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Proceedings of the Standing Senate Committee on
National Finance

Issue 26 - Evidence - February 8, 2011


OTTAWA, Tuesday, February 8, 2011

The Standing Senate Committee on National Finance met this day at 9:32 a.m. to examine the Estimates laid before Parliament for the fiscal year ending March 31, 2011.

Senator Joseph A. Day (Chair) in the chair.

[English]

The Chair: I welcome to this meeting of the Standing Senate Committee on National Finance all honourable senators, and Happy New Year to those with whom I have not spoken directly. It is good to be back. I am sure you were all anxious to get back here on the Hill to get on with some of the important items with which we have been dealing.

We anticipate that Supplementary Estimates (C) will be out either today or tomorrow. That will give us a new look at some of the departments and agencies that are looking for government funds. The machinery of government, estimates and appropriations are our primary areas, after all.

[Translation]

This morning, we are continuing our study of the estimates for the fiscal year 2010-11 that is now before our committee.

[English]

In addition to the Main Estimates, the government has thus far tabled two sets of supplementary estimates for this fiscal year. As I indicated, we are anticipating receiving Supplementary Estimates (C) soon.

Over the course of our consideration of the estimates, this committee has identified departments, agencies and programs in which it is interested. We try to space out our review of different departments and agencies over time. This morning we will be continuing in that vein with the Superintendent of Bankruptcy. We are pleased to welcome the Superintendent, Mr. James Callon, who is accompanied by the Deputy Superintendent, Ms. Patricia Alférez. Welcome.

Before you begin with your opening remarks, I want to remind honourable senators that it is often the case that different committees in the Senate have grey areas of overlap. In the Finance Committee, we are interested in the machinery of government and any appropriations or funds, public funds, that are obtained in other manners to help various agencies operate.

We are not focusing on some of the other bankruptcy issues that might have been in the news in the past while; in particular, priorities, insurance claims or general areas of the law of bankruptcy, which is covered by the Standing Senate Committee on Banking, Trade and Commerce. We have a good many members of the Banking Committee, including the chair of that committee, with us today to help us with that grey area of interest that lies between our committees.

Honourable senators, I have also been advised that the deputy chair for this committee has resigned from that position — not from the Senate. We are now open for election to fill that position.

Could I have nominations to fill that position?

Senator Finley: I nominate Senator Gerstein.

The Chair: Are you willing to serve, Senator Gerstein? It is so nice to have you back.

All those in favour? Contrary minded?

Senator Gerstein is back as deputy chair of this committee.

Although he is not here today, I want to thank Senator Neufeld, who served as deputy chair for the last couple of months. We will get a chance to thank him in person when he returns.

That business is now done. The steering committee was previously composed of Senator Marshall, Senator Neufeld and me. Now that Senator Gerstein is there as a member of the steering committee, who will be the third member? Are you able to tell me, or will you consult further?

Senator Gerstein: I will consult further.

The Chair: Very well. We will do the usual consultation and advise at the next meeting who the third person on this committee's steering committee will be.

In the meantime, we will go ahead with this meeting. We have reserved this meeting to learn all about the Office of the Superintendent of Bankruptcy Canada. Mr. Callon, you have the floor. Once you finish your introductory remarks, it is our custom to ask honourable senators to engage in comments and questions, and we will have a dialogue, if that is acceptable to you.

James Callon, Superintendent of Bankruptcy, Office of the Superintendent of Bankruptcy Canada: It is a pleasure to receive the invitation and to be here. We tried to put together an information package that would be of interest to the committee.

[Translation]

Many statistics about bankruptcies and the economy are available to you, besides the brief about which I will now make a few preliminary remarks.

[English]

It is a pleasure to be here before the committee and have an opportunity to respond to your questions about the work of the Office of the Superintendent of Bankruptcy Canada, OSB.

In my introductory remarks, I would like to provide you with some historical background, including the operations and structure of OSB, the current environment in which it must operate and key initiatives that are under way.

Canada's insolvency laws represent fundamental marketplace framework legislation that affects Canada's economic well-being, in that it supports and provides certainty in the functioning of the credit markets. The laws establish the rules of how individuals and companies may become bankrupt or may restructure their affairs.

The primary stakeholders in the insolvency system are the creditors, debtors, private sector licensed trustees, provincial courts and OSB.

Section 91 of the Constitution Act, 1867, confers on the federal government exclusive legislative authority in the area of bankruptcy and insolvency. The key pieces of federal legislation governing insolvency are the Bankruptcy and Insolvency Act, BIA; and the Companies' Creditors Arrangement Act, CCAA. Both statutes are under the responsibility of the minister, and, therefore, the department is responsible for policy as they are reflected in the legislation.

I will give you a brief historical background. Bankruptcy law began in Canada in the 1870s and originally focused on the corporate relationship between debtors, which are primarily traders of goods or merchants, and financiers, now called creditors. Over the decades the law expanded to recognize a broader range of debtors, including individual consumers.

The function of the Superintendent of Bankruptcy was originally created in 1932 to deal with issues of corruption within the insolvency system. Over time, Parliament broadened our responsibilities to include supervising the administration of all matters to which the Bankruptcy and Insolvency Act applies.

The BIA confers on the superintendent the statutory responsibility to supervise the administration of estates and compliance; maintain a publicly accessible record; investigate complaints; license private sector trustees; and establish and enforce professional standards in estate administration.

In summary, the objective of the insolvency system in Canada is to promote investment and creditor confidence in the Canadian marketplace through a number of measures: by providing of a fair and effective system for the orderly payment of debt and the restoration of assets to productive use; by providing a framework for debtor rehabilitation; by providing a deterrent to fraud; and by maintaining a public record.

I will talk about the structure of OSB. The superintendent of bankruptcy is a regulator within the financial marketplace responsible for providing creditors with an orderly process in the recovery of debts. In addition, the superintendent has quasi-judicial responsibilities related to the professional conduct of licensed trustees.

The BIA sets out the superintendent's responsibilities, powers and authorities to act. The superintendent is a Governor-in-Council appointment for up to five years and is based on good behaviour rather than at pleasure. The BIA also establishes the Office of the Superintendent of Bankruptcy Canada, which is to support the work of the superintendent. OSB is a departmental branch of Industry Canada.

The Treasury Board of Canada Secretariat provided, in the 1990s, OSB with net vote authority. As a net vote organization, OSB obtains the vast majority of its revenues from the collection of levies and fees, which are used to offset the operating expenses.

OSB's mission is to contribute to a fair and efficient marketplace by protecting the integrity of the bankruptcy and insolvency system for the benefit of investors, lenders, consumers and the public.

Our strategic objectives, which are used to help define our program activities, are to maintain an efficient and effective regulatory framework; promote awareness of the rights and responsibilities of stakeholders in the bankruptcy and insolvency system; ensure compliance; and be an integral source of information about the insolvency system.

With respect to our operations, we have over 320 employees located in 14 offices across the country. The offices are divided into three regions. Approximately 70 per cent of the workforce directly supports compliance, oversight of estate administration and provides services to the public within the regions.

In terms of financial management, OSB is a net vote organization that relies primarily on non-appropriated revenues. Our total expenditure authority is set at $36.5 million. In terms of revenues that are generated, it is forecasted at $43.1 million, and our forecasted expenditures are at $36.9 million. Not included in those operating expenses are the costs of certain basic services provided by Industry Canada and other government departments, for example, accommodations.

With respect to oversight, the superintendent reports to Industry Canada by way of a multi-year business plan, an annual report on program activities and regular corporate reporting on its revenues, finances and performance. OSB and Industry Canada frequently exchange administrative information. The superintendent's administrative authorities are delegated at the discretion of the deputy minister.

There is also a management advisory board. As a consequence of having been established as a provisional special operating agency in 1998 by Treasury Board, a management advisory board was established to provide external advice and guidance to the superintendent and Industry Canada on the strategic management of OSB. The board is strictly advisory in nature and is not involved in the day-to-day management.

The board is structured to achieve an effective balance of members and is made up of a variety of stakeholders and business professionals. The chair and members are appointed by the Deputy Minister of Industry Canada.

In the context of the current environment, since the fall of 2007, the world economy has been shocked by failures in the financial system, which triggered significant economic slowdowns and, in many countries, a recession. During this time, we have seen unprecedented restrictions in the credit markets, increased unemployment, large corporate restructurings and significant increases in consumer insolvencies. Slowly, economies are recovering. I will quickly review some of the key trends and impacts that the economic slowdown has had with respect to the insolvency system.

