Financial Agency as one component of an ongoing effort of the Department of Finance to work with industry and consumers. In a few years we expect this effort to result in a significant improvement in the quality of financial services in Canada. At this point CAC is eager to support the consumer provisions in the act. Although we have been before this Senate committee many times over the last 54 years, for CAC today is one of our happier appearances. This bill contains important provisions that allow consumers to make prudent choices among the confusing offerings from the Canadian financial services sector. The provisions of Bill C-8 are not directly "consumer protection," but they allow consumers to protect themselves. Our main concern is that the positive measure to establish a consumer financial agency for Canada may be weakened. In this regard, consumers in Canada are grateful for any assistance you provide to ensure that the consumer provisions of this bill are maintained to ensure that it serves us well. Senator Oliver: In your presentation you talked about bank closures. Could you elaborate on the suggestions you make? You say that closures can have a devastating effect on communities and that you trust that the commissioner will be given adequate power and resources to ensure that these impacts are minimized. In what way could they be minimized, and what things would you like to see? You talk about creative alternatives that can be implemented. Do you have in mind some specific, practical things that we could recommend to the banks as they close branches in rural areas? Ms Hillard: In Winnipeg, for example, some grocery stores have a little bank in the back corner. There is a person there during the day and there is a banking machine available whenever the store is open. In the U.K., a lot of quasi-banking is done through the post office. Maybe some banking can be done through insurance brokers, since they are another deliverer of financial services. It is difficult to force a bank to stay open. It is not good for the consumers who have money in that bank if the bank is not paying in a small community, but a community can be shut down completely if there is no access to financial services. We are thrilled with the impact assessment that can be triggered, the fact that the commissioner can look into a bank closing, that there has to be a previous announcement, and that anyone can ask for an inquiry on a bank closure. However, along with that, the commissioner must have provisions to look at what can be done if, in truth, there is no alternative to closing the bank. Senator Oliver: Apart from post offices and grocery stores, has your association thought of any other creative ideas? Ms Hillard: I mentioned insurance brokers. Those are the ones out there now. We have not spent a lot of time looking for new ideas. We have looked at what exists in other places. As I said, in Winnipeg, the banks themselves have a little office in the back of some grocery stores. In the U.K., the grocery stores themselves take deposits and run savings accounts, at a very good rate of interest. Senator Oliver: Have you collected any data from people in rural or northern areas to find out what they would like to have? If so, can you make that available to this committee? Ms Hillard: No, we only have anecdotal evidence. In Leaf Rapids, Manitoba, which is north of where there are paved roads, our only bank closed. It was a town that was already in difficulty, as so many of these single industry rural towns are. When you take away their financial services, and in this case they did not even leave a machine, it is difficult to keep the town going. You can never encourage new businesses to go there. Unless you want to finish up with ghost towns all over the less populated areas, we have to find some way to proceed. Of course, with the Internet coming into play more and more, there are a lot of other alternatives. Once the commissioner holds hearings, he has to have the ability to do something with the results. Senator Meighen: It seems to me that the best solution lies in finding viable alternatives - and I am not being critical - rather than putting a hand in the dike and saying, "Thou must keep a full-blown branch..." which is difficult to achieve. I am interested in the alternatives and what information you have about them. In addition to the examples you have cited, I think there is a chartered bank that is linking up with a large grocery chain in Ontario to provide banking services in grocery stores. A proposal to have basic services provided at the post office has also been made. Are you aware of why this does not seem to be catching on more quickly? Ms Hillard: I think the idea of the banks in grocery stores is catching on quite well. Perhaps, the post office is a little difficult because so many post offices have been shut down and moved to the back of drug stores. Senator Meighen: This might be a reason to keep them open longer. Ms Hillard: We have not been forced into a situation of having to look at alternatives. We have been arguing with the banks about closing. Usually, there have been three or four financial institutions in a small town, and they are shutting down. As you start getting down to the last one or two and they, too, are thinking about going, then you hit a whole other level of concern. Senator Meighen: You mentioned the Internet. In earlier hearings of this committee, we had evidence from Australia that they are using the Internet, or the telephone quite widely, or increasingly widely, but the objection here is that it is a generational thing. Do you subscribe to that? Ms Hillard: Yes, to a certain extent. Had you asked me six months ago, I would have agreed with you 100 per cent. In our own agency, I am amazed at the number of volunteers in our association over the age of 80 who have been hooking up, getting on e-mail and feeding into our system in the last few months. I think it is becoming less generational. [Translation] Senator Hervieux-Payette: I know that the study lasted long enough. In Canada, is there a membership fee for members of the Association? Are there branches in every province? How do you consult with members? I know that the Independent Business Association sends questionnaires to all its members to have their views on various issues. You are here to make recommendations on behalf of consumers. We make recommendations on behalf of voters, but there is a good chance that they are the same people. What is the composition of CAC in terms of membership and staff? [English] Ms Hillard: Our policy initiatives are set by our volunteers. We have a vast number of them now on e-mail. We have branches or contacts in every single province and territory. We have issues committees working on the various issues. When we are working on something like this, depending on how much time we have between writing it and submitting it, it goes back and forth to the people in the provinces. They talk to their people and