Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 18 - Evidence
OTTAWA, Thursday, March 22, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-37, to amend the law governing financial institutions and to provide for related and consequential matters, met this day at 10:55 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Ladies and gentlemen, welcome to the committee. On our first panel of witnesses this morning are Mr. Duff Conacher, Mr. John Lawford and Mr. Jacques St-Amant. The meeting is being viewed from coast to coast to coast as well as on the Internet worldwide. Everything said this morning will have reverberations around the globe.
Today, we begin a rather important study on Bill C-37, to amend the law governing financial institutions and to provide for related and consequential matters. Bill C-37 was introduced in the House of Commons on November 27, 2006, and referred to this committee on March 21, 2006. The bill covers a wide range of areas including disclosures to consumers, streamlined approvals for certain institutions, electronic cheque imaging, mortgage costs, the establishment of cooperative credit associations, and foreign experts on boards of financial institutions. According to the Department of Finance, the bill would ensure that Canada continues to be a world leader in financial services, which we are. Moreover, in tabling this bill, the Minister of Finance has said that the proposed legislation would help to modernize our regulations, cut red tape and advance the interests of consumers. That, honourable senators, is all to the good.
The four principal acts governing the financial services sector are the Bank Act, the Insurance Companies Act, the Trust and Loans Companies Act and the Cooperative Credit Associations Act. The goal is to allow financial institutions to operate as efficiently and effectively as possible in meeting the needs of consumers and businesses, while ensuring the safety and soundness of the financial services sector. The periodic review of financial institutions legislation is required by virtue of the sunset provisions contained in these statutes.
The provisions necessitate a five-year review, which we are undertaking, that governs federally-regulated financial institutions such as domestic and foreign banks, trust companies, insurance companies and cooperatives. The last legislative review occurred at this committee in 2001, and the sunset clause for the financial institutions was October 24, 2006. In Budget 2006, the federal government extended the legislative sunset date by six months to April 24, 2007. Thus, the committee is under tight time constraints in order to allow Parliament sufficient time to conduct its current five-year review, of which this is one part.
It is only one month until the April 24 deadline and therefore, the committee begins its hearings with the first witnesses on this important bill. Before I invite our witnesses from the Public Interest Advocacy Centre to proceed with their presentation, I will introduce Senator Angus, Deputy Chairman of the Committee, Senator Meighen, Senator Massicotte, Senator Eyton, Senator Harb, Senator Goldstein, Senator Ringuette and Senator Biron. Mr. Lawford, please proceed.
John Lawford, Counsel, Public Interest Advocacy Centre: We are here on behalf of the Canadian Consumer Initiative, which is a grouping of six consumer organizations that include the Alberta Council on Aging Services, the Automobile Protection Association, the Consumers Council of Canada, Option consommateurs, the Public Interest Advocacy Centre and l'Union des consommateurs. CCI represents thousands of individual Canadian consumers in all provinces and several consumer protection organizations. CCI provides advice and assistance to enable the federal government to safeguard consumer interests.
CCI has come before you today to provide the committee with its comments on Bill C-37 from a consumer perspective. We present our comments on those sections of the bill that have the most direct consumer effect. However, we have some observations on what is missing from the bill, in particular a framework for electronic payments. With the committee's indulgence, I will proceed clause-by-clause, if I may.
The first area that we will deal with is clause 27, to amend section 417 of the Bank Act, which would allow banks to accept mortgages up to a value of 80 per cent of the value of a residential property instead of the current 75 per cent. Consumer groups have been watching, with some alarm, the continuing increase in overall consumer debt.
Increasing mortgage value debt increases debt for consumers who may be purchasing a first home and who may already be vulnerable to increasing credit pressures. We also note that in a declining housing market, bank solvency itself may become an issue. Here we note the present meltdown in U.S. sub-prime mortgage lending. Increasing this limit, therefore, seems imprudent at this time.
Section 31 of the bill improves bank disclosure requirements regarding RRSPs and other financial products. This sort of disclosure is very good for consumers, and we support the level of fee disclosure in this section. We trust it will become a precedent for other bank fee disclosures.
Section 32 makes improvements to information requirements regarding banks' complaint resolution procedures. While the requirements to provide written brochures in branch, website information and written information to those who request it is welcome, simply providing such information in a passive manner is insufficient. Instead, such information regarding complaint procedures should be a positive requirement on the bank, such as in the disclosure requirements for RRSPs just mentioned. In particular, banks should be required to bring a consumer's attention to the procedures at the earliest opportunity, when the consumer expresses dissatisfaction with products or services.
Section 33 clarifies that fees and charges can be imposed by a bank only through express agreement with the consumer or upon a court order. Again, while this is welcome, it does not clearly remedy the problem that banks can change fees unilaterally in their account agreements, and that the customer who does not close his or her account is often deemed to accept this charge. We feel a better formulation would be to require adequate advance notice or the fee is not collectable.
Section 34 is something of a major issue for us. It allows the Governor-in-Council to stipulate maximum cheque hold periods. Cheque hold periods are a key issue for consumers and often act as a barrier to bank use by lower income Canadians. Although this power is a step forward, we note that in the United States, such limitations are established by statute, not regulations, and they have been so for the last 20 years.
The vast majority of cheques in the electronic age now clear quickly and will clear even faster once electronic presentment is implemented. There appears to be no rationale for the banks' extended hold periods. We therefore ask you to consider a more direct approach to cheque holds by making hold periods subject to a legislative requirement. We would argue that, ideally, the issue should not be solved in the Bank Act but in legislation such as in the Canadian Payments Act to establish a level playing field among all deposit-taking financial institutions in Canada.
The section 35 amendment requires broader website disclosure of the prohibition of tied selling of insurance products by bank insurance companies. An additional and perhaps more useful piece of disclosure would be in the actual text of banking agreements, where we think it would come more to the attention of consumers at the appropriate time.
Section 36 introduces what we think are cosmetic changes to branch closing procedures. Again, this is a large issue for consumer groups. The FCAC, the Financial Consumer Agency of Canada, has power in relation to branch closures, but we do not feel they are sufficient. In our view, we think they should be significantly increased to include a power to require banks to maintain branches where need is shown at least for a specified period.
Section 398 amends the Bills of Exchange Act, and this is the electronic presentment section. It will allow electronic images of cheques to stand in the legal shoes of paper cheques. However, we are concerned that the amendment to the definition of ``eligible bill'' in that section may result in the notion of any cheque no longer being defined by Parliament but by members of the Canadian Payments Association. We are concerned that in the future, the financial institutions, through the CPA, would define the characteristics of an acceptable cheque without adequate input from stakeholders. We believe that the essential characteristics of important payment instruments such as cheques should be established by Parliament, duly taking into account the interests of all economic stakeholders.
We would also be remiss if we did not note for the committee what appears to be a slight textual inconsistency between the English and French versions of section 163.4 of the Bills of Exchange Act in this new amendment, and it could be remedied by this committee.
According to the English text, a document is presumed to be an official image, and this wording makes the presumption rebuttable if the consumer brings evidence to the contrary. The French version indicates that the image is ``reputée,'' an official image, wording that would make the characterization legally irrefutable.
We are concerned that in cases of forgery of cheques, the customers have the opportunity to prove the original was not genuine and that there is no ``legal deeming,'' to use the equivalent English legal term, of a cheque being irrefutably genuine.
I am not sure on which line that falls, but it is on lines 19 and 20 on page 209 in the printed version.
Jacques St-Amant, Legal Counsel, Public Interest Advocacy Centre: It is section 398 of Bill C-37.
Mr. Lawford: Section 403 concerns the Canada Deposit Insurance Corporation. Under this proposed section, CCIC would be allowed to reimburse insured deposits by instalments without paying interest to consumers. We are concerned that full reimbursements might therefore be partially deferred for quite some time. We fail to see the policy rationale for depriving customers of interest in exchange for depriving them of the use of their money.
Section 422 deals with the Canadian Payments Association rules and standards, and they would expressly be described by this amendment as not being statutory instruments under the Statutory Instruments Act. At a time when CPA rules are increasingly important to providing rights and recourses to consumers, this amendment does nothing to clarify whether the courts can take judicial notice of such rules. In fact, it tends to confirm that rules cannot be legally relied upon by third parties such as consumers or retailers, and it reduces Parliament's ability to review these rules.
With respect to section 430, we note that under this amendment there is no major change to the requirement that CPA is statutorily required only to make the text of its rules available to its members and not to the public. For years, the CPA has indeed made its clearing rules public, but in the interests of transparency, this policy should now be embedded in legislation just as, for example, the existence of the stakeholder advisory committee was in the last legislative review.
Section 435 deals with penalties that can be imposed by the Financial Consumer Agency of Canada. This amendment raises the maximum penalty to $200,000 in the case of an institution. Clearly, this level of penalty is inadequate in this industry.
We note that there is another bill before Parliament, Bill C-41, which is in regards to the telecommunications industry, where $5 million administrative monetary penalties are being considered for competition violations in the telecom sphere. Penalties of a similar magnitude would make flaunting FCAC authority more than a cost of doing business.
A number of consumer issues are not addressed in the Bank Act review of this bill, at least not adequately. I will list them for the committee. First, clear language requirements in bank agreements and other documents and second, clear and complete disclosure of liabilities imposed upon consumers in the case of debit card fraud. Credit card fraud is an increasing problem. Overlooked was a review of internal complaint and ombudsman mechanisms and approval of bank policies by the FCAC, which would be a vast improvement. The bill does not adequately address the improvement to disclosure of borrowing costs. Finally, the bill overlooks a principles based and comprehensive legal framework for electronic payments, which we addressed briefly in the House of Commons Standing Committee on Finance and we will likely be addressing again in the future. Many of these issues were actually raised in the White Paper from the previous government; however, we especially wanted to bring them to this committee's attention.
We are hopeful that this presentation has raised some consumer concerns that we have with the bill, and we hope that we will assist the committee in its deliberations. We will be happy to answer any questions you may have.
The Chairman: Mr. Conacher, how are you related to Charles Conacher?
Duff Conacher, Chairperson, Canadian Community Reinvestment Coalition: Charles is my great uncle.
The Chairman: He was my late father-in-law's closest friend, so I have a conflict of interest that I want to declare. I will be softer on you, Mr. Conacher, than I normally would.
Mr. Conacher: Thank you for this opportunity and for your overly generous and exaggerated introduction with regard to my fame; it is inherited, if anything.