You may wish to refer to the handout, where there are statistics that show various trends as they apply to what has been happening over the past few years.

Currently, we have close to 380,000 bankruptcy estates under supervision, with consumer volumes up significantly from pre-recession levels. We have approximately 400 to 500 insolvent businesses coming through our door each month, evenly split between sole proprietorships and corporations.

Business insolvencies have, however, declined to their lowest level in years and have been declining for the past 10 consecutive years. Business filings include those by corporations and sole proprietorships or individuals in business.

The impact on the insolvency system is broad. We now have 380,000 estates under administration. An average household affected by these estates is comprised of 2.5 members and an average of seven creditors are involved in each estate.

Since the recession, the amount of debt and assets being declared by filers has risen with the increased volume. The insolvency system is dealing with 80 per cent more debt and 140 per cent more assets in comparison to pre-recession filing volumes. Just this past year, the system was handling more than $26 billion in debts and $12 billion of assets, as declared by the filers, compared to pre-recession times where it was $14 billion in debts and $5 billion in assets.

The volume of filings has clearly added pressure on the system. Over the past few years, though, OSB and the private sector trustees have invested heavily in technology to alleviate the administrative processing and improve the managing of insolvency cases.

This investment in technology substantially decreased paper processing, which was replaced by e-filing and also positioned the system to handle the substantial increases in case volume that we are now seeing.

The provincial court system plays an important role in the supervision of estates in dealing with issues of debtor discharge, including issues in dispute with respect to the management of the estate. A few regional courts are facing some challenges in relation to dealing with these volumes of files in a timely fashion, and we are corresponding with those jurisdictions.

Although recently we have seen a decrease from the high of last year in new filings, the impact of our workload will continue to be felt for a number of years as estates remain open on average for more than two years.

Along with the oversight of a much larger inventory of estates, OSB has also responded to large increases in demand for information by the public, media, stakeholders and policymakers. Complaints have also increased, but at a much lower rate than the increase in filings.

In response to the current environment, we are improving our capacity to monitor compliance by all stakeholders, investigate unlawful activities, better communicate, improve data collection and improve the performance of the system.

I wish to highlight a couple of OSB's key program activities. With respect to compliance and enforcement, we have undertaken a detailed review of our compliance activities — and it is still under way — to be responsive to the constantly evolving marketplace and to be able to protect the integrity of the insolvency system.

Consistent with its objective to increase the surveillance and analysis of debtor compliance, OSB will be implementing, in the coming year, two new special investigation units; one will be located in Vancouver and the other in Toronto. We had already established one in Montreal several years ago.

With respect to the trustee licensing framework, last year OSB launched a consultation to update the framework. The objective of the exercise is to update the framework to ensure that it is reflective of the current environment, that the licensing process is complete and transparent and that the public interest is respected.

The licensing regulatory framework is an essential component in promoting the integrity of the system by ensuring that well-qualified, competent, ethical and financially capable individuals are licensed to act as trustee administrators in insolvency estates and in applying the Bankruptcy and Insolvency Act.

In conclusion, as you may have noted, OSB and its stakeholders are well occupied with the impact of the economic downturn. It is my view that the administration of the system generally works well, thanks to the dedicated work and the professionalism of the private sector, the insolvency community, the courts and the staff of OSB. Where there are strains in the system, we will endeavour to address them as best we can.

I will try to answer your questions and respond in a clear and concise manner. Should I not have the information here today, I will ensure that it is provided to the committee in a short period of time.

The Chair: Thank you, Mr. Callon. That was a very thorough review, and it has prompted a good number of senators to ask you questions.

Senator Ringuette: On page 6 of your statement, you say that the vast majority of your revenue is from the ``collection of levies and fees, which are used to offset its operating expenses.'' Do those levies and fees go into the Consolidated Revenue Fund of Canada?

Mr. Callon: That is correct.

Senator Ringuette: If it goes directly into the Consolidated Revenue Fund, then your expenditures should be viewable under Industry Canada in the budget. However, it is not there; we cannot see it.

Mr. Callon: I believe there is one line that refers to it. OSB is a small part of Industry Canada, but I believe there is one line that notes OSB and its net vote authorities being $36.5 million.

I can look at that afterwards.

Senator Ringuette: I put on my reading glasses, but I still could not see that one line. Perhaps you could identify exactly what page.

Mr. Callon: We will get back to you with that reference.

The Chair: We did find an additional appropriation in Supplementary Estimates (B) for information technology, but we could not find your basic operating budget anywhere.

Mr. Callon: As I say, it gets rolled up into Industry Canada's, as far as I know. When I looked at the estimates before, it is reduced to one line.

The Chair: Will you help us find that line?

Mr. Callon: Yes, we will.

The Chair: Great. Thank you.

Senator Ringuette: That is a major issue because that is the main purpose of this committee.

I would like to go back into your statement. On page 2, you say that the primary stakeholders in the insolvency system are the creditors, debtors, private sector licensed trustees, provincial courts and OSB. What about the employees involved with this? You mentioned twice the list of people with whom you deal with respect to bankruptcy, but you never identify the employees.

Mr. Callon: The employees would be creditors in the system, if there were unpaid wages or benefits. They would have a standing as a creditor.

Senator Ringuette: I have not had the time to look at your statistics, but in the last three years, what would be the average number of corporate bankruptcies with which you dealt, and what would be the small and medium-sized business numbers?

Mr. Callon: We receive roughly 5,000 business insolvency filings a year.

Senator Ringuette: Does that figure of 5,000 come from corporations and small and medium-sized businesses?

Mr. Callon: We divide them based on structure, whether they are incorporated or not. We have not divided them into the definition of ``small enterprise.'' They are divided into sole proprietorships and formal corporations.

Those 5,000 insolvency filings under the Bankruptcy and Insolvency Act are approximately evenly divided between the two categories. There is also the Companies' Creditors Arrangement Act, which is an act that is predominantly managed by the courts. It deals with businesses that are into restructuring. They are generally larger corporations. Since the period when records were being maintained, which is only from September 2009, there were 41 filings under the CCAA legislation.

Senator Ringuette: In a situation of bankruptcy, are you the entity that identifies the group that will be responsible to supervise a certain bankruptcy?

Mr. Callon: Normally, a debtor will choose to visit a trustee that has been licensed by OSB and file through the trustee of their choice. The only exception is where a creditor has forced someone into bankruptcy, at which point the creditor would appoint the trustee for the estate.

Senator Ringuette: Therefore, your only role in the trustee process is to license the individuals and recognize them as trustees; is that correct?

Mr. Callon: That is right. We put them through the training program. We examine, license and then supervise them in the administration of those estates and the funds that they accumulate as they liquidate assets.

Senator Ringuette: On page 4 of your presentation, you said, ``The function of the Superintendent of Bankruptcy was originally created in 1932 to deal with issues of corruption.''

Are those issues still alive and well, or have they been dealt with?

Mr. Callon: In my view, the system works very well. We work particularly closely with the Royal Canadian Mounted Police, RCMP, to deal with any issues of fraud that might occur. On the debtor side, if there are problems with a trustee who might have taken funds, we will also be dealing with those. Cases of that type that we uncover are very much the minority.

Senator Ringuette: You then state that you investigate complaints. I will give you an example.

A major Canadian corporation files bankruptcy. Then, over a number of years during the bankruptcy process, it had provided its bankrupt company CEOs good pay and additional bonuses for bringing their company into bankruptcy. Would that situation be a legitimate complaint, and would you investigate it?

Mr. Callon: It certainly might be a complaint, but we are bound by the provisions of the BIA. Nothing specifically deals with the bonus scheme that you have described. Also, if it is a publicly traded corporation, the provincial securities commission would also have oversight of the behaviour of the board of directors. I do not know specifically whether their securities legislation addresses that.

However, in the BIA, no provision limits the payment of bonuses.

Senator Eggleton: That sounds similar to Nortel.

Senator Ringuette: That sounds similar to Nortel, yes.

Mr. Callon: In the case of Nortel, that specific process was managed by the courts system.

Senator Ringuette: You are saying that, in a situation such as the one I described, you would be somewhat involved and so would the Ontario Securities Commission because it is a publicly traded company.

Mr. Callon: We would have different roles and a different mandate but potentially, yes. I assume the securities commissions would continue with their oversight as we would as the insolvency process unfolds.

Senator Ringuette: What would be the role of the trustees in that these bonuses are being paid to CEOs and not to the shareholders or to the creditors in the bankruptcy filing?

