Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 8 - Evidence - December 14, 2011
OTTAWA, Wednesday, December 14, 2011
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:30 p.m. to study Bill S-5, An Act to amend the law governing financial institutions and to provide for related and consequential matters.
Senator Michael A. Meighen (Chair) in the chair.
[Translation]
The Chair: Welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce as we study the present state of the domestic and international financial system.
My name is Michael Meighen. I am a senator from Ontario and I have the honour of chairing this committee.
[English]
Today, we will hear from a panel of representatives from the Canadian Bankers Association and the Canadian Payments Association. Representing the Canadian Bankers Association are Mr. Terry Campbell, President; and Ms. Marina Mandal, Senior Legal Counsel. Welcome.
[Translation]
From the Canadian Payments Association, we welcome Mr. Guy Legault, President and CEO, and Ms. Penny- Lynn McPherson, Vice-President, General Counsel and Corporate Secretary. Welcome to you as well.
Terry Campbell, President, Canadian Bankers Association: Thank you, Mr. Chair.
We are pleased to provide the banking industry's comments on the 2012 Financial System Review Act. We believe strongly in the importance of ensuring that the legislative and regulatory framework is reviewed regularly and for that reason, we were pleased to see that the bill proposes retaining the sunset clause for financial services legislation at five years.
[English]
I will begin by talking about a few points about the banking sector in Canada generally, particularly in light of the current global economic uncertainty. As we all recently learned during the global financial crisis three years ago, Canada is not immune to the fallout from problems that originate elsewhere. However, it is important to keep in mind that unlike in many other countries during the crisis, Canada's banks did not require taxpayer funded bailouts and did not have any bank failures. During the global financial crisis, our banks continued to lend to consumers and businesses, while many others pulled back from the market or pulled out of it completely.
As was the case three years ago, today our banks remain well managed and well capitalized institutions operating in a competitive marketplace with effective oversight. Our banks continue to help support Canada's economic recovery and growth. A strong and healthy banking system is an essential component of the Canadian economy. It is a cornerstone to helping Canadians buy homes and save for retirement, helping small businesses grow and thrive and promoting Canada's brands internationally.
I will share some facts and statistics with the committee before I talk about the review to illustrate how our banks contribute to Canada's economy. In 2010, for instance, Canada's largest six banks paid $8.3 billion in taxes to all levels of government in Canada. Canada's banks provided $10.3 billion in dividend income to millions of Canadians through pension funds, retirement funds, and in many cases, directly to retirees. The banking sector helps Canada to grow, generating over $55 billion or 3.4 per cent of Canada's gross domestic product. They were able to do this because our industry remained profitable.
It was against the backdrop of the global financial crisis that the Minister of Finance, the Honourable Jim Flaherty, introduced the Bank Act review last fall. He indicated that given the very large volume of new international regulations that resulted from the crisis, the focus for the 2012 review should be on fine-tuning the domestic legislative and regulatory framework. We agreed with that approach, especially since the extensive array of new regulatory changes is still being implemented. The dust has not settled.
There are two specific items in Bill S-5 that I will comment on. The first one is the ministerial approval of foreign acquisitions, which has received media attention elsewhere. As the minister noted when he was announcing the bill, Canada's banks are the strongest and the soundest in the world. Our banks have always been prudent risk managers, which extends to their foreign acquisitions. Although the approval of foreign acquisitions has been with the Office of the Superintendent of Financial Institutions since 2001, the government indicated that the decision should rest with the minister as, in effect, another tool in his tool kit as it had been before 2001. We are looking for further clarification about how this provision would work since some aspects of it may cause operational issues, for example the 12-month window for approvals. Our goal is to make provisions. We understand the government's intent and our goal is to make it as workable as possible.
Second is the Bank Act security regime. Amendments have been proposed to the Bank Act to clarify security interests granted under the act. These types of security interests have long been a significant aspect of the regulatory regime applicable to banks and have played an important role in the ability of banks to support the economy as lenders, particularly in areas such as agriculture and forestry. It is important to the economy that lenders are able to operate within a legal framework that is clear, transparent and certain. Unfortunately, there are some ambiguities in the Bank Act provisions regarding the Bank Act security regime because of recent court cases that sort of clouded the issue. In one such decision in 2010, the Supreme Court of Canada actually indicated that Parliament may wish to clarify these provisions. We are happy to see that the Department of Finance is proposing to make some changes in that regard.
In considering the bill and the financial sector more broadly, there are some broader directions or policies that we believe the government should undertake to ensure the ongoing strength and resiliency of the financial services system in Canada. First, is the importance of a strong, national policy and regulatory framework — a national policy for the financial and banking system in Canada. That is one of the many reasons we are on record as being strong supporters of the government's leadership in moving forward on a national securities regulator. We look forward to the Supreme Court's decision on the reference by the Canadian government on the proposed Canadian securities legislation. We hope that it comes relatively soon.
Second, while we fully agree, and I talk about this all the time, on the merits of a strong supervisory system as part of Canada's excellent standing in the world, policy-makers and regulators must be mindful continually that is what is being required of Canada's banks now is the biggest regulatory implementation exercise that they have ever been through in history. This process is stretching systems and resources to the limit and beyond, and not just as a near-term necessity but as a steady-run rate. This is a challenge for the system, particularly for smaller institutions. All policy- makers and regulators in the industry must take care to ensure that the sheer volume and complexity of new rules does not become a new regulatory risk in and of itself.
