Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 11 - Evidence - Meeting of April 21, 2005
OTTAWA, Thursday, April 21, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:55 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: Ladies and gentlemen, welcome to our hearing. This is a continuation of the Standing Senate Committee on Banking, Trade and Commerce's examination of consumer issues focusing on oversight of consumer protection mechanisms within the financial sector. We are delighted to have Mr. Protti from the Canadian Bankers Association here with some of his colleagues.
For your information, CPAC telecasts these proceedings from coast to coast and they are available on the World Wide Web. Your words will be heard or listened to around the globe. The only thing we would like you to do is to keep your presentation as short as possible to allow the committee members as capacious an opportunity as possible to ask questions
Mr. Raymond J. Protti, President and Chief Executive Officer, Canadian Bankers Association: Thank you, Mr. Chairman. Ms. Hubberstey, Mr. Terry Campbell and their staff have been instrumental in preparing the material in front of you and will certainly assist me in the question and answer session.
I have taken your admonitions about being quick to heart. Everyone has a package in front of them. Under the first tab is our full-length submission, which I hope you will read at your convenience. I will give a short presentation with 10 slides. You will find our written notes in your package under the tab "Presentation,'' and you can follow along with the PowerPoint presentation.
You will find more analytical material under tabs entitled "Competition,'' "Access to Banking,'' "Choice,'' "Affordable Service,'' and "Consumer Protection.'' Through the course of the question and answer period, my colleagues and I may refer to these sections.
We have a mass of other material. If you request any other information, we will be delighted to provide it to you.
The Chairman: I have had an opportunity to go through your presentation. We are delighted with the depth of the material. We are interested in statistics, as you know. We want to hear what people say, but we also want to see through statistical analysis whether it is accurate or not or if it reflects what is going on. Thank you for the depth of your material.
Mr. Protti: Your guidance and encouragement while we prepared for this session ensured its success.
The consumers of financial services products are well served for four reasons. First, there is a lot of competition in the sector, and when there is a lot of competition, it is excellent for consumers. Second, we feel we now have an efficient and effective government regulatory process in place. You have heard bits and pieces about that process and we will spend some time on further discussions.
The third critical element is that consumers should have a redress mechanism in place. We have an effective, efficient and costless redress mechanism for the consumers of financial services products. The fourth element is you need to have education. You need to have a package of consumer education.
Everyone is familiar with the six large domestic banks in Canada; but in addition, there are 13 smaller domestic banks. Since Bill C-8 has passed in 2001, we have added about seven new banks to the roster.
Added to that list, we have 54 known banks, 25 trust companies, and a very active credit union movement, particularly in the Province of Quebec and in western Canada. We have a variety of federal and provincial lending agencies, independent finance companies, independent investment dealers, over 100 life insurance companies, 4,000 advisers, and according to Statistics Canada, at least 3,700 firms that provide financing to small- and medium-sized businesses. We have an extensive array of players in the financial services sector.
Let me deal begin with the first element of the four pillars, competition. I am going to talk about competition in terms of access, choice, and affordable services. Slide 5 gives you a good indication of access to the accounts of a financial institution in Canada.
The most recent analysis we have comes from the Public Interest Advocacy Centre, and it indicates that about 99 per cent of Canadians have access to an account at a financial institution. Relative to the rest of the developed economy, this is an extraordinarily good track record. There are only two countries we find that might have slightly improved access, and that is Denmark and the Netherlands, but we are dealing here at the margin. In the United States, against whom we tend to compare ourselves, their figure of 87 per cent is nowhere near the 99 per cent that we enjoy here in Canada.
Slide 6 illustrates the nature of choice that individual consumers have in the marketplace, and includes personal deposits, consumer loans, residential mortgages and mutual funds. You will probably want to ponder this slide in more detail when you have time.
If you look at personal deposits, you will see two banks have in excess of 15 per cent of the market, and you see the breakdown for the rest of the lending institutions in terms of personal deposits. Each one of those institutions is an aggressive competitor against the other. All would like to see the market share numbers change in their favour.
Concerning consumer loans, we have one bank that has slightly above 15 per cent of the market share, and the others you can see on the graph. Please note that not one of the big six banks has a mutual funds market share that exceeds 10 per cent. Three banks are in the 10 per cent to 14 per cent range in the residential mortgage sector.
Those are four common financial services products, and the chart gives you a flavour of the nature of competition in the marketplace.
Slide 7 is a particularly interesting chart because it deals with the issue of the affordability of Canadian bank and financial services.
Banks make their money off consumers in two ways: off the spread on the loan products that they offer and off bank fees. This chart illustrates the Cap Gemini Ernst & Young analysis based on 2003-04 data. The bars show you that the cost of a service fee package in countries from Italy down to the U.K. is from $792 a year to $88 per year. Canada, according to CGE&Y, is in at $185 a year.
The percentages show you the spread and the spread is the other way that banks make money. The spread is the difference between the costs of funds against the cost of funds charged to borrowers. In Canada, the spread is particularly tiny. It is at 1.6 per cent. Only Norway is slightly below Canada. You will notice that in the United States, their spreads are 80 per cent higher than here in Canada.
That narrowness of the spread is a good indicator of the degree of competition in the marketplace. Canadian consumers are getting a decent fee package and a very narrow spread.
Slide 8 illustrates the next two pillars of our four pillars. We think consumers are well served if there is an efficient and effective government regulatory process in place. We have that in Bill C-8, which includes a variety of enhanced market conduct and consumer protection measures. Appendix 6 has a complete list of consumer provisions as they apply to each type of financial institution. It is 32 pages long and includes such subjects as account opening and disclosure on cost of borrowing. That compilation is from the Financial Consumer Agency of Canada, created in 2001.
In addition, we have privacy legislation, which is also an enormously important component part of consumer protection. We also have strong voluntary codes of compliance in the industry. We have six separate voluntary codes of compliance in addition to the legislative provisions, and the FCAC monitors the industry for compliance to those voluntary codes.
The third pillar is the importance of an efficient and effective consumer redress mechanism. I will not spend time on that subject because the Ombudsman for Banking Services and Investments, OBSI, and the other consumer protection and redress mechanisms have already presented to this committee.
Slide 9 covers the fourth element of consumer education, which includes informing the consumer with respect to the nature of the products they would like to purchase. There is an extraordinary quantity of information available either in pamphlet form or on the lending institutions websites.
Since 1988, the Canadian Bankers Association, CBA, has had an aggressive consumer education program. Our national free booklet program has been the single most successful consumer education program ever mounted by a not-for-profit organization. We have 5.8 million booklets in use across this country and over 1,800 community organizations across the country use the booklets. We have a 90-minute seminar program for high school students to teach them the basics of financial management. We have taught over 106,000 students and will be teaching another 20,000 over the course of 2005, and the program is delivered by 1,300 volunteer bankers trained to deliver the program in high schools across the country.
We have spearheaded the creation of YourMoney Network, which is an extraordinary tool for anyone who wants information about the range of financial services in the country.
We believe that consumers need a highly competitive marketplace, extensive consumer redress and standards of the industry level, strong government regulation, and an abundance of consumer education information. We think those four elements are now fully and effectively in place.
Does that mean that the system is perfect? No, it does not.
Do we have ideas to fine-tune the system? Yes, we do.
The Chairman: I hope the senators will be as acute and cogent as you were in their questions and answers.
Senator Angus: Welcome, Mr. Protti. I have to echo the chair in extending my congratulations on this document. This is the best document I have seen in a long time and I have been on this committee since 1993. Looking through it in my office, my staff brought it to my attention saying that this terrific document will help us to do a better job.
You will be surprised because the question I would like to ask you today has nothing to do with what is contained in your brief. I think it flows from the way it is drafted. It makes a very good case for the competition and infrastructure in the financial services industry, which has evolved in this country in the last 10 years.
On the front pages of all the newspapers this week, the headlines read, bank mergers, the time is right. This focus is due partly to statements made by the Governor of the Bank of Canada both here and in the House of Commons committee.
When the usually closed-lipped, closed-mouthed, non-commenting governor and protector of the integrity of our currency, speaks out like that, I have to listen carefully.
The chairman last night made a statement on the record about where this committee stands. We are basically waiting and ready to give our input on the issue. I would like to know what position the industry is taking.
Do the banks want to merge at this time, and is it the right time to merge?
Is that what this document supports?
Mr. Protti: The document deals with the consumer aspects of financial services products and not with the issue of mergers, but since you asked the question I will make a few comments.
I thought the governor's comments were cogent and thoughtful, as they always are. I think it is incumbent upon all of us to pay a great deal of attention to what he has to say about the efficiency of financial markets and about the necessity to ensure we have strong, growing and active players.
You cannot run a modern economy without a really extensive first-rate banking system. We have that, and I think the point he was making is we do not want to lose it. Not only do we not want to lose it, but we want it to grow. The issue of growth then translates into the issue of scale. Each of my major institutions has its own perspective on mergers. Each institution has an idea on how and when it would like to proceed.
There is one point, though, on which the industry is clearly unanimous, and that is the necessity to get some clarity in the rules associated with the mergers. Effectively, the structure of the banking industry has been frozen in place, locked in stone, since early 1998. I think we all hope that at some point, sooner rather than later, some clarity will be brought to the associated guidelines.
The Minister of Finance has indicated that he is continuing his consultation process. I think he is finished with the institutions, and he is in discussions with the opposition parties. We hope that we will get clarity on the process that we need to follow. At that point, each institution will determine whether it will proceed in that way.
Senator Angus: This document not being, at least on its face or in its intention, designed to support the case for mergers, I have to tell you that over the last 10 years, this committee has continually heard evidence from consumer organizations that are anti-bank consolidation.
We have had indications and requests from our political masters, to determine what is in the public interest.
Can this committee help define for the government, from a consumer and a competition point of view, when a merger would or would not be in the public interest, and when and how consumers would or would not be protected?
You listed all these others banks on the second or third slide. There are not just six major chartered banks; the number 50 is right at the top of the page.
