Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 6 - Evidence - Meeting of February 9, 2005
OTTAWA, Wednesday, February 9, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:05 p.m. to examine and report on consumer issues arising in the financial services sector.
Senator Jerahmiel S. Grafstein (Chairman) in the Chair.
[English]
The Chairman: Welcome, ladies and gentlemen. I would like to welcome, as well, the Canadian viewing audience on CPAC and on the World Wide Web.
We are here to resume our study of the consumer protection elements within the government and within the self- regulation mechanisms that have been set up in the past few years. This is the first time that a committee of Parliament has started an oversight of the oversight within the industry and within government.
Our role is to study the effectiveness of the oversight and determine what impact, if any, it has with respect to benefiting the consumer interest and the public interest — and the consumer interest and the public interest might sometimes differ.
We are delighted, Mr. Knight, to have you as a witness tonight.
Mr. Bill Knight, Commissioner, Financial Consumer Agency of Canada: I first wish to thank the committee for this opportunity to see many of you again and, also, in my new capacity as the Commissioner of the Financial Consumer Agency of Canada, to tell you our story and to contribute to your report.
I have brought a number of colleagues with me tonight. With me are Deputy Commissioner Jim Callon, Susan Murray, Director of Consumer Education and Public Affairs, and Danielle Poulin, Director of Compliance and Industry Relations. We are here today to inform and assist the committee, and I will begin with a few brief remarks.
We are pleased at the leadership we are seeing here in discussing fundamental issues around consumers and their role in the marketplace in Canada. In the three years that I have been in charge of the agency, this marketplace has become far more complex. It is quite natural that major players in a competitive market bring forth a lot of bells and whistles to add to many of their basic products.
It needs to be pointed out in our system that consumers have a strong confidence in Canada's financial institutions and in the government's ability to regulate them. This may be addressed further by my colleague, the Superintendent of Financial Institutions, who I believe may be with you later this week.
My job is to put the consumer first, and that is what I will address, and I will address it in terms of what our role is. One role is one of consumer education, to ensure that unbiased information is combined with effective market conduct in terms of regulation, to ensure, in essence, that there is confidence by the consumer that they have certain rights to information, et cetera, in that marketplace.
We have two mandates as expressed by Parliament in the act. One is to inform Canadians and the second is to protect consumers.
Let me take a minute to talk about our mission. Our role is to put consumers first. Our role is a regulatory one and in that we do a number of things. First, we ensure that federally regulated financial institutions comply with consumer protection laws and regulations. Second, we monitor their voluntary codes of conduct. Third, we educate consumers about their rights and responsibilities. Fourth, we help Canadians become informed consumers of financial products and services.
In the first three years, we have been very busy. The demand for our services has increased steadily over those three years that we been in operation, primarily, I think, due to the fact that the agency really fills a need in the financial sector. I will not go into the numbers here, but I will supply any information or numbers to the committee either during questions or in briefs that we will provide to the committee directly — so high demand and very busy.
When I first started as the commissioner, I had a task to do — that is, talking in private-sector vernacular, we were a start-up. The start-up was to get it into order and to pay attention to the details of staffing the agency and of ensuring that we had the proper regulatory regime, of getting up and going in those first three years.
I think we have done very well with that. I am very proud of the team we have assembled. We have assembled them from the private sector, from the public sector, from the payments system, and we have been able to gather together a first-class group.
The second component of getting it up and going was that we decided strategically to “stick to our knitting.” What do I mean by that? We have 38 employees and I focused them on those two mandates — that is, informing and protecting consumers, while at the same time taking a lot of our operational aspects and outsourcing it to other agencies in this town.
In order to maximize operational efficiency, we have contracted out a number of our services and negotiated service agreements with other government departments. We share a call centre with our colleagues at the CDIC. OSFI looks after our human resources, financial administration and library services. We have our technology handled by Public Works Canada. This has allowed us to focus on our dual role of informing consumers and protecting Canadians. We have been able to then sustain a focus on the job and on the mandate provided to us.
My awareness of market-conduct regulation as a fundamental aspect of all markets has grown rapidly in this last three years. There was a hope of 200 or 300 years ago expressed by Adam Smith of a notion of a perfect marketplace, whereby the information just naturally existed and therefore you would not have a role for a referee. However, in terms of the concentration of the financial institutions in this country, combined with the imbalances pointed out by the MacKay task force, you will see that there is still a role of having a referee — and a referee in the market conduct area. It does not matter whether it is a complex futures market or a simple transaction with a local merchant, the fundamental role for a referee in an imperfect marketplace is still sound.
In markets that remain stable over time, the concept of proper market conduct is ready understood. However, in markets that are changing rapidly, such as in the financial services industry, the need for market conduct oversight and consumer education increases concurrently with the rate of change.
This situation is not just our market. I have discovered, in terms of working with our colleagues around the world, this is consistent across all types of markets, whether it is Great Britain, Eastern Europe, et cetera.
Our agency was founded, in essence, because the MacKay task force found no coordinated source for information to inform Canadians in terms of the marketplace. We have built on that with a very effective program in the areas of education and literacy. We have been able to back that up by regulatory moves around such areas as enshrining the principle of access to basic banking in legislation.
Over this last year — we are just in the midst, for example, of mystery shopping this whole area of access to basic banking, to ensure that every Canadian has a right to a bank account in order to function and do their transactions.
One of the areas, a sensitive area, is that if you have a right to access a basic bank account and you are homeless in this country, how do you find out? This is an example of where we have gone into a number of partnerships. One partnership I am very proud of is with the homelessness secretariat. We are working directly with them to ensure that Canadians found in a situation of homelessness have access to basic information that allows them to know their rights in terms of opening bank accounts.
We just got that under way, and as we go along we will be able to show you and report back to this committee on our progress. We ran a few experiments. We went to Kitchener and into some of the tougher areas in that city. We worked with our colleagues in the homelessness secretariat and community groups and put on a number of “train the trainers” events. We have gone out and helped people to understand how they can go about getting accounts to do their transactions. From that experiment, we will be able — I hope — to roll it out right across the country.
We have also worked and partnered with a number of our colleagues in Quebec, Option Consommateurs and l'Union des Consommateurs, to deliver programs that relate to people who traditionally have been left out of the mainstream of Canadian banking and financial services in general.
We are pleased with those partnerships. I could say more about the partnerships, but the subject may come up in the questions.
The second component of informing consumers that is often missed is what I call the time disadvantaged. We live in an incredibly busy world. Not everyone will take every day of their life to sort out where they stand in terms of basic financial services. What have we done for them, because many of them are computer and web savvy, is put together a website where people can pick up reports — we have one we can share with you later this day, entitled “Credit Cards and You” — and compare products. They can compare the credit card products and pick and choose those which most suit the individual. This has had enormous take up, much to my surprise, to be perfectly frank. A number of are downloading this website. It is being used both by individuals and consumer groups across the country, to compare their needs in the marketplace. We are using direct-connect — consumers, directly to us, use the websites, download the material and are thus able to shop more wisely in a highly competitive marketplace.
Finally, we are taking into account and beginning to look at a number of factors that emerge after two or three years of looking at the market place. One is the increasing risk — I put that with care — that shifts to the household, in terms of the carrying of debt and the issue of an extended period of time with a lot of really easy credit. What is the exposure here? Are people really geared and informed about their managements of their financial affairs, in order to handle any sudden change within that economy? There are no quick and easy solutions to this — it is an emerging issue.
I noted in your earlier hearings, for example, references to payday loan operations and to some customers in fact being in the average income bracket of $51,000, or something. I would caution the committee, in your deliberations, about getting caught up on that. There was very good initial work done by the Public Interest Advocacy Centre — PIAC — on researching some of this, but it needs follow-up. What I would commend to the committee is some very good work by SEDI — Social and Enterprise Development Innovations. They have done a good piece of work on financial capability and poverty. Just because you see someone in a fur coat going into a payday loan operation does not mean they are not in a lot of trouble. Income measurements on that kind of business are a risky business for all of us. We can come back to this subject during questions, if senators wish.
