Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Evidence - May 30, 2012
OTTAWA, Wednesday, May 30, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at
4:17 p.m. to examine the subject matter of those elements contained in Divisions
2, 10, 11, 22, 28 and 36 of Part 4 of Bill C-38, An Act to implement certain
provisions of the budget tabled in the House of Commons on March 29, 2012 and
Senator Irving Gerstein (Chair) in the chair.
The Chair: Honourable senators, this afternoon we continue our
pre-study of certain divisions of Part 4 of Bill C-38, the jobs, growth, and
long-term prosperity bill.
We have already heard from the Minister of Finance and officials from the
Departments of Finance, Industry and Human Resources and Skills Development.
We have also heard from two agencies impacted by the legislation: Canada
Mortgage and Housing Corporation and the Office of the Superintendent of
We will now continue our work hearing from those outside of government. In
the first hour, we welcome two professors. Here with us in Ottawa is Ian Lee,
Assistant Professor with the Sprott School of Business at Carleton University.
Joining us by video conference from Guelph is Jane Londerville, Associate
Professor in the Department of Marketing and Consumer Studies at the University
of Guelph. The professors are here to discuss Division 11, which deals with the
governance of the Canada Mortgage and Housing Corporation.
We have one hour for this session. Professor Lee, we will hear from you
I assume, Professor Londerville, you can hear us in Guelph quite clearly.
Jane Londerville, Associate Professor, Department of Marketing and
Consumer Studies, University of Guelph, as an individual: Yes, I can hear
The Chair: After that, we will have time for questions.
Ian Lee, Assistant Professor, Sprott School of Business, Carleton
University, as an individual: Thank you very much, Senator Gerstein and
honourable senators. It is an honour and a privilege to appear before what I
believe is the oldest continuously operating committee of the Senate, dating
back to the very origins of our country in 1867. In fact, I feel the ghosts or
spirits of history past in this room, not only because of the history of this
committee, but because I know of or have had the pleasure to meet some of the
members of this committee in the past. Although I have no consulting contracts
with any organization anywhere — private, public, non-profit, union — nor do I
hold any investments of any kind, as I am merely a poor professor, I must
disclose that while I am not a member of any political party today, I did run in
the 1993 federal general election against then Liberal member of Parliament and
now Senator Mac Harb. He won decisively and conclusively. There were no recalls
The Chair: We will note that you made that disclosure prior to the
time that Senator Harb did.
Mr. Lee: I wanted to beat him to the punch. Parenthetically, and I
will come back to these issues, I did run at that time on positions exclusively
focused on fiscal prudence, fiscal probity, and what is generally called fiscal
conservatism. I do not speak about or address social policy or social issues at
all. I will return to those issues.
To finish off on this preamble, in 1991, I completed my very first television
interview, with the most remarkable journalist in the history of our country,
the late Barbara Frum, whose daughter I believe sits on this committee.
I cannot let pass that I have been extraordinarily fortunate to have met
Senator Marjory LeBreton on several occasions. She is one the most distinguished
and honourable Canadians that I have ever known.
Finally, although he is not a member of this committee, I have been
privileged to debate Senator George Baker on Global TV's The West Block
over the past several months. While I have been told I do not suffer from a lack
of self- esteem, I can state that Senator Baker is one the most formidable and
intimidating debaters I have ever known, who gives me the willies.
If I may quote from our debate last Sunday, Canada and, for that matter,
every Western country is at a unique moment in history. For the first time in
2,000 years, world leadership is shifting from the West to the East. From the
time of ancient Greece and the Roman Empire to the British Empire, the home of
my late father, and then the American empire, Westerners or Occidentals have
understood that the West ruled the world. No more. This is and will change
everything. That will lead to the second transformation as we in the West, as
Governor Carney and others have noted, have been living beyond our means for the
past 40 years and the bills are now coming due.
The third transformative event is the aging of the boomers, my generation,
who I believe caused much of the second problem of living beyond our means.
Sadly, there are countries in southern Europe and the United States that do not
know that they do not know that these changes are happening and that we must all
change our policies in every sector from top to bottom.
Budget 2012 is, in my view, profoundly important for it represents the
beginning of the undoing and the redoing of policies in sector after sector that
are absolutely essential to deal with these three world historical changes — the
shift from East to West, the aging of the baby boomers, and the fact that we
have lived beyond our means for 30 or 40 years, and not just in Canada but in
all the OECD countries.
Now let us turn to housing policies and CMHC. Just as a preamble, in the
1970s I was the mortgage manager of a quarter of a billion dollar portfolio, the
fourth largest branch the Bank of Montreal, about 100 feet from here, except
that it was taken over by the Government of Canada. I worked in that branch for
many years throughout the 1970s and early 1980s, lending millions of dollars of
mortgages. I dealt with CMHC on the ground, as it were. I realize that was 30 or
40 years ago but mortgage lending has not changed fundamentally in the sense
that you are evaluating risk, and trying to adjudicate risk and minimizing risk.
The particular policies of whether we require 20 per cent or 25 per cent down
payment, as it was when I was a mortgage manager, or whether we do 30 years or
40 years, are details, important details, but they do not change the fundamental
issues that are being dealt with in housing and in mortgage lending.
Very quickly, CMHC was established, as we know, in 1946 to help with housing
for returning soldiers, which was a laudable objective. To use somewhat more
theoretical language, that is what is called a market failure because the
markets could not do that at the time, so government stepped in.
Over the past 50 or 60 years, like Topsy, CMHC grew and grew and grew. It is
in at least five lines of business, as I can determine. First, it is in
commercial mortgage insurance for high ratio mortgages. Second, it is engaged in
social housing. Third, it is engaged in economic and statistical analysis, and
there is an army of excellent economists and statisticians within CMHC. Fourth,
they have the green and energy conservation initiatives and programs. Fifth,
they act as a market maker as a bundler and reseller of mortgage-backed
securities intervening in capital markets with the securities.
The problems, as I see it, I have said in op-eds and in interviews. I should
disclose that I completed two papers three years ago at the time of the housing
and financial crisis in 2008-09. I argued at the time that I completely
disagreed with the conventional wisdom that it was caused by banks in New York
City. I argued it was caused by the failure of the United States Congress to
properly regulate housing. In fact, they watered down and undermined the
mortgage credit underwriting standards. I can say that as someone who actually
worked in a bank, who lent money in a bank to people for housing. I know what
they were doing in the United States because I investigated it and I know people
in American banking.
They had some profound problems. Those are what triggered the problem. We
were fortunate for many reasons, including good policy, that we did not suffer
the same collapse that they suffered and they are still living with one third of
all houses underwater today.
Nonetheless, I have argued for a long time that CMHC has a governance
problem. It operates in secrecy. We do not even know what they are doing
completely in terms of the risk, in terms of the tranches, what the delinquency
ratio is on mortgages with one set of down payment versus another.
The second point is that it is the only mortgage insurance company in Canada
that is not regulated. As someone who believes strongly that banks and financial
institutions, including near banks, must be regulated, my views are very similar
to Governor Carney. We must regulate them. It is beyond imagination that CMHC
has been unregulated. I do not consider regulating myself as a form of
regulation. We all do that. We all regulate ourselves but we still have police,
courts and so forth, and they are not.
Third, more fundamentally, I did testify three years ago before the House of
Commons Finance Committee, with the CMHC CEO and vice-president sitting beside
me, and I do not think they were too happy when I said that I think CMHC does
not possess a strategic understanding of its own business.
I realize that seems very strong. However, I remind you that in August 2006
on the front page of The Globe and Mail, on the top of the fold, was a
story of then Governor David Dodge going down to CMHC headquarters on Montreal
Road and charging into the CEO's office. This was shortly after they introduced
40-year amortization, zero down-payment mortgages, which I characterized at the
time as an attempt to emulate the failed Fannie Mae and Freddie Mac in the
To someone who understands mortgage underwriting, you should never, ever,
ever do a zero down-payment mortgage. The fact that they were willing to try to
do it until it was overturned shows that they did not have a complete grasp of
Yes, CMHC absolutely must be supervised by OSFI, which is doing an
outstanding job supervising the banks. Yes, it is an excellent idea to place two
ministers on the board. Yes, a bank should not be allowed to insure conventional
mortgages, that is, low-ratio or not high-ratio mortgages, through CMHC.