Are Canadian consumers of financial services going to be negatively affected if mergers are allowed to proceed?
Mr. Protti: One issue that cropped up in the 1998 environment was that there is not sufficient competition in the banking industry, and if institutions are allowed to merge, it will be too heavily concentrated a sector.
I have given you some charts that show what the share is like across major products, and I think those charts demonstrate that there is a lot of competition today.
One of the other issues that was raised is it is too tough to start a bank. It is too difficult to get a bank started up, and until we can relax the rules to start up a bank in this country, we will not let you merge.
We then got Bill C-8, which dramatically relaxed the rules and capital requirements for the establishment of a bank. I want to bring to your attention some of the new banks in the Canadian marketplace that have been established as a consequence in the changes in Bill C-8. Please refer to page 3. There is quite an extraordinary variety of new institutions now operating, from major international institutions like ING and MBNA to made-in-Canada examples like the Canadian Tire Bank.
I will ask you to turn slide 21 under the tab called "Access'' in our submission. I think this is a fascinating chart, and I will take a minute to walk you through slide 1, because it graphically demonstrates the range of deposit taking institutions across the country.
In British Columbia, you have 765 bank branches, and you have a very strong credit union in British Columbia. I am pleased to say that where they have banks, the banks are all members of the Canadian Bankers Association. There are 479 credit union branches.
Alberta is fascinating. There are 578 bank branches in Alberta, and if you add the credit union branches and the Alberta Treasury Branches, they have 490 in total. They have almost the same number of non-bank deposit taking institutions as they have bank branches.
Saskatchewan has 265 branches. There are more credit union branches than bank branches in Saskatchewan. Manitoba is quite close.
The anomaly in this chart is Ontario, and of course, Ontario is the big competitive battleground for the six major banks. Ontario has 2,500 bank branches, and a relatively small credit union movement.
Quebec is the most fascinating, because the big banks are clearly second-tier institutions in the marketplace. The dominant player in Quebec's financial services is not any of the six banks, it is the Mouvement Desjardins, and you can see that by the range of branches they have.
Prince Edward Island is also fascinating because there are 38 deposit-taking branches for 140,000 people. That is an extraordinary ratio.
All of this is to say that some of the concerns around the 1998 merger proposal seem to have been dissipated by an aggressive development on the part of the credit union movement and certainly on the part of the changes introduced as a result of Bill C-8. Many of the conditions that some people felt should be in place are now in place.
Senator Angus: I have so many more questions that I would like to ask, but I have a sense the chair would like to move around a little bit.
Senator Harb: I want to congratulate you. I know you have a program that deals with something about money, because I was involved with it when I was on the other side of the House. I think it would be useful if you were to send the senators as well as all members of Parliament some information about the program. You should expand it to deal not only with youth and kids but also adults. We all need to learn something about money.
My question deals with the fact that there are so many different groups and levels where a consumer can shop for financial services.
I would like to run down a list and ask you to comment on the points.
Each bank has its own ombudsman or woman, and then all the banks have the Ombudsman for Banking Services and Investment. You also have the Canadian Life and Health Insurance OmbudService and the General Insurance OmbudService for other groupings. These services fall under the Centre for the Financial Services OmbudsNetwork or CFSON, an umbrella organization. Then, we have the Canadian Bankers Association. With Bill C-8, we have established the Financial Consumer Agency of Canada, which took over from the Office of the Superintendent of Financial Institutions.
While that centre does not specifically deal with specific complaints, it deals with regulations and it has a mandate the protection of consumers and so on. John Smith would have a complaint and the first stop would be the manager and the next stop would be the ombudsperson for that bank. Failing that, his next stop would be the Ombudsman for Banking Services and Investment. Is that the case?
Mr. Protti: Yes.
Senator Harb: Looking at the mandate of the Ombudsman for Banking Services and Investment, it looks like they do not deal with general complaints about the pricing of products and services. They do not deal with complaints about the level of interest rates or they do not deal with issues related to general industry policies and procedures and they do not deal with credit granting policies or other risk management points and procedures. As well, they do not deal with issues that are before the court, arbitration or other dispute resolution process.
My question is that if someone has a specific problem and they go beyond the ombudsperson of that bank, where could they go?
Mr. Protti: Let me explain the process. Here is what is available to a consumer who has a concern or complaint inside a bank. First step, they go to the branch manager or customer representative and try to get the problem solved. If it cannot be solved, every bank has a second step, a centralized complaint-handling bureau, which might be at the regional level. If you are not happy with the response you get there, you have a third shot inside the bank. Every bank has an independent ombudsman who will have a look at it and decide whether the issue can be resolved.
The vast bulk of concerns find a resolution somewhere inside those three free mechanisms because it is not in the interest of any bank to have customers going beyond those three avenues. There is an awful lot of time and effort spent trying to resolve the problem inside the bank in the three different steps.
If the customer remains unsatisfied, then the bank ombudsman will give all the pertinent information to the Ombudsman for Banking Services and Investment. That person will then conduct their own independent investigation and decide whether the complaint is well founded.
You have seen the numbers and I have repeated the numbers elsewhere in this presentation. In fact, it is not a very great number and in terms of the volume of transactions that the banking industry undertakes, it is very small. It is small because there is a very good reason to solve the problem inside the bank. In the hour we have here, between one and one-half million banking transactions will take place, 11 million per day, over 4 billion over the course of a year.
If the issue falls outside of the scope of the internal mechanisms or OBSI, that is where the Financial Consumer Agency of Canada comes into play and they will deal with the issues that the internal mechanisms do not pick up.
Senator Harb: I brought this up because I feel that you probably pay more taxes than any other group in Canada.
You are one of the few corporations that is owned by pension funds or individual Canadians or RRSPs and so on.
Is there a move on the part of the Canadian Bankers Association to simplify the process a little bit because of all of the checks and balances?
As you said yourself, there is a small percentage of cases that really ever pass the level of manager to go to even the ombudsperson of that particular bank.
Is there any move to simplify things and merge some of these groupings?
Mr. Protti: In response to your question, is it too much, my answer is no. On behalf of the industry I will do a mea culpa. We should have been in this business a long time ago. We got into it on a voluntary basis, but very much pushed by parliamentarians in the early to mid 1990s. There had been some clear difficulties in the wake of the recession in terms of dealing particularly small business customers. Members of Parliament and senators were overwhelmed with concerns from consumers. There were no formal redress mechanisms in place.
Just before I started in 1996, the industry put in place the Canadian Banking Ombudsman which is the model that everyone follows and which was expanded about three years ago to include securities and mutual funds.
In hindsight, it would have been better off if the industry had been in this business two or three decades ago. It is now in it, and it works extremely efficiently. I have had an opportunity to look at mechanisms elsewhere and by comparison, our mechanisms are better. Some mechanisms take a year to resolve because you have a lawyer on both sides and it gets costly. Bottom line, however, it is a good thing.
Can it be simplified? Yes, it can be simplified. If you see fit in the course of preparing your report to make such a recommendation, we would welcome it wholeheartedly. Where there is complexity is that the securities industry, the mutual fund industry and the banking industry have one ombudsman.
Does it make sense that the property and casualty insurers and the life and health insurers also be part of one financial services redress mechanism?
Our view has always been, absolutely. We have encouraged the others to join together. There is a difference in products, but you can set yourself so it makes its easy.
What would be good for the consumer is one organization. With just one organization, there would be just one independent board and one phone call. Senator Harb, if you want to make that recommendation, we would be in favour of it.
The Chairman: Mr. Protti, I thank you for pointing out another justification for this committee's review. As you know, this is the first oversight review in looking at these new mechanisms.
Senator Meighen: I will try to follow Mr. Protti's example of brevity and succinctness. Perhaps I could start Mr. Protti, with referring to your first slide about the share of market and personal deposit consumer loans.
I have to apologize, I have been travelling with another committee and I have not seen this excellent document until this morning.
Is there something in your brief to indicate the terms of trends with respect to share of market?
Mr. Protti: We are limited in terms of everything we could put together, but we have all that trend data. We will provide you with the trend analysis. Mr. Campbell, do you know how far back it goes?
Mr. Terry Campbell, Vice-President, Policy, Canadian Bankers Association: The data goes back to the mid 1990s.
Senator Meighen: Your next chart on spreads and fees is interesting, particularly in light of the long-standing and widespread perception that the chartered banks' fees are numerous and relatively high. The chart indicates that our perception is incorrect.
Have you done a comparison study of financial institutions' fees?
Mr. Protti: I have two answers to that question. I have not prepared a table that shows all the varying fees. However, you can go to the website of the Financial Consumer Agency of Canada, FCAC, and find the fee structures of the individual institutions.
Mr. Protti: Any consumer who is interested can go to their website to look at the entire fee structure. In the submission proper, you will find in appendix 1 that we have printed out the low fee accounts of each of the eight members who voluntarily provide the figures and what the consumer receives for those fees.
I would ask senators to turn to the tab marked "Affordability Services,'' and towards the back of that section, go to the chart on page 37. This is interesting because the columns show you the dramatic increase in the volume of transactions, including ABM, debit card and cheque processing. It shows a tremendous increase in this volume. Taking inflation out of the equation, the red line shows what has happened to real fees. These are service charges on retail and commercial deposit accounts as collected by OSFI. During the period of 1996-03, real fees have fallen by 19 per cent. The next chart on fee structures has figures that are more interesting. A study in 2003 by the Public Interest Advocacy Centre shows that 53 per cent of Canadians paid $10 or less per month for banking services and 24 per cent, mostly seniors, young people and some others, paid nothing at all.
A chart that I find interesting is on page 39. This data comes out of Statistics Canada's survey of household spending. Based on a survey done in 2002, a typical household paid $15 per month for banking services. That means they were spending about 80 per cent more on government run lotteries and about 10 times that amount on tobacco products and alcoholic beverages, which I find an interesting comparison. That is what is happening with service fees.
Senator Meighen: That covers the spectrum of financial institutions including chartered banks, credit unions and trust companies.
