Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 18 - Evidence - November 20, 2014
OTTAWA, Thursday, November 20, 2014
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to examine the subject matter of those elements contained in Divisions 9, 12, 18, 22, 26, and 27 of Part 4 of Bill C-43, A second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good morning. Welcome to the Standing Senate Committee on Banking, Trade and Commerce. Today is our second meeting as part of the pre-study of six divisions of Part 4 of Bill C-43, A second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
Today's extended meeting is divided into two main parts. First we will hear from officials about the divisions of the bill assigned to our committee. In the second half, we will be hearing from outside witnesses.
We begin with Division 9 of Part 4. Our witnesses for that part are from Industry Canada. We have Jenifer Aitken, Director General, Investment Review Sector, and Mr. Paul Halucha, Director General, Strategic Policy Branch.
Ms. Aitken, I believe you are making the opening statement. The floor is yours.
[Translation]
Jenifer Aitken, Director General, Investment Review Sector, Industry Canada: I am here to speak to division 9, which contains amendments to the Investment Canada Act. These changes are found in clauses 186 to 190.
The first amendment in clause 186 amends paragraph 10(1)(c) of the Investment Canada Act so that a foreign lender who acquires control of a Canadian business through realization of security for a loan is required to file a notification. This new requirement applies only if the transaction is not subject to approval under another statute, namely the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Co-operatives Act.
Subclause 190(2) prescribes that the part of the Investment Canada Act applying to reviews of foreign investments based on their net advantage will continue not to apply to this type of acquisition.
[English]
These two subclauses, 186(1) and 186(2), will result in these types of transactions being subject to notification under the act, while maintaining their exemption from net benefit review. The purpose of the exemption is to avoid adversely affecting credit markets. The notification requirement is a form, specified in regulations, that requires information about the parties and the proposed investment. The information an investor must provide when filing a notification includes the name and address of the investor and the Canadian business, a description of the business activity of the Canadian business, and the value of the assets being acquired.
The result of these changes is that the government will now receive useful information about transactions where a foreign investor has gained control of a Canadian business by realizing on security for a loan. This additional information will contribute to the data about foreign investment collected by Industry Canada.
Clause 187 contains amendments to the confidentiality provisions in section 36 of the act. The strict confidentiality provisions in section 36 set out the limitations to what can be divulged and discussed with regard to the application of the Investment Canada Act to any specific investment. Certain exemptions permit limited disclosure of information, for instance in the context of a net benefit review.
Subclauses 187(1) and 187(2) amend the act to permit the disclosure of the notices that are issued at each stage of the national security process. Subclause 187(1) adds the notices that can be sent during a national security review process to the list of exceptions in section 36 of the act, thereby permitting disclosure of information in those notices. For example, the government would have discretion to disclose that a notice has been sent to an investor, that an order for a review may be made —25.2(1) — that no order has been made — 25.2(4)(a) — or that an order for review has been made — 25.3(2).
Similarly, subclause 187(2) allows for the disclosure of the fact that an order was made by the Governor-in-Council at the end of a review, and the effect of that order. For example, the Governor-in-Council may send an order authorizing investment with or without conditions, directing that the investment not be implemented or requiring a divestiture.
Subclause 187(3) amends the act so that the minister must be satisfied that the disclosure of the information would not prejudice the investor or the Canadian business.
The effect of these amendments will be to allow greater flexibility for the government to provide information on key decision points in the national security review process while continuing to protect confidentiality of an investor's information and national security.
Finally, clauses 188 to 190 make amendments to the Economic Action Plan 2013. The government amended the Investment Canada Act national security timelines to allow the Minister of Industry, where necessary, to extend the time it has to conduct national security reviews. Clauses 188 to 190 in Bill C-43 repeal one of these amendments, which is not required, but the others remain in place and will be brought into force when the national security regulations are amended.
These regulatory changes will provide the government with additional flexibility in the time taken to conduct national security reviews. This is a drafting measure, not to leave provisions on the books that are not needed or required.
The Chair: I will go to my questioners immediately.
Senator Black: Thank you, Ms. Aitken, for your presentation.
Correct me if I'm wrong, but I read this and the question in my mind was: What can the possible purpose of all this be? Your answer from your testimony appears to be that it is to provide the government with additional information for national security purposes. Is that your answer?
Ms. Aitken: I'm not sure when you ask the question on the purpose of all this. I described three amendments —
Senator Black: The proposed amendments you are discussing today. What is the purpose?
Ms. Aitken: There are two key amendments. The last one, as I said, was a drafting point. The first one is to provide for a notification requirement where a foreign investor acquires control of a Canadian business by realizing on security. The purpose of that amendment is to obtain information about those transactions, if they're not subject to another piece of legislation, so there's not going to be overlap between the two. It is to get that additional information.
Senator Black: Today that does not exist, apparently. If I'm the Hong Kong and Shanghai Bank and have a charge on an asset in Saskatchewan, and I realize that charge and am now in a position of some greater control, I do not need to disclose that today, apparently. Is that correct?
Ms. Aitken: Under the Investment Canada Act, that's correct.
Senator Black: This will correct that?
Ms. Aitken: Yes.
I can't answer about the Hong Kong international bank specifically because Bank Act requirements do exist. This applies to those situations that aren't covered by the Bank Act.
Senator Black: I understand that from the government's point of view more data is a good thing, I presume. I'm a senator from Alberta. The oil sands is the greatest asset that Canada currently has. It is fueling prosperity in Canada. To continue developing this investment, hundreds of billions of dollars are required. Since the last involvement in gathering information in respect of investment, investment from outside of Canada in the oil sands has stopped. This is not in Canada's interest.
I would like to know why you think these amendments here assist, in any real business way, the development of one of Canada's most important assets.
Paul Halucha, Director General, Strategic Policy Branch, Industry Canada: The answer is that it is not making any changes to the oil sands policy at all. The burden that's going to be placed on businesses who are realizing on debt here is going to be extremely minimal. They basically have to provide us with a form providing basic details on the transaction and provide that to the Department of Industry. There are not any changes to the oil sands policy. There are no impacts here on the flow of capital going in and out of the oil sands.
Senator Black: Except it continues to send a message to foreign investors that they're not particularly welcome in the oil sands, would be my point of view.
Mr. Halucha: I won't dispute your point of view on it. I'll just indicate that we're not increasing the —
Senator Black: Thank you very much.
Mr. Halucha: — paper burden. We're not going to be making those reviewable under the net benefit test, so when notifications come in it doesn't require that we're going to be undertaking reviews. To the extent that a transaction is or is not reviewable now, nothing will change in the future. We will just have a better sense of how many of these transactions are happening in the entire economy, not just the oil sands. That will assist us in understanding how frequently they're used, and we don't have that data right now.
Senator Black: So more government. Thank you very much.
[Translation]
Senator Massicotte: Thank you for taking part in our committee to allow us to better understand the objective and the consequences of these amendments.
I will continue somewhat along the same lines. In your opinion, if a foreign creditor were to gain control of a Canadian business, their only requirement would be to fill out a form which briefly describes the consequences of this recourse on their security. There is no government decision. It is simply a matter of providing information. Is that correct?
[English]
Mr. Halucha: Yes, you are correct. From the perspective of national security, these transactions would already be reviewable, so that's an obligation that already exists. We're not changing that in any way.
Senator Massicotte: When you say that, what do you mean? In other words, the answer is yes but is there another review occurring because of that?
Mr. Halucha: The Investment Canada Act has two streams of review. There's an economic review, the net benefit test, and there's also a national security review that's in place. The regime contains both of those reviews.
Under the net benefit test, there's an exception in the act that says if you're obtaining control of a business as a result of the realization on debt, it's an exception. It's not reviewable under the net benefit test. That exception does not exist on the national security side.
Senator Massicotte: Which means what? Let's say you're HSBC and you have major loans against an oil sands company, and they go into default. As a typical banker, your priority charge is to take control of the entity. Can they exercise that? Other than filing a form saying, ''Here are the consequences that are to follow,'' can the government say, ''No, you can't realize any security''?
Mr. Halucha: Under the national security test it would be reviewable, so yes.
Senator Massicotte: Tell me more about the criteria of the application of that act, the national security test. What does it apply to?
Mr. Halucha: The national security test applies to any realization of control of a Canadian asset by a foreigner. People are familiar with the threshold in the net benefit test, which right now is around $350 million. Transactions above that limit are subject to review. Transactions below that limit are not subject to review.
Senator Massicotte: That's the national security test.
Mr. Halucha: In the national security test there is no limit. The factors are obviously different on national security. If there are concerns with an investor coming in or with the asset that's being obtained, you want to have full flexibility; you want to have a limit that's based on asset value that means you can or cannot, and the national security considerations need to be paramount.
Senator Massicotte: There's a lot. Billions of dollars are lent by foreign entities to Canadian companies. It's just normal. Will they not be concerned with that loose explanation, loose wording to say ''I want recourse against my assets; the company is in default''?
Mr. Halucha: We're not changing that as a result of this amendment, right?
Ms. Aitken: Part of the amendment is for the notification and not to change the exemption to net benefit review. Those transactions are still exempt from net benefit review, recognizing the importance.
Senator Massicotte: But they are subject to the other one? Is it the national security review?
Ms. Aitken: Yes.
Senator Massicotte: That seems to suggest it's pretty loose as to the criteria of application.
Ms. Aitken: A transaction is only subject to national security review under the act where the Governor-in-Council makes an order for review. The act sets out a process: The Minister of Industry must consult with the Minister of Public Safety and make a recommendation to the Governor-in-Council, and then the Governor-in-Council makes a decision to do a national security review. It is not an automatic review that applies.
Senator Massicotte: I appreciate that. Basically it's for the cabinet to decide. But what is the objective? Is there an encadrement? Are there framing objectives for that review? I'm trying to determine if the third party who will review that should be concerned.
Mr. Halucha: The act is based on a case-by-case review. The net benefit factors are outlined in the act.
Senator Massicotte: You said it's not applicable.
Mr. Halucha: It's not applicable. On national security the real factors are whether or not the transaction raises concerns on national security. That's not something where there's a list or framework that's been publicized. It's not in the legislation.
There are two tests in the act. First, a screening that takes place around the concept of ''could'' the transaction be injurious to national security. If the decision is made, it is based on careful review and consideration, and there's a consultation process between the Minister of Industry and the Minister of Public Safety. If the determination is made that it could be injurious, then under the act there's legislative authority to go forward with a national security review.
The purpose of that review is to effectively elevate the bar higher. ''Could'' is for the first stage, and then ''would'' for the second stage. If the determination is made that it would be injurious to national security, the GIC has the authority to take whatever measures it deems appropriate to mitigate the transaction.
Senator Massicotte: Does it matter whether the recourse is by control? Control usually means you own the shares, the controlling interest shares. Would it matter re: the application whether the banker says, ''I net the shares,'' or rather take recourse on the hard assets and liquidate the assets? Does it matter whether it's control of the shares or recourse and liquidation of the actual assets within that entity?
Ms. Aitken: For the amendment requiring notification, it applies to control of a Canadian business, which is what the act generally applies to. That is control of the business: the shares or substantially all the assets.
Senator Massicotte: Substantially all the assets, okay.
Senator Ringuette: Usually when we see a piece of legislation in front of us, it's because there was an event that prompted a discussion at a department, government level or cabinet level, and it results in trying to close some kind of loophole. What event prompted this piece of legislation?
Ms. Aitken: No specific event prompted this change to the legislation. It's just a practice of ensuring that the legislation is effective. It's not in response to a specific event.
Senator Ringuette: The legislation effectively does what?
Mr. Halucha: Could I add to that? The addition of the national security regime into the Investment Canada Act was undertaken in 2009.
Senator Ringuette: Yes.
Mr. Halucha: Effectively we are carefully monitoring, as we do with all pieces of legislation, whether or not changes are needed to make sure that it's responsive and modern. There's no specific event here.
Routine reviews take place to determine whether improvements can be made to legislation. This was an area that had last been looked at. The exception was put in the act in the 1980s, and so the determination was made that it would be important to at least have data. We don't know how often this is happening right now. The purpose is to effectively get an evidence base to determine how often this is happening as a way of gaining control of Canadian firms.
Senator Ringuette: You said that in order to prompt a national security test that the threshold investment had to be $350 million or more.
Mr. Halucha: Correct.
Senator Ringuette: What is the threshold for this control? Is it 51 per cent of the assets of the company? Is it 60?
Ms. Aitken: The act has two types of filings. Over $354 million in asset value of the Canadian business is the current threshold. A filing for an application for review has to be made. Below the threshold it's a notification, but that applies to all acquisitions of control of Canadian businesses. ''Control'' is set out specifically in the act.
Senator Ringuette: What is it? Is it 51 per cent of the entire assets of a business?
Ms. Aitken: You have to go through the provisions in section 28, but generally it applies to an acquisition of a controlling interest, which is a majority of the voting interests. A Canadian business can be a company, a trust, a joint venture, or partnership, and then the interests in that are defined as voting interests in the act. It is an acquisition on the majority of the voting interests.
Senator Ringuette: It is not a dollar value, per se?
Ms. Aitken: Correct.
Senator Tannas: In the reasons, apart from those that you have already enumerated, would it also be fair to say that it might be in order to potentially close any loopholes that might exist where foreign ownership could come through this fashion? Would that have crossed anybody's mind in bringing these changes forward?
Mr. Halucha: Given the fact that there's already coverage under national security, we really did not do it as a way of closing loopholes. The purpose was to gain evidence.
Senator Tannas: To gain information and insight into what the activity is.
Mr. Halucha: Correct.
Senator Tannas: Good.
Secondly, any loans that were led by Canadian banks where, let's say, some of the syndicate members were foreign institutions, which happens a lot, how would they go about determining whether or not this is a loan by a foreign bank, if indeed they're part of a syndicate that is led and managed by a Canadian bank?
