Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 6 - Evidence - Meeting of February 10, 2005
OTTAWA, Thursday, February 10, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:05 a.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: Honourable senators, I wish to welcome once again not only our witnesses, but also Canadians who are watching us from coast to coast via CPAC and now on the Worldwide Web. Today we continue the committee's oversight of consumer protection mechanisms within the financial services sector.
We are delighted to be able to welcome an outstanding Canadian public servant, Mr. Nick Le Pan, Superintendent of Financial Institutions. Mr. Le Pan comes from one of our most distinguished families of public servants. His father, Douglas Le Pan, was an outstanding public servant. We are delighted that he is following in his father's footsteps. I knew his father quite well. We are delighted, Mr. Le Pan, to have the benefit of your skill, expertise and your genes. Please proceed.
Mr. Nick Le Pan, Superintendent, Office of the Superintendent of Financial Institutions: Honourable senators, material has been distributed. I would propose not to go through all of it, but to highlight just a few points for the committee relevant to its study on consumer issues and then move to questions.
We have a most important mandate at my office from Parliament for prudential — and I underline the word “prudential” — regulation of banks and federally regulated insurance companies. Prudential means that we are in the business of promoting safety and soundness. We enhance the safety and soundness of our regulated institutions and pension plans so as to protect depositors, policyholders and plan members from undue loss. While this is largely preventive and behind the scenes, it is important for consumers. Our surveys show that public confidence in the safety and soundness of our financial system rightly remains very high.
I will say a few words on what OSFI, my office, does not do. We are not responsible for market conduct regulation, monitoring, for example, the consumer provisions of the various statutes. The committee is hearing from a number of other important organizations, both federal and provincial, who are involved in market conduct regulation.
Recently, we have been placing more emphasis on certain related issues, such as anti-money laundering, reputational risk and operational risk at the institutions we regulate and supervise. That latter particularly benefits consumers as it reduces the chances of serious operational risk breakdowns. That is an area on which both financial institutions and regulators are, rightly, spending more time and attention. We have a clear but challenging mandate and I am pleased to say that we have the ability to focus on it.
Since 1996, there has not been a failure in this country of a deposit-taking institution at the federal level, nor has there been one in the recent past in the insurance area. We have not had the kind of well-publicized problems that have existed in other jurisdictions, and those results are despite the fact that we have encountered major declines in asset markets, problems in the telecom sector, and the well-understood issues of financial weakness in the property and casualty industry. I believe that that record is, in part, due to sound economic performance in Canada, but it is also, in part, due to the quality of the regulatory system and to the quality of the risk management practices at the institutions we regulate and supervise.
We are accountable to Parliament through the Minister of Finance and, as noted in the material distributed beforehand, we engage in a variety of activities to assess how we are doing vis-à-vis our legislative mandate. That includes peer assessments organized by the International Monetary Fund, that is, looking at various aspects of our operations in comparison to international regulators.
We are increasingly conducting anonymous surveys of the people we deal with and other knowledgeable observers about how our activities are perceived, and we are starting to publish those results on our website. For example, a recent survey on our approvals process is on our website. We are not in the business of making everybody we deal with happy, because we are a regulator, but we do think it important to get some independent assessment of how we are doing. From time to time, not only do those show that we are doing a good job, but they also identify areas where we could be doing better. The financial services industry is increasingly becoming more and more complex, and we cannot stand still if we are to fulfil our mandate.
Our annual statements are audited, as are the related financial control processes, by the Auditor General annually.
The committee has spent a bit of time on recent legislative changes, and there are a few I would like to mention. At the time that Bill C-8 was introduced, we adjusted our approach to approvals consistent with the government's policy of reducing the requirements for setting up new banks. In addition to the six applications that have been approved to date, we have about another dozen expressions of interest, of various degrees of seriousness, at this point. I expect that a number of those will also result in new banks in the future. The new entrants, in my view, generally have been profitable and have met their business plans as originally set out.
In addition, there have been positive results from the change in government legislation and policy to allow foreign banks to open branches in Canada. That has expanded access to certain types of wholesale funding, particularly, as was expected at the time.
Turning now to regulatory efficiency, I would note that the system of prudential regulation, safety and soundness regulation, is a largely national or harmonized system, in contrast to the system in this country of market conduct regulation and in contrast to the prudential regulatory system in other countries. That is a big benefit in terms of regulatory efficiency. Regulatory efficiency is one key to an efficient financial services sector, and that is hugely important to consumers and the economy.
Important strides were made at the federal level through Bill C-8 to further the goal of improved regulatory efficiency. There was streamlining of the approval process, for example, for financial institutions to reduce their compliance costs. More could be done there, frankly. Measures were also taken by us to approach our guidance in a different way from how we had approached it previously. We now will not adopt new guidance if, in fact, there is international guidance that we can use instead.
We have also taken actions together with provinces to reduce compliance costs for industry related to the data they file with us. Some of those initiatives for the insurance industry, for example, have reduced by up to half the amount an insurance company has to file with federal and provincial regulators in a harmonized system. That is the kind of thing we need to continue to look out for, for more opportunities to keep compliance costs in check.
I will now say a few words about pensions, which is part of our mandate, for the roughly 10 per cent of private pension plans that are federally regulated. This is hugely important for Canadians. The pension plans that we regulate comprise about half a million members. These issues became more important for us starting in the mid- to the late 1990s. Our mandate was changed and refocused to focus on safety and soundness issues to protect pensioners. More recently, we have actively stepped up our efforts to identify risk and intervene where necessary. A number of those cases is widely known.
The number of pension plans on our watch list has remained roughly stable over the past year. I have described the situation in the pension area as “manageable but tenuous.” Much depends on the future course of asset markets and long-term interest rates as to whether the solvency position of plans will improve. I am encouraged because we have seen improvement over the past year. A number of our plans that we have upgraded and a range of plan sponsors and representatives of plan members have stepped up to address funding issues — to put more money in or, where it is not possible to fully fund the plan, to look, on a consensual basis, at how to restructure the plan, often with our assistance or with our encouragement. It will take some time to reduce the number of plans on our watch list, but progress is being made.
In conclusion, having a high quality prudential regulator like my office is important for Canadians, even if our activities largely take place behind the scenes.
I would be pleased to answer any questions on what I have said or on any other issues that the committee would like to raise.
The Chairman: I appreciate the cogency of your comments. We do have your fuller written comments.
Senator Angus: Mr. Le Pan, I believe this might be your first time here since you became Superintendent.
Mr. Le Pan: That could be. I am not absolutely sure.
Senator Angus: Congratulations. It is good to see you back.
You mentioned that more time and attention is being spent on money laundering issues. This issue seems to be attracting a significant amount of public attention and transcending many areas. Could you tell us to what extent this is a serious problem, how it manifests itself in Canada and, more particularly, how it impacts consumers and the changes that have been introduced to control it.
Mr. Le Pan: Over a number of years, there has been widespread international agreement about the need to step up efforts to combat money laundering and counterterrorism financing. The international community came together, and Canada was very much a part of that, to produce guidance to financial institutions and other players in the financial services sector about the practises that we needed to have in place to do a good job of recognizing suspicious transactions — knowing your client, those types of things. Regulators such as my office increased their efforts to assess how well financial institutions are complying with those types of requirements.
At the same time, other actors, such as FINTRAC in Canada or equivalent organizations in other countries, put in place new rules around keeping track of suspicious transactions, seeing whether or not there are patterns in those transactions and so on. It is a massive, coordinated effort. There is international cooperation and so forth.
On our side, our focus has been to assess the adequacy of institutions' compliance programs around anti-money laundering and counterterrorism financing. It is more of a top-down than a transaction-based checking. Other federal organizations were more involved in that.
We found that, generally, the approaches in major and other financial institutions were good but, as with everything we deal with, there are challenges from time to time and there are areas in which institutions could do a better job. Our role, when we identify weaknesses, is to follow up with institutions and ensure that they have adequate plans and deliver on those plans to put improvements in place where necessary.
Senator Angus: Are these regulations that are being put in place in cooperation with other nations, and particularly in Canada, working? Have you detected less money laundering? Have you unearthed shocking schemes and situations?
Mr. Le Pan: For a complete view, you should probably expand your discussion of this to include others who are involved in the fight against money laundering.
From our perspective, I believe that we have seen progress in institutions to put in place better know-your-client rules and to identify suspicious transactions, and that is making a difference. As the Commissioner of the RCMP has testified in various committees, it is hard to know how much is still out there. It does not take much, as we have discovered, to finance activities that have tragic consequences.
I do not think we will ever be able to fully declare victory. There must continue to be a heightened level of vigilance. It is getting there, but it needs continual reinforcement from organizations like mine, and that is what we do with the major institutions.
Senator Angus: You will recall, when the legislation was being reviewed, particularly by this committee, there was discussion about the constitutionality or the appropriateness of applying these laws to the legal profession because of issues of solicitor-client privilege. Ultimately, I understood that it was held not to apply to lawyers. Is this a problem? I read an article somewhere recently indicating that it is an inhibiting problem for the regulatory effort.