Mr. Protti: That is correct.
Senator Meighen: Is there any indication whether the level of fees is dependent on the level of competition in any given area?
For example, if you are in a small town and there is only one financial institution, would there be any data to indicate that the fees of that institution would be higher than the fees in downtown Montreal?
Mr. Protti: Our fees are nationally based. If you live in Moose Jaw, Saskatchewan, or in Jonquière, Quebec, the service fees that you pay to your bank are the same.
The Chairman: Essentially, are you saying that banks internally cross-subsidize consumers in the underserved areas of the country so they can get the same services as in downtown Toronto, Montreal or Vancouver?
Mr. Protti: One of the great virtues of our banking system is that it is national. We looked at the U.S. because they do not have a national bank system, although they are in the process of trying to create one. We have some data in the submission that shows the fantastic differences in the cost of a car loan across the United States, depending on where you live. Many banking institutions in the United States or in smaller communities or in a monopoly situation charge what the market will bear.
In Canada, the virtues of our nationally regulated and established banking system, is that the fee structures are the same across the country. The cost of a loan in Moose Jaw is the same as a cost of a loan in Jonquière.
Senator Meighen: I have to refer to an example I know. Is the service fee to a consumer in St. Jean, Quebec, where there is only one financial institution, the same as the fee for me in downtown Toronto?
Mr. Protti: Yes.
Senator Meighen: My example is not a bank.
Mr. Protti: I cannot speak for the Mouvement des caisses Desjardins, which may be the only one there. I would be surprised if the fee structure is different in one area of Quebec than in another area.
Senator Meighen: The information you are giving applies to chartered banks.
Mr. Protti: That is correct.
Mr. Campbell: To follow up on Mr. Protti's comments, I would ask you to turn to the tab marked, "Choice,'' on page 33. Senator, in response to your question, this will show you the array of prices in the United States.
Mr. Protti remarked that Canada has a national banking system and so prices are set nationally. In the U.S., there are several thousand banks but they tend to be small, one-of banks. The effect is that the U.S. does not have a national pricing system. In this submission, we have shown a survey of banks across the board. As you can see, the price on a standard auto loan varies widely, up to 225 basis points. That does not occur in Canada because we have consistency and competition in pricing.
Elsewhere in the submission, you will find that although there are many banks in the United States, one or two of those banks are dominant on a city-by-city basis. This is the benefit of the Canadian pricing system.
Senator Meighen: Does the Canadian Bankers Association have any position on how many mergers are acceptable?
In other words, we could get down to one chartered bank.
Would that be acceptable to the Canadian Bankers Association?
Mr. Protti: We do not have a position on the issue of mergers. The truly relevant player in assessing whether that would be desirable is the Competition Bureau. If four institutions have market share greater than 65 per cent, that is almost prima facie evidence that there is a significant competition concern. The Competition Act and the work of the Competition Bureau and the Competition Tribunal is directed to ensure that we never have sufficient concentration in the marketplace to exact a "price revenge,'' if I may put it that way, on the consumer. That is the effective check.
As well, when the Minister of Finance is making a decision, he will look for advice and guidance from the Competition Bureau and from the Superintendent of Financial Institutions. I cannot conceive of a superintendent who would be the least bit comfortable with one major bank controlling the entire banking marketplace. There are some significant checks, legal and otherwise, on such a consolidation that would lead to that degree of concentration.
Senator Meighen: Of course, that presupposes that the merged chartered banks would keep their aggregate market share, but maybe they would not.
Mr. Protti: Quite possibly they would not. You will have noticed, because they have been very public about it, that the credit union movement and others of my members have been very vocal in their support for mergers going forward, because under some combinations, there would be concentration issues. In those concentration issues, it is likely that the Competition Bureau would direct the merged institutions to divest themselves of certain assets, including branches. Of course, it would be in the interest of the credit union movement to pick up any of those divested assets. However, there are foreign banks operating in Canada that also have been very vocal in saying they would be very interested in picking up any concentration concerns or any assets to be divested.
Mr. Campbell: That is true of some other smaller domestic banks.
[Translation]
Senator Massicotte: For the past four or five years, competition in the credit card sector has been fierce. However, competition is always less intense in two or three other sectors, despite the number of players. In fact, yesterday, the Governor of the Bank of Canada commented on the lack of competition in a number of sectors.
One such sector is bank loans awarded to small- and medium-sized businesses. And while the number of loans awarded has, admittedly, increased in recent years, the size of the loans is steadily decreasing.
Financial institutions have told us that they are not really interested in bank loans. Some may, however, be interested in investment loans, but that's not true of most institutions.
Even with a $50 million or $100 million investment, banks do not have access to international markets. Several banks need to operate through a holding company or management group in order to market an investment product. There is no point in looking for a party that would charge a lower commission on transactions. Often the holding company in question has no choice but to follow the standard.
Clearly, competition is lacking in these two sectors. Do you agree with my assessment of the situation? What solution would you propose?
Mr. Protti: We have some slides on the issues of small- and medium-sized businesses. I will turn the floor over to my associate, Mr. Campbell, and, if you have no objections, Senator Massicotte, I will respond in English.
[English]
If senators would turn again to the tab marked "Choice'' and go to slide 34, you will see some information on bank involvement with small- and medium-sized enterprises. If this information is not satisfactory, we will be happy to provide you with more.
The Chairman: Just pause there. I do not mean to interrupt Senator Massicotte's questions, but we have heard that there is a lacuna in terms of servicing small- and medium-sized businesses. Your chart indicates that chartered banks provide only one-half of the service. We would like the backup and detail you have on that subject.
Mr. Protti: We will provide you with that information.
[Translation]
Senator Massicotte: Perhaps you have retained some of these figures. How much money did SMEs receive in the form of loans five or ten years ago compared to the present day? Did they receive more, or less money?
Mr. Protti: They received more.
Senator Massicotte: I am not talking about the number of loans awarded, but about the size of the loans.
[English]
Mr. Campbell: Absolutely. We have the Statistics Canada survey of this subject. Statistics Canada performs credible surveys and this one dates back to 2000. We can provide you with the amount of credit in terms of the authorizations.
[Translation]
Senator Massicotte: I was talking about the size of the loans.
[English]
Mr. Campbell: We do not have this specific right now, but what is happening here is the authorizations are rising. What we are finding is that individual SMEs, if they have the credit available to them, more often than not do not have to draw that down, they do not have to use that.
If you look at slide 35 what is interesting is when small businesses ask why you have not drawn down that credit, why have you not drawn the loan, the answer in more than three-quarters of the cases is that they simply did not need that credit. They are managing their financing needs through other means.
However, the point is the banks approve 80 per cent to 90 per cent of the applications. It is a very competitive marketplace. I do not know a single account manager that wants to lose market share or a client. They are competing among themselves and among other providers.
We will go back and see if we can find that more specific level of detail, but this is an environment where there is an array of financing services.
[Translation]
Senator Massicotte: That is odd. Some bankers actually told me in person that they were not as interested in this, only if they could offer additional services. I was told that smaller loans were being awarded. If the clients meet all of the criteria, then the loan is approved.
Perhaps that explains why there is so much money available and why there are fewer trusts, percentage wise. Sometimes, the client does not necessarily fit the typical profile that bankers are looking for.
I am hearing that loans are not available and I would like to see the numbers showing that the actual amount of the loans has increased, not just the approved amount.
Mr. Protti: We will have those figures for you, Senator Massicotte.
Senator Massicotte: I have a second question.
[English]
The Chairman: I will ask a supplemental because this is of interest to the committee. If you give us that breakdown, please include the regional breakdown, because it is important that we learn about areas of the country that are underserved.
We are interested in where the banking system is not properly serving the SME market. We would appreciate any information that you have in that regard.
Mr. Protti: We will do everything we possibly can to give you everything that we have. I am just not absolutely certain how much regional breakdown we have; but if we can find it, you will get it.
The Chairman: I will give Senator Massicotte a little more leeway, because I did not want to interrupt his train of thought.
[Translation]
Senator Massicotte: My second question pertains to the interests of consumers, but from the standpoint of bank mergers.
Studies have shown that despite the limited number of Canadian banking institutions, service quality has remained very high. You maintain that future bank mergers should not adversely affect service quality.
Do we need to set certain conditions? The CD Howe Institute released a report. With the proposed new legislation, there has not been much competition or new American inputs. Maybe we should force Canadian banks to share the ATM network to ensure that everyone has access to the machines and to all of the information pertaining to their file.
Some banks oppose this move, arguing that they have invested a considerable amount of money in this area. However, this could mean a greater number of virtual banks. Another argument raised is that we are moving toward the U.S. model. However, as noted in a report released two weeks ago, according to several experts, the experiment has been a failure thus far and a number of Canadian banks are refusing to go to the United States. What kind of business plan is needed and what is the solution to ensuring real competition, if ever a merger were approved? What benefits would a move like this have?
Mr. Protti: I will answer in English, if you do not mind.
[English]
The marketplace is handling the exchange networks and ATM systems. There is an extensive network involving institutions in Western Canada, banks, both foreign and domestic, the credit union movement and banks inside the U.S. All of these institutions have built an exchange network amongst themselves; so there is interoperability amongst their ATM cards and debit cards.
I believe there was an even more recent development involving one of the major Canadian banks building the same sort of network with other institutions. The marketplace is in fact sorting out the interoperability issues.
Senator Massicotte: They are sorting it out under the recommendations of C.D. Howe. In other words, withdrawals I appreciate, but they are recommending even account information and so on. Are we going that far?
Mr. Protti: It is a very competitive issue. It is a very proprietary issue; and it is one where the institutions feel it makes an enormous amount of sense that they are doing it.
That is the right way to handle that interoperability issue with respect to account information, ATM deposits, cheque deposits, and so on. The marketplace is sorting it out.