Ms. Aitken: In an instance where you are dealing with a Canadian bank, you would have to look at the Bank Act. There's a clear division between the Investment Canada Act and the Bank Act, and anything that is governed by the Bank Act is not subject to the Investment Canada Act. So it is clearly except for cases where there are approvals under the Bank Act.
A lot of cases of lending are going to fall under the Bank Act and not the Investment Canada Act. This captures the other ones.
Senator Tannas: It will simply not be part of any reporting regime whatsoever?
Mr. Halucha: That's right, yes.
Ms. Aitken: They're under the Bank Act.
Senator Tannas: Under this?
Ms. Aitken: Yes.
Mr. Halucha: To answer your question, that's the real gap we're talking about because they're not part of a reporting regime at this point.
Senator Black: Does it not follow that if I am a foreign bank — I'm a Malaysian bank — and I have been asked by a Canadian-based LNG proponent to fund their operations, given this new proposal where if the project goes into default I may or may not be able to realize upon my security depending on a determination of a bureaucrat, I will refuse to grant the loan because there will be a cloud over my ability to enforce my security? If I am right on that, then isn't this, in effect, restricting the ability of entities developing businesses in Canada to fund outside of Canada?
Ms. Aitken: So there aren't any changes in these changes being made to the government's ability to approve a transaction acquiring a business.
Senator Black: I understand that.
Ms. Aitken: There's no requirement for net benefit review and there's no change to the national security provisions. There's just an information requirement. The requirement doesn't apply at the time of the —
Senator Black: That's not what your colleague said. That's not what you said, sir. You said that there is a possibility, and this is where the question comes from. If I wish to enforce my security and I'm a foreign lender and it is over a threshold, there is now a national security component because I could effectively get control of an asset that the Government of Canada may not approve and, therefore, I cannot enforce my security. That is what you said.
Mr. Halucha: I'm saying that that already exists under the national security provisions of the act. We're not actually changing that risk. That risk is there now.
On your point about a bureaucrat making the decisions, the decisions are all made by the Governor-in-Council, so there's a broad discretion, under the act, for the Minister of Industry. He makes decisions on a recommendation, in the case of national security advice, from the Minister of Public Safety, but ultimately any decision around an investment where there's a national security concern is a GIC decision. That's where the orders come from.
Senator Massicotte: Just two comments: I appreciate the response you are making. You may not be changing it, but it certainly has been an impediment for lenders to invest in the oil sands because it does impede this relative to security.
My question is more about clause 189. I'm just curious: You are repealing a section that never took place and used to allow the minister the authority to extend the review period. Why are you removing that?
Ms. Aitken: The amendments were made in 2013 to add provisions that would allow for extensions to the phases of the national security review process. The amendments then referred to prescribed periods, so regulations are necessary in order to bring those into force, to actually prescribe the specific periods.
It has been determined that it is no longer necessary to have that specific authority, but the other authorities to prescribe the national security review timelines are still there.
When regulations come into force, there will be extensions. It is just a drafting change because that specific authorization wasn't needed.
[Translation]
Senator Bellemare: I would like to know if the regulation you are proposing, along with existing regulations, put Canada in a situation comparable to that of other G20 countries. Are we comparable to most of the large countries with which we usually deal, or will we have more or less regulation?
[English]
Mr. Halucha: That's a very good question. Every country has some sort of a national security review around investment. This is very typical. I would indicate, as well, that actually trying to find out how those NS regimes work is often very difficult. It is hard to do an assessment on whether there's a degree of burden in Canada that's higher than it is in another jurisdiction because the level of disclosure is not usually high around what happens in a national security process inside of other countries.
Senator Greene: Further to the question asked by Senator Ringuette as to what event might have triggered this change, can you provide a couple of examples of the kinds of transactions your regulations would flag as potential difficulties?
Ms. Aitken: The regulation that requires a notification — so something to be filed — would apply when any entity is giving a loan to another entity, perhaps a shareholder. It is not at the time of the loan. But if the borrower defaults and the lender realizes on security and, in doing so, acquires control of the Canadian business, the notification requirement applies.
Senator Greene: That's fine up to a point, but then where is the national security problem?
Ms. Aitken: Those notifications, which apply generally to foreign investors, won't necessarily have anything to do with national security. National security is a process that already exists in the act —
Senator Greene: Sure.
Ms. Aitken: — where there's a transaction that the Minister of Industry, after consulting the Minister of Public Safety, considers could be injurious and goes to the GIC.
Senator Greene: I would like an example of a national security problem in the context of an investment.
Mr. Halucha: The government has not articulated the factors around national security, what would actually constitute it. It is a case-by-case decision. There aren't factors enumerated in the act, and obviously in the case of specific circumstances, we're not in a position to provide examples.
The Chair: Ms. Aitken, Mr. Halucha, thank you very much for your participation today.
Senators, we now turn to Division 12 of Part, 4 which also comes under Industry Canada. Honourable senators will recall that in 2010, at the request of the minister, our committee undertook a 10-year statutory review of the Business Development Bank of Canada Act. This legislation appears to implement some of the recommendations from our committee.
Our witnesses from the Business Development Bank of Canada are Michel Bergeron, Senior Vice President, Marketing and Public Affairs; and Mathieu Belleville, Assistant Vice President, Legal Affairs. Mr. Bergeron will make the opening statement.
Michel Bergeron, Senior Vice President, Marketing and Public Affairs, Business Development Bank of Canada: Thank you very much, Mr. Chair, and good morning, honourable senators. I'm pleased to be here before you today to discuss the proposed amendments to the Business Development Bank of Canada Act.
As you know, the BDC is mandated to provide financing and consulting services to Canadian entrepreneurs with a focus on small- and medium-sized enterprises, or SMEs. This role is one of complementarity with private financial institutions. As a result, we take on greater risk and price accordingly. We currently serve more than 30,000 entrepreneurs who employ 690,000 Canadians and generate close to $200 billion in revenue, with 16 per cent of these clients being exporters, generating export revenues exceeding $22 billion. While our primary focus is to help create and develop Canadian businesses, we are profitable, returning dividends to the government on a yearly basis.
[Translation]
As you know, the Minister of Industry is required to conduct a review of the Business Development Bank of Canada Act — BDC — every 10 years. In this respect, many members of this committee had the opportunity to actively participate in that review. Their work led to the tabling of a thorough report from your committee in December 2010. Furthermore, another report was published by the Minister of Industry on June 16, 2014.
Both reports conclude that the time is right to amend the act. Indeed, although the BDC Act has served entrepreneurs well since its coming into force in 1995, it is now wise to make certain changes to update it in the light of the changing environment in which SMEs do business.
The amendments put forward for the BDC Act are minor. They will not change its mission or its particular focus on small and medium businesses in any way. On the contrary, these amendments will allow the BDC to use relevant tools in order to support entrepreneurs well when they request it.
[English]
With this in mind, the proposed legislative amendments to the BDC Act would allow the bank to, first, help SMEs grow beyond the domestic market. In this vein, we would now be able to help companies, like Advantage Engineering, expand their operations in Mexico to improve their competitiveness while maintaining wealth and jobs in Canada and not overloading their Canadian balance sheet.
Second, it would allow the bank to invest in venture capital funds legally established outside Canada that deliver benefits to the Canadian economy. For example, this would allow us to invest in a U.S. incorporated venture funds, such as XPV, if at least one half of fund managers reside in Canada and the fund has an ongoing commitment to invest in Canada.
Third, the proposed amendments would allow BDC to provide indirect financing through third party organizations, such as Futurpreneur Canada, formerly known as CYBF, thereby supporting young entrepreneurs more efficiently.
The amendments would also allow the Governor-in-Council to make regulations specifying additional financial tools and management services; update the scope of BDC's management services and ensure that they are complementary to those offered by the private sector; and, finally, modernize the governance provisions so that they are in line with industry practices.
My colleague and I would be pleased to answer any questions you may have regarding the suggested amendments.
[Translation]
Senator Bellemare: According to what you have just said, the Business Development Bank of Canada will be able to invest venture capital outside of Canada if certain conditions are met. Business people here complain that there is not enough venture capital in Canada. The rates of return in the United States are, without a doubt, higher there than in Canada. Several factors can explain that.
There were actors who had access to tax credits, mainly the FTQ fund. Those tax credits have been reduced. Those actors invested significantly in venture capital. Are the proposed amendments likely to reduce yet again venture capital available in Canada?
Mr. Bergeron: It is important to specify that the will was not to invest in funds that would then be invested abroad. Investments must be made in funds that, even though they fall under foreign jurisdiction, will be invested in Canada and managed by a team in Canada.
The XPV corporation is a good example. XPV is a Canadian fund. Through its past performance, XPV succeeded in attracting many foreign investors that wanted to invest in Canada. However, for tax reasons, legal reasons and other reasons, the company decided to incorporate in the United States. In this context, investment capacity in a fund that was going to benefit Canadian businesses was limited.
The proposed amendments would therefore grant us some flexibility. That being said, the tests required under the act require us to ensure that not only shall the team of managers be based in Canada, but that the fund benefits Canadian businesses.
Senator Bellemare: That is what I wanted to hear you say, specifically.
Mr. Bergeron: This is not from the point of view of pulling funds out of Canada, but rather to try and encourage further funding.
Senator Massicotte: Thank you, gentlemen, for your presence at the committee. As you know, all of these amendments flow from a process started several years ago. In 2009 or 2010, you published your own amendment requests. In December 2010, after review, the committee dealt with the act itself in its entirety, which constitutes the BDC. You are no doubt aware that these amendments flow from our recommendations, that this has nothing to do with the minister.
In one of your recommendations, you requested an increase of your paid-in capital. It is not clear in the proposed amendments if this proposal is feasible. Are you in the habit of making such requests? Is this a request that remained unfulfilled?
Mr. Bergeron: First of all, I want to thank you again for your work in 2010. At the time, we were the ones who made that request. However, after discussions with the government, it was decided not to change this provision. The current limit of $3 billion therefore remains unchanged. It is a particular situation. Since the appearances in 2010, our paid-in capital has diminished, because we made a remittance in terms of share capital. Currently, we are at about 2.1 or 2.2 billion, which leaves us some room to maneuver. In my opinion, this decision was made to give us enough room for eventual growth.
Senator Massicotte: Does the BDC agree?
Mr. Bergeron: Yes, absolutely. Our capacity in terms of capitalization is sufficient for the years to come.
Senator Massicotte: Another question that was raised in December of 2010 concerns the skills of individuals appointed to your board of directors. It was strongly recommended that appointments be made based on adequate financial skills to meet your needs. You spoke of amendments to governing regulations. However, there is nothing about appointment criteria for your board. Is that correct?
Mr. Bergeron: Once again, it was decided that it was perhaps not necessary to include it in the act. During our director selection process, a very thorough competency grid is used. External head hunters are often called upon to choose our candidates. They make sure that the candidates meet the required skills criteria and, in this case, the financial skills criteria.
Senator Massicotte: So the BDC publishes the skills criteria, the minister approves them and then takes them into account during appointments?
Mr. Bergeron: Yes. You can consult the list of administrators. We currently have excellent administrators who are extremely competent. The current process therefore works very well.
[English]
Senator Tkachuk: What recommendations of the Senate review were incorporated in the amendments?
Mr. Bergeron: I would say the most substantive ones were incorporated, for instance, the recommendations with regard to providing us flexibility to finance operations abroad. The first recommendation with regard to keeping a primary focus on SMEs is maintained within the act; the complementarity is also maintained within the act; and the issue of providing flexibility on a non-financial tool is now incorporated in the amendments before you. As I said, it's flexibility in providing financing abroad for term financing purposes but also for investment or venture capital purposes.
Finally, there were some recommendations relating to governance as well as the recommendation by the committee with regard to providing us ability to finance not-for-profit trust corporations, the example I gave you of Futurpreneur Canada.
The more substantive provisions of the bill before you are basically in line with the recommendations contained in the report.
Senator Tkachuk: When you talk about management services being offered by BDC, are you talking about assisting the businesses that you have invested in by a loan or about being in the consulting business?
Mr. Bergeron: To be clear, there is no conditionality. If you are a BDC financing client, then you have to take the consulting offering or vice versa. The two are completely distinct offerings. The reality is that the nature of the consulting market, especially as it relates to small- and medium-sized enterprises in Canada, is very fractioned. There are a lot of small suppliers, and a lot of our clients are not sure where to go for access to this consulting service so they come to us. In many cases, it is our bankers that visit the plants and customers to identify the potential needs. This needs identification allows us to bring in consultants to help address that.
Senator Tkachuk: Are you talking about bringing in consultants to assist, or are you talking about the bank itself being in the consulting business in competition with consultants in the private sector?
Mr. Bergeron: The model we use for consulting is a hybrid. We have internal consultants that develop our methodology, but in order to deliver across the country, we outsource the private sector consultants and bring them in. We act as a connector between small business and private sector consultants. The private sector consultants are paid for by BDC, but BDC contracts with the SMEs in terms of the provision of services.
Senator Tkachuk: I'm not sure if I understand it totally, but I will go to the next question.
I find it interesting that you're now going to invest money in venture capital. Are you going to do it as a percentage of the amount of capital that you have? How do you make these decisions? Is 10 per cent of the capital going to be in venture capital and 90 per cent in loans to small business? What criteria are you using?
Mr. Bergeron: Every year we have a strategic planning process that we call the corporate planning process, where we have to submit to our shareholder, the Government of Canada. Within the corporate plan we have a financial plan that provides for projections in terms of the various investments or lending activity that we have on the year going forward. For instance, if you look within the venture capital activity of BDC, we make decisions as to how much we will be investing directly into Canadian technology-based firms versus indirectly into funds. So that capital allocation is done in the corporate planning process. Throughout the year, depending on the approaches and requests we get, investment decisions are made within those capital allocations.