Mr. Le Pan: Senator, I cannot comment on that. My focus as per our mandate is on the institutions that we regulate and supervise. That is the banks, other federally regulated deposit insurers and the insurance industry. That is where our focus lies.
Others have a complementary focus, and I think you should ask them for their views on that. Frankly, I think it is important that we do the good job we are doing with respect to the job for which we are responsible.
Senator Angus: Should we direct that question more to the police, the law enforcement agencies, those kinds of people?
Mr. Le Pan: Yes.
Senator Harb: Congratulations on your appointment, Mr. Le Pan.
Under your mandate, you examine the compliance of financial institutions with relevant legislation. You also look at situations where there are financial problems, you report those, and you suggest specific resolutions to those problems.
In reviewing the mandates and objectives of some other groups that have appeared before this committee such as the CDIC and consumer agencies — and perhaps later we will hear from the Competition Bureau — one cannot help but note many similarities in your objectives and mandates. Suppose we had a crisis situation involving financial institutions or agencies that are regulated by you, and there was a need for immediate action, who would move in first? Would it be the CDIC, one of the consumer agencies, the Superintendent of Financial Institutions, the Competition Bureau or the police? Is there a Team Canada type of approach whereby you meet and decide a situation falls within the jurisdiction of one body, or do you all jump at once to deal with the issue at hand? I cannot help but recall some of the American movies I have seen in which the FBI and the police have a fight over jurisdiction at a crime scene.
Since this committee is looking at the whole mechanism of consumer protections, before we start putting pressure on financial institutions themselves, we have to examine our institutions, as an organization, and decide whether some fine tuning is required from within, so that we can take a Team Canada approach and decide on the rules of the game and what mechanism we will put in place. Whenever there is a situation involving a financial institution, we have to know the trigger points and know what we will do first.
Is there a mechanism like that? If not, would you suggest that one of this committee's recommendations should be that something like this be put in place?
Mr. Le Pan: I do not agree with your initial characterization that there is lack of clarity, with one exception that I will come to in a minute, where I think there is an issue. For example, it is clear in the statutes and in the administration that my office is not responsible for the financial consumer provisions of the Bank Act. Those are the responsibility of Bill Knight and the FCAC from whom you heard yesterday. The accountability framework and the legislative mandate make that separation clear. There is room for cooperation to reduce efficiency costs. We do a lot of their back office functions and so on, but the mandate is clear.
With respect to the Competition Bureau, it is clear that we are in the safety and soundness business and that they are in the competition business. When it comes to major transactions, we have a well-defined role, and they have a role. We have been through a number of significant transactions involving both of us. There have been no issues of, as you said, several people arriving at the scene trying to sort out who has jurisdiction.
I do not believe the Competition Bureau believes it has a mandate to deal with safety and soundness issues. That is my job. I do not have any mandate to make judgments surrounding the impact of a transaction, a merger or any other issues regarding competition. That is their job.
As I indicated with respect to anti-money laundering, we are not in the business of doing what the police do. We are not in the transactions business. We are in the business of looking, top down, at the compliance systems that ought to be in place to reduce the number of times the police have to be involved.
We have memorandums of understanding to share information with, for example, FINTRAC,
The Chairman: Mr. Le Pan, would you explain the function of FINTRAC? This is a new organism within the financial sector with which few in Canada are familiar, but they should be.
Mr. Le Pan: FINTRAC stands for the Financial Transactions and Reports Analysis Centre. It is an organization, similar to those that exist in other countries, that is responsible for receiving information from financial institutions, other players in the financial markets, currency houses, foreign exchange bureaus and so on about suspicious transactions; and for working with the police and intelligence services to identify transactions and potential suspicious patterns, et cetera.
We deal with the compliance systems, and they deal with the transactions. These are cooperative systems.
The Chairman: On that, Mr. Le Pan, I think the Canadian consumer should understand that all transactions of I believe $10,000 or more are tracked now at a central source in order to determine systemic patterns that might be sourced to money laundering or other criminal activity. I do not think the Canadian public is aware of that. If Canadians make cash transactions in excess of $10,000, they are tracked by this organization.
Mr. Le Pan: That is correct, Mr. Chairman.
Let me spend a few moments on the prudential system, Senator Harb.
Contrary to what exists in certain other countries, we have a long-understood separation of responsibilities, but there is cooperation in the case of a crisis between my office, for example, and the Bank of Canada.
The United States of America has both an office like my office and the Federal Reserve Board involved in supervision. It also has the Federal Deposit Insurance Corporation and the state regulators, who are involved with safety and soundness regulation. We do not have that here in Canada.
The Bank of Canada, as is the case in other countries, has a key role as lender of last resort. However, it is not involved in prudential supervision, assessing risks in institutions and so on. We have good cooperative links with the Department of Finance, with CDIC, to deal with a prudential crisis. That works because of mechanisms like the Financial Institutions Supervisory Committee which is set out in legislation. There is a cooperative mechanism in handling a financial problem, with the organizations understanding their mandates.
The last point I will make is that the minister indicated in his last budget that, in his view, there were issues of overlap and duplication with respect to the Canada Deposit Insurance Corporation and my office. He wanted to assess the possibility of reducing those. It is not a case of, say, four organizations arriving at a scene, as you described, but he thinks that there may be opportunities to reduce compliance costs resulting from overlap and duplication. I share that view, and work is ongoing in that regard with us, the Canada Deposit Insurance Corporation and the ministry. It is not the kind of situation you described where there is a lack of accountability for, say, five different organizations.
The Chairman: Are these overlaps statutory, or is it a matter of overlapping practices among institutions that have the general oversight? If there is contradictory overlap in the legislation, that is something we would be most interested in looking at.
Mr. Le Pan: One of the issues that industry has raised—and I do not know if you have hear from industry representatives — is that the Canada Deposit Insurance Corporation, under its statutory mandate to promote sound business and financial practices, issues standards of sound business and financial practice. Those are, effectively, rules. The CDIC is in the rules business.
We are also in the rules business. We are in the rules business respecting all the institutions that we regulate and supervise. We give guidance and so forth, and there is overlap and duplication in those. A good part of that stems from the overall mandates, not from two organizations that are not cooperating.
Similarly, both organizations formally have to approve a new bank. That comes from the legislation. The minister has to approve a new bank application on our recommendation, but CDIC also has to approve it, and that comes from the statute. Some overlaps are statutory.
The Chairman: Some is useful overlap and some is not. We are more interested in efficiency. I think the purpose of Senator Harb's question was to explore the efficiency, the effectiveness and the clarity of regulation.
Senator Harb: It was not my intention to get you on the defensive. Looking at the functions that you, the Competition Bureau and CDIC perform, one cannot help but notice that at least 25 per cent of your mandate and those of the Competition Bureau and the CDIC are similar in nature. Do you not think it would be a good idea for the government to look at possibly of either merging some of these organizations into one, with one organization having the oversight in different departments, or perhaps changing the mandates so they will become complementary, as you are suggesting?
Mr. Le Pan: My view is not similar to yours about the extent of overlap and duplication in mandates. For example, with regard to our mandate respecting compliance with the statutes that we oversee — not the Competition Act but the Bank Act or the Insurance Companies Act — I do not believe in that there is the 25 per cent overlap in mandates that your question suggested. Other than the in area of the Canada Deposit Insurance Corporation, where I think there are practical things that could be done to reduce compliance costs, I do not see the situation you have described.
I have been asked whether there should be a kind of super regulator that combines many functions. Other countries have followed that route. There are pluses and minuses to that. One of the things that I said in my opening comments is that we at OSFI have benefited from a fairly clear and specific mandate for safety and soundness. Having that legislated mandate from Parliament in the mid-1990s has been important to us. That has allowed us to focus both internally and externally. It has helped us in that regard.
Countries have responded to that question differently but, certainly, my predecessor and I have been pleased to have a focused mandate on safety and soundness.
Senator Harb: You are doing a great job.
Mr. Le Pan: My point about focus is important as it relates to the issue of whether it is worthwhile adding more to the mandate.
Senator Massicotte: If a financial institution has difficulties, you are not involved in the subsequent liquidation of that bank. Is that correct?
Mr. Le Pan: We are generally not involved in liquidation. We are involved in problem identification. We are involved in problem resolution up to the time of liquidation. It would normally be us who would apply to the Attorney General if it had to be wound up, but we are not, nor should we be, responsible for a decision about whether money from the deposit insurance fund ought to be used to solve a problem. That kind of workout issue is the responsibility of the Canada Deposit Insurance Corporation, and it should be.
[Translation]
Senator Massicotte: We read a lot about the use of derivatives and speculative funds by Canadian banks in our newspapers. What is your position on this as the one responsible for the security of financial institutions? How can you ensure that the level of risk is acceptable in terms of public policy?
Mr. Le Pan: I would like to stress that these kinds of transactions and derivative products are very useful in terms of risk management. We have seen many cases where financial institutions used derivative products in order to improve their risk management. I feel it is very important. Over the last few years, we have seen a rather significant increase in the number and complexity of derivatives and other structure products. The most important thing for a financial institution is to find a balance between the risks taken, and its ability to weigh and manage them. If it is balanced, the more complex the product, the higher the level of the ability to weigh and manage the risks will be. If there is a lack of balance, we must either increase the risk or increase the ability to manage the risks.