Mr. Callon: If we are talking in the context of a case similar to Nortel, that would be under the supervision of the courts and, therefore, a decision of the judge as to what is and is not appropriate. A trustee might work as a monitor, which is an assistant to the judge, who looks at and manages the file on behalf of the courts and makes recommendations. However, it is the judge who decides in those cases what is an appropriate expense.

The Chair: Senator Meighen is next on my list. He is the chair of the Banking committee and his senatorial designation is St. Mary's in Ontario.

Senator Meighen: You will be relieved to know I just have one question. I would like more information about trustees in bankruptcy. I am looking at page 13 of your presentation. You referred to the trustees as ``well-qualified, competent, ethical and financially capable individuals.'' By capable, I presume that means knowledgeable?

Mr. Callon: That is right.

Senator Meighen: How many licensed trustees in bankruptcy are there? What background do they have or must they have generally? What is the nature and length of their training process, and how are they nominated or proposed? How can one get rid of them, if necessary?

The Chair: That is one question?

Senator Meighen: That is one question, with some subsections.

Mr. Callon: To begin with, for trustees, we have certain qualifications within the licensing directive that we issue. That goes to several aspects; we do a criminal check, and also reputation and education are factors.

We have about 740 practising trustees across the country. About 70 per cent of those are also chartered accountants, CAs. Some are lawyers and other professions that have chosen to be trustees in bankruptcy.

On training, we had worked extensively with the trustee association to put in place a three-year training program comprised of four different modules that looks at the gamut of issues one would face in the insolvency system, whether it is from the legislative point of view, or the contracts and legal perspective from a counselling point of view. They are required to go through a very comprehensive program that has been put in place. They must endure testing and a final examination after each module.

Finally, we will put them through an oral board process, where OSB will manage that process and invite an insolvency lawyer and existing trustee who have no conflicts of interest to interview the candidates who are posing their candidature to OSB for a licence. It is based on the recommendation of that committee whether I will decide on the provision of a licence to them.

With respect to removal of a trustee, if it is in the context of a case, for example, that a debtor decides the trustee is not working out, he or she may go to court and ask for the trustee to be removed and a new trustee put in place.

If it is an issue of professional conduct, under the act — and those would be my quasi-judicial responsibilities — we would undertake investigations as to the trustee's conduct and look at whether we apply some sort of disciplinary measure, with the extreme being to take the licence away.

Senator Meighen: In terms of the qualifications of an individual, if you want to grow up to be a licensed trustee, do you have to be a lawyer? Do you have to be a chartered accountant? Do you have to have a high school leaving certificate? Do you need anything, or can you just apply and if you pass, you succeed?

Mr. Callon: It is fairly broad. We have left it broad because often professionals who have worked in trustees' offices and who have a multitude of years of experience finally feel that they have the experience to come in through the qualifications system. However, generally, the majority of trustees have a degree. As I mentioned, probably 70 per cent to 75 per cent of them also have another profession that they have decided to switch from to become a trustee.

The Chair: As a follow-up on that, you mentioned that 70 per cent are CAs. That is one type of professional designation. Were you intending to restrict it to CAs, or could other types of accountants also fit into that 70 per cent?

Mr. Callon: The ability to apply for the training program is broad enough to encompass any of the accounting designations. It is not in itself a requirement. For trustees who wish to go into the corporate side of insolvency, that would be a very important qualification, but it is not a restriction for entering the training program.

The Chair: I understand; but the 70 per cent who you indicated were CAs, should I take you precisely on that, that 70 per cent are chartered accountants, members of the chartered accountants association or whatever it is called?

Mr. Callon: That is right. They generally will have membership in both the Canadian Institute of Chartered Accountants, CICA, and also the Canadian Association of Insolvency and Restructuring Professionals, CAIRP.

The Chair: Are they all trustees in that second association you just mentioned?

Mr. Callon: CAIRP is a national association that the trustees have established. It is a very active group with which we work closely, particularly in ensuring the level of competency and training.

The Chair: Is that based in Ottawa?

Mr. Callon: It is based in Toronto.

Senator Eggleton: I am interested in this vast increase over the years in the number of bankruptcies, particularly consumer bankruptcies. One chart that was given to us by our analyst shows from 1976 up to current day, and it keeps going up and up.

It may have fallen a little in the last year, but now we are being warned about all this consumer debt out there, which may take it back up again. Anyway, it looks to be a five- or six-fold increase in that number of years. Apparently, we have the dubious honour of leading the pack on consumer bankruptcy, along with our American friends, over other countries belonging to the Organisation for Economic Co-operation and Development, OECD.

You have laid out in a chart the reasons — mismanagement of funds, insufficient income, et cetera — but I am sure that they probably apply in these other countries; these seem to be standard reasons. Why do we seem to be so worse off than others, and what can we do about it?

Mr. Callon: A variety of factors come into play when you are trying to compare one country versus another. There is cultural acceptance of debt and, in particular, the introduction of instruments such as credit cards. You also have social policy with respect to insolvency legislation, as to what the process will be.

For example, in some countries no provisions exist to allow for consumer insolvencies. There is no process for consumers to be able to be discharged from their debt in certain countries. In most OECD countries there is.

Senator Eggleton: Just keep it to the OECD countries.

Mr. Callon: In that context, the policies of the government have put in place a range of processes. For example, we have a process in which people can go through the bankruptcy process when they have run into unemployment or major health problems and have no surplus income; in that instance, it is possible to go through the process within nine months of having filed for bankruptcy.

If you compare that to other countries, I believe in Ireland, for example, it can be as long as 12 years to go through the process. Different standards are put in place by respective governments to be reflective of their own policies.

Senator Eggleton: What about financial literacy programs? Would that not help?

This may not be your direct responsibility, but you get a lot of information on why people get into the financial trouble that results in them filing for bankruptcy. It seems to me that you could be a good source for determining how we get out of this, how we stop leading the pack and cut down on the number of bankruptcies. Financial literacy is perhaps one of the ways.

Mr. Callon: That is an excellent point, and I very much agree with you. In the past two years, we have looked at partnering with those agencies that are specifically trying to target improving financial literacy. We have been working with the Financial Consumer Agency of Canada, FCAC — another agency, I believe, that did a report under the Banking Committee — to develop a tool for students and student debt. We are also looking at another project with them to look at the possibility of something for those who are reaching the age of retirement and dealing with their current level of expenditures when they must also deal with decreased revenues.

As you mentioned, we have a significant amount of data. We had provided data to the Financial Literacy Task Force set up by the Minister of Finance to look at ways of improving financial literacy. I understand they will be reporting shortly. We worked very closely with them to provide them with whatever data we thought they could use.

We are also collaborating on another initiative with FCAC. It deals with a conference with the OECD that will be held in Toronto, I believe, in May. That will focus on the national efforts toward financial literacy within Canada.

Senator Eggleton: That is good. I certainly encourage to you keep doing that and reporting to the minister on your views about that matter. Hopefully, we can help people who get into this dilemma.

With this increase in consumer household debt that Governor Carney of the Bank of Canada, among others, has been warning us about — as well as the debt within the financial community — you could see a further rise in consumer bankruptcy.

Mr. Callon: That is right. The governor has clearly talked about the issue of debt to disposable income. I also provided a chart that looks at the fact that despite the costs of debt to the households going down, the debt has increased where expenditures on debt have remained the same for the past 20 years. If the interest rates have increased and they have maintained that level of debt, what will happen? I pay attention to those statistics from the bankruptcy and insolvency point of view for that reason.

Senator Eggleton: At one time, the business bankruptcies were higher than the consumer bankruptcies. Then they crossed over in the late 1990s and have been down quite a bit since then. What happened in the late 1990s that changed the picture?

Mr. Callon: That is very reflective of a question I had when I took over as superintendent. We held a series of round tables. Statistics could not really show why that would be happening. Therefore, we invited the professionals and individuals from the insolvency community to review what was happening, particularly with respect to business insolvencies. A range of observations occurred potentially to explain why the insolvency rates have been going down to an almost record low.

I will highlight those observations: One reason is that during the past recession in particular, the financial institutions were much more flexible with existing credit arrangements. As long as a certain degree of ``service'' has been provided on the debt, the credit arrangements have been extended. Therefore, leniency in the system is one observation.

Another observation is that small businesses, in particular, learned significant lessons in the 1990s about recessions. Therefore, they were quicker to react when this severe recession came, and they were better prepared to downsize and adjust to be able to survive.