I hope that answers the question. We initially define, in the strategic planning process, the amount of capital allocated to the various business lines, and within those it depends on the opportunities that come to us.
Senator Ringuette: On the issue of third party organizations' indirect financing, would that be applicable to business incubator settings? Would it be marketing co-ops? Would it be applicable to provincial or municipal organizations? When you say third party organizations, would that be applicable to the list I just enumerated, or is it a specific determination on what type of third party organization?
Mr. Bergeron: Subclause 217(3) of the bill provides for the specific language as it relates to this. It says paragraph 3 does not apply, but it's indirectly then allowing us to apply this to a trust or corporation as defined under subsection 2(1) of the Canada Not-for-profit Corporations Act.
Senator Ringuette: It is limited?
Mr. Bergeron: It's limited to those not-for-profits either federally or provincially. It wouldn't apply to all kinds of organizations. In the current example, we want to have greater flexibility to provide funding to Futurpreneur, which is a federally incorporated not-for-profit. The objective is to raise funding from a private sector financial institution. In this case, given the loan performance of the Futurpreneur portfolio, the institution is asking the BDC to provide a guarantee on that particular funding.
Right now we don't have the ability. If this bill is adopted, then we would have that ability. That's one example. Some of the examples that you gave, such as provincial entities and so forth, are not provided for under subsection 217(3).
Senator Ringuette: What about regional business co-ops?
Mathieu Belleville, Assistant Vice President, Legal Affairs, Business Development Bank of Canada: Typically, there is a law that governs the co-op. In Quebec you have la Loi sur les coopératives, and co-ops are governed by that law. That would not be applicable because it would not fall under the non-profit corporation act or an equal in Quebec or any province in Canada.
Senator Ringuette: It's very limited.
The Chair: Mr. Bergeron, and Mr. Belleville, thank you for your appearance today.
We will now turn to Division 18 of Part 4, which comes under Department of Finance Canada.
Honourable senators will recall that our committee conducted an in-depth study on money laundering and terrorist financing and issued a report in March 2013. This decision implements some of our recommendations.
Our witnesses from Finance Canada are Sophie Amberg, Senior Project Leader; and Lisa Pezzack, Director, Financial Sector Policy Branch.
Ms. Amberg will make the opening remarks.
Sophie Amberg, Senior Project Leader, Department of Finance Canada: Thank you very much for having us here today. I'm a senior project leader in the financial crimes, domestic section, at the Department of Finance. I am here to give you an overview of Division 18. This technical amendment proposes to amend Part 1.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, specifically the definition of foreign entity under that part.
Part 1.1 allows the Minister of Finance to take steps to protect the integrity of Canada's financial system with respect to illicit funds that flow from outside Canada. Specifically, Part 1.1 authorizes the Minister to Finance to take countermeasures against foreign entities and foreign states that would pose a high risk to Canada of money laundering and terrorist financing. Currently, foreign entity is defined in this part and would include a foreign money service business.
The first budget implementation bill following Budget 2014 proposed amendments that would bring foreign money services businesses into the act as reporting entities. These are not yet in force, but eventually they will be in force. The amendment proposed in the second budget bill is meant to ensure that the definition of foreign entity will be updated to include foreign money services businesses, even when they become reporting entities under the act. It's not meant to change their treatment but to ensure they still could be considered foreign entities and could be subject to counter measures under Part 1.1 if the threshold is met.
Senator Black: Can you tell me and those who are watching this from the comfort of their homes what this means? Can you give an example of where this would be applicable?
Ms. Amberg: As I mentioned, it's more a technical amendment because currently a foreign money service business would be a foreign entity under the act. Are you asking for an example of how a countermeasure would apply?
Senator Black: Give us an example of a foreign money service. Tell us how that works and how they would be funneling alleged terrorist money? Give us a visual.
Ms. Amberg: A foreign money service provides services to Canadians, but they're not located in Canada. For example, those who operate through the Internet would be considered a foreign money service business as long as they are providing services to Canada.
Senator Black: What kind of services? Is this a virtual service? Is this a foreign bank?
Ms. Amberg: ''Money services business'' is defined under the act not as banks but as financial institutions that provide services such as money transfers. As you noted with virtual currency, the first budget implementation bill introduced an amendment that would have dealers in virtual currency become a money service business. That is not yet in force, but they will be included as a money service business, so it is possible that a foreign money service business would include a dealer in virtual currency. That is an example of many types of money services businesses.
Part 1.1 applies when a foreign money service business would be a client of an institution in Canada. For example, if I were a foreign money service business and wanted to do business in Canada and offer services to Canadians, I would have to open up a bank account. Part 1.1 would require that bank to take initiatives against me to monitor me more closely, perhaps, to require more ID from me and different reporting thresholds. Part 1.1 applies to when that foreign money service business would become a client of a financial institution in Canada.
Senator Black: All you are doing, then, is broadening your reach in terms of alleged terrorist financing funds to capture this type of business operation. Is that accurate?
Ms. Amberg: No. Currently under the legislation a foreign money services business is included. The minister today could issue a countermeasure against a foreign money services business. This amendment is needed because foreign money services businesses will soon be reporting entities under the act. This distinction means that they would then no longer be considered a foreign entity as currently defined. This is not meant to broaden but to bring it back to the current status once obligations under this come into force. This is a status quo measure.
Senator Black: I am completely lost.
Lisa Pezzack, Director, Financial Sector Policy Branch, Department of Finance Canada: We're trying to create greater legal certainty. The measures that we put in Budget Implementation Act No. 1 made this obligation for a foreign money services business to become a reporting entity. We want to be sure that even as a reporting entity, they still will be considered a foreign entity, against which the minister can take countermeasures. It's just a greater legal certainty. For clarity, it's not only terrorist financing but also money laundering.
Senator Ringuette: Does this concept include all the different outlets for money exchange?
Ms. Amberg: It would include money exchangers because foreign exchange is a type of activity that would make you a money service business.
Senator Ringuette: Would it also include entities that we see on the Internet, for example from the U.K., similar to the pay day loan organizations in Canada? They do their business with Canadians via the Internet. Would this allow the minister to include that kind of entity?
Ms. Amberg: Yes, depending on the facts. Right now under Part 1.1, the minister cannot target a domestic company. For a lot of those entities, it's a question of fact as to whether they are located in Canada. Yes, in general the minister would be able to do that provided they meet the criteria in the definition of foreign entity. A U.K. company might actually be located in Canada for business purposes and not fall under the definition of foreign entity.
Senator Ringuette: In the real world, we're way beyond that. We're talking about virtual currency on one hand and about Internet lending on the other hand.
Ms. Amberg: I want to be clear. The obligations under the act would fall on MSBs whether they were located in Canada or elsewhere once these provisions come into force. This is separate from requiring them to have obligations and systems in place. This relates only to Part 1.1, and it's the ability for the minister to take countermeasures against higher-risk foreign entities. It's only meant to ensure that he's protecting the system from illicit funds that would stem from abroad.
[Translation]
Senator Bellemare: Does that include foreign banks that do not do business here but with which Canadians have accounts?
Ms. Amberg: According to the definition right now, foreign banks are considered foreign entities.
Senator Bellemare: And Swiss banks?
Ms. Amberg: Yes, that is how they are considered.
Senator Bellemare: The Minister of Finance has a legal recourse from now on?
Ms. Amberg: Yes, but there are criteria. There must truly be a high risk. Specific criteria must be met before measures can be undertaken.
Senator Massicotte: My question has already been answered. I would like to take the opportunity to congratulate you for being diligent enough to read our report and share your recommendations with us.
[English]
Senator Black: This committee reviewed the issues around terrorist financing and money laundering a year or so ago and made a series of recommendations. Were any of our other recommendations considered for putting into legislation?
Ms. Amberg: Various other recommendations were put into legislation. Certain others might be addressed through regulatory packages currently being developed and others might be addressed from an operational perspective. Not everything actually required a legislative change. We took the report into consideration quite seriously when assessing the package of things we wanted to pursue.
Senator Black: And you thought it was great work.
Ms. Amberg: It was great work. I sat many a day in this room watching you do your work.
Senator Black: Thank you very much.
The Chair: Ms. Amberg and Ms. Pezzack, thank you very much for your attendance.
We now turn to Division 22 of Part 4. Our witnesses from Finance Canada are Mr. Glenn Campbell, Director, Financial Sector Policy Branch; and Eleanor Ryan, Senior Chief, Financial Sector Policy Branch. From the Bank of Canada, we have with us Mr. Ron Morrow, Chief, Financial Stability; and Robert Turnbull, Special Counsel, Financial System.
Mr. Campbell will make the opening statement.
Glenn Campbell, Director, Financial Sector Policy Branch, Department of Finance Canada: Good morning, honourable senators. Measures proposed in Bill C-43 pertain to improving and clarifying the federal regime for credit unions. Clarity on the roles of regulators and sources of official support where needed is essential for the well-being of the financial system. The government is continuing to move forward with its proposed parallel agenda with respect to credit unions, to clarify federal regulation in respect of provincial credit union centrals and to support those credit unions that may want to become federally regulated.
On the first part of the agenda, the federal government is proposing technical changes to the Cooperative Credit Associations Act, the Canada Deposit Insurance Corporation Act and the Bank of Canada Act to clarify federal regulation of provincial credit union centrals.
Centrals refer to several financial institutions across Canada that provide support to various credit unions, including liquidity, payments, technology and other back-office services.
There are three components to this first part of the agenda. First, the Office of the Superintendent of Financial Institutions, OSFI, will cease its dual supervision of provincial credit union centrals.
Second, the Canada Deposit Insurance Corporation, CDIC, will no longer provide lending to provincial credit union centrals and provincial deposit insurers. Access also to the Bank of Canada's emergency lending assistance could be provided only if a province provides an indemnity to the Bank of Canada for provincial credit union central lending.
In addition to the changes I just mentioned, there are consequential amendments to the bill. These include facilitating the dissolution of the Credit Union Central of Canada to align with the organization's ongoing transition to a trade association. This aligns with the CUCC's own plan, also adding the condition of federal predominance for associations in federal centrals to ensure they're appropriately regulated by OSFI. This is consistent with the decision that OSFI should be able to see into the risks of any institution it supervises to manage them effectively.
Since the financial crisis, the federal government has intensified its dialogue with provinces to ensure our respective financial systems are appropriately regulated.
The federal government signalled the need for clarity around supervision of the credit union system, given its ongoing evolution and increased size of individual credit unions relative to provincial credit union centrals.
The federal government also formally consulted with provinces and industry by releasing a technical paper on centrals on October 16. The paper provides technical information about the changes to the federal regulatory regime and is designed to facilitate the transition to exclusively provincial regimes. The federal government is seeking views from provinces by the end of December on their implementation plans and timelines. This feedback will help set a reasonable coming-into-force date of the legislation. The federal government is committed to working with the provinces to facilitate timely implementation without disruption to credit union business.
On the second part of the agenda, the federal government is making changes to the Bank Act to further promote continued growth and competitiveness of those credit unions that may want to offer services on a national scale. There are two components to this part. On request by stakeholders, the federal government is making changes to federal legislation in respect of continuance and amalgamations whereby a number of provincial credit unions would collectively agree to continue federally and merge together. This is taking a multi-step process and making it into one. The federal government will streamline the timelines and requirements — for example, one joint notice of intent — for continuance and amalgamations and provide members of each credit union with one vote on the overall transaction.
The federal government will also make a consequential change extending to amalgamating federal credit unions an existing authority for continuing federal credit unions to provide an undertaking on insurance networking. The federal government is open to exploring alternative models for continuance and/or amalgamation if presented by stakeholders.
Thank you. My colleagues and I will be happy to take your questions.
The Chair: Thank you very much. The first question will come from the deputy chair of the committee, Senator Hervieux-Payette.
[Translation]
Senator Hervieux-Payette: These are extremely important changes. First of all, how many federal credit unions are currently incorporated? Secondly, have provincial credit unions been officially consulted? And thirdly, did they participate in developing these in-depth changes?
[English]
Mr. Campbell: First off, as yet there are no federally incorporated credit unions. This provides a framework should any provincial credit unions wish, singularly or multiples, to merge and continue federally.
With respect to consultations, there is a long history of consultations between the federal government and the various regulators, both with their provincial counterparts, provincial regulators as well as the industry.
Senator Hervieux-Payette: No, not the regulators, the co-op movement. Did you consult with the co-op movement? I'm not talking about regulators.
Mr. Campbell: Yes, there have been consultations both with the CUCC and other members of industry, including many cooperatives that have come to Ottawa or we have met with jointly or individually over the past few years.
Perhaps Eleanor, who was involved in these consultations, would like to comment.
Eleanor Ryan, Senior Chief, Financial Sector Policy Branch, Department of Finance Canada: I would only echo my director's comments in that there have been extensive, long-standing engagement and conversations between the department, the agencies and the credit union industry.
Senator Hervieux-Payette: Did they ask to have that new regime? Who are you serving? If there is no federal co-op, why are you making so many changes to a law that does not apply to anybody in this country?
Mr. Campbell: On the question of a federal credit union framework, there have been, over many years, representations from the industry themselves who have asked to have a framework should their members wish to grow and/or offer services beyond their province.
At this time, there is, publicly, one set of credit unions or caisses populaires in New Brunswick that have recently taken a first vote in this regard, with the possible intent moving to a federal credit union framework.
That is one entity that this framework would support, as it is now, and others have suggested they would like this opportunity should they wish to grow and expand services nationally or across provincial borders.
Senator Hervieux-Payette: You can assure me that the provincial ones are all in agreement with all of the services or the status they had with the federal government, that they are all happy with what you are doing? Actually, I don't think that what you are doing is in their interest. I think you are, in fact, undermining the co-op in this country with these changes.