Senator Massicotte: I agree with the theory because that is the objective of the instrument. When you read certain articles published by the United States Federal Reserve, you realize that we are perhaps not fully aware of the complexity and that perhaps Canadian institutions will suffer as a result.
Mr. Le Pan: In my opinion, the most important thing is to try and maintain a balance. If we believe that there is a lack of balance between the risk and the ability to assess, we must act.
I think that generally speaking, the risk is well managed, but there are surprises from time to time. Could there be a surprise of such magnitude that it would cause one of the major financial institutions to fail? I believe not. This is not a long-term risk management issue. This year, we are going to study the subject further.
We have analyzed the practices of the large banks two or three years ago, with a view to reviewing their risk assessment processes for investments in speculative funds. We were satisfied with the results of the analysis a few years ago, but it should be redone now. This is a priority for the upcoming year.
Senator Massicotte: When we look at actuarial studies on pension plans, many forecasts are done on the rate of growth of investments or on the measurement of inflation, for example. According to the going theory, the current criteria dealing with liquidation for example, would it not be a good idea to determine the criteria that ensure the credibility of the report? Some people claim that actuaries are in a conflict of interest from the outset. Certain reports from five years back show today that their projections were exaggerated.
Mr. Le Pan: This situation concerns me greatly. I gave a speech at the Actuaries Annual Convention which was held in Montreal a few months ago, on the management of pension funds and the extent of actuaries' responsibilities.
[English]
The Chairman: Mr. LePan, could you send us that document? It would be useful to have a background document.
Mr. Le Pan: I would be happy to do that.
[Translation]
Mr. Le Pan: In my presentation, I said that we need to increase our research in the area of pension funds. We have increased our efforts as regards the auditing of these reports. I have asked the actuarial companies to create a review process. Our office has put forward a review for life insurance companies. It is critical to have an independent review process. There are existing criteria, but they are very flexible.
Senator Massicotte: What do you think of the CBC, University of Ottawa and CMHC pension funds? According to their calculations, surpluses were expected, and it is on that basis they distributed funds to their employees, which we now know brought about a significant deficit. It looks like bad management, or at the very least a very optimistic vision of the future.
Mr. Le Pan: We have seen similar situations. When there were problems with the federal government's pension plan — minor incidences here and there —, we always asked ourselves what the actuary's responsibilities was.
[English]
There is an actuary discipline process. We refer actuaries to that process when we think there is a problem.
[Translation]
We also have to talk about the responsibilities of managers.
[English]
There is an issue of governance here also.
[Translation]
In any case, it is up to the actuary to clearly explain the projections he has put forward following his analysis. We have seen clear improvements as regards the management of federal pension funds. They must continue to work in the same vein.
[English]
Senator Meighen: You have talked directly and indirectly about OSFI's risk-based approach. Is that approach uniquely Canadian, or is it shared around the world?
Can you amplify on how you proceed to verify the reliance of institutions regarding their control on governance processes so that people can understand what you do and how you provide that early warning of weaknesses?
Mr. Le Pan: On your first question, our approach is broadly similar to that in leading jurisdictions — the major regulators in the United States, the United Kingdom, and a number of other countries. It is risk based and reliance based. Risk based means we that we step back, using whatever information we think we can get our hands on, both from the institution and from the analysis that we do, to assess the high-risk areas, where there may be an imbalance in controls. Capital market issues are classic examples. We review those issues regularly. Every year we review something.
Our job is to assess where the problems may be. That then goes to the reliance issue. We are not, nor should we be, in my judgment, replicating or duplicating what is done by internal control systems, internal auditors, external auditors and the governance systems, right up to and including the board of directors of these institutions. We are in the business of trust, but we verify.
That brings me to your second question: How do we verify? We will focus on an institution. For a major institution, we will split its activities into 20 or 25 business areas. Our framework is published and is available on our website. We communicate it regularly to all institutions. Under that framework, we will choose certain of those areas on some kind of cycle and we will dig into them. The amount of digging we will do will depend on what we find. By digging into it, if we are looking at an equity derivatives operation, we will bring general expertise, as well as specialist expertise. We have some on staff and we have the ability to go outside, if need be. We will look at the policies and procedures, how well they have been communicated; what went to the board of directors on the risk tolerance in that business, if it is an important business; and what exception reporting is going on.
The Chairman: For our audience, would you explain what “exception reporting” means? It is an important concept. Some of us are familiar with it, but we are trying to be consumer friendly and explain things in non-technical terms.
Mr. Le Pan: Institutions will have limits on what positions they want to take, how much risk they want to take. Were those limits followed? Most of these organizations would normally expect that the limits they put on particular parts of the businesses would be adhered to, but they will also have a process, because sometimes it may make sense to exceed those limits, where the institution needs to be aware when it is exceeding the limits. Occasionally, we find a case where operations are exceeding the limits and people did not know that it was happening. That is an example where we cannot trust the control system fully because the control system should have picked that up.
Through that kind of focused analysis we will get a picture of how well the control system is operating relative to the risks. If we see deficiencies, deficiencies against international guidance and our own guidance, that will lead to degrees of feedback to the institution. If the deficiencies are very serious, we have a range of formal powers that we can invoke under the statute, but we rarely need to resort to formal powers.
Senator Meighen: What is the most drastic power that you have under the statute?
Mr. Le Pan: We have the power under the statute, using a legally enforceable order, to order an institution to change its practices. That is a compliance order. We rarely have that kind of case, though there have been a few publicized cases. For example, we ended up doing that, as is widely known, in a recent high profile pension case. Ultimately, if necessary, we have authority to take control of the organization in the event of serious financial difficulty. We also have other powers, such as fining institutions and so on.
That is a broad outline of our approach. It is similar to the approach of the Federal Reserve Board, the Office of the Comptroller of the Currency in the United States or the Financial Services Authority in the United Kingdom.
Senator Meighen: Some might argue it may even be better. Your record speaks for itself and in this country we are relatively blessed, with the possible exception of securities regulations. However, that is another story.
I would like to ask about pension plans and the verification that you touched on in your presentation. What degree of cooperation do you have with provincial regulators who are mandated to supervise private pension plans?
Mr. Le Pan: We do have cooperation with provincial regulators. As I indicated, under the regulations, they are responsible for about 90 per cent of the plans.
The federal and provincial legislation is not harmonized in a number of respects, though some parts of it are, but there are differences and understandable differences for cross-jurisdictions, many of them stemming from differences in pension policy.
We work through the Canadian Association of Pension Supervisory Authorities, CAPSA, a joint group of all the federal and provincial pension regulators. There have been efforts to act in a harmonized kind of way. One of the things we are working on now is a further elaboration of guidance on pension plans on pension governance issues. We did some work with the provinces on that about three or four years ago. We believe, as per the discussion with Senator Massicotte, that there is room for improvement, not necessarily in the big plans, but in some of the medium and smaller plans where it is sometimes a challenge for groups to understand what is going on. With the guidance of provinces, we are developing a self-assessment questionnaire that plans can use to help improve themselves. There is cooperation on things like that.
There is also a network of agreements because some plans, not all, have members who are sponsored by employers that have to comply with both federal and provincial regulations. There are agreements for reciprocal supervision of those kinds of plans.
I know also that industry is concerned about the differences in legislation and the differences in pension regulations as a compliance cost issue, and that is understandable, given the situation we have in this country.
Senator Meighen: It sounds as if harmonization is a work in progress in this area.
Mr. Le Pan: That is correct. It shares some of the aspects of other harmonization issues that we have talked about.
Senator Kelleher: I wanted to hone in on the part of your speech where you talked about the impact of recent legislative changes, in particular, Bill C-8. I was here when we dealt with that bill. It was the hope that, to a small degree anyway, it would open up this so-called third sector as well as the area in which foreign banks operate.
You have now had a chance to see this legislation work. One thing that has troubled me is the number of foreign financial institutions seems to be decreasing rather than increasing. I do not want to draw you into the argument. The competition would be good if our foreign banks grew. It is better for our companies to acquire other areas of financing. However, I am worried about this trend. Do you have any observations on that subject?
Mr. Le Pan: First, with respect to domestic institutions, I do not know what was anticipated by parliamentarians, officials or the community about how many new organizations there would be and so on.
Our experience in dealing with the roughly half dozen that are now in place, after Bill C-8 and observing the operation of a number of them over several years, is that they have made a difference.
I cannot comment on the big policy issue of whether that is enough. That is a fair question. Others who are responsible for the overall framework would be in a better position to address that question. That is a judgment to be made by all kinds of policymakers, including parliamentarians.
In several cases it has allowed institutions that were subject to multiple regulations to become federal banks and be subject to a single set of regulations, which was hugely important for their efficiency and their ability to service other markets. We have seen institutions set up as banks that are designed to service particular types of markets, and they are broadly meeting their business plans, so there has been some success.
