Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 10 - Evidence - Meeting of March 5, 2008
OTTAWA, Wednesday, March 5, 2008
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to examine the present state of the domestic and international financial system (Winding-up and Restructuring Act).
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good afternoon, ladies and gentlemen, witnesses and listeners on the CPAC network and viewers on the World Wide Web.
This is the Standing Senate Committee on Banking, Trade and Commerce. We are continuing our ongoing study into matters arising from Bill C-55 and Bill C-12 in the field of bankruptcy and insolvency.
It has come to our attention in doing our study in respect to the statutes involved — the Bankruptcy Act and the Company Creditors Arrangement Act — that there are other statutes relating to the field of insolvency. Indeed, our witnesses today have brought this to our attention. Therefore, we are very delighted to welcome Mr. Paul Kovacs, President and Chief Executive Officer of the Property and Casualty Insurance Compensation Corporation, PACICC; and from Assuris, Mr. Michael Hale, Executive Vice President.
We also have here today officials from the Department of Finance Canada, who will listen with us to your evidence. We will get some information on the record on the subject of the Winding-up and Restructuring Act.
Before we ask our witnesses to begin their presentations, I would like to introduce my colleagues, starting with the deputy chair of this committee, Senator Goldstein, from Montreal; from Vancouver, Senator Jaffer; from New Brunswick, Senator Ringuette; and from Ontario, indeed from the Ottawa district, Senator Harb.
There will be other senators joining us. There is a ceremony going on at the Centre Block involving the retirement of the Usher of the Black Rod, Mr. Christopher, so there will be other senators arriving soon.
Paul Kovacs, President and Chief Executive Officer, Property and Casualty Insurance Compensation Corporation (PACICC): Thank you very much and good afternoon. I look forward to the discussion, and to talking about the Winding-up and Restructuring Act as part of the broader review.
At a recent hearing, Senator Goldstein asked the Insolvency Institute of Canada, should the Winding-up and Restructuring Act be part of the committee's broader review of insolvency legislation in Canada? I believe the answer is yes, and I would like to take a moment to offer a couple of reasons why I believe that would be the case.
The three pieces of legislation — the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Winding-up and Restructuring Act — provide the legislative framework for responding to insolvencies in Canada. The Winding-up and Restructuring Act deals with the failure of banks, insurance companies and other financial institutions.
Our organization, the Property and Casualty Insurance Compensation Corporation, is the guaranteed fund that provides insolvency protection for home, car and business insurance consumers in the unlikely incidence when a member company fails. The act is our legislative framework; everything we do for consumer's flows out of this piece of legislation.
The first property insurance company in Canada, Phoenix Assurance, was founded more than 200 years ago in Montreal. Since that time, there have been a number of insurance companies that have come into and exited the market. Sometimes the exit was involuntary and the Winding-up and Restructuring Act was the legislation that dealt with those circumstances when they arose.
Our organization has more than 200 member insurers. We do not have many insolvencies but this is part of a healthy industry. It does happen occasionally and the legislation is an important part of us looking after Canadians.
The Chair: Mr. Kovacs, the other day you showed me a document summarizing the various insolvencies of insurance companies over a recent period of time. Has that document been tabled with the committee or is it part of this document?
Mr. Kovacs: As background, we tabled an analysis of the 35 insurance companies that have failed from our industry over the last 50 years. We tried to look at each one and the circumstances as part of our research program. We shared that with the committee as part of the record.
We have been operating for the last 20 years. Since we were set up, we have responded to about 12 insurance failures, which involved 250,000 Canadian policyholders. We paid more than $150 million in industry funds to resolve the associated claims.
Of the various wind-up actions that have been taken under the legislation since 1990, about two thirds have involved the property and casualty insurance industry. In the last 10 years, all of the wind-ups have involved our industry. It is our belief, which is widely held in the industry, that there will be occasional insolvencies in the insurance industry. This is part of how a healthy industry operates and, going forward, we are likely to continue to be one of the major users of this legislation.
While we have been operating for 20 years, we have been trying to carefully look through the media to see how consumers have reacted to the various insolvencies in our industry. Our research has identified 55 different newspaper stories over the last 20 years. That is a relatively small number and often the stories in the newspaper say if you have a problem call the Property and Casualty Insurance Compensation Corporation and they will look after your problem. The guaranteed fund business has been looking after consumers for the past 20 years, and we are well positioned to do that going forward.
We also believe that the solvency regulatory system is working well in Canada. There are companies that fail, but that is part of a healthy system. The Office of the Superintendent of Financial Institutions is doing its job well in monitoring the industry, in helping the industry to identify and manage risk and in appropriately supervising the industry. Again, the appropriate and healthy goal of the industry is to have a small number of failures, and the regulatory system does that well.
While the guarantee fund system is working and the regulatory system is working, we believe that the legislation we are operating under, the Winding-up and Restructuring Act needs to be reformed. It has been in place since the late 1800s and has been largely unchanged since that time. Canadians and the system we are operating under have changed a great deal over the last century so there is need for some technical adjustments to make it work better.
Technical adjustments can make the system fair, efficient and allow the liquidation process to best serve Canadian consumers. We also believe that the system is becoming more complicated with large, complex corporations and financial institutions. The current act is not necessarily ready to handle such a complicated situation.
I will develop those two thoughts. On the first side, the act has been in place since 1882 and largely unchanged. The act is fairly flexible and with the combination of knowledgeable courts, professional liquidators, it is made to work well. We are not saying to the committee that there is a problem and the act is leading to difficulties. While the system is working well, it is slow and costly. The system can be better with some relatively minor technical adjustments. To illustrate that briefly, for most of the liquidations in which we have been involved, almost all of the payouts — more than 90 per cent — happen within the first four years. Despite that, some insolvencies have gone on for decades. It takes time to fully resolve liquidation, and it is costly to go through the process. The system can be made more efficient and better.
Suggestions for technical reforms have been forthcoming from the Insolvency Institute of Canada that sound and well done. We have tabled the research we commissioned from professors Thomas Telfer and Bruce Welling. These are areas where, for some time, there is consensus on some of the technical changes that would speed up the process and look after consumers efficiently and well.
I use one illustration of a change: to have a guarantee fund appointed in a position to inspect the process. During the 12 insolvencies in which we were involved, half the time we were appointed inspector and half the time we were not appointed. For the latter, we were unable to act on behalf of policyholders to ensure that through the process we were fighting for consumers to make sure the process went effectively for policyholders. It could be fairly easily changed in the legislation to require that.
The Chair: Is that to require that there be an inspector?
Mr. Kovacs: That is correct.