If the mergers go forward, they will have to pass three tests. Test 1 is a Competition Bureau test, and of fundamental concern to the Competition Bureau is whether consumers will face institutions that have the ability to exert market power. Consumer interest is absolutely at the heart of the issues that the Competition Bureau must analyze. The bureau must ensure that the Competition Act is respected.
If a merger suggests to the Competition Bureau that there will be problems for consumers, it will insist on divestitures. Those divestitures are why the credit unions, Desjardins, foreign banks, and smaller domestic banks are interested.
The second test is the superintendent of financial institutions prudential and solvency tests, and the consumers' interest is at the heart. The third test, which is absolutely unique, and which has held up the development of the publication of the guidelines paper, is the public interest test. No other sector or firms in Canada other than banking institutions face a public interest test. Most people expect that in the public interest test, there will be at least two, if not three, dimensions.
What will happen to small business?
Is there any reason to believe that this merger would be injurious to the interests of the small business community?
A second test will certainly be what the implications are for rural Canada and small-town Canada.
Are there satisfactory answers to small-town and rural Canada?
A third issue is the issue of jobs.
What are the implications for the employees of the merged institutions, and how will they handle their issues?
Any merger proposal that comes forward will have to address those issues, and there are two or three others that will emerge as well.
The Chairman: We are moving a little farther a field. The governor has provoked this debate with you. I hope that for the rest of the hearing we could get back to consumer issues. As Senator Angus has said, we suspend our judgment on the question of bank mergers. We will deal with it in an objective way when it comes before our committee.
I would rather we refocus on the consumer issues because those are the terms of this particular reference. Senator Plamondon is next, and I am sure she will bring us back in line.
[Translation]
Senator Plamondon: I would like to talk about the future of debit cards and about debit card fraud. When customers had access to their financial institutions, there were no debit cards. Before there was talk of mergers, there was talk of consolidation. As institutions consolidated their operations, the Desjardins group also introduced debit cards to its customers. ATMs replaced service points that were closed.
I noticed that in Quebec, as caisses populaires gradually merged, service points were replaced by ATMs that sometimes proved to be unprofitable. If few customers use a particular ATM, generally the financial institution moves to shut it down. Now that people have grown accustomed to using ATMs for their banking transactions and to using debit cards, the focus has now shifted to the security of debit cards.
With respect to credit availability, statistics show that the level of savings of Canadian households is virtually nil. Could that be one of the reasons for the proliferation of independent ATMs, or is that phenomenon merely a by- product of consolidation? In slide 6, which shows your range of suppliers and consumer loans, no mention is made of independent ATMs. Are they listed elsewhere? I only see a reference to banks which have over 50 per cent of the market. Yet, we have seen a phenomenal growth in the number of independent ATMs in Canada, the exception being Quebec where the government has stepped in to regulate these operations. What are you doing for small borrowers? In the United States, the banking sector and credit associations are working together to counter the proliferation of these institutions.
Can you in fact loan money for one or two days and charge people interest in the range of 60 per cent interest annually? I would like to know what kind of interest you charge and if these kinds of situations really exist?
Yesterday, we discussed mergers between banks, insurance companies and other financial services providers. I read that the crash of the financial markets in 1930 was blamed in part on the fact that financial pillars were not separate. Laws were subsequently passed prohibiting until 1988 the merger of financial operations. Do you feel that mergers pose any kind of danger in this day and age?
Mr. Protti: I would have to answer no to your last question, but we would need to think about this a little more. I will ask Ms. Hubberstey to answer your first question.
[English]
Ms. Caroline Hubberstey, Director, Public and Community Affairs, Canadian Bankers Association: You raised an interesting point about debit cards and also the other technologies available to consumers today. They are using these technologies a great deal. In fact, Canadians are the number one debit card users in the world.
The Chairman: You said the credit card percentage is the highest in the world. What is the percentage of ATM machines?
Ms. Hubberstey: We have 35 million cards in circulation in Canada. That is more than one for every Canadian. I know I actually have two.
The Chairman: The graph shows that the utilization of your market is under 50 per cent of actual utilization.
A number of people may have more cards, but the question is how often do they use the system?
Ms. Hubberstey: Four billion ABM point-of-sale transactions occur each year, and 11 million per day.
The Chairman: As a percentage of the actual marketplace and the number of people, what is the number?
Ms. Hubberstey: Electronic transactions represent approximately 50 per cent of the marketplace. A decade ago, 86 per cent of all transactions were in cash and cheque.
Under the tab "Access'' and on slide 27, you will see the Strategic Counsel survey on Canadian attitudes towards banking and technology. It was not that long ago that the banks defined what kind of convenience their customers could enjoy. The branches were open 10:00 to 3:00 Monday to Friday. Customers had to get all the money they needed for the weekend out by Friday because they could not access their accounts on the weekend. Today, consumers define convenience and what is important to them. When we asked them, if these technologies help them in their day-to-day banking, they overwhelmingly said "yes.''
On slide 28, we can see that during 2002-04, Canadians' impressions of the banks' performance has gone up because of these new technologies.
Senator Plamondon: That was not my question. My question concerns security.
Ms. Hubberstey: There were two parts to the question. There are 35 million cards in circulation in Canada. The system is extremely safe and secure, and only one-tenth of 1 per cent is involved in skimming.
There was a lot of effort on the part of the banks to deal with security of the system, putting detection prevention mechanisms in place. You may have seen press releases in the last couple of months that there will be a move to chip technology. The system will be chip ready by 2007. There is an ongoing effort to ensure safety.
Senator Plamondon: Between the move to chip technology and the situation right now, you can skim debit cards. The danger is still there.
Ms. Hubberstey: This is an extremely safe system. The banks are investing a great deal of effort into monitoring the system and working closely with law enforcement.
In a case in Halifax, the police apprehended the people involved in skimming activity. The police and the banks are diligent in their attempts to keep the system safe and secure.
Mr. Protti: If you get on an airplane, Senator Plamondon, can you be certain that the plane will not fall out of the sky? No, you cannot be sure.
Ms. Hubberstey is raising a relevant point. When you have 35 million cards in operation, you work hard to ensure that they remain secure, however, one-tenth of 1 per cent fall prey to skimming. We would like to have absolute perfection. We are not there yet, but the system is extraordinarily safe. It will get safer and even better when we move to chip technology. The Interact association will move to the chip technology by 2007.
Senator Plamondon: So it is safe but it should be safer?
Mr. Protti: We are always working to improve the system. There is nothing more inventive than the criminal mind. We have to work hard because the criminal mind is always trying to be one step ahead of us. We do everything we can to anticipate what the criminals will do, but it is their business to thwart our systems.
Mr. Campbell: I would add that on those few cases where there is a problem, the consumer is made whole and the money is refunded. We make every effort to have that happen as we move forward to have even more security put in place.
[Translation]
Senator Plamondon: We are told that businesses such as Payday and Moneymart offer services. Do you include these businesses in your list of suppliers and do you think of them as service providers?
Mr. Protti: I do not believe that they are included in our figures, but I am not certain.
[English]
Mr. Campbell, do we have data on the size of the payday lender business in Canada?
Mr. Campbell: I am not aware of that data. The payday lenders are 99 per cent regulated financial institutions, and they are included in our information. We can look to see whether we have that data, senator, but I am not aware that we have it in our possession.
Senator Plamondon: They are not regulated, but they are not underground either.
Mr. Protti: We have a fascinating bit of analysis here on the issue of payday lenders. We know you are interested in the subject. I will ask Mr. Campbell to take you quickly through a piece of analysis from the Ryerson University Centre for the Study of Commercial Activities.
[Translation]
Senator Plamondon: I would like you to answer the following question for me: if a person wants to borrow one million dollars for one day, what kind of fee and what kind of interest rate would he be charged? Furthermore, if these calculations were done on an annual basis, what would the annual rate be, in percentage terms?
Mr. Protti: I have taken note of your questions and I will endeavour to provide you with a more detailed answer.
[English]
Mr. Campbell: We were aware of the Senate committee's strong interest in this and we commissioned some research. It was the Ryerson University Centre of Commercial Studies.
I would like to direct you to the written submission on pages 64-67. It is the actual report from the Ryerson study: It looked at the issue of the view that payday lenders locate where banks and other deposit institutions have closed down. We asked them to study that subject. They looked at Toronto, Halifax, Winnipeg and Vancouver. They did a statistically detailed analysis and found locations and compared them.
I want to read the conclusion to you. It is two sentences.
It is apparent from this study that the payday lending industry is not locating in areas that are under-served by traditional financial institutions. Quite the opposite, they are locating in close proximity to the existing network of financial institutions.
We found that over 50 per cent of payday lenders were located within 250 metres of a bank, a credit union or some other kind of traditional financial lending outfit, and 90 per cent were within 1,000 metres.
We thought this would be useful information to share with you. We have the full report.
Is it the whole answer as to why payday lenders are there? No, but it is an interesting bit of information.
The Chairman: Mr. Protti, we do not have a lot of time but this is important. The evidence before this committee on payday lenders is very simple: Five years ago, they did not exist, and now it is a $5 billion business. It is serving at aggressive rates an underserved portion of the marketplace. This helps us to say where they are located, but it does not help us understand the nature of the system. If you can give us more help on this subject, it would be useful. It means that a portion of our consumer is being underserved or badly served.
Mr. Protti: You can count on us, Mr. Chairman. We are running out of time but we will provide you more analysis of this issue from our perspective.
Senator Angus: The fact that they are located in the same place, the logical conclusion I come to is that is where the market is and that is where the people live. It does not solve the problem. We have heard a lot of evidence that there is a terrible problem. When you respond, I hope you can give us an answer.
Mr. Protti: We commissioned a study in particular because there had been suggestions that they were moving into locations that banks had vacated. That is why we asked Ryerson to look at that issue.
Senator Angus: We thought it was moving into the services of the banks.
The Chairman: It is a lacuna we will have to analyze.
Senator Tkachuk: I want to focus on access, which will make the chair happy because it has to do with consumer issues as well as with discussion that the governor raised concerning bank mergers.
