Proceedings of the Standing Senate Committee on
National Finance
Issue 13 - Evidence - June 29, 2010 - Morning Meeting
OTTAWA, Tuesday, June 29, 2010
The Standing Senate Committee on National Finance, to which was referred Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures, met this day at 9:05 a.m. to give consideration to the bill (topic: Parts 16 and 17).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call this meeting of the Standing Senate Committee on National Finance to order. Honourable senators, this is our 14th meeting of the committee in relation to Bill C-9, which is the budget implementation act of 2010.
Over the 13 previous meetings, the committee heard from various department officials who explained the provisions of each of the 24 parts of this bill. We have also been hearing from outside stakeholders who are interested in or impacted by this proposed legislation.
This morning we will hear from witnesses who can help us with Parts 16 and 17 of the bill, which deal with the Canada Deposit Insurance Corporation Act and the federal credit unions legislation. We will have a second panel on these issues this afternoon.
I would like to welcome our two witnesses this morning. The first is Mr. David Phillips, President and Chief Executive Officer of Credit Union Central of Canada. He has undertaken to explain to us the structure of credit unions and how Credit Union Central of Canada fits into the organization of credit unions across Canada. We also welcome Mr. Joseph Dierker, an associate with McDougall Gauley, a law firm in Saskatchewan.
Mr. Dierker and Mr. Phillips, welcome.
David Phillips, President and Chief Executive Officer, Credit Union Central of Canada: Mr. Chair, I am pleased to start. I have a few prepared remarks I would like to read. You also have invited me to explain a little bit about my organization. With your indulgence, at the end of my remarks, I will say a few words about the role of Credit Union Central of Canada. We can elaborate on it in the questions that follow.
Mr. Chair, honourable senators, thank you for the opportunity to speak to you today on Part 17 of Bill C-9, the jobs and economic growth act, which proposes to amend the Bank Act to allow for the establishment of federal credit unions.
In 2009, our organization called upon the federal government to establish a federal charter option for credit unions. We believe that a useful, attractive, accessible and distinctive federal charter would achieve several objectives.
[Translation]
First and foremost, a federal charter would enable those credit unions that wish to do so to reach beyond provincial boundaries and pursue business strategies that are not constrained by provincial regulation. Expanding across provincial borders has become more pressing as the growth and consolidation of the credit union system is approaching the point where the lack of a federal charter option may become a competitive disadvantage for some credit unions and for the credit union sector as a whole.
[English]
Credit Union Central of Canada has expressed a preference for establishing federal credit unions under the federal government's existing cooperative financial institutions legislation. However, Canadian Central did not preclude alternative legislative approaches if such legislation could provide a federal charter option for credit unions that meet these conditions.
The federal government has chosen to provide for the establishment of federal credit unions through the Bank Act. Credit Union Central of Canada supports the enactment of Part 17 of Bill C-9 as a good first step toward the establishment of a useful, attractive, accessible and distinctive federal charter option for credit unions.
While it has many positive features, the placement of the federal credit union charter in the Bank Act does raise some issues of compatibility between the framework proposed for credit unions and a number of provisions in the Bank Act that are primarily designed for commercial banks. The federal credit union legislation, while welcome, is lengthy and complex.
For this reason, Canadian Central is still analyzing the proposed amendments. We expect that some issues will result from this analysis that Canadian Central will want to discuss with the Department of Finance at some point in time. These issues include matters such as granting to members of a federal credit union access to the membership list of that credit union and the position of the federal credit union in the payments clearing and settlement system.
Canadian Central, nevertheless, wishes to express its support for the enactment of the legislation in Bill C-9, which will provide existing credit unions and those desiring to establish new credit unions with the option to operate under a federal charter. We believe that the proposed legislative framework is a positive step forward in achieving this purpose.
I will comment briefly on Credit Union Central of Canada to give you an idea of where we fit within the credit union system. The credit union system of Canada is a three-tiered system. We are talking about credit unions outside of Quebec. The top tier is the credit unions themselves, which are the provincially incorporated financial institutions that interface with the members across the country.
There are currently 410 credit unions in Canada. They are serviced by seven provincial centrals in Canada, which are really wholesale financial services suppliers to the credit unions. Then Credit Union Central of Canada is really the central of the centrals. We are at the third tier. We interface with the federal government with the Bank of Canada, provide some services to the provincial centrals and really function as the national trade association for the credit union system in Canada.
It is a three-tiered structure, and we are the central of the centrals. The credit unions are indirectly members of the Credit Union Central of Canada through their provincial centrals.
The Chair: You said there are seven provincial centrals.
Mr. Phillips: There are seven, yes.
The Chair: There must be a combination somewhere. You have excluded Quebec; is that correct?
Mr. Phillips: Quebec is not a part of this. Consolidation is happening in the credit union system right now at the provincial central level. That mirrors the consolidation taking place at the level of the credit unions themselves. About two years ago, two of the largest centrals, British Columbia and Ontario, joined together to form Central 1 Credit Union. You may have seen that name; it is the combination of B.C. and Ontario.
In Atlantic Canada, the three provincial centrals and part of Newfoundland are moving towards a merger. That could take place by the end of this year. Discussions are under way in the Prairie provinces to bring those centrals together in the form of a regional central.
We are currently seven provincial centrals. We could soon be three regional centrals.
The Chair: Do you find this threatening to your position?
Mr. Phillips: Not at all. We see consolidation and growth as part of the natural evolution of the system. There are good reasons for this consolidation, and it makes it a stronger system as a whole in the long run.
The Chair: You do not see one large amalgamation, just these amalgamations moving towards one large one.
Mr. Phillips: I think there are many in the system who see that as the logical culmination of these developments.
The Chair: That would be you.
Mr. Phillips: Or all of us. At this stage, a regional consolidation is taking place.
The Chair: Do Quebec and Northern New Brunswick have any relationship?
Mr. Phillips: We call each other cousins. That is the Desjardins system, and we have good relations with that system. It is structured on a different basis. I gather you will be hearing from them later today.
The Chair: That is correct, but we will not be hearing from New Brunswick, which is an officially bilingual province. The credit unions form an association in the northern part of New Brunswick that is separate from the association of English-speaking credit unions.
Mr. Phillips: I am not familiar with the details, but my understanding is they have some relationship with Desjardins.
The Chair: Maybe Desjardins will help us, but they are not part of your system.
Mr. Phillips: No. The other federation in New Brunswick is part of our system, and it is one of the provincial centrals that is merging into the Atlantic central.
The Chair: I interrupted you to clarify something. Had you concluded your general remarks?
Mr. Phillips: Yes, I had.
Joseph Dierker, Associate, McDougall Gauley LLP: Mr. Chair and members of the committee, thank you. As the chair indicated, I am a lawyer in Saskatoon. I have practiced law for many years. One of my specialties has been to work in the area of cooperative and credit union legislation.
I have been involved in that for some time. Back in the 1960s and 1970s, I worked on the amendments to the Income Tax Act, providing for the taxation provisions for credit unions. I also worked for Mr. Phillips's organization and others as counsel to provide for the enactment of federal legislation relating to the rules and regulations of the central organizations that Mr. Phillips has spoken to, primarily in the order of capital, liquidity and powers, bringing them into the Canadian Payments Association and bringing them into that financial aspect.
I was engaged by the Department of Finance Canada and am still under contract with the department to assist with Part 17. My principal engagement was to assist in bringing into a banking structure the cooperative governance relations and the cooperative nature of credit unions to enable credit unions to operate as credit unions and still have the legal facilities of a bank.
In that capacity I have worked carefully with Veronica Wessels, who was here before your committee, as well as others in the Department of Finance to bring these amendments before the committee. I would be pleased to walk through that if there are any questions.
In concept we wanted to have enabling legislation that would allow qualifying credit unions to come into the system. When I say "qualifying," I mean ones that would meet the Bank Act tests on capital, liquidity and general governance. That legislation would provide for their continuing operation, as a bank with credit union governance. Then the legislation would provide sufficient safeguards to avoid abuse of those provisions.
You will note, for instance, that the majority of members of federal credit unions must be individuals and the business must be primarily for the members. We have been very careful in structuring getting-out provisions so that the legal steps to move out are very carefully drafted to avoid abuse, particularly the demutualization provisions.
I suppose one of the questions that might be of interest to the committee is who will use this legislation. Why is it before you? As Mr. Phillips indicated, there is significant amalgamation of credit unions within the part of the credit union system that he is associated with. In the past 10 years, there are probably half of the credit unions there were in the preceding period.
That amalgamation is accelerating. Along with the centrals' consolidation, there is significant consolidation of credit unions becoming larger and larger financial institutions. Those institutions are looking for a more significant financial base to operate and different ways of providing diversification to their asset portfolios.
On an individual basis there are credit unions that are becoming fairly significant financial institutions and looking for other ways to operate, particularly internationally. The credit union legislation that exists in Canada really does not accommodate international operations in a significant way.