The Chair: Does it make that much difference?
Mr. Kovacs: Individual policyholders do not have enough power to influence the process. Our role is to champion the policyholders. Often, we have tens of thousands of people with small claims and we act on behalf of all of them.
The Chair: I have some background in bankruptcy law but not nearly to the extent of the deputy chair. I have problems with the concept of a corporate inspector such that you can have a representative of an entity such as PACICC. Is that how it works? Do they actually name the organization?
Mr. Kovacs: In half the cases when the court chooses to identify inspectors, we have been appointed as an organization. We have been appointed by the court as an inspector to support the process. In the cases where we have not been appointed inspector, it has been difficult to know what is going on and which consumers are being look after, and to be available for the liquidator for discussion. In the cases where we are appointed inspector, the process has been smoother, certainly in our attempt to inform and support the process.
Also part of the recommendations that have come from the Insolvency Institute and from Telfer and Welling has been to define what the inspector should and should not do and how to be helpful. The liquidator is supposed to liquidate, not the inspector, but what role should the inspector play?
The other recommendation we had beyond such illustrations, which are not contentious, is for some minor adjustment to the existing legislation to make it more effective for consumers. A broader concern that is not a minor change would take time to develop. Most insurance companies, banks and other financial institutions are now part of large, complicated groups. We are concerned that the funds that were identified as being in place for insurance have suddenly moved elsewhere, perhaps to another country or another part of the organization.
In a complicated group, the Winding-up and Restructuring Act, in our opinion, does not fully anticipate and is not fully prepared for these kinds of complex failures that are increasingly likely to happen. We are seeing them in other countries around the world. Most of the failures in Canada, for which the system has worked, have been individual insurance companies in a particular field and in a particular geographic area. It has worked all right and we have been able to work around the current legislation. To anticipate that there will be a complex failure and to try to plan in advance so we are not surprised in the middle of the event would be good public policy and the initiative should be taken.
Michael Hale, Executive Vice President, Assuris: Good afternoon, senators. It is a pleasure to have the opportunity to speak to you about this issue. Assuris is a not-for-profit corporation.
We protect Canadian policyholders against loss of benefits if a member company fails. Assuris was founded in 1990, and since then has earned a reputation for supporting policyholders and containing losses.
I would like to focus on three things. First, to discuss why there should be a review of WURA, the Winding-up and Restructuring Act; second, to identify some issues specific to life insurance companies and their policyholders; and, third, to propose some broad principles that could lead to clearer, more robust legislation for dealing with financial institution insolvencies. It is my intention to inspire you to move this review forward long before an event occurs that exposes the cracks in the system to the detriment to Canadian policyholders.
First, why is the review needed? That is an understandable question if we are looking at life insurance companies. After all, few Canadian-regulated life insurance companies fail. Since 1990, we can count those failures on the fingers of one hand. We would have two fingers left over.
When failures do happen, they touch large numbers of Canadians. We estimate that almost three million Canadians were covered by the policies of the three failed life insurance companies: Les Coopérants, Sovereign Life and Confederation Life. If a failure were to occur today, it is reasonable to speculate that the effects would be farther reaching because financial markets have become more complex. Specifically, since the 1990s, we have seen three significant trends. Financial institutions are increasingly multinational, usually with a conglomerate structure. As well, insolvency proceedings are being fought more aggressively in the courts, most notably by opportunistic investors who buy the debt of troubled companies. When an international corporation fails, nations are often competing to be the location of the insolvency proceedings.
For the last 10 years, strong supervision and buoyant economic conditions have reduced the risk of insolvencies, but we are seeing a marked changed in the economic outlook in the U.S., Canada and around the world. We are also seeing the growth of complicated and potentially dangerous market instruments such as derivatives, structured financial products and collateralized debt obligations or CDOs. OSFI's 2006 departmental performance report states that increased complexity in the financial industry, coupled with the competitive nature of global markets, present risk to the financial markets.
In spite of much greater industry efforts to manage these risks, we have seen unexpected events such as the sub- prime mortgage disaster that originated in the U.S. and spread around the world. This disaster spread through complex collateralized debt obligations. This disaster contributed to the asset-backed commercial paper problem in Canada and had a severe impact on some great institutions like Citibank and Merrill Lynch. You do not have to be a technical expert to conclude that rule-based legislation that has been fundamentally unchanged for 100 years cannot contemplate the world that confronts us today, let alone deal with it appropriately.
The case for review and renewal is consistent and growing. The two reports mentioned by Mr. Kovacs have also identified a broad range of concerns that need to be addressed.
That is the big picture. There are issues specific to life insurance companies and their policyholders. I am here with Mr. Kovacs because many of the same issues that affect property and casualty insurance affect the life insurance industry. In addition, there are specific concerns particular to the life industry. The most important difference between property and casualty insurance and life insurance is that individual life insurance contracts are long-term, multi-year contracts. Let us think about what that means. Retirees want their retirement policies to continue paying an income as long as they are alive. For life and disability insurance, a person's insurability will tend to change over time; replacement life insurance benefits can be hard to get if one's policy is discontinued. For example, if a person has had a heart attack, he or she will find it difficult to get a new life insurance policy elsewhere.
All this means that to properly deliver relevant coverage and protection to Canadian policyholders, Assuris needs to help transfer a failed company's existing policies to solvent companies. Yes, we did that successfully in the three insolvencies in the early 1990s, but we attribute that success more to the wisdom of creative judges and insolvency practitioners than to any clarity or appropriateness of the WURA.
This brings us to our third point: What broad principles would lead to clearer, more robust legislation? A new WURA should avoid detailed prescriptions that may become irrelevant in particular circumstances, but it should clearly state the relevant principles and judicial discretion that may apply. These changes would enable creative and flexible solutions when failures occur. To ensure fairness and reduce disruption and losses to policyholders, we need WURA to clearly outline the process and judicial authority for prompt transfer of policies to solvent companies. We need WURA to align with current public policies, most notably the employee protection recently adopted in the Bankruptcy and Insolvency Act. We need a clear role for compensation corporations such as PACICC and Assuris in advising the court about restructuring and liquidation. This will limit the cost of insolvency and maintain the public's confidence in the industry and the financial system.
In conclusion, now is the right time. A comprehensive review and renewal of WURA will not be easy but delays will only make it more difficult. We urge you to seek that review and renewal now. Renewal that provides clear principles to enable rather than stifle creative solutions; renewal that incorporates the best practices from current bankruptcy legislation and addresses the unique requirements of financial institutions; renewal that recognizes the needs of corporations in the Canadian financial system; and, most importantly, a renewal that enhances protection for Canadian policyholders.