My only criticism of the budget bill in this respect is that the reforms of
CMHC do not go far enough. The government, to use a metaphor I use a lot, has a
very important role; it is the referee of the hockey game. We cannot have a
hockey game or football game without referees. At the same time, the referee
should not be owning or playing on one the hockey teams. The Government of
Canada is the referee of banks and mortgages and the mortgage business, and they
also own one of the players. Worse than that, they cheat, to use my language,
because they give a 100 per cent guarantee to CMHC but only 90 per cent to the
private sector. That is a conflict of interest. They have a 70 per cent market
share, which is an unfair competitive advantage for using public funds against
private firms in the private sector, the mortgage insurance companies. I do not
consult or have any investments in any firms including mortgage insurance.
Government should be encouraging, not discouraging, private investment in
Canada; yet the Government of Canada insures 100 per cent of CMHC's liabilities,
which are up to a staggering $600 billion or one third of Canada's GDP.
We can talk more but there is experience. Of course, the Australians
privatized their version of CMHC, and the world did not come to an end in
Australia — they did not have a collapse. Other things can be done, such as
reinsurance and, I would hope, ultimately privatization. There are things that
still need to be done with CMHC that are not yet being done.
I conclude my remarks here and am pleased to take questions.
The Chair: Ms. Londerville, please proceed with your opening
Ms. Londerville: Thank you. I will echo some of the comments that you
just heard. I appreciate the opportunity to appear before this committee. I have
been a professor of real estate at the University of Guelph since 1993, teaching
and doing research in the area of mortgage finance, among other things. I have
written several articles for the Macdonald Laurier Institute that are on their
website if you are looking for more information.
Canada can be justifiably proud of our mortgage finance system. Careful
underwriting and legislation have allowed us to weather the global financial
crisis better than almost any other country. The percentage of mortgages three
months or more in arrears is less than one half of 1 per cent in January 2012;
and it never really got up much higher than that during the crisis. While the
system is strong, there are improvements that can be made. This proposed
legislation regulating covered bonds is important. Many European investors are
not permitted to invest in covered bonds in countries where there is no
legislation, so passing this will assist in the marketing of these securities
and should bring additional funds into the mortgage finance system.
However, financial institutions are prevented in this bill from using insured
mortgages as collateral, so they will have to pay a higher rate on these bonds
than they would pay if they could use insured loans. It reduces demand for
mortgage insurance, particularly on those loans that are below 80 per cent that
do not really need to be insured. Overall, I think it is a sensible measure.
This bill also recognizes the major shift in CMHC's focus over the years.
Mortgage insurance and securitization is a growing portion of the corporation's
activities, relative to those related to social housing. Private mortgage
insurers are overseen by the Office of the Superintendent of Financial
Institutions; and this moves CMHC into that realm as well. I do not anticipate
the annual reviews by OSFI will raise alarms because CMHC has been very prudent
in their management of their mortgage insurance portfolio and holds twice the
reserves recommended by OSFI. I think it is a good measure.
The bill also places the Deputy Minister of Finance and the Deputy Minister
of Human Resources and Skills Development Canada as ex officio members of the
CMHC board. The second position is important as it is critical in any effort to
properly oversee the commercial activities undertaken by CMHC that we do not
forget the vital role to be played in housing policy and the provision of
affordable housing for lower income households and individuals in Canada. These
activities have been overshadowed by the attention paid to the growing portfolio
of insured mortgages. Since HRSDC is responsible for the federal homelessness
programs, it is important that they remain connected with CMHC.
The bill also requires that CMHC ``make available to the public the books,
records and information that are required by regulation.'' It is not yet clear
what will be required under this, but I look forward to greater transparency of
information from CMHC comparable to the private insurers, as Professor Lee
mentioned. Despite the positive aspects of the proposed legislation, there are a
couple of remaining concerns.
As a Crown corporation, CMHC mortgage insurance policies are implicitly 100
per cent guaranteed by the government under the Basel Accord. If you are a
banking institution, you do not need to hold any capital reserves against those.
The government protection limit for private insurers is only 90 per cent. As a
consequence, banks whose loans are insured through a private firm must set aside
some capital reserves against the possibility of default. Thus, rates of return
are higher on CMHC-backed mortgages for a bank. When profit margins are thin and
banks are nervous about their capital reserves, as in the financial crisis of
2008, this makes a major difference. The evidence of this impact is in the
growth in CMHC's mortgage insurance premium income during 2008 and the drop in
Genworth's rate— the major private insurer at that time.
CMHC argues that the difference in guarantee is necessary because of their
social mandate and the fact that they insure multi-residential buildings. In
their latest annual report, they state that 46.5 per cent of their total rental
and high-ratio business address gaps in the marketplace left by private sector
competitors. This is where more public access to CMHC data would be helpful.
CMHC has a monopoly on the provision of insurance of loans of multi-family
buildings — private sector insurers are not permitted to insure those. If the
private sector is not permitted to compete, then it does not make sense to
include them in loans in any comparison with them. As well, there is no
indication that CMHC does not make a profit on the provision of this insurance
as they do on the homeowner insured loans.
According to the 2011 census, only 13.3 per cent of Canada's population was
in the territories or remote from census metropolitan areas and census
agglomerations, which makes we question that 46 per cent figure by CMHC. An
objective, thorough analysis of the geographic location of privately insured
loans relative to CMHC insured loans is necessary to back that statement up. I
would be surprised if there is any material difference. A private insurer who
refused to insure a loan on a remotely located property would not receive much
future business from the financial institution they turned down.
The lender, not the borrower, decides who will insure a mortgage, CMHC or a
private investor. The implication of this for consumers is reduced choice. This
is not a competitive marketplace with consumers freely choosing which company
will insure their loans, even though they are the ones who pay the large upfront
fee for this insurance. CMHC has 70 per cent of the market. One party with such
a dominant share of the market implies inadequate competition. To make this a
truly competitive market, changes to the 90 per cent guarantee are necessary
either by reducing CMHC's guarantee, moving the mortgage insurance business out
of that organization, or raising the one for the private sector.
To conclude, I welcome the introduction of this bill. I believe that by
leveling the playing field for private and public insurers by giving the same
guarantee, consumers will benefit. There will be more private insurers competing
for their business, ensuring competitive fees and greater incentives for product
The Chair: Thank you for those comments.
Senators, you will understand if you were listening closely to Professor
Lee's opening comments that he last faced our friend and colleague Senator Harb
in the 1993 election. Hence, since he had 5 or 10 minutes for his opening
statement, it is only appropriate that I turn to Senator Harb to ask the first
question of his opponent of several years past.
Senator Harb: He is a fearless leader who is not afraid to express his
opinion, as you have noticed.
Professor Lee did not mention many things in his presentation. He has
extensive experience in government restructuring and government organizations.
In particular, Professor Lee was involved with the recommendation of the Nielsen
Report. Perhaps he can tell us briefly about that experience, why it is so
important that you appear before us today, and why it is so important for us to
take what you are telling us at face value.
Mr. Lee: Certainly. I do not want to exaggerate the role that I
played. Shortly after I started my doctorate in public policy, I was employed in
the Privy Council Office, which of course supports the Prime Minister of Canada.
I was in the machinery of government. That was in the spring, summer and fall of
1985. The then Mulroney government had been elected on, among other things, a
campaign of privatization. When they looked into it, they discovered they did
not have an inventory. The Government of Canada at the time did not have a
comprehensive — it had a partial but incomplete — inventory of all government
agencies, Crown corporations, tribunals and so forth. It was a fascinating
experience, I assure you, for a PhD student to construct the document that
eventually was adopted. Others vetted it and it was eventually taken over by the
Treasury Board Secretariat. At the time, there were over 450 agencies on that
list. It was astonishing. The 1917 Halifax Relief Commission was still operating
in 1985, and other such agencies. That was the lead up to the then
rationalization for the privatization and the rationalization, including
subsequent changes to the Financial Administration Act.