The Canadian Community Reinvestment Coalition is a coalition of 100 organizations from across Canada including anti-poverty, community economic development, consumer, labour and citizen groups, representing a total membership more than 3 million Canadians. Since 1996, when it was formed, the coalition has been advocating increased bank accountability in many areas within Canada.
I will not go into some of the details of the proposals that are in the submission the coalition has made to the committee, because the CCRC generally supports the proposals that have been put before you by the Canadian Consumer Initiative. Those areas, in terms of increased disclosure, fair treatment rules, enforcement and penalties, are all areas that the Canadian Community Reinvestment Coalition has been pushing in the same direction.
Our submission refers to Bill C-8 in several ways, essentially pointing out that Bill C-8 contained many half-steps and half measures forward. Unfortunately, half-steps and half measures are about as good as half-truths. It does not really do much to increase bank accountability and accountability of other financial institutions covered by federal financial institution laws. As a result, what we have in Canada is still a two-tiered system of banking based on the wealth of the customer. Unfortunately, nothing has been done to stop the progress and deepening of this two-tiered system because of the half measures in Bill C-8.
One of the most important areas that the coalition believes needs a full review, and which has never taken place, is the pattern of bank branch closures in the past 15 years. We need to look at where branch closures have occurred and take a serious look at those local marketplaces in terms of the principles of competition law and the concentration of power of the branches and the financial institutions that control the branches. From what we know, these closures have occurred in mostly low-income neighbourhoods in both rural and urban communities.
During its testimony before the House of Commons Finance Committee, the Financial Consumer Agency of Canada noted that they are producing a map of branch closures, using Statistics Canada data, which they will make available on their website. I believe it goes back a decade. That should give some sense of where closures have taken place. However, what needs to take place after that is a close look at the market power of the institutions that have been left, and the reality, from the consumer's perspective, of whether there are choices. If there are not choices, are consumers being gouged? Are the regulations strong enough to ensure the branches treat the people in those neighbourhoods and rural areas fairly?
Essentially, it is the belief of the coalition that several local monopolies have been created across the country, and those monopolies can easily abuse customers who have little recourse but to use their services. Again, the laws are full of loopholes in disclosure rules, fair agreement rules and enforcement.
As Mr. Lawford has highlighted, the penalties are simply a joke: $200,000, which would be the increase, would be the maximum penalty. I have never heard of the current maximum $100,000 penalty being charged against any financial institution. When the banks are earning more than $10 billion each, never charging that maximum means there is essentially no enforcement.
The history of regulation, especially in large organizations that are powerful and profitable, shows that if there are loopholes and if there is little chance of being caught and the penalty is low, then the loopholes will be exploited. The institutions will do a calculation and if there is a one in 1,000 chance of being caught and the maximum penalty is $100,000, then they will view it as a $100 penalty. A $100 penalty for an institution that makes more than $10 billion a year is meaningless. It is not even a cost of doing business, especially when that institution has millions of customers and can easily add a loonie or toonie to any service charge and recoup not just that $100 but also millions of dollars a month. They can do that very easily, without any recourse for the customer.
What is incredible is how far behind Canada is when compared to the U.S. in terms of bank accountability. Banks in the U.S. face quite a bit of competition, less and less as mergers occur, and in some cases they have a lot of market power in local areas. However, the U.S. has said who cares about the level of competition; we are interested in fair treatment.
Thirty years ago, the U.S. passed the Community Reinvestment Act, and other laws, which require detailed disclosure of each bank's lending investment and service record, branch by branch, neighbourhood by neighbourhood, based on the demand by customers in each category. The U.S. conducts regular reviews of that data and requires corrective action, especially when there is a merger, takeover or expansion. Essentially, in the U.S, if you are a bad bank, the government will not allow you to get bigger because then you will be a bigger bad bank and more customers will be treated unfairly. We are not anywhere near having that kind of system here in Canada, even though we have only six big banks to watch over and to review, whereas in the U.S. there are hundreds.
According to the former head of the Federal Trade Commission, Robert Pitofsky, the market power of our big banks is extraordinary. Mr. Pitofsky's view is that the record profits of the big banks in Canada are proof alone that we lack competition.
What do we need to do to have an effective system? Bill C-8 had the half measure of public accountability statements that when compared to the disclosure statements in the United States are far less detailed and not reviewed. In the U.S, they actually grade the banks regularly and require corrective action. We need more detailed public accountability statements. They need to be issued annually, and they have to be reviewed and graded by OSFI and FCAC, with public hearings, as they have in the U.S., where consumer and community groups can come forward and raise issues of unfairness in lending, investment and service.
I will mention a penalty that could be effective beyond increasing the fine. When institutions are found to be in violation of federal financial laws, they should be prohibited from bidding on the tens of millions of dollars of business that the federal government hands out to financial institutions in terms of credit card business, holding deposits and other money handling business. That would be a highly effective penalty to introduce.
In respect of the current regulatory agency, there is a half step in Bill C-8 with the creation of the Financial Consumer Agency of Canada. This agency has far too much discretion to keep secret the name of an institution that violates the law, and has done so. The FCAC did a mystery shopper survey in 2003 in which they checked more than 1,600 bank branches and found that more than 850 were in violation of the law. None of those branches or the institutions that control them was prosecuted or fined. Incredibly, they did the survey again in 2005 and did not survey on the areas where the banks had had the worst record in 2003. That is not effective enforcement; that is letting the banks off the hook. That agency needs to be required to disclose the name of the institution every single time one of them violates the law. Why? They must disclose the name of the institution because consumers and investors have a right to know. Everyone is talking about ethical and responsible investment and encouraging companies to be more responsible. No investor in any financial institution in Canada has any idea about the compliance record of these institutions. The ombudsman needs to be made more independent and have binding powers. Overall, we need to balance the marketplace in terms of consumer power versus the power of the institutions. We and everyone else you might hear from in the consumer realm are working on multiple issues. I spend about one-eighth of my working time on bank accountability. If we were to add up the time spent on that by all of the consumer advocates in Canada, it would equate one full-time person.
The consumers pay for the 100 full-time lobbyists that work for the banks, insurance companies and trust companies. Consumers pay the $15 million for television advertisements that tell them that everything is hunky-dory, it is your money, we built the bank one customer at a time, everything is fine, and we treat everyone fairly and well. The consumers pay for all of that. How do you balance such a marketplace to make it fair? You require financial institutions to facilitate, as consumers are facilitating the financial institution lobby, the consumer lobby. This could be done at no cost to the financial institutions. This committee, the House Finance Committee and the Task Force on Financial Services from 1998 recommended that the pamphlet method be used to form such an organization. That was recommended in 1998, yet here we are almost 10 years later and nothing has been done.
The FCAC was created but it is not an advocate for consumers; rather, it sits in the middle as the agency that enforces the law. Consumers are on their own when they call the agency but the institutions are not because they have their lobbyists and lawyers to argue against anything that the consumer might bring forward. Consumers need a place to call that is well-resourced and broad-based, and the pamphlet method is the way to do it. This sample pamphlet is required in four U.S. states. It is from the State of Illinois. The utilities distribute them when they send out their customers' monthly bills. Pamphlets do not come every month but once or twice a year.
The Chairman: Mr. Conacher, please table that document with the clerk when are you finished.
Mr. Conacher: The pamphlet states that the Secretary of State requires this important message concerning the Citizen Board be included in the envelope. It is a simple lick and stick envelope like Canadian magazines used to use for subscriptions. It describes the group and invites the customer to join for a nominal annual membership fee. Every customer receives this pamphlet because every customer receives a bill. They have only to put their cheque in the envelope, lick and stick it, and send it back. If this were done in Canada, more than 20 million Canadian bank and insurance and trust company customers would receive it. If only 1 per cent responded, the group would have 200,000 members. If the membership fee were set at $40 per year, the group would have an $8-million budget, and that would balance the marketplace. The collective budget of all of us who work on banking would likely amount to $100,000 per year. That is not enough to counter the power of 100 full-time bank lobbyists who have $15 million spend on television advertising alone. There would be no costs to the government or to banks and insurance and trust companies because the group would pay for printing the pamphlets. There is no cost to insert it because a machine simply would make one additional move to stuff the pamphlet in the envelope. Already all kinds of items arrive in our mail with banks statements, credit card bills and utility bills. In this way, we could balance the marketplace forever. It is a no-cost solution to balance the marketplace and that gives consumers a place to call that is run by them, funded by them and dedicated only to serving them. In that way, when a consumer has a problem, the lawyer from this group would call the bank branch. The customer would not have to call the FCAC only to hear that the Bank Act does not protect consumers in that area and the ombudsman is their only choice. Who pays for the ombudsman? The banks and the insurance and trust companies pay for the ombudsman. It follows that the ombudsman lacks independence and binding powers. We need this organization and this is the way to form it. This is the long-term solution to so many problems in the financial institutions marketplace.
Thank you for this opportunity. I know you cannot amend Bill C-37 but I hope you will undertake a new study of the industry. Such a study is needed. It has been 10 years since the MacKay task force. We need to stop a two-tiered system that contains so many loopholes and flaws in the disclosure of fair treatment rules. We need stronger enforcement and penalties. We need an effective bank accountability system, as established in the U.S. 30 years ago.
The Chairman: Mr. St-Amant, did you wish to comment?
Mr. St-Amant: I accompany Mr. Lawford and will provide any input to senators' questions.
The Chairman: The agencies to which you have referred will be part of our witness list today and we will ask them to respond to your concerns. Thank you for the provocative and informative evidence. We will read your texts thoroughly.
Senator Meighen: I believe Mr. Conacher touched on the thrust of my question when he said that unless we want to live without banking legislation in place, whereby capital markets might be unsettled by that fact, it would be difficult, given the necessity of this bill receiving Royal Assent by April 24, to make any amendments.
I believe that I heard the witness say that with the exception of one or two improvements he would like to see in the bill, he finds nothing that is very egregious. Mr. Conacher, did I hear correctly that, given the time constraints, one-half a loaf or one-quarter of a loaf is better than no loaf at all.
Perhaps Mr. Lawford could comment with respect to the language contained in proposed section 398.
Mr. Lawford: We would have liked more structural changes in the bill. We realize that we are coming in at a stage in the process where we are unable to do that, so we concentrated on the text of the bill to ensure the best possible consumer amendments came through. For whatever reason, we were not actively involved in the lead-up to Bill C-37.