they then feed into the national office. It is not perfect; however, it probably consults with more ordinary grassroots consumers than most other witnesses who would make preparations to you - who may be more staff driven than volunteer driven. Ms Lacombe: Our membership is around 10,000 members. It is not those 10,000 members who are necessarily consulted; it is the grassroots provincial volunteer people who do the volunteer issues and policy work at the Consumers' Association of Canada. Senator Hervieux-Payette: Do they take out yearly memberships? Ms Hillard: Yes. Senator Hervieux-Payette: It is important to know who you are representing when you talk about consumers because there are many consumer organizations. [Translation] Two agencies have been set up, the Consumer Protection Agency, which deals specifically with the enforcement of the law, and the Ombudsman to deal with operations. Both agencies will be indirectly funded by consumers since the industry will be paying for the operating costs of those two agencies. Why did you agree to have a Consumer Protection Agency for financial products that is separate from the present agency - that is the Consumer Protection Bureau, which is funded out of the Consolidated Revenue Fund - instead of an independent agency for a single product? Is it not going to be confusing for consumers to have two agencies with services related to the same product? Don't you think it's somewhat complicated to have two agencies plus one ombudsman? [English] Ms Hillard: I think it probably is. We used to have a government department to look after consumers. That department was shut down and we finished up with about a dozen people in the middle of Industry Canada. Although the people in that department are absolutely wonderful and very consumer-oriented - I cannot say enough good things about them - they are really just a little blip on the Industry Canada radar. As a result of that, so many consumer issues have dropped all over the place that they have had to create this financial consumer agency in the Department of Finance. They have had to set up a consumer and public interest office in Health Canada. Goodness knows where else they will need one. The result of getting rid of one department has caused lots of little agencies to pop up in lots of departments. Certainly, the people in Industry Canada have done what they could for us, while they have been down at such small numbers. They have been monitoring and posting interest rates and bank charges because they know what a big consumer issue these numbers are. There are not the required human resources, without the setting up of this agency, to do the work necessary on transparency, plain language documents and all the little wrinkles of consumer stuff. Senator Hervieux-Payette: What about the transparency and all the information? There will be banks. However, when you deal with trusts, insurance companies, the caisse populaires and even brokers, all these nice rules will not apply because the ombudsman has been created as a federal organization and will have no jurisdiction. There will be the banks on one side with an ombudsman created by the government and financed by the industry to deal with these matters; on the other hand, all the other financial services provided by these institutions will not be covered. Why were you inclined to support the provision for an ombudsman in the bill, claiming that the existing ombudsman would deal with both jurisdictions, but with some criteria that you mentioned in your presentation? Ms Hillard: What we have asked you to do is to hold up the setting up of that federal ombudsman because there is so much work currently going on among the different institutions, the federal government and the provincial governments. You know how sensitive these sort of talks are. We do not want it to appear as if this federal entity has been dropped down to pre-empt the negotiations. We are hoping that the negotiations will bring more of that all together and that everybody will be happy to use the same system so that it will not be so complicated. Consumers who have complaints these days just do not know where to go. Senator Hervieux-Payette: I understand that you would be willing for it to be passed but not implemented, and in fact we can implement part of the bill, depending on the royal sanction. We could just suspend the application in case there is nothing happening with the provinces? Ms Hillard: We would like you to hold off on setting up the federal ombudsman until this forum has completed its work, which is scheduled to happen by January 2002. Hopefully, then, everyone will come in together and it will work better. If it does not, we have only lost a few months. It is not like we are saying to hold it up for five years. Senator Tkachuk: It is safe to say that on our side of the table we support your initiative in delaying the appointment of the ombudsman and the ombudsman's office until the report of the Joint Forum on Financial Regulations. We will do our best to try to achieve that before the bill is sent back to the House of Commons. I cannot speak for the other side, but I am sure there are members there who also think it is a good idea and who will be helpful on that front. I noticed that you started your presentation talking about more competition providing better service. Is the Consumers' Association of Canada satisfied with the provisions of the legislation, or the regulations that you are aware of, for providing increased competition in the financial service marketplace? Ms Hillard: We are fairly satisfied with this bill on the whole. Obviously, we would not go jumping up and down about all of it, but we would like to see it go through. It is not perfect but we think it is as close to perfect as we will get. We would like to see it move into place, and if there are problems later we will deal with them. Senator Tkachuk: What are you telling me? Are you satisfied with the provisions for increasing competition in the marketplace, or dissatisfied but saying this is as good as they will give us so let it pass? Ms Hillard: We are satisfied. We are not ecstatic. Senator Tkachuk: Where would you like to see it improved? Ms Hillard: We have a large committee on this. I do not have all the details. I will gladly speak with the people who have dealt with that in detail and I will come back with a firm answer. I have been more involved in the bank closure and the access to banking services. The more technical people have dealt with what you are talking about. Senator Tkachuk: If you could get your answer back rather quickly, because who knows how soon we will be dealing with it here in committee. You have raised two points about people opening accounts for any individuals without a credit check, and the cashing of federal government cheques for non-customers. There are many businesses now who cash cheques for people who do not have bank accounts. Ms Hillard: It is at a huge charge. Senator Tkachuk: I