The other use that may initiate use will be the provincial governments' concern about their respective abilities to manage those financial institutions, such as duplicating the resources of the Office of the Superintendent of Financial Institutions, OSFI, for larger financial institutions. That incentive might be one of the driving factors.
I will rest with those comments. If members of the committee have questions, I will be happy to respond to those.
The Chair: I have a number of senators interested in participating in discussions, Mr. Dierker. Thank you.
I wonder if you could give us more history on the incentive to bring about this particular bill. When we had the representatives of Finance Canada here, we were told there was discussion back in 2002-03, and then there was the MacKay report in 1998. Was it that far back? Have you been involved, and have you seen the impetus for this proposed legislation?
Mr. Dierker: The matter of increased federal capacities goes much further than that. It started basically with the centrals being able to provide services to their credit unions. The other initiative that forced that was the amendments to the Canadian Payments Act in late 1970s or early 1980s. For there to be acceptance of the financial institutions that were coming into the payments system, there was a desire to have a common regulator and expression of financial worth with the adoption of common financial reporting. That led to a registration provision for the provincial centrals; and Ontario, B.C. New Brunswick and Nova Scotia took advantage of those federal provisions.
That was the beginning of the movement of federal authorities to the credit union system. It has been the subject of quite a number of discussions over a period of years about how best to accomplish that. This is particularly so in some of the provinces where the legislation was not as accommodating to carry on the business that they felt they had to provide to serve their members. Is that helpful?
The Chair: Yes, it is. I will go to senators for questions and comments. Either of you may reply if the question has not been directed specifically. I will start with Senator Ringuette.
Senator Ringuette: Good morning, gentlemen. Mr. Phillips, you indicate on page 3 of your statement that the Credit Union Central of Canada is still analyzing the proposed amendment in Bill C-9. We are beginning to analyze these proposed amendments. Since this bill was tabled in early March, you have been analyzing these amendments for close to three months. I was surprised to see Part 17 with amendments to the Bank Act in this budget bill. There is not enough time to really analyze these amendments and understand their full impact.
Do you have proposed amendments to these amendments that would provide greater certainty for the Credit Union Central of Canada?
Mr. Phillips: We have analyzed the proposed legislation to the point where we know we support it. This part of the bill addresses an important gap in allowing federal credit unions to be established. When we anticipated proposed federal credit legislation, we did not anticipate its being 125 pages, so there are technicalities that need to be examined. We need to understand better the interplay between this and the Canadian Payments Act. However, that is understandable, and I expect that maybe at some point we might recommend some adjustments on the basis of how we see this working out. It is important for us that the charter be accessible and useful to credit unions. We have legislation in place with the Cooperative Credit Associations Act ostensibly for credit unions, but it has not been successful. This proposed legislation has a better chance of being successful. We might come forward with amendments at some time, but there is nothing urgent at this time that would cause us to say this part should not be passed.
Senator Ringuette: There is nothing so urgent that it should be in a budget bill and not in a stand-alone bill.
Mr. Phillips: It is in Part 17, yes. We understand the context. I do not want to speak to the bill in general, but this is a financial measure, so it was not illogical to us to see it in the budget. Mr. Dierker alluded to the pace of consolidation in the credit union system, which points to a need for federal credit union legislation.
When we talk about consolidation in the credit union system, it is important to understand that we are talking about consolidation in a system that is growing in assets and membership. The consolidation is creating more efficient and stronger units within the system. It is a condition of success within the credit union system that this consolidation is taking place. We have many multi-billion dollar credit unions across Canada. We have three that are over $10 billion in asset size. As these institutions continue to grow, because they are incorporated under a provincial charter, their growth strategies become limited unless they have the ability to move across provincial boundaries. We see that pace of consolidation continuing at 35 to 40 credit unions a year. If I were to appear before the committee a year from today, it would not be a surprise to hear me report that there were 370 credit unions in the system as that pace of consolidation continues. Because these credit unions are starting to bump against the provincial boundaries, strategically they need a federal option so that they can consider other growth strategies that will allow them to amalgamate and consolidate across provincial boundaries. That speaks to the need for this proposed legislation at this time.
Senator Ringuette: When departmental officials appeared before the committee a few weeks ago, I asked whether this proposed legislation deals with a unit or a central. They specifically said that it was per unit. I am looking at the grand scheme, and you are promoting amalgamation of credit unions. What does that do to the community-based organization, which is the ground rule of credit unions and cooperatives, where each member or depositor has a vote? What happens when you amalgamate 40 credit unions in a given territory? You spoke to amalgamation across provincial boundaries, and Mr. Dierker spoke to the potential to operate internationally. How would that impact the notion of credit unions and cooperatives being community-based?
Mr. Phillips: That issue exists now with the consolidation that is taking place. Today's credit unions have many thousands of members and need to be innovative in the ways they serve their communities and handle their governance practices. Certainly, there are many different approaches to that across the credit union system. For example, they might set up regional community councils, have delegate voting structures or use electronic voting techniques.
The credit union I know best is Alterna, which is based in Ottawa. When Alterna holds its AGM, there is a television hook-up between Toronto and Ottawa. Everyone is invited to attend and to participate fully in the meeting. Electronic methods are used to create that sense of community. It is possible to retain that sense of community, which is rooted in the DNA of the credit unions.
There is no suggestion or evidence that consolidation of credit unions has led to a diminution of that. They remain part of their communities and they deliver services in the way they always have done. When they have 40,000 or 100,000 members, they cannot hold their AGMs in the same way, so accommodations are made, such as electronic voting.
Part of the strength of the credit union system is the fact that there are 410 independent financial institutions that approach issues in quite different ways. There is no set standard for how they meet the needs of their members.
Senator Ringuette: Do you understand that under this proposed legislation there could be 410 applications for provincial government approval to become a federal credit entity?
Mr. Phillips: We do not see it happening that way. We think the number of credit unions that would be interested in going federal would be quite small, simply because that is not part of their strategy. It would only be the largest ones, and even those would be looking at this from a strategic standpoint for years down the road. The difficulty they currently face is that this strategic option is not available, so they cannot factor it into their planning.
I would think that in a year or two we will not see much difference in the credit union system due to this bill, if it becomes legislation, but 10 years from now it could well have an impact. It is important that this option be made available to credit unions to allow them to consider strategies that take them across borders.
This also becomes important with the regionalization of the centrals, because it would allow a credit union to match the footprint of its regional central. Traditionally, credit unions have been able to match the footprint of their provincial centrals because they were provincially incorporated, as was the provincial central. With regional centrals, some credit unions will want to go regional, and the only way they can do that is by having the capacity to move across borders, and the federal charter gives that capacity.
Senator Ringuette: You could have a federally chartered credit union in one province — in French we use the word "maraudage" — competing against more community-based local credit unions in a given geography, or even interprovincially.
Mr. Phillips: You would more likely see a consolidation or merger of a credit union in one community with one in another community in order to provide better and stronger services.
Mr. Dierker: Mr. Chair, the legislation as drafted provides maximum flexibility to the federal credit unions to design the manner in which the members will relate to each other and to the credit union for the purpose of meetings and elections. There is the ability to nominate directors, to have information on members and to experiment with different types of representation, such as electronic and mail voting.
Most people know a bit about Saskatchewan. It is three times the size of France with a few people scattered around. They have been reasonably successful in establishing representation structures over an exceedingly vast area. Some have done it electronically, as Mr. Phillips said.
The credit unions in British Columbia have done very well in maintaining member contact in the very broad area that they represent.
I think the credit unions will be able to manage that. It would be difficult for a credit union from B.C. that has members in Nova Scotia, for example, which the proposed federal legislation would permit, but that would be something they would have to develop.
Senator Ringuette: For the record, I am a proud member of the Caisses populaires acadiennes. I was almost born in one.
The Chair: She is declaring a possible conflict of interest. We have noted this.
Senator Ringuette: I strongly believe in the cooperative movement.
Mr. Dierker: I happen to know the Caisses populaires acadiennes very well.
The Chair: Mr. Dierker, would you comment on two points made by Mr. Phillips. He indicated that a provincially incorporated credit union would have to go federal in order to operate outside the province. He also said that this proposed legislation provides a strategic option that is not currently available to a provincially incorporated credit union. We heard evidence at the last session that a provincially incorporated credit union in fact created a bank to operate as a bank.
Mr. Dierker: I will deal with the questions separately. Under the credit union legislation it is very difficult for a credit union incorporated in Alberta, for example, to carry on business in Ontario. There are registration issues, and, more important, there is the constitutional issue of carrying on business in a banking fashion.
However, the more important issue is member safeguard, because the deposit protection provisions for credit unions are provincially based. Again using the example of Alberta, where the Government of Alberta effectively guarantees the deposits through their deposit protection plan, they are not very anxious to guarantee deposits for credit union members in Ontario.
For many years credit unions have been looking at ways they could use provincial legislation to extend their operations interprovincially, but they have never resolved the deposit-protection issue. That is one of the walls they have hit. I believe there are three banks owned by credit unions, and the credit unions do that to be able to operate.
