Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 7 - Evidence - December 7, 2011
OTTAWA, Wednesday, December 7, 2011
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-5, An Act to amend the law governing financial institutions and to provide for related and consequential matters, met this day at 4 p.m. to give consideration to the bill.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Welcome to the Standing Senate Committee on Banking, Trade and Commerce. Today, we are initiating our examination of Bill S-5. We are privileged to have before us Canada's Minister of Finance, the Honourable James Michael Flaherty. Good name, Michael; I did not want to leave that out. Minister, you are well known to all members of the committee so I will skip that over in the interests of having a discussion with you. I know you are pressed for time and have to be on to other duties, but we hope that the depth of our questions will incite you to stay a little longer than originally planned.
I believe you know the senators present: Senator Moore from Nova Scotia; Senator Oliver from Nova Scotia; Senator Di Nino from Ontario; Senator Greene from Nova Scotia; Senator Gerstein from Ontario; and the deputy chair of the committee, Senator Hervieux-Payette from Quebec.
[Translation]
Mr. Minister, without any further ado, the floor is yours. We welcome you to our committee.
[English]
Hon. James M. Flaherty, P.C., M.P., Minister of Finance: On my left is Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada; and Jane Pearse, Director of Financial Institutions Division, Department of Finance Canada. If there are any difficult questions, they are here. I will answer the easy questions.
Good afternoon, honourable senators. I will not speak long because only a limited amount of time is available. I want to quickly thank the chair, deputy chair and all committee members for agreeing to undertake the parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in early 2012. This is important work, and your committee's review will be crucial to ensure that our framework in Canada in these important areas remains both efficient and effective. I look forward to that review and to your eventual recommendations.
[Translation]
I encourage the committee to read Bill S-5, An Act to amend the law governing financial institutions, and to respond to it so that all Canadians can continue to rely on the solid and secure financial system they enjoy today.
We all know that Canada's strong regulations serve as a model for countries the world over. For example, the World Economic Forum recently ranked Canada's banking system as the best in the world, for the fourth year in a row. This system-wide strength allowed Canada to escape the worst of the global financial crisis with no Canadian bank going under or requiring a taxpayer bailout.
[English]
Bill S-5 will ensure that our financial system remains secure for Canadians and the fundamental strength of our economy. Before I briefly highlight a few elements of the bill, let me provide some background to the review process. As you may know, this is a mandatory process whereby the government reviews legislation governing federally regulated financial institutions every five years. Existing legislation includes a statutory sunset date that is required to be renewed. In this case, that date is April 20, 2012. This is done to ensure that the legislation remains current, to reinforce stability, and to account for the growth of our financial system. The most recent legislative review was completed in 2007. The current five- year review began in September 2010, when I invited all Canadians to join in an open consultation process. Today's bill takes into account the feedback received during that consultation process, which brings me to today's proposed legislation.
Let me first emphasize that much of the bill is technical in scope, like fixing cross-references, modernizing reporting requirements, fixing drafting errors and the like. However, the bill contains several more substantive measures, including a number of measures to promote financial stability: first, reinstating ministerial approval of a select few very large foreign acquisitions; second, improving the ability of regulators to share information with their international counterparts in fulfillment of our G20 commitments; and third, enhancing the supervisory powers of the Financial Consumer Agency of Canada, FCAC, to better protect consumers. Bill S-5 will also build on our government's ongoing efforts to cut red tape by proposing to reduce the administrative burden on financial institutions and by adding regulatory flexibility, such as limiting duplicative disclosure requirements.
Senators, as you will see during your study, Bill S-5 will ensure that Canada's regulatory oversight mechanisms will continue to serve all Canadians and further contribute to our financial institutions' sound international reputation. On that note, my officials and I welcome questions from the committee.
The Chair: I will lead off by acknowledging that while you said that most of the bill is taken up with technical or administrative amendments, one or two changes have attracted some attention, one of which has been commented on in the press: the reinstatement of ministerial power to review exceptionally large acquisitions by Canadian financial institutions abroad. Can you outline for us why it was deemed appropriate and necessary to reinstitute ministerial approval? What will that do for Canada, if not for the minister himself?
Mr. Flaherty: Thank you for the question. I will give you a little history on this section. Prior to 1992, banks were prohibited from owning a foreign subsidiary. In 1992, the government of the day amended the legislation to allow federally regulated financial institutions to own a foreign subsidiary or hold a substantial investment in a foreign institution with the approval of the minister.
In 2001, for reasons that are opaque, the requirement for ministerial approval and review by the Department of Finance was repealed, and oversight was limited to the Office of the Superintendent of Financial Institutions Canada, OSFI. In the normal course of events for legislation and regulations relating to financial institutions in Canada, the Office of the Superintendent of Financial Institutions and staff review initiatives of various kinds from the banks and make recommendations. Some that are purely prudential in nature are approved by the superintendent, and that is the end of it.
Other initiatives come to me, as Minister of Finance, with a recommendation from the Office of the Superintendent of Financial Institutions based on the review done by the superintendent. The statutory duties of OSFI relate to prudential supervision of financial institutions in Canada. We learned in 2007, 2008 and 2009 that we needed to make some improvements with respect to regulatory structures, some of the powers of the Bank of Canada, and some authorities of the Minister of Finance, which we have done; and this is another one of them. This is to make sure that we have systemic oversight over what would be large financial transactions by Canadian financial institutions that are regulated by the Government of Canada.
If we look at it practically, since 2004 there would have been only three transactions that would have been subject to this provision. It is viewed — and I view it — as systemically important. At the end of the day, the government is responsible for the soundness and reputation of the financial sector in Canada. If there is a large transaction like that, our view is that Parliament, through the Minister of Finance reporting to Parliament, ultimately ought to exercise a degree of supervision.