My third point is on financial literacy, in particular the recommendations of the Task Force on Financial Literacy and the government's response. The Canadian Bankers Association and our member banks are very active in supporting financial literacy programs and are committed to ensuring that Canadians have the knowledge and skills to make the right financial decisions. We stand ready to work with the new financial literacy leader. The government has just introduced proposed legislation in that regard.
I will conclude with the fact that we always need to bear in mind that we cannot have a strong economy without strong banks, and strong banks cannot be taken for granted. We must collectively work on that every day.
Guy Legault, President and CEO, Canadian Payments Association: I would like to thank honourable senators for inviting the Canadian Payments Association to contribute to the committee's review of Bill S-5. I will preface my remarks with a brief summary of the CPA's legislated mandate, its operations and activities. The reliable, secure and efficient exchange of payments is critical to the economy. The Canadian Payments Association operates cost-effective national infrastructure essential to the movement of hundreds of billions of dollars across the country each day. Together, we lead our member financial institutions and our key stakeholders, including the business, government and consumer sectors, in establishing the rules of the payments highway. In a global and digital economy, the CPA provides a strong foundation to support innovation and the developing needs of those who depend on payments.
[Translation]
Created in 1980 by an act of Parliament, the CPA presently has 136 members, which include the Bank of Canada, all chartered banks, trust and loan companies, credit union and caisse populaire centrals, cooperative credit associations and others. We process, on average, 24 million payments each and every day at an average value of $170 billion, which translates into 6 billion annual translations at a total value of $42.8 trillion.
Parliament has given us a very specific mandate: to establish and operate national clearing and settlement systems; to facilitate the interaction of our systems with others; and to facilitate the development of new payment methods and technologies.
Parliament further set out a clear public policy mandate: that the CPA promote the efficiency, safety and soundness of its systems and take into account the interests of users.
The CPA was an active contributor to consultations by Finance Canada for the 2012 financial legislation review. I should clarify that the Canadian Payments Act, unlike the Bank Act, does not sunset and is therefore not required to form part of the government's five-year review. That said, the review is an opportunity to consider and update provisions of the Canadian Payments Act, an important piece of federal legislation.
[English]
At the onset of the 2012 review, the CPA was advised by the Department of Finance that the purpose of this process, as it pertained to the payments system, was only to consider technical amendments to the legislation because the broader policy, or fundamental underpinnings, of the system is being examined by the Independent Task Force on the Payment System Review created in Budget 2010.
With respect to the Bill S-5, we welcome the incorporation of technical and housekeeping amendments to Canadian Payments Act legislation to provide greater clarity surrounding our membership, with the inclusion of the new concept of federal credit unions as mandatory CPA members. However, we do find some legal uncertainty with the amended definition of clearing and settlement systems in the Payments Clearing and Settlement Act, as proposed in Bill S-5. With the amendment, the requirement that at least one participant in a system be a bank has been removed. In its place, the concept of jurisdiction has been added. We are unclear as to the scope of the term "jurisdiction'' associated with that participant and whether it means outside of Canada or simply outside of a province.
We are very pleased that one of our proposed amendments to section 18 of the Canadian Payments Act has been addressed. Specifically, we sought greater clarity on how to enforce compliance from our members. Bill S-5 addresses this concern through amendments that clarify that the Federal Court has authority to enforce compliance panel decisions and that the president and CEO of the CPA has the authority to enforce any order, whether or not it has been made an order of the court.
CPA does, however, remain concerned that our current legislative and regulatory framework restricts our ability to respond quickly to both member and user needs in the current dynamic payments environment.
[Translation]
Since the CPA's inception, there has been a transformation in the way payments are exchanged. Today, electronic payments represent the majority of payments cleared and settled through the CPA. Electronic payments have also created new expectations for consumers and other payments system participants.
Responding to the needs of a digital economy requires an agility that is not currently present in the CPA's legislated framework. CPA by-laws and rules must keep pace or we risk a continued migration of payments outside the CPA to private schemes where there is limited oversight and public policy import.
One of the key strengths of the CPA is its ability to support the finality and legal certainty of payments it clears and settles. It must therefore have the ability to respond quickly and decisively to changes in user needs and technological advances.
[English]
The CPA embraces the creation of the task force by the Minister of Finance. As an active participant, we continue to emphasize that regulatory and institutional structures need to be more flexible than they are today to ensure that innovation and competition are not unnecessarily hindered. We believe that regulation of the payments industry should follow a principles-based approach, with a light touch appropriate to the risk to the system and its participants. We believe it equally important that common oversight requirements are applied across the payments industry. Given the events of the recent past in the global financial industry, it is also imperative that the overall safety and soundness of Canada's payments system is not jeopardized even by a need to encourage payments-related innovation. Maintaining a balance between these often competing objectives is also required.
Finally, we welcome the opportunity to support this review of the financial legislation, and we look forward to the recommendations of the Payment System Review Task Force to the Minister of Finance, as a vehicle to propose further legislative amendments necessary to position Canada as a world leader in the digital economy.
The Chair: Mr. Legault, you mentioned a couple of things that you would like to see brought about; you are looking for more flexibility, et cetera. Do I conclude from your last paragraph that you hope that will be embodied in the report of the task force?