Many credit unions also use the services of Concentra Financial, which is a federal association under the Cooperative Credit Associations Act, and use that as their agent to carry on business interprovincially. However, that requires the use of an agent, just as having a bank requires the use of an agent.
Those facilities would still exist under the proposed legislation, but they would be able to deal with it directly.
The Chair: What is the other federal legislation you mentioned?
Mr. Dierker: The Cooperative Credit Associations Act, which is the legislation under which Credit Union Central of Canada operates. It also regulates the provincial centrals that are registered under it.
The Chair: Thank you for those points of clarification.
Senator Runciman: I am not a member of a credit union, but I am a fan of them. An article in The Globe and Mail in March sums up my view of credit unions. It says they have developed a reputation for innovation and for supporting individuals and communities that banks have neglected. Mr. Phillips, you talked about the sense of community as well.
I represented what is essentially a rural riding in Ontario for 29 years, and I saw the big banks abandoning the small towns and villages in rural Ontario, and in a couple of situations credit unions fill that void. We recently heard of an example of that in Iron Bridge in Northern Ontario. In 2009, they learned they were losing their only financial institution, and a credit union has moved in to fill that void.
Given your commitment to rural Ontario and rural Canada, how do you foresee the impact of this proposed legislation? Will it strengthen the role that you have traditionally filled in that respect?
Mr. Phillips: Yes, it certainly has the potential to strengthen the role of credit unions in more remote regions. Those may be the credit unions that will not be as attracted to the federal option. They tend to be smaller and locally based. Perhaps you are near a provincial border in Northern Ontario and across the border in Manitoba there is another small credit union that you would like to merge with to become stronger. Currently, that option is not available. This makes that cross-border option feasible. It makes it available.
We talk about this legislation's being attractive mostly to the larger credit unions, but it also can be used by smaller credit unions. Indeed, this may be a good option for smaller credit unions located close to provincial boundaries to consider in terms of how they can combine and become stronger together.
Senator Runciman: What do you think Main Street banking facilities will look like 20 years from now? You have talked about electronic banking and the access to ABMs virtually everywhere. We are talking about tellerless banks at some point in the future. Is that the direction we are headed? Are we not going to be able to sit down and chat with someone face-to-face about our financial situation?
Mr. Phillips: I do not think that is the direction credit unions are headed. I should have mentioned in the discussion with Senator Ringuette about the consolidation that despite the consolidation of the system, the number of branches in the credit union system throughout this consolidation period has stayed roughly the same. It is approximately 1,700 branches across the country. To your point, 380 of those are located in communities where there are no other financial institutions. When you think about it, it makes sense, because you do not have someone from afar saying the branch does not make enough money so we are shutting it down. These are extensions of the community. Residents of the community have created this credit union. They will not shut themselves down, and they have a permanence in the community that is not matched by the banks in many cases.
Senator Runciman: In the same article in The Globe and Mail, Nancy Hughes Anthony, the president of the Canadian Bankers Association, said that the bankers association members are welcoming the new competition, but — there is always a but — they do not want credit unions to end up with advantages the banks do not have. They go on about a number of things, which Mr. Dierker talked about, such as regulatory standards, capital requirements and tax policy. One thing they raised that I have not heard anyone else reference is the right to sell insurance. We know the Minister of Finance not long ago reaffirmed the fact that the government will not allow the major banks to get into that line of business. What is happening with respect to this proposed legislation, and how does it impact that area?
Mr. Phillips: The bill is treating credit unions and subjecting them essentially to the Bank Act regime on regulation. As we are all aware, that has some significant restrictions on insurance distribution.
Some credit unions in Canada at the provincial level have greater powers with respect to the distribution of insurance. In many ways, this decision to go federal is a business decision. The credit unions will have to put on one side of the ledger the advantages and on the other side the disadvantages. For some credit unions going federal, a disadvantage may be that they have fewer insurance powers than under provincial regulation. They will want to trade that off against some of the advantages. From the standpoint of insurance distribution, this does not create an advantage for credit unions that move under this proposed legislation.
However, an important issue is that if a credit union that has greater insurance distribution powers now goes under a federal charter, there would have to be some attention to the transition; you cannot just flip a switch and all of a sudden you are out of the business. There would have to be some appropriate transitional arrangements. The regulatory system for federal credit unions under this bill is substantially the same as for banks.
Mr. Dierker: That is correct. Mr. Chair, may I go back to an earlier question by Senator Runciman?
One advantage of this bill is that credit unions that use this legislation will be able to provide enhanced services to basic industry such as agriculture and small business. Presently, they can provide financing services to small businesses in the provinces, but then they cannot follow the business of that member down, let us say, into Minnesota or some other jurisdiction, or even across into another province. That will be a significant advantage of this proposed legislation and should be of assistance to small business.
Senator Runciman: Thank you for that.
The Chair: Just for the record, the Canadian Bankers Association was invited to attend, and we could have had their point made publicly here, but they were not able to attend during this time period when we are having hearings. We will have to rely on their articles as read by Senator Runciman.
Senator Mitchell: I am interested in some technical things. One is the issue of deposit insurance. I know that Canada Deposit Insurance Corporation, CDIC, limits the amount of money it will insure, but at least in Alberta in the past, credit unions would insure 100 per cent of deposits. If these begin to migrate from a provincial jurisdiction to a federal regulation, will the deposit insurance migrate as well, or will it be reduced? It becomes even more of an affront to the banks, who say we cannot compete with that anyway. What happens? Do the banks go up to 100 per cent or do the credit union banks go down to $100,000 per account?
Mr. Phillips: Under the federal regime, you would come under the Canada Deposit Insurance Corporation Act limit. If you were moving from an Alberta incorporation to a federal incorporation, you would move from unlimited deposit insurance provided through the Alberta government to $100,000 per account. I mentioned earlier about the business decision that needs to be made. You have the ledger; you have the advantages down one side and the disadvantages down the other. This is one of the considerations that need to be taken into account: What is the impact of our movement under federal legislation on our deposit base? That would depend on the makeup of the deposit base.
This also differs with where you are in the country. Alberta has unlimited, as do others. Ontario is essentially $100,000 with unlimited on registered instruments.
Senator Mitchell: It is unlimited on registered instruments.
Mr. Phillips: That is quite recent. There at least the equation perhaps is different from what it would be in Alberta. Clearly, you are under CDIC and you would have to exist within the CDIC framework.
Mr. Dierker: Mr. Chair, my friend is substantially correct, as you would expect. Senator, you are correct that in Alberta and Saskatchewan there is a 100 per cent guarantee, and, as Mr. Phillips said, in other provinces it is much less. The bill and amendments to the Canada Deposit Insurance Corporation Act propose a transition period. For an Alberta credit union coming into the federal regime, there would be a retention of the Alberta insurance, the 100 per cent insurance, for 180 days on general deposits. If you have a fixed-term deposit, the insurance would stay at 100 per cent during the term of that fixed-term deposit. A transition provision is built into the structure.
Senator Mitchell: If someone like Senator Ringuette, who was born into the credit unions, decided that she wanted to keep 100 per cent provincial deposit insurance, would she have to leave this credit union that is moving to a federal jurisdiction or federal regulation and get into one that is not?
Mr. Dierker: If you wanted to retain 100 per cent insurance, that would be correct, yes.
Senator Mitchell: People whose RRSP retirement benefits are covered 100 per cent right now in Ontario would be confronted with the same problem; they would take greater risk in retirement benefits. The banks are happy about this because they do not want to compete with 100 per cent deposit insurance when they get a $100,000 limit.
The last time I checked, CDIC was not fully funded. It had a lot more liability than deposit insurance funds covering it. What is the state of the deposits that cover the liability at the provincial level for credit unions that might migrate? Will there be some restriction so that if it is not sufficient — that is, the feds do not get enough to cover the liability reasonably — this will not happen? Otherwise, the federal government could be adopting greater liability in having to cover credit unions that might fail. We know from experience that many financial institutions at that level have failed except for bailouts.
Mr. Dierker: You have asked several questions. The strongest deposit insurance entity in the credit union land, if I can call it that, is the Saskatchewan fund. Alberta is reasonably well funded, with a provincial government guarantee. Saskatchewan has a backup assurance with CDIC, both for assurance and for funding. Other deposit entities vary as to their absolute solvency from province to province, but they are substantially in excellent shape.
When the entities come into the federal regime and become insured by CDIC, it is as any new financial institution. CDIC will obtain premiums on those deposits from them just as they would from any other financial institution.
Senator Mitchell: Would they receive the past premiums that have accumulated over the years as they were managed under the provincial regulation? Would they get that?
Mr. Dierker: Any funds that are in a provincial deposit entity will stay with that provincial deposit entity.
Senator Mitchell: The federal government will take liability for existing deposits and start premiums right now?
Mr. Dierker: They will start premiums when the entity becomes a federal entity.
Senator Mitchell: If this company with $10 billion in assets went federal, the federal government would take $10 billion in deposit insurance liability without any premiums that have accumulated against that? All of a sudden, $10 billion would be taken and the province would not have any responsibility for that if that company failed tomorrow?