Senator Harb: Our other witness spoke a bit about the social housing
component of CMHC. I believe that there are thousands of units across the
country that somehow CMHC was involved with at some time. CMHC is turning a
profit on an annual basis for the Government of Canada. There are those who say
that the government should look at taking part of that profit and putting it
back into social housing, if not create more social housing, to retrofit the
existing social housing, which is in terrible decay all across the land. Do you
subscribe to that?
Mr. Lee: I am going to be very direct with you. I certainly will not
beat around the bush, as you know. Social housing is very important and there is
a need for it, I completely agree, but I do not believe the federal government
should be providing it. That is why we have the provinces. This is in their
bailiwick. This is under the Constitution Act.
The paper I am working on will advocate the transfer of the dollars, the
resources, the people — not shutting it down, transferring it — to the provinces
where it properly belongs. The provinces are closer to the people, the
individual Canadians than the Government of Canada here in Ottawa and the Rideau
River and the Rideau Canal. Yes, it is important but it is not the role of the
Government of Canada. There are other things that are very important for the
Government of Canada, but I do not think that social housing is one.
The Chair: Professor Londerville, what impacts might you expect there
to be to Canadian borrowers as a result of the stronger governance and
regulatory regimes on mortgage insurance proposed in this budget implementation
On the other side of the coin, what risks do you view there would be for
Canadian taxpayers if Parliament does not act in regulating the mortgage
Ms. Londerville: I would not see a huge impact on borrowers as a
result of this. We have set the criteria for what you need to qualify to get a
mortgage loan. They have been tightened three times in the last few years. I
think they are in pretty good shape right now, so I would not see borrowers
seeing any huge impact from that.
The covered bonds might bring more money into the system, which might help;
bigger supply of funds, lower cost. I would see a bigger impact on borrowers
from this. Again, I do not see CMHC's portfolio as terribly risky right now.
Certainly they have a lot of loans in their insured portfolio that are under 80
per cent loan to value, so they are not hugely risky. I think it is reassurance
and oversight as we go forward that they are keeping enough reserves. I think
they need to be under the same supervision that private insurers are. If we are
implicitly backing them more than we do the private companies, we should be
overseeing them the same way.
The Chair: Thank you for that succinct answer.
Senator Hervieux-Payette: I usually speak French but the translation
might not be that good on the television. My question is addressed to both of
I bought a house nearly 20 years ago in Europe. My term was 15 years and I
had to put 40 per cent down. This was the norm for everyone, not just because I
was from Canada. Here we have played with these terms and conditions for quite
some time. If it could be done on an incremental basis, what would be the most
secure and fairest way of bringing the terms and conditions to a point that we
What would you say to CMHC, Genworth and the rest being only 80 per cent
insured? This is in terms of having banks assume part of the risk and probably
do their due diligence a bit better in some instances which we saw on the other
side of the U.S. border, which was not done carefully. I do not think anyone is
challenging to have the oversight of OSFI.
I want to remind you, Mr. Lee, that the terms and conditions were not CMHC's
decision; they were the Minister of Finance's decision. They were changed in the
last six to seven years. Personally, I feel when people buy a house and put very
little money down, they can walk away from it when times are not good. They do
not lose anything because they have invested almost nothing.
What would be the ideal situation so that we have fairness in the system, but
at the same time the whole financial sector and the $600 billion would not
continue to rise to a point where half of the GDP is invested in mortgages?
Mr. Lee: I appreciate your questions because I think this goes to the
very essence and core of those related questions. Let me deal with them
serially. I want to compare and contrast it to when I was a mortgage manager in
the 1970s. That is when the boomers were young and we were all buying houses, if
I could remind everyone.
The down payment requirement was 10 per cent, not 5 per cent. It was 5 per
cent for 30 or 40 years until the late 1990s when it ranged from 10 down to 5,
which I think was a big mistake. The amortization when I was manager was 25
years. There was no such thing as a 30 or 35 year mortgage. Heaven forbid, no
one even contemplated 40 years. There were no HELOCs,interest only or variable
rate mortgages. There was a lot less consumer choice. I will come to the second
question, but just to show it did not affect risk.
At the time Paul Volcker was the Federal Reserve Chairman after Reagan became
President, interest rates drove to over 20 per cent. I was the mortgage manager
when rates were at 20 and 21. I am smiling when people say, ``My goodness, the
mortgages might go from 3 to 5 per cent in Canada. What is going to happen?'' I
was there when they were 20. The delinquency ratio in Canada went from one half
of 1 percent to 1 per cent. I provided that figure to the Ben Tal, the Deputy
Chief Economist at CIBC who has done good work on that.
Risk minimization is the question. There is no question both in research and
practice that skin in the game is the driver. The higher the down payment, the
lower the delinquency ratio; the lower the down payment, the higher the
delinquency ratio. When Congress went to zero down-payment mortgages, it was
completely predictable that it would cause a housing crash. There is zero risk;
no skin in the game.
More down payment is better than less. When I suggested that recently they
say, ``How can young people buy houses?'' The same way we did for years and
years. You went to your first source of financing, your parents — called love
capital — and got the down payment. That was the norm. That was the first one.
The second one — I am glad you brought this up — was the government guarantee
versus whether we should be downgrading it. I see the government guarantee as
competing with regulation as a policy instrument. That is to say if you have
rigorous — which we do have in Canada through OSFI — regulation of insurance
companies as we do with Great-West Life, Sun Life, the casualty companies,
property companies and the life insurance companies, they are all regulated and
do an excellent job within OSFI. You do not need the government guarantee, the
80 per cent. I would say go to zero but make sure that OSFI is equipped with the
regulatory tools for mortgage insurance to ensure the risk is minimized through
regulation rather than government guarantee.
The Chair: Professor Londerville, anything you would like to add?
Ms. Londerville: Yes, a couple things. Having that guarantee allows
the government at this time to really enforce those rules. We will not let you
borrow 35-year amortization and get it insured. Yes, we must have specific
regulations and oversight if we are going to get rid of that guarantee entirely.
The other thing is that it is not easy in Canada to walk away from a house
and say, ``Here are the keys back, I do not want it anymore. It is not worth
what my mortgage is.'' You will have a judgment against you. Until you clear
that you will not be able to buy another house. It is much simpler in the U.S.
to go to the bank and say, ``I am done, I am not making any more payments,'' and
a year later buy another house. You cannot do that in Canada. The consequences
of foreclosure are much greater in Canada. Yes, bigger down payment; I do not
have as much of a problem with a 5 per cent down payment. I was not a big fan of
zero, but I think 5 per cent is okay. The fact that the consequences of
foreclosure are so high in Canada helps.
People stay in their houses, even when the value may be below what the
mortgage amount is, because they want to keep it and rebuild that equity.
Mr. Lee: Can I respond to that quickly? I appreciate very much the
This has been said many times in Canada, that the risk of the bank going
after you for deficiency changes the rules of the game.
I can state that in practice I know of no bank or mortgage manager — it may
have happened — who has ever sued on deficiency. You write it off. First off, if
you are foreclosing, the person probably has serious problems. They were
probably unemployed, or they have skipped or have no assets. You do not throw
good money after bad. Yes, theoretically you can sue for the deficiency. The
reality, the practice in banks — and I would urge you to get a banker to testify
— I think you will find it is extremely rare to sue for the balance. The option
is there, but you do not do it. It is partly bad public relations and partly it
is pointless; why throw good money after bad?
Senator Maltais: Professor, I just want to say that, based on how fast
you went through your opening statement, your 60-minute lectures must take 10
In your brief, you say that banks should take on more responsibility in terms
of insurance and push aside the Canada Mortgage and Housing Corporation. Is my
understanding correct? Ms. Londerville says that the Canada Mortgage and Housing
Corporation funding 70 per cent of housing is too much.