Mr. Campbell: On the latter part, the federal credit union framework, this is really optional should any members decide to move federally.
With respect to the first part of the act, this is about strengthening the credit union framework in Canada by clarifying the regulations between the provincial and federal governments.
At the end of the day, it is provinces that are responsible for regulating these institutions. These institutions currently are incorporated under provincial legislation, and they're regulated as such. What we are doing is clarifying, in this case, that OSFI would no longer be involved in any kind of dual regulation of an entity, to provide both the centrals and the entities with clarity as to who was responsible for that entity and as to the framework under which they operate.
Senator Hervieux-Payette: They are doing more than that.
Senator Black: Thank you all for being here.
This is extremely complicated, but it is also very interesting as well. Constitutionally, we can agree that credit unions normally fall into the property and civil rights basket and are, therefore, regulated provincially. So I'm a little surprised that the federal government had as much interplay, constitutionally, with the credit unions as apparently you did. That's interesting.
I take from what you said, sir, that this is a federal pullback from involvement with co-op societies and credit unions across Canada. Would that summary be accurate?
Mr. Campbell: I think that summary would be accurate with respect to the role of OSFI in the sense that they are pulling back and that we're basically removing the optionality of some credit union centrals to voluntarily also be regulated by two different governments. In that respect, for clarity purposes, yes, it would be deemed a pullback.
Senator Black: That's an interesting part.
I have two questions that I'd like you to explain or to help me understand: one, the rationale for these moves; and, two, the consequences of these moves.
Mr. Campbell: Certainly.
Clearly, for the fundamental rationale, we should look in the broader context of all of the efforts that governments globally and in Canada have undertaken since the financial crisis to address areas where there were actual problems and other areas where there were weaknesses. In certain cases, in Canada, which generally speaking faired quite well, there were some areas that needed clarity.
At the end of the day, any institution needs to know clearly what the legal regime under which they operate is and what their potential tools in times of need and/or stress are. In this case, the rationale was providing clarity that the province is responsible for an entity and for the tools at the disposal of that entity should there be times of stress.
In the case of OSFI, it was really a grey area, given that OSFI was not able to actually see through these credit union centrals into the actual activity of the hundreds of credit unions that exist in Canada. They were actually not able to do their job under this dual regulatory regime, and it provided a bit of cloud over who was responsible for that entity.
That's the first clear question on rationale.
As to the second, with respect to consequences, there should really be no material consequence for the operation of any credit union or central. This is a case of being clear who the regulator is. Even in access to federal tools, for example, under the bank's lending facility, the only change here is really between the governments — that the Government of Canada would need to be indemnified or the bank would need to be indemnified if any of these tools would be available to the province.
There will be no material consequences on the entities themselves.
Senator Black: Extremely clear; thank you for that.
Is there a possibility that a smaller province or a territory — let's take a territory like Nunavut or a province like Prince Edward Island — would be unable to provide the indemnity required by the Government of Canada and, therefore, their respective credit unions would be at risk? Is that a possibility?
Mr. Campbell: I will turn to Mr. Morrow.
Ron Morrow, Chief, Financial Stability, Bank of Canada: As to emergency liquidity assistance provided by the Bank of Canada to a credit union, just to clarify, our pre-existing policy on this was that credit unions and caisses populaires would not ordinarily be eligible for emergency liquidity assistance from the Bank of Canada, but the bank would consider providing that eligibility in the event that there was a systemic risk to the Canadian financial system.
So that was our previous stated policy, and internal policies at the Bank of Canada that we had developed did require us to seek an indemnification from a province in the event that we did provide a loan to them. The change to the Bank of Canada Act is really reflecting what already had been a pre-existing policy within the bank.
When we do provide liquidity, it is a collateralized loan that we make to the institution. We take good collateral against a loan we make. The indemnification really just covers the possibility that the collateral we've been given as a part of the loan declines in value over the course of the loan and that there's a potential for a loss to the bank, in that instance. So, in actual amounts, it should be a very small amount where the indemnification is required, and the fact that we're seeking the indemnification really reflects the fact that the provincial institutions are ultimately the responsibility of the provinces.
Senator Black: Thank you. That was very helpful.
[Translation]
Senator Massicotte: Thank you for your participation in our committee. You mentioned that on October 14, you gave details on these proposed changes. You also said that you have been discussing them with provincial governments and credit union centrals. Do Quebec and British Columbia agree with these proposed changes? These changes were certainly proposed to ensure consistency. But is there a province that disagrees with them?
Does the Desjardins Group, which is a very important group in Quebec, agree with these changes or see drawbacks?
[English]
Mr. Campbell: All very good questions. I can say that there has been extensive engagement with the provinces over the last few years, and following the announcement in Budget 2014, there have been further discussions with the provinces. To date, I wouldn't characterize any province as being opposed to the measure, but they can speak for themselves.
Certainly, we're seeking clarification on when and how this would be implemented, hence the flexibility in the coming-into-force date in this legislation and our continuing consultation with them. I don't think there's any disagreement on the need for clarification around the regulatory regime in any province.
With respect to Desjardins, which is a formidable institution and credit union in Canada, they're not impacted by the withdrawal of OSFI because they never availed themselves of that. That's a part that does not touch on Desjardins.
With respect to the part that Mr. Morrow just mentioned, it's really indemnification under that hypothetical scenario that goes from the Province of Quebec to the Bank of Canada and, in turn, the Government of Canada. It should have no impact on Desjardins whatsoever.
[Translation]
Senator Massicotte: You say that you are being flexible, that the transition will happen easily and that discussions are ongoing. It implies that some provinces disagree or that there exists greater flexibility. What is the province's main objection concerning these changes?
[English]
Mr. Campbell: Actually, senator, there has not been an explicit objection to which I know of in our discussions about when this will come into place. The federal government is making a decision in its own right to remove the voluntary aspect of new regulation. The provinces are already responsible for regulating their institutions, and in certain cases, many of them may need to make legal or legislative adjustments to allow them to take sole responsibility of regulating.
We're in the process of discussing with them about what time frame they need. The issues are around the time frame of implementation. They have not been, to my knowledge, opposing the withdrawal of OSFI supervision, in particular, specifically or collectively at this time.
[Translation]
Senator Bellemare: I would like to come back to the changes for lending at the Bank of Canada as they apply to Desjardins, for example, which is a major player in Quebec.
Will the proposed changes lead to treating Desjardins differently than institutions under federal jurisdiction, for example, the Bank of Canada, or will they be treated exactly the same? I would like a clearer explanation of this matter.
[English]
Mr. Morrow: There will be different treatment for Desjardins vis-à-vis the federally regulated financial institutions when it comes to emergency liquidity assistance from the Bank of Canada. Because Desjardins is a provincial institution, regulated by the Province of Quebec, it is the province's ultimate responsibility to oversee, supervise and provide liquidity assistance to Desjardins. For federally related institutions, it is the Government of Canada that provides that liquidity assistance. The Bank of Canada is part of that liquidity assistance framework.
There is a different treatment between Desjardins and other federally regulated financial institutions reflecting the fact that they're a provincially regulated institution, and our previously stated policy is that because they're regulated by the provinces, under our mandate we would normally not provide liquidity assistance to provincially regulated institutions, save at a time when it poses systemic risks to Canada, and we are now clarifying the conditions under which that would take place.
[Translation]
Senator Bellemare: Does Desjardins agree?
[English]
Mr. Morrow: I won't speak for Desjardins specifically. What I will say is we have had discussions with provinces, provincial regulators, and with credit unions in particular. I would say that there are some entities, not all, who would prefer not to have this indemnification requirement.
[Translation]
Senator Bellemare: Given the scope of the Desjardins Group and its impact, have you considered the idea of making an exception within the framework of this bill to ensure that it has access, like the others, to last-resort assistance? I say this because we know that a provincial government has to borrow from the market to be able to offer that last resort, which is not always easy to do, and that the federal government, for its part, has access to the Bank of Canada which is, as we know, very different from foreign markets.
[English]
Mr. Morrow: That was part of the considerations we undertook in our policy. Where we landed at the end of the day, and the motivation behind our policy, is to respect the division between federally regulated and provincially regulated institutions. That liquidity provision oversight and all the things that go along with supervising and regulating a financial institution, if that responsibility rests with a province, then it is their ultimate responsibility to provide that.
Our responsibility, given our role to promote the economic and financial welfare of Canadians, only comes to bear when it is a systemic issue.
[Translation]
Senator Bellemare: This would have an impact on the insurance sector. What would be the impact of creating federal entities in the field of insurance?
[English]
Ms. Ryan: There are no elements in Division 22 dealing with the insurance sector.
[Translation]
Senator Bellemare: I was under the impression that there were provisions about that, but that is not the case. I wanted to know if there were any networking commitments through insurance sales. It is written here.
[English]
Mr. Campbell: Thank you, senator, for the clarification.
With respect to the first part of the division to which we were speaking, there is no impact on the insurance sector, per se.
With respect to Part 2 of the bill, under a circumstance where provincial credit unions, who are now legally allowed to sell insurance in their branches, should they wish to become a federal institution over time, they will have to migrate to the complete federal regime.
The provision in this bill allows an undertaking of a grace period such that they would have to commit to transition over time to a situation where they respect federal legislation.
It is not on day one. There is a period of time they will have to make structural changes to separate the insurance and other banking services underneath the credit union to respect federal legislation.
Senator Tkachuk: I know that Senator Massicotte, and I think Senator Hervieux-Payette and others, have had, over the last 15 years, numerous presentations to the Banking Committee to have this kind of legislation put forward by the federal government. I wanted to make that point, that this is not new to us. This has been going on a long time. There have been plenty of presentations by the credit union movement to have this legislation as we are putting forward now. I wanted to make that point and thank you for it.
Senator Ringuette: You did not confirm that you sat down with Desjardins to get their opinion in regard to the legislation in front of us. You kind of skirted that.
Have you sat down with them with the current legislation to ask if they agree or not? Have you asked them if there is a better way to put forth legislation?
Mr. Campbell: First, I can say that prior to the tabling of the bill there were discussions among officials with Desjardins, in advance, and also the Quebec regulators in the weeks prior to the tabling of the bill. They have since seen the tabling of the bill, and we have also shared the technical amendments paper and other consultations which we have provided.
I would like to provide clarity, though, that where Desjardins will be impacted has more to do with the Province of Quebec and the regulators, not Desjardins themselves. This is an issue where the regulators are the ones seeking clarification here. We do not envision any impact at all on Desjardins themselves.
Senator Ringuette: We will try to seek their input.
You said that the bill provides for a framework so provincial cooperatives can become a federal entity and that it is strengthening the framework. One good thing about the Senate, among others, is that we have an institutional memory. A number of years ago, I definitely recall that a framework was placed in front of us to take a provincial co-op that wanted to become a federal co-op. We have had plenty of discussions about that. One of the discussions was that within that framework was a principle that is vital to the cooperative movement — one member, one vote. In this piece of legislation, you said earlier that it was going to be one vote per cooperative, which is miles apart.
Mr. Campbell: I'll answer the first part of your question senator, and then I will turn to my colleague Eleanor to be very specific.
The first part about strengthening is that you are correct; we had existing legislation now, at the request of industry, to allow for or provide for mergers, amalgamations and continuance federally. I can say that the discussions under way in New Brunswick with the caisses populaires are proceeding under the basis of the current enacted framework.
Senator Ringuette: Exactly, one member, one vote, which is the co-op principle.
Mr. Campbell: Absolutely, and which is maintained. I will allow my colleague to explain what is being streamlined here with this particular type of vote.
What is before us today are additional avenues to provide flexibility, given the discussion with other credit unions that may require a different legal path to have their members continue federally. So we are giving optionality, and we have committed that if in the future other provinces, other credit unions, decide with their members that they would prefer a different legal path to migrate federally, then we would be open to making further amendments. It's being flexible to the demands of the industry.
Ms. Ryan: Technically, the existing federal credit union framework provides that each member has a vote. In this bill there is no change to that principle.
The change is when there are two legal parts to the transaction, and then the member gets to vote on both parts of the transaction at the same time. But they still get their vote. So each member gets a vote. Instead of voting on two legal transactions, they get to see the whole thing and vote once, so it provides them better clarity.
Senator Ringuette: What's the issue with regard to one vote per cooperative, as Mr. Campbell indicated earlier in his statement?
Ms. Ryan: I think he was just referring to when there are two legal parts to a transaction. So if a provincial credit union is thinking about becoming federal, they might first want to amalgamate the credit union and then continue it to the federal framework. The member can continue it and then amalgamate it. There are different ways to do it. Those are two legal transactions and the member gets to vote on both of those at the same time. We're simply streamlining. So the member gets to vote, but they get to vote on both pieces at the same time and see the entire transaction.
Senator Ringuette: As one legal —
Ms. Ryan: As one decision: ''Yes, I do want to come to the federal framework no matter how many legal parts to the transaction.''
Mr. Campbell: The ability of any member, in any credit union, will always have one vote in any transaction. What this does is provide more clarity and empowers that member who is voting to know the full suite of both the objective and the end run of what they're voting on. Clearly, if you're voting to merge for the purposes of some of them downstream going federal, then you should disclose it to that member when they're voting.
Senator Ringuette: If you know.
Mr. Campbell: The policy intent under this act, at this time, would clearly be their intention to go to their members and have them vote as to whether or not they wish to the move federal framework. You should go to your members and provide full disclosure of that one vote and you still respect one member, one vote, one institution and all the corporate governance thresholds that they need to abide by. It's the same. It means you're not going to members with part of a question. You have them vote on whether they want this end result.
Senator Tannas: The likely scenario would be a British Columbia credit union that wants to merge with an Alberta credit union and the only way they can do that is to go federally. But if they can't get past that first question — they don't want to go federally — a member would not likely support going federal without needing to, so that's the idea that you're enumerating.