Mr. Dierker: There are two things. First, in order for a credit union to continue as a bank, it must meet all of OSFI's requirements. Second, in order for it to meet OSFI's requirements, from day one it must have all the capital and all the liquidity required by a well-financed bank. The issue of solvency and collapse of a federal credit union on coming into the system is not there.
Senator Mitchell: I am drawing a distinction. Yes, the entity must be solvent, but CDIC has money to cover federal banks now. If they fail, CDIC takes the premiums paid by the banks and creates an insurance fund. The provinces have done that, but you are saying that this provincial entity, the credit union, can move to the federal level with $10 billion of assets. It may look good — its capital may be great, and so on — but the money accumulated in premiums in the province of Alberta to cover it will not move with that to the CDIC as an insurance fund.
Mr. Dierker: CDIC will accept those deposits as the deposits of any other financial institution.
Senator Mitchell: From now on, but not from the past. It is a brand new liability?
Mr. Dierker: It is a brand new relationship. I repeat: That is the same process that happens in any other financial institution coming in there.
Senator Mitchell: But this is not a new bank. The credit union has been there for 40 or 50 years with all the liabilities and all the premiums that have accumulated, and the province will keep the premiums. That is great; the province is happy. However, now the federal government gets the liabilities. It is incomprehensible. How did you do that?
An Hon. Senator: You are advocating for Alberta to give that money —
Senator Mitchell: I am advocating for Saskatchewan and for Ontario.
The Chair: Order, please.
Senator Mitchell: I am actually advocating for the federal interest here. How do you guys do that?
The Chair: Do you have any comments, Mr. Dierker?
Mr. Dierker: The point has been made that CDIC accepts those deposits as deposits of a qualified financial institution that meets the requirements of both OSFI and CDIC and they continue to insure them on a going forward basis.
[Translation]
Senator Hervieux-Payette: I am from the province where the institution probably has the largest presence in Canada. Representatives from the institution will be meeting with us this afternoon, and we will be able to ask them questions.
You said that, at the national level, there was a legal entity and an economic entity, and that was also the case at the regional level in certain places, as well as at the local level. What is the role of the individual member at the various levels? What are the funding methods at the regional and national levels?
[English]
Mr. Dierker: The individuals in the credit union will operate as a financial institution at that level. The credit unions have their liquidity funds at the second level, which is the provincial central. The national central, which is David Phillips' entity, provides the ultimate liquidity for the purposes of clearing and settlement in the daily transactions, the daily clearing, the bank clearings, the electronic clearings, Interact and those areas.
[Translation]
Senator Hervieux-Payette: Can individuals vote at every level or just the first? If one million out of three or four million members decide to belong to a national institution, will they have the right to vote at the regional level? I would like to know who heads those entities.
[English]
Mr. Dierker: The voting and the governance at the credit union level will be among the members at the credit union level.
Senator Hervieux-Payette: Will it be local?
Mr. Dierker: They will be at that credit union level. It may be a local credit union or it may be a credit union that operates in two provinces. The voting for meeting purposes and for the election of directors will be at that level.
The second and third level organizations, just as in Quebec, are entirely separate entities providing services down. You can see the credit union system as a triangle with the locals at the bottom, the provincial centrals at the middle, and the Credit Union Central of Canada at the top for the purposes of specialized services.
[Translation]
Senator Hervieux-Payette: Am I wrong in thinking that the individual, who is a member at the local level, will never have the right to vote at the regional and national levels?
[English]
Mr. Phillips: The individuals vote for the boards of directors of their credit unions, and the credit unions are members of the provincial central. They vote for the board of governors as credit unions of their provincial central. We are the central of centrals, and our board is selected by the provincial centrals. The role for the individual member as a voter is at the level of the individual credit union. They do not necessarily have a direct vote at the level of the provincial central or at the national central.
[Translation]
Senator Hervieux-Payette: You quickly went over the international role of cooperatives. At the local level, aside from the example of a province that borders the United States, what is the role of that federal entity in Europe, Asia or elsewhere?
[English]
Mr. Dierker: This is one of the advantages of the federal legislation, because it will give them the corporate capacity to operate beyond the borders of Quebec into Maine. It will give them the capacity to operate from Quebec into Ontario, New Brunswick or Nova Scotia.
Keep in mind one fundamental thing, which is that the federal credit union legislation maintains the credibility of the credit union structure. That is why, to avoid abuse, one of the two requirements that are important to your question is that the majority of the members have to be individuals; however, more important, the services have to be primarily to members. It is a much higher test on the services. That really gives you some comfort that in supporting federal legislation for federal credit unions, you are not essentially setting up financial institutions that can pick and choose business, if you will, unless they also provide for membership and the governance and voting rights of the individuals at the local level.
[Translation]
Senator Hervieux-Payette: In order to increase the capacity of your local branch, which would join with others, you have to meet base capital obligations. Will the base capital for the new federal entity be the same as that for the banks? I read that, contrary to the Bank Act, an individual could invest up to 100 per cent of the capital but would get only 20 per cent of the right to vote.
Would that not put a huge weight on a single person, in terms of the other members, which would likely influence all of the new entity's subsequent decisions?
[English]
Mr. Dierker: First, the capital and liquidity roles for the new entity are identical to those for a bank. The members maintain a one-member, one-vote relationship all the way through. To the extent that capital is invested in preferred shares of those entities, capital can be invested in preferred shares to help support that capital, and the members of the credit union can give voting rights to appoint directors. Up to 20 per cent of the directors can represent that capital.
[Translation]
Senator Hervieux-Payette: Was it done to coincide with the Bank Act, which allows a corporate entity to be limited to 20 per cent whereas it used to be 10 per cent? Is that 20 per cent based on the same model as the Bank Act? What was the rationale behind that 20 per cent?
[English]
Mr. Dierker: The existing Cooperative Credit Associations Act does provide for that same model, and that has been adopted in this legislation.
[Translation]
Senator Hervieux-Payette: I want to share a little something with my colleagues.
[English]
I would like to have your opinion on the following: When you pool a lot of capital and you become stronger, of course you have to put your deposit and buy different instruments so that you have a return on these amounts of money that are being invested. I suppose that for a small credit union at the local level, the danger of investing in too sophisticated, sub-prime-type vehicles is less, and the minute you become a bigger entity you need more expertise, but at the same time you can fall into the same problem that the big institutions have fallen into.
What is the insurance of the local member? They have seen this in Quebec. I have to tell my colleague on the other side that the caisses populaires lost billions of dollars in sub-prime last year, and it was a big disaster for the members. This is just to say that bigger does not mean better. Small is beautiful, for me. This was the concept of a credit union.
I want to hear your reaction. We do not want this bill to promise paradise before you die. I would like to have your remarks on this.
Mr. Dierker: Mr. Chair, I am exceedingly pleased that I gave up my golfing to come to Ottawa. Thank you, senator. I have been to Ottawa many times, but I have never heard it described as paradise.
Senator Hervieux-Payette: Because you do not come often enough to Ottawa.
Mr. Dierker: Certainly enabling credit unions or caisses populaires to become federal entities does not guarantee success any more than it guarantees success to any other financial institution that comes under this legislation. That is a matter of management, complying with regulations, and exercising prudence. Not just the caisse populaire system, but also the credit union system lost money on some of these investments. Hopefully, management is a little smarter and a little more prudent in these matters.
I can tell you, senator, that it is anticipated that the credit unions that would be under this legislation would be more substantial credit unions. There are significant incremental costs involved under this legislation. As Mr. Phillips says, these are the checks and balances that have to be gone through. Clearly, there are significant costs in member relations and in reporting. For some provinces there is an incremental capital requirement. Other provinces follow the federal model, so it will be identical. In Quebec, they tend to aggregate capital a bit more than they do under the federal rules, as you know. If a caisse populaire came under this legislation, you would expect it would have an increased capital cost.
Senator Hervieux-Payette: I would like to share something with my colleagues. Those on the Banking Committee have studied credit and debit cards, mostly owned partially by banks. Desjardins in Quebec has developed its own credit and debit card system that is not subject to screening by the U.S. Department of Homeland Security because it is done in Canada and not across the border. We must know that Visa and MasterCard — there are only two — have two operating centres in the U.S., and of course they are not in Canada.
Which system do the credit unions use?
Mr. Dierker: They use both. On the debit card system they own a Canadian model, which is managed by Mr. Phillips' organization, Credit Union Central of Canada, and through that, credit unions issue debit cards. The Interac access is totally domestic. For credit cards, they now operate through relationships with banks.
Senator Marshall: Thank you, Mr. Dierker and Mr. Phillips. It has been a very interesting presentation. I would appreciate hearing your views on the regulatory regime, because the provincial credit unions are regulated provincially and now there will be a federal regime. Do you foresee one regulatory regime? What are your views on that?
I know Mr. Phillips also mentioned about the transition. Do you foresee the provincial regulatory regime being similar to the federal? I would like to hear your comments on that.