Thank you for this opportunity to speak to you tonight. I look forward to the question and answer period. If we cannot get through all of the questions today, I will come back again. Also, the agency is at your disposal to provide you with the information required to do your report.
The Chairman: We are interested in statistics. It would be interesting for you to give us the number of complaints you have received and all the information about how you deal with them. You will see that I am anticipating a round of questions that we have already had with respect to other witnesses. Hence, we are not interested in general principles here; we want to take a macro-analysis and a micro-analysis of the work of the agencies.
Therefore, it would be helpful for us to get at statistics, tests and models, to give us more focus and assistance. We would be pleased to receive any statistics you might have. Send them to us. We will digest them, and if we have any questions we will come back.
I am trying to anticipate what I consider to be an intense line of questioning, because we would welcome that. I say this to other witnesses, too. We want to see the statistics as part of the data analysis as we go forward.
Senator Angus: Welcome, Mr. Knight. We have missed you. We have been experiencing withdrawal symptoms for a couple of years. You were a regular attendee at our committee.
Mr. Knight: Indeed, sir. I see you have new facilities.
Senator Angus: This is only our third day in here.
It sounds like you have really cottoned on to this new agency. I am personally delighted that you have. Your enthusiasm is infectious.
I had planned to ask you about the payday loan situation. I was not going to ask it so much from the point of view of average incomes or the type of customer that were using this new cottage industry, it seems to us. We are told that there are about 1,000 of these outlets. We got quite concerned this week with the evidence we heard. When I noted in your materials that one of your main goals or activities is to ensure that all Canadians have access to basic banking services — and then it goes on to talk about interest rates, interest rate disclosure, and the costs of credit. The evidence to us is that the big main banks have no interest in dealing with small short-term $100, $200, $300 loans, which may seem trivial on their face but are key to the people who need them.
The chairman and I were wondering — because we were examining the subject in the context of Bill S-19, which is a private member's bill from Senator Plamondon here — what the right kind of regulatory regime would be. It suddenly jumped out at me this in morning reading this that you are there, sir. This sounds like your cup of tea. You cautioned against jumping to conclusions where angels fear to tread.
I would be interested in knowing whether there is a rule in this for you folks.
Mr. Knight: There is a role. There is no question that in my first annual report to Parliament I spelled out clearly a real concern about the payday loan business. It is totally unregulated and is involved in all kinds of transaction business. I will come back to that.
Senator Angus: We will have to get those documents.
Mr. Knight: I am pleased that the Senate Banking Committee is dealing with this subject. It is not an easy subject. I commend Senator Plamondon for introducing a bill that focuses our minds on this subject, because the last time this was discussed was in 1980 — 25 years ago. It was done within three days, if my memory serves me. It was put through in two or three days, in less than 72 hours. Some healthy reflection and a re-examination would be very important at this time.
We have been able to be supportive of the federal-provincial working committee and to be supportive of getting literature out there to inform consumers. However, I do not think that is good enough. We have a major issue here.
To the credit of the Province of Quebec, they took remedial action on this under the present Criminal Code provisions. They brought in pretty tough criminal legislation, and you do not see these outfits functioning there. That is worth an examination. We have not time to look at that legislation and its fallout.
I live on the Ontario side. However, I bought a cottage on the Quebec side, and I was protected head to foot because of the tradition around very good consumer protection there. That should not be underrated. It was done under the present laws.
The good news is that this is getting everyone's attention.
I will come back to why I think it is so important. First, there was a cease and desist order in the province of Ontario by the Ontario Financial Services Commission of an outfit out of London. I do not know the details, but they brought down the hammer on them. Second, a lot of other provinces have begun to try to force these outfits to licence themselves, in their marketplace. Third, the new administration in Ontario has, at least in its initial months, spoken about trying to tackle this issue as well.
It may be worth hearing from a number of those sources as to what they have in mind and what they would think in terms of the proposed federal legislation. It really is time to ratchet it through a machine. It is not fair to use the example I am about to use, but you will know what I mean. This is not a fair comparison, but it is just like the time when suddenly there were 7-Elevens on every corner.
I get a big charge when a member of the payday loan association comes in and talks about how much it costs to do a transaction. They claim they cannot make any money. Well, if they cannot make any money, why are they on every corner in town? There is something missing in the formula.
In my view, this is what happens: First, they are not just into payday loans. I suspect a major part of their business is the cashing of cheques, and mainly government cheques.
Senator Angus: That is the payday part.
Mr. Knight: That is the payday part for them. I suspect that that is not cheap to the individual consumer.
There is a real need to build a regulatory regime around this, and not just a major player putting out a code of conduct statement. Of course also is that there is no question that it becomes addictive, in my view.
Senator Angus: The borrowing?
Mr. Knight: The borrowing, yes. It is a quick fix; it gets you to the next payday.
Senator Angus: It is like getting a raise.
Mr. Knight: Right. There is a bit of bait and switch happening, to get you used to coming in and out. You can cash a cheque quickly. You get hooked on this — hooked into that cycle.
As any of you know, it is not just an individual citizen that can do that. How many businesses have we seen race from one corner to the next, except it is with the commercial bankers, to get fixed? I think this is a pretty fundamental area.
Senator Angus: My question was whether perhaps under your organization itself there would already be in place some mechanism to oversee these people, but I take it not?
Mr. Knight: No, unfortunately.
Senator Angus: You have the right to inform the consumers.
Mr. Knight: In the first three years of experience, any of the provinces, on a number of these items, will team up and work with you, but they are within provincial jurisdiction. I am very concerned about them, and I will work with anyone to assist Canadians to get off the hook of dealing with these enterprises for the sake of their self-worth, and I do not mean just money, but getting themselves in order and their financial capability in order. These are not winners.
I will give you an example. We partnered with the Canada Revenue Agency in a mailing to millions of Canadians. We included an information sheet in the envelope that contained the Revenue Agency's GST-rebate cheque, to inform these Canadians about the right to a low-cost account. We told them that they were eligible to get a bank account, so they could deposit a cheque directly. I am pleased to report that there is a high demand out there. Close to 250,000 Canadians moved to direct deposit. If they are doing that, we have a chance to move them from going in the doors of these establishments. I can help that way, but every time a province moves to tighten up the laws and bring these guys under regulation, I will go down on their front lawn and do a little tap dance for them.
The Chairman: Mr. Knight, we have only 45 minutes. I have a long and growing list of questioners. If we can be a little shorter on the answers, we can focus a bit more. Senators tend to have a long wind-up, but maybe you can swing back quickly.
[Translation]
Senator Massicotte: Thank you for being here today. If I understand correctly, the role of the Financial Consumer Agency of Canada is to ensure that the various financial institutions comply with consumer protection regulations. Moreover, confidence is an important economic and personal factor, since it is at the heart of any business relationship, particularly when it comes to financial institutions.
However, as a consumer, as a newspaper reader, I am personally quite surprised, and even disappointed, to hear what has been happening in the past year or year and a half with certain mutual funds, and even some banks. We have learned that, among insurance brokers and insurance companies, a practice which perhaps began in the United States has spread to Canada. Many consumers of insurance products were surprised to learn that there are incentives, kickbacks, and more.
As someone whose role it is to protect and ensure that the financial institutions respect their obligations, do you not feel that this is something that should be of concern to us? I would go as far as to say that we should be extremely disappointed with what has been happening, particularly because we had to learn it through the United States, and disappointed that Canada only reacted after having heard this from the Americans.
People in Canada will say: “Our agencies are not giving us much protection,” and secondly: “It looks like they only took action because of political pressure, after hearing what goes on in the United States.”
I would like to hear what you have to say about that, please.
[English]
Mr. Knight: I have a few comments. First, quite correctly, this has shown the need for serious market conduct referees with enforcement powers. A number of those powers are within the provincial jurisdiction. I know the big debate between provincial regulators and one national regulator in the securities industry. I will park that; that is not my area of jurisdiction.
In my area, around deposit-taking institutions, we have actually called institutions to account on many occasions. In fact, I can say that around compliance with the law, I have had a 100 per cent positive reaction to making changes in their systems by the major financial institutions in this country, to their credit.