The Chair: Thank you very much, sir. Before I go to the questioning, I have a couple of questions for clarification. First, Mr. Hale, you may be aware, but I am not sure all the members of the committee are aware, that this committee, in 1994-95 did a case study on the Confederation Life failure. I do not know whether you are aware of that and our report. The chair of the committee at that time was Senator Kirby. Our report went into quite a bit of detail not so much in terms of the enabling legislation, but more on the regulatory regime, the role of OSFI and the ability to go in and replace boards, and so on. At that time, there was a Canadian life insurance health organization.
Mr. Hale: That is us. We changed our name from the Canadian Life and Health Insurance Compensation Corporation to Assuris.
The Chair: It is the same corporation, then.
Mr. Hale: Yes, it is the same gang. We made some changes in our bylaws as a result of that study, including some ability to intervene early in order to provide financial support while the business was transferred to other companies.
The Chair: My recollection — and it goes back now — was that after all the dust cleared, the losses to policyholders were minimized quite successfully. Am I right? There were some American holders and there were jurisdictional issues, but by and large there was a pretty good recovery.
Mr. Hale: In Confederation Life, policyholders recovered 100 per cent.
The Chair: Mr. Kovacs, I understand that as far as you are concerned, the Winding-up and Restructuring Act, while very old and with some imperfections, as you have mentioned, there is nothing urgent that you want to bring to our attention. It is not something that needs to be done tomorrow, like some of the things in the BIA and CCAA. On the other hand, you have supplemented that information today. It is sounding a little more urgent today than it did when we met several weeks ago.
Mr. Kovacs: I certainly would continue to share that the system has been made to work, that it is flexible and that the knowledgeable judges and professionals involved in liquidation have found a way to work through the system, not necessarily because all the definitions are good. For example, the current legislation talks about a priority should be to pay clerks. Today we would say to pay employees, and judges and liquidators understand that terminology. It is not that the legislation is there that they work around it.
If there was a liquidation that went across the Canada-U.S. border, the U.S. is incredibly prescriptive, and if some of the Americans showed up and tried to work through the Canadian legislation, they would be challenging us every time we moved, I think. Fortunately, however, we are not in that circumstance and we have worked through the system.
I am not saying there is an urgent problem. We have been able to work well with this. However, I am concerned that down the road — and it may come sooner; you never know with insolvencies — we should anticipate this and work in a positive and productive way to try to anticipate this.
The Chair: This act was originally incorporated when?
Mr. Kovacs: In 1882.
The Chair: You are not advocating tearing it up and starting afresh?
Mr. Kovacs: If we were to make five or six recommendations, they would be technical. We are very comfortable that, by and large, it is working well.
Senator Meighen: Could any of these technical changes be accomplished by regulation?
Mr. Kovacs: I do not think so. I think they must be within the legislation.
Senator Ringuette: Mr. Kovacs, I am looking at your document that you have given us, Why Insurers Fail. On page 26, the study indicates that with regard to primary causes of property and casualty insolvency from 1995 to 2005, there is a 40 per cent rate of inadequate pricing, deficient loss reserves as the cause of these insolvencies.
The deficient loss reserves caught my attention. If my memory serves me correctly, we have a provision in the Financial Institutions Act that includes insurance, that they have sufficient reserves. Here I see that 40 per cent of insolvency is based on the fact they have deficient loss reserves. What is your conclusion and what is your recommendation with respect to this particular issue?
Mr. Kovacs: The research that we have done for the last 50 years for Canada, of every failure that has happened in Canada, came to the same conclusion as an analysis of the American and European failures. The most common reason, about 40 per cent of the time, when an insurance company involuntarily fails and must be wound up, is because they failed to anticipate the costs that they were going to experience and the claims that were going to come in.
You accept a customer; you try to actuarially anticipate the kind of claims that may come in — they may be in a car accident or there may be a fire — you make your best professional judgement to anticipate those costs and occasionally you are wrong. Occasionally you are wrong on such a scale that the company is overwhelmed when the actual costs come in and they are unable to pay the bills. Almost all companies do this well and they do not have a problem, but occasionally they do.
The most common reason a company will fail in the property and casualty insurance industry is because the ultimate claims that are realized were larger than anticipated and larger than the losses that were put aside, despite the best judgement of the professionals in the company and despite the supervision that comes from the regulatory system.
Senator Ringuette: I understand what you are saying. On page 28, you make a comparison between Canada, the U.S., EU and Asia. The number of Canadian companies that have been insolvent in Canada over the same period of time is 35, while in the U.S. it is 871. All things being equal, if you look at the population base of both countries, in absolute numbers Canada is only 35. However, if you multiply that by 100, for the proportion of population, you realize that number is very high. You have to face that, because they are your customers.
Mr. Kovacs: We have done an analysis across countries and tried to adjust for the size of the country, the number of insurance companies and the number of insurance customers. It would be more common for us to compare the United States and say America is 10 times larger than Canada.
By most measures, the likelihood of an insurance company having serious difficulty and becoming insolvent is higher in the United States. It is one of the most difficult environments in the world in which to operate. In Canada, the likelihood of a failure is much lower than in the United States. The likelihood is somewhat higher than in most parts of Europe, but still the rate in Canada, 35 companies over 50 years, is fairly low, in our opinion. That is why there is not a lot of public concern about insurance companies failing, because it does not happen that often. Most of those 35 companies that failed in Canada were not large, such as Confederation Life. These are relatively small property and casualty companies. It is part of a healthy industry. There are several hundred companies, and some fail from time to time.
Senator Tkachuk: You mentioned the failures are small. What are the total liabilities of the failures and how do they compare?
Mr. Kovacs: The likelihood of a company in the United States getting into trouble and failing is much higher than in Canada, and the average size of a company that fails in the United States is usually larger. The cupboard is often bare in the United States, by the time an intervention takes place. By the time someone steps in and says this company is unable to meet its responsibilities and the company is closed in the United States, there is often nothing left.
In Canada — and certainly over the last period more aggressively because of the committee's research on Confederation Life, et cetera — when there is an intervention in Canada, there are usually some resources left in the company. It is a seriously troubled company, but there are monies available to pay many of those bills in Canada. The assets and risks are definitely lower in Canada.
Senator Ringuette: In light of the demographics of Canada, what do you consider the risk factors regarding life insurance?
Mr. Hale: We have a number of the same risks that are general economic risks for the property and casualty industry. What we are seeing is a new range of retirement products with complicated guarantees that probably meet consumers' needs very well but require careful risk management.