In terms of this technical problem that Mr. St-Amant caught, our concern with proposed section 398 is that you are replacing jurisprudence and science with what looks like a simple change. We wanted to the consumers to have the opportunity to see the paper if they are caught in a situation where there is a forgery or a problem. In the French version, it is deemed to be an official copy, and it is hard to get out of that box. On the English side, it looks as if there is an opportunity because they can rebut the presumption and call a handwriting expert to dispute the handwriting. Then they have the opportunity to have the paper checked if it still exists. In the French version, it contradicts that.
Senator Meighen: Is that an advantage to having two official languages? You can opt for the one that serves your purposes.
Mr. Lawford: I think a judge would pick the version most advantageous to the consumer, but you never know.
Mr. Conacher: It is within the framework of the bill, and looking at the specific sections from the CCI brief, section 34 on the maximum cheque hold periods could be amended to create some constraint. It is just creating a regulatory power. Some constraint could be put on the regulatory powers saying, for example, that the regulation cannot stipulate a cheque hold period of any longer than what it takes the cheque to clear, which would constrain the regulation power.
Senator Meighen: On that, Mr. Conacher, if my understanding is correct, I have always thought that the holding period in the U.S. was generally longer than in Canada. Is that not so?
Mr. St-Amant: It has not been so since the end of the 1980s. As you know, the banking system in the U.S. is more complicated, so there are different rules.
When cheques clear in the same region, the normal rule is that within two days the amount of the cheque should be available, and, in most cases, an amount of $500, I believe, must be made available to the consumer immediately.
Senator Meighen: When you say ``same region,'' is that a Federal Reserve region?
Mr. St-Amant: I believe so. One would have to look very closely at the legislation, but my memory is that it is within a clearing region.
Senator Meighen: What happens if it is not within the clearing region?
Mr. St-Amant: If it is not, the delays might reach five days. Again, you must take into consideration cases where a cheque would be deposited in Hawaii and would have to clear in the Virgin Islands, which is why the U.S. rules are somewhat broader than what we need to have in Canada.
In Canada, the only thing we have is a section in the CPA rules that states that a cheque must be sent back, at most, within two days of the moment it arrives at a point in the clearing bank where it can be viewed. In many cases, it can be five or seven days before the cheque comes back, and the rule varies from bank to bank, depending on where the cheque is cleared. We believe Canada can do better than that.
Senator Meighen: Would electronic presentation not assist in shortening the delay?
Mr. St-Amant: It should. Whether that will be reflected in the bank holding periods remains to be seen. Right now, in most cases, the delay is shorter than the bank policies.
I have in mind the policy of the National Bank, which says that in most cases, they will make funds available within five days but they reserve the right to extend that delay, as they feel appropriate. Again, I think Canada can do better than that.
Senator Meighen: What would you suggest as a maximum?
Mr. St-Amant: In most cases, especially with electronic cheque presentation, it should be able to clear cheques and make funds available within two days.
Senator Meighen: Is that two business days?
Mr. St-Amant: Yes, and if the industry can prove that it needs more time, there should be a provision, as they have in the U.S., where at least part of the funds are made available. That would help low-income consumers to have some cash and therefore be able to do business with the bank instead of a cheque cashing company.
The Chairman: On that point, we have had witnesses on another pending bill before this committee dealing with payday loans. In my view, the cheque clearing is at the heart of the problem. Mr. Conacher, you point out that 10 per cent of the consumers do not have access to the banking system and must use this alternate system.
Mr. Lawford and Mr. St-Amant, if you prepare a bill dealing with an amendment to the Canadian Payments Act, I am prepared to introduce it as a private members bill if I am satisfied that it is viable. I put the banking association on notice because they are coming up later on. We have raised this as an issue. In the bill, they are making movements to improve the efficiency with electronic imaging. The question is whether it will be implemented fast enough to help the consumers on this particular issue.
We are very mindful of this issue. If you produce a draft bill, we will give it serious consideration and I myself and perhaps some of my colleagues, would introduce a private member's bill to move the industry along.
I hope that satisfies you on this point.
Mr. Conacher: I want to mention two other sections that were highlighted in the CCI brief that are again within the framework of the bill. There is no reason why the committee and the full Senate cannot amend it and send it back.
With respect to section 36, and branch closing procedures, there is no reason why there could not be a mandatory, fuller review with some justification, disclosure of the profit-loss record of the branch being required, even if it is only disclosed to the FCAC as an interim step, although it should be disclosed publicly to have a full public review. Again, the penalty section is within this bill and it is fully within the legislative power of the Senate committee to increase that penalty and send it back to the House and see what the House says.
Senator Eyton: I have a supplementary comment that concerns the clearing times and the experience of Canada and the U.S. My experience with Canadian clearing is significantly better than with U.S. clearing by days and days. We are not talking about a complicated transaction outside a region, even within regions, but in the U.S. I find the time to clear a cheque may be five, six or seven days.
My typical experience with Canadian clearing is, perhaps, two or three days, although I recognize the stated policy gives the banks more time. In practical terms, the clearing system as it is today — forget about improvements that might come about because of electronic cheque imaging — is better than the experience I have had in Europe. At least in that area of activity, our Canadian banks are doing well.
Mr. Conacher: I do not doubt your experience, but Bill C-8 only required that the banks publicly disclose their hold policy. Almost invariably, they say their policy is a 10-day hold. If you are a person with a low income, not just on social assistance, and you are treated that way, you will not go to a bank. You will not have a bank account. You will go to a cheque-cashing outlet and get gouged even worse than you would by a bank. It is not good enough for Bill C-8 to say you must have a policy.
The four-day to seven-day period set out in this bill is excessive. Many people cannot go for a week without having access to their cash, not just people on social assistance but also people with low incomes. This committee could say the hold period can be no longer than the actual clearance period; otherwise, it is already instituted because of the bank branch closures and the two-tier system. You will never take the step toward fair treatment for all Canadians if you keep allowing cheque holds to be used as a barrier because the banks will use them as a barrier. The banks do not want to deal with people who do not have money to invest. They have been protected from foreign and domestic competition. They are as big and as profitable as they are from those protections. The requirement should be to treat everyone fairly, open an account for anyone, and loan money to anyone who is creditworthy. They should not be to be able to do whatever they want with our money at whatever price.
Senator Goldstein: Thank you, gentlemen, for excellent presentations.
I am intrigued by the flyer that you propose to include with bank statements or credit card statements. How many states in the United States do that, recognizing that banks are essentially state regulated in the United States?
Mr. Conacher: It has only been done in the area of utilities in the U.S.
Senator Goldstein: It has not been done by banks at all?
Mr. Conacher: No. Bills have been put through but they have not been passed.
Senator Goldstein: There is no precedent for that in North America?
Mr. Conacher: In the banking sector no, just in the utility sector.
Senator Goldstein: In terms of clearing, the Canada Payments Act provides for bills, including cheques to be sent back by the drawee bank no later than the day following presentment of the bank and the sending of the item. The item itself is no longer presented. It is the list itself.
With imaging, it should be relatively easy for institutions to be ``stuck,'' using their terminology, or lose recourse if a cheque is wrong, forged or improperly drawn. I understood there was a commitment from the Ministry of Finance that under this bill, when passed, the time for hold would be restricted to seven days and then would be further reduced to four days maximum at the time cheque imaging became the norm, which is in the not too distant future.
Do you have any comments on that? Would four days be a problem recognizing that the people who are subject to the four days are generally the people who are most in need of immediate funds?
Mr. St-Amant: The current rule is actually set out by rule 8(2) of the CPA. It is not in the statute per se.
Clearly, if the eventual regulations, which we have not seen, set a maximum period of seven days and eventually four days, it would be an improvement of what we currently know.
Senator Goldstein: You understand that there is a commitment to that effect?
Mr. St-Amant: With due respect, was that a commitment by the current minister or by his learned predecessor? I am not sure.
Senator Goldstein: It was mentioned and the details are not important.
Mr. St-Amant: Yes, it would be nice but it would be even nicer to have a set rule in legislation because then we could be sure that it is cast in stone.
Senator Goldstein: My understanding of the increase in the ceiling for mortgage loans is not anti-consumerist but the contrary. With the cost of housing in Canada, most people cannot afford a 25 per cent down payment and reducing the down payment from 25 per cent to 20 per cent as the bill suggests, seems to be pro consumerist. You appear to say the contrary.
Mr. St-Amant: We are aware of that argument. It certainly holds weight but consumer groups who do budget counselling also see people who are already way over their heads in debt. We are concerned that the effect in the market could not be what we wished but could be detrimental to a number of consumers. We also realized that one of the reasons the ceiling was raised is because extending mortgages is interesting to the banks in terms of complying with the Basel II capital requirements. That must be kept in mind.
We would have suggested that all the angles of this issue be looked at closely with all the stakeholders involved to ensure that what we are doing will actually achieve the objectives that are put forward. We are concerned that it could actually result in increasing consumer bankruptcies. We hope not, but there is a risk. As my colleague said earlier, when we look at what is happening in the sub-prime lending market in the U.S. we believe there is cause for concern.
Senator Ringuette: My first question concerns the change from 75 per cent to 80 per cent. The major investment that a Canadian makes is in the home; it is also the major debt. We definitely need to look at the real impact of this provision.
None of you have talked about reverse mortgages. I would like to have a few words from you in this regard.
Mr. St-Amant: Let us say we are not quite sure we like them, to say the least. In my experience, there has not been much of a market for reverse mortgages in Quebec. I am not really able to provide you with consistent comments based on real experience. Unfortunately, my experience has been in Quebec, although my colleagues may be able to add a bit more.
Mr. Lawford: It will not be available to the committee but our group, not the Canadian consumer initiative but the Public Interest Advocacy Centre will be undertaking a study of a larger sub-prime market for the Office of Consumer Affairs. It will include a section on reverse mortgages, which is not in time for you. We did a report almost 15 years ago, I believe, on the possibility of this becoming a big market. We found some evidence of it. It was not a good thing in our opinion. I can try to find that report and give it to the committee but it is quite dated. We are not in a position to answer that question at this time.
Senator Ringuette: Is there anything in this legislation pertaining to reverse mortgages in the banking system?
Mr. St-Amant: No.
Senator Ringuette: Yet it is a growing threat.
Mr. Lawford: Yes.
