Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Evidence - March 28, 2007
OTTAWA, Wednesday, March 28, 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 4:06 p.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Today, we are about to continue our study of Bill C-37, and we want to welcome the witnesses. This is being televised from coast-to-coast in Canada and around the World Wide Web, so everything you say today will have global echoes. We are delighted you are here. I will make a brief introduction to the work of our committee.
We continue our study of Bill C-37, to amend the laws governing federal financial institutions and provide related and consequential matters. Periodic review of federal financial institutions is required by five-year sunset provisions contained in the relevant statutes. The last legislative review on this topic occurred in 2001.
Bill C-37 was introduced in the House of Commons on November 27, 2006 and was referred to this committee on March 21, 2007. The bill covers a wide range of matters, including disclosure to consumers, streamlined approvals in certain situations, electronic cheque imaging, mortgage costs, the establishment of cooperative credit associations and foreign experts on the boards of financial institutions.
The four principle acts governing the financial services sector include the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act and the Cooperative Credit Associations Act. The goal of the regulatory framework 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.
There is less than one month before April 24, 2007, the deadline for the renewal of the relevant statutes; nevertheless our committee will continue its review.
I want to welcome Senator Angus, the vice-chairman, from Quebec and Senator Goldstein, also from Quebec. We will be joined by others shortly.
We are happy once again to see so many familiar faces and to hear presentations by Mr. Terry Campbell and Ms. Karen Michell from the Canadian Bankers Association and Mr. Gary Rogers and Mr. Daniel Burns from the Credit Union Central of Canada.
Terry Campbell, Vice-President, Policy, Canadian Bankers Association: Thank you for the opportunity to contribute to the review of Bill C-37, the amendments to the Bank Act and other financial services statutes.
In the banking industry, we believe strongly in the importance of ensuring that legislative and regulatory framework is reviewed regularly to keep it up-to-date with technological developments, eliminate obsolete provisions that no longer reflect sector realities and make it as efficient as possible for the benefit of Canadian consumers and industry competitiveness.
Canada's banks and other financial institutions operate in an environment of rapidly increasing regulatory burden, particularly in light of the explosion of international regulation, which impacts the regulatory environment here in Canada. Since this environment affects the ability of institutions to innovate and to serve their customers, it is critical that policy-makers and legislators here in Canada ensure that the legislative framework provides as much flexibility as possible and avoids imposing unnecessary or prescriptive measures.
With these principles in mind, we were deeply disappointed that the government did not adopt our proposals for changes to the insurance rules. In our view, the facts of the case — the benefits to consumers of removing out-of-date restrictions and the positive experiences in other jurisdictions that do not have these restrictions — all tell a good, common sense public policy story. Nonetheless, the government has made it clear that changes will not be made to the insurance rules, and so we are turning our attention to the piece of legislation at hand, Bill C-37.
As honourable senators know, the bill is focused on technical matters, and that is the focus of our commentary today. Describing these matters as technical, however, does not mean that they are not important for consumers and for the efficient operation of the marketplace. Indeed, in some key areas, the government has taken positive steps in the direction of modernizing the framework, and we support the legislation going forward expeditiously.
One such positive step in Bill C-37 that we would like to highlight — and you mentioned it yourself, Mr. Chairman — is the government's proposal to amend the Bills of Exchange Act to allow for the introduction of electronic cheque imaging. This is an issue that this committee studied very closely during its hearings on consumer issues last year. As you know, the Canadian Bankers Association, CBA, appeared before you on two occasions to discuss this and other consumer issues. In its report last year, this committee made a very positive recommendation on cheque imaging, and the government has followed up with the legislation before us.
As members of this committee know, while Canada has one of the most highly efficient cheque-clearing systems in the world, it is still largely based on the physical clearing of paper cheques. Cheques drawn on one bank and cashed or deposited at another must be physically transported between banks and processing centres — sometimes right across the country — before they can be cleared. The proposed amendments, however, would allow financial institutions to use electronic images of cheques — in effect, rather than having to physically transport pieces of paper, images of the cheques could be sent electronically.
Making an already efficient system even more efficient will speed up the cheque clearing process, reduce the amount of time that funds are held and reduce risk — and all of this will bring real benefit to consumers. In fact, the banking industry has been working with the government on this and has agreed to reduce the maximum period for the very small number of cheques that actually have holds on them from 10 business days to seven business days by April, and reduce it to four business days upon the full implementation of the Canadian Payments Association cheque imagining system.
Another positive step in Bill C-37 is the proposal to streamline the foreign bank entry regime. We have a highly competitive financial services marketplace in Canada with some 50 foreign bank subsidiaries and foreign bank branches competing to provide services to individuals and business consumers. While Canada's market is open to the entry of foreign banks, the actual structure of the legislation is highly complex. It is cumbersome and difficult to navigate. The rules apply both to real foreign banks as well as to near banks; that is, companies that are not banks in their own country and that want to undertake activities in Canada that normally would not be regulated. The result of trying to deal with both types of entities is a convoluted set of approval procedures for near banks that do not seem to be necessary. Although the details will be set out later, it appears that Bill C-37 helps to streamline the system by focusing the rules on real foreign banks wishing to enter Canada.
While we feel that this technical bill makes useful improvements to the regulatory framework and should definitely be passed, there is a concern — admittedly outside the scope of this bill — that we wanted to flag for your future consideration. That concern relates to bank holding companies. As you know, in the 2001 round of reform, banks were allowed to structure themselves as holding companies — as banks in most other countries around the word are allowed to do. This option held out the promise of greater flexibility and a more targeted and streamlined regulatory system.
Unfortunately, while the power to create bank holding companies was provided in 2001, other rules in the Bank Act make it very difficult for banks to convert to this structure and actually add regulation rather than streamline it. The practical result is that six years after the 2001 reforms, the holding company model is still not an option that banks can use. In effect, the rules say this: A bank can enter into transactions, such as offering loans or guarantees to subsidiaries of banks, without restrictions, but if those same subsidies become sister companies of the bank under a bank holding company, then the restrictions on those transactions between the bank and its sister companies now must be imposed, even though no new risk has entered the system. We are working with the government and with the Office of the Superintendent of Financial Institutions, OSFI, to sort through these issues, but more work is necessary.
Given this committee's interest in the efficient operation of the financial marketplace, we would encourage the committee, in its future work on financial services issues, to urge the government to take steps to ensure that the holding company model is a workable option for the industry.
Thank you very much for the opportunity to provide our thoughts. In summary, we feel that Bill C-37 deserves support and should be passed quickly for the benefit of consumers and the efficiency of the system. Of course, the goals of making the regulatory system as efficient and effective as possible and as supportive of innovation and international competitiveness as possible are ongoing tasks. Bill C-37 is an important step in that process, but we look forward to continuing to work with the government and members of this committee on these important goals.
In addition to this specific bill, we know that the committee has a range of interests, and we look forward to your questions.