In the other markets, I think quite correctly, we are getting to the point where we have to go back to some fundamentals. Over 100 some years ago, in order to make markets work, Judge Brandeis said, “Let the sun shine in on the transactions.” Put it out there for people to know the nature of the transaction. If I go to a broker and am buying a product and he says, “This is the best for you,” I should know the terms of what I am dealing with. Some of those brokers would be surprised to find out that a significant number of people will still deal with them, because they know the range of options. What we have fallen into is unacceptable practices around transparency. I think in the next round, related to any of the financial institutions, examination of issues around being transparent and getting the information right out front for the consumer will make a big difference.
You are quite correct that we are getting corrective action here on a number of fronts, and some of it started with the Attorney General in the State of New York. Maybe Canadians on this one are just being agile followers.
[Translation]
Senator Massicotte: If I may, I would like to ask two more short questions. All of the witnesses who have appeared before us have repeated the same thing: “It is not up to me, that is somebody else's responsibility.” Taking the example that I have just given you, whose responsibility is it to counter these abuses?
Second question, you represent the consumer and financial institutions; we have a weekly debate about whether or not there is enough competition. When you look at Canadian banks, there is very little; it is not a monopoly, but there is certainly a great deal of control. When you consider the commissions paid on investments or other types of transactions, they are always about the same and there is very little room for negotiation. It appears to be a common practice.
What do you think? Is there enough competition, are consumers well served in Canada? You have the advantage of having all of the facts; what is your opinion?
[English]
Mr. Knight: Again, I have a few comments. In terms of transparency, we could probably toughen up the legislation going forward to be a bit more relaxed. When you call an institution to account, just tell everybody, partly because they correct the problem, so why would they not like to hear it themselves? They should lighten up on that side.
The regulatory mandate is around deposit-taking institutions and related to taking deposits. It is not around insurance. For example, insurance is within the scope of provincial regulators. I am not trying to duck it at all. If you want to rewrite the laws and put them under federal authority and give me the mandate, I have no problem, but I do not have it now. The mandate is with the provincial regulators.
[Translation]
Senator Massicotte: Is there enough competition among the banks? Are consumers well served?
[English]
Mr. Knight: That is a very good question. As you are aware, the five major banks control about 80 per cent of the market in Canada. There were three routes to bring more balance in terms of the consumer. My agency oversees them on regulations, education and information. I believe that we have a high demand and that it is going well. We can build on our good record so far. The second is an ombudsman network, which is under way. I am sure those people would be pleased to meet with you, if they have not already. The third is that there would be new entrants, and we have had new entrants into that market. Some of the new entrants, in terms of virtual banking or whatever, have had impacts on daily savings accounts. The big five have moved to provide more flexibility to consumers as a result of them.
It is shifting in the right direction, although, of course, more could happen. Obviously, we would like to see more competition. I believe the major banks want a bigger chunk of the domestic market. Five to seven years ago, they wanted to be international and global, and they still do today, but they are really into commercial lending and all that jazz. I think they have discovered that it is not a bad idea to have a solid domestic base.
Senator Banks: You spoke about the rights of Canadians. From where do Canadian citizens derive their right to have a bank account, and how does that infringe on the right of a financial institution, if one exists, to refuse to give a bank account? If five of them do that, where does the consumer go to exercise his right?
Mr. Knight: The financial services legislation of 2001 was unique for Canada. It said that every Canadian has the right to basic banking. Under that legislation, people need to provide some identification in order to exercise the right to open an account. The regulations under this act came into place September 2003.
We are currently checking whether that obligation is being honoured by way of mystery shopping at financial institutions across the country. We will eventually share our findings with the committee.
That right of individuals comes out of that law. Parliament said that individual consumers should have the right to a basic bank account, that in order to function as a citizen in this country one has to be able at least to do basic banking transactions. The institutions signed on to a deal with the Government of Canada to provide basic low-cost bank accounts. That information is on our website. If an individual only needs a basic bank account, the person can get one from those institutions.
There is an issue of ensuring that people are informed of their right to those bank accounts, but over the next year or so the commissioner will be helping the institutions figure that how to be more vocal about it.
[Translation]
Senator Plamondon: I suggested that consumer problems with financial services should be examined by the committee and I would like to thank the committee members for having made this a priority. All of the members of this committee do not have 40 years' worth of consumer protection experience.
The battle for transparency and clarity in contracts continues. The fact is that you need a bank account, because even the government can't pay cash, it must pay by cheque, and these cheques have to be cashed somewhere. If you go to a payday lender, it will often cost you 15 per cent of the amount on the cheque. The government must act. If you work for the government and cannot be paid in cash, but rather with a cheque, then you need a system to cash the cheque. More and more insurance companies refuse to accept cash payment for their life insurance policies. They want preauthorized payments. Everything revolves around a bank account. We did not go far enough, because there is still no access to credit, although one witness did tell us that at least one bank provides a credit limit. So possibilities do exist.
Bill S-19 was intended mainly for finance companies, and obviously payday lenders are included, but we realized that there were concerns relating to the banks as well. The banks have their own act. Amendments to the Bank Act can be made if it is deemed relevant, but that would not affect the Criminal Code, whether the actions involved are criminal or not. If any accommodations must be made, it would have to be in another act. The same applies when it comes to the payday lenders. You said that there were no payday lenders operating in Quebec. The provinces, along with the federal government, will have to manage this problem. Complaints have been made to the attorneys general in each of the provinces. There have been raids, and the proceeds are being examined.
What do you do with the finance companies? You have published a brochure on the cost of payday loans, but there is nothing that explains how one goes about filing a complaint. You did not go very far. Is it because your mandate is not broad enough? Do you not have a high enough budget? You are important partners in consumer protection in Canada. We no longer have a consumer affairs department, the Department of Industry came to speak on behalf of consumers. There is no one left to represent the consumers. You should have a larger budget, a broader mandate and powers, and include information about complaint procedures in your brochures, rather than simply provide information. Otherwise, people will think that in informing them, you are accepting the situation. You said that you spoke out against this in three reports. If you tell people about something, without explaining what they should do, then you are not going far enough, it is just like giving up. Tell me what you are doing to inform consumers? How do you reach them? How many people read The Cost of Payday Loans? How can you protect them if you do not tell them what recourse they have, if you do not intervene? How much extra money or staff would you need to broaden your mandate? What would a broader mandate include?
[English]
Mr. Knight: How can one turn down an offer of more money? In terms of the powers, they exist; in terms of informing consumers, we have begun to work that turf, vis-à-vis the difficulties around payday loans. With regard to the companies you are referring to, it is a very good point to move in that direction.
We have been increasing the budgets by 3 per cent or 4 per cent a year, so we are up to about 38 people; and this year we are around what we projected three years ago, between $7 million and $8 million.
Therefore, we are increasing that budget; and yes, we are going to have to monitor that because the demand on materials and information — what you are referring to — is jumping by about 25 per cent a year. There is clearly the demand out there.
In order to get through to a significant number of Canadians, we consistently find in our research — and we need to double-check if this is valid — that 3 per cent of people have no banking. Three per cent of the total population do not have a bank account at all. Take all Canadians and work it out — it is somewhere between 750,000 to 1 million people. How do we get to them if we do not partner with others? This is where we are having real success.
In Hull, we ran a project around adult literacy to work in these areas, which we found to work. We are now going out to get partners who are plugged into those communities, so there will be direct-connect. Therefore, on the informing side, we have a model we think is working — painfully slow, but effective. That is working.
Getting directly to them if they get cheques, as we have done in the fall — seven, or eight or nine million of them — this is working and we are getting high responses. Our call centres are up. As I said, we are hitting almost 250,000 Canadians who signed on to direct deposit. Many of those accounts could well be low-cost accounts, thank goodness. Therefore, we are trying to take them out of circulation in terms of the finance companies and the payday loan crowd.
Within our jurisdiction, we can do a number of those approaches. Under the law, I am not sure, without a federal/ province teaming up, what we could do.