Mr. Phillips: I do not foresee one regulatory regime. For the reason I stated earlier, this will be of interest to a few credit unions, but the vast majority of the 410 existing credit unions will be content to stay where they are, and the regulatory regimes across the country differ somewhat each from the other, and they have each evolved to respond to circumstances that exist in that particular province.
Nevertheless, they are also influenced by federal regulation and OSFI regulation. The regulators meet on a regular basis and know what each other is doing, so there is good communication across the regulatory system. I think there is clearly a role to be played by provincial regulation of provincially incorporated credit unions.
The federally incorporated credit unions will adhere to and will be required to adhere to the OSFI regime, and I do not really see the provincial and the OSFI regimes coming together. I think there are different needs, and we are dealing with different sizes, different scales, of credit unions, so there will be lots of room for the provincial jurisdictions to carry on with the regulatory function.
Senator Marshall: Do you see the federal regulatory regime as being stricter than the provincial one? Would you have any comments on that? Would you be familiar enough with those two? With what is anticipated federally and what is now in place provincially, is the intensity consistent, or do you think that the federal regulatory regime is stricter? I am thinking about what happens as people transition from the provincial to the federal jurisdiction.
Mr. Phillips: I would like to avoid comparisons. It is fair to say that the federal regime is strict and robust, and I think we have seen that in the last few years. Probably many credit unions would have to plan for that if they were thinking of moving under that regime.
Mr. Dierker: My reaction is parallel to Mr. Phillips' reaction. The federal regime has matters of prudential concern that are much more broadly based than is found in many of the provincial regimes. In many of the provincial regimes there are more self-regulatory aspects to financial regulation, and that works reasonably well in the provinces, but on the federal side, the regime is much more complete.
Senator Marshall: Do you think the provinces would be interested in one regulatory regime?
Mr. Dierker: In moving regulatory regimes?
Senator Marshall: Yes.
Mr. Dierker: That depends a bit on provinces. As Mr. Phillips said, I do not see a significant impetus to move out of regulating credit unions. They are provincially created, so ultimately the province is responsible for them. Some provinces do contract out for some services now. There may be increased contracting out, but as long as there are provincial credit unions or caisses populaires that are provincially incorporated, the provincial governments will have ultimate responsibility for those, so there will be some regulatory regime at the provincial level.
Mr. Phillips: I do not see any provincial regulators hanging out a "going out of business" sign. I think they see they have a long-standing role to play in the regulation of provincially incorporated credit unions.
Senator Callbeck: Thank you for your presentations. Continuing on with the regulations, is there a great deal of difference between the regulations in various provinces? Are some much more robust than others?
Mr. Dierker: The answer is yes; some are much more robust, particularly in the determination of capital and the compliance with the Bank for International Settlements, BIS, rules and the timing within which credit unions will comply with the BIS rules.
There are differences in the manner in which you calculate your capital and your liquidity and the ability to count your investments and your central organizations as being ready capital and ready liquidity. In some provinces, there is the ability to have partial double counting, and in others there is not, so it varies significantly. However, I do not mean it varies significantly in the sense of ultimate prudential regulation. All provinces have the ultimate prudential concern.
Mr. Phillips: I disagree slightly with my friend.
Mr. Dierker: You cannot.
Senator Ringuette: There goes paradise.
The Chair: Mr. Phillips, you are supposed to say he is substantially correct.
Mr. Phillips: He is substantially correct, but I want to avoid any comparison of robustness. It is fair to say that each jurisdiction has a regulatory system fit for purpose, and we have seen successful regulation right across the credit union system. It has been a very successful system through a difficult period, and that speaks in part to the wisdom of the regulation.
There are differences in regulation. Some adhere more closely to Basel; others have leverage ratios. Another way of restricting and regulating is restricting business powers. Some jurisdictions have limited business powers as a way of ensuring the safety and soundness of credit unions. It differs from jurisdiction to jurisdiction.
At the end of the day, it is fair to say that the OSFI regime is a strict and tough regime, and certainly any credit union that moves to that regime will probably have to make some changes to the way it approaches business.
Mr. Dierker: With all due respect, Mr. Chair, I thought that is what I said.
The Chair: The record will speak for itself.
Senator Callbeck: You mentioned that some provinces can do double counting. What do you mean by that?
Mr. Dierker: That is the formula for calculating the amount of your capital investment in your credit union. Part of it the credit union then invests in its own central and can be counted as part of its capital. It is a fairly technical calculation, but it reduces slightly the amount of capital that would be required by the BIS rules. It is still significantly higher than many of the financial institutions we read about last week.
Senator Callbeck: Have there been many changes in these regulations in the last two years because of the financial problems we have had?
Mr. Dierker: I do not know that there have been substantial changes in regulations, as such. Certainly more diligence has been required in management. The centrals have required more diligence, and, more important, the deposit protection agencies in the province have required much more diligence in the management and investment of members' funds.
Senator Callbeck: The emphasis is on diligence, not on changing the regulations.
Mr. Dierker: To support what Mr. Phillips said, the regulations have stood quite a test of time. They continue to be updated, but they are a good model.
Senator Callbeck: I come from Prince Edward Island and, certainly, as you know, that is —
Mr. Dierker: That is closer to heaven than Ottawa.
Senator Callbeck: It is. I will guarantee that. Credit unions are certainly strong in my province; it has been said they will go to places where banks will not, provide great service, get involved with the community and be supportive of whatever is taking place in that area. Credit unions have been tremendous and positive for Prince Edward Island.
I want to ensure I understand the tier system. I guess it is the same in every province. I know you talked about Quebec. Every credit union is a member of the central, right?
Mr. Phillips: That is right, yes.
Senator Callbeck: That central must be a member of the Credit Union Central of Canada. Is that right?
Mr. Phillips: That is correct.
Senator Callbeck: I thought there were some credit unions that were not under that umbrella.
Mr. Phillips: That is correct for one province, the province of Ontario. It is not a requirement that credit unions be part of a central. There are a few credit unions — I stress just a few — that are not part of Central 1 Credit Union. There is one fewer now, because one of the affiliates recently joined Central 1. However, in every other jurisdiction in Canada, every credit union is a member of the provincial central, which is a member of Credit Union Central of Canada.
Senator Callbeck: Did you say Nova Scotia, Quebec and B.C. took advantage of having similar regulations? Or did I not hear that correctly?
Mr. Phillips: I do not think I said that.
Mr. Dierker: I hope I did not say that. That would not be the case. They have their own separate provincial regulations.
Senator Callbeck: Are no two provinces alike?
Mr. Dierker: All of the provinces are similar in regulation. None of the provinces is that far removed in regulatory concern from OSFI. As I think Mr. Phillips indicated, the provinces look to OSFI and its rigid regime in the financial structure. That, of course, would be expected. This would be particularly at the insistence of the deposit protection agencies in those provinces.
Senator Callbeck: In your brief, and Senator Ringuette has talked about this, you say that you are still analyzing the proposed amendments. There are 125 pages, and I can understand why you are still analyzing it. Then you provide two examples of issues you are looking at that you might have to take back to the Minister of Finance. Are there other issues besides those two?
Mr. Phillips: Another issue would be demutualization, what the appropriate rules are around demutualization, which is raised in the proposed legislation. I think we want to give that question some consideration at the national level. Actually, that will naturally be a subject for discussion, because I think regulations are to be issued on that subject. We would certainly weigh in at the time of the issuance of the regulations that will regulate that process. That is potentially an interesting issue for us from a credit union standpoint.
The Chair: Will that happen when the federal credit union wishes to become a bank and stop being a credit union?
Mr. Phillips: That is the option that demutualization would allow for, and there are provisions in the bill that address that. We are interested in looking carefully at how that would work.
The Chair: The question was whether it is compulsory, and I think the answer was it is not compulsory; it is just an option.
Mr. Phillips: To demutualize would be quite a process and would require substantial member support in order to take that step.
The Chair: Most of us are thinking of the parallel with mutual insurance companies.
Mr. Phillips: That is right. That would be an example of one issue.
Senator Callbeck: Those are the three issues?
Mr. Phillips: There are technical issues as well. We would be interested to see whether a credit union starts to apply to use this, just to see how well it works, because one of the interests for us is that this be useful legislation. We want this to be a substantial hurdle — there needs to be discipline around it — but we do not want it to be an impossible hurdle for credit unions to achieve. We would be interested to see whether issues might arise during the course of a credit union's attempt to move under the legislation that might lead us to determine it is being too strict and that some accommodation should be made.
Senator Callbeck: I have a question on preferred shares. I did not realize that credit unions had preferred shares. Can I own preferred shares without being a member?
Mr. Dierker: The answer is yes, you may own preferred shares without being a member. I can tell you that that situation exists in other provincial legislation. If you think about that for a moment, a financial institution that grows needs capital. The members who want the services may have to get that capital from third parties, which could be a broker, et cetera.
Senator Callbeck: The preferred shares section can elect 20 per cent of the directors?
Mr. Dierker: It is up to the members to grant any rights to elect directors, but they cannot provide for more than 20 per cent; 20 per cent is a limit rather than a right.
Senator Callbeck: Thank you very much.