Mr. Campbell: That's correct.
Senator Tannas: In the credit union space, of which I am recently familiar with, there is a lot of talk that gets mixed up with action and so I'm never really sure. Is there a combined credit union central? Are B.C. and Ontario actually together?
Mr. Campbell: There is an entity called Central 1 that serves a portion of Ontario credit unions as well as British Columbia credit unions. It has offices in both provinces, headquartered in B.C., but with many operations in Ontario.
Senator Tannas: Now that the federal government is backing out of this, was there any request for time or was there any gear grinding amongst the Ontario and British Columbia governments now that they're going to have to separate these two, which I presume they would, or jointly supervise this mash-together? Could you give us any colour on that discussion?
Mr. Campbell: First, I would say that we do not necessarily envision any structural change with respect to that ''central'' as a derivative of this act or this proposal. There are many discussions going on. As I mentioned in my remarks, there is an evolution going on in credit unions, in various provinces in Canada. They're amalgamating and consolidating. Some are growing. Their centrals have to adapt because they provide service to their members. These are issues that provinces among themselves have been trying to work out and will continue to work out interprovincially.
In this case, the issues that were there before, about those two provinces having the same central to manage their credit unions, don't change. They need to cooperate under the two. What's happening here today is not having a demonstrable impact on the operations of Central 1.
Senator Tannas: Other than somebody new is going to have to supervise those two?
Mr. Campbell: As it stands, in B.C., it's largely the provincial regulator that regulates Central 1. They have a very light touch from OSFI, so from the British Columbia point of view, this will have a negligible impact. Similarly in Ontario, they may have to make an adjustment.
Ms. Ryan: B.C. is the primary regulator of Central 1. We're not privy to the conversations they're having. As the primary regulator, the only thing that is changing here is that OSFI is removing itself as a secondary regulator.
Senator Tannas: Are you aware if we have ever actually had a formal application or is there a formal application for a federal credit union?
Mr. Campbell: No formal application.
Senator Bellemare: If you want to answer my question in writing that would be good, too. My question relates to a comment that Senator Black made at the beginning of the discussion. He suggested that in the Constitution, cooperatives are under provincial jurisdiction. That's why, at the beginning of the 20th century, when Desjardins came to the federal government to have a federal —
The Chair: And the question is?
Senator Bellemare: The question is: How would you get around the Constitution with this law, if there is a constitutional problem?
The Chair: This can be in writing, if you would prefer, or if it's a quick answer, we can accept it now.
Ms. Ryan: I think I can provide a simple answer and we'll see if that suffices.
In 2010, when we put the federal credit union framework in place, it was embedded in the Bank Act. The federal government has authority over banks and banking. Therefore, banks that function as federal credit unions are something we have jurisdiction over. I think the comment before was that credit unions incorporated under provincial law are clearly provincial domain.
The Chair: Thank you very much to our panel.
Senators, we now turn to Division 26 of Part 4. Our witnesses from the Department of Finance Canada are Erin O'Brien, Chief, Financial Sector Policy Branch; and Lisa Pezzack, Director, Policy Sector Branch. Ms. O'Brien will make the opening statement.
Erin O'Brien, Chief, Financial Sector Policy Branch, Department of Finance Canada: Thank you. It is a pleasure to be back before you today. I am Erin O'Brien and I'm the Chief of Payments within the Department of Finance in the Financial Sector Policy Branch. I'm here today to explain and provide answers to your questions on Division 26, proposed amendments to the Canadian Payments Act.
The Canadian Payments Association owns and operates Canada's national payments clearing and settlement systems. The CPA's mandate, membership and governance framework are prescribed by the Canadian Payments Act.
Division 26 proposes to amend the Canadian Payments Act to reform the governance structure of the CPA by introducing greater independent decision making to its board of directors and by strengthening its accountability framework to the government and to the public to ensure that the national payments clearing and settlement infrastructure is operated for the benefit of Canada's economy and citizens.
Key changes include the establishment of a smaller majority independent board of directors, an expansion of the Minister of Finance's power to issue directives, and a requirement for the CPA board to annually prepare a corporate plan for the minister's approval and to publish an annual report.
The Chair: The first question will be from the deputy chair of the committee, Senator Hervieux-Payette.
[Translation]
Senator Hervieux-Payette: Could you tell us why the board of directors was reformed? Who complained about the current system? What led you to change the terms and conditions? You mentioned that you must act in good faith with all the care, diligence and skills of a reasonable person. I hope that that is already the case. It is important to understand the goal of such a change. What did these changes improve?
[English]
Ms. O'Brien: The government has taken two successive reviews of the payment system. One was done in 1998 and the other more recently when the payment's task force reviewed the payment system and issued a report in 2012. Both reports found deficiencies in the governance structure of the Canadian Payments Association.
At present, the board of the CPA is dominated by its member financial institutions. As such, members of the board are either in a perceived or actual conflict of interest situation. We found that the national clearing and settlement infrastructure that the CPA owns and operates hasn't been run in a manner that respects the three public policy objectives that the government set out for the association: ensure that the systems are safe and sound, efficient, and respond to user needs. The conclusion of the reviews was that the systems are certainly safe and sound, but we feel that the board needs to pay closer attention to other public policy objectives, notably respecting user needs.
A tangible result of some of the board decisions is that the infrastructure owned and operated by the CPA is aging and requires renewal. By implementing a majority independent board, we feel that we would have greater assurance that the decisions made by a majority independent board will better balance the spectrum of the public policy objectives, notably as systems will be renewed.
Senator Hervieux-Payette: Who are not serving the rest of the members well? Who will take their place? Is it the banks? Which group is overrepresented?
Ms. O'Brien: The financial institutions — the banks.
Senator Hervieux-Payette: Just the banks? Are insurance companies not part of the financial institutions for you?
Ms. O'Brien: It's predominantly Canada's largest financial institutions.
Senator Hervieux-Payette: You don't have a quota. You say they are aging, but I guess all boards in Canada are certainly too old, so it's not the only place where there could be a change.
You said that it will be more efficient, I presume. Besides the fact that there are too many financial institutions, are there many other members, in terms of percentage, that could be on the board?
Ms. O'Brien: Thank you for that clarification. My comments were in respect of the age of the systems that the CPA owns and operates, not the members of the board of directors.
At present, the existing board is dominated by CPA's members, who are Canada's financial institutions. Our amendments propose to introduce a majority independent board. We will reduce the size of the board from 16 members at present to 13 members, and there will be a requirement that 7 members of the board be independent. We think that will bring better balance to the board's decision-making process.
However, it is very important to continue to ensure that the financial institutions are represented on the board and, as such, provisions in the bill allow six seats to be maintained by members of the CPA board. They will be divided according to different membership classes within the association.
[Translation]
Senator Massicotte: I thank you for appearing before our committee. In fact, the amendments were necessary because you are modernizing your governing regulations. The majority of the members of your board will be made up of independents, which will somewhat limit the powerful influence of financial institutions. The objective is to satisfy the clientele, not just providers. I congratulate you for the proposed changes, you are on the right track.
I would like to make just one comment about these amendments. A few years ago, many discussions were held by other crown corporations about modernizing their boards. The Bank of Canada is an independent institution with an independent board of directors. There will certainly be a debate among your board, centred around the members' right to consult each other because they are members of the board, the fact that the members were appointed under a political system, and that the minister always has the power to issue directives.
One must ask oneself if the opportunity and the capacity to act are available, especially when a difficult context raises controversy. Should one wait for the minister's or deputy minister's directives? What will you do to ensure a certain balance?
[English]
Ms. O'Brien: To be clear, the CPA is established in legislation, although it doesn't have the same legal entity. It isn't a Crown corporation. I will step back and provide context before I get into the directives.
Not only are we changing the governance structure of the CPA, but another key element of our reforms is to introduce an accountability framework. Under that framework, the CPA will be required to prepare, on an annual basis, a five-year corporate plan that will be presented to the Minister of Finance for approval. In addition, the CPA will be obligated to publish an annual report, including audited financial statements, on its website. In this way, in terms of the minister having to provide approval of the corporate planning, it will be an important element so the government can ensure that the CPA is headed in a direction it is comfortable with.
The Minister of Finance's ultimate authority would be to issue a directive to the CPA, although that is a significant and serious intervention.
Senator Massicotte: All that is good. You're getting to what the corporate world has done for a couple of decades. It's very positive.
Who will name the board members? You've categorized them as being independent and not independent. Is it still a political process? And if you do it, has your body established criteria for selection? Has the minister bought into the criteria that you will name people consistent with your level of competency?
Ms. O'Brien: That element of the CPA's governance will be changing. At present there are three ministerial appointees on the board of the CPA. That will no longer continue under the new governance structure. The member directors as well as the independent directors under the new board will be appointed by the CPA's membership. However, in the legislation and coming regulations, we will be providing a transition plan and guideposts in terms of, for instance, providing a definition of what an independent director would mean and ensuring that their board of directors will have the requisite skill set necessary to perform it abilities.
[Translation]
Senator Massicotte: Your annual business plan must be approved by the minister. What happens after the minister approves or rejects it?
[English]
Ms. O'Brien: In that respect, the way it works will be similar to what it is currently in place for Crown corporations, so then the CPA would not be able to go forward with a significant activity or whatever it had outlined in that corporate plan. This is why we think it is essential. At present, the CPA is considering what the next generation payment clearing and settlement system should be for the country. As such, we feel it's important that the minister and government have oversight of the direction in which that new infrastructure will be taking.
Senator Ringuette: Could you provide us with a list of your CPA members?
Ms. O'Brien: Absolutely.
Senator Ringuette: When you say independent from the financial institutions, would that allow organizations such as Interac to now be part of the board, or Rogers with regard to its aspiration to become a player in the banks? Would it allow the Retail Council to have a seat?
Ms. O'Brien: We are currently considering the definition of ''independence.'' We're looking at basing that definition on a National Instrument 52-110, and it is a very high-level definition of independence. In essence, an independent director could not have any relationship, whether material or personal, with any member of the CPA or the CPA itself. There can be no direct relationship with any of the Canadian financial institutions or management of Canadian Payments Association itself. We will be adhering to a very strict definition of independence.
Senator Ringuette: You're saying that an organization such as Rogers or the Retail Council, because they are involved in the payments system, could not be seen as independent members of the board?
Ms. O'Brien: It's difficult to make a general statement without considering the merits of the candidate. For instance, perhaps somebody from the Retail Council of Canada might qualify given the definition of independence. However, I would question whether a director or senior executive of Interac would meet the definition of independence, given the relationship between Interac and the Canadian financial institutions.
Senator Ringuette: This brings me to a third question: What is your definition of independence? I think that's very central to the issue that we're looking at here.
Ms. O'Brien: We will be defining term ''independent director'' in forthcoming regulations. As I said, as the basis of our definition, we are looking at National Instrument 52-110, so with certain modifications, given the circumstances —
Senator Ringuette: Usually we have definitions within the legislation, not in the regulations.
The Chair: Ms. O'Brien and Ms. Pezzack, thank you. We will ask you to remain.
We are now on the final division. We will ask Mr. Morrow and Mr. Turnbull from the Bank of Canada to come back to be witnesses. We're now dealing with Division 27 of Part 4. Ms. O'Brien will make the opening statement.
Ms. O'Brien: The Bank of Canada is responsible for the regulatory oversight of clearing and settlement systems. The Payment Clearing and Settlement Act provides certain powers to the Bank of Canada to fulfill its oversight responsibilities by controlling risk to the financial system while promoting efficiency and stability.
These amendments to the Payment Clearing and Settlement Act will expand the scope of enhance the Bank of Canada's oversight powers with respect to designated clearing and settlement systems. The amendments allow the Bank of Canada to oversee payment system risk, in addition to its current authority to oversee systemic risk.
The Chair: Ms. O'Brien, you were so succinct and clear that we do not have a question to ask you.
I spoke too soon.
Senator Tannas: This is a bit of a step into the regulatory environment beyond other activities. Will this increase head count at the Bank of Canada?
Mr. Morrow: As we move into overseeing prominently important payment systems from systemic risk, there would be a resource impact on the Bank of Canada in the order of two people, I would say.
Senator Tannas: We'll allow that.
Mr. Morrow: Thank you.
[Translation]
Senator Bellemare: Will these changes, in their entirety, have consequences for the industry or individuals? Will this have an impact on transaction speed?
[English]
Mr. Morrow: There shouldn't be any impact on speed of payments or anything from a consumer point of view that any individual sees as a result of this change.
The Chair: To our panel, thank you very much for appearing before us.
We are continuing our pre-study of certain divisions of Bill C-43, A second Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures.
In this second part of our meeting, we are going to hear from outside witnesses about certain measures. In our first session our committee will consider Division 22, which deals with measures related to central cooperative credit societies and federal credit unions.
Our witnesses from Credit Union Central of Canada are Martha Durdin, President and CEO; and Marc-André Pigeon, Director, Financial Sector Policy. Always a pleasure to welcome you back here, sir.
Joining us by video conference from Halifax, from Atlantic Central, Michael Leonard, President and CEO; and from Vancity Credit Union, Chris Dobrzanski, Chief Economist. He is also the President and CEO of Citizens Bank of Canada.
Ms. Durdin is making the opening comments on behalf of the credit union, to be followed by Mr. Leonard and Mr. Dobrzanski.
Martha Durdin, President and CEO, Credit Union Central of Canada: Thank you, Mr. Chairman.
[Translation]
Good afternoon, my name is Martha Durdin. I will give my presentation in English. However, it will be my pleasure to answer your questions in French. I thank you for giving me the opportunity to appear today.
[English]
Credit Union Central of Canada is the national trade association for the 317 credit unions operating outside of Quebec. Desjardins is not part of Credit Union Central. These credit unions hold over $166 billion in assets and operate out of 1,740 locations. They provide 27,000 jobs and banking services to 5.3 million Canadians.