Another aspect is that our statistics might not be holistic. There might be situations where people simply walk away from businesses where there are very little assets, such as knowledge-based businesses. When the creditor goes to look for those assets, they are not worth proceeding with under an insolvency process.

A combination of those three observations would probably play a role in explaining those numbers.

The Chair: What happens to those assets that are too insignificant to process in an insolvency or bankruptcy?

Mr. Callon: If it is a process through the insolvency system and the assets are too few to distribute, they are to be remitted to OSB where they are held in a general account. We track them separately. Currently, $7 million to $8 million in unclaimed assets has accumulated in that account over the years.

The Chair: Is it a real account, or is it just an accounting figure with the monies going into consolidated revenue?

Mr. Callon: They are within the Consolidated Revenue Fund, but they are held as a separate account.

The Chair: Can you draw on those funds for special purposes, assuming you have authority from the Minister of Industry?

Mr. Callon: No, we cannot draw on those funds. We have another account referred to as unclaimed dividends, as well. In an estate, for example, again with respect to cash, if they cannot find the creditor, they remit the funds back to OSB.

Our website has the ability to search the database. If you are a debtor or a creditor and you want to see if we are holding money in trust, you can plug your name into that account, much like the Bank of Canada's unclaimed bank accounts, and find out if there is money that might be owed to you.

The Chair: That is interesting.

Senator Ringuette: For how long a time would you hold those trust accounts?

Mr. Callon: There is no limit. As I understand it, it is very similar to the Bank of Canada and the unclaimed bank balances. There is no specific time limit relating to holding those funds in trust.

Senator Callbeck: Thank you, and welcome this morning. Senator Eggleton has talked about financial literacy, which is something that really concerns me. Yesterday I received a letter from a financial institution about taking a Registered Retirement Savings Plan, RRSP, and rolling it over into a Registered Retirement Income Fund, RRIF. It would take a financial expert to understand that. There was a whole list of questions you were to go through and check this off and that off.

I thought we were making progress in this whole area, but when I looked at that, I really could not get over how complicated it was. Consumer insolvencies have gone up 32 per cent from 2007 to 2010, according to the figures I have. I guess they will continue to keep rising.

Do you feel that financial literacy is a big factor in that increase in consumer insolvencies?

Mr. Callon: It is one of several elements. Within the statistics I provided to you, a range of factors are identified by the debtor as what they felt caused the insolvency. The vast majority are caused by a mismanagement of funds, which would tend to indicate the issue of literacy comes into play.

However, that is not to play down loss of employment, which has nothing to do with literacy and is simply loss of revenue, or a major health crisis that affects revenue. Those are also important factors that force people through the bankruptcy process.

With respect to your question on literacy, we believe that that is an important area on which to focus. As I said when I responded to Senator Eggleton, it is one of the primary reasons that we are trying to have an outreach program with those agencies that are focussing on literacy. The Financial Consumer Agency of Canada, in particular, was set up by Parliament 10 years ago to improve on the educational side. However, one of the difficulties when monitoring the disclosure is that products come on to the scene very quickly and outpace the ability to regulate what is appropriate disclosure. It is a difficult area in which to ensure that there is a good level of plain-language information available for the consumer.

Senator Callbeck: You say that you are working with FCAC on a calculator tool for students. What exactly will that do for students?

Mr. Callon: As with any education, people will seek information when they need it. It is a tool that will put students through a process when they realize that they are having difficulties; it looks at their situation and how they can manage it.

In particular, we know that student debt is increasing within Canada. We thought it was important to develop a tool where they can plug in their situation and see how they rate.

Senator Callbeck: Can you talk about the tool that you are working on for people reaching retirement age?

Mr. Callon: It is within the same context. We have noticed within the statistics that the rate of insolvency among those over 55 is increasing. It increased significantly over the past few years, so it has drawn our attention to that category of debtor.

Again, we have worked with a partner, in this case FCAC, to look at a tool to get them to realize what their current expenditure levels are, what they anticipate their revenues will be and provide them with information on what that looks like in terms of a net income.

Senator Callbeck: Who assesses the conduct and the performance of your office? Does the Auditor General get involved?

Mr. Callon: The Auditor General had been through OSB many years ago. However, aside from that, Industry Canada also has an audit and evaluation unit where they look at aspects of our operations.

The Chair: Can you tell us more precisely what ``many'' refers to?

Mr. Callon: I believe it was in the 1980s when the Office of the Auditor General came through specifically for OSB. They clearly have been through Industry Canada. It is a multi-layered, multi-dimensional department, but in terms of our specific program, I believe that was the last record that I have seen.

Senator Callbeck: You mentioned a management advisory board and that the appointments are made by the deputy minister. Is there any attention given to regions when they are appointed, or is it just their expertise?

Mr. Callon: It is a combination of trying to blend expertise and experience and regions with the board. There are seven positions, so it is limited, but there is a strong desire to have representation across the country.

Senator Callbeck: How many would be there from Atlantic Canada?

Mr. Callon: We have one of the seven, John Eisner, from Halifax. He works with the Credit Counselling Services of Atlantic Canada Inc. He has been on the board for the last year and a half, I believe.

Senator Callbeck: Therefore, we have one seventh.

How many women are on it?

Mr. Callon: The chair is the current woman on the committee.

Senator Callbeck: There is one woman.

Mr. Callon: Yes; Joan Huzar, who also came out of the consumer movement.

Senator Marshall: In your opening remarks, you said that one of your roles was the supervision of the administration of estates and compliance with your legislation. Could you give us some additional information as to how you would do that?

If possible, could you link it to concerns that you raised later in your opening remarks about how long estates remain open? I think you said that it was up to two years. Then you also mentioned a review that was being carried out. Could you follow through and talk about who is doing the review and why the review arose?

Mr. Callon: I will give you an overview of the compliance role, and then I will ask Ms. Alférez, who is leading that review, to provide you more detail on the aspect of that review.

We have two primary aspects of compliance. One is in regard to debtor compliance; debtors under the act have responsibilities, in particular in the area of disclosure and relinquishing of assets. We also have compliance relating to the professional conduct of trustees. The organization is primarily divided into debtor compliance and trustee compliance.

To focus on trustees, we have several layers of compliance activities, depending on what we view as risks that a particular trustee might pose. When we look at risk, we include several factors. We look at the types of complaints that might have been filed against the trustee. We will look at the volume of estates that are being opened by the trustee. We will look at the length of time the trustee has taken to close estates, and we will review those factors and determine exactly what level of supervision we will use.

We may just use a baseline to look at an odd number of estates to see if we see any problems. We may do what we call a banking review, which is to go and look at the trust accounts to see if there are any problems. Then we have the full-fledged audit. We call it a practice review, where we go into the office and look at all the administrative processes — banking, the aging of the estates — and assess the conduct of the trustee.

Senator Marshall: With 740 trustees, you must go through a risk assessment process, and the ones that you go on site to do a detailed review of obviously would be the ones that you have some concerns about.

Mr. Callon: That is right. We do an average of 90 practice reviews a year of trustees.

Senator Marshall: Is bankruptcy fraud an issue with respect to trustees? I have read many articles about bankruptcy fraud.

Mr. Callon: It is not a significant issue for us. We do have, probably once every couple of years, an issue where there has been falsification of the trust accounts. We do have two or three criminal cases that we are prosecuting due to fiduciary problems. However, we do not see a significant problem with the number of trustees involved in that aspect.

Senator Marshall: What about the debtor compliance group?

Mr. Callon: On debtor compliance, we also looked at variables that might indicate problems. As examples, we will look at the number of credit cards the person claims to have had, the size of the debt that is coming in versus the assets that they have, and make an assessment and rank them.

Based on that ranking, we might decide to have an examination of a debtor. We will ask the debtor to come in and go through the statement of claim. which lists what they claim to be their debts and assets. Based on that examination, as well as any information that might be provided by the trustee, we might pursue a more formal investigation if we find issues.

I will refer the question about the review to Ms. Alférez.

Patricia Alférez, Deputy Superintendent, Office of the Superintendent of Bankruptcy Canada: As part of our three- year business plan in 2009-10, we decided to start a review of our compliance framework to ensure that we were in line with the marketplace. For the organization, this meant going through our processes and policies to ensure that we were responding to the needs of the marketplace, considering the numbers of insolvencies coming in.

We identified some gaps and programs that we needed to improve, one of which was the debtor compliance program. As Mr. Callon explained to you, we already have some investigation processes in place, but we realized that we needed to improve and be more visible in the community.