understand that. It is probably because these people do not have bank accounts. What assurances have you been given as to how this system will work? In other words, if you cannot make money at it, why are you doing it? If you are in business and you have shareholders, do you see this as something that other shareholders and bank customers should subsidize, or that banks should be doing as a public service, or that banks should be breaking even on or making a profit? Ms Hillard: I am sure the banks will not do this without a fee. Even if you are a bank customer you pay a few for some of these services. The issue is to get rules in place that have sets of reasonable identification so that if someone is going in to cash a cheque or to open a chequing account, that they can be pretty well assured of what they must bring in with them and that they will not in fact get turned away. Senator Tkachuk: Do you have any research on this? Are there many members of the Consumers' Association of Canada who cannot open a bank account or cannot cash a government cheque at a bank? Ms Hillard: There probably are members of our association, but certainly some of the other consumer groups we have been working with on this are primarily poverty groups, and they have many members who have this problem. If you do not have a driver's licence, if you are getting a welfare cheque or if you do not have a passport or a citizenship card, what do you use? The idea is to get an agreed-upon list. It is not just consumers who are being consulted. The banks are also being consulted on this list of agreed number of pieces of identification. The number will be set. Senator Tkachuk: I will ask the department officials about these two areas when they come back, but I wanted to see how the consumer's association perceives this problem. I will ask that question again. Ms Hillard: Okay. Senator Tkachuk: If they are not doing the service now that means there is probably no money in it, or they cannot find a way to charge for it and get paid for the service. Do you see this service by the bank as being something the bank should do as a social good, and not make money and be subsidized by the shareholders of that bank, or should it be allowed to choose to charge and make a profit? It does not really matter to me. I want to know your policy on it as to how you see this, because whatever the service is it will cost money. The cost will come out of someone's pocket. I want to know whose pocket you think it should come out of, the government's pocket or the bank's pocket? Ms Hillard: I am being prompted to say the bank's pocket. It would be nice if the bank's service charges related to the cost of delivering the service. If there is a charge that relates to the cost of delivering the service that is fair and reasonable. I do not believe that most bank charges have much to do with the actual cost of delivering the service. There is probably some considerable slack in there that might be used to move this service forward. I am sure there will be a fee. People do not object to paying a reasonable fee for a reasonable service. People do object to getting charged $2 for putting their bank card in a white machine in Toronto airport, then have their bank statement come through and they get charged another $2. Therefore, for the $40 they have withdrawn, it has cost them $4 to access their own money. Those are the sort of things to which people object. Senator Tkachuk: It says right on the ATM bank, "your bank account will be charged $2," so if you do not want to be charged that you do not use that machine. Ms Hillard: That is right, and you go without money. Senator Kelleher: Does your association receive any funding from the federal government? Ms Hillard: Project funding only. We are totally project funded. We do not get chunks of grants. We send in applications for projects and if they like the project applications they give us the money and we do the work. Senator Kelleher: Do you get any general funding? Ms Hillard: No. Senator Kelleher: The government has claimed since the MacKay task force report came out that they have increased available funding by 70 per cent. Did you notice any increase in funding? Ms Hillard: Currently, as far as we know, there is a little pot of $1 million in Industry Canada for which all the consumer groups compete, in a cut-throat manner, once a year for project funding. Outside of that, we go out and make separate applications to funding agencies, foundations, other government departments, and trade associations where we have other common areas of interest. It is all project-related. No one comes in and gives us a chunk of money and tells us to have fun. Ms Lacombe: This year there has been an additional, I believe, $690,000 that has been put into the possibility of project funding. There are no core grants. At one time, there was a core grant available from Industry Canada when it was Consumer and Corporate Affairs. Core money no longer exists. It is all project funding. However, the original $1 million that was always there for all consumer groups across the country has been increased this year to $1,690,000. Out of the new money - the $690,000 - I believe that $100,000 is available in development and the rest is all project funding. The Chairman: Thank you for your appearance. Good luck in your endeavours. The next group of witnesses are from the Office of the Superintendent of Financial Institutions. Please proceed. Ms Julie Dickson, Assistant Superintendent, Regulation Sector, Office of the Superintendent of Financial Institutions: Honourable senators, we have worked closely with the Department of Finance on this legislation. We are happy to answer any questions that you have. Senator Oliver: You said you worked closely with the Department of Finance on this particular bill. Have you also worked closely with them on the regulations? Ms Dickson: Yes. Senator Oliver: How far have you gone with the regulations? Do you have drafts? If so, drafts of what, and when will they be become available? Ms Dickson: We are working quite hard on the regulations now. Nothing will be put out into the public domain until we see that the legislation has been passed. However, we are talking about concepts with the industry and what might go into a regulation and how it might look. There are many regulations and issues that have to be worked out between now and the time when this legislation might come into force. Senator Oliver: I am interested in the regulations with respect to the holding companies. Can you tell me something about what you have in mind for controlling and regulating holding companies that banks may have and have rolled something like a credit card business into? How will that be regulated? Ms Dickson: That will not be in regulation. Senator Oliver: No regulations for holding companies at all? Ms Dickson: There are some regulations for holding companies, but not for the example to which you referred. That particular example involves how we