Credit unions are provincially regulated financial cooperatives owned by their members. These members help guide the evolution of their credit unions and exercise control over their institutions on a one-member, one-vote basis.
Credit unions have strong relations with Canadian communities. We do not seek short-term profits, and we stay invested in communities when competitors leave. In fact, we operate in 380 communities right now where there is no other banking presence.
We also support small business. CFIB data shows that credit unions have the second highest share of small business lending in Canada at 18.6 per cent, just behind the Royal Bank of Canada. According to CFIB, credit unions are successful because they dominate the banks in providing exceptional service to businesses.
Credit unions are also a force for financial stability. Our loan growth is steady, and average credit union loan loss rates have been significantly lower than those of the banks.
In short, credit unions are a Canadian success story. They are community-focused, a key support for small business and a force for stability. They are essential elements in a competitive financial ecosystem. This success is aided by collaboration between credit unions, and this collaboration is built by provincial centrals and more recently regional centrals like Central 1 and Atlantic Central, which provide back-office services to credit unions across provincial boundaries.
Collaboration helps the credit union system build scale and find common approaches to meet market and compliance challenges. This collaboration has been aided by a federal legislative framework that facilitates cooperation across provincial boundaries.
That brings us to Bill C-43. It proposes changes to the federal framework that has governed aspects of the credit union system for decades. These legislative changes were initiated by the federal government in Budget 2014 and are not being made at the request of the credit union system. In short, C-43 will reorder the federal government's relations with the credit union system, particularly in regard to its relationship to the provincial centrals.
Currently, five centrals are duly regulated by OSFI and provincial regulators. Bill C-43 will eliminate, as you heard earlier this morning, the joint federal-provincial supervision of the provincial centrals. Centrals will fall under exclusive provincial regulatory framework.
The implications of adjusting to such a departure from past practice will take some time to understand and to respond to. Specifically, it will take time to understand the impact of these changes on provincial central operations and the relations between central organizations across provincial boundaries. The system is working with provincial authorities to determine how provincial frameworks need to be adjusted to accommodate exclusive provincial authority. Provincial legislation will need to be amended, which takes time. Finally, the provinces will need to review their supervisory frameworks and modify them as necessary. It's a big project that involves many parties and moving parts, and we need time to get it right.
In mid-October, the federal Department of Finance issued a technical paper setting out its plans in more detail. It asked the credit union system to respond by the end of this year, December 31. We are working with provincial governments and system stakeholders to meet this challenging timeline.
Shortly after the technical paper was released, the government tabled C-43, which gives effect to the policy changes the government wishes to see. This compounds the challenges that the system faces as it seeks to respond.
The government has specified a two-year period to accommodate this transition. This is welcome but it is not clear when the clock starts on the transition. Does it start when C-43 is passed or when the stakeholders have a clear sense of what must be done to facilitate the transition? In our view, the timetable should be dictated by the need to ensure a smooth transition to exclusive provincial authority. The timetable should be set in consultation with the system.
To close, Bill C-43 proposes changes to the federal legislative framework that governs parts of the credit union system. The credit union system and provincial authorities will need time to prepare and implement the transition envisioned by the federal government. It is important to get it right. To that end, we request that this committee recommend the federal government grant credit union stakeholders the time to prepare for the transition to exclusive provincial authority and that the timetable be dictated by the requirements of a smooth transition in consultation with the credit union system.
Thank you for the opportunity to speak to you today. I will take your questions.
Michael Leonard, President and CEO, Atlantic Central: Good afternoon. My name is Michael Leonard, President and CEO of Atlantic Central, a regional trade association and financial central for the Atlantic credit union system. I am pleased to join you today to represent 47 credit unions with 150 branches and 317,000 members from across our four provinces.
In all, our members have entrusted us with more than $8 billion in mortgages, loans and deposits. Atlantic Canada credit unions are a force for economic growth and job creation. As our competitors have retrenched from many of our communities, credit unions remain to provide vital services to families and small businesses. In fact, in 45 communities in Atlantic Canada, a credit union is the only financial institution. As an example, in Nova Scotia, credit unions and cooperatives are the second largest employer in the province behind only government. Across our region, credit unions employ almost 1,800 Atlantic Canadians.
We specialize in working with the small end of small business. Our typical small business is the sole proprietor or small operator — the kind of business that drives growth in this country. Year after year, we're recognized for not only being number one in customer service but also number one in service to small businesses across the country.
Imagine being the manager of a small credit union. You run a financial institution with fewer than 20 employees and every day you wear many hats. You are the HR, marketing, lending, IT, payments and lending, and investment expert. All the while, you need to compete against the bank branch down the street that has what must appear to be unlimited resources at their disposal.
The answer to this competitive challenge is simple and natural to a cooperative financial institution: We cooperate. Credit unions in the Atlantic region are notable for many reasons, but perhaps most notably for our willingness and ability to cooperate. While we continue to grow in our communities, we remain, at this time at least, very small financial institutions. While our friends at Vancity and Coast Capital may be the most visible faces to the credit union system, we are far more representative of the average credit union. While Vancity holds approximately $17.5 billion in assets, our largest credit union is approximately $400 million and our smallest less than $10 million.
With 150 branches across our four provinces, we are truly the small businesses of the financial services industry. To continue to grow and indeed to thrive, we depend on cooperation. Credit unions must work together to leverage what we call cooperative scale, which means building scale through collaboration.
More and more the spirit of cooperation is growing, not only in Atlantic Canada but also across the country. We have created shared services models in the areas of marketing, HR and technology, among others, to leverage scale while retaining our community ownership and focus. To be competitive for our members and future members we must continue the evolution of cooperative scale across the country.
Atlantic Central is a great example of this collaborative approach. Our organization was a logical next step in the evolution of the Atlantic credit union system. With a single brand in common technology platform, our credit unions built an Atlantic Central to leverage regional scale in areas such as liquidity and balance sheet management, loan syndication, compliance and strategy development.
Our regional system is now more integrated than ever while still providing local governance, ownership, decision making and service. This regional approach was built on a common federal regulatory framework that each province could commit to.
However, herein lays the challenge with C-43. Financial services is a scale business. Volume drives efficiency, which drives price, all of which drive innovation. Our interpretation of the bill indicates that working collaboratively to generate cooperative scale would be hampered by the limitations imposed by C-43. We believe mandating that a federal entity must have a preponderance of federal members will severely limit our ability to generate scale and efficiency at the national level for the benefit of our members and our communities.
As we look to the future of the national credit union system, Bill C-43 may divide the credit union system by creating barriers between federally and provincially regulated entities at a time when we must be looking for opportunities to enhance our collaborative efforts and service to members.
We hear that government values the role of credit unions and our ability to support communities, both large and small, and our ability to support small business. We believe government must recognize that the vast majority of credit unions are small organizations, and government must work with credit unions to find ways to encourage collaboration and to work with us to enact legislation and regulation that will enable and reward cooperation amongst cooperatives.
To conclude, Atlantic Central would like to indicate support for Canadian Central's request that government grant the credit union system and provincial governments the time to develop responses to Bill C-43 that work for credit unions and their members. We also recommend the federal government take this time to further consider how it might best facilitate cooperation and collaboration amongst credit unions.
We would be very pleased to collaborate with government on changes to improve the competitive balance in industry and support the growth of small financial institutions across the country.
[Translation]
Cristobal (Chris) Dobrzanski, Chief Economist, Vancity Credit Union: I would like to thank the chair and members of the committee for having invited Vancity Credit Union to participate in today's discussion of Bill C-43. I am Chris Dobrzanski, Chief Economist of the Vancity Credit Union, based in Vancouver, in British Columbia.
I am also the CEO of Citizens Bank of Canada, which is wholly owned by Vancity and provides a national financial framework to our credit union.
Today I will share the perspective that is rooted in community and provincial incorporation. Credit unions and caisses populaires attract a growing number of members and talented financial services employees. Our constituents benefit from the national network of provincially incorporated financial cooperatives. The Canadian credit union sector, excluding Desjardins Caisses populaires, represents 5.3 million members or 20 per cent of the population.
[English]
Since 1946, Vancity has known that members make us who we are. We were founded by providing banking services to those in its community who weren't served by existing financial institutions.
As a cooperative, Vancity is driven by the needs of its members, which has resulted in the provision of many firsts, extending the reach of financial inclusion. This ability to work with the needs of community serves us well today and has allowed Vancity to be an innovator in providing real-time solutions to community challenges in areas such as affordable housing, local food systems, social enterprise, renewable energy and environment, and financial literacy, just to name a few.
This local innovation in part relies on direct access to payment settlements. Specifically, Vancity, via its membership in Central 1 has Canadian payments CPA protocol, reliability and stability. Vancity is grateful for the existing framework that allows regional central credit unions to be equal partners in the CPA. Today with over 501,000 members and assets of nearly $18 billion, Vancity is Canada's largest community credit union.
Vancity understands the big picture for emerging financial regulations, especially for the implementation of Basel III internationally by 2018. We agree that some financial reform will inconvenience deposit-taking financial institutions to provide more stable credit pipes that support the real economy, which is aided greatly by harmonizing and tightening regulation. Vancity favours regulation that provides for a stable supply of banking services to Main Street where our credit union members work.
[Translation]
Vancity Credit Union cooperates nationally with credit unions across the country to create a secure, large-scale network via Central 1. We are grateful for the current framework that today allows our central credit unions to be equal partners in the CPA with equal regulatory rules established by the Office of the Superintendent of Financial Institutions.
These uniform standards support Vancity Credit Union members and ensure greater financial stability for all deposit-taking financial institutions, not only for credit unions but also for their members' centrals.
As a cooperative, Vancity Credit Union is democratically governed by its members. Together with other B.C. credit unions, we are members of our regional central credit union and through our member-elected board of directors, we consult with each other on matters of financial reform, financial scale and sound financial practice. Our consultation process reaches deeper consensus, perhaps, than our competition. It does take more time to consult within our peer groups and to coordinate across our credit union regions.
[English]
We note that the important changes envisaged in Bill C-43 with respect to credit unions would also benefit from a deeper consultation. Our experience is that when we devote adequate resources and time to policy changes like those in the bill, we are able to ensure a smooth transition to the new state with clear benefits to all those involved.
We ask the committee, therefore, to understand that we would welcome sufficient time to allow for our system of cooperative collaboration to develop a coordinated response to the regulatory changes envisioned.
[Translation]
In closing, I wish to emphasize how important it is to begin discussing the topics we covered today. I thank you sincerely for the opportunity to present to you today.
Next time you are in Vancouver, I encourage you to come visit us. You will see the positive influence we have within the communities we serve and the importance we attribute to our values as a basis for our financial activities.
Senator Massicotte: I wish to thank the witnesses for their comments.
All three of you said the same thing: these are significant changes for which you request an adequate transition period.
One of the witnesses focused on the Atlantic provinces. As you know, following the proposed amendments, the federal government will no longer ensure regulation along with the OSFI. You deal with a number of provinces. What would happen if you had a financial or other problem? Which provinces would you call upon for compliance with the code? The main objective of the bill is to clarify the situation, but in your case, because you work with a number of provinces, things would be more complicated. What would you do?
Marc-André Pigeon, Director, Financial Sector Policy, Credit Union Central of Canada: I can come back to what we were saying earlier. It will take us time to review how we are going to deal with these issues. We always maintain access to the lender of last resort at the central bank, namely liquidity facilities. This is a basic protective element and will not change.
Senator Massicotte: On condition that the province provide a guarantee?
Mr. Pigeon: No. There are two elements to the lender of last resort; there is the daily element and the extraordinary one, in case of a significant crisis. Effectively, very little has changed regarding emergency assistance as we maintain the daily lender of last resort element. Secondly, as was mentioned by the witnesses from the Bank of Canada, they clarify the existing system. There are not many changes from that perspective. It is already part of Bank of Canada policy.
Senator Massicotte: That changes when you do business with other provinces. Are there no additional complications?
Mr. Pigeon: Not from the perspective of emergency assistance, as I stated earlier.
[English]
Ms. Durdin: Yes, it is complicated to try and understand the implications of the change, and we do need time. Certain provinces will need to make legislative changes in terms of the authority of the regulator. That will take time.
There are contracts and arrangements between various parties that need to be looked at.
Senator Massicotte: Is it only time you require? Is it all okay conceptually? Do you just need time to adjust, or is it something more profound?
Ms. Durdin: All I can say is we didn't ask for this change, but we need time to figure out how to adjust.
Senator Massicotte: Mr. Leonard, time only will resolve the issues?
Mr. Leonard: Yes. I would echo Martha's comments that until we have a chance to work through this and especially have collaborative discussions with the provinces in our regions, it is difficult to understand where all the impacts are. To the senator's question as to whether it is just time, until we go through that dialogue and talk it through, it will be difficult to say for sure.
[Translation]
Mr. Pigeon: Regulatory agencies must also adapt to these centres, which means hiring people and making sure they are at the required level. This also takes time. There are changes both in the rules and on our end, in order to adapt to these changes. There are therefore many changes involved.
Senator Ringuette: If I understood correctly, there are implications in the bill that may hinder accessibility to some credit unions within the Canadian payment system?
Mr. Dobrzanski: Today, we work with SMEs and the funding of cooperatives and transactions are much more specific. The number of provincial partners is critical, and in British Columbia, Central 1 is quite large and allows credit agencies to have specific costs. It is also thanks to the Office of the Superintendent of Financial Institutions at the federal level. I do not know how the new system under which activities can be conducted only at the federal level if we want to participate will work. These days, activities at the national level are what allow us to develop. This is why we are sure that, with time, access to payments will not be reduced and that with the help of new technologies, we will be able to move forward instead. That is the advantage I wanted to emphasize.