The Chair: I have been looking for the demutualization. It did not come up with that terminology at page 635 of the bill, "Conversion into a bank with common shares." I assume that is it.
Mr. Dierker: That is correct.
The Chair: That would be proposed section 216.08 at page 635, for those who are interested in that. Thank you for bringing that to our attention.
Senator Murray: I have just two small matters, which I think I can cover in one question.
I thought I heard Mr. Phillips say that the existing federal legislation, the Cooperative Credit Associations Act, is not working all that well. I wonder how to square that with his stated preference in his opening remarks that Credit Union Central of Canada would have preferred that federal credit unions be established under the existing legislation rather than under the Bank Act.
At the same time, perhaps Mr. Dierker could enlighten us, since he was advising the federal Department of Finance on this legislation, why the government chose one option over the other.
Finally, Mr. Dierker, I obviously need some education on this point. I thought I heard you say that the credit unions under provincial jurisdiction in Saskatchewan have some kind of backup arrangement with the CDIC regarding deposit insurance. How does that work?
Mr. Phillips: In our sense, maybe it was a lack of imagination on our part. When we were considering the federal charter, it occurred to us that while the vehicle that would make sense to establish the federal charter for credit unions would be the Cooperative Credit Associations Act, which is the act that governs cooperative financial institutions, it does not work well. It has been around for about 50 years. There are only two institutions governed by it, ours and Concentra Financial. There has never been an incorporation under that act for various reasons that make it difficult to incorporate. We anticipated that the amendments would be brought into that act to make it easier, to remove some of the barriers and to facilitate it. However, there is a cooperative regime there that is designed for retail associations. We anticipated that a federal charter would be a few sections added to the Cooperative Credit Associations Act that would remove some of the barriers, and away we go.
Senator Murray: To clean up the existing legislation.
Mr. Phillips: We did not anticipate 125 pages of amendments to the Bank Act. There are clearly advantages to going under the Bank Act versus the Cooperative Credit Associations Act.
Mr. Dierker: The Cooperative Credit Associations Act has been there for many years. It was structurally designed to regulate the Canadian cooperative credit associations, Mr. Phillips' organization, and the provincial centrals. It does not permit individuals to be members of those entities. It is a second- and third-tier legislative structure.
Working that legislation into the form of a retail structure that permits individuals to participate in their local credit union was an extensive piece of work. It is theoretically possible that that route could have been taken. Importantly, however, that legislation is unique to Canada, and to the extent that credit unions want to use national or for that matter international services, the concept of bank legislation is much more broadly known. A regulatory regime is there to respect consumers and that could be built up to protect members, and it is a regime that has national respect. The rules are provided by the federal government. They are rules for across Canada, whereas the rules under the Cooperative Credit Associations Act, if that act had been amended, could still have been dealt with on a provincial basis because you are required under that legislation to register provincially, just as any other federal company, and the provincial governments can provide what conditions they have for operating that facility, even though it is a federal facility.
To provide for uniformity, it was clear that the federal Bank Act was a model that should be looked at, so that is kind of the concept.
How does the Saskatchewan model work? I forget when these amendments were put in — probably in the 1990s — but the Cooperative Credit Associations Act provided for a lender-of-last-resort facility to the credit union system from the federal government in that legislation, and that is effectively administered by CDIC, in the case of Saskatchewan. It has never been used. It is there as a facility that can be used, but it has never been used.
Senator Murray: Do you have to sign up for it?
Mr. Dierker: You have to make an application. It has to be a fully secured facility, just like a Bank of Canada facility. Really, at today's date, it has been totally surpassed by the Bank of Canada facility through the clearing system. It is almost an anachronism at today's date.
Senator Dickson: Gentlemen, it was an excellent presentation, one of the best I have heard on any subject matter in the short time I have been on this committee. It was thorough. I hail from Nova Scotia, just like Senator Moore and Senator Murray, although he seldom admits it before this committee. Better still, he and I go way back; we are both from Cape Breton, which is the heart of the credit union and the cooperative movement. I do not have a conflict of interest, but I am a great supporter.
In Atlantic Canada, if I understand correctly, there will be a joining of the credit unions in the four Atlantic provinces into an Atlantic unit. Who makes the decision that we want to go federal? Is it the Atlantic unit or the provincial units that join the Atlantic unit?
Mr. Phillips: The decision as to whether or not a credit union would go federal would be made by the credit union itself or, more particularly, by the members of the credit union. The regional central under this proposed legislation would not have an option to go federal. It is partly federal anyway because it will be what is known as a designated central under the Cooperative Credit Associations Act. The regional central is regulated by OSFI.
It would be an option for the individual credit unions that make up the central to decide whether to go federal, in which case they would then have to go through a process of board approval, and there would be a vote by the members as to whether or not they wished to do that.
Senator Dickson: Let us take an example. At the New Ross Credit Union in Chester, Nova Scotia, who makes the decision? Is it the New Ross Credit Union or the Nova Scotia unit?
Mr. Phillips: It would be the New Ross Credit Union. For instance, the board might decide that the credit union should go federal because it wants to do business in the United States or something. The board would have to approve the idea, and then it would state the advantages and disadvantages and ask the members whether they would favour doing that. It would require a member vote to allow that to go forward, but the decision is at the local level.
Senator Dickson: Sometimes small is best. Down at the local level, how do you see their strategies, staying with the New Ross example? How do you see the strategies of that credit union changing as a result of a federal credit union being able to compete with them in the Province of Nova Scotia? The big brother comes from Ontario to compete with the locals in Nova Scotia. Will it be disadvantageous or advantageous?
Mr. Phillips: I can recall a discussion about competition within the credit union system at one of our conferences. One of the speakers said that a rising tide lifts all boats, and everyone applauded in the audience. I do not think competition is feared within the system. By and large, we find it is more a question of cooperation between credit unions. We see that through mergers that take place to make the credit unions stronger. There are areas where credit unions will be operating in close proximity to one another, but that has not led to any weakening of the system. If anything, it has led to a strengthening of the system.
Senator Dickson: Do you think it would be advantageous?
Mr. Phillips: Yes, I think it is advantageous. Anything we have seen would suggest that. In British Columbia you see, perhaps, the most competition between credit unions, and that is one of the areas in Canada where the credit union system is the strongest. That is one example.
Senator Moore: It was news to me today that, first, credit unions can issue preferred shares, and, second, you do not have to be a member to own a preferred share. How is that done? Do they do a public offering? Does the purchaser of the shares have to be in that province? Can it be held internationally? Are the shares listed? Are they traded on an exchange? How does that happen?
Mr. Dierker: Senator, I do not know whether all provinces permit preferred shares at the moment. I do not know whether your province does. However, that provision does exist in quite a number of provinces. By and large, preferred shares, in practice, are held by members who wish to invest additional funds into the credit union or caisse populaire.
How would you place a preferred share issue? I know of some credit unions in Saskatchewan that have used a prospectus offering. A private placement would make more sense if you were taking and raising a significant amount of capital; I would guess you would go by way of a private offering.
Are they listed? At today's date, there are none listed. The legislation in the provinces that authorizes preferred shares does permit listing of the preferred shares.
Senator Moore: Who can buy them? Can anyone, or does the purchaser or the holder have to be a resident of that province?
Mr. Dierker: That would depend on the nature of the offering. If it is going to be a private placement, it would be the financial institution that would buy it up. If it is going to be a public offering, it would depend on whether it was a provincial or a national offering.
Senator Moore: Each province's regulations would probably set the ground rules. Do they stipulate who may purchase a preferred share?
Mr. Dierker: The provincial legislation would set the ground rules, but the credit union would determine how it would do the offering.
Senator Moore: Each specific one — not the central, but the actual credit union that is seeking the additional capital?
Mr. Dierker: That is correct.
Senator Moore: I would like to follow up on Senator Callbeck's question, which I did not quite understand. Maybe you can walk me through the double counting of capital. I have read a lot of stuff recently in the financial sector about things that happen in North America and around the world, and some of that was happening. What can any particular credit union do in terms of its calculation and provision for accounting for its capital?
Mr. Dierker: Let me start in general terms, and Mr. Phillips can be more particular. I have seen his study on capital, but I do not have it with me.
If you use this example, generally speaking, just like banks, credit unions are required to have an 8 per cent capital. In some provinces, to achieve the 8 per cent, you may be able to include a portion of your investment in your central. If your capital requirement is $1 million, you may be able to include $100,000; it is a small proportion.
Senator Moore: The capital is there from members putting their money in, right?
Mr. Dierker: Yes.
Senator Moore: I have the $1 million from all the members there, and I put $100,000 in my provincial central, so now I have $1.1 million; is that correct?
Mr. Dierker: No. If your total requirement for capital is $1 million, the $100,000 that you have invested in your central will be included in calculating that $1 million, the assumption being that the centralization of capital provides a source of capital to support the credit union system. It is a fair assumption because of the working-together nature of the system.
Mr. Phillips: I wanted to comment on the issue of preferred shares, and I will ask Mr. Dierker perhaps to validate. I do not think a whole lot of preferred shares are issued; it is not done frequently. I do not believe there are any listed on a public exchange at this point.