With respect to foreign banks, the legislation was changed to allow foreign banks that took wholesale deposits — it was basically about the wholesale market — to enhance their presence in the wholesale market. I do not think you can only look at the number of those banks. Some have exited and some have come in. You have to look at the total amount of financing. I am aware that, in some cases, as expected, by allowing the bank to branch into Canada it could essentially use the parent's balance sheet as a way of supporting its lending activity in Canada. That has led, in cases, to a number of those foreign banks significantly increasing their participation in wholesale financing.
Again, is it enough? I am not in a position to answer that question. I can tell you what we have seen. Others would be in a better position to look at the position of the overall market and, if you wanted to explore that area further, you might want to hear from others, including other federal agencies such as the Bank of Canada and the Department of Finance. You may want to ask them, on those markets, whether that is enough or whether more should be done. Regulation is part of that.
As well, tax changes were important. There were changes to the withholding tax that made it easier to fund the participation of these organizations in project finance and mid-sized lending. This is not all about lending to big companies. Much of this is about lending to medium-sized companies as well. There have been demonstrable improvements, but I am not in a position to answer the part of your question about whether that is enough or whether more can be done.
The Chairman: I have several questions, one of which arose from our discussion this morning. I agree that the heart of your mandate is the supervision of federally regulated institutions and pension plans. As you say, you are in the safety and soundness business. I like that. To my mind, that is the ultimate element of consumer protection. If there is safety and soundness in the financial institutions, our pensions and deposits are ultimately protected in our economy.
I read with interest this morning, and I will quote to you, a report by the TD Bank's deputy chief economist Craig Alexander in his report that he tabled yesterday. I have not received the report, so I will quote from The Globe and Mail this morning. In the article, Mr. Alexander is quoted as saying:
The sustained low interest rate environment has dramatically increased global liquidity and may have led financial market participants to become overly leveraged and inadequately diversified, leaving them vulnerable to a sharp and unexpected increase in rates.... Indeed, financial market participants have come to view the prevailing level of interest rates as normal, and this may be breeding a culture of complacency about the risk of some of the investment strategies being pursued.
The article goes on to say:
As well, it says that through a variety of vehicles, such as financial derivatives and reinsurance, risk is being transferred to a wider array of financial market participants...
The author of the article then quotes Mr. Alexander as saying:
“...and in many cases away from the institutions that are the most capable of managing it.”
Essentially, he is arguing that, according to his conclusions, the chance of a crisis occurring in our financial sector is less than 10 per cent. What do you make of his conclusions and how does this relate to your mandate?
Mr. Le Pan: I do not know, because I have not seen the piece, and nor is it clear in that article whether he was talking about the general situation or about Canadian financial institutions. I say that because one of the issues on the agenda of financial safety and soundness regulators like my office and others in other countries has been the issue of risk transfer that is referred to in your article through mechanisms such as derivatives and so on. I believe that risk transfer, properly managed, has been hugely beneficial in helping the financial system deal with shocks. That is true for Canadian financial institutions as well as financial institutions globally.
The key is the word “properly” used, “properly” understood. Several years ago, we participated in international discussions because financial regulators, banking regulators, were aware that quite a lot of credit risk had been moved out of the banking system through the use of credit derivatives and diversified by the banking system. The question was: Where did it go? A number of financial regulators said that perhaps it had gone to the insurance companies, and they questioned whether the insurance companies understood the risks that they were taking by taking in these products. When we looked at the Canadian insurance companies it turned out that they had not been big acquirers of credit risk from the banking sector, and their risk management practices in the areas where they had acquired that risk were very good. Therefore, we did not believe there was an issue. I cannot say that there is no issue anywhere in the world. We know that there is the potential for sharp movements, whether it be in interest rates or asset prices. Certain asset prices have caused problems. Certain dichotomies have caused problems for institutions.
Our concern regarding Canadian institutions is: Do they broadly understand their exposure to those risks? Canadian institutions are not big players in the derivatives markets. Canadian institutions are not big takers of market risk. They do have some exposure to hedge funds. The issue is whether they have managed the exposure well.
It is also important to recognize that when there are events in financial markets or in economies there will be losses. The financial institutions I regulate are in the business of taking risks, and sometimes that means there will be losses. The issue is: How serious are those losses relative to the capacity of institutions to bear them? That is what I look at from the point of view of safety and soundness. We have a banking and insurance system that is well capitalized and well provisioned against potential losses. That is a huge part of our assessment of the risks in our financial system. We take that into account in our methodology to assess risks in the financial system.
A number of the issues raised in the article are potential issues. People need to be vigilant, including regulators like me, so we do not become complacent. It is not our job to be complacent, nor is it the job of risk managers in financial institutions to be complacent. It is also not our job to overreact.
The Chairman: One final question to which you do not have to respond unless you can do so briefly. You feel that your mandate is adequate for the objective that you are given, which is to ensure the safety and soundness of our financial institutions, but if there are recommendations on the legislative or regulatory side, we would be interested in receiving those. We understand that you are a public servant and you are hesitant to do that. You are doing that at the request of a body responsible for oversight, but also responsible for legislation. We are asking you to do that, not your other masters. If you could do that we would benefit from your advice, because you did indicate some concern about some conflicting or inefficient utilization of regulation and harmonization. We would be interested in pinpointing those. Could you do that for us in writing?
Mr. Le Pan: I would be happy to do that. Shortly, for the record, I will say that I believe I have all the powers I need to meet my mandate.
The Chairman: I appreciate that.
Senator Massicotte: You emphasized the prudence aspect of your job. In our last reform of banking regulations we were looking to create smaller banks and allow greater competition, which did not happen to any great extent. One could make the argument that the fact that nobody has failed means you have not done your job, because that means there is inadequate competition. In a pure capitalist sector, for some banks to be competitive and provide better services they have to assume greater risk, which was to some degree the intent of the legislation. Who did not do their job? Why is it that no one failed?
Mr. Le Pan: I have not said that there have been no problems. If you look at our annual report you will see aggregate information on a number of institutions that have been on our problem list. As I said earlier — and it is an important contributor to safety and soundness — we benefited from strong macroeconomic conditions. Before 1996 when we had serious problems which led to financial failures, we had a regulatory system that was not where it is today, but we also had financial conditions and economic conditions that were a lot less positive for the economy, for consumers and financial institutions. We have not seen that again yet. My job is to intervene early so that, if there are problems, they are dealt with in a way that minimizes losses to policyholders.
We have had a few failures, foreign insurers, for example, operating in this country, where the problems were abroad. We acted — and it is reported in our annual report — to protect Canadians in those types of cases.
I am not saying that there should be a failure-free system. Our mandate from Parliament explicitly recognizes that institutions can fail, for exactly the reasons you talked about. That is appropriate.
Senator Angus: In your opening statement you indicated that property and casualty companies are part of the institutions you oversee. Lately, they have been in focus south of the border; in particular by the Attorney General of New York. There was a suggestion that they had been operating in a way that was not transparent and that consumers had not had an opportunity to know exactly what they were paying for or how much they were paying and so on, as well as the general issues arising from contingent commissions and the like. Is this a concern to you; and is there a problem relative to Canadian consumers?
Mr. Le Pan: We have no mandate in this area.
Senator Angus: This would fall under what you call market activity.
Mr. Le Pan: This is market conduct. We have no mandate. We have no powers. As a general matter, though, I supported the move led by the provincial insurance regulators to push for greater disclosure.
We also participate in the Canadian Council of Insurance Regulators with our provincial counterparts, and we made some of our staff that has knowledge of the industry and knowledge of disclosure issues available to them as they were developing their questionnaires on disclosure practices and so on. That is what we should do. They took the lead, but we were there to help through the Canadian Council of Insurance Regulators. I think the initiatives towards greater disclosure in this area are good initiatives.
The Chairman: We will welcome any further comments you might give us in writing in terms of legislative changes that might increase the efficiency of your organization.
We thank you very much for your evidence. It has been interesting and helpful.
Our final witness this morning will be Ms. Sheridan Scott.
Senator Kelleher: If I may make an observation, and please do not take it personally, but more and more lately I receive the briefs of our witnesses just as they appear before us. I am not a speed reader. Could we do something to ensure that our witnesses get their notes to us in advance of their appearance?
The Chairman: That would be useful. Normally we receive complete information about the agencies we are examining before the date of the meeting, but we might ask our witnesses to provide copies of their specific briefs ahead of time, but we cannot compel them to do so.
Your point is well taken. The staff has heard you and I would instruct them to follow your advice.
Ms. Scott, please proceed.
[Translation]
Ms Sheridan Scott, Commissioner of Competition, Competition Bureau: Thank you Mr. Chair and members of the committee. I am accompanied here today by Gaston Jorré, Senior Deputy Commissioner of Competition, Mergers Branch, and Sally Southey, our assistant commissioner, Communications Branch, who is also responsible for our consumer outreach program.
We welcome this opportunity to participate in your study on consumer issues arising in the financial sector.
As an independent law enforcement body, the Competition Bureau seeks to ensure that all Canadians enjoy the benefits of competition, namely competitive prices, product choice and quality services.
The Bureau enforces and administers the Competition Act, a vital piece of economic legislation which touches on virtually all sectors of the Canadian economy. We are not a consumer protection agency, but I believe that two facets of our work would be a particular interest to your current study.