[Translation]
Senator Plamondon: I would like to suggest something. Last week, a witness mentioned that a study by Ernst & Young determined that those who use payday lenders have an average income of $51,000. Since then, I found a report published by Money Mart that says that in all of the countries where Money Mart — which is owned by Dollar Financial Group — is established:
[English]
We operate in a sector that serves the basic needs of lower- and middle-income working-class individuals.
[Translation]
That would therefore not include people with an annual income of $50,000. Did you undertake another study to determine whether or not it was really people earning $50,000 a year who took out payday loans? I just cannot get my head around that.
[English]
Mr. Knight: That is exactly my point. I do not believe that, either. The vast majority are individual citizens who need to build their financial capability and get out of a very bad cycle around this stuff. We should have no illusions. They go in for a quick fix — cash a cheque, get their hands on the cash, get a loan that gets them to the next payday — rather than moving them to lines of credit, longer-term services beyond those institutions. It is not easy.
[Translation]
Senator Plamondon: What do these finance companies do? In Bill S-19, I gave the example of someone who borrows $4,400. At the end of four years, he would have paid some $10,000; and the $6,000 did not go into savings, but were paid to a finance company. What do you do in that type of situation?
[English]
The Chairman: I apologize, I should have intervened sooner. We have a growing list of senators and a limited amount of time. If you could respond very quickly, we will move to Senator Meighen and Senator Tkachuk. I do not mean to cut off Senator Plamondon, but we have to be fair to all members of the committee.
Mr. Knight: I think it is very important on the finance companies, although they are under provincial jurisdiction, nothing would prevent us from getting in a few licks on the costs of those things in terms of informing consumers. If you would like to sit down with us and talk about your experiences with that, that would be very good.
Senator Meighen: Thank you, chair. Maybe I am missing something here. There is the expression “where is the beef?” I want to know, where is the bite? You appear to have been doing an admirable job on informing, and there is more work to be done obviously. However, can we talk more about the protection side and how you cause that to happen?
Have you come across blatant cases of tied selling that this committee has heard about so much over the years? Have you come across cases of bank closures, for which you are responsible to supervise the procedure, that were not done according to the law? There was a case in Nunavut where it caused some publicity some time ago.
If you have come across these, do you use moral suasion? Have you got other tools; do you work with other federal agencies? How do you do it — how do you bite?
Mr. Knight: I can bite by naming them, holding them in violation and fining them. It goes from that, right through to letters of reprimand or compliance agreements with the institutions.
What kind of items have we dealt with? There have been over 700 branch closings since this agency came into play. We have ordered a number of those banks to hold public hearings where they were not going to hold public hearings. They have now changed their rules in discussions with us where most of them move quite quickly, if there is any complaint, to have their own public hearing. It is a big change for those communities. In a number of communities, one just south of here, a little town called Cardinal, the community was able, because of the hearings and everything else, to get another institution to move in. So there has been some of that.
In some cases, the community gets the building. In one case in Ontario, the institution allowed people's accounts to be moved to another institution and did not charge any penalties, just to keep everybody happy. So there is a change in the tone and the relationships there.
Does it stop them from closing a branch? No. Parliament decided that that should not happen. There is a lot of action on that front. We have a complete compliance unit; we use individual cases. We are running at 24,000 to 30,000 cases a year, at least, consumers who come across our call centres. We boil that down to significant cases, to which we can talk to the individual institution or all of them together.
What do I mean? I mean mortgages, penalty clauses in mortgages, inadequate spelling out clarity of what the penalty clause meant to that individual consumer. We got that changed in one institution by a compliance agreement. We moved from there to examine all the others. Now every Canadian who needs a mortgage and needs clarity of what those penalty clauses are about has the clearest documents they have ever had in their history.
Senator Meighen: Tied selling?
Mr. Knight: I have not run into much of it at all. There are two areas that would interest this committee. I have a number of tied-selling issues coming before me right now, but not many.
Several are at issue, but nothing like all the wind that was blowing five and ten years ago. To be right up front with the committee, it has not emerged to that level.
At least in the first three years, tied selling has not been as high as people perceived.
The third — and I am cautious on this and probably should not even say it — is in the area of small to medium-sized businesses: minimal traffic, so far.
Senator Tkachuk: Of the $8-million budget, how much would be for consumer education and how much of it would be to investigate complaints?
Mr. Knight: In terms of operating costs, I believe it is about $3.5 million. The other is $1.5 million, on the information side to the compliance side.
Senator Tkachuk: How was that decided? Is that a supply and demand decision or was that good guess work by the managerial staff?
Mr. Knight: Demand and supply first, and then we run it past the institutions because it is all paid by them, as you know.
Senator Tkachuk: Yes.
Mr. Knight: We have a session in the spring each year and we take them through that.
Senator Tkachuk: My next question is about the payroll payday businesses that we talked about earlier and the research that resulted in a figure of 3 per cent, or 750,000 to 1 million people not having a bank account. Were people asked if they wanted a bank account? In other words, is there a market for it? Do they have a right not to have a bank account? Were these people asked why they had not yet applied for a bank account? Were they rejected or did they simply not think about it?
Mr. Knight: Those are very germane questions and I do not have simple answers, which I suspect is what you are thinking, too. We have had a core 3 per cent of the population that has never had a bank account. We are trying to sort out what to do about that. First, they have a right not to have a bank account, just like the right to have a bank account. They have a right to say, no thanks. People can fall into that category.
This is my view and I am still working on the evidence to support the 3 per cent core. I have dealt with East Vancouver in the past. Banks and other institutions tried to crack that market to ensure that those people had those services. However, there is a high-maintenance social policy issue in East Vancouver, to use that as the example. They found that people working with social services in British Columbia would literally go with the client to confirm who they were so they could open an account. That way, they could avoid cashing the social assistance cheque and the risk of getting rolled for the cash on the way home. That is a difficult area.
Others communities simply needed reassurance to reach the comfort zone of having a bank account. Immigrants might arrive in Canada having escaped an unpleasant homeland and having lost everything. The first thing someone might say to them is that they should have a bank account. There needs to be community assistance to help people and to reassure them. Local leadership needs to work in partnership to help people move to a comfort zone on that. That is a different category.
One of the major issues around all of this area is that a no-bank-account-at-all policy is a tough social policy. I have often said, and it creates great misunderstanding but I will say it again, that banks are not good at social policy, because they are into banking, in some of those neighbourhoods. You have to work with the people who are there to move that partnership. Banks can help to pay for it — cut the cheque — and give assistance with core professionals, but the core of getting it done is found within the community.
Another category has been emerging over the last few years that needs to be looked at carefully — I call it the “under-banked.” By that, I mean that they may have an account but they are not doing anything with it, and so they are going to a payday loan operation. These people do not sort out their money. They need to develop their financial capability to be able to function properly in society.
One of the major banks did some initial research on this and shared it with us when we first started up. There are 1 million or 2 million people who do not use those functions with comfort or confidence. I think we can do a job with that.
Senator Kelleher: There are many financial institutions with many branches. I do not think that most of these poor people know enough to complain. How do you find out who is transgressing?
Mr. Knight: Surprisingly, they are learning to complain. There is a change in the nature of Canadians. Since the early 1980s and on the heels of the Charter, Canadians have two things going for them. First, they have become a little more skeptical of everyone — including parliamentarians, bankers, et cetera. There is less deference out there and they believe they have certain rights, generically. We find them coming in through our call centres and the numbers are increasing by about 25 per cent per annum.
Senator Kelleher: Do you have hot line for complaints?
Mr. Knight: Yes.
Senator Kelleher: How does that function?
Mr. Knight: It works well. In a call centre, business calls take about 30 seconds. In our business, we take two to three minutes per call. We have done a customer satisfaction test, which we hope to do every two or three years. On the first test, we received a high rating, and we will share that with you.
Senator Harb: You seem to be chasing the banks, which have been in business for a long time. If foreign institutions register in the province of Ontario, do they fall under your jurisdiction?
Mr. Knight: Yes. I think we are talking about the same thing. Absolutely.