The Chair: Would OSFI still participate in that review?
Mr. Flaherty: Yes, and make the recommendation to the minister.
The Chair: Thank you very much.
Senator Harb: Minister Flaherty, I greatly appreciate your presentation and the presence of your team.
I have a couple of specific questions. I will start first with clause 165, subsection 396. This section seems to allow a foreign financial institution, controlled by a foreign government, to hold shares of a federally regulated trust and loan company. Perhaps you can elaborate a little on that, including its scope, how it works, who manages it, who decides on it and what percentage of the bank they can own.
Senator Hervieux-Payette: Not just how it is done, but why is it being done?
Senator Harb: That would be the second question.
Jane Pearse, Director, Financial Institutions Division, Department of Finance Canada: Are you asking a question about the rationale behind the amendment that would allow a situation of non-control for a foreign financial institution into Canada?
You are referencing a clause that is in respect of the Trust and Loan Companies Act. There is a similar clause — and I can get the number — for the Bank Act. It is a similar amendment that is going all through the financial institutions legislation, just to highlight that it is not just for the trust and loan companies.
Essentially the amendment is there to correct and to slightly enlarge a provision that currently exists, where a foreign financial institution owned by a foreign government is allowed to come into Canada and control or own a subsidiary entity in Canada. This amendment would allow them to own less than control.
If we are comfortable with the policy that a foreign entity can come into Canada and absolutely control a subsidiary, we would also be comfortable with less than control.
Senator Harb: Is it a percentage of the shares of the financial institutions on the market? If so, perhaps you can explain to me in clause 8, subsection 223, as well as a series of other clauses, where you have changed the ownership in a bank from $8 billion up to $12 billion. Can you give us a comparison between how the two relate to each other?
Ms. Pearse: The two do not relate. The first amendment that you referred to is specific to a foreign financial institution owning shares of a Canadian subsidiary or Canadian entity.
The secondary issue, where you quite rightly identified where the threshold for a large financial institution in Canada has been amended from the current $8 billion to $12 billion, is a fundamental part of our ownership framework that distinguishes between how much of a financial institution in Canada has to be widely held. We call it the "widely held rule.'' Therefore, small, medium and large financial institutions have different rules that fall out of that widely held rule.
A large institution has to be completely widely held, so no one shareholder can own more than 10 per cent of a large financial institution in Canada. The amendment that you just referred to is changing the equity threshold to define what a large institution is — from $8 billion to $12 billion — to reflect the growth in the sector.
Senator Harb: Would that be the maximum?
Ms. Pearse: A minimum.
Senator Harb: How did you decide on the $12 billion? Why is it not $16 billion or $18 billion?
Ms. Pearse: We looked at the growth in the size of the sector between the last amendment in 2007 and the next five- year block. We made a decision that $12 billion was an appropriate minimum threshold to define the difference in ownership structure between large financial institutions and medium-sized ones.
[Translation]
Senator Hervieux-Payette: Minister Flaherty, you said earlier that Canada has the best banking system in the world, that it has the best legislation in the world. Given that I participated in the consultations, I like taking credit for it as much as you do.
My colleagues and I travelled across the country. In one year, we consulted with Canadians in each province regarding the amendments made to the act in 1995. These were significant reforms.
My question is as follows. I have not seen any of the studies that you mentioned. I was never asked to participate in any of those meetings. I do not doubt that they were held, but who conducted those consultations? Where were they held and by whom?
I believe that when it becomes necessary to amend the act, it must be recognized that the work done in 1995 was well done and that perhaps, when the act is to be reviewed again, we would be associated with that process, but perhaps more than one year before its implementation. It must be acknowledged that there is a deadline, April 2012 in this case, and that we are now coming to the end of it.
We received the bill last week. I believe we would need at least 12 months to examine the entire bill. I would just like to know what consultation process was undertaken and I would also like to know why you did not ask your knowledgeable colleagues to participate in that consultation?
Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: The government's decision, as reflected in the press release that the Minister has just mentioned, was to limit the review to essentially technical issues.
It was done in response to the financial crisis and the important decisions that the government had already made on this issue. Significant fundamental changes were made and this time, a decision was made to exclude the consideration of major changes. That is a big difference from the 1995 situation.
The consultation process consisted in issuing a press release inviting Canadians to submit their suggestions. We received some 30 submissions that we posted on our website when the authors of those submissions gave us permission to share them with everyone. In short, that was the process that was undertaken.
Senator Hervieux-Payette: Could you give us the reference framework? Because if you consulted in a more targeted manner, you did not consult on the entire financial legislation at large. You probably singled out the sector you wanted to examine. Did you submit proposals during the consultations or did you simply examine the entire legislation?
Mr. Rudin: Yes, we reviewed the entire legislation. This time, the government did not issue a green or white paper first. The government was open to all kinds of proposals.
That said, the minister was clear in the press release when he indicated that, based on current outlooks, he was not planning to make major changes.
Senator Hervieux-Payette: Can the minister tell us why changes were made to the issue regarding foreign governments owning shares, since they are going to have the right to vote from now on? What is the objective? Is it a means of encouraging foreign governments to hold shares in our banks? What is the rationale behind this statement?
[English]
Ms. Pearse: I apologize; I just missed the last part. You were asking about the rationale?
[Translation]
Senator Hervieux-Payette: You said that, from this moment forward, as an example, governments from Arab countries, given that they own banks, will be able to make investments. The Government of China has a bank. You are now giving it the option, like any other shareholder, of purchasing the maximum number of shares. There is still a maximum number of shares one can own. The limit used to be 10 per cent, it is now 20 per cent. We would therefore be giving permission to a foreign government to own 20 per cent of a Canadian bank's shares?