Mr. Lee, you have been working in the mortgage industry for a long time. Do
you know why the Canada Mortgage and Housing Corporation was created? It was
created because banks have not been taking care of Canadians, and when they do
lend them money for a home, they bleed them white. Thirty years later, banks are
waking up. Too bad for them.
When you say that the government has no social role to play in housing, you
are going completely against what the Canada Mortgage and Housing Corporation
stands for. That organization was created to help young couples, young workers,
buy a house at a lending rate different from that offered by banks.
Today, I want to give credit to the insurance companies that were the first
and the only ones to trust little Canadians, while big financial institutions
would lend money only on $500,000 houses whose owners had $2 million deposits.
The Chair: Senator Maltais, I am going to interrupt. I know you are
not a professor, but I will ask you to state your question.
Senator Maltais: Do you still believe that banks should provide more
insurance and buy shares from the Canada Mortgage and Housing Corporation?
Mr. Lee: I am not sure that I understand that question, but I will ask
you to rephrase it. I just want to respond to the second question.
Transforming CMHC or privatizing it will not end mortgage insurance. It will
not end the lending of money to young people to buy houses. This is purely an
instrument. The end of CMHC does not mean the end of mortgage lending or the end
of the ability of young people to purchase a home. This is merely an instrument
to achieve the end of being able to purchase a house.
On the other side, the 70 per cent figure was the percentage of all the
mortgage insurance contracts in Canada provided by CMHC. In other words, they
have a 70 per cent mortgage error. CMHC is underwriting 70 per cent of the
high-ratio mortgages in Canada, where the two private firms have about 30 per
The Chair: Professor Londerville, do you wish to comment?
Ms. Londerville: Yes. I think that mortgage insurance is a critical
tool to allow people to buy a house without a huge down payment. It is very
important for young people and so on.
Both CMHC and the private insurers make a lot of money doing it. I argue that
maybe the fees are a little too high for it, and there are other ways to
structure fees that could be considered. As Professor Lee says, it is not going
to go away. If CMHC is not doing it, there will be many private sector companies
that would like to do it.
Senator Maltais: You think that banks are losing money?
Ms. Londerville: No.
Mr. Lee: I will answer that. There is also something the senator said
about the banks used to be very difficult about lending money. Up until, I
believe, 1968 — I stand to be corrected on this — the Bank Act, passed by the
Parliament of Canada, prohibited the banks from lending anything other than
highly securitized mortgages. The Bank Act, up until 1968 prohibited personal
lending by banks, and they prohibited what we would now call personal lending of
all kinds. Banks were purely commercial banks prior to 1968.
It was only after 1968 amendments, in the early Trudeau administration, when
the Bank Act was liberalized and the banks were allowed to get into credit
cards, consumer loans and mortgages, and then they went and raided or hired all
kinds of people from the consumer loan or finance companies, called Household
Finance, Beneficial and Traders and companies like that.
Senator Maltais: Why have they changed their minds if they wanted to
get involved in that market?
Mr. Lee: The answer is very clear. I know this committee has addressed
this, and I will not get into that, in terms of credit card rates and so forth.
There are three broad product lines in lending for a bank. There are mortgage
loans, which have the lowest risk of all. The risk to the bank for a mortgage is
extremely low for anyone to default and walk away. I think I had one foreclosure
in four years.
Consumer loans have higher risks, and by that I mean car loans. That is why
they carry a higher interest rate. The losses on consumer loans are higher than
on mortgages, but much lower than credit cards. Credit cards have the highest
interest rates because they give them away like candy to almost anyone,
including people who are unemployed and do not have a job.
My point is that the risk is lower for mortgages because it is more difficult
to get a mortgage from a bank than a credit card. The risk is lower, the
interest rates are lower and the losses are lower. Yes, it is profitable. Banks
do not make loans to lose money.
Senator Ringuette: As a long-standing member of this committee, I
remember the relaxing of mortgage loan approval in the 2007-08 budget bill. That
is not too far away, then two years after they had to come back to the 2007-08
mortgage insurance provisions.
Professor Lee, something many Canadians may not be aware of is that one of
the major differences between the U.S. and Canadian mortgages is the fact that
private home mortgages are income tax deductible in the U.S.
Mr. Lee: True.
Senator Ringuette: Interest payments are deductible, so people and
banks would tend to offer a lot more loans.
Ms. Londerville, in your statement you say that in this bill, from using
insured mortgages as collateral, they will have to pay a higher rate on these
bonds than if they could use insured loans. You are talking about financial
institutions in Canada.
I deduce from this that it is going to be more costly because of the higher
rate for covered bonds for our financial institutions, if it will be more costly
for them to get the liquidity in the market, that will be transferred with
regard to the mortgage rates for Canadians. Do you agree with that?
Ms. Londerville: This is an additional source of funds for the banks,
so it is a new way for them to raise money, secured by mortgages they have on
their books. I am saying they have to pay a higher rate than if they could put
insured loans in there, but they also have more investors who are allowed to
invest in them because we have the regulations going into place.
I do not really know what the net effect of those will be. They are against
each other and I do not know what the net effect would be.
Senator Ringuette: I want to commend you on putting this forth to us
because not only you but highly sophisticated economic and financial analysts
have also indicated the same thing in recent weeks.
Mr. Lee: Senator, you are absolutely right. It will increase their
cost of borrowing but in a very small amount because the Canadian banks are
extremely large and extremely well capitalized. Right now they are getting an
unfair subsidy from the taxpayer of Canada, from CMHC.
Senator Ringuette: I remember not too long ago that they got $69
billion worth of subsidy through the repurchasing of loans.
Going back to this current bill with regard to the covered bond, I have here
an entity called Fitch. They are New York-based and they analyze all these
mortgage securities. They say this measure will probably increase the cost of
mortgages in Canada. In Reuters, an article from London, England, says that in
the European experience with regard to covered bonds, it has increased the cost
of mortgages for homeowners.
I would like you to try to explain the reality of what will happen in the
market and the end result for the homeowner who requires a mortgage.
Ms. Londerville: The banks have been very small in their issuance of
covered bonds so far. To me, it is a new way for them to bring in more capital.
They are securing them with mortgages they have on their books, so they are
pretty safe investments.
As Professor Lee says, Canadian banks are pretty well respected as an
investment around the world. Yes, they would have to pay a higher rate than if
they could put insured mortgages in there, but I do not see it will be a huge
difference in cost. The mortgage market is very competitive still in Canada, and
rates for homeowners have been quite good over the last while.
Bringing in more funds is a greater supply to the financial market, so I do
not see how that overall would raise rates, or not significantly.
Senator Tkachuk: I have a few questions. We talked about the cost of
social housing. Are the revenues CMHC produces used to subsidize the cost of
social housing within the corporation?
Mr. Lee: No, there is essentially a firewall, so there is a separate
budget line for social housing. Money is fungible. They bring in $1 billion of
profit and give it to the government; the government gives them back some money
to do social housing. Technically, they are accounted for by a separate flow of
Senator Tkachuk: Do you know what the cost is of the social housing
part of the CMHC?
Mr. Lee: I do not have that. I have always focused on the mortgage
insurance because it has such an impact on the mortgage market. I have not
focused on social housing.
Ms. Londerville: I do not know that off the top of my head, but I
think they should be separated. I do not think we should be saying, okay,
first-time home buyers, pay your mortgage insurance and we will use that for
social housing. I think it should be all our responsibility to fund social
housing. There is a role at the federal level as well as the provinces.
Senator Tkachuk: As you both know, the government has not only CMHC
but it has other banks: Business Development Bank, Farm Credit Canada. Should
those also be governed by regulatory bodies?
Mr. Lee: If you are asking me, I distinguish commercial crowns that
are competing in the marketplace from a social government corporation such as
CBC, which is delivering social programs.
Senator Tkachuk: I would like to see them regulated, too. Nonetheless,
we will deal with Farm Credit and Business Development Corporation.