[English]
I will briefly describe how the bureau reviews merger transactions in the financial services industry, and then I will explain the bureau's role in addressing false or misleading representations and deceptive marketing practices. Both these areas, which are under our jurisdiction, can affect consumers in the financial sector.
Let us begin with merger review. The Commissioner of Competition can review mergers in all sectors of the economy, but large mergers in the financial services sector are somewhat unique. It is important to realize that the bureau applies the same analytical framework when reviewing a bank merger as it does for other sectors. We assess whether the merger would result in a substantial lessening or prevention of competition. This means that we assess whether the merger creates, enhances or maintains market power.
We tend to focus on whether or not the merged entity has the ability to raise prices. However, we also address non- price dimensions of competition such as a reduction in quality or service.
In the bank merger reviews of 1998, we examined the impact on competition in all banking services and determined that a detailed analysis was required for three major lines of business in which banks are engaged: branch banking services to individuals and businesses; credit cards; and securities. Other areas of banking did not pose competition concerns and, therefore, were not subject to detailed review.
When the bureau concludes that a merger would result in a substantial lessening or prevention of competition, we work with the parties to find a remedy. If there is no settlement, then the parties would either abandon the transaction or face possible litigation before the Competition Tribunal.
However, in the case of bank mergers, there is an exception that gives the Minister of Finance the final decision when he has certified that his actions are in the best interests of the financial system in Canada.
In 2001, as part of Bill C-8, the Department of Finance issued guidelines that set out the separate responsibilities of all of those concerned with respect to large bank merger reviews.
This is part of my text, Mr. Chair. I could skip over the details, since this sets out the separate roles and responsibilities.
The Chairman: It is important for the listening public to understand the separation of powers and duties, so spend a few moments on this.
Ms. Scott: I will go over this list, which was drawn from the annex to Bill C-8 when it was introduced in 2001.
The Chairman: We will try to set this out in a chart in our report, but it would be most useful for you to go through that now.
Ms. Scott: The Competition Bureau and the Office of the Superintendent of Financial Institutions provide independent reports to the minister. The House of Commons Finance Committee and the Senate Banking Committee provide their reports to the Minister of Finance.
The Chairman: That is not quite correct. We report to the Senate.
Ms. Scott: That is interesting. We were talking about this at the office. We read the guidelines, and that is what they say.
The Chairman: I am sorry. Senator Angus points out that, not only do we report to the Senate but, in this particular instance, we do in fact report to the Minister of Finance. It is a dual reporting function.
Ms. Scott: We are trying to be quite careful because it is important to understand the independence in both roles.
The Chairman: It is both.
Ms. Scott: The Minister of Finance renders a decision on whether the public interest, and prudential and competition concerns raised by the transaction are capable of being addressed. If not, the transaction is denied and the process ends. If the concerns are capable of being addressed, the merger review process enters the negotiation of remedies stage, and the Competition Bureau is responsible for negotiating the competition remedies with the banks. Meanwhile, OSFI negotiates the prudential remedies and, following the successful negotiation of those remedies, the Minister of Finance is in a position to approve the transaction with terms and conditions that implement those remedies.
Those are all our separate lines of responsibility.
The analytical framework for reviewing transactions in this industry has not changed since 1998, when the bureau reviewed two bank merger proposals. We will continue to apply this framework in any future transaction. The outcome may well be different, given changing circumstances in the marketplace, but the framework will remain the same.
[Translation]
The second area I would like to address relates to our jurisdiction over false and misleading advertising, which touches consumers and the financial services sector in a variety of ways. Our jurisdiction is this area is based on the need for consumer confidence in the marketplace which is key to a well-functioning economy.
Financial institutions, like other businesses, cannot engage in false and misleading advertising. The Bureau carefully reviews all complaints received on this subject. However, the vast majority of complaints regarding financial services are not against major institutions like banks. The bulk of the complaints deal mainly with various types of fraudulent representations to entice consumers to give away their money in the hope of getting access to loans, for fake credit card protection, solicitations to obtain personal financial information, etc.
[English]
Over the years, the bureau has seen a number of such scams that affect financial institutions. Litigation in this area is very expensive and is often not the best means of enforcing the act. Sometimes public awareness initiatives and other means of encouraging compliance are cheaper and often more effective. This approach of using different instruments is known at the bureau as the conformity continuum. Educating consumers is a vital part of this process.
The fraud prevention forum is one example of how the bureau works to increase consumer awareness and promote confidence in the marketplace. As chair of the forum, I was pleased to join with our partners in declaring this month Fraud Awareness Month in Canada. Our goal is to inform Canadians about the dangers and warning signs of fraud.
This month, more than 45 public and private sector organizations, including all the major financial institutions, are participating in a number of ways, such as distributing more than 30 million bill inserts, airing public service announcements, buying newspaper advertisements and posting web banners, all in the name of fraud education and prevention.
Millions of Canadian consumers are being educated on how to protect themselves from fraud, thanks to this month- long campaign.
In addition to our fraud prevention work, the bureau is also building partnerships directly with consumer organizations in order to develop an open and constructive dialogue on consumer issues, including those that affect financial services. In December 2004, we hosted an inaugural meeting with representatives of consumer associations and various consumer groups. As part of the meeting, the bureau outlined its work, mandate and benefit to consumers. It also explored ways to strengthen linkages with these groups.
[Translation]
The Bureau also needs to understand changes in the business environment if it is to do an effective job. Technology, globalization and deregulation have changed many business models, and we need to be aware of the latest developments. As a result, we have established a number of industry sector teams, including financial services. The creation of sector teams and the organization of sector days will ensure that the Bureau is aware of, and sensitive to industry developments and concerns.
Sector days will involve a series of meetings between industry leaders and the Bureau staff in order of us to learn more about how the business environment is changing. The fist of these sector days will take place on March 14, 2005 in Ottawa, focussing on the financial services sector, specifically insurance.
[English]
I would like to take this opportunity if I may, Mr. Chair, before concluding my remarks, to update the committee on consultations we were conducting in relation to the issue of efficiencies under the act. Some of you may recall that, when I appeared before you in the spring of 2004 in relation to private member's Bill C-249, you expressed an interest in understanding the issue of efficiencies in light of Canada's broader industrial and economic context.
Since Bill C-249 died on the Order Paper, the Competition Bureau has undertaken an extensive consultation process consisting of three main components: first, a consultation paper entitled “Treatment of Efficiencies in the Competition Act,” as a basis of discussion; second, an international round table in October 2004 with participants from a number of other countries; and, third, an advisory panel of experts with backgrounds in business and international trade.
You might be interested to learn that, as part of this consultation process, we have received a submission from a financial institution, the RBC Financial Group, highlighting the importance of the consideration of efficiencies in the context of bank merger proposals.
Senator Angus: On the subject of negotiation of remedies, which I think was the first major subject you addressed, when negotiating the so-called competition remedies in a particular circumstance under review, a proposed merger, could you give us some practical examples of how these negotiations on competition would play out so we can have an idea of how that works?
Ms. Scott: Certainly. There is one main remedy that we would look at in the context of banking transactions. That would be divestiture of some of the branches that would be acquired in the context of a merger. We would sit down with the parties and go over our analysis of the various markets. As I indicated in my opening remarks, we segment the various product markets. We segment them geographically as well. In a given geographic area, we would look at part of the credit card market. A better example would be with regard to branch banking. We would say, for example, “We think that there is too much concentration. There is the likelihood that you have market power that would allow you to increase prices. You must agree to divest a certain number of these branches.” Those would then be sold to another competitor. That would be a typical remedy that we would negotiate.
Senator Angus: Before asking one of the parties to divest or take some steps in this regard, would you consider alternative sources of supply, for lack of a better word, such as the modern types of banking that do not need a branch? Does your bureau look into those things and have a good understanding of the market?
Ms. Scott: That is exactly what we would look at when we do our initial analysis of the market. We would look at what is currently available by way of a competitive product in that market. We would take a two-year horizon, looking forward to see what type of banking we think will emerge that would act as a discipline on prices.
Indeed, the issue of electronic banking arose in the context of the previous banking mergers. There was a discussion about whether there would be a strong presence of electronic banks in the market. The assessment at the time was that there would not be a sufficient presence to act as a discipline on prices.
We do not know if and when we will get bank merger applications, but that would certainly be something we would look at when we study the product market, that is, whether there are alternate sources of supply. That goes to our competitive analysis. That goes to our assessment of whether there is sufficient competition in the product market that we are looking at. Once we decide there is insufficient competition — that is, there would be market power that would allow for an increase in prices — that is when we sit down and negotiate remedies such as divestitures.
Senator Angus: On a second subject that you indicated you are involved in, false and misleading advertising, fraud and improper practices, one of the things that has arisen in our current study, as you may have observed, is the issue of payday loan emporia. Some 1,000 of them have apparently grown up in Canada. We have had varying comments about them, not many of which are favourable, other than those from their own association.
To what extent would your mandate have anything to do with them? I do not want you to get into an area in which you do not have an interest.