We will do more interventions in court at the time of the discharge of the bankruptcy. We will be more visible there. As was discussed earlier, we will be starting special investigation units in Vancouver and Toronto in partnership with the RCMP to investigate fraud cases concerning debtors.

Senator Marshall: We were talking about the Auditor General a few moments ago, and I think the last audit was done in the 1980s. Who is doing this review now; is it being done internally, or have you contracted with an outside group?

Ms. Alférez: In 2009, we first asked, through a contract process, a consultant to help us start the review and to provide us with recommendations and their views on where we should be improving our compliance framework. They provided us with their report and recommendations in May 2010, and we are now in the process of implementing those recommendations.

Once we are further along in that process, Industry Canada's audit and evaluation branch may come in and verify where we are in terms of the implementation.

Senator Marshall: Would that review be on your website? Do you have any plans for publicly disclosing what came out of that review or investigation?

Ms. Alférez: In our business plan, we have already explained where we wanted to go with the review. As we move forward with the implementation of changes to our programs, it is our intention to provide some information to the stakeholders.

One of the goals of the review of the compliance framework is to ensure that the stakeholders understand what the regulator is and what the expectations of the regulator are in terms of the compliance framework. As we move into the implementation stage, our programs and processes will be available to the stakeholders and the public.

The Chair: I am interested in knowing if that business plan is on your website for everyone to see. How do the stakeholders become aware?

Mr. Callon: When we are drafting the business plan, we sit down with the primary stakeholder with respect to trustees and go through what we anticipate the priorities for the regulator should be over the next few years; and we take their views into consideration.

Additionally, we have conferences where we bring together the registrars from the provincial courts, and we give them a presentation about what we anticipate the priorities for the next three years would be.

We carry out those consultations on the proposed activities for OSB directly.

The Chair: Am I correct then in saying that your business plan and your annual report to the minister are not on your website?

Mr. Callon: No. They are documents provided to Industry Canada to provide them the ability to provide oversight on OSB.

Senator Marshall: For the advisory committee, what is the reporting structure to the minister? Do you report to the advisory committee that then reports to the minister, or do you report directly to the minister? I think you mentioned something about the deputy minister being involved there somewhere.

Mr. Callon: I will provide a background, and then respond directly to your question.

They set up special operating agencies — in other words, taking a part of the public service so that it could focus on its mandate — which, in our case, provided us with net vote authorities that provided us with the ability to obtain revenues. During that process, Treasury Board felt that stakeholders should have a say in the management of these special operating agencies. Therefore, they requested the departments set up informal but real advisory boards.

Therefore, there is no legislative mandate for it. It was done strictly in the context of a Treasury Board policy, as I understand it. A board was set up shortly after the agency status was given. Industry Canada, as the responsible department, set up the board and then appointed members and the chair to the management advisory board. That decision making was specifically delegated to the deputy minister.

In terms of reporting, I do not report to the board in the context of direct supervision. If I might, it is a talent pool that I am able to access four times a year during which they have the ability to take a look at the various strategies that we, as management, intend to propose, whether it be a communications, human resources, compliance or revenue strategy. Whatever management initiative we are undergoing will go through the management board for them to provide their advice to OSB to make adjustments or alter the focus. I will then take that under advisement and make adjustments.

Senator Marshall: However, you report to the minister.

Mr. Callon: That is right.

Senator Marshall: That was very informative.

The Chair: Thank you.

Mr. Callon, before I continue, you have given us the names of two of the seven members of your advisory board. Are the names published on the website so that we can see the members' names and background?

Mr. Callon: Yes they are. I can give you the names quickly.

The Chair: If you would tell us who they are and where they are from, that would be helpful.

Mr. Callon: The intent was to have a mixture of business professionals as well as stakeholders. Therefore, we have Alan Spergel, past chair of the Canadian Association of Insolvency and Restructuring Professionals, who is on the trustee side. In terms of legal insolvency practitioners, we have Edward Sellers, who is a member and a senior lawyer in Toronto. We have a representative of a financial institution, Alban D'Amours, who was a former president of the Desjardins Group. I mentioned Joan Huzar, our chair, who came out of the Consumers Council of Canada movement. We have Jean Brassard, who I believe is on the board of CGI Group Inc., a large technology company. We have Charles McAllister, from New Brunswick, who works for the Government of New Brunswick and provides a different point of view of how another type of government does a similar type of work. Finally, we have John Eisner, who I also previously mentioned, who is with the Credit Counselling Services of Atlantic Canada Inc.

The Chair: Thank you. Equally important, these names are posted on your website, are they not?

Mr. Callon: I believe so.

Senator Oliver: All my questions were about financial literacy and have been ably canvassed by Senator Callbeck and Senator Eggleton.

First, I want to ask you about the 380,000 estates that you currently have under administration. You said that you divided Canada into three regions, the West, Ontario and the East. I would like to have a breakdown by region and per capita, if possible, of those 380,000 estates under supervision now. What percentage would come from the East, Ontario and the West?

Mr. Callon: I will be able provide specifics later, but I can give you a general sense now of what the breakdown is.

Approximately 50 per cent of the insolvencies are in the Ontario region, or Central Canada region; approximately 35 per cent of the filings are in the East, which is Quebec and the Atlantic Provinces; and the remainder are in the Western provinces and on the West Coast.

Senator Oliver: Internally, do you differentiate between Quebec and Atlantic Canada?

Mr. Callon: We have assigned a specific office in Atlantic Canada at Halifax.

Senator Oliver: Do you have those numbers broken down by the provinces of Newfoundland and Labrador, Nova Scotia, New Brunswick and Prince Edward Island?

Mr. Callon: We can slice and dice them pretty good. I can make sure that you have those figures in short order. I do not have them with me today.

Senator Oliver: On financial literacy, I will not go back over what you have expressed. The main thing you do for financial literacy is to work with outreach programs from other agencies already in the field, such as the Financial Consumer Agency of Canada. You also talked about giving information to the Financial Literacy Task Force set up by the Minister of Finance. The task force tabled its report with the Minister of Finance in December 2010, and in January 2011 it was announced.

It seems that most of your work on financial literacy is done with others and not independently. Do you have the mandate to work directly on financial literacy, or do you have to work through other agencies, such as FCAC?

Mr. Callon: We do not have a specific mandate to carry out an educational function. In my view, as in the view of any regulator, it is important to ensure that people understand their roles and responsibilities within the context of the legislation. Therefore, we have a strong outreach program. On our specific area of responsibility, which is debt, we have produced several information packages that deal with debt and managing debt.

Several years ago, even before it became fashionable in the world of financial literacy, the OSB focused on a package for schools that dealt with aspects of savings and debt. Certainly, we have felt an obligation to be intricately involved but not necessarily to take the lead, in that FCAC for the federal government is tasked with the educational component. As well, we work with the Office of Consumer Affairs, Industry Canada, wherever possible on any information that we would like to get out.

We often have requests to speak on the topic of debt. We take those opportunities to make presentations and to explain the statistics and trends we see. We also promote our website that contains good information on debt and debt management.

Senator Oliver: Do you have any new, extraordinary plans for financial literacy on your drawing board that you are about to announce?

Mr. Callon: The task force tabled a preliminary report, and I believe that a final report is due out this month. We are looking forward to its recommendations and guidance on the focus and the value that it presents. Our strategy is to work in partnership and see what partners are available to try to meet the expectations that might be contained in that report.

Senator Oliver: On financial literacy, the thing that caught my eye more than any of your recommendations and so on that you spoke about is what you are doing for seniors. You indicated, in response to Senator Callbeck's question, that you have someone who will sit down with seniors, review their net worth, liabilities and assets and show them a net income figure so that they know how much they have available to spend.

Is that your program, or does it fall under another agency such as FCAC?

Mr. Callon: No, that was in response to a technology-based tool that we are developing that is applicable on the website. The tool is in the works with FCAC and would be accessible through our respective websites.

Senator Runciman: In response to Senator Eggleton's question, you mentioned the concern about interest rates. Can you quantify that risk in terms of the rise of interest rates relative to the rates of bankruptcies? Can you provide that kind of assessment?

Mr. Callon: I cannot respond with a mathematical formula. It is important to note — and I provided a slide — that households have not reduced the cost of their debt despite the fact that it is at one half the cost that it was 15 to 20 years ago. People have maintained a very high level of debt. Some argue that it is in term debt, so if interest rates increase, it will not have an immediate impact. That is a possibility. There are various scenarios of what the impact would be and how quickly it would occur. I could not speculate on the specifics of the impact, but in my view, it is a concern.