Mr. Legault: Absolutely. We were told at the beginning of this review that, like the last one, it was very much a technical review from a payments perspective. Given that there is this payments task force to review the whole system, that will be the appropriate venue to consider further legislative amendments. That is why we will be looking forward to that report.
The Chair: Have you been given a time frame for that?
Mr. Legault: The report is due by the end of the year. We do not know when the minister will make it public or move to consultation or legislation. However, the deadline for the task force was December 31.
The Chair: Mr. Campbell, on page 3 of your presentation, talking about security, do I understand that this legislation, Bill S-5, has brought about those clarifications? You mentioned in your last sentence, "We were happy to see that Finance is proposing to make those clarifications.''
Mr. Campbell: That is right. The court case muddied the water, and it was important to have clarity as to how the security regime would work. Finance has brought forward clarifications in that regard.
The Chair: Bill S-5 has done that.
Mr. Campbell: Yes, Bill S-5 has done that. I am sorry; I should have been clear.
Senator Campbell: I am not a regular member of this committee, but I find it fascinating. If what I am asking is out of order, or not contained in the bill, please let me know.
I always thought that when I used my credit card I gave it to someone, then the bank transferred money, and it was all seamless. I have since found out there are intermediaries in this process. Would that be your organization, the Canadian Payments Association?
Mr. Legault: No, credit cards are not in the scope of the mandate of our organization.
Senator Campbell: My second question is: With regard to the Payments System Review, what is the scope? How broad is this review?
Mr. Legault: Basically, you have to go back to the mandate that was given by the Finance Minister to review the whole payments system, with a focus on innovation and on the efficiency of the current system, but also looking at other issues such as competition.
Senator Campbell: Does this mainly deal with changes in technology since the start of your organization and the differences in how we do business?
Mr. Legault: That obviously is part of it, but it is not the only focus. It is much wider than just a focus on technology.
Senator Campbell: Except for the digital portion of it, what parts of it do not seem to be working? Are there any parts that do not seem to be working?
Mr. Legault: Those are again the kinds of things that we would be prepared to discuss once we see the report of the task force. I think it would probably be premature to start a full discussion on what is not working or what the issues are because it could take more time than you have allocated today.
The Chair: I was going to point out, Senator Campbell, that this is not Bill S-5 you are talking about.
Senator Campbell: It is separate, but it was brought up.
Senator L. Smith: Senator Campbell, you might have taken my questions.
The paragraph reads: "CPA does remain concerned over current legislative and regulatory frameworks and restrictions.'' I was asking what your concerns are and whether you have specific concerns. In your next paragraph, on responding to the needs of the digital economy, is there something we could simply understand that you can fill us in on?
Mr. Legault: I will give you one example in terms of the current approval process that is required for the CPA bylaws. We were able, through formal reviews, to get the government to agree to move the approval of our bylaws from the Governor-in-Council to the Minister of Finance. That made it easier than having to go to cabinet. However, in the current environment, even if it is to be approved by the Minister of Finance, there are still statutory instruments. It means that they have to go through the whole Department of Justice review, and it could take quite some time to get those changes approved. That would be one specific area and aspect of our current environment that makes it awkward and really inefficient.
Senator L. Smith: You said that you do 24 million payments daily. Could you give us an example of the types of payments that go through your system?
Mr. Legault: Yes. They include pre-authorized debits, payroll, cheques, any kind of electronic transfer such as wire payments and large-value transfer payments. We produce all the rule sets for the exchange of those payments and our system monitors the positions of the banks and financial institutions and then effects settlement through the settlement account of the large financial institutions through their accounts at the Bank of Canada.
Senator L. Smith: Does the Canadian Payments Association operate all the equipment or do you just monitor it?
Mr. Legault: We operate the systems that monitor those positions.
Senator L. Smith: So you are a big IT centre?
Mr. Legault: As well, yes.
Senator Moore: Mr. Campbell, I have a couple of questions with regard to your submission.
On page 3 you mention that there are two specific items in the bill on which you would like to comment. Toward the end of that paragraph you say:
We are looking for further clarification about how this provision would work since some aspects of it may cause operational issues, for example the 12-month window for approvals.
When the minister and the Superintendent of Financial Institutions were here they indicated they would both be monitoring all transactions all the time. If they are both monitoring them, how will this work practically? If a given bank is interested in buying a certain asset in a foreign country, does that bank go to each of those two offices? If so, when do they do that? This involves competition and confidentiality. How do you see that happening?
Mr. Campbell: Those are the right questions. The way the proposal in Bill S-5 is structured is that if in making a foreign acquisition, the assets of which would comprise more than 10 per cent of your total assets, which is a fairly sizable acquisition, you would have to get government approval.
Senator Moore: When do you start that approval process? If a bank negotiates a deal with someone in another country to buy an asset, signs the documents and returns to Canada, do they have to go to each of those offices to have them consider it? What does the 12-month window for approvals mean?
Mr. Campbell: That is the issue about which we have some questions. Under Bill S-5, if your last acquisition in a 12- month period takes you over 10 per cent, you would have to get approval from the government for that last transaction. It could happen that the last transaction is very small, well below the 10 per cent, and presents no concerns at all, but you would have to get approval for it because you exceeded the 10 per cent rule.
Senator Moore: That is an aggregate for the year.