Daniel Burns, Chair, Legislative Affairs Committee, Credit Union Central of Canada: Mr. Chairman, honourable senators, I would like to thank you for the opportunity to come before the committee today to provide comment on Bill C-37. I am Chair of the National Legislative Affairs Committee of Credit Union Central of Canada, commonly known and Canadian Central. With me is Gary Rogers, Canadian Central's Vice-President of Financial Policy.
Canadian Central is a federally regulated financial institution that operates as a national trade association and finance facility for its shareholders, the provincial credit union centrals and, through them, for nearly 500 credit unions across Canada. Our credit unions employ more than 24,000 Canadians serving our members, who now number over 4.9 million. At the end of the last quarter of 2006, our credit unions held more than $95 billion in assets.
Credit unions are independent, community-based financial institutions that operate on cooperative and democratic principles. As such, the credit union system is decentralized and diverse in terms of size and the communities it serves. The credit union system does not operate like a bank and credit unions are not branches subject to centralized direction; rather, they are locally owned, autonomous institutions accountable to their members. This local focus enables credit unions to respond quickly and effectively to community needs.
Credit unions are provincially regulated and, from a constitutional standpoint, fall under provincial jurisdiction. The federal government does, however, regulate two entities under the Cooperative Credit Associations Act — Canadian Central and Concentra Financial Services Association, which was established in 2005. In addition, the federal government regulates several provincial credit union centrals that have chosen to be governed under Part XVI of the Cooperative Credit Associations Act.
With this in mind, Canadian Central would like to clearly state its broad support for Bill C-37, in particular the proposed amendments to the Cooperative Credit Associations Act contained in the bill. These amendments will make incorporation under the act more of an option for credit union organizations interested in acquiring a federal corporate charter. There are, nevertheless, some elements of the act that could be improved and that are not addressed in the bill. On these points, we look forward to working with the government moving forward.
I will give you some examples of positive change to the Cooperative Credit Associations Act that we support in the bill. The bill proposes, in clause 139, to amend the act and make it easier to incorporate a retail association by reducing the number of required incorporators from the current number of 10 credit unions to two credit unions from more than one provincial jurisdiction. The number 10 was a near impossible threshold to meet as evidenced by the fact that credit unions have not sought to establish organizations under the Cooperative Credit Associations Act.
Further, the bill contains provisions that make it possible for corporate entities to convert to a retail association. For example, the bill contains an amendment to the Canada Business Corporations Act that permits a Canada Business Corporations Act company to convert to a Cooperative Credit Associations Act company and continue under the Cooperative Credit Associations Act. Finally, the bill will permit a retail association to operate on a level playing field with wholesale banks, where a retail association limits its deposits to deposits in excess of $150,000. In these circumstances, the wholesale financial institutions need not be members of the Canada Deposit Insurance Corporation. This option may be of interest to second tier organizations in the credit union system such as the provincial central credit unions that might be considering moving to a federal corporate charter.
I will confine my remarks at this time to these few points. In closing I would like to thank the committee for the opportunity to present our views on Bill C-37 and our support. I would be happy to answer any questions the senators may have.
The Chairman: While you are proceeding with your testimony, we want to welcome Senator Eyton from Ontario, and not that Senator Tkachuk, from Saskatchewan, needs any support, but he has a strong supporter in Senator Gustafson also from the province of Saskatchewan. Welcome, senators, and thank you, Mr. Burns, for your evidence.
Senator Angus: Thank you very much for appearing today and for your interest in this process. We consider your two organizations to be amongst the most important stakeholders in the area with which we are dealing and in this review process. It is very important that we hear you. I have not heard anything negative about Bill C-37 from you, but I would ask this opening question: Are you comfortable with the bill as it stands?
Mr. Campbell: Senator, our answer is yes. We have examined this bill closely. When it was before the House of Commons Finance Committee, we had a technical amendment to suggest. Those were adopted by the government as it was passed at third reading. As we review this now, our recommendation to the committee is that the bill should proceed expeditiously. We support the bill.
Mr. Burns: You have our broad support.
Senator Angus: That makes it easier. As you know, given the sunset clause in the legislation as extended in Budget 2006, we do have to move quickly, and all the bases are touched upon in this process. Have you all been consulted in the process leading up to the introduction of Bill C-37?
Mr. Campbell: Indeed.
Senator Angus: In both cases, you have had an opportunity to express your views and interact with the people from Finance Canada and the minister's office, correct?
Mr. Campbell: Yes.
Mr. Burns: Correct.
Senator Angus: I will move then to another area and address Mr. Burns first. We have not had a chance to question you on this subject although the others have had experience with us. There is an area that the banks have abandoned, and that is the area of small loans. These are called payday loans and are loans to consumers who require, for one urgent reason or another, small amounts of credit on a short-term basis. Banks, for their own reasons, have withdrawn from the field. Being a Quebecer and familiar with the caisse populaire, I have felt that the credit union industry was analogous to the caisse populaire system; am I correct?
Mr. Burns: Absolutely, yes. It is very similar.
Senator Angus: It is interesting that the payday loan industry has grown quickly, and especially in certain parts of Central Canada. Have you folks abandoned the field? Do you engage in payday lending?
Mr. Burns: We do. I would preface my comment by saying that we and the credit union industry were just as surprised at the growth and the penetration of the payday lending market. We have come around to the market recently. There is a credit union in Ottawa, Alterna Savings, that is looking into entering the payday lending market. I know quite a few other credit union in our industry are looking at the Alterna Savings model. I am from British Columbia, and there is much interest recently there in the market.
I would not say we have abandoned it. Perhaps we were slower than we should have been to enter the market, but there seems to be renewed interest in the market now.
Senator Angus: I am delighted to hear that, and I am sure some of my colleagues are as well. It is a perplexing aspect of public policy that we are grappling with at the moment. There is no specific regulation in place for this aspect of consumer credit. There is regulation over the banks and what they do and over your industry and what you do. Within the bounds of your statutory powers, regulation already exists. Would I be right on that?
Mr. Burns: That is correct, provincially, yes.
Senator Angus: You are an umbrella organization.
Mr. Burns: Correct. However, our shareholder credit unions would be provincially regulated in that regard, yes.
Senator Angus: I encourage you to continue in this area. It would have a very salutary effect not just for the competition, but also it might help to broaden the standards prevalent in your industry and the banking industry — one that witnesses tell us consumers would like to see in the payday lending field.
On the same subject, Mr. Campbell knows of our intense curiosity as to why the chartered banks — in particular, the membership of your association — chose to get out of the field. It has been suggested that perhaps the members of your association might want to rethink the position. I am asking these questions under the rubric of Bill C-37 because it is the review time. The legislation out there contains a large amount of consumer protection measures that came in with Bill C-8. There are some social, socio-economic and ergonomic obligations and exigencies. It has occurred to some of us here, when wrestling as we are with a piece of legislation, whether the banks and your members might be thinking of this subject. Do you have any proposals that you might put to us that we could pass on?
Mr. Campbell: Let me lead off with a couple of points that you have made, senator. You said, senator, it is a perplexing issue. I want to come back to that in particular.