Senator Runciman: One of your charts on consumer insolvencies shows the spike in 2010. Do you see that as a one- year phenomenon because of the new rules that came into play? Do you expect that to level out to the relatively stable rates of the past?

Mr. Callon: It stabilized pre-recession at 100,000 filings for about three or four years. In the fall of 2007, we saw the constriction of credit and the resulting economic fallout. There were a couple of variables. One was that credit was no longer being extended in the same way. Consumers who relied on debt as cash flow were probably hit first. We saw a bit of an increase, as the graph shows, coming forward in 2007-08, followed by the impact of the recession, which was unemployment in the auto industry and the forest industry. We see that impact in 2008-09. It has gone down during the current year. One could assume that with the country coming out of the recession and jobs being created within the economy, we will see a continued decline in bankruptcy filings.

Senator Runciman: The Finance Minister recently announced some changes related to mortgages, amortization and a range of others. Has that been a significant part of this problem in the past?

Mr. Callon: It simply reflects an overall concern about the level of consumer debt in the marketplace. It was a cautionary step to send the signal that consumers should ensure that they are prepared for any extraordinary event that might occur. I mentioned a few, such as health and unemployment. People must have an awareness of whether they would be able to manage their debt should something arise.

Senator Runciman: Another of your charts shows the proportion of consumer insolvencies by age, which is interesting. I am not sure what we take away from that, so perhaps you could give us your conclusions.

I am looking at 1988, and the 25-to-34 age group. We have heard much over the years about student debt that has contributed to bankruptcies. That does not seem to line up with your graph as a significant problem. How do you see that? Perhaps you could give us your interpretation of this chart.

Mr. Callon: Is that the graph on page 15?

Senator Runciman: Yes, that is right.

Mr. Callon: It tells an interesting story. In the under-44 age group, we are seeing a decline in the proportion of consumers filing through the insolvency process. However, for the groups aged 45 and older, for the three time periods shown, we are actually seeing an increase of the filings.

Many factors come into it in terms of the youth. Although they may be getting more debt, we are also aware of a social trend of youth returning back to the home base and reducing their costs significantly. It could be that they are transferring those debts to the older group. I would not want to hypothesize, but, having children myself who are in university, I seem to be accumulating a bit more debt than I had before, and they do not.

I cannot give you an in-depth analysis. Maybe it is just the flavour of possibilities.

Senator Runciman: That is interesting. Have you established any real significance from those conclusions?

You talked about mismanagement of funds being the major contributor to consumer insolvency. From my past experience in dealing with some of these situations in the constituency office, I tend to agree with that observation. There is a television show where a lady tries to solve the financial problems of primarily younger families. It is, indeed, a challenging situation.

You referenced Ireland, where it could take up to 12 years, I think, to get through the bankruptcy process. Clearly, you have made it a little more challenging with the changes to the rules that the government has now put in place. How do we line up with some of these other jurisdictions now after the rule changes? Are we pretty much on par with the others, or are they still much tougher on individuals going through the process? How do we line up today?

Mr. Callon: I have not done any particular research on systematically comparing the legislative schemes for various countries. Therefore, I cannot honestly answer that question with good, solid academic research about the schemes or regimes of other countries' insolvency processes.

Senator Runciman: When these changes were made, were no comparisons made with other comparable jurisdictions?

Mr. Callon: When policy decisions are made, that is within the scope of the department. A policy shop manages the government's policies. Although we are consulted particularly on our work and statistics, we are not directly involved in their research that supports whatever policy they are working on.

Senator Runciman: Would your advisory board have the ability to comment on proposed changes? Is that not part of the process?

Mr. Callon: The management board is focused on management as opposed to policy.

Senator Murray: I am very interested in the subject matter that Senator Runciman dealt with and Senator Eggleton earlier. The last questions Senator Runciman asked were to be my first questions.

Let me frame the question this way. In your view, have the recent legislative changes had the effect of making it easier — that is to say, facilitating consumer bankruptcy — or, to use Senator Runciman's term, do they make it ``more challenging'' for the consumer?

Mr. Callon: Back in 1992, an initiative from a policy point of view, as I understand it, brought in the concept of individuals being able to restructure their debt — we call them consumer proposals — as opposed to going through a bankruptcy. A bankruptcy is a process where a trustee will take possession of your assets, liquidate them and also manage your affairs during the insolvency process. A proposal process was put in place to allow consumers, through a trustee, to negotiate with the creditors to reduce the payment load, the debt load, and to come to a reasonable solution over a period not to exceed five years.

Senator Murray: Those are provisions of your legislation.

Mr. Callon: That is right.

Senator Murray: How frequently are they resorted to by consumers compared to bankruptcy?

Mr. Callon: Typically, the proposals have been increasingly popular. Pre-recession, about 20 per cent of the insolvencies were proposals. Recent amendments increased the maximum amount of debt with which you could enter into one of those proposals from $75,000 to $250,000. Since then, we have seen a shift to proposals, which now make up almost 30 per cent of the insolvencies.

Senator Murray: Is the fall-back position of the proposer that if his or her proposals do not fly, he or she then goes into bankruptcy?

Mr. Callon: That is a possibility, yes.

Senator Murray: That is what hangs over the heads of those who are involved in that process.

Mr. Callon: The creditors could put them into bankruptcy; that is right.

Senator Murray: They could also go voluntarily.

Mr. Callon: Yes.

Senator Murray: It says here, and you have said in your statement, that you have a quasi-judicial responsibility relating to the professional conduct of licensed trustees. Is there a code of ethics or of conduct relating, for example, to potential conflict of interest on the part of trustees, or are we dependent on the criteria of those professions, be it the legal or the accounting profession, or whatever?

Mr. Callon: Two codes of conduct apply to trustees. The association itself has produced a code for its members, but, in a more forceful way, the rules or the regulations that accompany the BIA actually have engrained a code of conduct as well, dealing with the behaviour of trustees and conflicts.

Senator Murray: Is that in legislation?

Mr. Callon: That is right.

Senator Murray: The trustees are appointed under your authority, is that correct?

Mr. Callon: That is correct.

Senator Murray: Is the minister or the minister's office involved in any way in that process? Do they review the names of candidates before they are licensed?

Mr. Callon: No, they do not.

Senator Murray: Do you inform them afterwards?

Mr. Callon: We do not directly inform them. We put on our website all trustees that have been licensed by OSB.

Senator Murray: With respect to machinery of government, the issue that the chair raised at the outset, you are appointed, superintendent, for up to a five-year term based on good behaviour. Is the five-year term renewable?

Mr. Callon: Yes, it is.

Senator Murray: Do I take it that your background is in the senior ranks of the federal public service?

Mr. Callon: That is correct.

Senator Murray: You head an operating agency. Now, this is a label that covers a multitude of sins. There are so many of them across the system, I have lost count. It is hard to find a common thread among any of them. I take it that what makes you — not unique because other agencies can do it — special is your power to exact user fees or net appropriations?

Mr. Callon: It is net vote.

Senator Murray: That is what makes you special. Otherwise, your relationship to the minister and, through the minister, to Parliament is no different than any senior officer of Industry Canada. Is that the case?

Mr. Callon: It is a Governor-in-Council appointment as opposed to perhaps an executive, EX, which is within the management framework of the department.

Senator Murray: Do you mind me asking where you came from before you came to the bankruptcy sector?

Mr. Callon: I was the acting commissioner for the Financial Consumer Agency of Canada. Prior to that, I worked with Department of Finance Canada with the financial task force on financial institutions back in 1998-99. Prior to that, I worked as the executive director of another regulatory agency, the federal labour board.

Senator Murray: Those were all EX positions, is that correct?

Mr. Callon: That is right.

Senator Murray: This is a Governor-in-Council appointment.

Mr. Callon: The acting commissioner was a Governor-in-Council appointment as well.

Senator Murray: Most, if not all of the people who work for you, who work under the Superintendent of Bankruptcy, are civil servants?

Mr. Callon: That is correct.

Senator Murray: Do they belong to the relevant public service unions, and so forth?

Mr. Callon: That is correct.

Senator Murray: Nothing is different, as a special operating agency, except that you are appointed by Governor-in- Council and have this financial relationship.

Mr. Callon: That is correct.

The Chair: You raise a number of very interesting points, Senator Murray. I appreciate that.