Ms. Scott: They are essentially provincially regulated.
Senator Angus: They are not regulated at all.
Ms. Scott: They are subject to provincial jurisdiction; I should put it that way. To the extent that there was any false or misleading advertising in a material respect, that might be something we would look at, but I am not aware of any complaints to us in this particular area.
Senator Angus: We are told that the reason they have grown up is that the banks that are sometimes involved in these negotiations with you do not either accept nor give out loans of the nature these people give, even though they are required to let all Canadians have access to a bank account and the ancillary things that would go with a bank account.
Would a line of credit for $200 or an overdraft privilege fall into a category that you could negotiate with banks? You certainly have the power to encourage them to unload a bank branches and the like.
Ms. Scott: Our remedies deal with the issue of whether there is a substantial lessening of competition. That would be the sole basis upon which we could negotiate some type of remedy in the context of a bank merger. I am not sure to what extent it would extend that far.
That being said, I may say a few words about our reaction to those sorts of situations. One thing that we believe is absolutely essential for the good functioning of a marketplace is accurate information for consumers. I believe that some of the other witnesses who appeared before you made the observation that the more information you can provide to consumers about the availability of bank accounts, the more they understand about their ability to open bank accounts and have access to financing at a better rate. Those are good things, as far as we are concerned, and we would support any initiative to get more information to consumers.
Senator Angus: The last subject I wish to deal with is Bill C-49. I think many of us were not unhappy that the bill died on the Order Paper.
Is there any great gap now in the system because those provisions are not on the law books?
Ms. Scott: As I indicated in my remarks, we took your suggestions to heart, and we have found that people have been responsive to the discussion paper we published. It is an extensive discussion paper that outlines the history of the efficiencies defence and the legislation. It sets out a number of options that one might pursue, including the status quo.
We have had a number of comments on this paper. We had the international round table, as I mentioned, and we have held round table discussions in Vancouver, Toronto and Montreal. Those discussions were well attended, and interestingly enough, we had quite a variety of players that brought their own perspectives, so there was quite a debate at those round tables.
We have now struck a panel and we are in the final stages of defining its mandate. We will shortly be announcing that and the composition of the panel. The panel will try to give us a broader perspective of the general economic and business conditions and how those relate to the handling of efficiencies under the legislation.
Senator Angus: Returning to my question, are you comfortable that without the provisions of Bill C-249, there is not a big gap in our law? Are we are all right without it, given what you have done?
Ms. Scott: We have not yet had a party advancing an efficiencies claim that would engage some of those elements. Again, it is always hard to know what parties did not come forward.
The efficiencies defence is complicated by the balanced weights approach which requires fairly sophisticated evidence to be filed, so we do not know whether that is acting as a disincentive to any parties to come forward.
I wanted to touch on the changes in the industry. One of the reasons we began the series of sector days was related to the point to which you were alluding. It is important for the bureau to stay on top of changes in the industry. It is important for us to understand the implication of changes due to globalization and accelerating technological change. That change is not just rapid, it is accelerating change that is turning a lot of business models on their heads. Deregulation is also a factor. Those are three very important forces at work in our economy.
Much of our information on industries is gathered in an adversarial context, merger review, abusive dominance provisions, and we felt it would be a more instructive approach to bring people and business leaders in to talk to us about their businesses so that we can understand, from their perspective, how they believe those forces are affecting their businesses. We do not have to agree with everything they say, but this will allow us to understand, from their perspective, the changes to which you were alluding, for example, in the form of Internet banking.
[Translation]
Senator Massicotte: I would first like to thank you for accepting our invitation to appear before our committee. Your comments are always very interesting and help us a lot.
Looking at the regulations and the process you use to determine whether there is greater or less competition following a merger, it appears the analysis is always based on the price of the product as such, by comparing products of similar quality. I am not an economist, but based on that and the comments of some experts, I can see that the process is actually quite subjective and complicated. There is not always agreement that the analysis inevitably leads to the same conclusions. Is the process actually that subjective and inconclusive?
Ms. Scott: I am going to turn the floor over to my colleague, who will be able to give you a more detailed answer. But first, I will say that we use an analytical framework very similar to the one used by the Americans and the Europeans. This way of analyzing the situation is well known in the world of economists and mergers experts. We take advantage of all of the experience of employees of the bureau and agencies in other countries to determine the approach and guide our market analysis. The process may seem complicated. However, the experts in that area have a lot of experience and are highly qualified to do this kind of analysis. Do they all agree on the conclusions? Like anything in life, it is hard to get unanimous consensus. However, in general, people agree on the basic factors that go into merger analysis.
Senator Massicotte: After analyzing, you reach certain conclusions. Do you do a post-mortem of those conclusions, three years or five years later, in order to confirm the validity of the scenario and the functionality of the model you have come up with?
Ms. Scott: We discussed this question the last time I appeared before your committee. This type of analysis is of great interest to me. Our powers in this area are limited. However, I asked to have two analyses of this type produced. The problem with a post-mortem analysis is that you have to rely only on public data. Frequently, this kind of analysis requires more confidential details from the companies that are subject to a court order or an agreement with the Competition Bureau.
Although our powers are limited, we do try to do this kind of analysis. I asked to have two studies of this kind produced and we are still awaiting the results.
Senator Massicotte: I would just like to make two comments on the regulations enacted in 2001 on Canadian bank mergers. I know that you did not draft those regulations. However, the banks have followed those regulations. The process is so complicated that you do not want anything to do with it. As a result, there is no application for the main Canadian banks that have merged since 2001.
In addition, in 1998, you did an analysis of two mergers. In response to a question you were asked earlier, you indicated that you still occasionally do analyses of this industry. What does the competition among Canadian banks look like today? Is it a very active scene or adequate? Are you satisfied?
Ms. Scott: You have asked a number of questions. First of all, we do not do any analysis on a regular basis. For one thing, we do not have the resources for that, and for another, it goes beyond our mandate. Our mandate is limited to the issue of mergers. Instead, we try to monitor industries. We have industry days that help us to monitor them, but we do not do any studies.
[English]
The Chairman: Did Senator Massicotte not raise a deeper issue? He is saying that when you look at the grid, your mandate is competition, that is, to increase competition, to ensure that competition is fair and equitable and to preserve competition. Is Senator Massicotte not raising a deeper question, which is that, if there is a whole series of regulatory hurdles, that in fact protects those who do not seek to compete?
Ms. Scott: I am not sure what those hurdles are. In terms of the banks, I understood you to say the banks felt the analysis was too difficult for them to come forward with merger applications.
Senator Massicotte: Since 2001, the press has been telling us that banks have to go to the Competition Bureau, the OSFI, the House of Commons Finance Committee and the Senate Banking Committee and then back to the minister. The press tell us that businesses do not want to do that. In fact, no mergers have taken place. Advanced merger plans have died. What is the message, and it is a good one?
Ms. Scott: That is not in our mandate.
Senator Massicotte: Does it inhibit competition?
Ms. Scott: We can only see the competition when it comes forward. I could not say that there is less competition because you say that parties are not coming forward that might otherwise want to merge. We have seen some growth in competition because of the changes due to Bill C-8; and a number of witnesses have testified to that. It is difficult to say whether it is as much as one would expect or less than one would expect. There has been an increase in the number of players in the field since Bill C-8 was enacted.
[Translation]
Senator Plamondon: I have two questions. The first has to do with mergers and the concentration that they entail; the second has to do with advertising. Before being appointed to the Senate, I headed a consumer group. Everyone feared that with bank mergers there would be no healthy competition. There have not yet been any bank mergers, but there have been branch closures, and Bill C-8 set certain conditions on that but did not stop it from happening, though it did enable people to state their views on those closures.
After the closure of a branch, we have also seen the closure of the bank machine that replaced it. The machine replacing the branch had to be cost effective. My concern is that with mergers, we will wind up with even fewer services.
Senator Angus referred to the disappearance of banking services with small loans. I think that may be related to the fact that there are no points of service close to the consumer. What has replaced points of service are payday loans, which are readily accessible in all kinds of buildings nearby and write their own rules — except in Quebec.
How did you react? You are there to ensure competition, but when a lack of competition amounts to a lack of services, do you have any authority to act?
Ms. Scott: Perhaps I should clarify the mandate of our office, because the chairman also said that our responsibility was to ensure competition. In fact, that is not the mandate of the Competition Bureau. Our mandate actually has to do with the enforcement of the Competition Act. Our authority is limited to mergers. We conduct tests to determine whether a merger is going to lead to reduced competition. So it is not about ensuring a level of competition.
Senator Plamondon: No, but to foresee a lack of services.
Ms. Scott: We disallow the merger if we believe there will be a decrease in competition.
Senator Plamondon: Let us talk about mergers; does that also include acquisitions?
Ms. Scott: Yes.
Senator Plamondon: If it includes acquisitions, it is because sometimes, a financial institution might acquire a few branches, and that was authorized; in those cases, do you see the consequences in terms of a lack of services or a decrease in services for consumers?
Ms. Scott: Our analysis is primarily based on prices, and then on the issues of quality and choice. It is difficult to foresee all of the possibilities, but we try to do so. It is easier when it comes to prices, but we also look at the issue of the other two factors, choice and quality.