The biggest risk we see on the horizon is our product complexity, and people fouling up the risk management because they do not pay enough attention or do not realize that they have bought those ABCPs that were rated well but now are not moving — those kinds of things. Obviously, there are extreme things such as bird flu pandemics. However, I think the biggest threat overall is product complexity and complexity of financial instruments.
Senator Ringuette: Would the new products and complexity of products include the new reverse mortgage?
Mr. Hale: That one specifically is probably not as complicated as some of the others. It is a package. There is more complexity and more risk in general.
Senator Jaffer: Mr. Kovacs, you were saying the court should always appoint an inspector to look after the interests of individual claimants. Since this act has been put into place, a lot has change. One of the things is class actions, where individual claimants can come together, have someone speak for them and receive legal advice as well. Have you thought about how you would work with class actions?
Mr. Kovacs: I have not from a guaranteed fund perspective. I know that the insurance industry has thought about class actions because they have been affecting the insurance industry. It has not yet been of a magnitude that it has led to insolvency problems, which is probably why we have not thought of it from that perspective.
We felt like we were the voice for the consumers in many of the liquidations. In most of the recent liquidations, the court early on thought we should be appointed an inspector. The court has recognized the role we have played.
In part, we believe that the absence of the adverse reaction in the media to some of the failures that used to be written about 20 or 30 years ago is because we are playing a far more active role on behalf of consumers, including often being involved as an inspector in the process.
Although I have not thought about class actions, I have thought about the role we have been playing and the potential we have demonstrated to work on behalf of policyholders.
Senator Jaffer: You alluded to the U.S. having bigger problems than we do. Can you tell us what the differences are so we can be aware of what could happen in the future?
Mr. Kovacs: There is no question that a comparison of the Canadian insurance marketplace and the U.S. insurance marketplace looks quite different. In the American market, failures are commonplace. They are sometimes large, spectacular and troublesome. There is a supervisory system, where the government is watching the performance of the insurance companies from a solvency point of view. In Canada, it is operating well; and in the United States, it is often not operating well.
When the government intervenes in the insurance market in the U.S., it is often to affect prices. It is common in the United States for the government to impose reduced prices on insurance companies, not because it makes any logical sense from the public point of view, but because it can be popular for politicians. This intervention, where you have artificially reduced pricing where costs may continue to march forward, can add to the insolvency problems of the American insurance industry.
The absence of price regulation in Canada has allowed a much stronger insolvency regime and a more successful one here in Canada. One market where that is a spectacular problem right now is in Florida. Anyone with property in Florida will know how chaotic that has proven to be in the last little while.
Senator Eyton: Thank you for appearing today. It strikes me that you are very agreeable and good witnesses to have. You are quite positive and very professional. On top of that, you are not asking a great deal, although I understand that there is more urgency than we anticipated.
With respect to your comments, there have been efforts to merge the two main acts, the Bankruptcy and Insolvency Act and the Winding-up and Restructuring Act. That was some years ago and it has been discussed for some time.
I take it from the substance of comments that you are happy to live with the Winding-up and Restructuring Act with some improvement. You are not here today to ask for some merger of the provisions of the two acts, so they are somehow combined into one and there is one regime and one set of rules. Is that correct?
Mr. Hale: The main thrust of our message is that financial institutions are different and special and need their own legislation. The insurance industry, within that grouping, has its own peculiarities. We are happy to have a separate act. We just think it should be updated. Again, it is one of those important but not urgent things, and there is a real opportunity to move that forward.
Mr. Kovacs: I want to reinforce that. I believe financial institutions are very complicated. They have millions of Canadians as their customers; and if they fail, they impact the public in a very complicated way. Recent bank failures in England have shown the kind of difficulties that can come if it is not managed well.
It is good that the Winding-up and Restructuring Act is separate from the Bankruptcy and Insolvency Act. As the same time, there have been some improvements made to the Bankruptcy and Insolvency Act that are yet to be reflected in the Winding-up and Restructuring Act. I think it would be helpful to ensure there is a proper link between the two; but financial institutions are different and having separate legislation, I think, is better.
Senator Eyton: We have apparently had a pretty good record in Canada, so perhaps there are not a lot of examples, but are there instances where there is some conflict between bankruptcy legislation and the winding-up legislation?
Mr. Kovacs: The short answer is yes. To try not to go on too long in areas that I am not necessarily an expert on, we have tried to ask experts in the liquidation process, has there been much shopping around? Are there some institutions where they can choose which legislation they would like to use?
It is our understanding it is relatively clear that is hard to do and does not happen often. The experts will identify one or two examples over a fairly long period of time where an institution may have started under one act and tried doing it under another act or whatever.
It is relatively clear that the Winding-up and Restructuring Act is for banks, insurance companies and financial institutions and the Bankruptcy and Insolvency Act is for other organizations. We might recommend greater clarity, but I think there is a fair amount of clarity there. However, there are differences between the legislation, and a chance over time to catch up and make that clear would be helpful to bring more consistency.
Senator Eyton: Hearing that response, you raised the question of financial conglomerates. I am not sure how you define a ``financial conglomerate.''
I am familiar with a group that owned and controlled an insurance company and a property insurance company separately, as well as a trust company. There was a common ownership and perhaps, to some degree, common control; but that would not qualify in your terms as a financial conglomerate, is that right? I ask the question in the context of a mixed jurisdiction and what legislation should apply.
Mr. Kovacs: The challenge that I would table is that most of the failures we have dealt with over our 20 years — and certainly in our industry over the last 50 years — involved companies that were not part of a group of any sort. That made them work, and we could work through the Winding-up and Restructuring Act to deal with the problem. However, most companies now are within some structure, either within Canada or across borders. We do not have a lot of experience on how this will get worked out. We also do not have specific recommendations yet. I think that requires a broader dialogue. We have some specific technical recommendations that would make it work better for the narrow companies that have failed in the past.
For these more complicated structures, we think it would be very challenging to identify how to work through winding up a larger structure, whether it is a group within Canada or a group across borders that may not be in different industries. In a tabletop exercise, where we sat with our colleagues in life insurance, banking, et cetera and identified a particular company, it came under all three acts. In each of the structures, there were slightly different rules. We quickly found it a convoluted exercise just to talk about how guaranteed funds would respond if a larger structure got into trouble.
Senator Eyton: You must have had some particular structure in mind when you suggested we need to do something about financial conglomerates. What is a simple definition of a financial conglomerate?
Mr. Kovacs: I would include under ``financial conglomerate'' what you were describing as the structure you are familiar with here in Canada. It would be part of something that would not be straightforward to deal with from a guaranteed fund or a consumer response perspective, and as part of a financial conglomerate, any organization that would have a structure that got into different solvency regimes, like across an international border.