What is most common, in my experience, is that a credit union may issue investment shares, which are bought by members of the credit union; that is one way of building up capital. I cannot say to what extent that would be a common rule across the country.
Senator Moore: Does the central office keep statistics on those sorts of things? If you do, what percentage of holders of preferred shares are non-members and what percentage are actual members?
Mr. Phillips: We do not, and that is why I cannot respond with more specificity. I take it one reason we do not is that not a whole lot of that is going on. It may be a potential. I suppose if the needs for capital become such, some credit unions might want to consider that. However, by and large, the capital is based on retained earnings and investment share issuance to members, and those sources of capital seem to be sufficient to meet the regulations, for the most part, under current circumstances.
Mr. Dierker: Mr. Chair, that would be correct. When I use the term "preferred shares," I include the investment share concept. By and large, we are exchanging words. There are not significant issues. There are a number that are being looked at because capital is precious.
Senator Moore: When did the preferred share start? How long have the credit unions been in existence, first of all?
Mr. Phillips: The oldest credit union in Canada is Alterna, which was founded by Alphonse Desjardins in about 1908 as the CS CO-OP.
Senator Moore: When did the preferred issue possibility start, in the 1950s or 1960s?
Mr. Dierker: Much later than that; I would say it started in the 1990s.
The Chair: It is interesting that you chose Alterna as an example. That was the example given to us of a credit union that has also incorporated a bank. The oldest one has a bank as well; maybe it is setting a trend for the others as they come along.
Mr. Phillips: I think it is fair to say that the credit unions that have set up banks have found it is a difficult model to work with. It is quite inefficient. I think Alterna has found it works for them, but there are other examples of banks that have been sold off. The federal credit union is a more efficient unit; it uses capital more effectively than that model.
The Chair: We presume; there are not any federal credit unions yet. You are making a presumption here.
Mr. Phillips: We think that will be the result.
Senator Ringuette: The credit unions or the caisses populaires are doing their clearance through an arrangement with a bank.
Mr. Dierker: No.
Senator Ringuette: Do you do your own clearance and settlement payment?
Mr. Phillips: Yes. We are what is known as a "group clearer" under the Canadian payment structure, which means the centrals all join as part of a clearing relationship under an agreement; they clear the cheques for their members through the group clearer. We are the group clearer for the clearing group. We have a relationship with the Bank of Canada, so we clear and settle with the Bank of Canada as a central.
Senator Ringuette: However, the individual units of credit unions do not do their own, do they?
Mr. Phillips: Yes, they do. They are part of the larger group, so they all clear and settle through their provincial centrals, which clear and settle through Canadian Central. Then we clear and settle through the Bank of Canada.
Senator Ringuette: What is your concern with this bill in that regard?
Mr. Phillips: The question in our mind is the status of a federal credit union as part of a group, and whether it would stay as part of a group. We need to look at this as part of the legislation.
Senator Ringuette: Currently, you are a portion of that group. Is that what I am hearing?
Mr. Phillips: We are wondering whether, if a large credit union were to go federal, it would remain as part of the group or would need to pull out of the group. We may need to look at that issue more carefully.
Senator Ringuette: I suspect it would not be able to be part of the group. It would have to act as a federally chartered entity, like a bank.
Mr. Dierker: Mr. Chair, that comment is not correct. The Canadian Payments Association's rules at the present time are sufficiently broad or generous, if I can use that word. They would permit a federal credit union to participate clearing through Credit Union Central of Canada.
There are two direct clearers in the credit union caisse populaire system: The Caisse centrale is a direct clearer for the Desjardins system, and Credit Union Central of Canada is a direct clearer for the credit union system. The credit unions funnel their payment items as a specific provision in the Canadian Payments Association's act and rules that allows credit unions to clear through their central without going through a bank. There are specific rules for it.
There is already an example of an entity that is a federal association, which would be parallel to a federal credit union for the purposes of the Canadian Payments Association's rules. It clears through Credit Union Central of Canada. Therefore, we know the system is there and that it can work.
Any credit union can structure its affairs to clear through a bank. Most do not do so because there are lots of good reasons to clear through Credit Union Central of Canada. Those reasons are primarily economic and service. There is nothing stopping them from doing it at today's date, however.
One assumes that Credit Union Central of Canada and Caisse centrale will continue to provide that service model, which would remain attractive, and that they will continue to do that.
Senator Ringuette: However, it is an assumption still.
Mr. Dierker: It is an assumption that tomorrow morning, Credit Union ABC in Ontario will continue, because it could withdraw from membership and join a bank.
Mr. Phillips: I will give you a hint of what Mr. Dierker and I will be talking about after this session. There are some interpretation issues around this. It is pretty technical stuff, but that goes to our point about needing to spend time studying the words.
Senator Ringuette: That could be a costly technical issue to be resolved for one entity.
Mr. Phillips: It is very easy to resolve. We do not have a situation where there is a long line up of credit unions wanting to move right away. Again, it is just one of those things we need to think through a bit.
Senator Ringuette: Mr. Chair, I have one last question, which is around an issue raised by Mr. Phillips in his document. In regards to concerns, you said, "These issues include matters such as the granting to members of a federal credit union access to the membership list of that credit union." Maybe I missed it, but I have not seen any provisions for confidentiality of membership lists, which you would normally see in legislation where a list of members must be provided.
Mr. Dierker: Mr. Chair, the legislation is very parallel to other credit union legislation and is also parallel to the Bank Act as it relates to shareholders. It allows you to have a list of members solely for meetings purposes. There is absolutely no right to get business information, and there is no right to know whether a member has a transaction with a credit union.
There are two ways you can have access to member lists: You can go to the credit union to get a copy of the member lists, or you can request a copy. In each case, you need to have an affidavit that restricts the purpose for which it is to be used. There is absolute confidentiality of these things.
Senator Ringuette: When you use the term "you," who would that be? Who would request an affidavit?
Mr. Dierker: It would be another member. Forget the proposed federal legislation. Right now, if you have a resolution before a credit union, except in British Columbia — and I do not know if there are any other exceptions —
Mr. Phillips: That is right.
Mr. Dierker: Let us talk about Saskatchewan. If you have a resolution right now before a credit union and that resolution was to continue to become a federal credit union, you could have any member getting a list of the members to find out who has the right to vote because you may want to contact these people.
You have to remember that the credit unions and the cooperatives are essentially a large partnership type of relationship. This gives you the right to know which partners will speak on the issue.
As a matter of interest, the Manitoba legislation looked at this in the past months and has continued that provision. In many ways, they reinforce the right to get member lists. They added some fines to misuse and that, but those already exist in this legislation.
That is its purpose; it is a matter of ensuring that people can know who will be influencing the decision.
Senator Ringuette: That is a very important list, since it pertains to who will be influencing the decision.
Mr. Dierker: I think that is a fair comment, because you attempt to get the influence of the decision down to the basic level of the people who have the right to vote. If you have a credit union with a large membership, you want to ensure that information is available.
Senator Ringuette: Can a non-member preferred shareholder get a list of the members of that credit union?
Mr. Dierker: Only if it relates to a resolution that affects that preferred shareholder.
Senator Ringuette: Who will determine that?
Mr. Dierker: Ultimately, a court would, if there is a disagreement. If you have a preferred shareholder that, let us say, has a preferred share that has a coupon rate of 6 per cent, the members control the by-laws. Therefore, if the members are proposing to pass a resolution to reduce the dividend rate, they are affecting the rights of the preferred shareholders.
If the preferred shareholders are, in fact, affected in that manner, they would have a right to get that information, or in the circumstances of a demutualization where the credit union is moving out of the credit union structure to become a bank, something fundamentally changing it, they would have that right.
Senator Ringuette: Yes, but my question was who will determine whether the proposed resolution justifies access to a list.
Mr. Dierker: In most cases, it is very clear.
Senator Ringuette: Who will decide?
Mr. Dierker: Normally, it would be the board of directors. You would expect it to be the board of directors who would make the first decision — that it is or is not a proper request. If there is disagreement, then the person requesting the information can go to court.
Senator Ringuette: Is it in this legislation to provide privacy provisions for these members?
Mr. Dierker: Yes, it is. The privacy is dealt with by the definitions that restrict what you can use it for, yes.
Mr. Phillips: I would like to comment that while I acknowledge that it does parallel legislation in place in provinces, we are not necessarily terribly happy about it at the provincial legislation level.
One question we are examining is whether there should be more safeguards around this. There are safeguards there. That is clear. Maybe there should be more. The fact of the matter is that the membership list, which is analogized in the proposed legislation with a shareholder list, is not a shareholder list; a membership list is a customer list, because the members are the customers of the institution.
The Royal Bank would not be happy about making its customer list available to someone walking in off the street, even with controls around it. Is that sufficient? Therefore, this is a case where I do not think it is quite appropriate to draw an analogy between a membership list and a shareholder list.