[English]
Mr. Flaherty: No, not at all. The rule is as outlined by Ms. Pearse a moment ago. We have small, medium and large rules. The fundamental rule in Canada is the 10 per cent rule, and that is not changing. This legislation does not change that. That is fundamental to our system.
The Chair: Is there not a distinction between a foreign commercial bank and a foreign state, sovereign? The rules are different.
Mr. Flaherty: Unless I misunderstood the senator's question, her question was directed to ownership in a Canadian Schedule I bank.
Senator Hervieux-Payette: Yes.
Mr. Flaherty: The 10 per cent rule applies.
Senator Hervieux-Payette: Why would they now have the right to vote? They have no right to vote. What is the purpose? Is it because we want to attract new investment, or is it because these people complained that, if they were buying shares, they could not exercise the vote?
Ms. Pearse: There is a technical amendment that links the slight amendment to allow circumstances of less than control with the piece of the legislation that allows voting. If we are going to allow them to own shares, we are also going to allow voting. Those two pieces are linked.
Senator Hervieux-Payette: If they have three banks and they own three banks, which could be possible for some big countries, what would you do? Would they each have the possibility of owning 10 per cent?
Ms. Pearse: The situation is that you have a foreign financial institution owned by a government, and that foreign financial institution is coming into Canada to make an investment?
Senator Hervieux-Payette: Yes.
Ms. Pearse: That is right.
Senator Hervieux-Payette: They could have three different banks.
Ms. Pearse: There are other aspects of the Bank Act that would impede one of those banks from dealing with the other bank in a way that was not at market levels, if that is what you mean.
Senator Hervieux-Payette: Before that, they could not vote. They could own shares and could not vote.
Ms. Pearse: The change is that, on the voting side, they were not allowed to vote less than control. Now, if we are saying they can own less than control, we are allowing them to vote less than control.
Mr. Flaherty: No foreign bank can control a Canadian Schedule I bank. That is the bottom line. That is not changing.
Senator Hervieux-Payette: We are talking about two things. We are talking about a foreign-controlled bank. Some banks are not in the same schedule. Of course, they could have more than 10 per cent, because they would be here, but on a special status. Then when we talk to the general public about the Schedule I bank, the big banks, the Royal Bank and so on, they could not own more than 10 per cent, and they are allowed to vote for 10 per cent of these shares at an annual general meeting. Is that it?
Mr. Flaherty: Yes.
Senator Hervieux-Payette: Why do we do that? Was it because they were not allowed to do that before?
Mr. Flaherty: The situation did not apply. As Ms. Pearse described a few minutes ago, we were not talking about Schedule I banks. We were talking about foreign banks in Canada in which outside banks had majority ownership, and now we are talking about situations where they would not have majority control.
Senator Moore: Thank you, minister and witnesses, for being here. I want to follow up on Senator Hervieux- Payette's question. Could a foreign government or a foreign financial institution own up to 10 per cent in any number of Canadian chartered banks or tier 1 banks?
Mr. Flaherty: That is the way it is today. It has nothing to do with this legislation.
Senator Moore: I am just asking the question. Therefore, they could vote 10 per cent in each shareholders' meeting. Could they also have directors?
Mr. Flaherty: If they can get elected.
Senator Moore: The existing rule requires banks to get approval for major acquisitions from the Office of the Superintendent of Financial Institutions. What is meant by "major acquisitions?'' Is there a dollar measurement, and how much was that before it was triggered?
Mr. Flaherty: It is defined on page 40 of the legislation as 10 per cent of the value of the bank holding company's consolidated assets as shown in the bank holding company's last annual statement that was prepared before its first acquisition.
Senator Moore: That is under the bill.
Mr. Flaherty: The proposed legislation, yes.
Senator Moore: What was it before? When you talked about major acquisitions, what was that?
Ms. Pearse: I do not think it was major acquisitions. There is a whole host of transactions that would require government approval. Some of them, as the minister has explained, are currently with the superintendent, and some of them are currently with the minister. In this legislation, we are moving to the minister's approval the transactions that would represent more than an increase in 10 per cent of that bank's equity. They would only be the major ones.
Senator Moore: I asked a question yesterday in the Senate. How will this work? I gather OSFI, the Office of the Superintendent of Financial Institutions, will still be the first review and then will come to the minister saying, "We have looked at this transaction. It exceeds 10 per cent, and we recommend yea or nay.'' Is that how it will happen? Will every transaction that one of these private banks enters into be subject to review and a decision? Can you look at them all, as well as the OSFI office?
Mr. Flaherty: We have a division of labour. Some of the assessments that are purely prudential are done solely by OSFI, and the superintendent signs off on them and I do not need to see them. For the ones that are larger and like this and more systemic in their consequences, yes, the minister will look at them.
What will happen, as it happens now, is that the superintendent will review the transaction, the Department of Finance will review the transaction, and recommendations will be made to the minister.
Senator Moore: How does that happen, minister? How do you know that the bank is entering into a transaction? Do they come to you and say, "Look, we are considering buying a piece of another, or something offshore, or buying something totally?'' How does that get triggered?
Mr. Flaherty: The bank must come and seek approval.
Senator Moore: They must come for approval, but do they come to you at the time that they have decided, or do they come and say, "Would you take a look at this?'' Does OSFI do that?
Mr. Flaherty: I have been Minister of Finance for almost six years. The practice is for the banks to call, frankly, and let us know when they are contemplating a major transaction, so that there is no surprise. That is true also outside the financial sector for large commercial transactions in Canada or Canadian companies acquiring something abroad. Usually I hear about it before it actually happens. That is normal. There is a formal process to be followed if we have one of these large transactions. It will go through the superintendent's office before there is any formal assessment by the minister.