I noticed you had a section here on Internet and telephone banking. There was much talk about seniors and their access to bank branches. When I got my letter from my bank when I turned 60 saying, "Mr. Senior Citizen, you have a special rate now,'' I wanted to see if I could still run a computer and do my Internet banking and I figured out I could. Senility does not come automatically when you turn 60; it comes over time.
Mr. Protti: I am delighted to hear that, because I turn 60 this year.
Senator Tkachuk: Internet banking provides good security. You can check your credit cards and all your accounts, and you know what transactions you have made. You can review your transactions on a daily or weekly basis, whenever you have the time. As far as I am concerned, with regard to credit cards, it is the best security I have ever had because you know are aware of all of the transactions. Sometimes you do not want to know, but you do know.
Have you done studies on how seniors have taken to Internet banking? That has been a discussion here. For someone at home who has a difficult time getting around, the best way to access it is to use Internet or telephone banking.
Mr. Protti: It is fascinating what has happened. We could not have predicted the dramatic growth rate in Internet banking. It was 8 per cent three years ago. It is 24 per cent today.
We have an extensive survey on how seniors use the system. I think we have the details with us today.
Ms. Hubberstey: We have a summary of the study in appendix 3. We have some additional demographic information that we could provide the committee with respect to different demographic groups.
Senator Tkachuk: My guess is that it has a great future for accessibility.
Senator Tkachuk: Are people of all education groups using the system?
Mr. Protti: We have got part of the summary of the study here but we do have the demographic breakdown. We will get that to you.
Senator Tkachuk: On this side, we advocate the lowering of the barriers to new banks, and believe that competition is important. We have made that part of our recommendation along with the other side for quite some years now.
I am intrigued by what you said about competition. You said that compared to international competitors, Canada's institutions are relatively small. I would say "So what?'' — but maybe not.
Have the Canadian banks' numbers been lower down the totem poll?
Has it dropped from 10 years ago?
Does the number continue to drop?
Mr. Protti: We have a great deal of comparative data on that and we will send it to you. We are dropping dramatically. We have fallen out of the big leagues.
Senator Tkachuk: We used to be big league.
Mr. Protti: Absolutely. We had a bank that was in the top 50 not that long ago. We are dropping dramatically and quickly and that was, in part, one of the reasons why the governor spoke as he did on the issue.
If I can link it back to the issue for consumers, and it relates to your first question, is that there has been a change in the way in which Canadians do their banking. It is all technology-based. There is nothing more expensive than ensuring you have technology that works, is modern and is up to date. This stuff explodes. The six big banks spend about $4 billion a year on technology. There is no reason to believe it will ever flatten out. You need scale and size to be able to afford that technology and ensure efficient service to your clients.
We have other charts but we have run out of time.
The Chairman: If you have further questions, you can put them on the record and ask them to respond in writing.
Senator Tkachuk: That is fine.
The Chairman: I have allowed to committee to go a little off field because of our discussions yesterday with the governor on mergers and so on. We will suspend our judgement on mergers. I would rather return to our mandate, which is the oversight as it relates to consumers. It would be useful to have recommendations with respect to improving the self-regulation within the banks and within the financial sector under your purview. By the way, we appreciate the consumer information here, but I want to bring to your attention that we did have an analysis made. I think it was the Federation of Independent Business that said that consumer satisfaction was 50 per cent, and it was 70 per cent to 90 per cent as it relates to one or two banks. They were not Canadian banks. I think they were Hong Kong and ING. The other was the credit unions.
If things are so good, why is consumer satisfaction so low?
I think you heard the testimony. It is on the record. Give us your recommendations.
When I look at credit card use and your charts, which are helpful, it looks like 40 per cent of Canadians, higher than the United States, at about 28 per cent, 27 per cent, use credit cards for personal consumption. The use of debit cards is very high as well.
The question I have for you is: if it is so high, and 70 per cent pay their bills on time, where why are the rates so high?
Mr. Protti: Everyone offers a low-rate card, at 10per cent to 12 per cent. There are eight different cards out there on the marketplace.
The Chairman: There is still an ongoing complaint that notwithstanding the fact that we are a good risk overall, the spread on credit cards in Canada is no different from the credit card spread in the U.S. or U.K, and they penetrated the market less, so there should be some economies of scale to the people using them in Canada.
Mr. Protti: I will respond to that statement.
The Chairman: Thank you so much.
Mr. Protti: May have one more minute? I was hoping this issue would come up, and we will write to you about it. We need your assistance in this matter. The issue of identity theft is a worrisome problem. I discussed this issue with Senator Plamondon.
In the last two years, the Retail Council of Canada and a number of not-for-profit organizations and all the chiefs of police built a coalition to try to convince the Government of Canada to change the Criminal Code to deal with the issue of identity theft. We want to modernize the Criminal Code with respect to some of the other technology developments, as well.
We do hope there will be a law in front of you sooner rather than later. Identity theft is a serious issue. We are working on it and we want to see some changes. I will ask for your assistance.
The Chairman: That is an issue within the context of our committee's oversight. Give us that recommendation, but also give us statistics to support it.
Mr. Protti: Absolutely. We have much material on that subject.
The Chairman: We will suspend for one minute. Thank you.
We will now proceed with the next panel.
I wish to apologize to our witnesses. We have so much information and so many areas that we wish to explore and we are limited in time. We will extend your time to about 1:20 and try to give you as much time as possible. If you would like to add to your written material or your answers, please feel free to give it to us in writing. We will go through this material carefully. One of the reasons we are long in our hearings is that all senators are deeply engaged in these issues and stimulated by the subject matter.
I wish to say to our audience that this is a continuation of the Standing Senate Committee on Banking, Trade and Commerce's oversight on consumer protection issues within the financial sector.
We are delighted to welcome the Insurance Bureau of Canada.
Mr. Griffin, Mr. Yakabuski and Mr. Orr, I would appreciate it if you could limit your presentations. We want to allow all of our committee an opportunity to explore some of these sensitive issues of importance to the Canadian consumer. Welcome and please proceed.
Mr. Stanley I. Griffin, President and Chief Executive Officer, Insurance Bureau of Canada: Honourable senators, it is a pleasure to be here to address these important consumer issues. We will try to move along quickly to allow you as much time as possible for questions.
I will start with a brief market update and then turn to Mr. Yakabuski to speak to some of the specific consumer issues. We will then turn it over to our partners in the Insurance Brokers Association of Canada.
This committee is rightly looking at some important consumer issues. Our industry has been proactive in this area. One of the things we have supplied you with is our Code of Consumer Rights and Responsibilities. I encourage you to review that code and we are open to answer any questions regarding its contents
We thought it would be useful to provide honourable senators with an update on the market situation for the property and casualty insurance industry. Briefly, the last few quarters have brought some positive news for our industry. Specifically, $1.4 billion in premium savings have accrued to drivers in Atlantic Canada, Ontario and Alberta. This has largely been the result of product reforms that have been implemented by the various provincial legislations in those provinces, which has reduced the skyrocketing costs of claims, particularly for personal injury. The competition in our industry, and there are over 200 property and casualty insurance companies, generated the rest.
I wish to comment briefly on commercial insurance, which is another major line of business for our member companies. According to our most recent figures, premiums are down by about 2 per cent, which is certainly an improvement over what we have seen over the last two years.
We have met with the Canadian Federation of Independent Business and they have acknowledged a similar change in premiums. We also point out that there is some evidence that homeowners insurance premiums have levelled off and in some cases are starting to fall in price.
I wish to be perfectly clear. The last few years and particularly the years 2002 and 2003 were not particularly pleasant for anyone involved in our industry. The good news is that that period is clearly behind us and we have returned to a period of financial health, which is encouraging strong competition and price stability amongst our members.
We have prepared three handouts that explain the hard market of 2000-02. The first handout is a graph entitled "Change in Real Capacity.'' This chart demonstrates the change in real capacity for our industry, the change in the rate of claims growth versus the change in the rate of capital growth. Obviously, if claims are growing at a faster rate than capital, we have a problem. If you look at 2000-02 bars, you will see a 25 per cent overall real reduction in the capital of this industry. That situation cannot continue in any business for it to survive. Something had to change. That was the result of higher claims costs, a lower investment environment that the industry moved into and greater uncertainty during that period. We have exited that period of hard market and difficulty for the industry.
The second chart looks at insurance as a percentage of operating profits for Canadian businesses and shows that it has not changed drastically over the last 15 years. In fact, in 1989, it was about one quarter of 1 per cent, and in 2003, it rose to one third of a per cent. There has been a relatively small change in the overall costs of insurance as a percentage of profits for Canadian basis.
The third chart shows a similar trend for the cost to individuals. This chart tracks the percentage of disposable income that spent on insurance and here it has not changed drastically from the approximate 2 per cent spent in 1989.
I will now turn to Mr. Yakabuski, who will address more specifically some of the consumer response issues that our industry has introduced.
The Chairman: Just before he starts, Mr. Yakabuski comes from a very distinguished genealogy. His father was an outstanding member of Parliament. I wanted to clarify a brief conflict of interest. He and my son went to school together. He was an outstanding debater a school. Welcome.
Mr. Mark Yakabuski, Vice-President, Federal Affairs and Ontario, Insurance Bureau of Canada: Your son was an even a better debater.
The Chairman: Yes, he was.
Mr. Yakabuski: I want to your attention that there are approximately 2 million property, home, auto, and business insurance claims, made each year in Canada. About 98 per cent of these claims are resolved quickly, and without any further lengthy involvement. Very small percentages, approximately 2 per cent, of the claims that are made in this industry require either litigation or some form of arbitration. This obviously is a very low level. It is not just industry statistics that are important in this matter.
Each year, the Financial Services Commission of Ontario, FSCO, does a study of claims satisfaction in Ontario. Consistently, that survey, done under the auspices of FSCO, has shown that approximately 85 per cent of claimants are either satisfied or very satisfied with the way in which their claim has been resolved.
[Translation]
For consumers who are not satisfied with how their claim is handled, there are a number of avenues available to them.