Senator Ringuette: Due to your size?
Mr. Dobrzanski: We make ourselves available to all the other small credit unions. This large volume promotes a more secure system that, through its national policy, provides stability to all independent partners no matter where they conduct their banking business.
Mr. Pigeon: I would like to highlight something that was said earlier.
[English]
I believe Mr. Campbell said that they are committed to change without disruption to the system, so we take them on their word for that. All we're saying is that we need the time to get there and make sure that that's what happens.
As long as we're in the federal regime, and we will be for the near future, nothing changes, and we want to make sure that over the period we come to a place where nothing changes going forward either. We take them on their word that they're committed to that, and we want to make sure we do that in the spirit of cooperation with the Department of Finance.
Senator Ringuette: I agree with you. It would be going backwards a lot for the centralized unions' capacity to access directly the Canadian payments system without going through TD or whoever, and it's a significant issue.
As I said earlier, the Senate is an institution with a very long memory. The Banking Committee is the longest standing committee of the Senate. I intend to be part of this committee for a while yet, at least for the next two years.
Can we, as a committee, ask that if ever your access to the Canadian payments system seems to be negated, could you write to this committee to alert us and to explain what is going on?
Mr. Pigeon: Yes.
Senator Massicotte: I didn't think that what we're talking about affects your membership in the Canadian payments system.
Ms. Durdin: I don't expect that it will.
Senator Massicotte: Thank you.
[Translation]
Senator Bellemare: As my colleagues have noted, it appears that this is a very complex issue. However, I also noted that the cooperative movement developed locally first and then built business ties throughout the country without need for federal regulation. The rules that you have adopted are formal but not legal, and I say that in quotes, as they were not enshrined in law, but they work quite well.
You were surprised when the bill was tabled because you were not consulted on it. Now, you are being consulted for its implementation, but not in the development or goal-setting stage.
Even though the system is obsolete, you are requesting that it be implemented at a later date so that you have time to think about it. Are you asking that this provision be struck from the bill, or are you asking that other provisions with longer time frames be added?
[English]
Ms. Durdin: If I can answer your question, we respect the government's desire to clarify the regulatory responsibilities of the provinces and the federal government. What we're asking for is consultation and discussion with the system on when the clock starts for the two-year implementation time frame. At this point it's not clear to us when it starts. If it's a two-year time frame, then we'd like to delay when the clock starts because we believe we need more time.
[Translation]
Senator Bellemare: In your opinion, does the legislation we have before us provide any clear indications on the federal regulations that will support this intent? Are the changes clear enough, as we have yet to see the regulations as well?
[English]
Ms. Durdin: I think it depends on what part. In terms of section 16 and OSFI's withdrawal, it's pretty clear. The federal implementation of federal credit unions, the legislation is not that clear just yet, but it needs to be worked out. I think there is, in the legislation, a process to get to that point.
Is that a fair assessment?
Mr. Pigeon: I wanted to suggest that it's easy to blend these issues because there are at least two or three issues at stake here. There is the federal credit union option, and we mentioned the insurance retailing and the amalgamation provisions. Those are measures intended to make it relatively easier for credit unions to come up to the federal level and be regulated federally. That's one piece.
I would say the department has been consultative on those measures, and there have been extensive discussions with respect to those.
The other piece is the Part XVI issue where the government is saying they will no longer regulate centrals. That part came as a surprise, and that's the part we're saying we need more time for.
The third part — not to go back on this too much — we talked about the changes to the Bank of Canada Act. That's another issue. There are at least three issues in this division that I think are important to keep separate in your mind.
As Mr. Campbell said, especially with respect to the federal credit union option and Part XVI, or what we call the Cooperative Credit Associations Act, those are parallel tracks. They're two separate processes. They're running in parallel timing-wise, but they're not the same thing.
[Translation]
Senator Bellemare: I believe I understand what you are asking for without saying it directly. Thank you.
[English]
Senator Tannas: Given that this is now out, have you been contacted by provinces? Is there any province that's actually moving, given that this is a fairly tight time frame? Are you seeing any action from provincial regulators to say, ''We better get together and figure this out,'' or are they waiting? That's one question.
Also, would you anticipate that the process would be simply for the provinces to figure out, individually or potentially in concert with each other like B.C. and Ontario will have to do, how to replicate the oversight?
In other words, they're not going to make many changes. They are just going to try to replicate the oversight, the rules that have been applied, the guidance that's been given, and so on. I would guess that it would not be as onerous as them sitting back and saying, ''Well, let's rethink how we oversee this somehow''. Do you have any sense of that yet?
Ms. Durdin: To answer your first question, the regulators have been contacted and have met with officials recently. They are talking together through their organization on how best to address this.
We have not had a formal discussion with them in terms of how they will address it, and I think we'll have a better indication of what they're going to do when they respond to the technical paper by the end of December.
I would really hate to speculate on how they're going to address it. There are some provinces where the oversight is already replicated and there is somewhere where they need to make changes, so it will vary.
Senator Tannas: Do you see the association of provincial financial regulators — CUPSA — do you see them taking a lead in this, or do you think it will quickly devolve to each individual province trying to figure this out?
Ms. Durdin: No, I think they're working together.
Senator Tannas: Thank you.
The Chair: To our panel, on behalf of all the members of the committee, we greatly appreciate your presence today. You have helped us very much in our deliberations.
We will now go to the next panel. For this session our committee will consider Division 26, dealing with the Canadian Payments Act. Our witnesses from the Canadian Payments Association, Doug Kreviazuk, Vice President, Next Generation Clearing and Settlement; Deborah Wilson, Senior Legal Counsel; and Geoffroi Montpetit, Director, Public Affairs.
Mr. Kreviazuk, the floor is yours.
Doug Kreviazuk, Vice President, Next Generation Clearing and Settlement, Canadian Payments Association: Thank you very much. I am Doug Kreviazuk, the Vice President of Clearing and Settlement Systems for the Canadian Payments Association. I would like to thank you for inviting the CPA here to contribute to this important study. I have a brief statement that will help try to situate this Canadian Payments Association and to explain the relevance and importance of Division 26 contained in the bill.
The Canadian Payments Association is Canada's main financial market infrastructure. We design and operate Canada's national clearing and settlement systems for payments. Financial institutions rely on us to settle with finality their clearing balance on the books of the Bank of Canada daily. Every Canadian, businesses, governments and financial institutions count on our systems to clear and settle payments such as checks, pre-authorized debits, direct deposits, bill payments, payments made at the point of sale, and wire payments. Last year alone, we cleared and settled approximately $44 trillion, which amounts to about $170 billion on every business day.
We are guided by public policy objectives of safety, soundness, efficiency and the interests of users. These objectives are enshrined in our legislation, the Canadian Payments Act. Financial institutions that are engaged in the business of payments are required to be members of the CPA and fund our operations. Today, our membership stands at 113.
Our focus is ensuring that financial claims between financial institutions can be settled efficiently and without risk. In addition to technical infrastructure, we develop the rules and standards that together with the Canadian Payments Act provide a strong legal framework for payments of today and tomorrow.
Bill C-43 introduces important amendments to the Canadian Payments Act and to the Payments Clearing and Settlement Act.
Amendments to the Canadian Payments Act, in particular, bring about changes to our governance framework. We believe that they will enhance the governance, overall functioning and accountability of the CPA, thereby helping us to fulfill our forward-looking strategy for Canada's payment system. Let me highlight a few of the key changes to the Canadian Payments Act.
First, a smaller, more independent board of directors will support a broader and more inclusive representation from the payments ecosystem.
The minister's power of rule disapproval will be maintained in the act, but the bylaw approval process has been made more efficient, with a new category of administrative bylaws that require only board approval and not what is currently required, which is ministerial approval.
The act will contain new accountability requirements, many of which have been introduced by the CPA over the past couple of years, such as the publication of detailed audited financial statements and reporting on the progress of our stated objectives.
Since the first reading of Bill C-43 in the House of Commons, we have had an opportunity to examine its provisions closely and we've engaged the Department of Finance on next steps, specifically with clarification in a few areas when the regulations are being drafted.
One area I would like to highlight is that we believe the regulations should specify a timely process, for example, 30 to 60 days, for the minister's approval on CPA's annual submission of its corporate plan. This is because the CPA operates systems and infrastructure that are critical to the day-to-day business operations of the financial system.
I would like to make one last comment on achieving our optimal oversight mechanism. Under the Canadian Payments Act, the minister has the power of directive over the CPA and the power to disapprove rules and bylaws. Under the Payments Clearing and Settlement Act, the Governor of the Bank of Canada has the authority to designate payment systems of systemic importance for oversight by the bank, like our large value transfer system.
Bill C-43 expands that power to a new category of prominent payment systems. This would conceivably allow the governor of the bank to designate a retail system — the automated clearing and settlement system — for oversight by the bank. It will be important to ensure that this possible duplication in oversight not impede the CPA's rule review process and therefore our ability to respond to user needs.
To conclude, the CPA is working diligently to ensure a speedy and smooth transition to this new governance framework. We believe the amendments being proposed will help the CPA and its new board of directors to deliver on our important mandate and the public policy objectives of safety, soundness and efficiency that benefit all users, including consumers. These amendments will allow us to achieve our strategy for continued modernization of Canada's payment system.
With that, I would be pleased to answer any questions you may have.
[Translation]
Senator Bellemare: I would like to clarify something. When you say that your organization validates all transactions by financial institutions, does that include all the credit unions, financial cooperatives, the Mouvement Desjardins, and so on?
[English]
Mr. Kreviazuk: All deposit-taking financial institutions, as well as eligible life insurers, money market mutual funds and securities dealers can be members of the CPA.
If they are engaged in the business of payments, wanting to make payments, then they're required to be a member of the CPA. Their transaction volume is cleared and settled through our systems, which does include all the caisses populaires and credit unions in Canada.
[Translation]
Senator Bellemare: The changes made to your organization in this respect will remain the same, even if some financial cooperatives remain under provincial jurisdiction?
[English]
Mr. Kreviazuk: No, it should have no change to those.
[Translation]
Senator Massicotte: Thank you for giving us your points of view.
[English]
You make the point that relative to your business plan you must submit to the minister, the proposed legislation has no timing deadline as to when you must respond. It is a valid comment, we would agree with you. What happens if he doesn't respond? You have no authority to spend, proceed or collect payments? What happens?
Deborah Wilson, Senior Legal Counsel, Canadian Payments Association: We understand that the details of what we're required to submit and the timing are going to be set out in regulations, which we have not seen yet, and all the requirements around the corporate plan.
One thing I want to step back and clarify is that we're not a Crown corporation. We're not subject to the approval requirements that are set out in other legislation that applies to Crown corps.
We would continue to operate our systems. Any activity that was set out in the plan, I expect we would just work out the details and continue to cooperate with Finance on the objectives of what we're trying to achieve in that plan.
Senator Massicotte: I'm sure you will have a capital program every year, whether you want to spend money on computers, or something. The minister is very busy. What would happen if he doesn't respond in your proposed 30 or 60 days and the fiscal year has now commenced? Are you going to spend money on your software?
Mr. Kreviazuk: That's why we advocated for the fact that at the lapse of a period of time — either 30 or 60 days — that the corporate plan be deemed approved. That would allow us to continue to do business.
I should say that the relationship between the Canadian Payments Association and the department and the minister's office is on a very solid foundation and has evolved over a number of years. We meet on a regular basis to discuss policy, new initiatives. There would be nothing that would come forward in a business plan to the minister's office that would come as any surprise. There would be considerable dialogue in advance.
Senator Massicotte: I have no doubt about that.
Given that you propose amended legislation to allow this time, what happens if you don't get that? What does the current legislation allow you to do? You must stop operating, obviously, and if you are going to continue as if it occurred, then the point is not that important.
Mr. Kreviazuk: Well, I'm not sure that the business plan would deal with the general ongoing operations of the organization. They would deal more with the capital expenditures and the larger projects that are being introduced. It is kind of the strategic priorities of the organization. If there was something within that realm, we would have to engage in a discussion with the Department of Finance to find a way around the impasse. Obviously, the clearing and settlement system cannot shut down.
Senator Massicotte: You said you worked closely with the minister's office in this legislation. I presume that this is not the first time you have made this recommendation; you probably made this same recommendation to the minister's office when they drafted this legislation. Obviously they did not respond positively to your recommendation. Do you know why?
Mr. Kreviazuk: I personally do not.
Deborah, do you have insights into that?
Ms. Wilson: I think it is all tied up in their overall oversight objectives and accountability measures. They have been clear from the outset that they think it is part and parcel with what they proposed.
Senator Massicotte: I quite like these proposed amendments because the governance is more modern for accountability. It puts you in the type of process where you have to prepare a business plan and budgets, quite normal processes. The key factor is your board, whereby your organization will become a lot more independent and the board members, therefore, serve an increasingly more important role.
I understand your nomination process is independent of the government and it must satisfy a set of criteria relative to competency to make sure your board members are adequately skilled to do their job. Is that accurate? For that skill set — the grilling, if you wish — has the criteria already been set to make that happen?
Ms. Wilson: The criteria for the composition of the nominating committee and eligibility for directors is a power that the Governor-in-Council has under the regulation-making authority in the act. Again, we haven't seen what those requirements are.
Senator Massicotte: That deals with independency. How about for competency, which I doubt will be in the legislation? It is more for your organization to say, ''Here is the type of board membership we need.''
Ms. Wilson: It is a dual track. There's what is in the legislation, what can go in the regulations as well, and what the CPA will do. We currently have — but will be revised to reflect the legislation — director competencies and skills.
It is also to ensure that we have the right competencies on the board. We also have the power to set out legislation for remuneration of the directors, that it's not set by the government.
Senator Ringuette: Since you work closely with the department and this was not a surprise for you, this is an issue you have probably been working on for a while. I'm somewhat surprised there is no definition of what an independent member is, because usually in legislation we have all those definitions. What would be your definition of an independent member?