Mr. Lee: The so-called commercial crowns under the Financial
Administration Act are the ones that have their own boards and so forth and they
are competing for capital with the private sector. If they are a bank or a near
bank, they should be regulated. Governor Carney has spoken about this and so
have I. Near banks have been getting away with a lot of things because they are
not regulated like banks. A near bank is a leasing company, GE Capital, all the
auto leasing companies. Farm Credit Canada is a near bank. It is any financial
institution that looks like a bank, acts like a bank but is not regulated like a
Ms. Londerville: I would agree with that. If there is competition with
the private sector in some way, then they should be under the same rules.
Senator Massicotte: I gather the bottom line is that relative to the
proposed amendments, you both agree with what is being proposed. Am I correct in
Mr. Lee: Yes.
Senator Massicotte: If we are having a chat among us girls, you are
basically both saying ``If I had a magic wand, I would also privatize CMHC.''
Are you both saying that?
Mr. Lee: I am, because we want to encourage a private market. The
argument, of course, is that mortgage insurance is very important. My response
to that is, I have had one mortgage insurance contract with CMHC in my life when
I was in my 20s. I eat three times a day, I think that is very important, but we
have not nationalized Loblaws or Provigo, and that is very important.
My point is, if we can have private life insurance companies and private auto
insurance companies and casualty companies, we should be fostering a —
Senator Massicotte: Ms. Londerville, do you agree with that? You also
would privatize CMHC?
Ms. Londerville: I think it would have to be a gradual move to that. I
am not maybe as firm on that as Professor Lee, but I think certainly we need to
level the playing field so that they are competing as the private insurers do
and then gradually the market share would shift. Right now, if we tried to sell
the mortgage insurance portion of CMHC, it is a pretty big buy.
Senator Massicotte: Are you saying we should privatize so they have a
level playing field? It seems the more significant argument would be private
enterprise, when there is significant competition, basically provides better
value and does not need sheltered money. Is not that the stronger argument than
a level playing field?
Mr. Lee: It is a more efficient economy when you have private firms
because they do not have an unfair competitive advantage. That is the problem.
Senator Massicotte: I will take the argument further. You go to
regulations. If you believe in the market approach, there are only two reasons
you should regulate. One is systemic risk, too big to fail — the same thing as
we are finding around the world, that institutions are too big to fail — and
another is consumer protection. If you think that this is complicated and
consumers need protection, they need a father figure holding their hand when
they take a mortgage, one could argue there is significant competition where no
one player is very large — contrary to the case with CMHC — and you should let
it be totally unregulated. The consumer knows the interest rate. He will know
that. There could be some fees. I think the average consumer is knowledgeable
enough to make that decision, so why regulate if there is no systemic risk? If
there is systemic risk, I agree; you have to get there, but if there is none,
why not allow real competition?
Mr. Lee: Maybe this is systemic risk or maybe it is a third reason.
Financial institutions are completely virtual; that is to say, they are
financial and digitized. You can get runs on banks or financial institutions. We
are seeing it right now before our eyes in Greece, Spain and Italy, where there
is deposit flight. You cannot have a run on a manufacturer. I just stop buying
GM's cars and their market share goes down, but in a bank, because banks and
financial institutions are so interconnected, I suppose this is the systemic
Senator Massicotte: Then deposit insurance is all you can do. So what
if they suffer? If you just give a loan, if they go under, they do not have to
pay it back. Why would we subsidize the shareholders?
Mr. Lee: I guess I will work from a different side. We have the most
successful financial system in the Western world because, and there is a lot of
evidence on this, we have regulated banks in a superior manner to the United
States or Europe. We do not have the uncertainty that the latter causes to
business, which feeds back into economic growth. There is a pro-business
argument in favour of regulation of financial institutions.
Senator Massicotte: We are just having a debate but the United States
have filed a regulation relative to the Volker Rule that is so burdensome and
applies to so many institutions that they are going to retract. You are right:
It could diminish risks, but why would you burden companies that have no affect
on the economy or society if it does fail.
Mr. Lee: Canada's financial rules are principles-based, and the
American model is much more prescriptive in that they are trying to anticipate
every situation. Our model of regulation is superior as well in Canada.
Senator Moore: I would like one of you to tell us what the difference
is between a covered bond and the stacking and parceling of mortgages that was
taking place at the start of the recession?
The banks were parceling off the strata of mortgages and selling them in
bundles. I want to know the difference between that and a covered bond.
Mr. Lee: Are you referring to the American practice that was going on
Senator Moore: I think some of our banks were doing the same thing.
Mr. Lee: I will give a partial answer. First, securitization was much
more extensive in the United States than it is here. If I am not mistaken, and I
stand to be corrected, it is only about 30 per cent. It has always been a much
lower figure in Canada with Canadian banks. They keep their own mortgages on
their books. They were securitizing when I was a mortgage manager. We would sell
off once a year, and I would get a note saying that they had sold a bundle to
Sun Life; but we continued to manage them on the Bank of Montreal books.
First, they do a lot more securitization in the United States. Second, they
do not have uniform standards of mortgage underwriting in the U.S. Going back to
Senator Ringuette's comment earlier about the interest deductibility, that is
one difference and the second difference is that the banks are much more
aggressive in the States than in Canada. They are what we used to call ``go-go
bankers'' as opposed to ``prudent balance sheet lenders'' in Canada. We used to
say that. Third, they have this plethora of regulations.
The standards are much more uneven. Here, mortgages are almost fungible, even
though they are lent to individuals, because the rules are very homogenized. The
Bank of Commerce and the Bank of Montreal are applying the same sets of rules.
Senator Moore: I know that.
Mr. Lee: That makes it easier, paradoxically, to securitize.
Senator Moore: What is the difference between the securitization of a
bundle of Canadian mortgages and the covered bonds that Canadian banks deal in?
I do not understand the difference between the securitization of a bundle of
mortgages and covered bonds, which are also secured by a bundle of mortgages, I
Ms. Londerville: In the covered bond situation, the mortgages stay on
the bank's books; so they remain part of the bank's assets. They are segregated
such that if that bank went bankrupt, the covered bondholders have first claim
on those mortgages to recover their bond money. With securitization, they are
selling the mortgages off their books to CMHC; and they are gone.
Senator Moore: Professor Londerville, with regard to the discussion on
the possible privatization of CMHC, I believe you said earlier that they have
$600 billion in outstanding mortgages. I do not know what the mortgage insurance
portion of their business is. You said that it would be a pretty big buy. What
is the amount of business that CMHC does in insuring mortgages? Do we know that?
Ms. Londerville: They have $600 billion worth of mortgages insured.
They are close to that with $560 billion or so.
Senator Moore: Thank you.
Ms. Londerville: The limit now is $600 billion.
Senator Stewart Olsen: I have a brief question for both of you. If you
moved to privatization, in essence what would happen to the social aspect? I am
a bit concerned. You are saying devolve it to the provinces, but I am not sure
what you suggest would happen in that case.
Mr. Lee: That is why I mentioned that CMHC has five lines of business
doing very different things. The statisticians and economists group is very
large and is doing fantastic work. They could be moved into Stats Canada, who is
supposed to be doing the number crunching and collecting.
Social housing is a completely different business from mortgage insurance.
One is social and the other is commercial. Mortgage insurance is no different
than property insurance or casualty insurance, whereas social housing is a
social policy — a social welfare function. Even if they did not privatize it,
social housing should probably be in a different agency.
Former Prime Minister Trudeau created a ministry for housing in the early
1970s. A former mayor of Toronto was the head of. The agency was separate and
apart from CMHC. It was doing a lot on social policy. I see them as two very
different items, and they do not have to be under the same roof.
Ms. Londerville: I would agree with that. It is a critical function
and we cannot forget about it in this discussion of what is going on in terms
the business side of CMHC. We do not want to forget about the social policy.
There is a big role at the federal level for helping to set a national housing
policy and criteria and then working with the provinces to ensure that we have
enough money to deliver those programs. We have underfunded that whole sector
The Chair: Professors Lee and Londerville, I express our great
appreciation for outstanding, enlightening and informative presentations.