Mr. Campbell: Exactly. We think that if the concern is to ensure that all the prudential considerations are in order it would make sense to do this on a transaction-by-transaction basis. Otherwise you could inadvertently catch small-fry transactions that do not present any issues.
Your question on the actual process is a good one. We will need to have clarification on exactly how the process would work. There are many wheels moving at the same time here. You are negotiating at the same time as you are seeking approval. It is in everyone's interest that an institution that is seeking to make an acquisition keep the relevant players aware all the way through. We have been doing this for quite some time when it was with OSFI, so there is a track record about confidentiality.
We will have to find out how this would work, because this is a new wrinkle. We understand why the minister is doing it.
Senator Moore: When do you have to start keeping the minister and OSFI informed? Does it start after the deal is signed or does it start when you are thinking of doing something? What if you got down the road and then they said no?
Mr. Campbell: That is the thing. These are highly sensitive competitive proprietary business deals and the CBA is not typically included in the discussions. In fact, the CBA is never included in the discussions.
Different banks approach it differently, but the general rule of thumb would be to give people a good heads up early on. We need to think the rolling-12-month issue through a bit more.
The Chair: You mentioned that you might have a very small transaction at the end of the 12-month period that would bump you over the 10 per cent. Is the reverse not also true? You might do two 9.9 per cent transactions and, if it was not aggregate, you would have 19.8 per cent.
Mr. Campbell: They have chosen the target because any acquisition that size is significant. In practical terms, you never make an acquisition and then divvy it up into small chunks. It just does not work that way. The way we see it, it is a transaction or it is not.
Senator Moore: Later in your brief you talk about some broader directions or policies you believe the government should undertake. One is the importance of a strong national policy and regulatory framework for the financial and banking system in Canada. We all agree with that and the importance of it.
You are looking forward to the Supreme Court's decision on the reference case with regard to the proposed securities legislation. Do you know when that will come down?
Mr. Campbell: We hope it will be soon.
Senator Moore: Are you expecting it in this calendar year?
Mr. Campbell: I would be surprised if it were this calendar year, but we hope to see it relatively soon in 2012. The timing is up to the Supreme Court of Canada, but I reckon it will be in the first half of 2012. That is certainly my desire.
Senator Moore: You say that we must also be continually mindful that what is being required of Canada's banks is the biggest regulatory implementation exercise they have ever been through. You say that this is stretching systems and resources to the limit and beyond, and not just as a near-term necessity but as a steady run rate. I guess that is a banking term. You will have to explain it to me.
With regard to the regulations are you talking about Basel III?
Mr. Campbell: Yes, that is part of it.
Senator Moore: Here we are as a nation talking about our strong banking system. The chairman of the Bank of Canada is now the chair of the key body that is implementing this internationally. Why are we not championing that? Everyone knows that it will be a concern, but it bothers me that the banking association is moaning about it when, at the same time, we think it will enhance our banking system and hopefully get other nations to adhere to what Mark Carney, wearing his other hat, is advocating. It is the financial sector that caused this meltdown, so why would we not be pushing that a bit?
What is a run rate?
Mr. Campbell: There is absolutely no question that one of the strengths of the Canadian banking system coming into the crisis in 2007 was our strong regulatory and supervisory framework. They were very strong and better than those of anyone else in the world. We had stronger capital levels and better supervision. That is not to say that everything was perfect here, and we are strong believers in a good regulatory system.
We work very closely with the Bank of Canada and OSFI and we are proud that Governor Carney has been made the head of the Financial Stability Board. My point is that we need strong regulation and Canada should be a model to the rest of the world. However, here it is the volume and not the content. Individually these rules make a great deal of sense. On the capital rules, we were already strongly capitalized, but it could always be better. You are absolutely right that other nations have to come up to Canada's standards.
What we are seeing, because we are part of this global network, is that even though the financial crisis did not start here, even though not a single one of our banks had those kinds of problems or failed, we are nevertheless required to be part of the whole international regulatory framework. That is fine, and we are doing that.
The concern that we have, and all I am flagging, is that it is not just Basel III, it is accounting rules, it is securities rules, it is a whole series of auditing rules. It is a combination of things that are all happening at the same time.
The caution that I am flagging is that we want a strong regulatory environment. We want Canada to continue to be a model to the world. I have had this conversation with OSFI and the Bank of Canada and others, and all I am flagging is that by having this tremendous complexity happen all at once, and I am particularly concerned for smaller institutions, that we not be sowed in the weeds here, checking off individual regulatory things, taking our collective eye off risks that may be forming on the horizon. That is my point.
In relation to run rate, you are absolutely right, as I was writing this it just came out of my head. What I mean by that is everyone understands that if we need to do things on an emergency basis to fix something now, you can throw all the resources at it and get it done, but if that becomes the norm — instead of "run rate'' just say "norm'' — the day- to-day norm for now and forever, that is quite an enormous commitment of time and resources.
This has not happened yet, and it may not, but what I am flagging here is that what we do not want to be, by having all these things happening at once and maybe not sequenced out, inadvertently creating more risk by diverting all of our resources just to comply.
Senator Moore: This new reporting and the regimes, are they coming out of Basel III or some other regime, or legislation? You must be doing a lot of this now.