Senator Harb: Thank you for your presentation. My colleagues both asked one of the questions I wanted to ask about the 75 per cent to 80 per cent to be able to insure on the 80 per cent rather than on the 75 per cent. If we do not go ahead with that change does it mean that consumers will not go and get a second mortgage or in some cases a third mortgage? In essence, you are defeating your own argument by saying you do not want to allow them to have a first mortgage up to 80 per cent but I do not mind if they go ahead and get a second and a third mortgage.
I was a bit intrigued with the cynicism that you hold, Mr. Conacher, toward the banks. Without going into too much detail, I was intrigued by your statement that the market share control of the big banks in most parts of the country is higher than in most industrialized countries.
Have you done any studies to that effect? Could you provide us with some information on that statement?
Mr. Conacher: This has been well documented. It was documented by the MacKay task force, looking at the top three banks' concentration, compared to other OECD countries.
What has not been done is a study looking at local monopolies based on convenience and access and what consumers view as actual real choices for themselves. In 1998, the Competition Bureau performed a very good study of the bank mergers, which was based quite closely on the reality of consumer experience. It looked at this issue to some degree, but not across the entire market because the Competition Bureau was examining specific bank merger proposals.
That is why we are calling for a realistic study. The banking people claim that an option like PC banking is competition, but PC banking is CIBC banking. The banks say that options like ING are competition, but you have to have a bank account with one of the banks to bank with ING. They say that options like white label machines and generic bank machines are competition. They are in competition for location, but they are just facilitators to established bank accounts. These ``competitors'' in many cases are really partners. That is why we need a serious look at the competition in the marketplace, looking at it locally and across the major products and services across the country.
Senator Harb: My final question deals with your comment that Canadian banks lack key accountability to quorum. Are you aware that banks are owned by shareholders and have meetings on a regular basis? Are you aware that unions, pension funds and teachers' funds also own banks, and that, on an annual basis, these people have meetings and an opportunity not only to vote but also show up for these meetings?
In addition, banks are federally regulated. Any parliamentary mechanism that is responsible for this file could, from time to time, look at issues dealing with banks. We also have a federal agency that oversees banks.
Mr. Conacher: I am aware of all of that.
Senator Harb: And you do not think that is enough?
Mr. Conacher: No, we could have a long discussion about the actual effective state of shareholder democracy in Canada, but I will not get into that.
If you look at any category, we are 20 to 30 years behind the U.S. in terms of effective bank accountability.
Senator Massicotte: Regulations are important and government supervision is important, but the most important measure of ensuring fairness to all parties in equity is competition. I am a firm believer that when you have good competition you can let the government get out of the way.
Let us talk about that in Canada. You obviously have an idea that competition is not adequate and many Canadians share that view with you. This act amends, in a couple of places, the definition of ``near banks'' and also increases the capital requirements which must be widely held. Do those two amendments increase competition? Does that ease the entry of non-Canadian financial players in Canada and is it adequate? If it is not adequate, what would you propose to ensure there is real competition in Canada to remedy many of the ills to which you refer?
Mr. Conacher: I do not think that almost anything you could do will increase effective competition because I very much believe — and the Competition Bureau's most in-depth study of the mergers in 1998 showed it — that Canadians want full-service banking at a branch that is convenient and close to home, work or school.
No one will set up those branches because the banks have all the best locations already and the costs of building that infrastructure are enormous. No foreign bank has done it. The only one that has branches is HSBC and they bought them from a bank that failed out west.
The credit unions were given the opportunity through Bill C-8 to come together to form a regional credit union possibly, a cooperative bank. We will see whether they do it, but 10 of them did not come together and could have, under Bill C-8; that was six years ago.
The changes that have been made for foreign banks have largely been a mistake. Foreign banks are only allowed to take deposits of $150,000 or more. ING came in and set up a virtual bank. Both of those moves allow foreign banks to poach tonnes of reserve capital, essentially deposits, from the big banks and this puts pressure on the big banks who are trying to maintain a full-service branch infrastructure across the country, services which Canadians want.
This is probably linked to the increase in fees that we have seen across the board. Banks try to maintain this branch network, but the foreign banks, with the $150,000 deposit rule and ING, come in with no infrastructure and therefore are able to offer better interest rates while obviously piggy-backing off the banks. They can get the cream of the crop.
Largely the moves that have been done to date have hurt the average Canadian bank customer, in terms of Canadian banks trying to adjust to that loss of the cream of the crop, and anything else that could be done will not effectively increase the competition. I am sorry; I believe that is the reality.
Senator Massicotte: Many people would share your opinion that the cost of brick and mortar for a competitor to be set up in Canada is very difficult and that impedes competition.
Mr. Conacher: No one has done it.
Senator Massicotte: You must admit also that the intention of the last amendments was to increase competition. It looks like in the last couple of years we are seeing a significant increase, but there is a point, relative to what they hoped would be created, to level the competition.
Mr. Conacher: Yes.
Senator Massicotte: A few years ago, C.D. Howe said that one way to get around this bricks and mortar solution would be for all banks to share, with reasonable costs, their network of electronic communications. In other words, you should be able to go to any electronic teller and withdraw monies and not only do simple but much more sophisticated transactions. Obviously, the banks are against that and you would break some barriers of significance. I am not as pessimistic as you are with respect to competition, be it Canadian or foreign. I believe it causes all the other banks to behave.
Would it be helpful if we went that far to cause that delivery system?
Mr. St-Amant: It would take a lot of will on the Hill to get that done. This is what we are seeing right now with the debate over the ATM fees. Banks have no interest whatsoever in providing access to their customer base to other institutions through whatever network you may be thinking of.
Right now, the convenience fees act as a barrier for a consumer movement. Interestingly, in some other jurisdictions, the kind of shared services that you mention have been implemented. Technically it would be quite possible to do in Canada. Clearly, there is no appetite from the industry to do that.
I would like to return to your first question and to an issue that was raised by Senator Harb. In 1998, I made a map of the network in Canada and a couple of things came out very clearly. In the 2500-odd communities in Canada that had a deposit-taking branch, there were, at most, two branches. In most cases, it was a credit union, caisse populaire or sometimes a bank. In most communities, there was a very high level of concentration.
Looking at the map you can see clusters. For instance, in Eastern Nova Scotia, you would see many RBC branches and Scotiabank branches but practically no CIBC. If you are interested in a CIBC product and you live in Pictou, for example, good luck, you cannot open a CIBC account.
There is a significant amount of concentration at the local and regional level, but, as Mr. Conacher mentioned, it creates obstacles to competition in the market. It would be nice if electronic systems could help, but I do not see that happening in the near future.
Senator Massicotte: Many experts in competition would say that there is a lot of competition in investment banking because most companies can go to the United States to choose an investment bank. Foreigners invest heavily in credit card companies. Would you agree that the two significantly potential weaknesses in that competition are small businesses and people who live in non-urban areas? Would you agree that is where the two principal concerns lie?
Mr. St-Amant: I would add low-income urban neighbourhoods to the list of regions where banks are absent, but, yes, I agree with your summary.
[Translation]
Senator Biron: My question has already been asked, but I wish to return to the same issue concerning those loans at 80 per cent. Obviously, this will mean that borrowers will have less leeway should they encounter difficulties in obtaining a second mortgage.
Another issue is that the 5 per cent decrease will increase credit, a measure which may prove inflationary. Already, as we speak, there is a lot of speculation going on in the real estate market. In the United States, once a loan has been approved, 50 per cent of the interest can be capitalized. The newspapers are saying that currently in the United States, many mortgage lenders are going through a difficult time, but the same danger does not exist in Canada, precisely because our threshold is 25 per cent.
Mr. St-Amant: Indeed, the issue of mortgage credit is a complex one. It is important to understand the issue as a whole. As a few of your colleagues, and you yourself, have noted, there is the entire question of second and third mortgages that must also be taken into consideration. If we decide to streamline mortgage credit given by the banks, we would be creating a situation in which a person in difficulty with his main creditor — the bank — may risk losing his house. If ever — and this is not impossible — the Canadian market and some regional markets experienced a significant reduction in real estate value — something that is entirely possible, given that the real estate bubble may eventually collapse — banks may decide to start foreclosing on loans guaranteed at 80 per cent. The financial situation of our banks could eventually become problematic.
For regional banks such as the Banque nationale and the Banque Laurentienne, significant difficulties in the Quebec residential market could have serious repercussions. All this must be taken into consideration before deciding whether an increase to 80 per cent is actually the best solution. Perhaps, ultimately, it is the best decision, but we really have to think about it carefully before concluding that, and we must make sure that everyone's interests are considered.
[English]
Senator Eyton: Your presentation is very welcome and has many good points that will continue to ring true. However, it struck me that much of it comes from a background where you are looking at banking as it was 10 years ago. The banking world is changing rapidly. For example, credit cards, as we use them today, embossed with a name and virtually no other identification, I think will be gone in five or 10 years.
I think much of the retail banking element will be driven through the Internet. The Internet also has the capacity of providing solid identity, both in terms of a PIN number and photo identification, which is not otherwise available. That means that facility will be available to all Canadians whether in small or large towns and cities. Therefore, the branch network that you have talked about and relied upon in part of your analysis, although it was relevant is less relevant today, and will not be so much a factor 10 years from now.
The banking world, in fact all of our worlds, are changing and some of your comments seem dated to me.
Mr. St-Amant: I beg to differ. Banks are finding that the number of their customers who do Internet banking is capping. It is still increasing, but much less quickly than it was five years ago. Banks are actually finding that their consumers, as we have been telling them for the last 10 years, want to bank at branches. Interestingly, TD Canada Trust is presently conducting a public ad campaign where it is not putting forward its Internet services. They are advertising their hours of service, which are longer than any other financial institution in Canada. Financial institutions are finding that consumers still want to go into the branches; that is a documented fact.
If you look, for instance, at the latest annual reports from the various banks, you will see the number of decreasing branches is stabilizing. That is one aspect. Second, there are a number of transactions you cannot do on the Internet, starting with obtaining cash.
Senator Eyton: You can do it in a minute.
Mr. St-Amant: Yes, but you cannot get cash from your own computer. That leads us to a discussion on payments and the lack of a legal framework. I agree with you that banks are going in that direction and we think they should, but we are also convinced that we need a framework for everyone to be protected in an adequate fashion.
As for the possibility of securely identifying people over the Internet, if you find a way of accomplishing that in a truly secure fashion, more secure than PIN numbers — which are absolutely not secure — patent it and you will become a billionaire.