In terms of where your revenue comes from, maybe you could explain to us if the trustees are required to pay to maintain their licence on an annual basis.

Mr. Callon: I can give you an overview of the revenue structure.

We have several sources of revenue. Trustees are required to pay an annual fee of approximately $900 to renew their licences. We receive approximately $1 million from that revenue, but it is not spendable by OSB. That goes directly to the Consolidated Revenue Fund, in that, in essence, the licence is a right of the Crown, so the funds must be given directly to the Crown.

The levies and fees that we charge are on payments made to the creditors through the trustee, so where the trustee has liquidated assets or if the debtor has some sort of payment schedule, a percentage or lump sum would be due to OSB as part of our oversight role.

The Chair: What percentage is that, and is it a legislated amount?

Mr. Callon: It depends on the type of insolvency and the fee that would apply. We have consumer proposals, which attract one set of fee types; consumer bankruptcies; business proposals under the act; and corporate bankruptcies as well. Each would attract a particular formula for the fees that would be due, and those are in the rules that are attached to the BIA.

The Chair: The trustee, likewise, can add a certain percentage fee that comes out of the estate, probably off the top, is that correct?

Mr. Callon: That is right. It depends on the type of proceeding that is before us. What that fee or percentage would be is also set down.

The Chair: Is that how the trustee gets his or her revenue and how you get your revenue?

Mr. Callon: That is correct. In essence, it is money that would go to the creditors. That is what the insolvency system is for, dealing with the debtors and creditors, and as I said, an orderly payment of debt that occurs.

Senator Murray: Does the trustee get his or her revenue off the top?

Mr. Callon: There is a priority for trustees, yes.

Senator Murray: The trustee is not likely to be one of the victims of the bankrupt.

Mr. Callon: No.

Senator Murray: I am not complaining or criticizing.

The Chair: We are just trying to understand the process.

Mr. Callon: In consumer bankruptcies in particular, where perhaps the consumer does not have the upfront ability to make payments, my office has an agreement with the trustees to provide access to the bankruptcy. It is called the Bankruptcy Assistance Program, and how consumers can access that process can be found on our website.

The Chair: You talked about the rather significant increase in the proposals that are coming forward now as opposed to a straight assignment into bankruptcy; it is up to 30 per cent, I think I you said. Does the trustee still have a role in that? Is the scheme for reimbursement for services rendered the same for proposals?

Mr. Callon: The changes to proposals, in particular with the last amendment, were very timely, in that we were heading into a recession, because proposals allow, in particular, homeowners to keep their homes. They had hit the limit of the amount of debt that the proposal would allow, which was $75,000. The alternative was bankruptcy, in which they then lose their assets. The increase in the amount of debt allowed provided much more flexibility within the system for consumers and households to be able to negotiate through trustees or have trustees act on behalf of the consumers to try to develop proposals. Through that process, consumers are able to retain their households, in the majority of cases, as they complete the proposal or the agreement of repayment.

The Chair: Is there a rule for people who are in distress to go to someone to get financial credit counselling other than going to a trustee, or is the trustee providing those services to people?

Mr. Callon: There is a choice for consumers. We certainly have encouraged trustees to offer counselling. If someone is interested in filing, the trustee has a requirement to go through the consumer's or business' situation. Very strict criteria are in place for the process of interviewing the debtor and providing advice on what options are available to the debtor. The debtor may choose to go to a not-for-profit credit counselling association, which exist throughout the country, and they in turn have a very good program for financial education, budgeting and so on, and will also do similar work. Additionally, if required, they have the ability to establish debt management plans, which are similar to proposals, whereby they will negotiate with the creditors to take the existing debt and either perhaps reduced the interest rate or extend the payments over a certain amount time.

In the marketplace, the consumer has the choice to use a trustee or a credit counsellor. For-profit companies that offer credit counselling are out there as well, and you have probably seen a lot of their advertising. The marketplace does offer choices for the consumer.

The Chair: Do you oversee those for-profit and not-for-profit credit counselling groups in addition to the trustees?

Mr. Callon: No. We are mandated specifically with respect to the trustees who we licence.

The Chair: If the trustee is involved in a counselling situation, are they entitled to charge for that?

Mr. Callon: That is right. I want to follow up on a question asked by Senator Runciman. In our process, to try to help improve the knowledge of the debtor in terms of financial management, trustees have to a specific requirement to sit down with the debtor at least twice to go over the financial education component. The trustee is entitled to charge a fee, I believe, of $85 for each session that he or she has with the consumer.

The Chair: Trustees are for-profit entities, I am assuming; they are not these not-for-profit credit counselling groups that you mentioned earlier.

Mr. Callon: That is right. They are a private sector service.

The Chair: Do you put any limit on the number of people who can work for one trustee? One trustee in bankruptcy puts his or her name out and then has all these other people working in the office. Do you put any limits on that? Do you oversee that in some way?

Mr. Callon: We do not put limits on it, but we pay attention through our risk management that I mentioned to Senator Marshall. We look at the volume of estates being handled by any one trustee. We have a number of trustees who operate sole practices. However, also we have the large accounting practices such as PricewaterhouseCoopers, KPMG LLC and Deloitte who also offer trustee services across the country.

The Chair: In that instance, would they have one trustee, one person who is the trustee in bankruptcy and multiple offices that that one trustee oversees?

Mr. Callon: They would have several trustees. However, normally one office will have one trustee and administrators who report to that trustee, and that trustee is responsible for the work of the staff.

The Chair: Every physical office has at least one trustee in it then; is that what you are saying?

Mr. Callon: I understand that they also have the capacity for sub-offices, where a trustee will travel. Particularly in the rural areas, such as in Northern Ontario, they might have a primary office in Thunder Bay but also offer their services in the surrounding communities in other offices. For example, they will spend one day in Sault Ste Marie, two days in Wawa and then return to Thunder Bay. Therefore, the operations of the trustee are flexible.

The Chair: You oversee all of that, do you?

Mr. Callon: That is correct.

The Chair: You approve and keep an eye on it.

Mr. Callon: That is correct. If they want to open an office, they would come to us to get approval.

Senator Ringuette: You said that you provide an annual report with recommendations to the Minister of Industry.

Mr. Callon: It is simply an annual report on operations. There are no recommendations.

Senator Ringuette: That report is not required as yet to be tabled in Parliament.

Mr. Callon: No. Because we are considered a branch of Industry Canada, it is simply management reporting that occurs between the department and OSB.

Senator Ringuette: Therefore, it would not be on your website either, would it?

Mr. Callon: That is correct.

Senator Ringuette: That plays a lot into the transparency and accountability issue.

I want to go back to your statement on page 8 about financial management. You are collecting $43 million annually from bankruptcy processes, an amount that is not going back to creditors. Have you been lobbied, or have financial institutions suggested that those fees be reduced in any way so that the financial institutions would acquire more of the insolvency situation?

Mr. Callon: In the three years of my office, that has not happened at all. I have met with the Canadian Bankers Association, CBA, on occasion to talk about OSB's program. We do face-to-face consultations with stakeholders when we look at our business plan. Given that you could argue that it is creditor's money, it is important that they understand what the regulator intends to do.

We looked at expanding the special investigation units into Toronto and Vancouver. That is an expensive proposition because you are engaging significantly experienced police officers. We had their support to try to expand enforcement of the insolvency process. We have not had any push back from the major creditors.

Senator Ringuette: A few months ago in another committee, the CBA said about bankruptcy that any additional creditors would remove their income generating from a bankruptcy situation and that it would increase the risk level of loans, the interest rate, et cetera, while the Receiver General for Canada is getting, on average, $43 million a year from those fees.

My conclusion is that the Government of Canada is receiving $43 million a year from bankruptcies while that money could be well invested in ensuring that pension funds are in good standing order so that the consumer bankruptcy rate you have reported begins to lower in Canada. There is a relationship in that.

The Chair: Mr. Callon, you are certainly entitled to comment on Senator Ringuette's conclusion.

Mr. Callon: I appreciate the invitation, but I will decline.

Senator Ringuette: I think you made the right decision.

Thank you very much, by the way; I appreciate the information here. On slide 12 of your deck, I cannot figure out why in the last 12 months these 41 companies that constitute 163 affiliated companies would go into bankruptcy when they have liabilities of $14.4 billion but assets of $14 billion. The difference between their liabilities and assets is not considerable enough for them to move from an operation standpoint into bankruptcy.

Mr. Callon: These processes, which are under the CCAA, are done through the court system and provide much more flexibility than the BIA to arrange corporate restructuring.