Senator Harb: When it comes to protecting consumers with the $60,000 figure, I know that CDIC provides the insurance money. Who ensures that the protection extends beyond the banks to these foreign institutions?
Mr. Knight: I believe they are covered, but I will leave it to the chairman of CDIC to respond. They are covered by the laws that I oversee.
Senator Harb: We talked a bit about the 4 per cent, but there is more to it than that when we talk about consumer protection. Have you had a chance to look at the credit reporting agencies and how they function? Do you have any concerns about that? Can you share that information with us? Do they fall under your jurisdiction? When someone applies for a line of credit or a mortgage, they are subject to credit reporting by a credit agency. Those do not fall under the jurisdiction of the banks but under some other jurisdiction. Do you have a comment on that?
The Chairman: They fall under our terms of reference, so that is a good question.
Mr. Knight: I agree. We will share with you what is coming through our call centres. This is an issue with consumers. Jurisdictionally, they are licensed by the provinces, but our numbers are growing in the number of people with concerns about their credit bureau and what the statements are on their lives.
This is a very good area for this Senate committee to follow up. I am picking this up in the last year or so.
The Chairman: That is something we will be considering.
[Translation]
Senator Hervieux-Payette: I have a suggestion. In listening to your questions earlier about what happened to those who go to payday lenders rather than to a bank, I wondered if people who are illiterate might not find the banks intimidating. They do not know how to read or write and there are millions of people in Canada who cannot properly understand what is written on the bank forms. I wonder what type of service might be available for these people, and what role you could play.
There are approximately two to three million people in Canada who do not have access to banking services because of that shortcoming, and I think these are consumers who should have the same rights as everyone else.
You say that the banks woke up and realized that there was a new niche — that of short-term loans to consumers — that may be worth their while, rather than moving into foreign markets. I would like to know if you have data that shows that there has been progress in this area since the establishment of your organization, or even before if those figures exist elsewhere.
In other words, your organization has been around for three years, and before taking your word that credit is available and that the banks are open to this, I need to see some numbers — which are perhaps available elsewhere. You can say what you will, and you can repeat what the banks say, but I need to see figures that specifically and clearly demonstrate that banks have become more involved with short-term loans — not mortgages — for consumers and that these loans have increased over the past three years, if three years is all you can tell me about.
[English]
Mr. Knight: Whatever we have, we will share. I was saying that I felt it was a decided shift where they were paying closer attention to the domestic market as a whole. The credit comes in many forms — some of it credit cards, lines of credit, lines of credit against increased assets and houses and so on. We will work with you to try to get that, but we may need to talk to the Canadian Bankers Association or whatever. We will work with the research people to help out.
On the first question, literacy is a huge issue. It includes financial literacy. That is a big-ticket area. We believe that there is need for serious work in that area. We are partnering with many community organizations across the country. There is some very interesting work I commend to the committee. You can get St. Christopher's House in here to talk about what they have been doing with RBC on some street-front offices that they are using for services for people in that community and how they are helping people fill in their income tax, getting them to learn the financial capability with that. We ourselves are supportive and back up those operations, but it is not perfect.
[Translation]
Senator Hervieux-Payette: I think that the forms, even credit card forms, are complicated — even for the literate. So imagine if you are not literate. I think we need to focus on this because when you do not have access to a card, and you do not have access to credit simply because you do not understand the bank terms and conditions, you end up dealing with those smaller businesses that charge you an arm and a leg. It is our duty, as a society, to provide those services across the board and consistently.
[English]
Mr. Knight: That is very good, because credit cards are going to the top of my list this year. One of them is plain language. Tell people in no uncertain terms what the terms are. Tell it clearly and simply. If you cannot, think about it.
The Chairman: I appreciate that.
You mentioned in your testimony an amendment dealing with transparency. If you have some ideas about how we can strengthen your mandate, we would appreciate that. You do not have to draft the legislation, but give us a few paragraphs and we can draft something. For us, it is important to look, as oversight, at the gaps in the legislation and what can be improved. If you think the legislation can be improved and strengthened, please let us have that right away.
What is the biggest failure in your administration?
Building on Senator Hervieux-Payette's comment, 18 per cent of the Canadian population is illiterate, and 40 per cent is functionally illiterate, unable to deal with the workplace. We have a huge underclass in Canada that is holding back our economy because we have not been able to either educate or train them. When it comes to credits, she makes the valid point that we have that, plus the overlay of third languages. What will you do about that? That is a real problem. I know some banks have very good service; others do not, so people are driven to these essentially unregulated enterprises.
Finally, I wish you could help us a bit more on your statistics. Please give us, if you can, for last year, the number of complaints. You have given us the number of contacts. It has gone from 17,800 to 20,000, but it says “contacts.” I would like to know how many consumer complaints there have been, what you consider consumer complaints, how quickly they are resolved and the nature of them. We would like to have that in specifics to assist us. I looked at your statistics, and in total you identified 233 violations, aside from your public meetings. That is a small percentage of the total contacts you had. In your statistics, I noted that you received 254,000 entry points on your website, which says there is a huge and growing interest in what you are doing.
I put my questions on the record. You can read my questions and respond to them, but please tell us about the biggest failure or where the biggest gap is.
Mr. Knight: That is actually an interesting question. In terms of the mandate, the consumer education mandate is quite generic, but it allows for partnership and so on. I am quite comfortable with that. I am comfortable with ABC Canada and Frontier College, the crack in the ice of getting financial literacy built into some of that.
On the regulatory side, Senator Massicotte raised an issue. This is just the commissioner speaking — and I have not checked on this with anyone, and none of my staff may talk to me again — but if there were anything, it would be that we could be a bit more transparent when we call someone to account. As Canadians, we should loosen up about that. We run a tight little ship, and we are all very polite to each other, but we should get over that, because it helps the market get really good and efficient if it is right out there. We should have learned that watching the Attorney General of the State of New York. He called it like he saw it, and look at that. There was no restraining order.
That would be my biggest concern. You asked; there it is.
Senator Angus: He hit pay dirt all the way.
The Chairman: Thank you very much, Mr. Knight. We look forward to the statistics, as well as any suggestions for proposed amendments to your legislation. If we have further questions, the staff will get back to you. There may be other things that crop up. We note your progress. We think it is remarkable, but, again, senators are not very satisfied.
Senator Angus: The budget is too low, and the governance is too poor.
The Chairman: You know all the issues.
We thank you and your staff for appearing here this evening.
I am delighted to welcome our next witness, Mr. Ronald N. Robertson, Chairman of the Board of Canada Deposit Insurance Corporation, an old colleague and friend. We have known each other for many years. With him tonight is Mr. Jean Pierre Sabourin, President and Chief Executive Officer of Canada Deposit Insurance Corporation.
Mr. Robertson, we had hoped that you could give us your comments more briefly than your text in order to allow all senators an opportunity to ask you some questions. You will see from the last round of questions that this committee is eager to probe some lines of inquiries. Please give us as much time as possible to ask you questions and, hopefully, hear your answers.
Mr. Ronald N. Robertson, Chairman of the Board, Canada Deposit Insurance Corporation: I look forward to your questions.
I will be very brief. I have been chair for five and a half years. My colleague, Mr. Sabourin, has been President and CEO for 15 years and in the public service for 35. He is retiring later this year, and I thought it would be appropriate to have Mr. Sabourin speak to you. I will have Mr. Sabourin speak on our behalf.
Mr. Jean Pierre Sabourin, President and Chief Executive Officer, Canada Deposit Insurance Corporation: Thank you. I have prepared opening remarks. It will take about six minutes.
Mr. Chairman, I want to thank you and the committee for the opportunity to appear before you today. I would like to focus my remarks on the depositor-protection aspects of the CDIC.
There are three main points I would like to emphasize. These are that we protect depositors by, first, promoting standards of sound business and financial practices, reducing the likelihood of a CDIC-member institution failure; second, in the event of a failure, providing payments to depositors promptly and using a variety of innovative techniques to minimize losses and disruptions to depositors; and third, promoting public awareness about deposit insurance.
[Translation]
As its mandate states, the CDIC must contribute to the stability of the Canadian financial system in various ways.