Mr. Campbell: We are right in the middle of it now. The rules started to come out in 2009 and 2010. We are in the middle of implementation. That implementation will go on for years. It is primarily Basel, all the capital rules, all the liquidity rules, all the leverage rules. It is also coming out of the Financial Stability Board, of which Mr. Carney is now the chair, it is coming out of the International Accounting Standards Board and it is coming out of the International Organization of Securities Commissions. All of these international bodies are setting rules that Canada has committed to comply with.
We understand that makes sense. I guess it is a bit of a plea for sequencing.
Senator Moore: Phasing in without the onslaught.
Mr. Campbell: That is basically it.
Senator Moore: Mr. Legault, I was listening to you and reading your brief. You said on page 2, fourth paragraph:
Yet we do find some legal uncertainty with the amended definition of "clearing and settlement system'' . . . In its place, the concept of jurisdiction has been added. We are unclear as to the scope. . .
Can you tell us a bit about that, whether it means outside of Canada or inside? I am not sure what that means. Tell us what your concern is and what, if anything, you might suggest to this committee that we could recommend in our reporting?
Mr. Legault: Is this page 2?
Senator Moore: Yes, fourth paragraph, Mr. Legault. It starts off, "Yet we do find some legal uncertainty. . .''
Mr. Legault: My colleague will answer the question.
Penny-Lynn McPherson, Vice-President, General Counsel and Corporate Secretary, Canadian Payments Association: It is under the Payment Clearing and Settlement Act. It is actually not under our legislation.
We were not involved in any discussions concerning changes to that particular piece of legislation, but it does impact our systems in that they have changed the definition of the clearing and settlement system. Previously it had talked about it including at least three participants, at least one of which was a bank. They have now amended that to indicate it is just a Canadian participant, at least one of which has its head office in a jurisdiction other than the jurisdiction where the head office is of the clearing house.
We just were not sure what they meant.
Senator Moore: Would you say that again?
Ms. McPherson: The proposed wording is it includes at least three participants, at least one of which must be a Canadian participant, and at least one of which is a participant that has its head office in a jurisdiction other than the head office of the clearing house.
When we first read that, we interpreted it to mean they are saying it has to have a Canadian participant —
Senator Moore: Can you give us an example of what that means? Just hypothetically, a couple of institutions, where they are based and how that would walk through, so we can understand what that means, please?
Ms. McPherson: For example, when we first read it we interpreted it to mean, say for one of our systems, that we would have to have the Royal Bank as a participant, but we would also have to have a foreign bank as a participant, such as BNP Paribas, or one like that. The more we looked at, the more we became unsure of whether that is what they were referring to, that there also had to be a foreign participant, or just a participant from another province. It was not clear.
If it is meant to be that it has to include a participant from another jurisdiction outside of Canada, it does not pose a problem for us right now. We do have both domestic and foreign participants, but if we had a situation where we did not it would cause a problem for us.
We were raising it, to have some clarification on what they meant by that.
Senator Moore: What would happen in that situation, in the second hypothetical? You say that would raise a problem. What would that mean to you in terms of the functioning of your system?
Ms. McPherson: It would raise a question for us in terms of the protections our systems have under the Payment Clearing and Settlement Act. Right now the Bank of Canada designates a system that they feel is systemically important for the financial system. One of our systems, our large-value transfer system, has been designated, which is important in terms of all the legal certainty around the payments and so forth.
We certainly would not want that system to be called into question, based on change of participation.
Senator Moore: Do you have wording or a suggestion for our committee?
The Chair: To add a sidebar to Senator Moore's question, do you expect this to be clarified in discussions with the department or do you expect it to be clarified by regulations, if there are going to be any coming out?
Ms. McPherson: Through either. I think we would want it clear to mean that it maybe involves both. It could be either provincial or external.
The Chair: Have you made your concern as to clarity known?
Ms. McPherson: We have expressed it, yes, to the Bank of Canada, which oversees this particular piece of legislation. We still need to pursue it with the Department of Finance.
The Chair: What I am trying to get at, and perhaps Senator Moore as well, is are you content to leave it as that and work it out after the bill becomes law, if it does?
Ms. McPherson: I think we would prefer more legal certainty in the wording, but obviously we would have to take as broad an interpretation as possible if it is not changed.
Senator Moore: On the last page of your submission, third paragraph:
We believe that regulation of the payments industry should follow a principles-based approach with the objective of being `light-touch', appropriate to the risk presented to the system and its participants.
What does "light touch'' mean and who is doing the touching here? What does that mean?
Mr. Legault: Under the Canadian Payments Act, we are subject to a lot of oversight from the Minister of Finance himself. Also our larger value system has been designated by the Bank of Canada under the oversight of the bank and the Governor of the Bank of Canada.
What we are getting at here is, on one hand, we would like to see a common oversight framework for all the participants in the payment system. From a CPA perspective, when we have to compete with other types of systems that do not have the same kind of oversight, it is an issue.
We also believe that it should not be rules-based, but should be principles-based, as much as possible, so that it is more flexible. As well, it should be light-touch, which means that there should not be too much regulation or too many specifics, because it is very difficult to be agile in an environment where things change quickly.
We see a lot of changes in technology and payment providers. If you do not have flexibility, it impedes what you can do. We have seen over the years some of the volume that used to be cleared by the CPA moving outside our jurisdiction and, therefore, outside the jurisdiction of the government. We think it is better for the government to have legislation that would be principles-based and light-touch to cover more of the system rather than have a situation where one player is over regulated and others are subject to very few regulations, if any.