Senator Eyton: There is work to be done.
Mr. Kovacs: There is definitely work required to think that process through.
Senator Moore: I wanted to clarify the roles of your respective organizations. The Property and Casualty Insurance Compensation Corporation is made up of more than 200 member insurers, and they are property and casualty insurance companies across Canada. You say that in the past 20 years, there have been a dozen member failures. I remember Confederation Life and Sovereign Life. I do not remember any others. You paid out $150 million to settle the claims of homeowners, drivers and businesses affected by those insolvencies. The moneys came from the member insurers.
Where do the member insurers get the money to pay the claims? Is the payment passed on as increased premiums to holders of policies issued by those insurers? That $150 million is a lot of money. How does that work? Have you built up a fund for such contingencies within your corporation? How does that unfold?
Mr. Kovacs: It is a Canadian licensing requirement that any company that wants to sell auto, home or business insurance must belong to a guaranteed fund to get that license. You must belong to our organization. You must commit that if one of the companies fail — we have 208 companies right now — the cost associated with that failure will be shared amongst the remaining members. We must cover all of the costs.
Senator Moore: Is that on a pro rata basis? What is it based on?
Mr. Kovacs: It is based on the premiums that come into the company. If one company sold 10 per cent of the insurance, it gets 10 per cent of the cost. We slightly complicated it by doing it by province, so if there is a failure in Quebec, we would split the cost across the companies in Quebec. If the company operated only in Newfoundland, we would split the costs across companies that operate in Newfoundland. The costs would be an extra cost shared by the surviving companies and they would do what they had to do to cover the costs associated with this failure. We agree, as part of our process, that we would pay all outstanding claims that result from the insolvency.
Senator Moore: Is there an annual fee similar? Is there a pro rata fee to be a member of the corporation?
Mr. Kovacs: We charge for the four staff that we have, so there is about $1 million a year to run the organization and have four staff. We have built up a fund; we have $40 million in the bank and should the next failure come, we can quickly respond.
Senator Moore: Assuris looks after the policyholders. How do you do that? For example, when a company like Confederation Life gets into difficulty, do you step in and become the insurance company until its affairs are sorted out? What is your role and how are you funded?
Mr. Hale: We have a similar funding structure to PACICC. We have paid $200 million to keep policyholders whole in the three insolvencies or to provide the level of benefits we promised. We have around 110 member companies. We have a pre-fund of $100 million to provide immediate liquidity, and we have an assessment capacity that we value at in excess of $4 billion over time. We have the same right to assess members in perpetuity, if necessary, to pay for the cost of an insolvency.
Senator Moore: Are they required by statute, Mr. Hale, to become members of Assuris?
Mr. Hale: As a condition of licensing to sell life insurance in Canada, you have to become a member of Assuris. It is a very similar structure.
We operate differently in the sense that a liquidator of a life company will continue the policies in the insolvency, and we encourage that and we tell policyholders they will be looked after. Then we facilitate and assist the liquidator in the transfer of those policies to solvent companies — someone buys them. To make good on the promises that Assuris makes to policyholders, we have to provide funds to do that and we advance that funding to the liquidator.
Senator Moore: Did you just say to make good on the promises that you undertake? Can you explain?
Mr. Hale: Well, for example on life insurance, we promise that policyholders will receive or continue at least 85 per cent of their policy. If those policies are sold when the liquidator's recovery is 70 per cent, we advance the funds to look after that and then, as those recoveries mount in the insolvency, we recover.
However, the key is, in order to deliver appropriate protection to policyholders, we need to transfer the policies. In fact, for restructuring purposes — this is one area where WURA could assist — to have a court supervised restructuring earlier, it would be useful to have those provisions in WURA to facilitate the quick transfer of policies.
Senator Goldstein: Thank you, gentlemen, for coming and being so enlightening. Many Canadians are watching these presentations; we are putting in for an Emmy Award. It is important that our viewers be assured that for the past 60 years whenever there has been an insolvency of a Canadian insurance company, the other Canadian insurance companies and the insurance fund have stepped up to the plate to make sure that policyholders continue to have coverage on the same terms and conditions they had in the past. Our viewers need to be assured that there were returns of premiums for those who did not wish to have coverage and that casualty claims or the insured risk is properly compensated with very rare exceptions. Canadians can have a great deal of comfort with the insurance industry as a whole, and the responsibility, which it clearly evidences in the context of making sure that the system preserves its integrity and that Canadian policyholders are protected.
That having been said, in the past six months we have witnessed insolvencies that we never thought could possibly be insolvent. I had the advantage of meeting with Mr. Kovacs this morning, and it was a very enlightening meeting for me. We had occasion to discuss something I want to address quickly.
We will not have the possibility of amending the Winding-up and Restructuring Act for some period of time. That is a reality because that has been the history.
We are in a position to make recommendations because of these hearings in the hope that government will pay attention. Therefore, I urge you to consider making a further presentation to us in writing on other amendments. While doing so please bear in mind the complexity of the operations that apply not only to the insurance business but also to the financial institutions as a whole, which offer similar services.
If there were to be an insolvency of a group, we simply do not have the mechanisms under the existing legislation to respond with any degree of certainty. I distinguish between certainty and intelligence because I have a great deal of confidence in the court's intelligence. However, there must be some structure within which the courts are to operate. I urge you to put something before us in writing so that the committee may consider it and possibly ask the Department of Finance to deal with it.
As a supplementary, many of these companies are cross-border, as we saw with the former Confederation Life insolvency. The Winding-up and Restructuring Act does not have the provisions modeled after the model act that we have in the CCAA and the BIA with respect to cross-border bankruptcies. If there were an insolvency of an operation that straddles the border, whether the United States or elsewhere, we would have doubly difficult circumstances. That would be so in particular in the United States because they have a very highly regulated and structured system, where we do not to such an extent.
I would urge you to consider recommending that, if nothing else, we adopt for the Winding-up and Restructuring Act something that would deal with cross-border bankruptcies so we can avoid that aspect of the problem.
Mr. Kovacs: If I may, I thank Senator Goldstein for raising the matter at committee today on the role that the Winding-up and Restructuring Act might play in the broader view of insolvency in Canada. I am delighted that we had this opportunity to talk about this important legislation. I would be delighted to take up the challenge of trying to offer some specific and concrete recommendations. I am being repetitive but our recommendations would be technical in nature for minor regulations or changes in the existing legislation to improve a process that we have made work well.