Nevertheless, it was created for one fundamental reason, which was to protect the money that Canadians entrust financial institutions with, in case of bankruptcy. That fundamental role has not changed since the CDIC was created in 1967.
[English]
Next, I will review a few facts. CDIC is an independent Crown corporation that is fully accountable to Parliament. CDIC has 81 member institutions, including banks, trust and loan companies. The corporation is funded by premiums paid by these members and does not receive any parliamentary appropriations or other government funding.
CDIC has dealt with a total of 43 failures of member institutions in its history. In the course of these failures, CDIC has protected over $23 billion in insured deposits held by some 2 million Canadians.
Nowadays, the failure of a bank is beyond the experience of many consumers, especially among a younger generation. Our polling of consumers indicates that many of them assume today that banks will not fail. Similar sentiments were expressed in the 1970s, but by the time the decade of the 1980s was out, there had been 23 failures. That led to a number of reforms to Canada's financial system in 1987. This included a change in CDIC's own objectives to pursue its mandate specifically for the benefit of depositors, such as to “minimize the exposure of the corporation to loss.”
Changes in CDIC's mandate have allowed us to take innovative approaches to dealing with problem institutions before they become hopelessly insolvent, thereby helping reduce costs associated with failures substantially. Costs have fallen from an average of 52 cents on the dollar, for failures prior to 1987, to 17 cents on the dollar related to the 20 failures that occurred after 1987. This has translated into billions of dollars in savings.
At present, CDIC has about $1.3 billion in financial resources that can be drawn upon in the event of a failure, and we have the authority to borrow up to $6 billion from the financial markets or the federal government. Today, $376 billion in deposits is insured by CDIC, and thereby fully guaranteed by the Government of Canada because we are an agent of Her Majesty.
[Translation]
The reforms that were undertaken following the bankruptcies in the 1980s have made the Canadian financial system stronger. However, with globalization, no financial institution is completely risk-free.
[English]
This should not be forgotten, even though the last CDIC member failure occurred as long ago as 1996. I suggest, further, that we take heed of our own history and our own experience.
When a failure does occur, CDIC is the only participant in Canada's financial safety net that is mandated to look out specifically for the interests of depositors alone. Unlike most other creditors in these difficult circumstances, depositors are in less of a position to assess the risks they face and bear the loss of their savings. That is why CDIC exists.
Also, CDIC's mandate to minimize its exposure to loss is unique. This is because CDIC is typically the largest creditor in a member failure. As the deposit insurer, CDIC has to write the cheque and is accountable for its losses, and ultimately one must remember that it is the financial consumer who bears these costs.
I would like to highlight three principal ways in which CDIC protects financial consumers. First, we are mandated to promote standards of sound business and financial practices for our member institutions. One of the best ways in which we can protect depositors is to ensure that the institutions to which they entrust their money are well governed and well run. CDIC standards require that members have sound governance practices and that they understand and manage their risk. This helps reduce the chance of a member institution getting into trouble or failing.
[Translation]
Thus, the CIDC helps to limit troubles that depositors may encounter and it contributes to good banking relations.
[English]
When we do find ourselves in a liquidation and payout of an institution, we ensure that depositors are reimbursed promptly. We can provide advance payments to any depositor in Canada within 24 hours of a member-institution failure. If registered retirement products are involved, we make arrangements with tax authorities to transfer those products to another member institution without any tax implications for the depositor.
The third area where we work to protect consumers is by recognizing that well-informed financial consumers are a massive force for stability. Accordingly, CDIC has actively sought to inform financial consumers about deposit insurance in a number of ways. For many years now, we have conducted a public awareness program that operates in various media. Our strategic objective can be summed up in this way: If deposit insurance is important to you in your investment decisions, find out about it.”
Some of the other means we use to inform the public include print advertising, toll-free information lines, an interactive website, brochures and other printed materials, and by participating in financial seminars and conferences across Canada. We also undertake periodic surveys of public opinion to gauge levels of awareness and to get a reading on the concerns of consumers in matters related to deposit insurance.
Today in Canada, deposit insurance enjoys the highest level of public awareness it has had for many years. Notwithstanding this, there are still misconceptions among consumers of certain investments, in particular mutual funds and foreign currency deposits.
We must continue to do what we can to inform the public to challenge these misconceptions. If we do not, consumers can make poor financial decisions. Low consumer awareness is brought about ad hoc government bailouts in some countries. In such ad hoc situations, governments have protected all depositors, over and above any statutory obligation, in order to restore stability and confidence in the financial system, and the related costs have been substantial.
[Translation]
The CIDC plays a major role in crafting joint initiatives with people from the public and private sectors for raising public awareness. For example, we have worked extensively with federal and provincial organizations, including the Financial Consumer Agency of Canada and the Autorité des marchés financiers from Quebec, and we have also participated in the creation of a joint forum with other compensation corporations.
We have also produced several publications jointly with the Financial Consumer Agency of Canada. In fact, the agency entrusted the management of its call center to the CIDC for the purpose of cost recovery.
[English]
We do mention in our briefing document provided to you that we have jointly developed a web portal to direct consumers to various national and provincial financial protection plans websites, depending on the product that the consumer wishes to inquire about. I would urge the committee to look at the www.financeprotection.ca website. CDIC led that effort, and we worked with representatives of the Canadian Health and Life Insurance Compensation Corporation, the Canadian Investors Protection Fund, the Property and Casualty Insurance Compensation Corporation and the Deposit Insurance Corporation of Ontario.
We are also increasing our efforts with organizations like the Canadian Association for the Fifty-Plus to enhance the ability of older Canadians to make informed decisions in their financial investments with regard to the insurability of deposits.
These are just some of the some of the examples of the synergies CDIC has achieved by working with other consumer groups, but there is more that can be done in that area. For example, we would like to better inform consumers about mutual funds and foreign currency.
Our current mandate emphasizes the importance of protecting depositors and acting in their best interests in a manner in minimizing exposure to loss.
After 37 years, this corporation is widely recognized in Canada and internationally is a well-governed, effective and efficient organization with sound governance practices. That view is also shared by others. The Auditor General has just completed its special examination of CDIC and confirmed that CDIC is well governed and well managed.
It is, therefore, not surprising that over 35 countries wishing to establish or reform their deposit insurance systems have looked to our Canadian model as their guide. Countries that study the Canadian system are impressed by how well we fulfill our mandate.
Mr. Chairman, it has been my privilege to serve Canadians these many years. I want to thank you and look forward to your questions.
Mr. Robertson: You can see why Mr. Goodale wrote back to me, when I told him that Mr. Sabourin was retiring, saying that he recognized that Mr. Sabourin had been a major force in the development and evolution of CDIC and that he has made an enormous contribution. Mr. Sabourin is obviously a strong proponent of deposit insurance, an enthusiastic supporter of it, and he will be missed.
The Chairman: I appreciate, Mr. Robertson, your putting that on the record. We will miss an outstanding public servant like Mr. Sabourin, but that will not prevent us from asking him some very hard questions while he is here.
Senator Angus: It is always a pleasure to have you before us. I share your comments, Mr. Robertson, about the role and the contribution that Mr. Sabourin has made over the years.
I cannot resist placing the following comment on the record, though. In your fulsome remarks about the Auditor General's findings and the good governance you have obviously ingrained — you are obviously not going giving us any golf balls today.
The Chairman: I have many; whatever name you want, I have them.
Senator Angus: I do not know whether this is relevant to the discussion about the study we are doing, but I note that the level of insurance has not changed since 1983, in terms of the amount of insurance.
In a study we did several years ago, we went into a lot of detail about how depositors would spread their deposits among a series of different institutions to get the maximum insurance. Hence, it really was not $60,000; it could be quite a bigger number.
In any event, what is your view at the present time? Is $60,000 the correct level? Do you have some comments that might be of interest to us in this regard?
Mr. Robertson: I have to point out, senator, that it is up to you and your friends in the House of Commons to determine. The $60,000 figure is in our legislation; we cannot change it. It is up to you, ladies and gentlemen, and your friends in the House of Commons, as to what that figure should be.