Senator Plamondon: We asked a previous witness about finance companies that offer insurance services. That is a captive market; there is no competition in that case because the insurance that is offered to the consumer is the insurance the company provides, not some other insurance. There is no choice of insurance.
Ms. Scott: That depends on the insurance.
Senator Plamondon: It is a captive market.
Ms. Scott: We received a complaint a few months ago; we studied various insurance markets; it depends on the insurance market.
Senator Plamondon: My second question has to do with advertising. I have been listening to consumers for 40 years, and I have seen that often, a complaint against a large company leads to an investigation and some results. But a complaint against a small company, because of the costs the prosecution entails — in the language of bureaucrats, it is called “opening a file” — there is no prosecution.
After some years, I am wondering how it is that a large company can be prosecuted, because that will result in a fine that will set an example and inspire respect, but the small companies are not prosecuted and get let off the hook. They just get a file opened on them and a letter of reprimand. Do you investigate all complaints?
Ms. Scott: We do not have the resources. We receive 60,000 complaints, that is our problem. Often, when we choose, we choose a company that could serve as an example.
We are proposing amendments to add fairly stiff fines to discourage companies. That way, there would be much more serious implications if we were to decide to prosecute those people. It is a sort of control over their behaviour to. We are not against the possibility of prosecuting small businesses too.
Senator Plamondon: But because you do not have a budget, you open a file.
Ms. Scott: We try to contact the companies and we sometimes meet with them. We are trying to create a program to get the companies to respect the law.
Senator Plamondon: What would you need to help all the consumers who complain to your office?
Ms. Scott: I talked about the continuum we operate by, which includes educating consumers, creating programs to get companies to abide by the law, and sometimes we have to resort to prosecution. If we were to prosecute everyone, we would need millions, if not billions, of dollars, frankly.
[English]
Senator Angus: It gives new meaning to the term “scot-free.”
Ms. Scott: The difficulty is if we had 60,000 complaints coming in our front door, we would need limitless funds to pursue those companies.
We try to strike a proper balance by going after some companies, so that there is an understanding and clarification of the law. Then we do consumer and business education. We visit companies, which is a less costly way of going about this. We can visit them and explain the problems. As with any other government agency, it is impossible to prosecute every contravention of the legislation.
The Chairman: I know the statistics are in your annual report, but it would be useful for us to have those as they relate to your commission, that is, the number of complaints, how many you deal with and their nature. Perhaps you have a graph which shows whether they are increasing or decreasing. I think that goes to the heart of Senator Plamondon's question, which is related to the fact that we are here not to set up hollow laws. We are here to set up laws that can be enforced. If the laws are hollow, then we must change them.
Ms. Scott: It is not so much the laws; rather, it is a resource question of the budget.
The Chairman: An unenforced law becomes a hollow law or ineffectual.
Ms. Scott: We try to select the cases for enforcement in order to create examples and provide deterrence. As I mentioned earlier, currently proposed legislation is studied that would do two important things. It would introduce fines and penalties for what are called “abusive dominance provisions” in the legislation, which would increase deterrence, and also introduce restitution for consumers who are duped.
The Chairman: Perhaps you could give us your entire compliance plan with the number of complaints and the problems, and we will analyze that along with the question of cost, which you mentioned. This committee does not believe in hollow or ineffective laws. I am sure I have opened up a whole raft of questions.
Senator Meighen: You referred to 60,000 complaints. Were those complaints in the form of evidence, or did people just write in with a complaint?
Ms. Scott: They are complaints. Our job is to seek out evidence.
Senator Meighen: Anybody can write a letter. They need not have evidence or anything to substantiate their complaint.
Ms. Scott: That is correct. Then we select from those. Some people might choose to send in evidence to encourage us to proceed.
[Translation]
Senator Plamondon: I know people send you evidence which could form the basis of a trial. But prosecution may cost more than it is worth, even when your statistics are published, because not a lot of people may hear about them. So what you are telling Canadians is that if they go after a big company, the Competition Bureau might get involved; but if they go after a small company, the Competition Bureau would probably not get involved.
I would like to hear you say that you will ask for additional funding.
Senator Angus: In fact, you would probably get it.
Ms. Scott: We already made the request. We asked for additional resources in the past.
Senator Plamondon: We do not give out the funding, but the very least we can do is support you.
Ms. Scott: To come back to your question, if you read the annual report, you will see that some small companies were subject to court orders. However, we have not found many such companies, because we lack the resources. It is not because we do not want to do it.
Senator Plamondon: I got that information from an investigator.
[English]
The Chairman: We are having a talk amongst ourselves. One of our senators acts as our budget chief. We also have problems with our budgets, so we understand your problem. Budgets are important, as is effectiveness.
Senator Meighen: This will not take long because it will become readily apparent that I am seeking an education in competition law. I have never practiced it so I do not understand it.
You say that you look into mergers if they would result in substantial lessening of competition and a substantial reduction of price. Is that the efficiencies to which you referred in the latter part of your presentation?
Ms. Scott: Yes.
Senator Meighen: I gather that your mandate is far more, if not exclusively, one of ensuring competition rather than taking into account efficiencies.
Ms. Scott: We carry out various aspects to the study. Generally speaking, with most of the mergers that we look at, it is a two-stage process. We look to see if there is a substantial lessening of competition. Once we conclude that there is, we proceed to a second stage where we determine if there would be sufficient efficiencies that would offset and outweigh that substantial lessening of competition. It works differently in the banking sector, but it is an issue to which we would address our minds.
Senator Meighen: It is theoretically possible that you would conclude that the efficiencies outweigh the lessening of competition; is that correct?
Ms. Scott: That is one of the issues that was raised in our efficiencies consultation by the banking group that participated in the round table. They were saying that efficiencies are quite important to them, and they think they should be a matter of considerable relevance in the context of banking mergers.
Senator Meighen: With respect to false and misleading advertising, does it matter to you which medium is used, whether it is the telephone or the printed word?
Ms. Scott: It could be in print, on TV, radio, a broad range of possibilities.
Senator Meighen: Telephone?
Ms. Scott: Telephone. It would be false advertising in a material respect that misleads a consumer.
Senator Meighen: Given the fact that you made reference to the fraud prevention forum, there are many cooks in this particular broth, principally provincial cooks, and you have to cooperate with them. Mr. Le Pan, rightly so, made much of his efforts to work closely with provincial authorities. Is that part of your mandate, and have you had any success?
Ms. Scott: The fraud prevention forum is a very good example of bringing people together and it is also a good example of being effective in how we do this, as well as getting the biggest bang for our buck. We have been conscious of that because it is so very expensive to enforce our legislation.
In the area of fraudulent telemarketing, we have created five partnerships across the country. We bring into those partnerships a variety of players who can put their own resources in their area of responsibility towards tracking down fraudulent telemarketers and asking for penalties and prison sentences. We have in our partnerships the RCMP, local police forces, consumer ministries, the U.S. Federal Trade Commission, the Canada Post Corporation, and ourselves. We each do what we do best in order to shut down fraudulent telemarketers.
If you followed the news out of Montreal last week, you would see that we did a major raid in a boiler room in Montreal. The Competition Bureau was involved in various parts of that raid, along with the RCMP. We are pursuing the possibility of extraditing the two principals to the States, where they could face fairly significant prison sentences. That is part of the work that we are doing with our Montreal-based partnership. One of the most effective ways of using our resources is to pool them and leverage that to go after the very expensive crimes to track.
Senator Meighen: Can a person in a position of confidentiality, not necessarily a lawyer, but say a bank manager, act as a whistle-blower on a customer?
Ms. Scott: Yes.
Senator Meighen: Is it the duty of the bank manager to do so? For example, if the bank manager has a customer, who is a senior, who says, “I would like to transfer $5,000 or $10,000 to a person who tells me that the money is to cover administrative costs, and if I do so I will be awarded a prize of $50,000,” what is the responsibility of the bank manager at that moment? Does he or she pick up the phone and call you?
Ms. Scott: I am not a corporate lawyer or familiar with fiduciary concepts in the banking sector or any other sectors, so I do not know. We certainly offer protection for whistle-blowers. We do get whistle-blowers and theirs is useful evidence.
Senator Angus: You are talking about advance payment scandals.
Senator Meighen: Would a bank manager have a legal obligation not to say anything or to say something?
Ms. Scott: I do not know the answer to that question. This relates to the issue of public awareness. One of our partners in the fraud prevention forum is the Canada Post Corporation. Part of what they are doing to contribute to this endeavour is to instruct all of their employees how to recognize someone who is sending money in order to claim lottery results. That is a standard scam. A number of our corporate members are thinking of teaching their employees the indicia so that they will be better able to recognize when a scam takes place, and so we can stop it before it occurs because that is the most cost effective way of enforcing our legislation.
The Chairman: It would be useful for the committee to have an analysis of your budget. How many people are involved in the analysis branch which deals with mergers and competition problems, and how many would be directly involved in the enforcement of false, misleading representations and deceptive marketing practices? It would be useful for us to know the allocation of the funds that the government disburses.