On the broader challenge, I am not certain how quickly we might come up with sound advice on how to deal with more complicated financial institutions, but we would be delighted to share some recommendations for some technical changes that are widely welcome within the small community that cares about these issues. They are not terribly contentious and I would be delighted to table those recommendations.
Mr. Hale: We at Assuris would be prepared to contribute to that process; we welcome the opportunity.
The Chair: For our next witnesses, we are privileged to have four representatives from the Department of Finance Canada and Industry Canada. I think all of you were in the room when Mr. Kovacs and Mr. Hale testified. I believe you have also been following our deliberations in the last weeks. Indeed, it has been a saga since Bill C-55 was passed, but was not enacted or proclaimed, because we did not have a chance to study it thoroughly.
It has been more an issue for industry and labour departments, but we have been trying to wrestle with the whole ensemble of insolvency framework legislation. It was pointed out to us by the previous two witnesses that there was a bit of an oversight. If we are going to do the Bankruptcy and Insolvency Act, why do we not do the Winding-up and Restructuring Act, which is more germane to the financial institutions that you folks are more interested in? Also, there is the Farm Debt Mediation Act, which we will have witnesses on as well tomorrow morning.
Roger Charland, Senior Director, Corporate and Insolvency Law Policy and Internal Trade, Industry Canada: Thank you for this opportunity to address you today about the Winding-up and Restructuring Act, also known as WURA. I tend to focus my comments on Part 1 of WURA, as this is the portion of the legislation for which the Minister of Industry is responsible.
The WURA forms part of Canada's insolvency law regime, along with the Bankruptcy and Insolvency Act, the BIA, and the Companies Creditor Arrangement Act, the CCAA. Responsibility for the act is shared by the Minister of Industry and the Minister of Finance. The WURA applies to all companies incorporated under the Canada Corporations Act, generally referred to as not-for-profit corporations, banks, insurance companies and trust companies, as well as to all provincially incorporated companies.
The WURA does not apply to companies created under the Canada Business Corporations Act or the Canada Cooperatives Act. These acts have their own rules for winding up.
The WURA differs fundamentally from the BIA and the CCAA in three ways. First, while the BIA and the CCAA apply to insolvent corporations only, the WURA deals with winding up both solvent and insolvent corporations.
The WURA applies to banks, trust companies and insurance companies, which I will refer to collectively as financial institutions. Neither the BIA nor the CCAA applies to financial institutions. Third, the WURA is largely a court-driven process.
I will turn to Part 1, which sets out a court-driven process by which a corporation can be wound up and its assets liquidated. The provisions are open to a corporation whether it is solvent or insolvent. The ability to wind up a solvent company is an important part of the market economy and, as such, most federal-provincial corporation statutes create regimes to allow solvent companies to wind up.
There are some corporations such as those incorporated by the Canada Corporations Act and special acts of Parliament, which can only be wound up using the WURA. In these cases, a liquidator is appointed to take control of the assets and sell them. Creditors are repaid in full and the excess is given to shareholders of the company.
The winding-up process of Part 1 also allows a corporation to restructure by proposing a compromise or an arrangement to its creditors. The restructure can only proceed with the approval of creditors. Again, the restructuring is court-driven and requires that a winding-up order be issued beforehand.
Although certain insolvent corporations other than financial institutions could choose to use the provisions for winding up and restructuring under the WURA instead of the BIA and the CCAA, to the best of our knowledge, they have not done so. In any event, at all times, creditors have the ability to force non-financial institutions — debtors — out of the WURA and into the BIA proceedings. Moreover, the debtor is prohibited from moving from the BIA to the WURA once BIA proceedings have begun.
The restructuring and liquidation provisions found in the WURA are different than those of the CCAA or the BIA. In theory, this could create the issue of statute shopping. This would happen if a debtor tries to choose a statute that is most favourable to his or her own interests. In our review, however, since creditors can be forced out of the WURA process and brought into the BIA, we have not found that to be the case. Insolvent corporations that want to restructure usually do so under the BIA or the CCAA, unless they are a financial institution. That said the WURA is necessary for a number of solvent corporations — for example, those corporations incorporated under the Canada Corporations Act or created by special act of Parliament, since they have no other means of winding up.
In conclusion, we welcome discussion on how the WURA can be improved. For example, there may no longer be a reason to allow insolvent corporations to wind up or restructure under the WURA when they could do so under the BIA or the CCAA. Those are the things we will need to look at, but we will need to make sure those who need the WURA to wind up can continue to do so.
We will continue to monitor how the act is being used and work with our colleagues from the Department of Finance to ensure that Canada continues to have fair, effective and efficient insolvency laws.
The Chair: Do you have many bills from 1882 to deal with in your job?
Mr. Charland: We do not have the list here, but we have identified 12 corporations that have been created by a special act of Parliament.
The Chair: Are you referring to the 19th century?
Mr. Charland: Yes, senator, since Confederation, but I think a couple were dated from the late-1800s and early 1900s.
The Chair: My question was just to highlight the fact that it is old. Rather than scissors and tape and patching, sometimes it is better to start afresh. However, we are in your hands; you are the experts.
Senator Goldstein: Mr. Chair, sometimes old is good.
Diane Lafleur, Director, Financial Sector Division, Financial Sector Policy Branch, Department of Finance Canada: I believe you have copies of my remarks, both in French and English.
[Translation]
I would like to thank the committee for the opportunity to discuss the Winding-up and Restructuring Act (or WURA), to hear the concerns of PACICC and Assuris, and to observe the interest of the Senate committee on this important issue.
[English]
The government believes that WURA is a flexible framework that allows parties to develop sensible solutions to the wind-up or restructuring of failed institutions. However, we also agree that that consideration could be given to the potential benefits of a principles-based modernization that would reflect new challenges in an ever more complex and integrated domestic and global financial system. A number of targeted amendments have been made to WURA in the past. I draw your attention to three important changes that have happened in the last 10 years. First, following major insolvencies the mid-1990s referred to by earlier witnesses, the government released a white paper in 1995 entitled Enhancing the Safety and Soundness of the Canadian Financial System, which led to major revisions in WURA. Specifically, in 1996, changes were made to the federal financial institution's legislation, allowing for the early closure of federal financial institutions. The goal was to facilitate early intervention in the affairs of troubled financial institutions. These changes allowed the Superintendant of Financial Institutions to take control of a federally regulated financial institution, and corresponding changes were made to WURA to reflect that. Amendments were also made in respect of insurance companies. These included provisions that give the liquidator powers to enter into agreement with compensation associations to facilitate the payment of claims and provisions giving the court and liquidator the flexibility to transfer or modify policy with the court's approval.