are going to supervise, say, an unregulated company sitting underneath a holding company. We have talked to the industry about how we plan to supervise. We have talked to the industry about the supervisory framework that we use now for regulating banks and how we will adapt that for a holding company. We have put out some material to the industry on capital requirements at the holding company. Senator Oliver: Can you tell us what you have told the banks about the way that you are going to regulate a holding company? Ms Dickson: Yes. We started by saying that we want to be internationally competitive in terms of the regulatory regime. We started by looking mainly at the U.K. and the U.S., because those countries have very good reputations internationally in terms of their regulatory systems, and they are very important markets for our institutions. We told the banks and the insurance companies that we did not really want to be a lot different than what you see internationally. For example, if we were a lot tougher than the U.S., then our banks might be at a competitive disadvantage. If we were a lot more lenient than the U.S., we think our banks would be at a competitive disadvantage as well because it would be a lot more difficult for them to operate in the U.S. because their regulators would have concerns. Therefore, we are very similar to the system in the U.S. We have said that there will be a consolidated capital requirement at the holding company. We have said that we will aggregate loans throughout the conglomerate. If you have a holding company at the top, a bank, and then an unregulated company that is lending, we are adding all of those exposures up on the lending side. If you do not do that, you could have an unsafe situation. We have told the banks that we would be looking for material risks in that conglomerate. If we find that the material risks are actually in an unregulated company and not a financial institution, we will have to go in and assess that because our mandate is to protect the depositors of the bank. The various jurisdictions, including the U.S. and ourselves, of course, think that you do have to go in and look if it is material. Senator Oliver: Finally, what types of things do you think the banking institutions will roll into a holding company, and what are the American companies that you have analyzed rolling into their unregulated partners? Ms Dickson: In the U.S., the financial holding company model has been in place for about a year. Approximately 500, I think, have actually been formed. In the U.S., they are mainly creating those holding companies to get into merchant banking and to mix banking and securities - investment dealer businesses. There is only one that has linked a bank with an insurance company, and that is the Citicorp Travellers group. In Canada, we are very flexible right now. We let a bank do anything underneath. In the U.S., you have to create a holding company before you can do that. Because there is already a lot of flexibility in the system in Canada, it is unclear right now how many banks will take advantage of the holding company model. When you talk theoretically about what might happen, people will talk about perhaps creating a credit card company, which would compete head on with some of the monolines that you see out there. However, theoretically there are all sorts of possibilities because there is so much flexibility built into the model. We do not have a crystal ball. We cannot guess. We are waiting to see what we get presented with, while talking occasionally to the banks to see if there is anything unique that we have not thought of. Senator Oliver: You have not heard anything unique from the banks that you have not thought about? The only one that you can think of now that might be rolled into Canada would be credit cards. Ms Dickson: It could be credit cards or other types of lending, such as a mortgage lender who just wants to do only mortgage lending in an unregulated type of company. The Chairman: In previous testimony on the MacKay task force report, you had some doubts concerning the recommendations to do with the formation of small banks - $1-million capitalized banks. Do you still have those doubts and, if so, why? Ms Dickson: I think the view of OSFI today is that the legislation would allow for the entry of small closely held banks. Legislation has always allowed for the entry of small banks. While some people would argue that could increase risk in the system, we have been saying that you also have to focus on the added competition and the benefits of that. You have to focus on OSFI's early intervention mandate, which we received in 1996. Our legislation was changed to clearly indicate what we are to do and how we supervise. That has been actually quite effective in terms of the rigour that OSFI brings to the supervisory process. We have also acknowledged that there are some important new powers that we sought, which are contained in the legislation that is before you. Senator Meighen: To follow Senator Oliver's question about holding companies, how will the existence of a holding company and the entities underneath it affect capital requirements at banks as you see it? Ms Dickson: For a bank, what we like to see today is a capital requirement of 7 per cent and 10 per cent. That is 7 per cent for Tier I, with a total of 10 per cent. For a bank holding company, we have said that the capital requirement would be slightly less than that. We have put out the numbers 6 per cent and 10 per cent. We think it should be less because, at the holding company level, there are no depositors. We are not protecting the creditors. In fact, we are recognizing that with the holding company there should be some lighter supervision, some flexibility offered to the industry. Senator Meighen: Given all that, one would wonder why the difference would not be more than that. Under this legislation, OSFI will have the power to remove directors and senior officers and to impose financial penalties. Will it be in the regulations that directors and senior officers will find out what is likely to cause their removal? Will you provide public guidelines of some sort in this regard? Ms Dickson: As you note, the statute clearly gives us the authority to remove directors. There is also authority for the director to appeal the decision to a court. That is a very broad-based appeal. The court can substitute its own judgment for our own. There will be no regulations for removal. However, we are putting together a corporate governance guideline that we will issue fairly soon. In part, it is linked to this new power that we have. We want to make it very clear what we require, what we expect of a board and of management of an institution. It is a fairly extensive guideline. We think it should make our expectations very clear to board members. Your question will be answered when that guideline is released. Senator Meighen: Needless to say, it would be nice if that were concurrent