Senator Campbell: I am concerned about the term "light touch.'' The way we have done business in Canada has allowed us to be a beacon for banking in the world and has allowed us to escape relatively unscathed in a global crisis. Would it not be more practical to worry less about a light touch and concern ourselves more with ensuring that the regulations apply to all who had no regulations and perhaps were operating under a light touch?
Mr. Legault: As I referred to in my comments, you also have to balance the issue of innovation and competition with the safety and soundness of the system. I would agree with you about doing it in a very careful way. Overall, if you have breadth in terms of catching most of the players in the field, then the question becomes how far to take it because if your regulations go too far, you will impede innovation. The question is about the breadth and depth of how far you want to go. As my colleague said earlier, you need a balance, otherwise you may hinder some organizations or the entire system if it is too detailed.
Senator Tkachuk: It is important for the banking system to allow more competition and new entrants into the market because it is helpful for innovation and productivity. I am concerned about your statement on the regulatory implementation exercise. You talked about the fact that this will be difficult for small entrants.
The reason we have sound banking is our regulatory system. We were very lucky we did not have a housing crisis as they had in the United States. Their government policy allowed purchases with no down payment and interest rate reductions, et cetera. All of those policies exacerbated the problem and led to an overvalued housing market. Nonetheless, that is another story.
I am concerned about the regulation. Will it be more difficult for new entrants? After the end of Enron and Bre-X, it took a long time for companies to get comfortable with all the new regulations. Currently in the United States, they are thinking of getting rid of the Sarbanes-Oxley Act because of the difficulties it causes for new entrants to the marketplace. Will this prevent new entrants to the marketplace?
Mr. Campbell: You have put your finger on the concern that I heard from many commentators. Over the first part of the last decade when the rules were changed to allow more competition into what was already a competitive marketplace, an awful lot of new banks came in. We have Canadian Tire Bank, President's Choice Bank and a number of other small banks, which brought additional competition to the marketplace.
It is hard to be specific on cause and effect, but the creation of new banks has slowed considerably over the last little while. Is it because of the current economic environment? Of course when new banks come into Canada we want them to be absolutely sound and to have gone through the proper steps. The worry I have is that inadvertently and with the best intentions in the world, we might be creating an environment where it is harder to bring new competition in. Are we creating an environment where smaller banks, which do not have the complexity of structure and operations but are well run and profitable, are simply not able to address all the requirements in the way that a larger institution can? It is a concern; I hear about it all the time. Will this prevent new competition? It is hard to say, but the concern you flag is one that I have heard quite a bit.
Senator Tkachuk: I was a little disheartened to hear that under the bill the minister will approve purchases over 10 per cent of the capitalization or asset base of the bank. Currently, regulatory permission is required for that.
Mr. Campbell: That is right.
Senator Tkachuk: Will this still require regulatory permission as well as the minister's permission? Will there be two steps?
Mr. Campbell: I think that is exactly what it will be. We chatted about this earlier. As I understand it, OSFI will still be involved in the decision-making. They will still have to pass judgment on whether the acquisition makes sense from a prudential point of view. That part of the Bank Act has not been removed. Following that, there will be input to the minister for his ultimate call. We understand why the minister is doing that. The point we are raising is the workability of this 12-month period. We need to think that one through a bit because it could have some unintended consequences, as I said earlier. With the way it would work, because the 10 per cent is now an aggregate 10 per cent, small fry acquisitions could require this heavy duty approval. We understand why the government wants to do this. The minister has a stewardship responsibility, which is another tool in his tool chest. It does have to be workable.
Senator Tkachuk: I am trying to figure out how it will be workable. Let us say that a bank is buying another bank in Chile. Of course, they would all do their due diligence through their accountants, lawyers, negotiators and board reviews — all of the things necessary to make such a purchase. In the end, they decide it would be a good deal for the bank. In such a case, how will the minister make the decision? Will he do due diligence? How much time does he have to do it? Can he take forever to make the decision? Is there a time frame?
Mr. Campbell: This is one of the things about which we would like to have some clarification from the department. We talked about this earlier in the hearings. My sense is that it is a very good idea for all institutions wishing to make acquisitions to keep the minister's office and the regulator informed all the way through the process. Everyone understands the need for business certainty, and that means timely decisions. Everyone, including the department and OSFI, understands that. To say specifically how it would work, we will need to have more conversations with the department on it.
[Translation]
Senator Losier-Cool: I am new to this committee, so the question I am about to ask may perhaps already have been dealt with and answered by other witnesses. Mr. Campbell, I was interested in the next-to-last paragraph on page 4 of your brief where you talk about financial literacy.
[English]
I must admit that, contrary to my colleagues here, I am illiterate when it comes to finance.
[Translation]
In the last sentence, you mention a new government-appointed financial literacy leader. Since this is a new position, how will the appointment process be done? How will he be appointed? What will the hiring criteria be?
[English]
Mr. Campbell: The financial literacy leader is a post that the government itself will create. The government has only recently introduced legislation to create that post and house it within the Financial Consumer Agency of Canada. It is for the government to decide how they will go about naming the leader and setting the criteria. We take great interest in this because we are strong supporters of the need for financial literacy. We hope that that position is filled soon, but how it is done and the actual selection will be up to the government.
Senator Losier-Cool: I will ask my question of the minister.
Senator Massicotte: Mr. Campbell, is this the first time you have been before us since you were named president of the Canadian Bankers Association?