In 1999, the Bank Act was amended to allow foreign banks to establish branches in Canada. These amendments authorized the Superintendent of Financial Institutions to seize all of the assets of the foreign bank in Canada in the event of an insolvency or threat of an insolvency of a foreign bank branch. Consequently, Part II of the Winding-up and Restructuring Act was also amended to provide for the winding-up of foreign bank branches in Canada.
In the event of the insolvency of a foreign bank with a branch in Canada, the foreign bank branch would be liquidated under Canadian law. The assets of the foreign bank in Canada would be used to satisfy the claims of depositors and creditors of the foreign bank branch in Canada. If these assets were not sufficient to reimburse depositors and creditors of the bank branch, they could seek recourse from the liquidator of the foreign bank in the home jurisdiction.
[Translation]
More recently, in the Budget Implementation Act, 2007, the government introduced amendments to modernize the bankruptcy and insolvency legislation with respect to the treatment of eligible financial contracts and supporting collateral.
Amendments were made to enable the governor in council to prescribe through regulations the definition of ``eligible financial contract'' applicable to the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, the Winding-up and Restructuring Act, the Payment Clearing and Settlement Act, and the Canada Deposit Insurance Corporation Act.
In all five acts, amendments were made to provide certainty in legislation that the collateral supporting eligible financial contracts is exempt from stays of proceedings.
[English]
The discussion today is extremely timely in ongoing international efforts to address the resilience of the financial sector, including frameworks for dealing with failing institutions. Work is underway in the Financial Stability Forum, FSF, in deliberations between G7 finance ministers and at the Basel Committee on Banking Supervision. Specifically, G7 finance ministers have asked the FSF to examine causes of recent financial turmoil and to assess and make recommendations where appropriate. An FSF working group released an interim report in February, which was considered by G7 finance ministers during their meeting with central banker governors in Tokyo on February 9. One recommendation suggests that authorities need to strengthen, where appropriate, arrangements dealing with weak and failing banks, both nationally and cross-border. Tangible evidence of the interests given to this work can be seen in the G7 communiqué in which ministers stated that authorities should review as necessary their mandates, coordination mechanisms and instruments to ensure measured and flexible responses to market stress, including arrangements for dealing with weak or failing financial institutions, both domestically and cross-border.
The budget tabled on February 26 noted that the government is committed to enhancing its core instruments for improving financial system resilience and stability within a framework founded on open and competitive markets. Moreover, the government committed to further fostering a financial sector regulatory framework that promotes soundness and efficiency, is anchored in well-understood financial principles and is responsive and innovative.
A review of WURA may be situated within this broader global and domestic effort, would be consistent with, and informed by ongoing discussions among financial sector policy-makers and regulators.
The statutory framework underpinning insolvency is a part, but only a part, of this broader framework that seeks to protect depositors, policyholders and creditors and contributes to appropriate pricing and behaviour.
Canada's financial system is solid and banks and other financial institutions are sound and well-capitalized. As noted by the International Monetary Fund in a recently released Financial Sector Assessment Program update:
Canada's financial system is secure, sophisticated and well-managed. Financial stability is underpinned by sound macroeconomic policies and strong prudential regulation and supervision. Deposit insurance and arrangements for crisis management and failure resolution are well-designed.
[Translation]
The government is pleased to receive the input of stakeholders, and will read with interest the report of this committee. We look forward to maintaining a dialogue with stakeholders on these issues and to advising the Ministers of Industry and Finance on our way forward.
[English]
The Chair: Do you disagree with any comments made by the previous witnesses?
Ms. Lafleur: It is not a matter of agreement or disagreement. Our priorities have been to address areas that need immediate attention in terms of WURA and to maintain a dialogue on other issues that might need to be addressed in due course.
To do a full analysis, it is important that we have an understanding of the issues being put on the table. We need to understand that when amendments are made to a statute such as this, different stakeholders might be affected to the extent of creating winners and losers. It is important before we make policy recommendations to understand what we are doing and the pros and cons of our actions.
The Chair: Were you comfortable with the points they made? Did their points make sense? Do you have issues with their comments?
Ms. Lafleur: At a general level, we all agree that the statute has been around for a long time. Certainly, there is merit to reviewing statutes on a regular basis. I would need much more information and details on the proposal before I could provide an educated perspective. For example, I recall hearing that there should be principles of fairness, but I forget the other one. It sounds great but I do not know what it means in practice. I would like to have more details. Like you, I welcome the detailed submissions.
The Chair: I understand that the previous witnesses know where you folks are located. I hope they will send you a copy of their submissions as well.
When you said that Canada's economy is great and well-managed, from what document were you quoting?
Ms. Lafleur: I was quoting from a recent report from the International Monetary Fund containing a completed Financial Sector Assessment Program update of Canada. It is a detailed look at the functioning of Canada's financial sector. I was quoting directly from their report. We would be happy to table that report with the committee.
The Chair: Could you do that, please?
Ms. Lafleur: Yes.
The Chair: Are honourable senators agreed?
Hon. Senators: Agreed.
Senator Ringuette: I have a few short questions for clarification.
[Translation]
Mr. Charland, in your presentation, did I hear you say that the industry, in the case of bankruptcy, could have recourse to one of the other models?
Mr. Charland: In theory, this possibility exists, but we are not aware of any situations or cases that gave rise to that. To our knowledge, according to the information we have, corporations operate within the Bankruptcy Act, or the Companies' Creditors Arrangement Act when restructuring.
Senator Ringuette: Currently, in order to benefit from the services of both institutions, previous witnesses told us that a contribution must be made. If companies do not contribute, the court cannot turn around and say: ``you must declare bankruptcy or restructure your business in compliance with this legislation''. Given the previous testimony, I would like clarity. I ask myself how can this happen? This can only occur during the time of incorporation. Is a process required under which a contribution is made to the other partnering institution?
Mr. Charland: Insurance companies have no choice. They are subject to the WURA. Parts II and III apply. The theoretical example I spoke of in the presentation concerns for-profit companies that are incorporated under the Canada Corporations Act and businesses that are not financial institutions, insurance companies, or banks.
Senator Ringuette: Examples?
Mr. Charland: If an association decides to incorporate itself as a non-profit organization, with a mission to serve a specific cause — I cannot think of any non-profit organization off the top of my head — but there are many associations, clubs, etc. These are non-profit businesses. If these businesses were to become insolvent and sought to restructure, then in theory it is possible for these non-profit businesses to use the mechanism provided under the WURA.
Senator Ringuette: Canadian chartered banks are multifunctional and sell a multitude of products, such as housing or automobile insurance. To your knowledge, could one or several of these components be dissociated and incorporated?