To your point about abandoning the market, when we look at the payday loan industry, why it has grown, and so on — and I must say I do take exception to the characterization, though I understand why you put that forward — the banks provide a range of these credit options on a short-term basis. If you go to a payday lender, you must have a chequing account. We offer overdraft that is at rates considerably lower than the payday lenders. Most people have a credit card. We offer credit cards — and you can get a cash advance — at rates considerably lower. We offer lines of credit that do not have to be secured, at rates considerably lower. We offer all these things.
I cannot remember a time where people could go to a teller and say, ``I want $100.'' They must go through a process. That is not the kind of business we are in. We have not abandoned that; we have those kinds of facilities and always have had. In terms of branches, it is sometimes said that we have closed branches. However, we have done research through Ryerson University. They have studied this and have concluded that payday lenders typically locate very close to branches. When a customer goes into a payday lender and wants to take out his or her first loan, standard procedure for a payday lender is that they will tell the customer to go across to their branch and use the automated banking machine to get a printout of the last 12 to 15 transactions to show that he or she has a live account. They are locating very close. It is not abandoning that particular market.
With respect to the growth of the payday lending market, the word you used, I believe, is the right word — it is a perplexing issue. Why has there been growth? Is it a broader social issue? What is it? We ask ourselves what we know about these people who use payday lending. We know they are of average income, employed, and have banking accounts. We also know that they need short-term emergency cash for a few days. We know that in many cases they have trouble managing their money. What do we not know? Why are these people not using their overdraft privileges or, if they have them, how much have they taken out? Why do they not use the cash advance on a credit card? If the answers to those questions are because they are already maxed out, then quite frankly, it would be irresponsible to start shoving more debt at them.
A small percentage of the population use payday lenders when they need emergency cash. The bulk of the population, who need emergency cash, do not; they use other facilities. I know the committee is interested in this, and I have looked at this personally. We have done research, and I have read up on it. I do not have a full understanding of what this is. Is it a broader social issue or the way people approach it? Fewer and fewer people have savings now. Fewer and fewer people have that rainy-day money set aside.
Until we find that out, it is difficult to say where we want to go. We know two facts. First, the federal government is proceeding to put in place Bill C-26, which will allow regulation. Is that a perfect solution to all the problems? Perhaps not, but it is a solution that would merit support. British Columbia, Manitoba, Nova Scotia and Saskatchewan, I believe, have a strong interest in this — to regulate it. It would bring these institutions, just as we are, into the regulatory sphere. A cap would be set on the rates; all those market conduct issues would be addressed; rollovers would stop; and so on.
Second, if we are talking about people who have challenges managing payday to payday or a broader issue about whether they have the capacity for financial budgeting and so on, I believe there is a role here for financial literacy. In the recent budget, the government has said that we have a regulator, the Financial Consumer Agency of Canada, FCAC. They have a broad interest and a broad mandate. They have been mandated and have been funded to do a broader project on financial literacy.
The Chairman: We heard from those officials, and they could not give us much advice about this because they thought it was not within their specific terms of reference and their mandate.
Mr. Campbell, I have a supplemental question. Alterna Savings, an Ottawa-based credit union — and, Mr. Burns, you referred to them — gave us a fantastic book about not lack of information but information. When you say we do not know, we do know. It was from the Financial Consumer Agency of Canada, but Alterna Savings referred to it as well. This chart says that for a $300 loan taken for 14 days, the average cost of a payday loan would be 435 per cent a year. If you do it by credit card, it is 36 per cent and 21 per cent for overdrafts or borrowing from a line of credit, all of which you say is correct. The problem is that 10 per cent of the population, for some reason, does not use these methods or traditional banking facilities; and now, again, based on the evidence we have received, 10 per cent of the population cannot make it to the end of their paycheque. This gap for immediate cash is necessary, and it is a huge problem.
Senator Angus and I are of one mind about this. This is a serious problem. It has occurred since the last five-year bank review. It did not really exist as an industry, but now it does. The numbers are anywhere from $2 billion to $5 billion. We are not quite sure. It is growing like Topsy. Quite frankly, we are perplexed as to why the banking community has not taken this under very careful advisement, found out what the problems are and helped us and the country to solve this problem.
Mr. Campbell: On that, I agree. We have tried to figure this out what is happening in the marketplace. We have shared it with this committee in the past. The FCAC study you cite is extremely instructive. We support Bill C-26 because it will set some rate caps on some of those interest rates to which you refer.
The Chairman: Mr. Campbell, we are familiar with that.
Mr. Campbell: I understand.
The Chairman: We know what that bill intends to do. Our question to you on this bank review is what, if anything, are the banks prepared to do. My deputy chair used his words very carefully. He used the word ``abandon.'' This is part of the banking facility of this country, and it is a gap. We welcome the margins of the bank; they are wonderful. Our question is as follows: With all of the margins of positive cash flow available to the banks, why do they not take a serious look at this question to help this committee and help the country on this? This is a serious, systemic problem. That is what we are supposed to do on a bank review, namely, look at serious and systemic problems. If you are telling me you are perplexed and you do not know, we are asking you why you do not know.
Mr. Campbell: We are trying to find out. We have been doing research on this, which I am happy to offer back. To be able to find out — and I say this with great respect — we must put our fingers on what truly is the problem. Why do people use that service? I am asking this question again. Believe me, when I am saying this, it is on the basis of consultation with my members, the banks. We say, ``You must have a chequing account. You can get an overdraft. Tell me, why are people using that?''
We have tried to do our own research on this, but I do not have a full answer.
The Chairman: Mr. Campbell, with all due respect, this does not need more research. This needs some alternate choices. The vice-chairman and I intend to pursue this matter with the presidents of the banks to see why they are not, as the vice-chairman put it very well, fulfilling their social responsibilities here? These are not impoverished institutions that we are trying to wreak out an extra ounce. These are vibrant, important, financial institutions. We welcome that, but there is also a sense of social responsibility.
Senator Tkachuk: Why do people eat hotdogs? I do not know that either; they are not very good for them, but I still like hotdogs. The important thing is not what the banks did not do, because it does not really matter. I do not worry about this as much as other members of the committee. This is a market. If someone opens up a shop and lends out money to people and people want to use it, there is nothing wrong with that. If someone wants a business, they will have to compete — in this case, the credit unions.
I want to hear why the credit union did it and what opportunities they saw. They obviously found the answer, and they are seeing it as a business opportunity and not as a problem.
Perhaps you could expand and refer other witnesses, who we may call, from the institution here in Ottawa who are going into that business.
Mr. Burns: The people at Alterna Savings could put you in touch with the other credit unions that are looking at their model. Alterna Savings have tried to model what payday lenders do, empowering tellers to make payday loans.
Credit unions are autonomous and every credit union has their own business model and plan. I can only presume that when Alterna Savings looked at the business model behind payday lending, they saw a margin that was healthy enough to support their business. At the end of the year, as you know, credit unions return their profits to their members. It is not really a profit motive that is driving Alterna Savings, but an under-serviced market.