For example, the Insurance Bureau of Canada operates nationwide four information centres funded by the industry. The centres are staffed by knowledgeable professionals trained to answer questions from the public and to handle most complaints.
We have toll-free telephone numbers that consumers can dial from any location in Canada. Approximately 95 per cent of all claims received at our information centres are handled directly at the centres.
Again, to give you an idea of the scope of our operations, approximately 100,000 claims are phoned in each year to our centres by consumers and approximately 95,000 of these claims are settled directly by the centres.
For those who are not satisfied with this approach, they can call upon the General Insurance OmbudService for assistance. I believe the committee has already heard from the Chair of the Board of Directors of the GIO. Since the creation of this service, which again is funded by the industry, fewer than 50 cases have been mediated by the GIO in the province of Ontario of the several million claims filed during this period.
This fact further reinforces the notion that the industry's main priority is to resolve consumer claims as quickly as possibly.
[English]
We are very proud of our claim satisfaction record in this industry. There is no greater priority than our ability to service our customers. Last November, we came out with our Code of Consumer Rights and Responsibilities and with a commitment to disclosure with respect to consumer information. We have no greater priority than addressing the needs of our consumers and indeed, our great partners in this exercise are the Insurance Brokers Association of Canada. The insurance bureau would be happy to respond to any of our questions after Mr. Orr has spoken.
Ms. Francesca Iacurto, Director of Public Affairs, Insurance Brokers Association of Canada: On behalf of the Insurance Brokers Association of Canada, we thank you for the opportunity to provide input on your study of consumer issues arising in the financial services sector.
[Translation]
I am the Director of Public Affairs for the association. With me today is the Chairman of our Board of Directors, Mr. Ken Orr, who is also a P & C insurance broker in the King City region of Ontario.
The Insurance Brokers Association of Canada is the national trade organization that brings together and represents the 11 regional and provincial member associations of property and casualty insurance brokers in Canada.
These associations represent approximately 25,000 insurance brokers nationwide. Most insurance brokerage firms have about 10 employees. Brokers are the principal distribution channel for P & C insurance companies.
P & C, or damage insurance primarily covers property, businesses, automobiles and other non-life assets.
Brokers provide an array of risk-management services to their clients. Among other services, they arrange insurance contracts with various insurers. They also interpret the legal complexities of insurance policies for clients, provide them with unbiased advice and assist them in dealing with the insurance company in the event of a claim.
[English]
The client base of brokers is very diverse ranging from individual clients to large commercial accounts. Approximately 80 per cent of personal and commercial insurance policies in the country are purchased through brokers. Brokers represent the insurance consumer and their priority is to the interests of their client and their insurance needs. Mr. Orr will continue with our presentation.
Mr. Ken Orr, Chair of the Board, Insurance Brokers Association of Canada: I will talk about two issues that have recently been on the minds of insurance-buying public and the politician and the media.
The first issue concerns the availability of affordable insurance and the related matter of industry profitability. The second point deals with broker compensation in Canada, an issue that was headline news last fall following the investigation of certain practices in the United States.
I will conclude the presentation today by discussing some of the other initiatives we have taken to assist our clients in understanding our industry and the insurance transaction.
I start with the issue of availability and affordability of insurance. The last couple of years have been incredibly difficult and many consumers have experienced challenges in finding the right insurance at the right price. The majority of the concerns were entirely legitimate and as brokers we share those concerns with our consumers. Fortunately, most of these challenges are now behind us. The insurance cycle has moved one with premiums generally on downward trend, while capacity and availability has been on an upward trend for the past several months. These positive developments are a direct result of the property and casualty industry's very solid financial performance in 2004 that we expect to carry on to 2005. I can assure you we have definitely turned a corner in the cycle.
This change must come with a world of caution, which is to say that no amount of industry profitability will ever put an end to availability or affordability issues of some lines of insurance. Certain types of risk because of their very nature are likely to remain difficult to insure. Disasters, such as the B.C. fires, Hurricane Wan, the Peterborough floods and other global natural disasters also continue to remain a fact of life in our industry and will always be a factor in insurance pricing and availability. In spite of these issues, we generally see better days ahead for individual and business insurance consumers in terms of product coverage, affordability, and availability.
To the extent that problems remain, we encourage those with concerns to contact provincial broker associations for assistance, as well as provincial governments and their supporting organizations, as they are the best avenues of recourse for issues not addressed by the industry or the marketplace. The insurance product and all related matters, such as market conduct and rate setting is provincially regulated. It is therefore those governments that have the best tools for effectively addressing consumer concerns about the price and availability of insurance. As I am sure you know, many provincial governments have demonstrated a willingness and ability to deal with those problems, particularly in the area of automobile insurance.
I want to assure you that our members have the consumer's interest at heart and take great pride in working on their behalf with our goals of affordability, availability and understandably of insurance. Our members work closely the provincial regulators to formulate successful solutions for insurance consumers' issues.
Turning now to the issue of broker compensation, I back the unequivocal view that the allegations of fraud, bid rigging and steering that recently surfaced in the United States involve unethical and illegal acts and that anyone found guilty should be prosecuted to the fullest extent of the law.
These allegations are troublesome for reputable brokers because they represent a betrayal of the trust the clients place in them which is such a huge part of the insurance transaction. It is important to note these allegations do not represent industry-wide practices. Moreover, there is no evidence whatsoever that kind of wrongdoing has ever occurred in Canada, in part because the compensation methods of Canadian insurance brokers are usually quite different from those in the U.S. In fact, compensation practices in this country vary from province to province and from insurer to insurer. The general rule is most brokers in Canada are compensated on a sales commission basis with the potential for a contingent commission based on profit. Contingent commissions are by no means guaranteed, they are paid by insurers in recognition of the quality of business placed with the company and not necessarily the volume of business placed.
To sum up our key message, insurance brokers in Canada focus on buying insurance from a financially stable insurer that combines superior product features, service, and the best value for the dollar, doing the best job possible for their clients on a day-to-day basis.
Unlike many other financial products, property and casualty insurance consumers have the opportunity to review their purchases annually to ensure they continually satisfy their needs. The broker is a key component in that annual renewal process. Brokers are now taking additional measures to ensure that consumers enjoy the highest level of transparency and confidence in their dealings with insurance brokers.
Since January 1, Ontario brokers have been voluntarily disclosing to their policyholders the commission rates as well as the financial involvement by insurers for each of those with whom they deal. Brokers in Nova Scotia also provide this information to insurance consumers upon request. I can assure you that brokers in other provinces are contemplating similar measures.
The Insurance Brokers Association of Canada has a code of conduct which we feel clearly represents brokers' dedication to their clients. This code of conduct was filed with the joint forum of financial supervisors in June of 2004. We have provided you with a copy of the code. As you can see clearly from the documents, this code is very extensive and provides guidelines to brokers and consumers for facilitating the process of buying insurance. Over time, we hope this code will become widely known by insurance consumers as the standard of professionalism and fair conduct they should expect in their dealings with property and casualty brokers.
We know that other organizations have raised the issue of the challenges with small commercial insurance. As a working broker with both personal insurance clients and small business clients, I can assure you the situation has much improved. I am able to purchase insurance that fills their needs and provides good value for the money spent.
Insurance brokers are proud of their profession. We feel we have a definite role in helping to make insurance available, affordable, and understandable. We strive to provide the necessary protection to our clients.
I would like to thank you for the opportunity to appear before you today. We would be pleased to answer any questions.
The Chairman: Thank you, Mr. Orr and Mr. Griffin.
Senator Angus: Welcome. Both of your organizations are well known to the committee.
I commend you, Mr. Orr, for meeting head-on the issues raised by Mr. Eliot Spitzer and that are clearly of concern to consumers. You are saying that you deplore the fraudulent cases but that they do not apply to most if not all of your members; is that correct?
Mr. Orr: The people that committed the acts must face prosecution. The bid rigging and the price setting, we have had an incredibly competitive market in Canada over the last number of years. They are unable to survive in an atmosphere like that. The acts that Mr. Spitzer uncovered I understand did happen, and they certainly need to be dealt with seriously because they are serious.
Senator Angus: You said the average number of people in a small insurance brokerage firm is about 10.
Mr. Orr: Approximately, yes.
Senator Angus: There are how many such firms in Canada?
Mr. Orr: I believe 6,800 would be the right number of firms but approximately 28,000 individual member brokers in the association.
Senator Angus: Whether or not your members were guilty of these bad practices, my understanding is there was an immediate ban and outlawing of contingent commissions, or PSAs as they call them in the U.K., profit sharing arrangements; is that correct?
Mr. Orr: That is not correct. Contingent commissions are still being paid.
Senator Angus: Was there not a statement by either the underwriters themselves or the regulatory people that this was under consideration?
Mr. Orr: There have been a couple of international distributors that have declared they will no longer enter into any contracts with contingent commissions. The contingent commission issue had very little to do with the issues that Mr. Spitzer dealt with in New York.
When I explain contingent commissions to my clients, those who do ask, I explain it on a forum that I believe is understandable. I deal with a wholesaler that provides a product, and that wholesaler would like to see me provide him with profitable business. In our contingent contracts or profit-sharing contracts is the recognition of providing quality business to an insurer. They have not been removed from the contracts. Most of the insurers have stated that they do not foresee that. There has been, however, especially in the case of Ontario, a declaration by the brokers that they will declare those conflicts of interest and disclose them to the consumer so they can make an educated decision on the product they buy.
Mr. Griffin: The decision has been taken by the majority of the industry, the underwriters and the companies, that there will be full disclosure of these arrangements on their respective websites. A consumer can go into any insurance company and see their full range of contingent commissions, regular commissions and their full range of compensation to their distribution force.
Senator Angus: I commend you for that transparency. I commend you for coming forward because industry from both the brokerage and the underwriters' side is based on the utmost of good faith.
These revelations really shake the consumers' confidence in the industry when they feel this whole issue of good faith is in question. Those commissions are designed in terms of the legitimate usage thereof to compensate brokers for something.