Whether or not the limit should be changed is, as you can guess, debatable, depending upon where you sit.
The Chairman: We are asking, where you sit.
Mr. Robertson: There has not been a lot of pressure, until recently; there is now a ground-swell. We have not, as a corporation, come to a final conclusion. We have certainly kept up with it, we have studied it. We have not been asked what we think, but we will be happy to respond as to what we think if you want to ask.
The Chairman: As I say, we are asking you what you think.
Mr. Robertson: I cannot speak for the corporation, as such. My own view is that it is time to think very seriously of an increase. When you look at the numbers south of the border, U.S. $100,000, when you look at the credit unions, either unlimited or $250,000 or $100,000.
That is a remark from me as chair, not a position on behalf of the corporation.
Mr. Sabourin can express his opinion, as well.
The Chairman: We would be interested in that, Mr. Sabourin.
Mr. Sabourin: The question is complex; however, let us look at the limit itself. It is important to look at the limit in the context of the coverage. Everybody talks about the limit being $60,000, but people have to understand that a $60,000 limit also applies separately. An individual who has all his or her savings and chequing accounts and term deposits, it is a combination of all those accounts, for one person, $60,000. The coverage also applies to joint accounts, separately, $60,000. It also applies separately to RRSPs, RRIFs, to trust accounts, and also to 83 different institutions. It is $60,000 per person per member institution.
Senator Angus: In a joint account, are you telling me it is $120,000?
Mr. Sabourin: No, a joint account, for deposit insurance purposes, to make it simple —
Senator Angus: So, it is per account.
Mr. Sabourin: No, it is per person. A joint account, for deposit insurance, to make it simple, is considered a separate person, for deposit insurance. So you would only get $60,000 for a joint account, but you can have as many joint accounts as you want.
Mr. Robertson: Your account is $60,000; you and your wife have a joint account, that is $60,000.
Senator Angus: My RRSP?
Mr. Robertson: Another $60,000.
Senator Angus: That is what I understood, so we are on the same page.
Mr. Sabourin: I would like to say that we have been getting letters recently. We have received about 120 letters in the last four or five months — and we have advised the minister of that. We have informed that minister that we are getting these kinds of questions.
Based on my experience, one concern that I have relates to retirement accounts. That is one issue that we should be looking. We have been dealing with CARP — the Canadian Association of Retired Persons — and a number of consumer associations. We will be doing partnerships with them, informing their members, the 50-plus, who are really concerned about interest rates and the protection of their principal.
Right now, the issue for them is not worrying about their savings; the issue is that they want their principal insured, because they cannot go out and earn that again.
Senator Angus: If a retired person has an RRSP with one of these organizations that are now owned by the banks, a CDIC-deposit insured institution, such as RBC Dominion, and they run it and make it grow — one would hope — does the insurance apply there?
Mr. Sabourin: It would depend, Mr. Chairman, on what instrument the funds are invested in. You could say to RBC Dominion, “I want my RRSP in a term deposit.”
Senator Angus: A term deposit, as opposed to equities.
Mr. Sabourin: Equities are not insured. We insure deposits. Deposits have to be in Canadian funds, repayable in Canada, within five years. Therefore, it is really Canadian deposits. It is not the instrument itself, the RRSP, but what the product is within that.
Senator Angus: If there are cash balances —
Mr. Sabourin: Cash balances — I would suspect, in most cases, that RBC Dominion, for example, keep them at RBC. So, therefore, those cash balances are on the deposit. If they are on deposit with RBC, they are, in fact, insured — if RBC gives the bank the information about the insurability of those products.
Therefore, there are rules, and that is well understood. We bylaws with respect to trust account disclosure and balances, et cetera.
Senator Massicotte: You are talking about consumer protection. Many economists have argued, when you look at other countries, that given the level of insurance you provide, the higher the level of insurance, the higher the risks — the systemic risks, which is how bankers refer to it — bankers will therefore not pay much attention to how they manage their bank, that you, CDIC, are inhibiting competition, because regardless of whether a bank is a good bank and is managed well, everybody gets the same insurance.
What are your comments with respect to that?
Mr. Sabourin: I have had the luxury of being the Chairman of the Financial Stability Forum, a study group on deposit insurance international, and also the chairman of the working group on issuing guidance internationally, so I am prepared to answer that question.
The issue of limits has always been a concern of moral hazard. The more we provide insurance, the less people will take the responsibility to protect themselves, or bankers will take more risks because the government is protecting the right side of the balance sheet.
What we have to look at is, in fact, there are a number of disciplines that can be imposed upon institutions. First of all, institutions should be providing market discipline, right information, sound supervisory regime, deposit insurance that provides limited coverage, so $60,000 instead of 100 per cent guarantee. There are many ways — and I would be prepared to give you a paper on that — on how to mitigate moral hazard.
The Chairman: Please give us that.
Mr. Sabourin: With respect to the limits, they are all over the place, around the world. The IMF has used two times GDP per capita. Our view is that — and I am also Chairman of the International Association of Deposit Insurers, of which we are 50 countries — it depends on the country, the circumstances and the history. Therefore, you cannot apply a $60,000 limit in Canada and the same in Jamaica. It does not work that way. It is related to the amount of savings the public needs to believe that a dollar in their pocket is the same as a dollar in the bank.
Senator Massicotte: Obviously, the cost of running the institution is paid by the banks, the financial institution per se. However, with respect to your board — which is made up of government representatives, OSFI representatives and Bank of Canada representatives.
Is there a conflict there? Given that you also bear the cost of any failures, what is your view on risky bank actives, like hedge funds, and so on?
Mr. Sabourin: I would like to concentrate on the issues of member institutions. We have a strong board, and that was changed in 1987 because we have private-sector directors, six private-sector directors and five public sector — the governor of the central bank, the Deputy Minister of Finance, the superintendent and the deputy superintendent as a member. Also, we have guys like the chairman, who are very astute and other private-sector directors, who are very competent. As well, the commissioner of the FCAC is on our board. We have a very strong business-like approach, and they keep me on my toes as far as operating costs are concerned.
We reduced premiums for the institutions substantially, from the $550 million we were charging in the late 1990s to about $76 million today. We are continuously looking at reducing operating costs. We reduced operating costs by 9 per cent already, 5 per cent next year. We are planning to reduce premiums again. We are looking at every measure to be able to run an effective and efficient system.
Senator Massicotte: You have an interest, though, where the banks bear undue risks. What are your thoughts on that?
Mr. Sabourin: That is why we have issued our standards of sound financial practices, which imposes on the banks, management and the board to manage their bank effectively and manage their risks. They have now to provide a bank resolution every year that says that the bank is managing its risk and that the corporation or the bank is in control of those risks.
Therefore, you would expect that a director of a board that has to give a board resolution to CDIC thinks twice about those. I would suggest that the banks and institutions today are certainly dealing with those risks. As well, we have a strong supervisor at OSFI — and you are hearing from him tomorrow. He can tell you all about the risk assessment methodologies they impose on the banks today.
Senator Tkachuk: What is the cost per depositor, to maintain this insurance of $60,000?
Mr. Sabourin: I do not have that number, but I can find it. I would have to find out how many depositors we have in the system.
However, we are insuring $376 billion. Currently, we have a $1.3-billion reserve to deal with future losses. We are charging the lowest premiums that we have ever charged institutions today, and our investment income is more than our operating cost.
However, the issue of asking how much that is costing per depositor is a very tough question, because the question is how many depositors. We will try to work it out and give you that information.
The Chairman: Just give us an average.
Mr. Robertson: One way of addressing it is this: The premium for the best-ranked institutions is currently, I believe, two basis points of the insured deposit on an annual basis. That is a simple way to look at it. Two basis points, multiplied by your bank account, up to $60,000. The average bank account is not $60,000 that we insure, in fact.
Mr. Sabourin: We will come back with a number, if you want a more refined number.
Senator Tkachuk: I do, only because I think you raised the fact that it is borne by the consumer. I would like to know what the cost is per consumer. There must be a cost to this.