It would appear to me that when you look at the payday loan industry in general, there was obviously a need that was left unfulfilled in the marketplace or the gap would not have been filled so quickly.
I also ponder some of the same questions that my friend Mr. Campbell was asking himself. If we look at the rise of the mortgage brokerage industry, there was certainly no shortage of mortgages available, yet that was not the problem. There were perceived barriers in the marketplace, and there was a need that was unfulfilled that mortgage brokers filled. It is perhaps not entirely access to credit that is the issue. That is what I am guessing intuitively. I would not presume to know. There may be another reason that perhaps is not entirely financial, that is meeting the need of these consumers who are willing to pay a higher price.
Mr. Campbell: Is the question anonymity? Do customers prefer to be anonymous when they use these services? Is it because the payday lenders do not worry at all about issues of credit check or ratings?
As I said earlier, when they ask people to get their statements from the bank machine, they are not worried about balance; they are just looking to see if it is inactive. I am sensitive to this issue, but from our perspective, if we have customers who, for instance, are maxed out on particular lines, we ask whether we are helping that person by giving them more debt.
The Chairman: Maybe they cannot make a payment and they might lose their car or they are maxed out and are desperate for money for a number of reasons. However, the fact is that a substantial portion of the population uses this service. We are delighted that the service is being offered rather than a lack of service. The problem is the cost.
Once we get into this rollover situation, we are in the hands of the devil, in a strange way.
Senator Goldstein: I want to come back to your cheque-clearing timing. You said that you plan to reduce it from 10 days down to seven days when we complete cheque imaging. When the Canadian payments system has that in place, you will reduce that to four days. My understanding is that a drawee bank presented with a cheque, or eventually with an image, has the balance of that day plus only the following day to refuse to honour that cheque. That makes an aggregate of a maximum of two days. I cannot understand why you would be talking about four days.
Karen Michell, Vice-President, Banking Operations, Canadian Bankers Association: I should remind you that the vast majority of accounts on any given day do not have cheque holds put on them at all. On any given day, less than 1 per cent of accounts would have a hold put on them. In the normal course, if a hold is not put on the cheque or the funds, access to the funds from the cheque happens immediately. This is because the bank advances provisional credit while they clear and settle the cheque.
A cheque may have a hold put on it depending on the history of the account. If a client generally deposits cheques for a couple of hundred dollars and suddenly he or she deposits a $10,000-dollar cheque, or if the bank has a reason to suspect fraud or illegal activity on the account, they may need a few more days to verify the accuracy of the cheque and the availability of the funds.
In the normal course, well over 99 per cent of people, who are depositing cheques, get access to the funds right away.
Senator Goldstein: It is the people, who need access to the funds right away, who generally have their cheques held. I am not terribly concerned about anyone holding my cheques because I believe my bank does not, but I am worried about the people — as I should be — who need money and cannot get it because of a hold that is longer than necessary under the Bills of Exchange Act.
I still have not heard you tell me why you need four days if the Bills of Exchange Act says that the drawee bank is liable after two days.
Ms. Michell: To clarify what would happen, the cheque would clear and settle overnight. If you write me a cheque and I go into my bank and try to cash it, overnight our banks' two processing centres are clearing that cheque and making sure the funds are available.
With respect to a four day maximum, if there is any reason to suspect that there is fraud or illegal activity on the account, they will take more time to look into that cheque or account. If the banks have a cheque that does not match up with a client's history, they will check into it more closely, which will take more time. In a small minority of cases, the banks may put a hold on a cheque, quite frankly, for valid reasons; to look into the funds and the activity in the account after which they will give the client access to those funds. In the vast majority of cases, that will not happen.
Senator Goldstein: I do not want to talk about the vast majority of cases, but only about the cheques that are held with respect to people who need the money generally. I want to talk only about those.
Here is the way it presents itself: That person goes to his or her depositing bank and physically gives the cheque to a teller. It then goes to the payment system and overnight there is a contra proferentem, which is done by the payment system, and is an excellent system, as you know. The following day, the drawee bank must either honour the cheque or refuse to honour it because if it does not, to use your technical term, it loses recourse. It must pay. If it must pay, no later than the end of the following day, I fail to understand why you could possibly need four days for a hold. Could you tell me that, please?
Ms. Michell: I agree with you. In the vast majority of cases, it works exactly as you are describing. A case where it does not, though, is if a bank has reason to suspect that there might be fraud. They will not necessarily give you a heads-up on that, but they will do some checking to see what is going on in the account. If there is some other reason — for example, if you have presented a cheque that is not easily legible, not encoded with magnetic ink recognition characters, even with an image — it will take longer to verify that. They need a maximum amount of time. It is a maximum of four days, not always four days, if they do put a hold on the cheque.
Senator Goldstein: I will not pursue that. I am finished on this subject.
Senator Moore: Just a supplementary on that. You mentioned the possibility of fraud, Ms. Michell. The payee bank has the cheque. Has it negotiated it, is it holding it physically, pending its fraud investigation or has it put it through the clearing system?
Ms. Michell: It depends on the situation. When we put it through our processing centre to determine whether the funds are available overnight — the clearing and settlement process — if they suspect for any reason that those funds are not good, they may need a few more days to determine whether the funds are available and whether the signature on the cheque is the correct signature. That may take a bit more time. It depends on the nature of the fraud and the nature of the situation.
Senator Moore: However, the cheque has been advanced through the clearance system process.
Ms. Michell: It must be presented to the bank on whose account the cheque was written. In that case, that bank must verify whether the funds are available in order to pay the funds.
Mr. Campbell: The process that happens now will eventually be shrunk down because of electronics. However, today, it can clear and settle in terms of the instructions back and forth and netting between the banks. We know there are funds there. That piece of paper literally must travel planes, trains and automobiles across the country to the home bank. It comes back because there is a problem. It then must go all the way back to the bank. That is what takes the time. The trains, planes and automobiles are now dispensed with electronically. It is the separation between the clearing and the settlement, on the one hand, and having that cheque go to the home bank. If there is a problem, it has to go all the way back. Remember, it is that maximum of four days.
Senator Goldstein: I would like to ask a quick question, which you have not covered, Mr. Campbell, but that we had the advantage of discussing last week. I believe it is important to have it on the record. It is not directly related to the bill, but it is something that I feel is important.
I would like you to talk to us briefly about the numeracy program that the chartered banks have put into place in terms of educating young people as to the proper use of credit.
Mr. Campbell: I appreciate that. I believe it goes back to the earlier question that we talked about.
We feel the issue of financial numeracy, financial literacy is extremely important. When I went to school, there was nothing in the curriculum. That is a huge gap. People enter the world without any of the skills. We have taken that seriously. For 10 years now, we have put out a series of non-partisan booklets — literally millions of copies are out there. We have put literacy programs in place in high schools. The program is called, ``There's Something About Money.'' It is a free seminar. We put that on the road and have been doing it for years. Hundreds of thousands of students have gone through the program, and we want to carry on because we believe it is of value.