Senator Moore: That will happen concurrently, will it?
Mr. Flaherty: Yes. There are two variables that the legislation directs the minister to consider: the systemic stability and the best interests of the financial system in Canada.
Senator Moore: You have become aware of major transactions if they want to acquire. What about major borrowings such as during the recent meltdown when our banks borrowed $28 billion from the Federal Reserve in the United States of America? Would you have been told of that in advance?
Mr. Flaherty: The superintendent watches carefully the quality and quantity of the capital of federally regulated financial institutions in Canada.
Senator Moore: Does that office look at the source of the lending?
Mr. Flaherty: Yes. The superintendent and I —
Senator Moore: They make it available to you, or how does this work?
Mr. Flaherty: The superintendent and I speak regularly. During the crisis back in 2008-09, we spoke weekly.
The Chair: We promised that we would free up the minister after about half an hour and we are getting close to that. If anyone has a pressing question, please raise their hand.
Minister, we have respected our word. I hope that will encourage you to come back soon before our committee.
Mr. Flaherty: I am happy to come back. Hopefully, next time I will have a bit more time.
The Chair: We appreciate your carving out time for us. We thank you for coming here with your officials. and we look forward to the next occasion.
Mr. Flaherty: Thank you, senator.
Senator Hervieux-Payette: Will you at least consider that this committee do the consultation the next time you want to consult?
Mr. Flaherty: Absolutely. I think that is a very good suggestion, senator. I appreciate your making the suggestion. It will not be for another four years or so before we undertake it again.
Senator Harb: We will be in power again, anyway.
Senator Hervieux-Payette: I am serious about this. Everything is moving forward very fast, both in the U.S. and in Europe. The whole economic situation certainly has not come to a perfect status. Maybe we need other tools. I hope it will be more than one year before. If we consult for a good period of time, you need time to receive the report and then to draft the bill. That process took nearly two years, just to tell you that it did not happen overnight — just as a suggestion.
The Chair: I am sure the minister, having been there for however many years, realizes that in this area things do not happen overnight, at least in a regulatory sense.
Mr. Minister, I appreciate your willingness to call on us. Come back and call on us when you need some substantive analysis done; we are always ready to do that.
We welcome, in addition to Mr. Rudin and Ms. Pearse, Eleanor Ryan, Senior Chief, Financial Institutions Division; and Leah Anderson, Director, Financial Sector Division. Titles always interest me.
Mr. Rudin, do you want to add anything to what you said before? Please take the floor.
Mr. Rudin: If I may, my colleagues pointed out that I gave incorrect information, for which I apologize. We did not post the submissions for this consultation on our website. It is our usual practice; we often do that. However, we did not, in this case, solicit permission to share the submissions publicly. Therefore, not having solicited that permission, we were not able to post them on our website. I stand, or sit, corrected.
The Chair: You said you did not share them on the website, but did you share them with other people who made submissions?
Mr. Rudin: No; we cannot. If we do not have permission to share them, then we do not share them.
Senator Oliver: The 30 submissions just stayed within your own department?
Mr. Rudin: That is correct. Some organizations made public their submission directly themselves.
The Chair: Was there a reason you did not ask permission? You say it is your normal custom.
Mr. Rudin: We frequently do. In this case, because of the technical nature of it, we made the decision not to do that. That said, there is nothing that prevents organizations from sharing their submissions, and some did. Do we know which ones?
Ms. Pearse: Yes; all the larger organizations.
Mr. Rudin: The Canadian Bankers Association posted their submission; the Canadian Health and Life Insurance Association posted theirs on the website. There were a number of them, but not absolutely all.
Senator Oliver: Did all the six big banks make a submission as well in addition to the Canadian Bankers Association?
Mr. Rudin: We are not in a position to identify the people who made submissions.
The Chair: No, because you do not have permission.
Mr. Rudin: Not the circumstances under which we solicited their input.
[Translation]
Senator Hervieux-Payette: An amendment was made in 2007 and there were also amendments regarding the mandate of the Governor of the Bank of Canada that we have never understood. We understood afterwards, when the governor disbursed certain amounts. But I think that, when there is just a narrow view and there is a problem — here we are ready to legislate quickly in an emergency situation — we have to look ahead. I said what is deplorable, I'm not saying that what you recommended is not correct. I do not think it is a consultation even if you posted it on the department's website, I find it hard to believe that Canadians in general were aware of it. The people I know do not consult your website regularly.
When we did the consultations, very knowledgeable Canadians or company presidents came forward and made recommendations. Even though I do believe in the new technology, we would still recommend that next time you make the recommendations public. What is more, my preference would be to have a committee such as ours be able to ask questions, meet with people and give the outlying regions an opportunity to participate in the process as well. I am not saying we need reform every ten years. Changes may be needed here and there.
When it comes to this sector, we spoke of the foundation and the need to review the issue of investment bankers associated with the chartered banks. Last week, we heard from representatives of the Canadian Bankers Association. We asked them questions regarding their investments in the innovation sector and they knew nothing about them. We subsequently received a document from the representatives. When we consult with the Canadian Bankers Association, they do not tell us what is going on with the insurance side of things and do not speak about the investment bankers issue. We were unable to get any details on this issue.
We suffered less than the United States. However, we need to look at the institutions as a whole. We are discussing demutualization and I think that issue should also be the subject of consultations.
I know you make recommendations to the minister. I am giving only my opinion. The Liberal government reformed the Bank Act, which turned out to be a parachute for Canada. What we are saying here is that this committee, today, also has the qualifications for doing the same thing.