There has been a lot of discussion about branch banking. One of the problems with branch banking with competitors from the United States is the question of insurance. Has there been any discussion as to how insurance can be carried forward to banks that may just simply set up a branch here without having to set up a holding company to operate a bank?
Mr. Sabourin: First, the changes in the past legislation provided for wholesale banks that can opt out of deposit insurance. We have about 12 foreign banks that have opted out of deposit insurance. They cannot accept deposits under $150,000 dollars, by definition. We have used that definition — namely, $150,000 dollars and above — as being investment. So there is no coverage on that. However, they have to disclose to all their customers that they are not insured by CDIC.
The issue of deposit insurance arbitrage between Canada and the U.S. is not an issue — not in Canada. It is in both the U.S. and Mexico, but certainly not in Canada.
Senator Harb: You provide insurance, as well as CMHC, CCA, EDC as well as the Business Development Bank. I am naming a few of the federal agencies that provide insurance. My question is twofold. First, how closely do you work with these agencies? Do you reinsure? Do you go for bulk insurance and do you cooperate with these organizations?
Second, you indicated that you insure RRSPs and RRIFs. Do you think it is a good idea to insure Registered Education Savings Plans, for example, because this is another instrument? Is that something that you look at?
Mr. Robertson: Basically, we insure bank deposits, which extends to certificates of deposit and all of those things. Hence, If you have an RESP, self-directed, and it is in a bank account with a member of ours, it is insured, just like an RRSP account, an RRIF account or your own account is insured. We insure the bank deposits, basically.
Mr. Sabourin: As far as your issue about reinsurance, we are fully guaranteed by the Government of Canada. As an agent of Her Majesty, there is no requirement for us to do so. We do have our own funds. We have an authority to borrow up to $6 million, but we also can go to the government to borrow, if there are any other losses, because it is government-guaranteed. The $376 billion is guaranteed by the government.
Concerning cooperation with other Crown corporations, we cooperate all the time. We cooperate vis-à-vis developing investment policies and working together on administrative issues, sharing the expertise within these organizations. We all have different mandates.
Again, as I was trying to point out, we are the only ones that, in a safety net, have a mandate legislated to act in the best interests of the depositors. We do not have anyone else. We do not act for shareholders; we do not act for creditors. Our job, strictly speaking, is depositors.
Senator Harb: Foreign banks can opt out. They do not have to subscribe to your organization. Can federally chartered banks do the same?
Mr. Sabourin: The government policy is that if you are a foreign bank you can apply for a licence to do business and accept only wholesale deposits. However, you also have to apply to CDIC to opt out. There are requirements if you opt out of CDIC. We want to ensure that the public is informed, if you are accepting deposits — and you are not allowed to take deposits under $150,000.
If you accept retail deposits in Canada, government policy states that you must be insured by CDIC — and that applies — the U.S. is the same. If it is retail deposits, you are insured.
Senator Banks: The funding sounds like a dedicated tax, and I did not think we did that.
I gather that the liability of the Government of Canada or of CDIC is not circumscribed by the $1.3 billion and the $6 billion that you can borrow. Actuarially, that is not very good. That is .02 per cent. The whole amount, the full faith and force of the Government of Canada is behind those $376 billion that you insure?
Mr. Robertson: We are an agent of Her Majesty.
Senator Banks: And Her Majesty, in right of Canada, has undertaken to insure all of those deposits?
Mr. Robertson: I am not here to give you legal advice, but I think your members would say that if she has an agent, then she is responsible for the obligations of the agent.
Senator Banks: If we had $780 billion under deposits, would that still apply?
Mr. Robertson: I would assume so.
We are in a very interesting situation financially. I do not want to take any time, but at the moment the premiums that we collect go straight to the bottom line. Our investment income is more than our operating expenses on the $1.3 billion. We are working on the question of accumulating an appropriate ex-ante fund to make sure we do not get into trouble.
Mr. Sabourin: We have learned from the past, when we had a number of failures in the 1980s and 1990s. We had a deficit and we had to increase our premiums to about $550 million to our institutions. We have learned from that past experience that we should have an ex-ante funding mechanism — that is, a reserve there — so that if we do have failures that we are not going to jack up immediately the premiums on institutions to pay for loss.
The Chairman: Is that a recommendation, Mr. Sabourin?
Mr. Sabourin: We have done that already, sir.
The Chairman: We will incorporate that, as well. Please let us have it in writing, and we will think about that.
Senator Banks: I think you said 43 institutions have failed. How many of those were chartered banks per se, if any? I presume the rest were quasi-banks or trust companies.
Mr. Sabourin: I think there were three: the Canadian Western Bank, the Northland Bank, in 1985; the Bank of British Columbia, in 1986. The rest were federal or provincial trust companies.
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Senator Hervieux-Payette: I wonder if we should be saying goodbye, Mr. Sabourin. You do not look like someone who has worked for the federal government for 35 years. Perhaps we should thank you for your excellent work and wish you several more good years.
You said that 83 institutions are covered by your insurance. Are there other institutions that would like to participate in the program and cannot do so? If the coverage amount of $60,000 was changed, is it reasonable to think that there would be more financial institutions that could obtain that coverage?
Second, the administration of Canadian pensions was recently handed over to an arm's length Canadian corporation. I do not remember the exact name of this corporation but it is the equivalent of the Caisse de dépôt in Quebec, and administers the funds of the rest of Canada. You stated that you invest the money that you have in reserve, and that this is more profitable then your transaction costs. Who is responsible for investing this money? The CIDC, private firms, or another crown corporation that has the know-how to invest a billion dollars?
Mr. Sabourin: First, there are no institutions waiting to participate in this financial system. You changed the policies a few years ago in order to reduce the financial institutions' capital.
In order to participate in the system, the institutions have to first obtain a Dominion charter from the government and then apply to the CIDC for deposit insurance. They are all treated equally.
The answer to your question is no. There have been seven to eight new small institutions. We have a list of other institutions that are in the process of becoming a bank.
Senator Hervieux-Payette: No other institutions that cannot be called a bank?
Mr. Sabourin: There are some waiting at the door of the system because the admission process has been started, but I do not think that there are any institutions that wanted to participate and could not, if they had the requisite expertise, capital and business plan for entering into the system.
With respect to your question on investments, we are bound by the Minister of Finance's investment regulations. We manage the risk on investments. We have policies that are designed and approved by the board. We are not like other institutions. We are not there to increase our return on investments. We are, rather, like an insurance for the purpose of depositors' protection. We apply those policies and we do not act like the new organization responsible for Canadian pensions that invests in all kinds of areas. That is not our mandate. We protect depositors and the money is there for their future.
Senator Hervieux-Payette: You are telling us that the organization responsible for Canada's pension funds is making investments that are so speculative that we may end up with no money? I am concerned!
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Mr. Robertson: We need this because we need liquidity if there is a problem so that we can pay people very quickly. We debate what degree of liquidity we need and how quickly we need it compared with actually trying to maximize our return within sensible liquidity.
Senator Hervieux-Payette: What is your return?
Mr. Sabourin: It is about 3.4 per cent to 3.5 per cent.
Senator Hervieux-Payette: It is true that you do not take too much risk.
Mr. Sabourin: That is not the purpose of the fund.
We can also provide you with the copy of our policy on investments, if you would like, Mr. Chairman.
The Chairman: That would be of interest to us.
Mr. Robertson: If it would be of assistance, we would be happy to give you our latest annual our report. It has all of that.
The Chairman: I would like to ask you some questions that you could respond to in writing, if you do not mind.
First, if you have any recommendations about strengthening the mandate of CDIC, that would be useful to us. We are interested in strengthening the consumer arm in the financial services sector, so your experience would be very important.
Second, please give us the benefit of your advice on the problems in favour of and opposed to increasing the level. The Americans do have a level of $100,000 and it has been very successful. We are in the North American space. In my view, there is no reason why we should not at least contemplate that.
Finally, Mr. Sabourin, you have served the Canadian public and government with great skill and dedication and we wish you the best in everything you undertake in the future.
Thank you so much.
The committee adjourned.