I made reference earlier to the government's own regulator, the FCAC, which the senator quoted. They have now been charged with promoting financial literacy. They received funding through the budget on that. We believe that is a positive thing.
[Translation]
Senator Biron: If payday lenders become last resort lenders, borrowers will know they are the last ones they can get money from, and they will pay them back. Banks and credit unions will lose this potential market. Will this not increase the risk of losses for banks, since they will no longer be last resort lenders?
[English]
Mr. Campbell: As entities that are seeking to gain customers, serve customers and have success in a competitive marketplace, the banks always look at ways that they can get market niches and target them every which way with every kind of product. It is with the individuals who use the payday lending industry where problems arise with issues of rollovers and so on. Bill C-26 and the parallel provincial statutes will be put in place to stop those issues from happening.
With the research that we have done, the vast majority of people — about 60 per cent — will take out a few such loans over the course of a year; about 25 per cent of people might use payday lenders seven, eight, 10 or 12 times. A very small hard core is made up of the people who are on a rotating basis. That is the issue. Those are the kinds of people that may have a problem.
What is the solution? Will that hurt the banks? No. We are under a very strict prudential regulatory regime that requires us to manage risk very carefully. We have government oversight on us and a detailed set of rules that keep us well within the bounds on that.
The Chairman: I want to turn to another subject that has been of interest to this committee, namely, the extent to which Bill C-37 proposes to increase mortgages from 75 per cent to 80 per cent. What is the bank's position on that? I assume when you say you are supporting the bill, you support that measure.
Mr. Campbell: That was a position that the government itself proposed. We still have a situation where the amount above the set limit is required to have mortgage insurance, so there is coverage there. We have the regulator that, as I was saying a moment ago, has a fairly robust risk-management regime. The government has put that forward, and we will work with them.
The Chairman: Do you feel that will increase the availability of credit to people who need credit? What do you feel the implications will be of making housing costs more accessible to more people? Will it be good or bad? Do you see a problem?
Mr. Campbell: I do not see a problem. That is a question to pose to the government in terms of the rationale for doing it. I believe they did it to make it less costly for consumers. We have not seen how it is worked out. Given that we have a robust regulatory regime and a variety of insurers coming into the market, there are many providers, which gives consumers a choice. It is an incremental step. The government has also said that, it being an incremental step, they will review the increase in mortgages over time. We believe it is a prudent action to take. In that sense, we are quite positive about the increase.
The Chairman: I have a brief question in response to Senator Goldstein's point, which we believe is important, namely, the timing of cheque clearances. It is our feeling that cheque-clearance delays accelerate the problem with credit. Therefore, we are trying to look at all aspects of this complicated problem. We feel imaging is terrific because that will speed up everything and will lay bare the problems in a more precise fashion. We welcome that. The real question to you is whether or not these cheques that are being held allow the Financial Consumer Agency of Canada oversight to take a look at these problems. We have heard what you have to say. We are now looking for some independent body to tell us what is appropriate and what is not. It falls to the powers of the FCAC to do precisely that. What is your take on that?
Mr. Campbell: Ms. Michell may wish to contribute. We are working out a code with the government that will be overseen by the FCAC. They will see how that cheque-hold code will work going forward. It will fall under that kind of oversight.
Ms. Michell: To date we have not seen a large number of complaints about cheque holds to the FCAC. It has been very small. Out of the number of complaints that they receive each year, about 20 to 30 involve cheque holds.
As Mr. Campbell has said, the code of conduct we have worked out with the government to ensure that we have a maximum hold period will be overseen by the FCAC.
The Chairman: Could you make that code available to us?
Ms. Michell: Yes, we would be happy to send it to you.
The Chairman: We would like to take a look at it. When it comes to questions of self-regulation, we believe there should be oversight on that as well.
I want to thank all of our witnesses. We will read your material carefully. Again, you can understand the passion of our exchanges. We are trying to sort out what we consider to be a real problem.
Senators, we are now pleased to welcome the Minister of Finance, the Honourable James Flaherty, looking none the worse for having just presented his budget.
Mr. Minister, we look forward to hearing from you and your officials on this very important five-year review of the oversight of our financial institutions. We understand that you are under a time constraint, but we have many questions. Please proceed.
Hon. James M. Flaherty, P.C., M.P., Minister of Finance: My time constraint, Mr. Chairman, is that there are votes in the House of Commons within the next 45 to 60 minutes. Someone will watch the proceedings in the House for me, and I will go when I have to go.
The Chairman: Would you object if your officials carry on?
Mr. Flaherty: Absolutely not. It will probably be a superior performance.
I will abbreviate the remarks I have here, but let me just touch on the major points.
[Translation]
Ladies and gentlemen, thank you for this opportunity to discuss Bill C-37. I will keep my remarks brief in order to provide ample time for questions.
[English]
This bill proposes amendments to the legislative framework governing financial institutions in Canada. Our federally regulated financial institutions play a significant role in the Canadian economy. I am also the minister responsible for the Greater Toronto Area, GTA, and it means a lot that this sector of the economy employees about 700,000 people in good jobs. It represents about 6 per cent of Canadian GDP.
Last year, we developed an economic plan for Canada called Advantage Canada. We made it clear that we will work hard to create the conditions for Canadian businesses, including our financial institutions, to succeed in the global economy. I had the opportunity in January to advance that cause on behalf of our financial institutions with my colleagues in the Government of China.
Bill C-37 has three basic objectives: advancing the interests of consumers, increasing legislative and regulatory efficiency, and adapting the framework to new developments. I know this committee is particularly interested in consumer interests, so I will touch on a few of those, if I may.
As a government, we believe in competition and disclosure. Competition provides consumers with more choices. There are financial products and services available now that fit many of the individual needs and goals of Canadians. At the same time, with increasing competition sometimes comes complexity in the decision-making process. Disclosure, on the other hand, ensures that consumers have the necessary information available so that they can make the best decisions for themselves and their families.
This bill contains a number of amendments to enhance disclosure requirements. The bill addresses the issue of disclosure to persons using online banking services.
[Translation]
The improvement of disclosure requirements affects the handling of complaints. Presently, under federal regulations, financial institutions are required to assign employees to the handling of their customers' complaints, and to provide procedures to handle these complaints.
[English]
There are presently no requirements to ensure that consumers have access to information on these procedures on an ongoing basis — for example, for consumers who do not open an account but, rather, obtain other products and services such as a mortgage. That is addressed in Bill C-37.
The bill also deals with the issue of cheque hold periods. This is an important situation not only for individuals who have bills to pay, but also for small- and medium-sized businesses. Bill C-37 addresses this concern by helping reduce the hold times imposed on cheques.
Also, cheque imaging using computer-scanning technology will allow financial institutions to reduce the physical clearing time of cheques, which is labour intensive, time consuming and costly. Given all the technological developments available today, that is something we can improve. We have the technology, and, in our view, it ought to be used.