We are pleased to welcome from the Canadian Life and Health Insurance
Association, Mr. Frank Zinatelli, Vice President and General Counsel; and by
video conference from Toronto Ms. Diane Urquhart, Independent Financial Analyst.
Both panellists are here to discuss Division 22, which deals with the Canada
Labour Code and long-term disability plans. We have approximately one hour for
Ms. Urquhart, we will hear from you first, followed by Mr. Zinatelli, after
which we will have questions.
Diane A. Urquhart, Independent Financial Analyst, as an individual:
Thank you very much for inviting me to make the presentation from Toronto to
your committee. I will be focused on sections 434 to 439 in the 2012 budget bill
on disability insurance.
Let me start by saying that mandatory disability insurance is the best
solution for eliminating unsafe corporate, self- insured LTD benefits.
As an independent analyst I fully agree with section 239.2(1), which sets out
this new requirement under the labour code. Many of you will remember me as
having worked with the Nortel disabled former employees, and making a
presentation to your committee a little over a year ago. I have continued to
work with that group to find solutions for their specific tragic situation, and
those whom I speak to also fully agree with section 232.2(1). Even though it
does not help them, they are most supportive of legislative change at the
federal government such that in the future employees of federal regulated
corporations who offer long-term disability benefits will be obliged to have
insurance and, as a consequence, there will be no disabled workers for federal
registered corporations that will suffer the experience they have had.
To briefly comment on why I am so strongly in support of this mandatory
insurance provision, and not to take away from the presentation we will hear
from Mr. Zinatelli but perhaps to strongly support the view that licensed
insurers should be involved in the provision of this mandatory disability
insurance, because the life insurance industry is well regulated today by the
provincial financial service regulators and by the federal Office of the
Superintendent of Financial Institutions.
The advantage of having gone this way rather than to develop a new regulatory
structure is that we have one that works well today. One of the big advantages
of being in this structure is that we do not need to build a new regulatory
infrastructure with more government cost. Let us use the one that we have and
there will be no extra costs associated with that.
Disability insurance policyholders also get higher priority in the bankruptcy
of bankrupt insurers under the federal Winding-Up and Restructuring Act so we
will not have the problem we had in Nortel, where the policyholders and the
disability insurance that was sold by Nortel as the corporate sponsor ended up
being equal to the unsecured creditors.
You will all remember the debates on the Companies' Creditors Arrangement Act
and the Bankruptcy and Insolvency Act. With this mandatory change at the federal
level, and on the assumption we will see the same change in all the provinces of
Canada, it is no longer necessary to make an amendment to the Bankruptcy and
Insolvency Act and the Companies' Creditors Arrangement Act for the purpose of
protecting disabled workers of Canada. If the provinces follow this, then all
the private corporations of Canada will be obliged, if they offer long-term
disability benefits, to do so by buying those benefits from a licensed insurance
I have been contacted by people in Quebec, and it is very likely that they
will adopt the same provision, mandatory disability insurance for LTD plans at
Quebec corporations. We have received communications from both Alberta and
Ontario indicating that they are actively studying the matter as well.
The life insurance industry also has Assuris, so we have the third level of
protection there in the event that a disabled policyholder of an insurance
company is in the unfortunate situation of their insurance company going
bankrupt. Then there is another level of insurance facility available
collectively from the insurance industry.
I will turn to provision 239.2(2):
However, an employer may provide those benefits under a long-term
disability plan that is not insured, in the circumstances and subject to the
conditions provided for in the regulations.
The regulations have not yet been released. I would recommend that the only
exception be the federal government and the federal government Crown agencies
and that no private sector employer be permitted to be exempt under any
circumstances. I will be looking forward to those regulations.
Turning to what will be the consequence for a federal private corporation
that does not comply with the requirement for mandatory disability insurance, I
would simply make the point that the objective of the Labour Code amendment must
be to set a standard of mandatory insurance. However, but I am concerned that
the $250,000 penalty for failing to comply with the federal Labour Code is far
too low and will not act as a significant deterrent.
To give you perspective on that, $250,000 is the maximum fine. In our Nortel
case, the range of damages, that is the damage for a single Nortel disabled
person, we have damages as high as $550,000 as a result of Nortel having
underfunded its disability income benefits for its workers.
I suspect it is far too late in the process for this to be the case, but to
the extent that your committee has the opportunity to make further amendments, I
would recommend that the maximum fine be increased to $5 million. We have to be
in the millions of dollars because it is only large corporations that would opt
to try to self-insure disability benefits. Those large corporations will have
hundreds of employees.
To give you perspective, in the Nortel LTD case the underfunded benefits were
$50 million to $75 million. If you have to waive paying a $250,000 fine versus
potentially keeping $75 million for your bondholders, you may be inclined to not
bother with the mandatory insurance, not be concerned about the Labour Code and
pay the $250,000 fine.
Turning to the Transitional Provision, section 438, the reason I am sure they
are on a going forward basis is that to not do so would cause retroactive
elements for this amendment to the Labour Code. The way the transitional
elements work is that if you are already disabled or if you have already made an
application to receive disability benefits, then you will not be subject to any
benefit from this change in legislation. It will apply only to all the active
workers who are going to get some new protection that they did not otherwise
In conclusion, I am very happy with what we see here. I would like to see a
higher fine amount. It goes without saying that if it is a fine, this
legislation has done nothing for the disabled workers who are specifically
precluded from receiving any benefit in the transition clause, but it is clearly
a positive step for the future.
I will spend a couple more minutes, and I see there are only two speakers for
the hour, so you must have allotted a lot of time for questions. I want to make
a brief comment on the situation for those who are currently disabled and not
receiving protection. In particular, I bring to the attention of this committee
that there are 360 Nortel disabled and 120 children who have been pushed into
poverty. After 14 months since this committee recommended that there not be a
retroactive change in the CCAA and BIA, there has been absolutely no progress
made on behalf of this group.
We have a situation now where these families have been paid 35 per cent of
what was owed to them, a 65 per cent cut in their income. You will also recall
that these were people who, for the most part, cannot go back to work given the
nature of their genetic diseases and their severe physical injuries from
accidents. They are still faced with a tragic situation. They have been paid
already now about three to four years of income, and that is pretty much what
they would expect to get.
We have people like Jackie Bodie, a young onset Parkinson's with two young
children. Two incomes are required to support her home. She is in a position
that while she is 40 years old, she needs to live on three to four years of
income until she is 65.
We still consider this situation to be a severe injustice for the Nortel
disabled engineers, scientists and many other well-educated former employees
who, through no fault of their own, are now pushed into poverty without a remedy
for what I have expressed before and for which we have firmer belief today:
There were misrepresentations in the disability insurance that was supplied to
them by Nortel and their money was wrongfully removed from the trust account.
In closing, as you might expect by now, you can see this group is not willing
to give up, nor am I. As a financial analyst who has been working with them, I
feel they have been wronged and an injustice has occurred. A petition was filed
this week on Monday by the Progressive Conservative Party of Ontario. In this
petition, the Nortel disabled group — with the support of the PC Party of
Ontario and the New Democratic Party of Ontario — is asking for the Ontario
legislature to instruct the Ontario Ministry of Consumer Services to enforce the
Ontario Consumer Protection Act in respect of unfair business practices and
false and misleading deceptive representations by Nortel and Sun Life in the
disability insurance supplied to Nortel's employees.
I ask all members of this committee, all members of Parliament and the Senate
to support that petition. This group has faced an injustice and it is unfair
they face a life of poverty when money was taken from their trust account.
The Chair: Thank you, Ms. Urquhart, for your opening comments.
Frank Zinatelli, Vice President and General Counsel, Canadian Life and
Health Insurance Association: Thank you. It is a pleasure to be here and to
be able to speak this time. I was under the weather a bit the last time I was
I am Frank Zinatelli, Vice President and General Counsel of the Canadian Life
and Health Insurance Association. I would like to first thank this committee for
the opportunity to contribute to your review of the divisions of Bill C-38, the
Budget Implementation Act 2012. With your permission, I would like to make some
short introductory comments.