Senator Eyton: I have seen it work.
The Chairman: This is an interesting discussion, and obviously we will be hearing from the bankers to respond to all of your questions.
I want to thank you very much because you have raised many questions that subsequent witnesses we hope will address, and if not, we will ask them questions.
I want to deal with two things very briefly. Our original study, if you will recall, was on consumers. Mr. St-Amant, you were helpful in that discussion. I do not recall, but I think Mr. Conacher participated as well.
Mr. Conacher: No, I did not have the one-eighth of my time on that occasion.
The Chairman: In any event, your previous evidence was very helpful, and that was an important benchmark study for us. This is a continuation. We are not leaving the consumer protection element alone. It is of continuing interest to us, as you can see.
As a result of your testimony and others, many of the changes we recommended in our study have been implemented in this bank revision, including moving more quickly on electronic imaging to improve efficiency, availability and cost to consumers.
I want you to respond very quickly to two items. First, unilateral changes in bank service charges are not fair. Give us a short answer about how we can have that addressed appropriately. Your recommendation was a notice provision. That is not unlike when there is a change in a regulation in a fixed economy. In effect, there is at least public notice of a change, justification of the change and, therefore, it becomes implemented and so on.
Is that what you are suggesting to us? Should we suggest to the banks that before they implement a unilateral change in a customer's account in terms of increasing service cost, there be a prior notice period? Is that your recommendation?
Mr. St-Amant: It would certainly help. At least people would be informed and have more time to shop around; however, the real problem is not merely a banking problem. If a consumer signs an agreement with a bank or a cell phone provider, et cetera, the agreement states that the consumer is bound by the terms of the agreement. The provider can change the terms at its leisure.
The Chairman: It is not a contract.
Mr. St-Amant: The whole principle is annoying. We are supposed to have a contract here.
The Chairman: What we are saying is it is not a contract, it is in effect a form of contract but it is not a two-way contract.
My second concern is the ATM charges, on which I would like you to comment because it touches on a raft of questions. In the United States, I use the ATMs quite regularly; it is the one mechanical thing that I can do quickly and efficiently. I notice that the charges overall in the United States are much higher than in Canada whether at a white label machine or a bank machine.
The other House has commented that the ATM costs in Canada are outrageous compared to the cost in the U.S. Can you comment on that?
Mr. Conacher: I do not think that is relevant. What is relevant is the costs for our banks to provide those services and their profit margins. The only way that can be determined is through an independent audit and there should be an audit looking back 15 years at all the fees, not just bank machine fees.
The Chairman: I raise that in the context of your comment that the United States market has more banks and therefore more competition and therefore the market should be driving down those costs. They do have more banks but it appears that the ATM costs are higher.
Mr. Conacher: TD has waived those convenience fees in the U.S. because of competition. The banks all doubled their fees in 2000-01. They were charging the Interac fee of $1.50 and then added the convenience fee of $1.00 to $1.50 and sometimes higher depending on the location. If there is competition then why have not one of the banks cut that fee in the past six years?
As they told The Globe and Mail in an article on February 22, if they are forced to cut the fee they will just add a fee elsewhere. Do you want a transparent fee or a non-transparent fee?
The Chairman: We read that article with great interest.
Mr. Conacher: The only solution is an independent audit. If there are new fees, there should be an audit of whether those fees are justified. Banks are providing essential services. Other companies that provide essential services like heat and hydro have to go before boards when they want to increase their fees. Banks should be required to do the same.
The Chairman: We get that point. I will raise your questions to our subsequent witnesses. We hope that they will respond because you have made some serious claims. I will not call them allegations, but you have raised many provocative points, which beg addressing. If they do not respond, we will ask them those questions.
Senator Angus: Excuse me; I think Mr. St-Amant wanted to address that last question.
Mr. St-Amant: I have a short comment to add.
The Chairman: Senator Angus can read your face better than I can.
Mr. St-Amant: We worked together 15 years ago at Stikeman Elliot.
Senator Angus: Yes, a consumer oriented organization.
The Chairman: No commercials, please.
Mr. St-Amant: In addition to what Mr. Conacher said, it should be kept in mind that convenience fees actually serve as an anti-competitive device for banks. They essentially force, or invite the customer to use, its own bank network. That is another aspect of the issue that should be kept in mind.
The Chairman: Thank you very much. Again, we have indulged ourselves. We have left the next witnesses until next time. If you take your leave, we will ask the new witnesses to appear.
We are here today because in the budget plan of 2006, the Federal government extended the sunset date by six months to April 24. That does not give us very much time, because the other House has been lazy and slow to get us this legislation. I want to say that because I read today in the National Post that this chamber is sleeping. We are not sleeping; we are alive, alert and working. The House of Commons is not working quickly and therefore we received this legislation late. We are here to do our work and we want to welcome Mr. Callon and Ms. Murray from the Financial Consumer Agency of Canada and Ms. Dickson from the Office of the Superintendent of Financial Institutions Canada.
Senator Angus: You may want to note that Mr. Callon's colleagues were here yesterday and he missed out on a big day.
Jim Callon, Acting Commissioner, Financial Consumer Agency of Canada: I have been fully briefed. Thank you.
[Translation]
I would like to thank you and the Senate committee for your invitation to the Financial Consumer Agency of Canada to appear before you today. Given the short length of time we have, and in keeping with the chairman's request, I will keep my opening remarks as brief as possible. This afternoon, I will talk about the agency's mandate and role in the context of Bill C-37. I will be happy to answer any questions you may have afterwards.
[English]
FCAC's mandate is set out in the Financial Consumer Agency of Canada Act and can be summed up in the following way: to protect and inform Canadians. Allow me to elaborate. FCAC protects Canadians by enforcing the law, by addressing market conduct issues and by seeking improvements in the marketplace in the public interest. We make sure that financial institutions meet their obligations to consumers as specified in the federal financial institutions statutes. When compliance action is required, such action can affect hundreds of thousands of consumers across the country. As a market conduct regulator, our ultimate goal is to encourage competition and choice in the marketplace.
When Parliament established the Financial Consumer Agency of Canada in 2001, it also enhanced the consumer protection framework to deal with individual consumer complaints and issues of redress. The creation of OmbudService was in part a response to Parliament's desire that all federally-regulated financial institutions belong to an independent third party dispute resolution body to deal with unresolved complaints from an individual consumer.
When a consumer contacts us, we provide the tools and information needed to deal with his or her concern. The consumer is encouraged to register his or her complaint with the agency. After receiving the complaint, the agency reviews it from the perspective of compliance. More important, we advise the consumer of his or her complaint redress process to pursue complaints and seek redress.
Through our consumer education mandate, FCAC informs consumers about their rights and responsibilities when dealing with financial institutions. We provide objective and timely information to help Canadians understand the system, and encourage them to shop around for common financial products and services. We believe that an informed and active consumer encourages competition in the marketplace.
Representatives from FCAC appeared before the committee yesterday and discussed the agency's consumer education mandate. For the sake of keeping my remarks brief, I will not elaborate on this program but I will be happy to answer any questions you might have on the program.
I would like to come back to the very important work of this committee on studying issues in the financial services sector. The committee's report of 2006 contained specific recommendations aimed at improving the protection and information on behalf of financial consumers, many of which were directed specifically at the Financial Consumer Agency of Canada.
I am pleased to report that through the Financial Consumer Agency of Canada's ongoing activities and the new initiatives outlined in our 2007-09 business plan, we are well positioned to address the committee's recommendations that fall within the scope of FCAC's mandate. Moreover, as announced earlier this week by the Minister of Finance, FCAC will assume a leadership role in developing and facilitating financial literacy efforts across the country, and the work of this committee will certainly be of great assistance to the Financial Consumer Agency of Canada in that regard. The support and interest that the committee has shown in consumer education and the work that it has done in the area of consumer issues in the financial services sector will be of value to FCAC as we move forward.
As a final point, I would like to say a few words about the Financial Consumer Agency of Canada's role as it relates to Bill C-37. It will fall to the agency to monitor and to enforce, under its compliance mandate, all of the consumer- related changes being proposed to the current legislative and regulatory framework. Mr. Chairman, I would point out that in keeping with the agency's broad consumer education mandate, FCAC will continue to be proactive in informing consumers of any new or modified rights and obligations stemming from the changes proposed to the legislative framework and the broader legislative review.
[Translation]
In closing, I would like to thank you for the opportunity to appear before the committee and I look forward to answering any questions you may have.
[English]
Julie Dickson, Acting Superintendent of Financial Institutions, Office of the Superintendent of Financial Institutions Canada (OSFI): Thank you and good morning, Mr. Chairman and members of the committee.
[Translation]
First and foremost, I wish to thank the committee for inviting the Office of the Superintendent of Financial Institutions Canada to share its comments during consideration of Bill C-37.
The Office of the Superintendent of Financial Institutions Canada (OSFI) is the prudential regulator of federal financial institutions. ``Prudential'' means we are concerned with the safety and soundness of financial institutions, which contributes to the overall stability of the financial system. Our mandate does not extend to market conduct or consumer-related issues, which are the responsibility of other organizations both at the federal and provincial levels.
[English]
In short, OSFI supervises federal financial institutions to determine whether they are in sound financial condition and complying with legislation. We are required to promptly advise institutions when there are material deficiencies affecting safety and soundness, and to take, or require management and boards to take necessary corrective measures in an expeditious fashion. OSFI also promotes the adoption of policies and procedures to control and manage risk with financial institutions and monitors and evaluates system-wide or sectoral issues that might negatively impact institutions.
Regular legislative reviews provide an opportunity to ensure that Canadian legislation promotes an efficient, competitive and safe financial services sector. In any legislative review, OSFI is interested in the following: first, whether proposed legislative changes increase risk to financial institutions, thus creating major prudential concerns; second, whether the legislation is clear, because we administer compliance with most provisions of the act; third, whether OSFI has the authority it needs to act when necessary — that is, whether the prudential tool kit needs to be enhanced; and fourth, whether regulatory burden can be eliminated in cases where it is clear that legislative requirements that might have been necessary at one time are no longer necessary from a prudential perspective.
In our judgment, Bill C-37 does not increase risk to the financial institutions that we regulate. Further, Canada already has a framework with prudential tools that are consistent with international norms for strong regulatory regimes, thanks to changes introduced in previous legislative reviews. As a result, OSFI did not seek significant new prudential measures as part of this review.