Bill C-37 contains additional measures that will provide a better choice of services for consumers. As you know, the cooperative credit associations — the credit unions were just here — are federally incorporated financial institutions that can provide products and services to their members.
[Translation]
The new Canadian government's opinion is that this requirement goes too far.
[English]
That is a situation where there has to be not less than 10 cooperatives to form an association. We propose to move to that number to two. On mortgages we have had the 75 per cent loan-to-value requirement. We propose to move to 80 per cent on that. This will lower the down payment people will be required to make and create an opportunity for mortgage cost savings for Canadians. This is a real savings for Canadians. A family paying for a $200,000 home with a down payment of 20 per cent could save $1,600, which is significant and helpful when buying first homes. That is money that can be used for other expenses.
There is much more in the bill, dealing with other issue that I will not become mired in right now, other than to say that there were extensive consultations leading to the development of this bill. The consultations culminated in a white paper, and that white paper, issued last June, formed the core of the bill that we are discussing today.
Thank you, Mr. Chairman, I will stop there for questions.
Senator Angus: Welcome to you and to your officials and colleagues that are with you. I echo my congratulations to you on the budget, and thanks for coming at a time when you are dealing with the aftermath. It is an undertaking I know.
Your officials have pointed out that this particular review of the financial services section legislation is an interim one. In other words, back around 1990, there was Canada's version of the big bang, and we did our separation of the pillars a little. Following that, there was a technical review without substantial amendments; then came Bill C-8, which incorporated a large amount of consumer protection legislation. Since then we have been trying to digest them. As you know, we did a big study on the effects, and right now there is not a big appetite to change policy direction with these in this particular review.
I just want to make sure I understand correctly that there is nothing in here that we can read in about cross pillar acquisitions or divestitures or things that are in the law that are so fundamental to this legislation. Of course, people who come to this committee are wondering about bank mergers. I do not see any change in policy direction in Bill C- 37. Is that a fair statement?
Mr. Flaherty: As you often are, you are right senator.
Senator Angus: Therefore, this is correct?
Mr. Flaherty: It is correct. I have said consistently that bank mergers are not a priority of our government, and they are not.
Senator Angus: The other big issue is insurance companies. I believe there is a slight change in the thresholds or the maximum amounts. Could you just elaborate on that?
Mr. Flaherty: There is a change in the ownership thresholds.
Senator Angus: Could you outline the changes?
Serge Dupont, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: The change is that any institution that has more than $5 billion of equity must have it widely held. That threshold is being raised to $8 billion to reflect the growth in the sector since 1999, when that threshold was established. Similarly, there is another threshold of $1 billion that was raised to $2 billion.
Senator Angus: I will use that as an example. This is a change in a significant area, but really it is only to reflect inflation or incremental growth in the sector and, therefore, not a big policy change. It is steady as she goes with the oversight there.
Mr. Flaherty: That is correct.
Senator Angus: There are many other areas that could have been addressed, I suggest to you. The explanation is that this particular review focuses on streamlining, fixing up little technical areas, and there is nothing really fundamental in terms of a change in the structure of the industry.
Mr. Flaherty: That is a fair comment, senator. This bill does not reflect any fundamental policy change. There are significant changes, such as majority of directors and that kind of thing, that will facilitate financial institutions in Canada and the operation of their businesses. They are not fundamental changes in direction.
Senator Goldstein: I have two questions, which arise from the budget, that directly affect banks. Banks have not been permitted to merge for quite some time in Canada. As a result, the banks have sought expansion in two ways: First, in trying to sell other products such as insurance, which has not been a felicitous experience; and second, in the acquisition of financial institutions elsewhere. My question now relates to the deductibility of the interest cost of the capital expenditures required to acquire financial institutions elsewhere. The way I have read the budget — and of course we have to wait for the legislation itself — it would appear that the financial institutions like other acquirers will not be permitted to deduct the interest cost from their earnings. Have you considered trying to carve out that kind of activity, which many of us would consider to be most appropriate from a competitive perspective, in order to permit banks and perhaps some other institutions of that nature to be able to freely deduct interest? That is my first question. I will have a second one in a moment.
Mr. Flaherty: Senator, I will be direct about this in the interest of time. We are after the use of tax havens here. This is a tax fairness issue, just as the income trust issue last October was a tax fairness issue. If we want to continue to reduce taxes in this country — and we do want to continue to reduce taxes — everybody, including the banks, all our financial institutions and all our corporations, no matter how they construct themselves in legal entities, will be obliged to pay their fair share of taxes. This measure with respect to deducting interest in Canada through the mechanism of tax havens is not something that will continue. The policy is firm. We are consulting with business and industry about the grandfathering provision that are part of this. The policy is there, announced in the budget, to stop the use of tax havens as a loophole to avoid the payment of taxes in Canada.
Senator Goldstein: My second question relates to the $3-million fund that is envisaged in the budget material for financial investment education. I take that to mean education dealing with the more sophisticated kind of investor and not education to help consumers with the proper use of credit. Have you given consideration to the breakdown of the $3 million between investment education directed at more sophisticated people and simply credit education directed at less sophisticated people? A collateral question, my third question, is whether this funding will be repeated or whether it will be a one-shot deal.
Mr. Flaherty: I have not thought about the second question. I would anticipate this will be an ongoing effort. We are aiming at the novice, the young person, the student.
We want to encourage financial literacy just as we encourage mathematic literacy and linguistic literacy. We will ask the Financial Consumer Agency of Canada to develop the educational materials and products, which we can use in cooperation with the provinces and territories, I would expect, to make financial literacy materials available.
I also intend to talk about it. It is very important when we get into various issues with the banks and other financial institutions. One of the realities is that people do not always understand the nature of certain financial products. Some people do not understand compound interest. Some people do not understand what the present value of something might be and how that is done. We want to move toward financial literacy among the next generation.
Senator Eyton: It is fair to say that your bill, Bill C-37, has been well received. I believe it is technically sound, and I expect that is a result of consultation that has gone on for some time. My colleagues want to raise issues of mortgage- lending limits, the holding periods for cheques and so on, but I want to focus on the governance questions.
Over many years, I have served on many boards and also on a Canadian bank board for a while. It is my experience that good directors are considered in the best interests of the companies they serve and their shareholders. I can see no difference from someone from Kenora or Los Angeles or London. I say that because you have changed the mix of directors from a two-third's requirement down to a 50 per cent requirement.
I question the rationale for that or for any requirement that is 50 per cent in a regime where there is good regulation, intensive regulation and where there are limits on ownership for widely held financial institutions. I put that partly in the context where our major banks have been seen by some critics not to have become as international or successful globally as some of their competitors in recent times. To the extent that we have these well-performing Canadian financial institutions, it seems unnecessary to require that 50 per cent of the directors be Canadian with all the other apparatuses to govern them. Could you comment on that?