The Canadian Life and Health Insurance Association represents life and health
insurance companies accounting for 99 per cent of the life and health insurance
in force across Canada. The Canadian life and health insurance industry provides
products which include individual and group life insurance, disability
insurance, supplementary health insurance, individual and group annuities —
including RRSPs, RRIFs and TFSAs — and of course pensions.
The industry protects more than 26 million Canadians and over 45 million
people internationally. The industry makes benefit payments to Canadians of $64
billion per year. It has almost $514 billion invested in Canada's economy and
provides employment to nearly 135,000 Canadians. Life and health insurers are
regulated at the federal level under the Insurance Companies Act and are also
subject to the rules and regulations set out in provincial insurance acts.
We welcome this opportunity to appear before the committee as you seek to
develop your report to Parliament. The industry is very supportive of some of
the divisions contained in this bill. Let me comment on two of them. I will
comment more fully on Division 22 and very briefly on Division 2.
Division 22, as Ms. Urquhart noted, would amend Part 3 of the Canada Labour
Code to require federally regulated private sector employers that provide
benefits to their employees under long-term disability plans to insure those
plans, subject to certain exceptions. This would require employers who have
uninsured long-term disability plans to insure them so that in the case of
bankruptcy, employees on long-term disability at the time of the bankruptcy will
continue to receive those benefits as long as they are disabled.
The Canadian life and health insurance industry is very supportive of this
legislative initiative. We believe it is critically important to ensure that
employees on long-term disability are protected in the event of a plan sponsor's
financial stress or insolvency. History has shown that when an employer becomes
insolvent and its LTD plan is uninsured, disabled employees can sometimes lose
their benefits. Ms. Urquhart spoke of one example. We know that about 10 years
ago there was the Eaton's situation and 10 years before that there was the
Massey Ferguson situation.
Senator Hervieux-Payette: Singer sewing machines.
Mr. Zinatelli: That is right.
Currently in Canada there is little regulation of uninsured LTD plans. There
is no requirement that employers set aside adequate reserves to cover future
liabilities arising from these plans. If reserves are set aside, there is no
restriction on how those funds are invested. There is also no obligation to keep
funds in trust to protect them from creditors. As a result, there are no
protections in place to ensure there are adequate funds available to support
ongoing LTD claims in the event of an employer's bankruptcy.
I should note that a couple of the provinces have some disclosure
requirements in their provincial legislation at this time.
Requiring that LTD plans be offered on an insured basis provides the maximum
protection for disabled employees and ensures they are paid, regardless of their
plan sponsor's financial situation. We believe this is the best route to address
the protection of those on long-term disability. With insured plans, the risk
and financial liabilities for providing the LTD benefits are transferred to the
insurer. The insurer's responsibility with respect to disability benefits
continues even when the plan sponsor experiences financial difficulties or after
the plan is terminated. Indeed, after a plan sponsor's bankruptcy, the insurer
will continue benefits for disabilities that began while the group policy was in
In order to protect those on long-term disability, it is crucial that there
be funds available to support all ongoing disability liabilities, even if the
employer is bankrupt. We believe the legislative initiatives set out in Division
22 would be effective to achieve the public policy objective of fully protecting
individuals on LTD.
As an industry, we are making representations to provincial governments
recommending that they make equivalent changes.
I will now turn briefly to one other matter. We note that Division 2 of Bill
C-38 would amend the Trust and Loan Companies Act, the Bank Act and the
Cooperative Credit Associations Act to prohibit the issuance of life annuity
like products. The provisions of the current legislation indicating that only
life insurance companies can provide life annuities are relatively clear and I
see this as a technical amendment that is helpful in reinforcing the rules and
policy objectives that are already in place.
The industry greatly appreciates this opportunity to participate in the
committee's review of Bill C-38, and I would be pleased to answer any questions
that you may have.
Senator Hervieux-Payette: I think that we are strictly concerned with
companies that come under federal jurisdiction. I have one question for both
witnesses. Is it usual for this kind of legislation or other types of
legislations — I have no expertise in this area — to require that the entire
collective agreement be submitted? This case seems to be general, although I
would think that the collective agreement provisions that concern that type of
insurance could be submitted to the government. As far as I know, collective
agreements — especially when it comes to large companies like Telecom — can be
No one has said anything — including you and Ms. Urquhart — about the
legislation requiring the whole collective agreement to be submitted. I do not
know what the unions will say. Traditionally, does a collective agreement that
may have hundreds of pages have to be submitted to the government when
disability insurance provisions are being looked at? Does the whole agreement
have to be submitted or only its relevant part?
As for the amount of the penalty, I agree with Ms. Urquhart that $500,000 is
not enough. Would you say that the $500,000 amount is sufficient — especially
since it is in your industry's interest of to know that people will really get
insured — as they will pay premiums to your members? For instance, for a very
popular campaign these days called the Canadian Pacific, I think that $500,000
will not necessarily suffice to ensure that those people have to take out an
In conclusion, I have a question for Ms. Urquhart. If action is taken in
Ontario for Nortel employees with the consumer agency, who would pay the
premium? Would it be the Government of Ontario? Does Nortel have sufficient
assets to pay? But technically speaking, you raised this issue, and I am
wondering where the money could come from. That is because, even if a case is
won, it is not much help if there are insufficient funds to pay the premiums.
My first question was about the whole agreement versus the insurance-related
clauses. My second question was about the penalty amounts for companies that do
not comply with the law. My last question was about Nortel.
Mr. Zinatelli: With respect to the first question, which relates to
the collective agreements, I note that that provision of the Labour Code is not
in the part in Part 3, as I understand, that relates to this particular
initiative of the government, although I stand to be corrected.
With respect to the requirement I see in this part that deals with providing
protection for persons on LTD, from what I read of the legislation, it simply
appears to say that you have to inform the government that you have such a plan
in place. It does not talk about the whole collective agreement, which I believe
is in another part and may have other rationales attached to it. I have not
looked at that aspect of it. You may want to check with experts on the Labour
If you look at the part dealing with this particular aspect, it only talks
about having to inform the government that you indeed have an insured plan.
Senator Hervieux-Payette: What about penalties?
Mr. Zinatelli: With respect to the penalties, I think one must be
careful about increasing penalties too much. Remember that purchasing insurance
is voluntary; employers do it in agreement with employees as part of the
benefits they want to provide to encourage individuals to come and work for
their companies. You do not want to put in disincentives that would drive an
employer who would want to have the protection for employees to say, ``You know
what, the penalty is too high. I just do not want to take a chance.'' I think
you want to create incentives for employers to create that kind of protection.
The Chair: Ms. Urquhart, do you want to comment on the penalties and
who should pay?
Ms. Urquhart: Are you asking me to speak now?
The Chair: Yes, first on the penalties.
Ms. Urquhart: As I said in my prepared remarks, that $250,000, the
number I see in the version of the budget bill I have — whether it is $250,000
or $500,000 — is too little I would argue. For major corporations, we need to
have penalties in the millions of dollars. If it is a high penalty, you are
going to purchase the mandatory insurance. From the disabled perspective,
certainly the group that has suffered the damages in the most recent case, they
would rather have no insurance than have bogus self-insured insurance that is
The incentive is to purchase the mandatory insurance. If you purchase the
mandatory insurance, there is no fine. If the consequence of that is you would
rather not have insurance at all, I think the disabled persons who have been
victims of not having the solvency of their disability insurance plan would
rather not have a plan at all. If this were to be the case, they would know that
they needed to purchase their own private personal disability insurance rather
than have the false faith that they had received disability insurance coverage
The next point, I am certainly not an expert by any means on collective
agreements, but I would like to make a brief comment about multi-employer plans
and health and welfare trusts and these new employee life and health trusts. It
was the union movement that, after the Eaton's bankruptcy, was responsible for
the Alberta government not proceeding with a proposal for mandatory insurance.
They made the argument that it was not necessary to have mandatory insurance
because the current self-insured plans were generally with their reserves held
in trust and that we had breach of trust common law.