Mr. Campbell: It is.
Senator Massicotte: Congratulations. I am glad to see you in this position.
Mr. Campbell: Thank you very much. I appreciate that.
Senator Massicotte: Both of you said that Bill S-5 lacks specificity and certainty and that in business, as in everyday life, we like certainty. I presume you shared your thoughts with the Minister of Finance, that they are aware of the improvements you wanted, but obviously they did not listen to you, for whatever reason.
Is that the case? Are they aware of your suggested improvements but, after a full hearing, they did not agree with you?
Mr. Campbell: We are in regular conversation with the department. We reviewed the bill when it came out. One has to analyze it and think it through. We have commented to them on the provision I mentioned. They are thinking about what we have said. What I have said to you I have said to them as well, and they are thinking about it.
Senator Massicotte: Have they responded?
Mr. Campbell: I think they are in the process of digesting what we said.
Senator Massicotte: Will they make an amendment to the act?
Mr. Campbell: I do not know. That is their call.
[Translation]
Mr. Legault: It is different for us because we are not subject to review every five years. We have the advantage of being able to introduce amendments when the Bank Act is reviewed.
We have been told that it was just a technical revision affecting payments and we were aware of that. Most of our recommendations were accepted. As for the more fundamental recommendations, dealing with aspects of legislative policy, we understand that they have to be made by the task force, which has to report by the end of the year. We will start discussions with the minister's office when the report is made public.
[English]
Senator Massicotte: For the Bank Act this is like a five-year regular sunset review. There may have been other issues that you wanted to bring forth, but the government decided to make it a technical review. Are there any issues on your shopping list that you are disappointed are not being dealt with? Is there something missing?
Mr. Campbell: No. When the minister announced the consultations on the review of the Bank Act, he said clearly that, given everything that has happened elsewhere in the world, this would be a technical review because we are still in the implementation of all of that. With that in mind we said that we understood. We actually agreed because we needed to have the dust settle from everything else that is going on before we take on anything larger.
Having said that, you always have to reset the clock on the five-year review. Since he said it was a technical review this time, we focused our minds on that and we presented a series of technical issues. The government has responded to some of them. We think the process has been appropriate.
Mr. Legault: I would give basically the same answer as I gave to Senator Smith earlier. There were only a couple of issues, and we will have another opportunity to discuss them further. We are in constant communication. We have a memorandum of understanding with both the Department of Finance and the Bank of Canada, given that we are under their oversight. We always have good communication. So far this review has been going as intended from a technical standpoint, and we look forward to the next step.
Senator Massicotte: Two or three of your most important member banks have decided to withdraw their cooperation from the ombudsman that the government set up relative to consumer complaints. They do not agree and do not want to be part of the process.
I find that very disturbing. Quite bluntly, the banks have the self-interest of their own shareholders and their own management. They are withdrawing from the process and now consumers have to go directly to the bank and ask for resolution of their issue. However, it does not work that way. That is not a fair process.
I suspect you will say that that is the banks and has nothing to do with you.
Mr. Campbell: No, I actually have an answer for you.
Senator Massicotte: Either another solution has to be found or the government will have to impose a solution on you, because it is not right for your customers or the industry.
Mr. Campbell: With respect, senator, I will differ a little with some of your underlying assumptions. All of the banks and all of the customers of all of the banks, including the two that are no longer with OSFI —
Senator Massicotte: Which are the two?
Mr. Campbell: They are Royal Bank and TD.
All customers have access to a full and independent third-party consumer dispute resolution system. There is choice in who they can use. Some banks use OSFI and some banks use ADR ombudsman, but it is third party and it is the same kind of process.
The government has announced that they want to establish regulations to set some standards for those third parties, and we are eager and willing to sit down with them to help develop those standards to, in effect, codify. However, it is absolutely not the case that the customers of those banks do not have access to a third-party independent process. It is just a different provider.
Senator Massicotte: Why did they withdraw?
Mr. Campbell: I do not want to speak for them because they took their own decisions. However, it is not that they have withdrawn from the system. Quite the opposite; they simply have a new provider, and customers of those two banks have full access to a dispute resolution system.
We believe in this very strongly. We created this whole system in the mid-1990s. It is kind of a model for the world. I personally believe that it works very well.
I want to reiterate and make very clear that no customer is left in the lurch. They have access to a full, complete and proper consumer redress service.
Senator Massicotte: One that two banks do not agree with, so they obviously favour one over the other.
Mr. Campbell: Some use X; some use Y.
Senator Oliver: My question is an extension of the second question asked by Senator Massicotte. We have before us two very senior financial organizations, the Canadian Bankers Association and the Canadian Payments Association. The Canadian Payments Association said in their statement:
At the onset of the 2012 review, the CPA was advised by the Department of Finance that the purpose of this process, as it pertained to the payments system, was only to consider technical amendments to the legislation because the broader policy, or fundamental underpinnings, of the system is being examined. . .