Mr. Flaherty: There is a history to this section, which you probably know better than I do. The Canadian banks, as a group, have a dominant market position in Canada and a very strong influence in our country in a number of ways. They have been successful and are increasingly active outside of Canada, which is good for Canada. Having said that, the feeling over time, given their position in the Canadian market, has been a majority of the directors ought to be Canadians. I feel reasonable people could differ about that. We are moving now to a 50 per cent level. As the banks become more international, I imagine there will be some who will suggest that that should be lower yet.
Senator Eyton: Okay, well, I guess we can disagree on that perhaps.
Within this bundle there is the removal of the mandatory retirement for chairman, deputy chairman and directors of the Bank of Canada and, I believe, Canada Deposit Insurance Corporation, CDIC. However, as far as I know, there is no such provision in the Bank Act for mandatory retirement for directors of banks.
My recollection is that they were obliged to retire at the age of 70. I want to tell you this out of personal experience, on behalf of many of my senator colleagues. At the age of 70, Alan Lambert was obliged to retire from the board of the TD Bank. I went to see him and finally persuaded him to come to our group of companies and help us with our financial planning. Alan Lambert went on our board at the age of 70 and served for 21 years before his death, and there was no question that he was our best director.
I am curious. I operate on the premise that the 70-year requirement to retire is still in the Bank Act, and I am curious that it was removed from the Bank of Canada and CDIC. Can you comment on that, please?
Mr. Flaherty: The Bank of Canada has a unique role. I am comfortable with that amendment to give us more range with respect to the bank, particularly if we wanted someone to stay on for another year or two. We would not want that to be an issue. As you know, judges do not have to retire until age 75 in Canada.
Senator Eyton: I do not believe there is any provision in Bill C-37 to change the retirement age for directors of Canadian banks.
Mr. Flaherty: That is correct. We are checking the current provision of the Bank Act with respect to directors and their ages.
Senator Tkachuk: On page 9 of your remarks, you talked about disclosure by financial institutions in their branches, the information and the amounts charged for services normally provided to consumers. My guess is that these did not come about as recommendations from the financial institutions themselves. What was it that guided the ministry and the department to include that? Were there problems? Were there complaints? Were studies done? In what area was information not provided that should have been provided in the past that led you to make these amendments?
Mr. Flaherty: The most significant one relates to the increasing use of online banking services. It relates to the online provision of the same information that one would have if one were to physically go to a branch. I understand some of the consumer groups raised the issue that there should be equal disclosure no matter how one accesses bank services.
Senator Tkachuk: Was it contemplated that the banks would be providing this on the website themselves? What were they not providing in online banking that they provide by just opening a regular account?
Mr. Dupont: There were representations to the effect that that was not provided. As we went through various consultations and looked at the statute and how it applies in today's world, it was felt that we have to have that symmetry between the branch and the online world. There may have been issues with regard to practices. I am not aware of complaints, but we have done consultations to find out if there were potential weak spots in the statute.
Senator Tkachuk: You cannot provide me with direct examples?
Mr. Dupont: Not necessarily.
Senator Tkachuk: Can you tell me how it would look on information when someone opens an online account, what exactly is it they would provide that they have not provided before?
Mr. Dupont: No. There may have been examples; I do not have them right now. I am clarifying that there is an obligation for them to provide the same kind of information that they would be providing in the branch.
Senator Tkachuk: Page 13 concerns complaint-handling procedures. The same kind of questioning applies. What are the banks not doing now? I ask these questions because when we go to a bank and open an account, we get brochures. It is similar to insurance. No one ever understands insurance — at least, when I read it, it is hopeless. There are few people who can actually read the insurance contract and tell you exactly what that means. I get to the first part, which is what happens when I die. I check with my lawyer to make sure that they will have to pay out the money and that is about as far as I get.
What is it that is lacking presently that the amendments would cover as far as complaints? That is another topic on which the banks provide us with lots of paper.
Where was there a problem that has to be fixed? I am not trying to defend the banks; I am just trying to get clarification of what these amendments tried to achieve, if anything.
Mr. Flaherty: You are correct; many of these practices are in place already. This is a codification of those practices and an attempt to make it law in Canada. If it becomes law, these methods of providing information will be mandatory.
Mr. Dupont: The problem, perhaps, is that the only time information was required to be available was on account opening when the larger amount of information is also being dealt with. This bill ensures that, at the time when a problem arises, in-branch information can be found related to complaint handling.
Senator Tkachuk: I congratulate you on the significant amendment, which is the 80 per cent mortgage increase. I also remember buying my first home; that will be very helpful.
Senator Moore: I want to touch on a question of Senator Eyton's with regard to the make-up of the boards of the bank. I believe you said they must have 50 per cent Canadian residents. That only applies to a bank holding company. The banks themselves must have a majority of Canadians. Am I correct?
Mr. Flaherty: You are right, senator. It is a majority.
Senator Moore: Yes, for chartered banks.
Mr. Flaherty: That is correct.
Senator Moore: With regard to the increase from 75 per cent to 80 per cent for mortgages mentioned by Senator Tkachuk, you could not help but be aware of what is happening in the United States with the number of mortgage loans that are being defaulted for closures because of minimum or sometimes nil equity put in by the home purchasers.
Did you look at that? How did you arrive at this figure? What is the magic of an 80 per cent or a 90 per cent figure?
Mr. Flaherty: Some would go higher.
Senator Moore: I know. I am concerned about that. Last year or the year before, Canada Mortgage and Housing Corporation, CMHC, said they would provide 100 per cent mortgages. I do not think that is right, because when a people put money in, they care for the property more and, hopefully, enhance it. How did you arrive at that figure? Did you consider what is happening in the marketplace to the south of us?
Mr. Flaherty: Yes, we did. We are mindful of the benefits of having homeowners put money into their property. I agree with you on that.
Some thought the increase should be more than 80 per cent. It is a significant move from 75 per cent to 80 per cent. I was comfortable with that, and the government is comfortable with that. Mr. Dupont can discuss that. I will have to ask the chairman if I may leave. The bells are ringing in the House of Commons; I have a summons.
The Chairman: Before you go — I know you have another six or seven minutes — I want to raise two issues with you.
Mr. Flaherty: Actually, I do not. I must leave now.
The Chairman: I understood there was additional time. Minister, what do we say? There is more to ask. I hope your officials will stay. I wanted to raise two questions with you; they will respond. We agree with competition. Why not more foreign competition? We will get at the question of holding cheques, which we think affects small business and credit.
Thank you very much, minister. You must attend to your legislative duties. We look forward to having you attend much more often before our committee.
Mr. Flaherty: It is always a pleasure. Thank you.
Senator Moore: I am looking for an answer to what research you did. How did you arrive at the 80 per cent figure as opposed to 85 per cent or 82 per cent? Did you consider what has happened? I am concerned about what is happening in the U.S. in terms of foreclosures. It may happen here. Have you analyzed the market to see what it looks like for us in terms of going forward and the trends in that regard?