Ms. Wilson: We have had a lot of back-and-forth dialogue with the department on this. We have come out on the same basis that it will be based on a National Instrument 52-110 as the broad basis for it, but mostly independent from management and the executive of the CPA, and independent of our member financial institutions. That is the broad understanding. It's our understanding it will be set out in the regulations, and we haven't seen the specifics yet.
Senator Ringuette: We were told earlier it the board members will be selecting the new independent board members. Is that correct?
Mr. Kreviazuk: Yes.
Ms. Wilson: For transition.
Mr. Kreviazuk: For transition, yes.
Senator Ringuette: For transition only?
Ms. Wilson: Just for the transition part. Otherwise, it is the membership that will be electing all of the board: the member seats and the independent directors.
Senator Ringuette: So what you said earlier in regard to putting together a committee to start looking at profiles of potential independent members; is that right?
Ms. Wilson: That's right.
Senator Ringuette: Do you have a threshold in regard to transaction volume that you require in order to do business with you, from an entity?
Mr. Kreviazuk: No.
Senator Ringuette: You don't?
Mr. Kreviazuk: We do not.
Senator Ringuette: Is there an issue of cost?
Mr. Kreviazuk: I will try to explain. The legislation currently sets out those that are eligible for membership in the organization, which are essentially the deposit-taking institutions of this country, security dealers, money market mutual funds and trusts.
Only chartered banks are required to be members of the CPA in legislation. But in reality, if you are engaged in the business of payments and you expect your payments to be cleared and settled through the CPA, you must also be a member. Now, you could be a member in two ways. Membership gets you in the door; participation on the systems is at two levels. There's a direct participant and an indirect participant. For the direct participants there's an added cost, and it is not insignificant. Today there are 12 or 13 direct participants in the retail system. Those 12 introduce the residual indirect clearers, the other 120 members of the organization. So they all have access to the system; it is just their functionality within the system that is determined. There is a threshold there. You can only be a direct participant if you exceed one half of 1 per cent of the total clearing volume today.
Senator Ringuette: Exactly.
Mr. Kreviazuk: It sounds insignificant, but it is not.
Senator Ringuette: The indirect members need the assistance or the cooperation or the partnership of the direct members to clear their stuff?
Mr. Kreviazuk: They do.
Senator Ringuette: Exactly. Herein lies the issue of the caisses populaires, and the relationship with the volume. Since the direct members are the ones that would accept, or not, to clear the indirect members' payments, there is also an issue of that price tag between those two levels. What is the direct member charging to the indirect member to clear their stuff?
Mr. Kreviazuk: The price at which the direct participants charge downstream to the ''indirects'' is competitively set in the marketplace. We don't have anything to do with the pricing.
There are a number of financial institutions that do provide this service in a competitive space. In the case of some of the credit unions, and in the case of the caisses populaires, they have to go through their federations. I think it is provincial legislation that requires them to do so.
Senator Ringuette: I understand it. Earlier I had questioned the caisses populaires in regard to their access and their cost in regard to their new regulation within 43, and what they have to rearrange in their own system. There is a potential issue there because of these changes from central that had the volume capacity to negotiate with your tier one members.
Mr. Kreviazuk: I see.
Senator Massicotte: Relative to the definition of independents, you made reference to a national instrument. Is that a federal government or is that the security commission that has a very detailed definition of independents? Is that where you are taking the reference from?
Ms. Wilson: That's become a best practice standard for many different organizations now. It is the baseline. It is not going to be word for word from the national instrument; it is just the basis. It is not having a material interest.
Senator Massicotte: Is there a national instrument produced by the federal government, or is that the one you referred to that is produced by the Ontario Securities Commission?
Ms. Wilson: It is the Ontario Securities Commission.
The Chair: To our witnesses, on behalf of all of the members of the committee, I would like to express our great appreciation for your appearance today. You have been very helpful in our deliberations.
Members of the committee, this is our final session, and we will look at Division 9, which amends the Investment Canada Act. Our witnesses, from the Canadian Bar Association, are Omar Wakil, Chair of the Foreign Investment Review Committee, Competition Law Section; and Noah Arshinoff, Staff Lawyer, Law Reform.
Noah Arshinoff, Staff Lawyer, Law Reform, Canadian Bar Association: Thank you, Mr. Chair, and honourable senators. We are pleased to appear before you today on behalf of the Canadian Bar Association in response to Division 9 of Part 4 of Bill C-43 amending the Investment Canada Act. The CBA is a national association representing 37,000 members of the legal profession. Our primary objectives include improvement in the law in the administration of justice, and it is through that lens which we have examined this portion of the bill.
The submission before you has been prepared by the Foreign Investment Review Committee of the CBA's Competition Law Section. This CBA section comprises lawyers whose practice embraces all aspects of competition law and foreign investment review, including direct experience with transactions subject to the Investment Canada Act.
While I'm here to help answer questions, my colleague Mr. Wakil is Chair of the CBA Competition Law Section's Foreign Investment Review Committee. I will turn it over to him to discuss the substance of the bill and our submissions.
Omar Wakil, Chair of the Foreign Investment Review Committee, Competition Law Section, Canadian Bar Association: Good afternoon, Mr. Chair, and honourable senators. Thank you for your time this afternoon. As Noah said, and as you know, I am the Chair of the CBA's Foreign Investment Review Committee of our Competition Law Section. I am also a partner in the law firm of Torys in Toronto and co-chair of our foreign investment review practice.
In 2009, the Investment Canada Act was amended to permit the review of virtually any foreign investment into Canada on the basis that it may be injurious to Canada's national security. We have previously expressed concerns about those amendments because of their broad potential application and the lack of guidance as to what sort of investments would in practice be reviewed. Without transparency and guidance, it is difficult to advise foreign investors or Canadian businesses on the likelihood or the likely outcome of a review. This creates the real risk of chilling foreign investment into Canada. We are making our comments today against the backdrop of those concerns.
The amendments to the Investment Canada Act currently proposed would primarily introduce two changes to the law. First, the list of investments subject to notification requirements under the Investment Canada Act would be expanded, which may give rise to an increased number of national security reviews.
Second, the government would have greater discretion to disclose publicly information about the status and outcome of a national security review, unless the Minister of Industry is satisfied that the communication or disclosure of that information would be prejudicial.
We support efforts to increase transparency and welcome this proposed amendment. However, we think the legislation would benefit from a specific qualification that no disclosure about the national security review process should be made in the context of a specific investment when the fact of that investment has not been publicly disclosed by the parties. Such unwanted disclosure could have the effect of deterring investors from approaching Industry Canada to address national security issues proactively and confidentially, thereby weakening the effectiveness of the process.
We also believe that the government should provide more disclosure about the frequency of national security reviews and the outcome of those reviews. This would provide the Canadian public, the business community and investors with better information about the broad powers to conduct national security reviews that are being exercised. In particular, it would be helpful for foreign investors in Canadian businesses to have very basic information about reviews in general. For example: How many reviews have there been since 2009? What were the countries of origin of the foreign investors? In which business segments did the Canadian businesses operate? How many investments have been blocked? How many investments have been conditionally approved? Industry Canada could make this information available in its annual report similar to what the Committee on Foreign Investment in the United States does in that country and similar to what Industry Canada already does in connection with net benefit reviews under the Investment Canada Act.
In our view, providing aggregate data on national security reviews would not itself be prejudicial to national security, and we would encourage the minister to include such information in his annual report. We would hope that the government would continue its efforts to increase transparency by considering amending the ICA to require the annual report to include this sort of aggregated data on national security reviews.
Thank you for your attention. I would be pleased to respond to any questions.
Senator Black: Thank you both very much for being here. I had the opportunity this morning to question officials from the Government of Canada who are providing us very helpful background data in respect of this. I put a question to the individuals that I want to put to you. I'm just trying to understand.
As I understand the proposed arrangements, if I am a foreign lending institution and I take security against an asset in Canada, and I have to enforce my security, that becomes potentially a reviewable transaction that can be blocked. Is that accurate?
Mr. Wakil: That's my understanding of the amendment as well. It would be reviewable not under the net benefits provisions of Investment Canada Act but under the national security provisions of the Investment Canada Act.
Senator Black: Then I posited to the individuals, and I don't expect them to comment, but perhaps you would: If I am a lender, is that not an additional consideration that I would have to make in terms of the risk profile in the event that I had to crystallize my loans?
Mr. Wakil: I think it is an additional consideration that you would have to factor into your risk assessment. I also think it would be helpful, more generally, if we had a better understanding from the government as to why they thought this change was viewed as being necessary or desirable. I'm not sure if that was something that was discussed this morning, but we don't have a clear understanding as to why this change is being made.
Senator Black: Nor do I.
The context of my question is as a senator from Alberta, but also as a senator serving the interests of Canadians. The oil sands and the development of the oil sands matter. It is hundreds of billions of dollars and cannot be funded from Canada; it must be funded from outside of Canada, in part. This, in my view, puts an additional burden against investment in the oil sands, which isn't in Canada's interest. Would you agree or not with that?
Mr. Wakil: It is my understanding that the transaction itself would still be subject to review under the present provisions of the Investment Canada Act. The change being made is that there would be a notification requirement. So the incremental additional effort that would be made in terms of complying with the legislation as a result of these changes would be small.
There is today and there will be after, if the amendments pass and come into effect, the possibility of a national security review, but it would be marginally increased because the government will have advance notice of the fact or notice possibly after the fact — it need not be advanced — of the fact that this has occurred, that is to say, the realization of security.
Senator Black: And could be blocked?
Mr. Wakil: And could be blocked.
Senator Massicotte: Thank you both for being here. I want to make sure I understood.
The current legislation — not the proposed — bears the same risks. If I'm a lender in the oil sands and I must seek recourse against the assets, there is no notification because I'm a lender basically exercising my security, but I should mention there's now a notice. The current process would allow a national security review if that was sought.
Mr. Arshinoff: Yes.
Senator Massicotte: The only difference is that it highlights — forget the legislation — a major issue in this process whereby foreign lenders would need to be concerned. The oil sands are a good example, which is deemed to be an important Canadian asset. There's a significant risk to the lender if he lends against such assets, even under the current legislation. That is probably a risk that many lenders have considered in saying, ''I'm out of here. I'm not going to leverage against that asset or I'm going to take a very low risk position in case there's default because I may be subject to this review.''
Mr. Wakil: Yes.
For members of the Canadian Bar Association, the bigger issue is understanding better the whole national security review process. How many reviews have there been? What are the countries of origin of investors that have been subject to review? What sort of industries have reviews occurred in? We don't have that information.
There's a lack of information about national security reviews that have happened today. We understand it is early days. We understand in some cases the disclosure of information could itself give rise to national security concerns because there's a disclosure of confidential information that ought not to become public.
Nevertheless, it is very difficult for us to advise clients in a particular transaction as to what the risk is because we have this void in our absence of information. We realize there has to be a balancing of the need to preserve national security confidences. There has to be at the same time the need to preserve confidential information of the parties, but on the other hand there ought to be some increased degree of public disclosure about what has been happening with respect to national security reviews that occurred to date. That will allow us to advise our clients on risk.
I don't think it is just the issue of this notification form that will create problems. It is the fact now that we don't have significant information about whether a particular transaction could give rise to a risk. Some small amount of additional information will allow us to better advise the client.
Senator Massicotte: When I read your letter, it is very polite and professional. You are basically trying to structure increased disclosure. But the way I read your comments is that they more or less relate to a frustration you have, as with the business community, as with many foreign countries that have criticized our system, whereby it is very loose. In other words, there are no criteria, no settlement of objectives, which therefore allows immense discretion to cabinet to say yea or nay to any transaction. No investor likes that uncertainty. Many people expressed that comment.
Relative to confidentiality, which is the other issue raised, subclause 187(3), though, makes it clear that the minister must be satisfied as to include detailed information contained in a GIC order that it will not cause ''prejudice'' to the applicant. They don't say ''material prejudice.'' But you still don't like that. That doesn't satisfy you. You say that allows only one party to decide and it may prejudice your potential client.
Mr. Wakil: That is right. We believe it would be advantageous and beneficial to have an additional condition imposed on the minister that is clear. That is to say, unless the parties themselves have disclosed the fact of the investment occurring, the minister should not himself or herself unilaterally make a decision as to whether or not prejudice ought to be caused.
Senator Massicotte: If it's a mutual decision then it's a problem. The client may well decide, ''No, I don't disclose.'' The government obviously is a democracy. The minister feels an obligation to be transparent. How do you deal with that issue? What does the United States do? What does the U.K. do? What do they do with that kind of disclosure?
Mr. Wakil: Different legislative regimes have different requirements. We did look to the United States in considering the degree of disclosure they make about their foreign investment reviews. It is not dissimilar to the type of disclosure made in connection with net benefit reviews with respect to general information about what sort of investments have been reviewed, the country of origin of the investor, the nature of the Canadian business that has been subject to review, et cetera.
We understand that in specific cases it may be very difficult to disclose a lot of information. I don't believe that these changes will result in a significant amount of disclosure of information in particular cases, for the reasons that we've talked about — the need the preserve confidentiality both of the investing parties but also to take into consideration national security concerns. I don't think that there is going to be a large volume of information that's disclosed by the government as a result of these proposed amendments. It will increase their discretion to do so on a case-by-case basis. We would welcome some degree of additional disclosure, but we would like to see more disclosure of reviews in general, not case-specific information because we realize there may be concerns about that, but reviews in general so that we can advise our clients about the likelihood of risk in any particular case.
The Chair: Mr. Wakil, Mr. Arshinoff, on behalf of the Senate Banking Committee, we would like to express our appreciation for your appearance today. You have been very helpful to us.
(The committee adjourned.)