[English]
Senator Di Nino: Welcome. First of all, a little bit of a commercial. I think the changes that you made beyond the technical ones are very good. They were driven, obviously, by the financial crisis of 2007, and the fact that our country is being recognized worldwide as having probably the soundest financial institutions in the world, if not among the soundest, I think speaks to the kind of action that you and your folks have taken. I think it is good to put that on the record, at least in my opinion. It seems that when you were finalizing this five-year review of the act, you found yourself in the situation that obviously drove you to make some changes.
I would like to ask a couple of questions dealing with the changes. The switch from OSFI to the minister is also a good one, in that the minister or the government always wears any problems, so they should have the buy-off of it. If I read this correctly, what is happening is that if a bank is in the process of investing a certain amount of money, which has a particular threshold — maybe you could explain the threshold a little bit — before that transaction could be completed, the minister has to give approval. Is that correct?
Mr. Rudin: That is correct, if the transaction in question is making an acquisition abroad.
Senator Di Nino: An acquisition of any kind?
Eleanor Ryan, Senior Chief, Financial Institutions Division, Department of Finance Canada: The acquisition of a foreign financial institution.
Senator Di Nino: I just wanted to ensure that was clarified.
Mr. Rudin: In order to create a materiality threshold, in the legislation, you look at the total value of the bank's assets before the transaction and ask whether the consequence of the transaction would be to increase the total value of the bank's assets by 10 per cent or more, and if so, then the ministerial approval is triggered.
Senator Di Nino: The 10 per cent or more would be the trigger. If in effect the investment or the purchase of shares in a foreign financial institution would only represent 5 per cent of the consolidated assets, then it would not require the minister's approval.
Mr. Rudin: It would not trigger the ministerial approval; that is correct.
Senator Di Nino: Would OSFI still go through its process, however? That is the other question I had.
The question I want answered is just because it may be under the 10 per cent threshold, a review is still conducted for the appropriate reasons, but it is done by OSFI instead of going to the minister. Is that correct?
Ms. Ryan: The trigger is if the acquisition is, first, sizeable, but then we have to look at whether it is over or under 10 per cent. If it is over 10 per cent of the shares of the target entity, the superintendent or the minister would be involved in the acquisition. Under 10 per cent, there is no approval by either.
You decide whether it is the superintendent or the minister by the size of the target. If the target is very large, the minister approves. If it is more modest in size, the superintendent approves.
The Chair: Did you say if it is 9.99 per cent, there is not the minister but there is not OSFI as well?
Ms. Ryan: That is correct.
The Chair: No one looks at it?
Senator Di Nino: Could we have a clarification, please?
Ms. Ryan: I am simply speaking of the number of shares that the Canadian bank is buying of the foreign financial institution.
The Chair: Now you are getting me very confused.
Senator Di Nino: Maybe we can have Ms. Pearse clear that up for us.
Ms. Pearse: This highlights the fact that this is a very technical bill, and so when we are explaining something, we are way down in the weeds.
There are two thresholds. The first threshold Ms. Ryan was explaining was that for any transaction to need approval by the Canadian government, either OSFI or the Minister of Finance — in this case, let us just use a bank — the Canadian bank would be looking to purchase 10 per cent of the shares of a foreign entity.
Senator Di Nino: Foreign financial entity.
Ms. Pearse: Yes.
Senator Di Nino: That is the first threshold.
Ms. Pearse: Yes. If they are buying more than 10 per cent of that entity, let us say in the United States, then OSFI would be interested in looking at the transaction.
If it turns out that 10 per cent of that 10 per cent, 20 per cent or more of that entity brings that financial institution to the next threshold, which is that they are purchasing more than 10 per cent of their consolidated assets — they are investing more than 10 per cent of their consolidated assets in that new entity — then it would get ministerial approval as opposed to OSFI approval. There are two tests. They both happen to be 10 per cent.
Senator Di Nino: They both have to be met.
Ms. Pearse: Yes.
Senator Di Nino: If one of these two thresholds is not met, and does not require the minister's approval, does it still go through some process where it is assessed by OSFI or the minister's offices of the department?
Ms. Pearse: If it meets the first threshold and not the second, it will be with OSFI.
The Chair: If it meets the second, they both will occur.
Ms. Pearse: OSFI will give a recommendation to the minister of finance, yes.
Senator Di Nino: I am sorry I created so much confusion.
The Chair: You have succeeded not in creating confusion but in clarifying.
Senator Moore: Thank you again, witnesses, for being here. Mr. Rudin, Senator Hervieux-Payette and I think the chair asked you about the submissions you received, and you said you did not seek permission to post them because they are technical in nature, and I do not understand why that would be the standard. Anyway, you did say that the Canadian Bankers Association made a submission. Did you ask them for permission to let that be known?
Mr. Rudin: The Canadian Bankers Association posted its own submission on its own website, so it decided to share its submission with anyone who has access to their website, as did the Canadian Life and Health Insurance Association. I am reporting here on a publicly known fact, that they made a submission, and that the submission is available to anyone.
Senator Moore: Did you ask them if you could put it on your site and share it with the public?
Mr. Rudin: No.
Senator Moore: Why not?
Mr. Rudin: We do not typically link from our site outside of government sites.
Senator Moore: I do not think that is a very satisfactory answer. I think the Canadian public at large is proud of their banking institutions, a lot of them are shareholders, and I would think you would have a duty to put that on record so they can look at that and be involved. I think they would like to know that. I would not undersell their intelligence, and I do not suggest you did. However, as to it being technical in nature, well, everything in law is technical, one way or the other.
I am disappointed in that. It would have been useful for this committee to have some kind of a previous record of what the submissions included, so we could think about them and maybe ask questions about them.