You referred to Nortel. However, Canwest has also gone through the process, as some of the large forestry companies are now. It does raise the question of why they are there. However, as we are not parties to those processes, I cannot speculate why they went through the process.

There is always the question of whether assets match the demand for cash flow. If your assets are primarily fixed assets and you are having a demand on your cash flow, that in itself can pose an insolvency problem where you are unable to make the payment requirements on your debt because you cannot sell the asset in time to make your debt obligations. That is one example.

However, I do not have specific information.

Senator Ringuette: That would be interesting to know. On one of the slides, you identify the reasons for consumer bankruptcy. It would have been nice to have the reasons for insolvency of companies also. Do you have that?

Mr. Callon: That is exactly the question we were asking ourselves when we were preparing the data, namely, why we do not have it for businesses.

One of the many activities we are undertaking is to look at the data that we collect and examine what other data would be of use for the future. Requiring trustees to provide us information on the primary reasons for insolvency for the business side is one of the data sets. I apologize but, unfortunately, that is not collected.

Senator Ringuette: You identify the number of bankruptcies for the business community on a yearly basis. On average, it was 5,000 a year. However, many companies decide just to close up shop. Do you have data to compare the companies that have closed up shop to the ones that have decided to go bankrupt with respect to process and decision making?

Mr. Callon: No, we have no way of accessing what we call ``walk aways.''

Senator Ringuette: However, Industry Canada would have it, and you are part of Industry Canada.

Mr. Callon: I do not believe that data would be collected. Perhaps the creditors track that type of information within their own credit portfolio. However, I do not believe there is information at the government level on walk aways.

Senator Ringuette: Slide 5 compares the business and consumer insolvency scenario for the last 10 years. I am looking at that and thinking about the different issues that face both the business community and consumers.

On the implication of the interest rate with respect to the bankruptcy scenario, the Bank of Canada overnight rate has gone in the last three years from 0.5 per cent overnight to currently 1 per cent overnight. That directly reflects on business interest loans, but not necessarily on consumers' indebtedness. I am referring to credit cards. The credit card interest rate has not been lowered because of the overnight Bank of Canada rate. That had a different impact.

I think that is one of the phenomena that is included in the major difference on slide 5 with respect to the spiking of consumer debt and the decrease of business debt. Then, again, we do not have enough information to either confirm or deny my theory.

Slide 2 is also interesting because it compares consumer bankruptcy trends in Canada, the U.S. and Australia. We know for a fact that with the credit card issue, the Australian government moved seven years ago to put restrictions on both the business side and the consumer side of the issue. That had a direct impact on the overall debt of consumers and how they operate with these financial tools. The U.S., Canada and the U.K. have not done that.

In your quest to increase the data that you collect and the analysis that you can make for both consumer insolvency and business insolvency, will you be able to identify in the near future why, in Australia, consumer bankruptcy is so much lower than in Canada and the U.S.?

Mind you, I look at the spike in Canada starting in 2007 and also thinking that in late 2006, the Harper government made changes in the mortgage rules to mirror the ones that were in operation in the U.S. That had an impact on consumers taking on more debt and on a longer term; therefore, they are more vulnerable to the fluctuation in the interest rate in the long term. All of a sudden, a month ago, they realized that they had made a mistake and have to go back.

It would be interesting to have more comparison data to know the reason why exactly. However, we can only speculate because we do not have more facts to contribute to the different findings that you have here. It would certainly be in order that your report to the minister would be tabled in Parliament so that we would have access to the valuable work that you do.

Senator Callbeck: Senator Ringuette touched on my question, but I want to make sure that I have your answer.

On slide 5, you give figures in the chart for business and consumer insolvencies. They are separate so that we know that consumer insolvency went up and business insolvency went down. However, on slide 6, you give the top reasons, and the business and consumer figures are all lumped together. I think I heard you say that you did not have those separate.

Mr. Callon: Those are just for consumers on slide 6. Unfortunately, we have not collected the data for the reasons for businesses.

Senator Callbeck: It is just for consumers?

Mr. Callon: That is correct.

Senator Callbeck: I also thought I heard you say earlier that financial literacy is under ``mismanagement.'' Am I right in that or not? Where is financial literacy in this chart?

Mr. Callon: One of the reasons for mismanagement is lack of knowledge, lack of awareness.

Senator Murray: I want to say that the remarks about business or personal bankruptcies by Senator Ringuette and Senator Callbeck were apropos. There must be as many reasons as there are business and personal bankruptcies. However, at the end of the day, they all boil down to the same thing: They are going broke.

A former cabinet colleague of mine, the Honourable Elmer MacKay, used to sum it up very succinctly by saying, ``When your outgo exceeds your income, your upkeep is your downfall.''

Senator Finley: One of the reasons for bankruptcy that I would like you to include — and maybe it is included — is fraud. It is becoming, from what I have read, fairly serious and is a growing issue.

Senator Marshall was pointing out to me that one of your own review panels, I think, indicated that the growth of personal fraud, that is, the hiding of assets, could become — what was the actual phrase?

Senator Marshall: It is from the 2009 report, the advisory committee that we spoke about earlier. I was interested in what they did.

The 2009 report was on your website. It talked about the business plan and about risk factors. One of the issues was the risk to the system if debtor fraud, hiding assets, is not dealt with by OSB.

That was the impetus for my questions about the bankruptcy problems. I was having discussion with Senator Finley.

Senator Finley: I would also like to know what the frequency of debtor fraud is. I noticed, for example, financial mismanagement has not changed in three years. It is almost bang on, so people have not become worse or better.

However, there are multiple reasons, as Senator Murray said, for bankruptcy. In many cases, each bankruptcy could have multiple reasons. As far as getting the reasons for business bankruptcies is concerned, I think it is impossible. I would not believe a single one of them. That is my point.

The Chair: Do you wish to comment on that, Mr. Callon?

Mr. Callon: I have a couple of comments. First, with respect to debtor fraud, Ms. Alférez explained that we reviewed our compliance framework, and we are focusing more on that area.

As you see, the consumer side of the equation has risen significantly, which, in regulatory speak, means my risk is increasing in that area. To address that, we are looking at increasing the staff's focus of looking at debtors and also to add enforcement to that, which is the special investigation units that we have established.

We refer about 95 cases to our investigation units for prosecution. They will go through and prepare their cases with their colleagues at the RCMP. Where we find either a violation of the BIA in terms of duties and responsibilities or criminal fraud, we will pursue those with the various provincial Crowns to try to get a conviction.

Senator Runciman: I am curious about hiding assets. Would transferring assets to other ownership qualify as fraud? Would that fall into that broad definition?

I have seen it happen in other areas, not necessarily in bankruptcies, where assets are transferred to another member of the family or another business entity and that sort of thing.

Mr. Callon: It could be fraud, depending on the reason why it was done. However, under the act, there is specific authority for the trustee to undo those transactions if there is mal-intent, which would be taking that asset out of the estate for the purposes of some sort of gain. Whether it goes to the point of fraud, I cannot say. However, we have the authority to deal with those situations by undoing the transaction.

The Chair: You indicated a review of trustee licensing and talked about a process that must be complete and transparent. You have heard a number of questions here about transparency and the desire of honourable senators to see, on your website or in a report filed in Parliament, just what you are doing and what your plans are.

This review of the trustee licensing, you indicate in your brief that that has been ongoing for a year now. When are you anticipating that there will be something that we can read on that?

Mr. Callon: We initiated the review in June by sending out a consultation paper, which is on the website. We provided two months for comments, and then had several requests to extend that, which we did to the end of September, I believe.

All told, we received about 56 or 58 submissions from a range of stakeholders. They responded to that consultation paper, but they also provided other advice and suggestions on the licensing framework.

We have undertaken a four- to five-month analysis of the comments received and perhaps other options that have been suggested. We are also looking at doing some benchmarking with respect to other countries that have a licensing regime. We are anticipating going back out with a paper for the stakeholders in the spring.

If a decision requires extensive implementation, we will consult on the implementation process as well. We will set out the direction of the decision but ensure that we have the best advice from stakeholders as to how to implement that decision. We are looking at the spring.

The Chair: All right. That is very helpful. Superintendent Callon and Ms. Alférez, thank you both very much for being here and telling us all about your office, which we knew very little about before you came. I think we are left with a much better understanding. Thank you for the good work that you are doing.

Mr. Callon: Thank you for your interest.

(The committee adjourned.)


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