Admittedly, and Mr. Dierker makes the point, we are living with this at a provincial level. We still want to think about this and possibly come back with some suggestions for adjustments that might create stricter access to the list.
Senator Ringuette: You can open yourself to political fundraising. Anyone who saw a potential good investment in one federally chartered credit union could buy a share, gain access to the membership list and then lobby the group. It is certainly a concern.
Mr. Dierker: That analysis is not correct. One must remember that the ultimate reason for this is fairness for the members. That is the whole reason it is there. Members want to be as fully informed as they can be on major decisions that affect their relationship with the credit union. That is why it is there.
Mr. Phillips suggests that it is a customer list, but I can be a member of a credit union and not deal with that credit union, although it was not suggested that I am doing any level of business or borrowing or anything. That information is carefully limited to voting at meetings. There are substantial penalties if it is misused.
Senator Ringuette: That is at the provincial level.
Senator Hervieux-Payette: Senator Ringuette has preceded me a bit with the membership list. We are almost talking about a philosophy of governance. Initially, we had corporations in which shareholders had a say. Now, as a single shareholder, I have no more say for the simple reason that owners of pension funds and hedge funds, who own billions of shares, have the main say. As a single shareholder, my say in the governance of a corporation is irrelevant. The membership is supposed to give direction to their credit union, but when we take it one step further, the credit union or cooperative becomes a bank in which people make significant investments.
Going back to my previous comment, 20 per cent is a significant number of shares or votes for someone on the board to hold. Certainly, that person can influence the direction of the corporation far more than an individual with only one vote can.
Does the Credit Union Central of Canada operate on a fee-for-service basis? Do people buy a membership in your organization? Is there a fixed price for service? What is the source of your annual operating budget? Does it come from the members, the regions, from each unit of a credit union or each transaction that you deal with?
Mr. Phillips: We have an investment portfolio that is, in relative terms, quite small. It generates some income every year. Most of our funding comes through an assessment on the centrals, who set the budget. A funding formula has been established and agreed to by the centrals, and the centrals are charged according to the funding formula. It works pretty well. The budget must be approved by those who pay the budget. It is an assessment model with some earnings on the investment portfolio.
Senator Hervieux-Payette: You know that some countries are thinking of charging a fee for each transaction. Even though it is only 0.003 or 0.001, Canada has not accepted it. That is why I ask whether you are financed by the number of transactions or a lump sum amount related to the service you provide, at the regional level in your case? If you are doing the compensation for cheques, how are the second and third levels financed?
Mr. Phillips: I said the third level is largely an assessment of the centrals by themselves, according to a formula with some investment earnings. It is a very simple, straightforward system. The provincial or regional level is a different system because they exist to provide wholesale financial services to their credit unions. Therefore, the array of services will vary from province to province. For example, Prince Edward Island might provide back-office human resources services. There tend to be smaller credit unions in Prince Edward Island, so the role of the central in Prince Edward Island is quite different from the role of centrals in other regions that may be larger. In many cases, they invest the funds on deposit and might provide consulting services. Certainly they provide payments, clearing services and some financial products securitization services. Much of that will be on a user-pay, fee-for-service basis. In some jurisdictions, there is a form of assessment for what might be characterized as trade association services.
You might find a slightly different funding model in each of the provincial jurisdictions, but it would be a combination of investment earnings, fee for service and some form of assessment. In every case, because they are made up of credit unions, these funding models are agreed to and approved by the credit unions that comprise the central.
Senator Hervieux-Payette: If I am at the local level, I have one vote no matter how much money I have in my credit union account. Am I right?
Mr. Phillips: Yes.
Senator Hervieux-Payette: Are dividends related to how much money I have in my account?
Mr. Phillips: Most frequently, but not necessarily. You can have patronage dividends, which would be linked to non-business associations with the credit unions. That would be a common approach.
Senator Hervieux-Payette: People who are watching these proceedings are gaining good information on whether to deal with a new institution or the local ones that still provide services. In talking to people outside my province, the question of stealing members from other credit unions arises. That is why this is a concern no matter how they try to protect the list of members. I subscribe to your notion that this must be well protected because they are both members and clients. It would be nice for one credit union to know everything about the clients of another, so this is a concern for many credit unions that I have spoken to so far, who envision other institutions preoccupied with pirating for their own purposes.
Senator Callbeck: My question concerns an amendment to other federal acts; I have a list. The bill talks about federal credit unions that meet the definition of "credit union" in the Income Tax Act. Why would credit unions not meet the definition?
Mr. Dierker: The Income Tax Act has three different definitions of "credit union." One definition meets the local credit unions and is based primarily on sources of revenue. Therefore, they would have primarily individuals as members, and they would have sources of revenue based on their services to the members and revenues resulting from a listed category of investments.
There is another definition, which has for its purpose to pick up the central credit unions, and another definition, which has for its purpose to pick up the caisses populaires federation. There are three different definitions in that act.
Senator Callbeck: Under Bill C-9, credit unions will be able to go federal.
Mr. Dierker: That is correct.
Senator Callbeck: This would apply to what will happen in the future.
Mr. Dierker: The credit unions that would qualify to apply for continuance under the federal act are credit unions that are credit unions in the province from which they come, whether or not they qualify as a credit union for the Income Tax Act. I believe that all credit unions currently qualify under the Income Tax Act, but there may be some that do not.
Senator Callbeck: The ones that will qualify will be subject to the same income tax rules as provincial credit unions? Provincial credit unions do not pay income tax, do they?
Mr. Dierker: They certainly do. They pay income tax calculated on the same basis as other financial institutions, with the exception that they have a continuation of the small business deduction until they have a tax reserve account, which is essentially their capital, that equals 5 per cent of their shares and deposits.
Credit unions have paid income tax since 1971. It was brought in, if you recall, by the Carter commission.
Mr. Phillips: On that point, this is a major distinction between credit unions in Canada and those in the United States. Credit unions in the United States do not pay income tax. What we read about credit unions is sometimes about credit unions in the U.S.; therefore, people are not necessarily aware that credit unions in Canada do pay income tax. As Mr. Dierker pointed out, they have been doing so for close to 40 years.
The Chair: Does Bill C-9 allow a provincial credit union that opted for continuance federally to opt back home? Is there the ability to go back and forth?
Mr. Dierker: Not directly. It is possible, but it would take quite a number of steps to do it. That is not unusual in federal financial legislation. The concept of continuing down, as I call it, really does not exist. A trust company that has continued as a bank has really lost its ability to continue down without doing a whole number of things.
Senator Moore: Am I correct that it cannot revert?
The Chair: Not without going through a lot of hoops. It would not be an easy movement.
The concern is that we saw some jurisdiction shopping in the U.S. from a regulatory point of view. They might move up and find that the Canada Deposit Insurance Corporation and the Office of the Superintendent of Financial Institutions are too strict, and they might prefer to go back down to a province. I was wondering whether there is some provision in the bill to make that easy, and you are saying no.
Mr. Dierker: No, there is not. However, in the proposed legislation there are some very carefully drafted provisions on coming in. The credit union must give its members a plethora of information so that the members have full information upon coming in on the operations, the insurance coverage and the future business plan of the credit union.
The Chair: At page 582 we see that there must be something in the provincial jurisdiction law that authorizes this continuance federally. Do you have a model clause, or does it already exist in a lot of the provincial legislation?
Mr. Dierker: I stand to be corrected, but I am quite sure that most of the provincial legislation permits credit unions to apply for continuance in other jurisdictions. That does not necessarily mean the federal jurisdiction, but it does provide for general continuance. I speak with total ignorance at the moment on the provisions in Quebec. I do not know what they are.
The Chair: Someone from Quebec will help us with that this afternoon.
We billed this as a hearing on Parts 16 and 17. Part 16 deals with the Canada Deposit Insurance Corporation's ability to create a bridge entity if one of the financial institutions it is regulating and overseeing gets into financial difficulty. Are you anticipating that this proposed legislation would apply to federal credit unions once they are under that scheme?
Mr. Dierker: It would. The provisions for conversion of a federal credit union into a bank contemplate the possibility of the minister or CDIC using those provisions as they apply to a federal credit union. Those enabling provisions are there to provide for the underlying solvency of the Canadian financial system, just as it does for chartered banks.
The Chair: Even if it did not apply to go from a federal credit union to a bank, it will still be regulated by CDIC once it is a federal credit union; is that right?
Mr. Dierker: It will be regulated by CDIC in the sense that it will have to comply with the CDIC standards. The regulation is really done by OSFI.
The Chair: If the federal credit union gets into financial difficulties and cannot follow the rules and OSFI determines that, CDIC can then take those deposits and do the same thing, under Part 16, that it could do with a bank or any other financial institution it regulates.
Mr. Dierker: That is correct, and it will apply in the same way.
The Chair: Thank you.
There being no other questions, Mr. Dierker and Mr. Phillips, on behalf of the Standing Senate Committee on National Finance, thank you for helping us through Parts 16 and 17. They are somewhat technical, but they are important to our communities and the people we serve. Thank you very much for helping us to understand them.
(The committee adjourned.)