Senator Hervieux-Payette: It is not what was included but what was excluded that would be of interest to us.
Senator Moore: That is what I mean.
Senator Hervieux-Payette: You probably did a cross-section of what people were saying that was similar. At the same time, there may have been other subject matters that this law is not dealing with.
The Consumers' Association of Canada, for instance, would probably have requested a little bit more than what they were given. For me, that option is of interest. If you have met the requirement of a number of these people, it is in the bill; but the rest that was submitted was not retained. That would be of interest.
That is why, as a committee, we discuss these things and we decide in our report how we think the public interest would be well served. It is not that you are not doing that, but we are doing that from a different perspective. I am sorry to interrupt. I just wanted to make sure we understand where we are going.
Senator Moore: Under this bill, a foreign sovereign fund or a foreign-held financial institution can purchase up to 10 per cent of the shares of a Canadian bank, one of our chartered banks. Is that restricted to shares in the marketplace, or could they go to one of the banks and say do a special issue and we will buy it, which would water down the existing shares? Is this restricted, or do they have to buy the shares on the open market?
Mr. Rudin: This restriction would apply to primary purchases of shares directly from the Canadian institution.
Senator Moore: In the stock market?
Mr. Rudin: Yes, but also directly.
Senator Moore: They could get a special issue to them?
Mr. Rudin: Right; and the limit is up to this amount — with ministerial approval, as I recall.
Senator Harb: Beyond.
Senator Moore: I did not think they could acquire more than 10 per cent. Am I wrong?
Mr. Rudin: If the minister said yes, they might.
Senator Moore: If the minister said yes, they could acquire more than 10 per cent?
Ms. Ryan: Perhaps I could clarify; the wide ownership requirement for large banks allows a purchase of up to 10 per cent of the voting shares without any approval. Above 10 per cent and below 20 per cent of the voting, or 30 per cent of the non-voting, requires ministerial approval. That is the definition of wide ownership.
Senator Moore: I did not think that is what he said sitting here. You asked the question, deputy, and he said it was 10 per cent; that is the cap for Canadian chartered banks. You are saying it is more than that. You are saying it is 10 per cent, and there can be more than 10 per cent if he approves. How high can it go?
Ms. Ryan: Perhaps I could clarify that; 10 per cent is the level that can be acquired without any approval. Over 10 per cent requires an approval, but it can only go up to 20 per cent of the voting or 30 per cent of the non-voting. That is what Parliament approved in 2001.
The Chair: That is widely held.
Ms. Ryan: Right; that was how "widely held'' was redefined to allow a bit of room above 10 per cent; but no one can buy above 10 per cent without approval. You must have approval to go over 10 per cent, but then there is an overall cap of what we call 20-30.
Senator Moore: It can be shares in the marketplace or it can be a special issue arranged between the foreign entity or the foreign state and one of our banks, correct?
Mr. Rudin: A foreign state —
Senator Moore: It is a sovereign fund, is that not a —
Mr. Rudin: A foreign state cannot own shares in a federally regulated financial institution. A bank that is owned by or controlled by a foreign state or a foreign financial institution —
Senator Moore: Owned by a foreign state — do they qualify?
Mr. Rudin: Yes, but the state itself does not.
Senator Moore: What is the difference? I do not understand that.
Mr. Rudin: There are a number of countries that have state-owned financial institutions and some of them have subsidiaries in Canada. The government made the decision that they would permit this. This is an exception to the general framework that discourages government ownership of Canadian financial institutions.
Wholly owned foreign financial institutions are allowed to own a subsidiary in Canada. They are allowed to own 100 per cent of the shares in that subsidiary. What this allows is for a foreign government-owned or controlled financial institution to own a minority interest in a Canadian financial institution as well.
Senator Hervieux-Payette: To complete that, if I remember, I will give a concrete example; we had a buyer bank, but they had a limitation in the type of operation they can have in Canada. They could not take the ordinary citizen from the street and open a bank account in these banks. They were limited to a certain number of operations — mostly commercial operations, lending money to companies and so on — but they really were limited in the type of banking activities that they were conducting in Canada.
There are others, but those who were not in tier one did not have the same range of activities as the ones that big banks have. Am I right?
Ms. Ryan: Technically, all Canadian bank subsidiaries, regardless of who owns them, have the same powers. It just so happens that most foreign banks, when they come to Canada to set up a subsidiary, choose to do more in the nature of commercial activities; but that is if they do it through a subsidiary.
Perhaps I could clarify and simply add that a foreign bank can also choose to have a branch operation. If they choose a branch operation, then they have the limitation that you are referring to, which is that they cannot take retail deposits.
Senator Hervieux-Payette: I think it is good for all of us to know that we are talking a different type of services, depending who the investors are. Those who can conduct all the activities of the Bank Act are the Canadian banks.
Regarding the 10 to 20 per cent, because the minister said it was limited at 10, I knew that we made some changes in 2001, but I did not remember that we needed to have the permission of the minister to go from 10 to 20.
The Chair: I will turn to Senator Harb in one moment, but before I do, between now and next Wednesday at this time, would it be possible for you to produce a chart, a block, indicating the present situation on one page and — assuming this bill is passed — the situation that would exist thereafter?
Ms. Pearse: On which subject?
The Chair: The subject we are talking about, Bill S-5, and its import in terms of foreign purchases.
Mr. Rudin: Yes, we would be glad to.
The Chair: That would be very helpful. We can distribute it to the members. I think if people saw it on paper in block form — here is what happens now in terms of requirements, here is what the requirements will be after the passage — that would be helpful.
Mr. Rudin: Right; and here is what is permitted now and here is what will additionally be permitted if and when this bill passes. We would be glad to.