with the proclamation of this legislation. Ms Dickson: It should come out before. Senator Meighen: The government has stated that regulatory approvals are being streamlined under this bill and that you and OSFI are getting some that you did not have before. In other words, it will require the superintendent's approval and this should expedite the process. I assume this does not mean that the minister's office has heretofore been very dilatory. Do you have the resources to take on this additional burden and to keep the process moving? Ms Dickson: From our perspective, it is not an additional burden because we look at them all now and we provide a recommendation to the minister when it is a ministerial approval. Beginning in October, we will have a pilot project running whereby an institution that has not heard from us within 30 days of their application can then proceed. They will be deemed to have received their approval. We started a pilot project along those lines last fall because we wanted to be sure that we were ready, should this legislation pass. As well, we did not think it was a bad idea to put a service standard out to the industry and say, "We think for a range of approvals we can get back to you within 30 days." Because the legislation is not in force, within those 30 days we are calling the institution or sending them a piece of paper saying, "Here is your approval." Once the legislation is passed, we will not have to do that last step. To my knowledge, we are doing quite well on that front. I do not think that there have been any extensions needed so far on the 30-day time frame. We certainly have the authority to extend going forward. Senator Meighen: You clearly know this legislation far better than I. Are there any powers in this bill heretofore exercised by the superintendent that are being transferred to the minister? Ms Dickson: No. It is the other way around. Senator Meighen: I know it is the other way around, but is it that way as well? Ms Dickson: No. Senator Meighen: I have not seen anyone here from OSFI in the last little while. I want to inquire about financial guarantee insurance. What is the main reason why we do not have that in Canada while they do have it in the U.S.? I understand that it can be purchased so as to improve the rating, for example, of a municipal bond, that it would go from A to AAA if it had financial guarantee insurance. I understand it is a product not permitted in Canada. I wonder if you can tell me why that is the case. Ms Dickson: The answer is that it is a very risky product. We have to ensure that the institutions that would be offering it have the processes in place to manage the risk. There was a company, I believe, that wanted to provide this product some 10, 12 years ago, which was before my time. There was a discussion and, for whatever reason, I think the entity decided not to do that. More recently, it is on the radar screen again. My understanding is that the industry has been invited to talk to us further about possibly offering this, and talking about the kinds of processes they would have in place to manage that risk. That is all I know at this point. It is a live issue, though. Senator Meighen: It is a question of your comfort level, and there is nothing inherently objectionable about financial guarantee insurance? It is a question of your comfort level, ensuring there is a minimal risk. Ms Dickson: They are linked, yes. [Translation] Senator Hervieux-Payette: Does the revenue of the OSFI come solely from payments by financial institutions? [English] Ms Dickson: Yes, it does come directly from the financial institutions, except for the chief actuary's office, which would be funded by government. [Translation] Senator Hervieux-Payette: The yearly fees that you charge are more or less equal to the expenses of the Office of the Superintendent of Financial Institutions? [English] Ms Dickson: Yes, all of our expenses, 100 per cent of our supervisory expenses, et cetera, would be charged back to the institutions. Senator Hervieux-Payette: You do not charge $100 million when you spend $50 million? Ms Dickson: That is right. We do not make money. Mr. Normand Bergevin, Director, Legislation and Regulations, Legislation and Precedents Division, Office of the Superintendent of Financial Institutions: The act specifies that we are to assess our expenses back after the fact. We do not expense more than we spend. [Translation] Senator Hervieux-Payette: A branch of your Agency deals with consumer complaints. Do you know how many members of your staff will be transferred and did you participate in the study about the creation of the Office of the Superintendent of Financial Institutions? [English] Ms Dickson: We have participated in discussions about the creation of the FCAC. We currently have three to four people who are dedicated to answering our 1-800 line. They also answer letters that consumers send in. Those people are moving to the FCAC. We certainly would expect that all of the calls that we get today, which is around 300 calls a week, would be diverted to the FCAC. Senator Hervieux-Payette: When you say "moving," they will be physically removed from your structure and sent to another place? Ms Dickson: Yes. Senator Hervieux-Payette: Is it totally independent from any other organization? Will it be a stand-alone corporation? Ms Dickson: The FCAC? Senator Hervieux-Payette: Yes, the new agency. Ms Dickson: Yes. We would help them out. We have agreed that, if they are created, we would provide their back office support. Our corporate services people would offer human resource services, the hiring kind of resources. We would also offer IT support and, I believe, library-type support. As to how independent the FCAC is from the government, I do not have an answer to that. Mr. Bergevin: I must admit that I am not an expert on the FCAC. That would be a question for the Department of Finance. I thought they would have some sort of a board that would be initially appointed by the government. Senator Hervieux-Payette: I asked because I thought you were closely associated with the creation of the agency. Mr. Bergevin: I am advised that it is the same regime as OSFI. The commissioner will be appointed by the government, but then they would operate in a similar manner as we do. They will assess their expenses back to the industry in a similar manner as well. In terms of setting it up, the commissioner would be like what the superintendent is today. Senator Tkachuk: Have you had inquiries regarding new bank start-ups or merger possibilities with the introduction of this bill into the House of Commons and then into the Senate? Ms Dickson: On the new bank start-up, we always get inquiries. I do not know that one can say it is directly related to this bill that is in the house, but we constantly get inquiries. We are always meeting people who are talking about this. Many of those inquiries do not come to fruition. On mergers, no one would talk to us about that at this point, I