There are however, several elements in Bill C-37 that would help us to be more effective because they would bring clarity to certain areas of the various acts that we administer and would eliminate some legislative requirements that are no longer considered useful, thus cutting red tape and regulatory burden.
[Translation]
A strong and efficient regulatory framework, one in which Canadians and those outside Canada can have a high degree of confidence, is critical to Canada's economic performance. In the opinion of OSFI, passage of Bill C-37 would help contribute to that confidence.
[English]
I would be pleased to answer any questions the committee might have.
Senator Angus: I would like to address my question to Mr. Callon. We were quite impressed with your literature from you various appearances before the committee. The chairman has pointed out an anomaly to me in your document entitled, Protecting Consumers and Informing Canadians, in which you identify the FCAC and provide an overview of the agency. At page 3 it states:
Between October 2001 and March 31, 2006, FCAC's commissioner identified 120 violations of the law by financial institutions and made 47 determinations of non-compliance with public commitments and codes of conduct.
In bold print it states:
In 100 per cent of the cases involving violation, financial institutions took corrective measures to ensure future compliance with the consumer provisions.
I believe you were in the room when Mr. Conacher spoke on behalf of the Canadian Community Reinvestment Coalition.
Mr. Callon: I caught the last several minutes.
The Chairman: We will obtain a copy of the material from the CCRC so that the witness may respond.
Senator Angus: Mr. Conacher appears frequently before the committee and we have found that he does a good job of identifying issues of concern to consumers of our financial services products. In his brief, he included a section about the FCAC and if I heard him correctly, the FCAC did a mystery shopper survey in 2003 that involved checking whether more than 1,600 bank branches were complying with the Bank Act in key consumer areas. He lists the banks and indicates that 57.7 per cent were in violation of the legal requirement to post interest rate information for accounts. Second, 49.6 per cent were in violation of the requirement to have a clear publicly available policy with respect to holds on checks. Third, 31.4 per cent were in violation of the requirement to have their public accountability statements publicly available. It went on.
He added that the survey did not include a test about whether or not banks were complying with a requirement to open accounts, et cetera. Incredibly, he concluded that your predecessor did not prosecute or penalize any of the more than 800 branches found to be in violation of the Bank Act.
In the reading of these two items, there seems to be a fair disconnect. Could you comment, please? They are basically saying you are there, you have all the tools yet you are not doing anything. You say you do have the tools and that you are doing your job.
Mr. Callon: We are interested in results, not necessarily a legal process of using a hammer on banks. If we can get results based on the powers and legislative authority we have, that is what we are after. If we can avoid legal processes and court appeals in order to get the results into the marketplace as quickly as possible, that is what we will pursue.
On occasion, we have publicized when we felt we had no other choice; however, in terms of dealing with the industry, we will use the measures Parliament has given to us. In 2001, Parliament granted us a broad range of powers to use in terms of compliance situations in which we find ourselves.
We can come up with compliance agreements, which we have used in the past. Mr. Conacher is alluding to going through the legal process of finding a violation, imposing a penalty and possibly naming wrongdoers.
A mystery shop is not a legal investigation. If we are going to court, we will use our powers. This is not the mechanism to use in order to substantiate our challenges in terms of violations of the law.
This gives the agency a clear indication of problems that exist in the marketplace. That is how we use mystery shops. We have run two or three mystery shops over the past few years. We sit down with industry as a result of those investigations and say, ``Based on this type of evidence, there is a problem out there. We want it fixed, and we want it fixed within a reasonable time frame.''
We look at it from an industry-wide perspective so we do not have to each bank and complaint by complaint. We can get faster and clearer results in the marketplace by using the other powers given to us by Parliament.
As the other publications state, we have had to use that method in roughly 120 violations and a couple of publications. That power is a tool we need in our tool kit, without a doubt, but it is not the only tool we have.
Senator Angus: In other words, you do not want this committee to be left with the impression that you are not using the tools you have available to correct violations.
Mr. Callon: The message I would like to leave is that we are getting results in terms of compliance.
The Chairman: Are your enforcement powers strong enough?
Mr. Callon: Yes.
The Chairman: Are you satisfied with your powers?
Mr. Callon: Yes.
Senator Angus: We were speaking to your colleagues yesterday about payday loans. This subject is very much on our minds. Do you have any suggestions?
Your colleagues took the position that it is not within their jurisdiction or part of their mandate, but it certainly affects consumers greatly. We find it to be an area that financial institutions, which are included in your mandate, have abandoned. This industry grew like top seed because there was a void.
I address this, Ms. Dickson, to OSFI and to all of you, if you have any input to provide. We are concerned about it, and we want to do the right thing.
Mr. Callon: There is no question that we feel the Senate's concerns are strong in this area.
Like my colleagues, we respect our mandate that we are a regulator; we enforce the laws, but we do not develop policy on behalf of the government. We have an educational role to play. We were one of the organizations in 2001 to advise Parliament of an issue through our annual report. We use our annual report as another tool in our toolbox to advise parliamentarians and policy-makers of issues with which we have concern. We expressed that concern five years ago, and as a result, I think the policy-makers have met with Industry Canada, the provinces, the Department of Finance and Justice Canada to try to find a solution. That is their expertise.
Our expertise is on the educational front and that is where we can help. A while ago, we provided you with one of the first pamphlets that came out dealing with payday loans. This month, we are putting out another tip sheet on our website, making it a bit easier for people to print off and deal with in respect to the major points under the payday loan issue.
Senator Angus: The very fact that you put out the tip sheet on payday loans is why I felt it was in order to ask you the question.
Putting the question in a slightly different way, do you receive any complaints in your agency from consumers who feel that they have been victimized in the sense that some consumer people last night were advocating the banning of payday operations?
Do we regulate this industry? Do we leave the status quo, which is open season? Do we do like Quebec and implement some kind of measure that will basically put them out of business?
Mr. Callon: Our view is that they serve a market niche. We have tried to fill the gap in terms of marketplace information through our consumer education mandate. When there are gaps and responsible parties are not filling that gap with information, we will do that for them. That is part of our mandate.
With respect to payday loans, we have always maintained that there needs to be improved market conduct and better disclosure in terms of fees, interest rates and whatever else is loaded onto that product.
This type of regulation of market conduct falls within the purview of the provinces. From the policy-makers' point of view, they had to propose a regime that would allow the market conduct void to be filled. FCAC does not have jurisdiction on the market conduct area for payday loans.
Senator Angus: Ms. Dickson, do you have anything to say on this topic in response to my question?
Ms. Dickson: No. It is outside of OSFI's mandate, so I have nothing else to add.
Senator Angus: Do you have a view on it?
Ms. Dickson: No, we do not receive complaints from consumers on that issue.
Senator Angus: My colleague, the chairman, and I are looking under every stone because you do have supervisory obligations vis-à-vis the banks. The banks seem to have abandoned the field and created a situation by not being there. I think you could construe that as opening the door to give us your wisdom.
Ms. Dickson: We obviously do have supervision over banks, but it is prudential supervision. It is with regards to whether or not their practices are safe and sound. That is why I am not tempted to wander into this field, which I think Mr. Callon has addressed from the regulatory agency's perspective.
Senator Angus: I see he has his hand up again.
Mr. Callon: Not that I want to attract more questions, but I failed to respond to a couple of points you raised.
With respect to complaints, we received 40,000 inquiries and complaints over this past year. On a weekly basis, we analyze those complaints in terms of what the trends are and if there are any blips in the marketplace to which we should react fairly quickly. This does not show up on our radar screen as a major area of complaint or inquiry. However, because we still had concerns, we did a couple of marketplace surveys to ask more detailed questions with regard to payday loan services. We found that a wide range of users make use of that service. PIAC, the Public Interest Advocacy Centre, a consumer group, also went into the field and found similar results. There is a segment that perhaps is being abused by this type of expensive service, but consumers have a whole range of reasons to use payday loan companies, such as convenience. In some instances, customers do not like operating out of a branch and that is why they use a payday loan service.
The Deputy Chairman: It is interesting that you folks put out this tip sheet. How do you get this information into the hands of the people who need the tip?
Mr. Callon: We have a couple of ways. We partner with the media; we were mentioned in The Globe and Mail today, and two or three times a week, we are mentioned in The Globe and Mail, The Toronto Star, The Vancouver Sun.
The Deputy Chairman: Do you mean you provide the newspapers with an insert?
Mr. Callon: No, I mean that reporters mention us in their columns. They reference our material in terms of the cost of these institutions and sometimes reprint aspects of our brochures. We have become a resource for consumer writers. That is a major component of achieving widespread dispersal of our information.
The Deputy Chairman: I understand you are partnered with CCRA and sometimes send out documents like this with tax return material.
Mr. Callon: In the past few years we have sent out 24 or 25 million inserts in the cheques that are targeted to the population that uses the GST, disability payments, the elderly, and so on. We send messages through that mechanism on a yearly basis as well through our partnership with CCRA. We also have partnerships with the YMCA where they put on sessions with new immigrants or low-income groups.
The Chairman: Mr. Callon, we are limited in time. You have made the point. Let me make my point. Canada's ``new government'' has been conducting this review. The ``new'' Conservative government regards the obligation for the review that you have each referred to. There have been a lot of references to Bill C-8 which was the result of the previous five-year review. Bill C-8 concentrated on bringing in many new measures designed to protect consumers. We did what we consider a type of audit, a little study, to see if these new measures were working. We gave a report and it was very positive. This government then read our report and the Minister of Finance wrote us a lengthy letter stating that he intended to act on some of our suggestions and Bill C-37 reflects much of that work.
Finance Canada told us that there were major overhauls to their system in 1991 when we broke down the pillars and tried to do Canada's version of the big bang, and that was a big bite. Then 10 years later, we had Bill C-8 and then two reviews. We are now in an interim period. Finance Canada told us there were no big issues out there. They said that everything is fine and that Bill C-37 represents more or less, what is helpful at this particular time.
Do all three of you agree basically with that and the direction of this bill?
Mr. Callon: Yes, we support the bill. On a regular basis we meet with the policy-makers to identify the issues we observe in the marketplace and the policy-makers then pursue what they feel is appropriate for legislative or regulatory change. That is an ongoing discussion that we have with them. The provisions that they have put forward will help the marketplace.
The Chairman: Can we move on? Thank you, senator, for that commercial. As a Liberal senator I was more Liberal with you than I should have been. We will turn to Senator Goldstein for questions now.