I would strongly suggest that we not subscribe to their opposition to
mandatory insurance this time. They pretty much had their opportunity in the
Nortel case for this matter to be brought to mediation or litigation on the
matter of breach of trust, and the legal counsel who represents many of the
unions did not even make that as a recommended action on behalf of the
court-appointed representative for the Nortel disabled group.
Breach of trust common law does not work. The one major bankruptcy where we
needed it, the legal counsel for many of the unions did not even recommend that
it be undertaken, so the time is up, from my perspective. Whether it is the
employer who is forced to have mandatory insurance once they decide to have an
LTD plan or whether it is a union or a group of unions who themselves in
consortium seek to have a multi-employer union-sponsored plan such as the GM
Health Care Trust, then I would argue that the unions also be mandated to
purchase insurance if they are going to offer long-term disability benefit
The Chair: I think there was another question.
Ms. Urquhart: Do you want me to go back to the matter of the Ontario
Consumer Protection Act?
The Chair: I would like you to give an answer to the question, which
was, who was going to pay if you were successful in your case. That was the
question. It should be a quick answer because we have other questioners.
Ms. Urquhart: The quick answer is the Nortel estate. Essentially, this
would have to be a consumer agency enforcement action — charges laid of offences
to the act. It is taken to another judge, not the bankruptcy judge, who
adjudicates whether the conditions are in place.
The Chair: Thank you. I think you responded to the question that was
Senator Maltais: Mr. Zinatelli, I would like to begin by
congratulating you on your brief. It is well-drafted and in line with the law. I
think that you have an openness that will help us avoid current problems in the
I am surprised that major companies have self-insured plans. Unions are
somewhat to blame for that. When a company applies for group insurance, they
always look for the cheapest option. The cheapest option may not necessarily be
the most credit-worthy one that will provide long-term guarantees. As long as
companies — both owners and workers — have this philosophy, they will be
searching for the lowest cost. So they should not complain when they obtain
nothing, as they have also given nothing, or almost.
Since we are talking about disability insurance, I would like to discuss the
issue of pension funds. I have a concrete example. You know that in the forestry
sector, companies like Domtar — and God knows that many have closed their books
in Quebec — they have closed the employees' pension fund books as well. Those
people end up with 40 per cent, 50 per cent or 35 per cent of their pension
fund. While they have been expecting a $50,000 pension, they end up with a
I do not know whether insurance companies could make sure that workers'
pension funds are safe with companies? That is my last question, Mr. Chair.
Mr. Zinatelli: With respect to pensions, there are very important
initiatives by the federal government to develop PRPPs — a new pension vehicle
which, it is hoped, will assist more individuals. Quebec has introduced similar
legislation, which I understand is moving quickly. There are some important
developments on the pension side.
To get back to the long-term disability benefits issue, Ms. Urquhart
mentioned Alberta. I want to note for the record that the CLHIA did not oppose
moving to an insurance model in Alberta in 2002 or 2003 when that was being
looked at. Obviously, we strongly support the current model.
In the context of reaching our policy position on this, we looked at other
possibilities for how one can protect employees. We looked at disclosure as an
approach, which can be helpful. You tell the person ``Hey, this is not an
insured product.'' The employer has the ultimate liability. You can also ask
employers to create trust accounts, but then you have to ensure money is put
into those trust accounts. At the end of the day, we concluded that you needed
insured plans to create as much certainty as one can in this area that employees
will be protected.
As Ms. Urquhart correctly pointed out, we are extremely well regulated as an
industry. I think you heard some of that discussion with the previous panel. In
the very unlikely event that an insurance company were to bankrupt, the industry
would stand behind that company. Therefore, the payments for LTD are continued.
There are some limits of $2,000 per month or 85 per cent of the monthly benefit.
For sure you will get that and possibly even more. There is very adequate
Senator Ringuette: Ms. Urquhart, it has been a long fight.
Unfortunately, we could not get the bill for Nortel disabled employees. It is
too late for them, but I hope it is not too late for other employees down the
road that may be affected by bankruptcy.
You mentioned that the penalty is not high enough. Would you see a penalty
being applied as a percentage of the not funded or maybe even the total required
funds in the LTD? The concern is that if the penalty is not high enough, some
major corporations like Nortel and others will laugh at it and prefer to pay the
small penalty rather than put the required funds or the required insurance in
Ms. Urquhart: I would not agree with a percentage of the unfunded
liability or the deficit of the long-term disability plan because a fine is a
penalty, which is to act as a deterrent, and the fine is paid to the Government
of Canada. The victims receive no benefit. If you are a victim of the loss of
your financial well-being, you would rather get compensation for your damages
than see a large fine paid to the government.
I would weigh it this way: $250,000 is so small that it will not even get the
attention of the media or others in terms of the impact that there could be on
reputational damage — to be found to have breached the Labour Code and to have
caused harm to disabled persons of Canada.
I said $5 million but I think that anything around $1 million, $2 million to
$5 million is enough that attention would be paid by the corporate human
resources office and the chief executive officer to not wish to lose that amount
of money. More importantly, the media and others would say that a company that
did not purchase the mandatory insurance under the Labour Code and paid a fine
of $5 million would probably get publicized. Hence, that, too, would deter
others. Yet, not so much money is taken that the victim has no money left.
Senator Ringuette: You are also saying that the specific penalty
should be put into some kind of employee protection LTD plan from the Government
of Canada. Is that right?
Ms. Urquhart: It would be good under the Labour Code — and I am not
familiar enough with the Labour Code with respect to other matters — such that
if you breached the code, you would be obliged to pay restitution to the victims
damaged as a result of your offence. I would be happy if there was no fine at
all but rather a restitution order. I would agree for sure if we had a
restitution remedy instead of a fine that it pay all of the deficit because of
the peace-of- mind nature of the insurance policy and the fact that there was an
opportunity for the employer to buy a third-party licensed, insured product,
which was much safer and better regulated, without meaningful additional costs.
Senator Ringuette: That makes perfect sense to me.
Mr. Zinatelli, you provide insurance to these companies.
Mr. Zinatelli: Yes.
Senator Ringuette: What are the statistics with regard to the Canadian
company and the insurance that they have on the LTD?
Mr. Zinatelli: I do not have the numbers with me, but I would be happy
to provide the committee with numbers that might be available on that. We
generally have the numbers on the insured plans. It is much tougher, and there
is not that much information on the uninsured plans because they are not part of
Senator Ringuette: You do not know what is the possible market?
Mr. Zinatelli: We have some general numbers, guesstimates, if you
Senator Ringuette: Give us a guesstimate in the meantime.
Mr. Zinatelli: I will look for one that is in some —
The Chair: Will you provide that information to the clerk? She will
see it is circulated to the members.
Mr. Zinatelli: I would be happy to do that.
I want to come back to what you were just discussing, but I also should note
that I have three copies of our policy paper here which might be helpful. I
think it has some of the numbers in there, which perhaps we can look at
afterwards with the clerk.
I wanted to get back to the previous discussion that you were having with Ms.
Urquhart. I looked at the provision of the act because for a minute I was not
sure, but what I understand the legislation to say is, effectively, if you
provide long-term disability, then it has to be insured — if you provide it.
You do not want to discourage employers from doing something positive that
they would want to do, that they want to collaborate with their employees in
doing. I think it is important not to put in disincentives on an employer doing
the right thing along with their employees. Raising penalties and trying to
punish employers who are coming to the table in good faith might be negative in
Senator Ringuette: You also understand that having a group of
employees, like in the example of Nortel, that were always under the impression
that their LTD plan was covered because, never mind a bankruptcy situation, it
did not interfere either way in regard to their disability status. It was quite
a shock, the reality of the bankruptcy and the major loss of benefits that they
Mr. Zinatelli: As in many things, senator, it is a question of
creating the right balance.
Senator Ringuette: I think this is at least a little step in creating
a balance. Thank you.
The Chair: That concludes our questions. On behalf of the entire
committee I would like to express to Mr. Zinatelli and Ms. Urquhart our grateful
thanks for appearing before us today. You have been very helpful in our