do not think. Senator Tkachuk: We have had some discussions here by members on both sides on the 20 per cent rule. Could you take me through how this would work in a general way, and then perhaps senators could ask specific questions if something interests them. Let us say there was an initial purchase of shares to the reporting stage of the securities commission because they were approaching the 5 per cent level by an American bank or perhaps another American institution that was not a bank - Microsoft or something like that. Tell me the difference, and tell me how that would be approached through fruition. Ms Dickson: The applicant might come to us, or perhaps to the Minister of Finance because it is ultimately the Minister of Finance's decision. They would come to us because we do the paperwork, so to speak, and we do the analysis. In this case, according to the legislation, you would be looking at the integrity and character of the applicant. How do we go about that? Routinely, we get police checks, especially if it is an individual. If it were a corporation such as an American bank, you would talk to the American regulator about what kind of corporation this is. If it were Microsoft, you would look at things like major securities violations or whatever in an effort to get at the character and integrity issue. The police check would help if you had never heard of the applicant and you want to ensure that the applicant is not involved in crime. If it were some other corporation, such as a telephone company or whatever, they also have a regulator, like the CRTC in Canada. You could talk to them about this applicant. That would be the kind of thing we would do, given what the legislation will say. I its geared to the character and integrity. Senator Tkachuk: When does this take place? When do you deal with it? Ms Dickson: It would start as soon as they walk in the door. Then we would send a recommendation to the Minister of Finance. Senator Tkachuk: How far can they go before they have to walk in the door? Is it 10 per cent? Mr. Bergevin: Yes, the 10 per cent rule stands. No one can acquire more than 10 per cent of any class of shares of a bank currently, and that will remain the case. The exception will be for someone that wants to go up to 20 per cent that meets the fit and proper test. They have to apply to the minister to go above 10 up to 20. Senator Tkachuk: Let us say they are close to 5 per cent and they are reporting to the stock exchange. Do they have to declare they are going after 20, or can they just say they are going after 10, wait, and then apply to go after 20? Mr. Bergevin: Well, we do not run the stock exchange. Senator Tkachuk: I know that. Mr. Bergevin: Presumably, if their intention is to go up to 20, they would come in early enough to see us to announce their intentions and to determine if there are any problems before they go any further and get into trouble with the stock exchange or someone else. The onus is on them. We do not know their plans. They know their plans. If they run into difficulties or issues, it is up to them to talk to us early so they can avoid such situations. The Chairman: That was not really the answer to the question. The answer is yes, they have to say what their intentions are. They may lie, but the law is clear. If they have the intention to go to 20, they have to say so. The fact that they have to go and talk to OSFI is a different matter. Senator Tkachuk: So that is it. They are done. They have to meet the integrity test. Mr. Bergevin: That is what the legislation says. Senator Tkachuk: Good person, rich as Rajah, done deal. Mr. Bergevin: Even the rich part, the requirements are in the legislation. Someone wanting to go up to 20 per cent of the bank only has to meet the fit and proper criteria in the legislation and would not necessarily have to prove that they could be an ongoing source of support for the bank or anything like that. Those are the tests that apply to someone who wants to incorporate a bank or to acquire control. That looks at the business record also. Are you fit to be a major shareholder of a bank? Ms Dickson: We would also have to be satisfied that they do not control with that 20 per cent. Senator Tkachuk: How would you do that? Ms Dickson: Each situation would probably be a bit different, but you would look at things like who they get to appoint to the board, how many board members, and whether they would have anyone else as part of management. There will be a range of things that one would look at. We do that now, because sometimes we are interested in whether someone has control or not. That will be done. The Department of Finance is also preparing a guideline that it will send to the industry or released publicly This will lay out the kinds of factors that you would look at in trying to determine whether control existed. Mr. Bergevin: There is currently in the Bank Act, in Bill C-8, a provision that says no one can control a large bank, being over $5 billion in equity. The Chairman: The senator wants to know how you define it. Mr. Bergevin: It is undefined. The concept incorporates both control de jure and de facto, but it is an undefined term. The Department of Finance, as they indicated at their appearance before the committee, wants to produce a control guideline to help people understand the issues to be considered when assessing whether a person is attempting to control a bank or not. They mentioned that at their last appearance. Senator Tkachuk: So it does not have to be another financial institution or an insurance company. It could be any business or individual? Mr. Bergevin: That would go up to 20 per cent? That is right, anyone. The Chairman: Wait, wait. We have not seen the guidelines yet. I do not think that is accurate. Mr. Bergevin: The guideline will deal with the control issue but not with the applicant. The applicant could be anyone. The guideline will define that. Senator Meighen: That was the question. We were told that the reason for going to 20 on the 30 per cent was to form alliances. I think we were told or we certainly understood that it was with other financial institutions. The Chairman: Could we discuss this in camera later? Senator Tkachuk: They are here and they are the regulators. The Chairman: I do not think it involves them. Senator Tkachuk: Will this be a ministerial decision? The Chairman: That is what the law says. Senator Tkachuk: So the minister will tell everybody. It is kind of out there - it is pretty grey. I have no more questions. Senator Angus: Mr. Bergevin, I believe you testified about this legislation at the House of Commons Finance Committee? Is that correct? Mr. Bergevin: I was there, yes. I attended with the representatives of the Department of Finance. I was part of the team that was at the table. Senator Angus: Did you talk? It seems to me I read a transcript where you said some things. Mr. Bergevin: I was asked is to clarify some questions by some of the members. Senator Angus: Let me go