Senator Goldstein: I am concerned about bank closures and the previous witness enhanced my fear. You have oversight mechanisms with respect to bank closures. As I understand it, you encourage meetings between community groups and financial institutions who intend to effect closure.
The banks have told us that when there is a closure they try to ensure that there are some facilities available in the area. Things like ATMs and other facilities are put at the disposition of the community to minimize the impact of closures. This bill addresses the issue of closures but neither this bill nor your oversight powers have any teeth in them in the sense that neither you nor they can prevent a bank closure.
Is there any mechanism that ought to be added to this bill or added as a private member's bill, which would create a better kind of control and supervisory power with respect to bank closures? I recognize that banks are part of private industry and they close branches presumably as a matter of their own economic best interest. By example, the licence of Air Canada to operate in Canada ensures that it operates and continues to operate unprofitable routes that are necessary in the North. There is information and instances that you can given me and I can given you where industry is compelled, because ever its nature, to provide the service, recognizing that the service will create a loss. The automobile insurance industry in Quebec, where it is provincially regulated, is forced to ensure drivers who would be otherwise uninsurable. Is there anything you can think of to minimize the impact of bank closures?
Mr. Callon: Branch closures in the little towns have big impacts. I have attended some of those meetings myself as deputy commissioner and the feelings expressed at those meetings are significant. We have limited jurisdiction in those issues.
If I can recall for you the legislative framework prior to 2001, there were no rules in terms of closing a branch. If banks want to close the next day, they could do so. There was no opportunity for small businesses to rearrange their affairs by either going to the competition, or a credit union or another bank. We have heard of situations where businesses not being able to put their affairs in order before the branch closed. Parliament, from a policy point of view, took a step of notice of disclosure. Similarly, the scenario when a major employer shuts down in a small town is that it must provide notice. In urban areas the notice time is four months, in the rural areas it is six months. This allows time for those areas to encourage services to come into those areas to replace the banks that are closing.
It is an issue for the smaller communities and the rural areas. I am not in a position to recommend what the policy fix would be in terms of being able to do that. That would be up to the policy-makers.
Senator Goldstein: You are coming as close as you can to saying that we should have something more than what now exists in Bill C-37?
Mr. Callon: I put it in the perspective of having lived in a small town. The impact of key services whether it is the only grocery store, gas station or bank leaving town, it is an impact and an inconvenience. If you close one, where do you go? In a one-bank town it hurts.
Senator Goldstein: We regulate other services such as telecommunications, natural gas supply and electricity. Many of these operations are publicly funded, but many are private and we nevertheless regulate and force them to abide by regulations. With respect to bank closures, Bill C-37 does not have any enforcing power. There is a notice provision and a voluntary consultation, but nothing that is of a coercive nature. I am not necessarily suggesting there should be one, but I am asking if you think it is appropriate.
Mr. Callon: I would rather not answer that question.
Senator Goldstein: That is fair enough.
The Chairman: What is the answer?
Mr. Callon: In my role as a regulator and enforcer of the rules, I would prefer not to answer.
The Chairman: Mr. Callon, we are trying to be helpful. We are trying to be helpful to you, to the consumers and to the banking association. We want good cost-effective services. Senator Goldstein has raised a major issue that has come back to us over and over again. We are not asking you in your position as the regulator; we are asking you in your position of providing consumer choice.
Here, as Senator Goldstein points out, in a small town, a branch closed down and you, by your own words, indicate there is no consumer choice. In effect, by not interfering in this process, you have made yourself functus.
Mr. Callon: Well, there are choices such as online banking and telephone banking. Some communities that have faced bank closures have been able to bring in a credit union at least on a part-time if not on a full-time basis. We will work with those groups to find ways they can get those services. Educational material is sent to the town so that they are provided with a choice. There is an opportunity for choice.
The Chairman: We have heard that the consumer is more informed because he or she has access to computers and the Internet; however, there is a gap in households that can afford computers and the Internet and that gap is getting wider. Many of these services can be provided by electronic means, but in a small town, it exaggerates the division between the rich and the poor. This is a problem for this committee. What are the other choices?
Mr. Callon: The main channels of distribution are the telephone, the Internet and in-branch banking.
The Chairman: Again, I point to the Internet. If you do an analysis, at least 24 per cent of the population does not have access to the Internet. That gap is getting smaller, but by incremental means. As the gentlemen from the Consumers' Association of Canada pointed out, there will always be a gap between those that have computers and those that do not. Some people cannot afford to purchase computers.
Mr. Callon: You must appreciate my position. I do not have the capacity to be researching such a major policy change. If that was the role of this agency, then we could provide that service to you. I am certainly not being disrespectful, but I am mindful of our expertise and limitations. I am not in a position to study the proposal, see the economic impact and then provide an educated view on that subject.
The Chairman: Fair enough. We will turn it back to the banking association to respond to that question.
Senator Goldstein: There are models in other countries where that kind of problem, namely the unavailability of banking services in rural areas, is resolved by different means. One resolution has the regulatory forces, the conglomeration of banks, all of the banks, proportionately sharing the loss of maintaining a branch, or having a fund to which all banks must contribute, in order to cause the government to permit the funding of loss areas in banks.
There are a host of possible ways to avoid bank closures. I am not talking about a bank closure on the corner because real estate has become more expensive; there are 16 branches elsewhere. I am talking about the rural areas, Aboriginal areas, places where people cannot afford the alternate services and do not really have access to online banking. Online banking does not give anyone any cash.
I understand your position and your problem. I empathize with you.
The Chairman: Senator Goldstein raises a concern that is shared by every member of this committee. Obviously, Mr. Callon, we will come back to this throughout these hearings. He is just putting you and others on notice that this is a continuing concern to every member of this committee.
Senator Goldstein: As a matter of curiosity, earlier testimony indicated that transgressors were not identified. I found that rather startling. Has that been your experience for banks that do not comply with their requirements? Is there any mechanism to publicize your decisions in that respect, notwithstanding the fact that banks, in all cases, have complied after you have asked them to do so?
Mr. Callon: When we run into a situation that requires redress, in other words, where the actions of a bank have caused harm to the marketplace, our normal practice is for the bank to inform the consumers in writing of the problem, inform them of the complaint procedure if further redress is required by their customers and then, if there is a reimbursement issue, it has usually been voluntary on the part of the bank. It has been a 100 per cent voluntary effort on their part to reimburse wherever we found an issue of redress.
Senator Goldstein: You do not do what the Department of Revenue does. Every few months they publicize the names of people who have been convicted of tax evasion and the sentences that they received. You do not have that kind of mechanism at all, do you?
Mr. Callon: In the tool bag that we have, in terms of compliance, there is a possibility of publication of violation. My predecessor used it on two occasions where he thought, based on several factors, it was necessary to broadcast.
Senator Massicotte: I appreciate you do not publicize specific instances in every case, but do you at least publicize a summary of infractions where the banks were asked to reimburse so as to let the public know the frequency and the seriousness of the issue?
Mr. Callon: Absolutely, that information is available on our website. On decisions such as those, we do a summary of the issue, the resolution, and then we place it on our website.
The Chairman: Going back to the senator's question, do you name the banks?
Mr. Callon: In generic summaries, no.
The Chairman: Why not?
Mr. Callon: That is a decision of the commissioner.
The Chairman: We are asking you Mr. Callon, why not?
Mr. Callon: I cannot answer for the previous commissioner decisions.
The Chairman: The public has a right to know. There is no reason why they should not be published once it is determined that they have breached a regulation and they complied. What is wrong with that?
Mr. Callon: That is a tool that is provided to the commissioner when the commissioner feels it appropriate to exercise. In the past he has gone to the extent of publicizing the name of the institution.
Senator Ringuette: Have you been consulted with regard to Bill C-37?
Ms. Dickson: Yes, we were consulted extensively because we administer the statutes on a daily basis.
Senator Ringuette: I am asking from a compliance perspective?
Ms. Dickson: Yes, we were consulted from a compliance perspective as well. There is much consultation. People want our views to ensure changes that are made are understood by us and that we have the information we need when the statutes change or come into effect. We also give advice on the prudential aspects of any changes. This is normal procedure to have a number of discussions between the Department of Finance and OSFI.
Mr. Callon: We have discussions on a regular basis with the Department of Finance, particularly if any legislative or regulatory initiative occurs.
Senator Ringuette: How many times have you met with consumer groups such as the ones that were witnesses earlier?
Mr. Callon: We meet with key consumer groups at least once a year. In some cases, we have day-to-day relationships with them in terms of dealing with our consumer education material or identifying gaps in the marketplace.
Senator Ringuette: Is there cooperation in regards to looking out for the well-being of the consumer?
Mr. Callon: Yes, if a key consumer group raises a void in the marketplace from a consumer education point of view, we will try to address that void. We worked with PIAC on the payday loan issue.
Senator Ringuette: You indicated that on an average yearly basis you hear 40,000 complaints.
Mr. Callon: No, we receive 40,000 calls, the majority of which are inquiries, people seeking information about various aspects of the financial services.
Senator Ringuette: How many of them are directed toward banking?
Mr. Callon: When they are complaints, we will talk to the consumer in terms of what actions the consumer has taken first. Many times, they have not taken any action. We will go through their institution's complaint process and guide them to where they can start the redress process for their complaint. In addition, we have put a complete, if I can use the term, rolodex, of all the complaint procedures of the federally regulated financial institutions, on our website.
Senator Ringuette: When getting all these calls and then identifying a certain complaint and directing it, are you able to have a real pulse on the consumer complaint? If you are redirecting to different channels the issue of the complaint, are you able to gather the proper data for Canadian consumers? Are you then able to translate that information to the Department of Finance so that banking review such as Bill C-37 will reflect the consumers' position?
Mr. Callon: Our normal practice is that before we refer the consumer we learn about the issue. We capture that in our database, so that we do not mislead the person as to where he or she should go with respect to the question or complaint.
Senator Ringuette: On page 2 of your material, for 2005-06, you identify 1385 as the total number of FCAC compliance cases closed. You say that you receive 40,000 calls on an average in a year. There is quite a range from the number of calls that you receive in a year to the number of complaints that you close. You do not identify the number of files left open in a year.