Senator Harb: I have a question about what you call the potential for challenge now that we live in a global economy. Is there any provision of this bill that you think could be, if passed, subject to a World Trade Organization challenge?
Ms. Pearse: No.
Mr. Rudin: We believe this is consistent with all of our international obligations.
Senator Harb: As my second question, I need a clarification on the different sections dealing with large bank ownership thresholds from $8 billion to $12 billion. The question is this: Is this to reconcile with the notion of the maximum 10 per cent ownership? Where does that fit? Say, for example, if I can own up to $12 billion in a bank that is capitalized at $100 billion, then the maximum I could own is $10 billion. This particular section seems to indicate that I could own 12 per cent. Maybe you can clarify that. The different sections dealing with it are section 138, section 156.09(2), 168(3.1) and so on.
Mr. Rudin: I will give the high level answer and if we need to get into further detail I will pass it to my colleagues.
We have three categories of institutions, and the ownership regime is different for them, so you think of them as small, medium and large. The large institutions need to be widely held, and we can talk about the definition of "widely held.'' The medium-sized institutions need to have a substantial public float. Shares that are available to the public, that is less than a majority of the shares, so they can be closely held, controlled, but nonetheless have a float. The requirement is a minimum of 35 per cent, and then the small institutions can be closely held.
Now we need to create a dividing line such that we know which institutions fall into which category. This revision of that $8 billion threshold to the $12 billion, which refers to the amount of shareholders' equity, if I am not mistaken, is the dividing line for the large institutions that need to be widely held.
Senator Harb: My point is that if a bank's value is $100 billion I can own up to $12 billion. Do I now need to go to the minister because suddenly I am over the 10 per cent ownership?
Mr. Rudin: If there are two thresholds, I am turning it over to my colleagues.
Senator Harb: I think, personally, that is the answer to the whole notion. At what point in time do you move from buying on the market or from the bank directly into going to the minister and asking for permission? I suspect the notion is that you put the $12 billion as one threshold and then you put the 10 per cent, so you have to meet them both. That is how I understand it.
Ms. Ryan: If I am going to use above 10 per cent of the shares of a bank, any size bank, you need the minister's approval. Regardless of the size of the bank, if it is 10 per cent of the shares, you need the minister's approval.
Senator Harb: Therefore the $12 billion does not apply in a bank that is —
Ms. Ryan: Not with respect to whether or not you need approval. The size comes in to how many of the shares you can buy.
Senator Harb: Maximum.
Ms. Ryan: Right. If it is a small bank you can buy any number up to 100 per cent, but only with the minister's approval.
Senator Harb: We are dealing with large banks. My question is with regard to large banks. I am trying to clarify if you have to meet both thresholds or one. One clause of the bill it says that you can own up to $12 billion. I am saying if I can own up to $12 billion, I want to go and buy $12 billion worth of a bank that is $100 billion, but really it is not true because I am over the 10 per cent.
Ms. Ryan: If you wish to buy above 10 per cent of one of the big banks, "big'' being over $12 billion, as proposed in this bill, you will need approval of the minister. However, you can only go from 10 to 20 per cent of the voting. Then there is a maximum of shares you can own.
Senator Harb: I will leave that.
Ms. Pearse: The $12 billion is a threshold for the bank. It is a threshold for defining the ownership regime that applies to that bank, not to the investors.
Senator Harb: That is good. That clarifies it.
My second and final question deals with the CDIC, the capacity to borrow without parliamentary approval up to $15 billion based on April 30, 2008. Why 2008? Why April 30? Why $15 billion? What was it before? How did you decide on the $15 billion?
Mr. Rudin: Again, I will give the high-level answer, and if we need more detail I will turn to my colleagues.
After the financial crisis, the government came to Parliament and sought an increase in the borrowing authority of the Canada Deposit Insurance Corporation. Furthermore, it sought and received from Parliament the authority to allow that borrowing authority to increase over time in line with the growth of deposits. The particular threshold that was established at that time would not be fixed and therefore needed to be renewed periodically, but rather would grow automatically as deposits grew. This bill proposes an improvement in the formula that is used to apply that growth factor.
Senator Di Nino: In answers where you refer to "the bank,'' this legislation deals with the Bank Act, the Trust and Loan Companies Act, the Insurance Companies Act. Do the same answers apply, for instance, if you want to buy a trust company or a piece of a trust company, or an insurance company or a piece of an insurance company? I understand that co-ops are a little different ownership. Does it apply to the others as well or are there different rules with regard to the Trust and Loan Companies Act and to the Insurance Companies Act?
Ms. Ryan: For the other acts there are size-based ownership rules. They are largely similar to the Bank Act but there are some minor differences. Perhaps the most important one is that for the Insurance Companies Act there is a large ownership threshold as well, but it is fixed historically as to the size of the insurance companies when they demutualized the four big insurers.
The Trust and Loan Companies Act does not have a large size threshold; it just has small and all other.
Senator Di Nino: Generally the same rules apply, and to foreign ownerships in particular?
Ms. Ryan: Absolutely.
Senator Oliver: Like Senator Harb, my question deals with the Canada Deposit Insurance Corporation. I wanted to ask a question about it because it is something that all Canadians, large and small, will have an interest in, not just large financial institutions and those in the business.
One of the things that this bill does under clause 203 is to give new powers to get private information about individuals who make a deposit at a financial institution. I have concerns that that might violate some individuals' privacy rights. Could the transfer of information obtained by the CDIC violate the privacy rights of the individuals to whom the information pertains?
In other words, if an ordinary Canadian puts $20,000 in a bank and it is insured, they decide that they will use some of the information about that person who put the $20,000 there, will that violate some of their rights? What protections can you tell us about so Canadians listening and reading this will know they will not be compromised by these amendments, particularly in section 203?