to one of the questions that I thought you were dealing with. As I understood it, you said that if a large dividend is to be paid by a bank to its holding company under the new structure, it will require the approval of OSFI. Is that correct? Mr. Bergevin: There is a provision in the bill for that, yes. Senator Angus: And the question was - and you were not able to give a specific amount - is what amount is "large"? What is a large dividend? What would trigger the need for that kind of approval? Mr. Bergevin: I am just going from memory here. I think the test would be a dividend that would exceed the current year's earnings, plus the two previous year's net retained earnings. That means net of dividends already paid. It could amount to three year's worth of earnings being given out in one year. This is not a prohibition. This requires the Superintendent's approval if your dividend payment is to exceed that amount. It does not mean you cannot pay it but you need to get approval first. Senator Angus: So the threshold is not based on a per-share amount? Mr. Bergevin: No. Senator Angus: It is a subjective test that the regulators would apply. I am told by the banks that this is one of the areas that they do not like. They have said that they will take this legislation even though it contains a lot of things that they do not like - that this is one of those things. This is a rather restrictive aspect of the holding company model. Mr. Bergevin: We have had discussions with the CBA and with the banks on this issue, as well as the insurance industry, because it applies to all financial institutions. The key to this test is that it is not a prohibition, per se, but rather an action that requires an approval. In our discussions with the banks and subsequent to these discussions, we have brought clarification to the test. At one point, they thought it was not perfectly clear what needed to be included in that calculation. We think it is clear now, and I think we have agreements with the banks that the test is clear now. Senator Angus: That agreement is recent, is it? In the last two weeks? Mr. Bergevin: Yes. The current wording reflects the discussions that we had. We did bring clarifications to the test to help people ensure that they could comply with it, that they could understand it. As I said, from the top of my head, the test is about three years' worth of earnings. We thought anything in excess of that, in a holding company structure, might warrant an approval from the Superintendent before the dividend is paid out. It does not say that it is precluded completely, but an approval would be sought. Otherwise, if a large dividend that puts a bank offside the capital rules, then we are trying to react after the fact. That was also prohibited in the legislation. You cannot do anything in terms of paying dividends that would put your capital offside either. Unusually large dividends would warrant a discussion with the regulator. That is where we were coming from in a holding company world. Senator Angus: In other words, this will be a subjective test, as I said. From your response, since we have not had any experience in that realm, it will be trial and error, as you go along, right? Mr. Bergevin: The test is spelled out. Anybody can figure it out. The point is, in our experience, a dividend that includes three years' worth of retained earnings is a large dividend. Senator Angus: You have to come and get approval. I guess it depends whether those were three good years or not. Mr. Bergevin: We may want to take into consideration whether the next year will be as good. Senator Angus: As a matter of interest, you said at the outset that the folks at OSFI have worked closely with the Department of Finance on the bill and so on. Are there any elements of the bill that trouble you, in as much as it is not OSFI's bill? You are an independent regulator or overseer. Are there areas that you have concerns about? Ms Dickson: No. We were involved all throughout the piece because, from the minister's perspective and the department's perspective, they sought our input. We do have a prudential mandate. If there was something that we could not live with, we certainly would have told them and, hopefully, it would have been changed. We fully support the bill. Senator Angus: From that answer, I take it that there were some things that you said you could not live with and they addressed all your concerns in the process? Ms Dickson: Yes. It is all a blur to me now. Senator Angus: It is a blur? Ms Dickson: It is a blur, but I can say that we fully support the bill. Senator Angus: I understand you have to say that, but we are just here - Ms Dickson: Amongst friends? Senator Hervieux-Payette: She is not at confession. You are not a priest. Senator Angus: I can do it another way. You have no concerns at all about the bill. That is your evidence? Ms Dickson: No, we are okay with the bill. Mr. Bergevin: It is fair to assume that, throughout the couple of years of discussion that we have had with Finance and with the industry on various aspects of the bill, they have made changes to accommodate some of the things we wanted. The things we felt strongly about we expressed strongly and they are reflected in here. Senator Angus: They are reflected here? Mr. Bergevin: Yes. Senator Angus: What about the guidelines for reviewing mergers? The way I have looked at them, it appears that it is not a harmonized process. When two institutions propose a merger, the review process starts. You have all the elements of the ministerial review process, as referred to in the guidelines, and your own review. On the face of it, they do not necessarily seem to be in sync. Are there any issues there that you would like to bring to our attention? Ms Dickson: I think everyone recognizes that that will be a complicated process because you have different players with different mandates. We want to look at it because we have a prudential mandate and want to ensure that if there were a merger, that the resulting entity would be safe and sound. When you have a range of issues, competition issues, prudential issues, public policy issues, it is difficult to come up with something that is perfectly seamless. We have looked at the guideline from our own perspective. Can we do our job? We can. It is the government's prerogative to set this out. We will wait and see, and we will do what we have to do to meet our mandate. Senator Angus: You say it is a complicated process. Ms Dickson: We would like to be certain that everyone knows that our involvement is on the prudential side only and not on the public policy side. Senator Angus: I think there were some attempts at bank mergers in this country, and they were turned down for whatever reasons. Various people gave reports, including OSFI. I understood that OSFI released a report that noted that there were no specific prudential concerns related to the two proposed mergers that were on the table. However, you noted that certain "regulatory