Is the tail wagging the dog? Is this a unilateral act? What is the role of Parliament? Five years is a long period of time. When you are going to have a review, what if they had said, "We are only going to look at sections 6 and 7 of the whole act, so do not bother discussing anything else.'' When will someone stand up and say, "We have some say in this too?'' Is there an undertaking that, for the next five years, there will be a full and complete policy review of this Bank Act, or will we again say that we have had some rough times in the economy, so let us just look at a couple more technical things to make sure we are safe and sound. It seems to me that there should be a role for the legislative branch to have a full and complete review. However, it seems that you two were told by the department, "Do not bring us anything whatsoever but small little things that are technical because that is all we want to look at for the last five years.'' It seems to me we are all missing the boat, you two major organizations and the legislative branch, by not saying that we feel it is time we looked at a few substantive policy things to make our system better.
Why have you not done better to protect Canadian citizens by saying, "Let us have a look at the real policy behind our financial system?'' It is not that perfect.
Mr. Legault: As I mentioned earlier, basically the CPA is not subject to the five-year review of the Bank Act. From a payments perspective, it is really an opportunity to look at some provisions that the government finds it easier to review during that review of the Bank Act.
From that perspective, when we were told that they would consider some technical amendments, given that the minister had already appointed the Task Force to review the whole payments system, we did not feel there was a gap. We felt that it was fine and that we could look at those amendments. We did provide, as I mentioned earlier, a couple of other suggestions regarding our framework. However, we understand that will probably be looked at when the Task Force reports. We will make the opportunity to raise those issues again.
Mr. Campbell: From our perspective, since 2008-09, there have been so many rules on you name it — capital, liquidity, leverage, domestic consumer rules, et cetera — coming out sequentially from domestic and international authorities. It is literally all we can do to absorb those and deal with them. We are still digesting them. Therefore, it made sense when the government said, "Given all that is happening on the international side and the fact that we have made, and are in the middle of making, a whole series of changes driven by the financial crisis, when looking at the Bank Act this time, we will just entertain technical amendments.'' I understand your concern, but it did make sense to us in that context. We are still digesting the range of changes and will be for some years to come. At some point, of course, I think everybody needs to stop and do stock taking about what has gone on here. However, in the context of this particular review, the government's call actually made sense to us.
Senator Oliver: The interests of all Canadians are at stake. It seems to me that some other witnesses who appeared before us on this same bill said that they went to see the Department of Finance and made representations to them, and the Department of Finance made representations back. In terms of things that are supposed to be important to us these days, such as accountability and transparency, they seem to be lacking. Somehow I would like to see a system where all of these matters are broadened and brought before a forum and a venue such as this, in which the public can participate and the representatives of the public can put questions to people like you, to the department and to ministers for a more thorough review. I am hoping that, in five year's time, we do not once again hear that the minister has decided to only look at two small sections for our five-year review. Canadians will be the big losers. Sooner or later, someone has to stand up and say "We count too.''
Senator Massicotte: Senator Tkachuk made a comment about competition. It is the backbone of our market system. Unless you want every transaction regulated, you must have competition to satisfy everyone's interests. That is the essence of the market system. It is fundamental. Senator Tkachuk made the proper observation that the banking system in Canada has a reasonable level of competition, but not an ideal level. The American system has its consequences, but it would be ideal to have more competition in Canada. In the last 20 or 30 years we have had this discussion, we have experimented with different forms of competition. Some American credit cards, and so on, came to the system, but most experts would still say that there are a couple of sectors where there is a lack of service because of lack of competition. It is probably the rule there because of small, domestic businesses. I know you have said in the past that there is adequate competition and people are adequately serviced. However, if you presume that we wanted to cause more competition, what could be done to get there?
Mr. Campbell: I hear that question a lot, and I have thought about it quite a lot. First, we have 70 banks in Canada. People focus on the big five, but we have 70. What is the magic number? Is 80 a better number? I do not know. We have 70 banks; it is an intensely competitive marketplace. You comment on the United States. I would not want to have the United States as a model for any banking system. We have a very good model here. People look at the United States and say, "Whoa, they have 8,000 banks, " but many of those banks have one branch in a little crossroads town.
If you look at major metropolitan centres and the share of the largest banks, it is no different than in Canada. In some cases, it is considerably less. We actually have a good system here and lots of competition. Is more competition desirable? What is the steady run rate of competition? Is there an optimum level? That is a question that could be debated for ever. Do we welcome more competition? Absolutely. What can we do to get more? In the 2001 round of the Bank Act review, the rules were changed to encourage more competition, and a lot more banks did come. You mentioned a few yourselves. They allowed commercial interests to own small banks and people took advantage of that. Regulatory pendulums do swing. It did not happen in Canada, but you understand it around the world. The regulatory pendulum is now on us never going through what we saw in 2007-08 and again in 2009. Therefore, there will be a real clamp down. One has to worry about the long term effects of that on innovation and competition.
I am not making predictions here or being unduly doom and gloom, but I think it is a legitimate question to ask. We do not know the answer because we are right in the middle of it, but it is a question that many people pose.
Senator Massicotte: How would you cause more competition?
Mr. Campbell: Well, I would have to think a little more about that. I think we actually have a very open system in Canada compared to many other jurisdictions in the world. I think the results speak for themselves. If we were having this conversation in 1995, I would not be telling you that there are 70 banks in Canada. They are here now; it is a pretty open system.
The Chair: Mr. Legault, Mr. Campbell and your associates, we appreciate very much you taking the time to be with us today in our consideration of Bill S-5. It has been a good exchange and interesting discussion.
Colleagues, we will meet again tomorrow morning at 10:30 when we will proceed with a clause-by-clause examination of the bill.
(The committee adjourned.)