Mr. Rudin: Again, I will start. I may not finish.
The Canada Deposit Insurance Corporation, under the existing legislation, is allowed to receive information obtained by the Superintendent of Financial Institutions on a confidential basis which is about the financial situation of the institution rather than about its individual depositors. How is their level of capitalization; is their liquidity adequate; how are their assets performing?
Looking ahead to the possibility that the CDIC might need to or wish to cooperate with, say, a foreign deposit insurer, the bill proposes that the CDIC be given the authority to share that type of information, which is about the financial health and status of its member institutions, with a relevant entity. For example, it could be a foreign deposit insurance corporation, like the FDIC, on condition that CDIC is sufficiently assured that the confidentiality of that information will be protected.
Senator Oliver: You are saying, then, that there will be no information about the depositor, the Canadian citizen who deposits with an institution that can be compromised, but the information being exchanged will be information on the financial institution only. Is that correct?
Mr. Rudin: Yes.
Senator Oliver: I have one other general question I would like to ask that covers a number of the answers you have all given today. It seems to me that the Minister of Finance does more than just run a finance department; the Minister of Finance sits around a cabinet table and is involved in public policies for the whole country over many other departments, such as agriculture, industry and so on.
If there were a financial institution that was engaged in 9.95 per cent, less than 10 per cent, and did not need ministerial approval, could the minister nonetheless, because of public policy, national security or other reasons, intervene and stop that transaction?
Mr. Rudin: The question is if an entity is —
Senator Oliver: If it was below the threshold in which he must give an approval, yet on grounds of major public policy, national security or the other things that the Governor-in-Council looks at, would he have the right to intervene and stop that transaction?
Mr. Rudin: That is a good question. People who control financial institutions need to meet a test that they are fit and proper owners. Under whom minority non-controlling stakes fall under, that is a good question. The answer is no.
Ms. Pearse: I think as the minister said when he was here, in many situations he is advised by the financial institution if they are looking at a major transaction. A situation where 9.99 —
Senator Oliver: The chair used 9.5 per cent, so I decided to put it up a little bit further.
Ms. Pearse: Right. At a certain point, there will be questions raised as to whether they are peeling off those last two shares to get under the number. There would be some discussion and questions raised about that.
If it was clearly under 10 per cent, then existing today, anyone is able to be a shareholder of a financial institution.
Senator Oliver: What about the power and the right of the minister and the Governor-in-Council? That is my question.
Ms. Pearse: There is not an approval process under 10 per cent.
Senator Oliver: Would the minister and the cabinet have the power to stop that transaction?
Ms. Ryan: There is no formal authority for transactions below the threshold in the Bank Act.
Senator Oliver: Not even if it raised critical questions about public policy for Canada?
Ms. Pearse: The issue is that public policy has deemed that transactions under 10 per cent do not raise those types of public policy.
Senator Di Nino: Maybe that would change the laws.
Senator Oliver: Thank you.
Senator Harb: If you could just clarify subsection 374(1) of the act, page 5. It reads something like this: "No person may be a major shareholder of a bank with equity of twelve billion dollars or more.'' Let us say tomorrow I decide I want to buy a bank at $11.8 billion; I am okay. I control it.
If I am a U.S. citizen and I grow the bank to $11.5 billion, I am breaking the law. I will then turn around and say, "Look, you are impeding my ability to grow my business. I will challenge you at the WTO for not allowing me to grow my business.'' If I want to grow my business but you are not allowing me, why is that?
Ms. Pearse: I do not think this is a change in policy in this bill. The ownership regime has been part of the framework for years. Our argument is that ownership framework is a prudential matter for the Government of Canada, and prudential matters have particular protections in the WTO and in our trade arrangements.
Senator Harb: No one has yet challenged it?
Ms. Pearse: There are also different thresholds and approvals that are required. I think the situation you are explaining is that you are a foreign investor, you have come into Canada, you have created a bank, you are growing the bank and the bank goes from a billion dollars to $5 billion. There is a point in there as your bank grows in size where you will be required to come to the government through OSFI and potentially the Minister of Finance for approval to continue to grow your financial institution without floating 35 per cent of your shares. You could ask for that. It would depend on the circumstance.
Again, as that institution grows from a medium-sized bank to large bank, there will be a point at which you will face the obligation in the law wherein you could ask for approval.
Senator Harb: However, you do not foresee any potential problem now that we are going global with free market economies and people moving back and forth. You do not foresee a potential problem in the kinds of limitations we have on the books. Is that right?
Ms. Ryan: All of our trade agreements recognize the prudential framework we have, and they allow for that.
The Chair: I would like to play lawyer for a second.
Looking at section 374(1), it says in English, "No person may be a major shareholder of a bank with equity of twelve billion dollars or more,'' and in French it says —
[Translation]
"No person can be a shareholder.''
[English]
I suppose "person'' or "personne'' is both a human individual or "personne morale,'' is it? There is no doubt about that.
Senator Hervieux-Payette: It could be Warren Buffett.
The Chair: Are there any other questions? It is a technical bill, and we appreciate everyone's patience and understanding in wading our way through it.
At our next hearing, we will have for the first hour the Credit Union Central of Canada and the Canada Life and Health Insurance Association. For the second hour, we will have representatives from OSFI and the Financial Consumer Agency of Canada.
Until then, I would like to close by thanking our witnesses very much for being here, and of course we expressed our thanks earlier to the minister. This has been very helpful, and we appreciate your cooperation in appearing before the Standing Senate Committee on Banking, Trade and Commerce.
(The committee adjourned.)