Mr. Dupont: One aspect to distinguish at the outset is that this is establishing the threshold at which mortgage insurance becomes mandatory. Starting at 80 per cent, it becomes mandatory. Beyond 80 per cent, it is the market that determines what kind of terms may be offered to borrowers. That may include, in some cases, 100 per cent leverage.
In Canada to date, we have had the development of a sub-prime market that is considerably less than the United States. It still represents a relatively small portion of the mortgage market. By changing from 75 per cent to 80 per cent, we are not really affecting the high-leverage, high-risk end of the market. We are trying to reduce the obligation for individuals, who have amassed a fair down payment, to go out and buy mortgage insurance that they do not benefit from, frankly, because they are not really the beneficiaries; it is the institutions. It is taking the obligation off them and letting the market decide, above 80 per cent, the terms of mortgages that will have to be insured.
Senator Moore: In the minister's statement on page 24, it states that they ``could save approximately $1,600.'' Is that over the full amortization period?
Mr. Dupont: Yes, except normally the way it works in Canada is that that amount of savings is a percentage calculated on the basis of the total mortgage, and it is applied to the principal of the loan. Yes, it is paid off, but it is paid off over the term of the mortgage.
The Chairman: Mr. Dupont, I want to raise the issues that I raised with the minister just before he left. He did not get a chance to respond because of the vote. I was taken by the text, which I assume everyone read carefully, about the minister being interested in two principles: Competition and disclosure.
Let us talk about competition. As you know, Mr. Dupont, this committee is concerned about productivity and competition. We believe that the more competition, the more productive we are, the better the country is as a whole.
It has been the evidence before this committee that a number of innovative services have come from foreign banks. I will not to suggest to you who they are; that is just the evidence we have received. In the statutory changes here after five years, are you satisfied that the access thresholds are good enough to increase competition within the Canadian marketplace now that the banks are doing so well?
Mr. Dupont: First, whether we go to Advantage Canada or to the more recent publication that was released with the budget on capital markets, we will find that the most solid anchor for financial sector policy is competition. There is certainly no argument on that.
With regard to access by foreign banks, presently there are very little impediments to foreign banks coming into Canada. In fact, they are treated the same as Canadian banks. There are ministerial approvals required that we handle simply to ensure that an institution is fit and proper. Once those basic tests, with the advice of the Office of the Superintendent of Financial Institutions, are met, then a foreign bank can come into Canada, establish operations and compete alongside domestic banks with the same powers and establish the same activities.
They do not do that right now, which, I believe, is the problem you are raising. We also feel it is a problem. We would like to find more foreign banks coming in to the marketplace. They are finding some niches, different ways to come in through different forms. They can come in through a subsidiary, through a branch, through unregulated activities and provide services to various segments of the market. However, there is no regulatory obstacle to prevent them from coming in. The only obstacle is that they cannot come in and buy one of the large, widely held banks.
The Chairman: We would welcome your continuing attention to this problem. Hopefully, there is no holdup at the ministerial level from access to the Canadian market.
Mr. Dupont: I am not aware of any application that has been sitting on the minister's desk for a long time.
The Chairman: The second issue the minister referred to was hold times. We are concerned about hold times for cheques. The evidence we have heard previously is that hold times in Canada are much longer than hold times in Federal Reserve areas in the United States. The hold time in the United States is 48 hours and here we are at 10 days, moving to seven days. As the minister says:
Cheque holds not only affect consumers who need to access funds to pay their bills, but also small- and medium-sized businesses that need to pay employees and operate their businesses out of the funds they deposit.
He has identified a real problem. We are delighted, by the way, about proceeding as quickly as possible with imaging. We know this will solve a good chunk of the problem, but it will take two or three years to happen.
Are you surveilling this issue from a ministerial standpoint to ensure that these hold times are reduced? The bill sets out certain standards, but there is no reason why we cannot proceed faster than these standards. Where are you and the ministry on this matter? This is focused on the ministry.
Mr. Dupont: That is a fair question, senator, because it is our job to establish those limitations. The bill provides regulatory authority for the government to establish limits. In the first instance, while securing this authority in statute, which will then to be implemented by regulation, we have also engaged with the bankers and established a voluntary agreement of which you are aware.
I was here earlier for the discussion with respect to the four days. Last summer, or maybe even the summer before, we spent a fair amount of time with the CBA and individual banks in a room with charts about how the various information systems work at the branch, where I deposit a cheque, and beyond. Even under cheque imaging, that branch itself is unlikely to do the imaging in real time to the other institution. It will go to a regional data centre, where it will then be recorded with the proper information. It will then be transferred in batch form, as opposed to sequentially in real time, to the other bank, which will then do what it needs to do in terms of its information systems. Sometimes flags will go up to indicate that they need to do additional checking and then it goes back into another batch system. It is not a real time system from the moment I deposit the cheque in the institution.
We went into those discussions with the CBA and the bankers with a very clear intent to get the hold time down as much as possible. As much as we felt responsible to reduce it, we did not want to damage sound risk-management practices. At the end of the day, we felt that seven days and four days was the best we could do without disturbing practices that were sound from a risk-management perspective.
We still have authority in the bill, if it passes, to say that once cheque imaging is in place and we are able to look at the systems and say it is not four days but two days, we can put it in the statute. However, at this time we feel that four days is prudent.
The Chairman: Realistically, when do you feel the imaging system will be in place so you can exert your supervisory power?
Mr. Dupont: We can exert the regulatory power as soon as the bill is in place, but the plan at this time is for cheque imaging to be fully implemented in the first half or the first quarter of 2009. It is a significant undertaking, senator.
The Chairman: We understand that. Again, we are perplexed because we did hear evidence that in certain Federal Reserve areas of the American system — and we believe our system is more efficient in many respects — the hold times are less.
When we heard about the millions of transactions, we understood that the bulk of them take place within the same region.
Mr. Dupont: That is right.
The Chairman: It is not a question of taking a cheque and moving it — as we heard from the banking association — from one part of the country to the other, back and forth. I understand that. However, that is a very small percentage. I am not sure what those numbers are.
Mr. Dupont: We are saying it is the maximum hold period.
The Chairman: I understand that. I am saying that the bulk of these exchanges, between now and implementation of the imaging, takes place within a geographic region.
Mr. Dupont: That may very well be, senator, but what will happen with the electronics, whether in the same region or to the other end of the country, will not make a difference.
The Chairman: I am not talking about that. I am referring to what happens between now and two years from now.
Mr. Dupont: It is seven days.
The Chairman: Is there any way of accelerating the process — not only on the imaging side, but also on the exchange side — to reduce these hold times? They are critical to business, small business in particular, and obviously to other industries.
Mr. Dupont: Those discussions can and will continue. I would refer back to the discussions we had when we were developing the voluntary agreement with the CBA and felt that immediately, before cheque imaging, seven days was prudent because there is the physical transportation of paper, which is labour-intensive and takes time.
The Chairman: I want to thank you and your associates, who have been before us previously and have been very helpful. Please extend our thanks to the minister for his attendance.
The committee adjourned.