How would they compensate for the other services if they were banned and outlawed?
I was operating under the belief that the commissions were not in all cases now being paid. How were the brokers going to be compensated otherwise for those services?
Mr. Orr: I have a primarily personal lines office. I have a good solid small commercial base, and I deal with a lot of farm clients. I have 17 people working for me. I represent nine markets. Of those nine markets, I have contingency agreements with them. I can tell I you that I underwrite the clients I place with them before they ever get to the insurer as far as the quality of the product, making sure they solve the insured's needs for insurance at a competitive price. In other words they do the job they are supposed to do for their client. I cannot make a decision on placing a product based on contingency.
We provide insurance for the disasters. I cannot operate my business based on contingency profit, because I could have two fires on December 15 that will completely wipe out any plans for the year. You cannot base your business on contingency profits. We make the decision based on the product, the clients' needs and the cost of that product.
Senator Angus: Mr. Griffin and Mr. Yakabuski, you folks were front and centre a few weeks ago telling the world about the amazing profits your members were making in the last year. I know this was probably difficult for you in light of the suggestions that perhaps consumers overpaid for the product. I suspect you might have a way to explain that away for us.
The Chairman: We are trying to look at this statistically, not anecdotally. Anecdotal information is useful, but not that useful. What is useful is statistical analysis.
Could you give us an indication of what percentage your association members get in terms of fixed fees and what percentage is straight commission?
Mr. Griffin: We can certainly supply that information.
Mr. Yakabuski: On almost every property and casualty insurance company's website you will find an indication of the percentage of compensation and fixed compensation, they pay to a broker with which they have a relationship. They will then give you the range of contingent compensation. It is easy to establish what portion is a fixed compensation percentage and what portion is a contingent fee. That information is already on the website of every company in Canada.
Senator Angus: That is a good point. Who will answer my point about the high revenues and perception?
Mr. Griffin: In light of the chart that I tabled with the committee earlier, it is not difficult to say that finally, this industry has returned to some financial health. For three or four years, the erosion of our capital base made it impossible to provide the coverage that Canadians need. We put it in that context and taken in that context it was not that difficult.
Mr. Yakabuski: This is a very cyclical business, by its nature. No one could have predicted the January 1998 ice storm that cost the industry about $2 billion. When we talk about contingent commissions, that ice storm was not great for the contingency commissions that the brokers were paid because they did not have any that year.
Senator Angus: Is that all based on lost ratios?
Mr. Yakabuski: For example, on July 15, in Ontario, we had a large rainstorm in Peterborough. The industry paid out approximately $90 million because of that rainstorm. As well, we paid out about twice as much of the government funds that have gone to emergency relief in the community of Peterborough combined. Those brokers in the Peterborough area will not have a very good year in relation to contingency compensation because of the reduction in profitability of that line of business.
I am speaking to the necessary cyclical nature of this business because we face disasters we could never have predicted, and yet, we respond to those disasters. Having said that, due to the cyclical nature of this business, we had an average return on equity in the cycle over the past seven years that has thankfully and effectively just ended in an amount of about 8.6 per cent. A return on equity of 8.6 per cent is extremely low in comparison to any other financial business in Canada.
You wondered why small businesses have availability problems. You asked why some people in Ontario and elsewhere were unable to get car insurance at the rates they wanted. You just have to look at the fact that there was not enough capital in this business to insure Madam X, Y or Z. There is no magic formula.
If there is enough capital in this industry, there will be an availability problem and some pressure on prices. That is why announcing that the industry has now returned to a respectable level of profitability is the best consumer news we have announced in a long time.
[Translation]
Senator Plamondon: I would like to discuss with you the report on business practices in the P & C insurance broker sector in Quebec. This report was made public last week and made the headlines in Quebec's French-language newspapers. This report referred to the incestuous relationship between insurance companies and insurance brokers and noted that the time had come for the proper authorities to clean up the insurance sector.
My questions pertain to the analysis of the four commercial practices current within the insurance sector in Quebec. I am curious as to whether such practices are prevalent elsewhere in Canada. For example, the report found that practices such as loans to firms, ownership ties, block transfers of business volume and contingent commissions are not in the best interests of consumers.
The report also found that insurers grant loans to firms with which they do business. These loans are subject to specific conditions which, in certain cases, remain in effect from one to five years following the repayment of the loan.
It was also noted that 23 per cent of large firms reported ownership ties with an insurer. In over 90 per cent of cases, an insurer holding shares in a firm has the most volume of business from that firm.
Block transfers are a practice whereby a firm transfers a volume of clients from one insurer to another in exchange for additional remuneration amounting to as much as 15 per cent of the premiums transferred, in addition to the standard commissions. Overall, 55 per cent of the large firms reported at least one transfer of business to another insurer over the past five years.
A contingent commission is a bonus added to the basic remuneration offered by insurers to a brokerage firm. I will not speak about the quality, which as you mentioned earlier, can change in the event of a disaster, but about quantity. Three elements factor into the contingent commission: meeting an objective related to the sale of the insurer's products, the profitability of an insurance portfolio and securing the loyalty of clients. On that basis, $4.2 billion in P & C insurance was sold to Quebeckers. This affects all of us as Quebec consumers, because we are talking about products such as automobile, home and liability insurance.
Since consultations will continue in Quebec, what do you suggest we do to find solutions of a regulatory nature? Meanwhile, consumers still harbour the impression that when they do business with a broker, they have access to a range of products. However, it has become apparent that a number of brokers do not offer consumers a broad range of choices because of their ties to certain insurers.
Can you answer my questions concerning the relationship between insurers and brokers?
[English]
Mr. Orr: The brokerage market in Quebec is a different market. You asked if that is particular to Quebec or is it right across the country. Several brokers do have concentrated volumes with specific insurers. They have agreements to have those concentrated volumes. There can be obvious advantages to those concentrated volumes.
Sometimes a broker has better clout with their clients or has more influence on the insurer on how they deal with that client as far as price, and claims consideration, based on the volume of business that they have with that insurer. Sometimes those increased volumes are an advantage to those clients, to have that increased volume and have that increased influence on the insurer, or on the decisions that they make and the actions that they take. I believe that it is better to have a broader spectrum and that is the direction I have taken.
As far as loans to brokerages from insurers, I can safely say that the financial industry has difficulty understanding the property and casualty insurance brokerage system and it is sometimes difficult to obtain loans to support increased business or additional business ventures.
There has been over the years, as the industry has those financial investments available, and understanding the business, those have come easier to the brokers than being able to get them from the bank. I would suggest that is probably the major reason you see that in those brokerages.
I believe that throughout all of this, perceived conflicts of interest, the declaration of those conflicts of interests and the disclosure of those conflicts of interest are the answer on how to look after the issues so that the consumer is an educated consumer and understands the purchase that they are making and understands that broker's business. Disclosure of those conflicts of interest, we believe, is the method moving forward.
In some of the other provinces, for example Ontario, with their compensation disclosure, the knowledge of that disclosure and compensation, as long as the consumer is aware of the situation and understands the situation, they can make an educated choice on their insurance buying decision.
[Translation]
Senator Plamondon: Therefore, in your opinion, the solution would be for the broker to declare a conflict of interest, rather than sever this relationship. If I understood correctly, you stated that in some provinces, conflicts of interests were declared, but solely at the request of the consumer. Is a conflict of interest declaration of this nature mandatory in some provinces, without consumers having to request one?
[English]
Mr. Orr: This is an on going development, certainly, moving forward. In Ontario, that declaration is made voluntarily to the clients. In Nova Scotia, for example, that information is readily available and is provided upon request.
Senator Plamondon: Upon request, on both sides, Ontario upon request?
Mr. Orr: In Ontario, that information is provided to the consumer on the first renewal and if there is ever a change in insurer. Each consumer in Ontario receives that information on their renewal and if there is a recommendation to change insurers by the broker, that information has to be provided to them.
[Translation]
Senator Plamondon: When a brokerage firm is paid a commission for the block transfer of business to another insurer, is this payment also reported?
[English]
Mr. Orr: That would be declared in the Ontario situation.
[Translation]
Senator Plamondon: Is this practice common only to Quebec?
[English]
Mr. Orr: Other provinces are looking to deal with this situation moving forward.
The Chairman: Just to respond to that, you are saying that declaration is only made on renewal, not at the first instance.
Mr. Orr: On the first sales, yes, on one year's renewals and any time that a broker on a new sale, or changes markets, recommends a different market.
[Translation]
Senator Plamondon: With respect to commissions paid for the quality of the portfolio with an insurer, in order to maintain the same quality in relation to claims, do you not find yourselves in a situation where you cannot side too much with the consumer in order to handle the fewest number of claims?
Mr. Yakabuski: According to the figures that I shared with you, it is clear that our priority is to resolve claims as quickly as possible. Moreover, all of the figures show that the industry is doing an excellent job on that score. I know of brokers who feel tremendous joy when they present a cheque to a client who has incurred a loss. These brokers press the insurance company for a cheque and present it proudly to the client, as if to say: see, I am working on your behalf.
Senator Plamondon: However, the higher the volume of business with a particular insurer, the easier it is to negotiate with that insurance company — at least that it what we are hearing. You told us that it was easier in such instance to deal with a complaint or settle a claim. Therefore, it is not so much the quality of the complaint as such, but the relationship between the insurer and the broker that determines how well represented the consumer actually is. Is that correct?
Mr. Yakabuski: If you look at the history of our industry over the past several years, you will note that several companies have merged their operations. For example, ING bought out Guardian and several other companies. When two damage insurance companies merge in Canada, the market share of the new company is generally smaller than that of the two companies combined, the reason being in part the level of competition in the industry. Brokers understand full well the importance of competition, as do the insurance companies. Other financial institutions in Canada do not face the kind of fierce competition that prevails in our industry. The market share of the newly formed company is always smaller, because brokers are loath to put all of their eggs in one basket.