Mr. Charland: I will defer to my colleagues from the Department of Finance to answer your question about banks. I will specify that banks, insurance companies and trusts, are institutions not that do not fall under the Bankruptcy Act. They must use the mechanism. My colleagues from the Department of Finance will elaborate.
Senator Ringuette: They are totally under the same protection.
Ms. Lafleur: The most obvious example is that of a bank that retains the services of a securities broker, who in turn is subject to provincial laws. If bankruptcy or restructuring occurs in this area, it is not subject to the WURA process.
[English]
Senator Meighen: We have heard evidence from previous witnesses and now your evidence. Things seem to be going along quite well. The previous witnesses would like to see some amendments, but there is no huge urgency to the matter, as I understood from their testimony.
[Translation]
Who must take the initiative? To your mind, is it the department or the industry?
[English]
Ms. Lafleur: As I mentioned in my remarks, the government has taken initiative in the last 10 years in a number of areas that were deemed in need of regular fixes. While WURA is not in that group of financial sector statutes that are subject to regular five-year sunsets, we have, in the course of those regular five-year reviews, made amendments to WURA as needed. We have included that in legislative packages in the past.
I do not want senators to think there has not been any initiative. There has been quite a bit and there is a track record for that. As a department, we remain forever open for stakeholders to come in and inform us of their concerns or their priorities if they think that changes are needed. Ultimately, we then take those requests and try to consult and be as transparent as possible, understand the trade-offs, et cetera, and we make policy recommendations. Out of that, governments set priorities.
All I can say to you today is that we will of course take back to our ministers the key points of the discussion today and whatever recommendations we get in the future in terms of specific amendments. We will do our due diligence to ensure we make informed recommendations to ministers.
[Translation]
Senator Goldstein: That was a very interesting presentation. This is not the first time we have hard from Ms. Lafleur. Your testimony is always very interesting and most informative.
[English]
I have some concerns about the Winding-up and Restructuring Act based on experience that I had in another life. The dominant concern is the fact that the process under that act is virtually entirely court driven. I have a great deal of confidence in the courts, but it is not always the best structure to solve problems. Many of the problems that arise in bank liquidations and insurance liquidations are better resolved in the boardroom than in the courtroom. There is no apparent incentive in the act to encourage that kind of exploration of problems and solution of problems.
I wonder whether your review, which is ongoing, might want to consider looking at a procedure that is not dissimilar to that in the United States, which, relatively speaking, reduces the role of courts and increases the role of creditors as being determinants of the process and the way in which the process runs.
Second, I am concerned about transporter insolvencies of insurers and, to a lesser extent, banks. We now have the UNCITRAL model act, with some modifications, as part of both the Bankruptcy and Insolvency Act and the CCAA. You have recently adopted the same kind of definition for eligible financial contracts and the same kind of conclusions for eligible financial contracts in the Winding-up and Restructuring Act as we have in the CCAA and the Bankruptcy and Insolvency Act.
Would there be anything to stop you from at this time adopting and adding to the Winding-Up and Restructuring Act provisions based on the UNCITRAL model act dealing with cross-border insolvencies and cross-border bankruptcies? You have already started doing that in a way when, five or six years ago, you amended to say that in respect of foreign bankruptcies, Canadian creditors get paid first from Canadian assets. You have gone some way in trying to deal with the implications of cross-border insolvencies, but you have not gone very far. I am not asking for an answer, rather for you to consider doing that.
I should tell you that there is some past experience in this regard. A number of years ago, some us active in bankruptcy realized that the bankruptcy of a brokerage firm was different from the bankruptcy of any other kind of firm. As a result, we added a particular chapter to the Bankruptcy and Insolvency Act dealing solely with bankruptcies of brokerage firms. We followed several small firms and one big firm through the process and it worked, not super well, but well enough that we were satisfied it worked.
I am wondering whether you would consider doing the same kind of thing. Therefore, when we go to sleep five months hence after our report is submitted and has been acted upon, we will know that cross-border insolvencies of insurers in banks are reasonably covered and Canadians are reasonably protected. I raise that issue for you and I hope our previous witnesses will raise it as well. I know that the Insolvency Institute of Canada will help you in that respect on a pro bono basis.
Ms. Lafleur: I welcome your advice on this matter. I am not very familiar with the U.S. process. To the extent you are able to provide us with more details on that process; we would certainly be interested in examining it. Thank you.
Senator Goldstein: It is supposed to be the other way around.
The Chair: In this case, it will be added value.
Senator Goldstein: That is nice of you to mention, Mr. Chair.
Senator Moore: Ms. Lafleur, on page 8 of your remarks, you say, ``Canada's financial system is solid and banks and other financial institutions are sound and well-capitalized.'' You then quote the IMF report as saying that deposit insurance and the arrangements for crisis management and failure resolution are well designed.
If view of the recent meltdown of our chartered banks in regard to their investments in asset-backed commercial papers, has your department been monitoring that situation and how do you deal with it? Was the IMF aware of that situation?
Ms. Lafleur: Of course, the Department of Finance and all of the other financial sector regulators have been paying close attention to recent events. I note that the IMF delegation was on-site in August and September of last year when the ABCPs, asset-backed commercial papers, market froze. Therefore, they were aware of what was happening. They did follow-up visits with us and spoke directly to the key players in the institutions. They had firsthand knowledge.
What you are seeing in that quote and what we will provide in the whole report fully reflects current circumstances. The report is up-to-date in that respect.
In terms of Canadian banks specifically, they continue to be well capitalized and they are well regulated by the Superintendent of Financial Institutions. If you want to know more about the specifics of that, it would be more appropriate to speak to the superintendent directly about the state and health of Canadian financial institutions.
Senator Moore: I am confused. You say we should ask someone else. Do you monitor this or not?
Ms. Lafleur: Clearly, we monitor —
Senator Moore: What do you monitor?
Ms. Lafleur: We monitor financial results, performance, et cetera.
Senator Moore: Do you monitor investments?
Ms. Lafleur: The Department of Finance does not monitor the day-to-day business of individual financial institutions. OSFI is the regulator and has a regulatory system where they go into understanding the details of the business and the institution.
Senator Moore: I could not figure out your role vis-à-vis OSFI.
Ms. Lafleur: We set the regulatory framework and OSFI administers that framework. OSFI is the regulator and deals with the day-to-day supervision of the institutions.
The Chair: Thank you for appearing. We look forward to the additional input and Senator Goldstein will be sending you his comments in regard to the points discussed. As I said at the outset, it is always a pleasure to have you here to help us understand the great complexities of the Department of Finance Canada.
The committee continued in camera.