Mr. Callon: In our annual report to Parliament, we provide a complete breakdown of all our statistics including cases that are pending at the end of the year. Of the 40,000, roughly 20 per cent to 30 per cent, depending on the time frame, are complaints. We ask the people who call with complaints if they want to register them with us. We will review them in terms of a compliance issue. We find that 3 per cent to 5 per cent of those cases result in further inquiry on our part as to whether there has been a problem with the legislation.
[Translation]
Senator Massicotte: Ms. Dickson, your comments are to the effect that nothing in the bill precludes you from acting responsibly, in a ``prudential'' manner, and that nothing in it affects you directly.
But is there anything that has not been included in the bill that would assist you in better meeting the needs of consumers?
[English]
Ms. Dickson: We do not think we need any additional powers. I will say that the previous witnesses did comment on the 75 per cent loan-to-value ratio and the increase to 80 per cent. They suggested that would create risks for banks that were not in the system's interest.
We are very comfortable with the increase to 80 per cent. The issues in the sub-prime mortgage market are primarily issues in the U.S. We have looked at the differences in the sub-prime mortgage market in Canada versus the U.S. and they are completely different. The 80 per cent loan-to-value ratio does help when banks are making loans. It does not allow for too much movement up the risk curve, so to speak, when the mortgage has to be insured.
The differences between the Canadian and U.S. sub-prime mortgage market are about 2.3 per cent of the Canadian market and close to 15 per cent in the U.S. The type of products you see in the U.S. are very aggressive, the loans, very exotic. In Canada, we primarily still see 25 to 30 year amortizations. We do not really see the kind of features that the U.S. has seen. This market is taking off a bit in Canada. People have started to look at it and some institutions are interested in it. It is nowhere near the size and does not have the characteristics of the U.S. market. We are perfectly comfortable with the 80 per cent loan-to-value ratio.
[Translation]
Senator Massicotte: Mr. Callon, you are not proposing any amendments to the bill, but is there anything missing from the bill which could help better meet the needs of consumers?
Mr. Callon: The bill contains a few highlights concerning certain issues. First, there is a provision which clarifies the rules of disclosure on borrowing costs. According to our statistics, the majority of complaints concern loans, and the disclosure of fees and interest. We would like to see improvements on how this type of information is disclosed. This bill deals with that. There are also provisions concerning disclosure of all lenders.
[English]
We discovered an issue though our call centres, with regard to the types of calls coming in. The practice developed where not all borrowers provided disclosure in multiple borrower situations. If you have a loan involving multiple borrowers, continuous disclosure was only provided to one borrower. If changes occurred through the changes in loans or amendments to loans, not everyone was entitled to that disclosure based on the practices of the industry. We have dealt with that and it will be reinforced in Bill C-37.
[Translation]
Senator Massicotte: Have you set out any penalties as such? In your opinion would an increase of $100,000 be adequate?
Mr. Callon: I believe that the bill stipulates an increase from $100,000 to $200,000. It all depends on the amount in question, but for us, it is the result that matters most.
For example, to resolve the problem of disclosure with co-signers, the cost would amount to approximately $50,000. This is how much it will cost to resolve the problem in the market place.
[English]
The costs of $100,000 in penalty is a tool we need in our tool chest; but frankly, when we are dealing with issues, we are talking about multi-million-dollar costs to the industry to put in place what the regulations state should be in place.
[Translation]
Senator Massicotte: You are saying that the amount is less important, in comparison to the cost of implementing the bill. That also indirectly confirms that the amounts are minimal. In other words, amounts of $100,000 or $200,000 are not going to cause problems. And since you do not even publish the names of offending institutions — as is done in the United States — banking institutions are not even fearful of having their reputations tarnished. To your mind, it is the result that matters, and not the regulations or the act as such. Nonetheless, in three or five years, it might be interesting to have a clear regulatory framework that also includes sanctions.
[English]
Mr. Callon: Some significant issues, in particular with regard to privacy, have hit the industry. I have not seen a tremendous amount of change in terms of consumer behaviour. I am not a policy-maker and I do not have all the facts but from our monitoring, we have not seen a tremendous reaction from consumers in terms of walking. I am not sure of the level of sensitivity for consumers is in terms of forcing them to say, that is enough, I am switching.
We are relying on the speed with which we can get results into the marketplace to fix the problem and that the consumers that are affected by that change are informed by the institution. That has been a focus of the agency.
Senator Massicotte: I am not a professional pollster, but I suspect most consumers would say they have not switched because they think the banks are all the same. In other words, in the issue of privacy or charging fees and so on, there is a general impression that the banks are largely the same. Would you agree?
Mr. Callon: In the results of some of our polls, we see that the large majority of people do not switch banks. They may have disputes but they work them out with the institution. Perhaps the reason you mention is one answer, but it also can be a matter of convenience, in terms of where the branch is located, and family history also enters into it. In any event, there is not a large elasticity in terms of consumers switching banks.
Senator Massicotte: In New York a month or two ago, the major banks and investment houses were accused by the regulatory agencies of not appropriately dealing with certain transactions, or not registering or informing their clients properly. It was publicized and in fact, there was some concern that some large institutions would go bankrupt because of that consequence of reputational risk. You say we do not see it here, but why do we not hear about such things in Canada? Are our financial institutions behaving more appropriately than in the United States?
The same Canadian banks have been caught doing things offside in the United States. It is odd that the ethics and rules that allow them to be perfectly normal and okay in Canada were not appropriate in the United States. Why do we not publicize such infractions? Why do we seem less vigilant here in Canada?
Mr. Callon: We have some issues, but as my colleague indicated, the Americans are much more aggressive in pushing the boundaries when entering into the regulatory grey zone. The framework may not necessarily be crystal clear to answer all the possible permutations of a product, but it is my view that the U.S. marketplace it is a much more aggressive place.
Certain issues have been publicized here, both on our website and in the media. For example, we dealt with the issue of disclosure of credit card interest rates. We found that a marketing campaign told people that they could obtain a credit card for an interest rate ``as low as'' When we looked into the matter, we discovered that very few people qualified for the ``as low as'' rate. We determined that the practice was not fitting in terms of the cost-of-borrowing regulations. That company actually ended up in the court and received some publicity.
Senator Massicotte: It is noteworthy that you acknowledge that the Americans are more aggressive in pursuing those practices. Some people, including the witnesses before you, would say more aggressive, yes, because they are doing the right thing, and we in Canada are not doing the right thing. I will give you a chance to respond because I think it is important for the record.
Some people would suggest that we are too soft, that your agency is too soft. They suggest that you are too close to the banks and therefore you are too oriented to satisfy your big brother, the big banks, as opposed to the consumer. Could you respond to that comment, which we often hear?
Mr. Callon: I find it insulting given our results over the past five years. We have taken a new piece of legislation, staffed up an agency, put in place a framework and achieved some significant behavioural changes in the marketplace. Those comments are irresponsible, from my point of view.
Senator Massicotte: Our Canadian approach is achieving better results in your mind than the American approach.
Mr. Callon: I am not spending all my time in the courts. I am getting the change in the marketplace.
The Chairman: I only have two brief questions and then we have to move on. I take it, based on Senator Massicotte's question, that you would have no objection if we recommend that the penalty be increased under section 435 from $200,000 up to $5 million. Such a recommendation might change bank behaviour even though you have pointed out that it is difficult to change consumer behaviour.
Mr. Callon: In the terms of the amount, I think $200,000 was the norm. That is the amount that consumer legislation across the country typically has in terms of dealing with both large and small companies.
The Chairman: Your evidence is that consumers are not changed by the penalty because of their concerns that they will get the same treatment from any bank. However, the issue here is not necessarily changing consumer attitudes as much as changing bank attitudes if they are in a superior market position. How do we change bank attitudes to conform to the law?
The suggestion made by the Consumers' Association, and this is obviously what Senator Massicotte was thinking about as well, is if we cannot change consumers, we can certainly change bank behaviour and make your job easier.
Mr. Callon: That certainly is the prerogative of the committee. In 2001, the agency was put in place to interpret regulations that had never been interpreted before that time. I think it was a landmark.
The Chairman: Mr. Callon, we are your side. We have tracked this issue; we have performed studies on this issue; we understand that there has been a progression and that the consumer element is improving, but we think there is a long way to go. I think you agree with that, and the question is how we get there more quickly.
That is why we are looking at some of these issues on a one-by-one basis. It is not one issue but a whole series of issues. We think we can better inform the banking services, which are good, and at the same time give the consumer the satisfaction that the Bank Act established to regulate them is being enforced properly. It is a question of enforcement.
I will leave it at that. I have one final question to our neglected witness, Ms. Dickson. You will be aware of the fact we have an ongoing study on hedge funds. Your responsibility is to ensure the financial viability of banks, and the evidence we have is a little sketchy at this moment. We are continuing our study but the whole question of hedge funds is escalating. The banks are involved on both sides of the hedge funds; they are buying, selling, participating and so on.
Senator Angus: You will recall that Ms. Dickson appeared as a witness during our study.
The Chairman: I understand but today, we are dealing more formally with the Bank Act and relevant subject matter. Ms. Dickson, do you have anything to add on the subject of whether banks are more exposed because of hedge fund activity?
Ms. Dickson: No, we continue to monitor and the situation is the same. Those exposures are well managed and remain very small. We continue to watch closely what is happening in the U.K. and in the U.S., where the bulk of the activity occurs. I stand by my earlier testimony.
The Chairman: You know there is a fierce debate raging in Europe and the United States, including in the U.S. Congress, on the extent to which those hedge funds should be regulated. Do you have any comments?
Ms. Dickson: I am familiar with that debate. I participate in international meetings where this issue is discussed. I will be at one such meeting next week when the subject of hedge funds is on the agenda. Certainly, I will be interested in that part of the agenda.
The Chairman: If you have anything new to report to this committee, please forward the information as part of the ongoing study.
I thank the witnesses for their testimony today. We are here to help the consumer and we do not mean to imply that we are critical of your work. We are trying to improve the services provided to the Canadian consumer.
The hearing portion of the meeting is adjourned.
Senators, we will move on to consideration of the budget of the committee. I need a motion to this effect.
Senator Angus: I so move.
The Chairman: It is moved by Senator Goldstein, seconded by Senator Angus. Are there questions or comments on the budget? I will put the question. All those in favour?
Hon. Senators: Agreed.
The Chairman: It is unanimous. Thank you, senators. Senator Angus wondered whether the committee should consider a trip to Europe for the study on hedge funds. Certainly, we will give that idea some cogent thought.
The committee adjourned.