challenges" might result. Time has gone by. The landscape has changed. Have you noted any changes in the Canadian financial services sector that might now change your mind in terms of those so-called challenges? Ms Dickson: The challenges are really the same. New reports are being done, such as a recent G-10 report on consolidation and whether it is a good or bad thing. There are more papers that you can look at. The kinds of things that we referred to at the time are really the big things such as the risks of integration. Does management have a good grasp of the factors that lead to success or failure in mergers? There has been a lot written on that. We will focus on the capital level if there were a merger. Is the resulting entity strong? You have two different risk management teams in these institutions. Which one will be in charge afterwards? We would look at issues like that. Those do not change. We did the TD-Canada Trust transaction. That was done in the meantime. You look at all the same issues. Clearly, if you are dealing with two mergers at the same time, and so on and so forth, you do look at all the same factors. In that letter, we referred to the fact that if there is a problem and you only have two banks in the system, they there is a challenge. However, regulators around the world recognize that as well. Senator Angus: Basically, it is the same environment, from your point of view, in the merger? Ms Dickson: In terms of our role, definitely, yes. Senator Angus: That is an important caveat you are putting on it. Ms Dickson: Yes. Senator Angus: We keep hearing, some of us, that the process of so-called globalization in the financial services sector has been continuing apace since that winter's morning when Messrs. Barrett and Cleghorn took their walk. Indeed, there is a different environment. There is a lot of new experience with mergers of big financial entities, whether they are in Switzerland and Holland or whatever. I was interested that you referred to the study about consolidation, the G-10 task force chaired by Roger Fergusson. You are familiar with that report? Ms Dickson: Yes. Senator Angus: I understand that that report indicated that bank mergers were neither a good thing nor a bad thing - they are just a thing. They may pose a risk in the future, I think the report went on to say, with respect to the safety and soundness, or they may raise prudential concerns, of the particular industry in question. Do you have any comments on this report and some of its findings in the Canadian context? I have come to understand that this is a different place than the U.S. and a different place than Europe, and we do have a different kind of banking system. Therefore, many of your initiatives and supervisory guidelines are tailor-made for us. That tells me, when I read the Fergusson report, that I should not necessarily deem it to be applicable to the Canadian context. Would you have any comments on that? Is there something that you could help me on, with respect to its findings about mergers or the "just a thing"? Ms Dickson: When I looked at that report, I thought there were some interesting things in it, but because a number of different countries were involved, it was not very conclusive. There were a few nuggets in there, but overall you do not take the report and walk away and say this means this for Canada. There were no surprises in there. They talked about the fact that if you have a merger, the result might be a larger, more diversified institution. Sometimes you would say that is a safer institution. On the other hand, they talk about them being much more complex and difficult to manage. There was lot of "on the one hand" and "on the other hand." I think that the value of that report is in its existence. The more work like that that is done, the more thoughtful people's analyses can be, if we are presented with those things. Senator Angus: This question is along the same line as bank mergers in particular, or the mergers that this legislation is not contemplating, namely the big bank and one of the two big life insurance companies. I asked a question elsewhere, or here, of the Finance people. I have a hard time, after I read the bill and listen to the officials and the minister, deciding whether this government is in favour of mergers or not. From an OSFI perspective, within your mandate, can you tell me, is there anything inherently anti-merger? Are you able to say, from what you know and within the prudential ballpark, that yes, mergers can take place between banks in this country? Ms Dickson: We certainly have an open mind to it. It would depend on what we are presented with, who is involved, and then we go through our list of items - integration risk, et cetera. It is very hard to say in advance because each transaction is unique. Senator Angus: I like that you said "open minded," because you know a lot about our banks. We have had you and many of your colleagues here before - Mr. Palmer, Mr. Lepin - telling us how much you know about the banks. They also tell us how much OSFI knows. You still have an open mind. Based on everything you know, you still are not able to say that you are against them and that you do not want mergers; is that right? Ms Dickson: We are neutral on that. If we get a merger, we will assess it and look at the prudential issues. Senator Angus: But there is nothing now that would make it something not on at all? Ms Dickson: We would have to look at it. It is very difficult to answer how we would view it in advance. Senator Angus: You have a process. It is stated under the holding company model that there will be much less red tape for the banking community and its various interests. As I read this legislation, I have the sense that the changes proposed in Bill C-8 will mean that the oversight by your agency will be as intense as ever before. Is this a reasonable conclusion? Ms Dickson: At the early stages, the industry was hoping that OSFI would look at the bank and nothing else - that we would ignore everything else in the group. That is clearly not where we are. That is not where the other major jurisdictions are. There are international principles on supervision and supervising banking groups that one cannot ignore. On the one hand, theoretically speaking, the banks would like to talk about a model where we ignore everything. However, once everyone becomes aware of what is happening internationally, we cannot, as a country, be way offside where everyone else is. We will look at lighter supervision to the extent that we can. We like to tell institutions that if they are well run, they will be lightly supervised. We do not have an army to send into institutions that are well run. We reserve our people for the institutions that are not well run and we drill down when we have concerns. If a bank holding company is created, and that is a very well-run group, they will not see OSFI very often. The Chairman: Thank you for appearing here today. The committee continued in camera.