Senator Angus: We would also need to know the human resources.
The Chairman: We would add those requests to the material that we have already requested, which is the number of complaints, the nature, the timing and all of that. That will help us analyze the effectiveness of the consumer aspect of your department.
Ms. Scott: As to disaggregating it by subject matter, financial services versus non-financial services, we do not have that level of detail for complaints.
The Chairman: We are not asking you to create new information for us. We will make an analysis of whether that might be useful. We are here to act as an overseer, not to question what you do, but review what has been done.
I would like to deal with the question of regulation in Canada as it applies to competition and regulation in the United States. We are all aware of actions taken recently in one jurisdiction in the United States with respect to competitive pricing in the insurance business. I read recently as well, again based on newspaper reports, that a penalty was exacted by the regulator of $850 million under certain regulatory powers.
Ms. Scott: Are you talking about Mr. Spitzer?
The Chairman: Yes. When you read that information in the New York Times, the Wall Street Journal or in the Report on Business in the various newspapers, does that trigger some type of response from you to pursue your mandate of, namely, “competitive prices, product choice and quality of services?”
Ms. Scott: I was most interested in those reports in the newspapers. In terms of the allegations that occurred in that case, in one situation it involved insurance commissions, and that is not our area of responsibility because those are regulated at the provincial level. We have no price regulation powers in our legislation. That is not something we do.
I will deal with bid rigging in a second.
The Chairman: You are leading to my next question. Is that not part and parcel of competitive prices?
Ms. Scott: The Competition Act that we administer is based on the view that, if you have a competitive marketplace, then that will produce competitive prices, innovation and quality services.
We do not have any separate power to regulate the prices in the marketplace. We rely on market forces. The regulation of particular prices is not our responsibility. There is nothing in the legislation that relates to price gouging or those sorts of activities.
What we always consider is whether a merger will result in a substantial lessening of competition or whether market power is being used to substantially lessen competition. We do not have jurisdiction to look at whether market power is allowing a company to charge prices that some may find unreasonable. We do not have that jurisdiction under the legislation.
In terms of the particular level of prices that was part of that investigation, that matter would be regulated at the provincial level, that is, insurance premiums that would be paid. We would simply not have that jurisdiction.
The Chairman: Pause there for one moment and you will move to your next step.
We have the interprovincial responsibility of commerce. This committee has three mandates. People think of us as a banking committee, but our mandate is banking, trade and commerce. One reason for a federal committee is that commerce is transborder, not just intraborder.
If this matter of commissions, as an example, is transborder, does that not fall within your jurisdiction?
Ms. Scott: It may fall within federal jurisdiction, but it does not fall under the terms of the Competition Act. We do not have jurisdiction to regulate prices. We do not.
The Chairman: I understand that. In effect, if it is a practice that is anti-competitive, reduces product choice, decreases quality of services and increases prices, is that not your mandate?
Ms. Scott: The Competition Act outlines the specific things we can do. They relate to merger enforcement, abusive dominance and so forth.
The Chairman: We are talking about uncompetitive practices, generally.
Ms. Scott: There is no general provision in the legislation that relate to unfairness.
The Chairman: That is transborder.
Ms. Scott: There is not that provision in the Competition Act; that is not how the legislation is set up.
The Chairman: Do you think that is a lacuna in your mandate?
Ms. Scott: I am not sure that we would want to embark on a detailed study of prices generally in the marketplace. I am not sure that is jurisdiction that would not be exceedingly broad. It certainly is not jurisdiction that you would find in any of my counterparts in the world. They do not have that jurisdiction. Perhaps another outcome of the competitive marketplace would be that, over time, that type of activity will be disciplined.
The Chairman: You should be aware that this committee has decided as part of its mandate, which was unanimously agreed to by the Senate, to study, at Senator Angus's behest, productivity in this country and that goes to the question of prices, competition and uncompetitive practices. We will be looking at this in a general way. We value your advice as to whether or not this is a lacuna in the law. I understand the differences between practices within a province, but these practices for major companies are not necessarily limited to a province. Their scope is national. They aim to be national in scope. They aim to serve the national marketplace.
There is federal power, but you are saying that the federal power has not been directed towards you.
Ms. Scott: I do not know. I have not studied this well enough to know if there is federal power here. One could say it is federal and not under the Competition Act. I do not know that from a constitutional perspective.
There are other mechanisms in the legislation that we have not spoken about that might be relevant in the type of situation that arose in the United States. Those are price fixing and bid rigging provisions. I do have jurisdiction in that area.
The Chairman: Tell us about that.
Ms. Scott: Those are criminal offences under the Competition Act. If parties get together and conspire to fix prices or parties get together and rig bids, then we would investigate that. In the context of the insurance industry, we have had no complaints. When I read about that in the newspaper, I immediately directed my mind to that question.
Your next question might be, “Did you do something about it short of receiving a complaint?”
The Chairman: You are a very wise public servant; that was my next question.
Ms. Scott: We do have informal conversations with members of financial institutions and whatnot. If we did want to launch an investigation in this area, the law requires us to have what is called “a reason to believe.” We would have to have some evidence — not a huge amount of evidence, not the full file — that would allow us to form a reasonable belief in order to go before a judge to say that we believe that there had been a contravention of criminal provisions in the legislation.
We are interested in the public being informed about our legislation so that they can send in a skeleton complaint that will allow us to get intrusive tools such as warrants, production orders and other tools that would allow us to force companies to produce information that might be useful.
The Chairman: I am trying to put myself in the place of an average Canadian, picking up his newspaper and reading, as most businessmen do now, not only the business pages across the country, but also the Wall Street Journal. This is front page news in the Wall Street Journal and it might trigger a ripple of response from Canadian or provincial regulators.
What you are saying to me is that perhaps we should consider is that the legislation makes you almost the agency of last response as opposed to an agency in anticipatory response.
We heard interesting testimony this morning from Mr. Le Pan who indicated that he views his mandate not only to look at his responsibilities, but also to try to anticipate problems and to give advisories to the institutions that he regulates in order to ensure that the ultimate result will meet his mandate.
What you are saying to me is that you are limited under the legislation from doing that.
Ms. Scott: We are an enforcement agency.
The Chairman: No, you are both.
Ms. Scott: I will actually add what else we do, because we are an enforcement agency, generally speaking. The major part of our mandate is to be an enforcement agency. We also have some responsibilities for policies and whatnot. It is in that context that we think it would be a good idea if the Competition Act were amended to allow some additional remedies — to be a disincentive to deal with anti-competitive behaviour that I mentioned earlier such as restitution and abusive dominance.
The Chairman: Again, you are reading my mind. We are here in an oversight capacity. If your mandate is not effective and raises serious questions regarding egregious practices in Canada, and that can be remedied, we would be most interested in that. We would be interested in taking a look at your recommendations to deal with this question of ensuring that uncompetitive practices have no place in the Canadian economy. I believe I speak on behalf of all honourable senators. They are nodding.
Senator Plamondon wants to add her comments.
[Translation]
Senator Plamondon: I think the law says that if about 15 people get together and sign, they can request an investigation.
Ms. Scott: Indeed, it takes six people.
Senator Plamondon: Whatever the case may be, we are not talking about many people. When a request was made to investigate the price of gas, we did not get the expected results. We were told that no measures were in place.
Ms. Scott: We said that we would continue to monitor the situation and that is what we did. We are in the process of conducting a study on that subject, but it is not finished yet.
Senator Plamondon: What a way to deal with a problem. Six people get together and ask for an investigation to be opened or for research to be conducted into a problem based perhaps on competition.
Ms. Scott: If we want to conduct a search, for instance, we need a judicial warrant. I do not have unlimited power, even if six people do sign a request.
Senator Plamondon: However, it is one way to tackle a problem. If six Canadians get together because they believe there should be an investigation, they can file a request with the Competition Bureau, which in turn could ask for a judicial warrant.
Ms. Scott: In the case where a search may be deemed necessary.
Senator Plamondon: For a while now, we have asked the market to regulate itself. Some people think this is possible. However, we have just heard that this is not always the case. Do you think that it is in the interest of Canadians for the market to regulate itself?
Ms. Scott: It is a question of choice. You can try to regulate everything that happens in the market, or you can let the market regulate itself, or you can partly regulate it. Our law is based on the principle that the market should be the starting point for the allocation of resources. Those are the powers which we have been granted.
Senator Plamondon: But if, as the chair pointed out, this solution does not work, you would have to think of an alternative.
Ms. Scott: It is hard for us to intervene every time the market makes a mistake, because we do not know whether the problem will be permanent or whether the market will correct itself. We can only intervene in some situations, but not every time.
[English]
The Chairman: I wish to thank all honourable senators for their interest in this subject.
Ms. Scott, you can see that there is a deep interest in your mandate. We would be interested in receiving from you the material that we have requested that we will try to analyze and, if necessary, we will invite you back if there are some questions to which we do not have the answers.
We thank you and your two colleagues for your attendance. This has been an interesting and provocative session. It has heightened the senators' awareness of the some of the problems we have to address.
Ms. Scott: Thank you.
The committee adjourned.