Senator Plamondon: That is not the finding in the case of Quebec on the question of conflicts of interests. When ownership ties exist and hefty commissions are paid on business volume, the tendency is greater to sell to a person who contacts a brokerage firm rather than to an individual a product that will increase the firm's overall volume of business.
As a solution, could we not have independent brokers without any ties to an insurance company, as well as brokers with such ties?
Mr. Yakabuski: The solution is to encourage more competition within the industry. One problem is that in Quebec, there is less competition that in other markets in Canada. Solutions of a regulatory nature will result in even less competition in Quebec and that is not what we want.
While one may agree with the report that was released by the Autorité des marchés, we should instead be looking for solutions that will strengthen competition, not for ones that involve governments.
Senator Plamondon: Could we not follow Ontario's lead and require that all broker commissions be reported? Having independent brokers could also be a viable option. Clients would then know who is independent, and who is not.
[English]
Mr. Griffin: Senator Plamondon, a very extensive survey was done in Quebec by the regulator in that province. A similar survey has been conducted over the past several months by the Canadian Council of Insurance Regulators in the other provinces. That report has yet to be released.
It is difficult for us to give you specific responses because we have not read the other report.
[Translation]
Senator Plamondon: Do you know when the report is scheduled to be released?
[English]
Mr. Griffin: No, it is in the hands of the Canadian Council of Insurance Regulators.
To your second point, the Ontario model has at least two components, one of which is the disclosure by the underwriters by insurance companies on their websites of all of this information. That obviously applies to a consumer whether they are in Newfoundland or British Columbia. That information is available to consumers across the country.
The second element, which at this point is specific to Ontario, deals with the mandatory disclosure of the commission arrangements at the point of sale. I will defer to the president of the Insurance Brokers Association of Canada as to whether that would be best implemented across the rest of the country.
Mr. Orr: I know that agreement has been implemented in Ontario and has been presented for review to the rest of the regulators and the associations across Canada. Each of our individual members is dealing with their regulators on that issue as we speak. It is a process that is moving forward.
[Translation]
Senator Hervieux-Payette: My questions deal primarily with consumers and with the cost of insuring oneself against each separate risk. With respect to natural disasters, have you compiled any data or done any studies over the past five years on cost increases and premium increases, whether for automobile insurance or general insurance? That would give us some idea of how the situation has evolved. Have the risks actually increased, or is it that premiums have risen substantially?
Earlier, mention was made of a once-in-a-lifetime disaster, namely the ice storm in Quebec. I hope we will not have another disaster of this kind for the next decade. Now, everyone is just waiting for an earthquake to hit Vancouver. Talk about risk!
[English]
The Chairman: Senator, there are enough political problems in the country. Do not threaten the gods.
[Translation]
Senator Hervieux-Payette: With respect to premiums, are profit margins really excessive? We want to ensure that consumers are well served, that costs are affordable and that profit margins are not unreasonable.
The cost of processing claims is another consideration. Each claim needs to be examined separately. We need to look at the cost of each disaster and consider how costs have increased over time.
In the banking sector, for example, with the advent of automation, costs are declining, not increasing. This trend impacts the profit margins of insurance companies.
Regarding the measures implemented to reduce the incidence of fraud, earlier we talked about the banking sector. However, in the insurance industry, in my humble opinion, practices are somewhat more lax than they were in the old days. Claims submitted do not always reflect the cost of lost or stolen items. While we have heard how risk costs have increased, I would like to hear more about the costs associated with fraud. Obviously, it makes a difference in terms of the amount of money insurance companies pay out in claims if the value of stolen property is pegged at $1,000 versus $500.
Earlier, it was mentioned that only 2 per cent of consumers take issue with the insurer. I hope the reason is that occasionally people inflate their claims. An insurance company may also take a hard line approach, but usually the parties can come to an agreement.
In assessing the situation, it is important to consider the components that factor into the premium-cost equation, and to look at whether the insurance is sold on line, or by a broker.
For instance, what happened in Alberta where premium legislation was enacted? One fine day, the Premier decided that politically speaking, it would be a sound move to bring in legislation and freeze premiums. Does this mean that insurance companies will now be incurring losses? Does this mean that coverage will change? I think it is important to clarify these issues.
I mention Alberta, because it has taken the most radical approach. Other provincial governments have brought in measures, but nothing like Alberta.
Finally, is legislating premiums a viable option, one that is in the best interests of consumers? If legislation is brought in to cap premiums and consumers are not as well protected because companies provide less coverage, then we are no further ahead in the game.
It will take an effort on your part to provide a written response to these questions. Perhaps you have some stories to relate to us about fraud. I am curious about the scope of this phenomenon, because I believe insurance fraud is more prevalent today than it was back in the 1950s.
[English]
The Chairman: To be fair, the senator raised a cluster of questions. We are limited in terms of time. You can respond to the major points as you choose, but the senator was gracious enough to indicate that she would like your response in writing. That will give you an opportunity to look at her questions more carefully and then respond. The transcripts will be available. She asked a series of clustered and interrelated questions. Respond as you like, and we will entertain your written responses.
Mr. Griffin: Senator, you have hit on several critical issues that go to the core of our business, and the first is how premiums are set.
The simplest basis is that it is the premiums of the many that have to be set to pay for the claims of the few that will make a claim. The trick is that this is the only product I know of sold in Canada today where we do not know the largest cost of the product ahead of time. It is a guess going into it. We attempt to guess based on past history the number of claims, their size, what we need in terms of expenses to deliver it, and a healthy return.
The second question you asked was on the issue of fraud. That is of great concern to our industry. We did a study about five years ago looking at actual closed claims. Between the example you gave, exaggerations of claims in which a Timex turns into a Rolex when it is lost, and actual fraud that is premeditated, our estimates were that in the range of 10 per cent to 15 per cent of claims dollars going out are as a result of fraudulent activity, either exaggerated claims, auto theft or actual orchestrated fraud.
In reference to Alberta, I probably need to give an answer that is too long, but the simple answer is I do not think legislated premiums are the answer. I do not think the legislatures of this country are any better at speculating what we need in terms of dollars to pay future claims than we are, and inevitably they get it wrong.
The Chairman: If you have any recommendations to make in terms of the consumer protection mechanisms within your industry that you think could be improved, we look forward to your recommendations.
I do note with some personal dismay that Mr. Orr suggests in bullet 2, page 5:
Provincial governments and related organizations remain the best avenue of recourse for consumer insurance concerns that cannot be addressed by the industry or the marketplace.
We heard the banking association, and you also heard their comments. They told us they were sorry that we did not push them further and faster because when we did push them the result was a better balanced marketplace. Does this mean we have to push the insurance brokers in order to bring about a fair result?
We have raised issues here of conflict, transparency, and the fact that one province has a better system than the other provinces. The banks have told us in a very candid way that the consumer and the marketplace benefited from our push.
I am not asking you to respond now, but we were listening carefully to what you had to say. We looked at your brief and, based on the pointed questions made by all senators, we are concerned about your industry. Remember that this is a non-partisan committee.
We are certainly not satisfied with the bidding process. The Americans have disclosed a serious flaw of giant proportions. The settlement was in the hundreds of millions of dollars.
Senator Angus: Over a billion in some cases.
The Chairman: At the end of the day, this is not a small issue. This is a systemic problem. We have had only anecdotal evidence from you to say there is no wrongdoing. We do not question that, but we would be interested in whether there should be a bidding code to ensure bidders do not get together and collude with one another to rig prices.
This is a serious issue for us, and this committee does not want to become muscular before we give the industry an opportunity to respond to what appears to be a lacuna in regulation, self-regulation or government regulation.
The evidence is not clear, but the American practices are not a hell of a lot different than some of the Canadian practices when it comes to bidding for large contracts.
What is the fallout? A problem like this can undermine consumer confidence. How can we prevent such a problem in this very important industry?
Canadians are insurance conscious, as they should be.
We are concerned, as we were with earlier witnesses, about the lack of statistical information. Mr. Yakabuski makes a good point about the number of claims. We would like to get those statistics in front of us. We want statistical analysis of the proportion of claims and their nature. To my mind that is the way to induce self-reform before government has to bring out its heavy hand.
Senator Angus: As we all know, this is an industry that is basically subjected to provincial jurisdiction, both as to the brokers and the insurance companies. They live and try to operate in a regulatory nightmare. There is a thing called regulatory reform which has been going on over a period of time.
This situation is similar to the problem we had with the securities business and the one single regulator that we would like to have. That is a big problem, is it not?
Mr. Griffin: Regulation is a huge problem.
Senator Angus: If you have any comments when you are giving us these written submissions, they would be helpful.
Today is a new day in Canada, and to have all this parochial mishmash affects our competitiveness in the global marketplace and in the financial services sector.
The Chairman: I thank the senator for that comment.
You should also be aware that this committee will be coming at this from another perspective. We are doing a productivity study which goes to the questions raised here about how to be productive and competitive and at the same time be fair to the consumer.
Another issue, which we think is an inhibitor of our marketplace and regulation, is the interprovincial trade barriers, and I consider diffuse and fragmented regulation to be part of that problem.
We see no effort on behalf of the provinces to move more quickly to harmonize their laws to benefit the economy and the consumer. We see no progress and we will be drawing that to their attention.
Senator Angus: The governor of the Bank of Canada, when asked about Canada's lag behind in productivity, to our surprise said it is bad but has gotten better in some areas. In the service sector it is the worst, and he referred specifically to your industry, to insurance, interestingly enough.
Mr. Griffin: Senator Plamondon referred to the Quebec report and some of the findings in that report. One of the most important findings from the report highlighted in their press release is they found no evidence of the type of action that was taking place in the U.S. That is an important finding out of that report.
The Chairman: We are not making unfounded allegations. We are here to prevent is a situation as occurred in the United States.
Mr. Griffin: The second is with the issue of regulation. I will be speaking tomorrow to the Canadian Council of Insurance Regulators on harmonizing and moving to a better system of what we call "smart regulation.''
The Chairman: Thank you very much, and thank you for your diligence.
The committee adjourned.