THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
OTTAWA, Thursday, September 28, 2017
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:31 a.m. to continue its study on the present state of the domestic and international financial system.
Senator David Tkachuk (Chair) in the chair.
The Chair: Good morning and welcome, colleagues, invited guests and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or on the web. My name is David Tkachuk, and I am chair of the committee.
On June 30, the Office of the Superintendent of Financial Institutions, OSFI, issued an advisory in response to observations that there has been an increase in the use of the words “bank,” “banker” and “banking” by financial service providers that are not banks. OSFI states in the cover note to the advisory that the restrictions in the Bank Act on the use of these words apply to all non-bank financial service providers, including both federally regulated trust-and-loan companies and provincially regulated institutions. They also apply to unregulated financial service providers.
I want to welcome a number of organizations to help us examine the topic of credit unions and use of the words “bank,” “banker” and “banking” by financial service providers that are not banks. I am pleased to welcome, from the Canadian Credit Union Association, Athana Mentzelopoulos, Vice President, Government Relations; and Marc-André Pigeon, Assistant Vice President, Financial Sector Policy. With us also is Bernard Brun, Director of Government Relations with Desjardins. Thank you for being here today and coming on such short notice.
Please provide your opening remarks, starting with the Canadian Credit Union Association. After those, we will go to a question and answer session. Please go ahead.
Athana Mentzelopoulos, Vice President, Government Relations, Canadian Credit Union Association: Mr. Chair and committee members, thank you for the invitation to speak with you today. You’ve introduced me, and I will just add to that by saying I have been in this job not quite three weeks. When we appeared earlier this week before the House committee, Marc-André was sitting to my left, so I called him my wingman, but today he’ll be my right-hand man.
Our association represents 275 credit unions and caisses populaires outside of Quebec. Our members are full-service financial institutions, serving over 5.6 million Canadians. Credit unions contribute $6.5 billion to the country’s GDP and help create over 58,000 direct and indirect jobs.
Credit unions are cooperatives; the people who bank with us are the people who own us. One practical result of this model is an emphasis on customer service. In repeated surveys of Canadians, Ipsos-Reid has found that respondents ranked credit unions ahead of federally chartered banks for customer service excellence. That has been the case for 13 years in a row. Similarly, in its survey of small-business owners, the Canadian Federation of Independent Businesses has found that credit unions are ranked far ahead of the banks when it comes to serving small- and medium-sized enterprises.
As the chair has suggested, I’m here to talk about the use of banking terms by credit unions, and we’re appreciative of your interest in this matter.
Before I begin, I want to make a few observations about the prudential soundness of credit unions. Provincial credit unions are incorporated, regulated and insured at the provincial level. Regulatory authorities at the provincial level set prudential standards and conduct reviews that are appropriate to cooperatively owned, deposit-taking institutions, with little exposure to international or foreign exchange markets. Through good times and bad, credit unions outperform other institutions in making high-quality loans. In fact, credit union losses have averaged less than half a per cent of total loans over the past two decades, compared to over double that for our competitors. For this, we credit the knowledge of those we are lending to, as well as the lending officers with on-the-ground knowledge of local conditions.
In addition, credit unions are naturally conservative with members’ money. This comes from having the same people who use our services sitting around the credit union boardroom table. This same care for our members and their money has resulted in leverage ratios that are consistently lower than banks over the past 20 years. Furthermore, credit unions generally hold onto more capital than banks do because they cannot easily raise capital by issuing shares in the public market.
Provincial deposit insurance provides credit union members with protections equal to or greater than those available to bank depositors. In addition, credit unions take extra steps to make sure that every dollar is protected: Eight to 10 per cent of deposits are held by credit union centrals, and for extra security, many credit unions also hold lines of credit with other financial institutions.
I’ve shared this with you because implicit in the argument some are making about the use of banking terms is what we think is a misconception about the regulation of provincial entities. While there is no question the approach of relating credit unions is different than banks, the results of these approaches are equivalent in that they help ensure the protection of depositors.
Canada’s banks can be proud of having weathered the 2008 financial crisis without incident. So, too, can Canada’s credit unions. No credit union member lost money during the financial crisis, and there were no credit union failures.
In our view, regulation should follow risk in equal proportion. In other words, the approach taken to protecting depositors of a local, cooperatively owned financial institution using a traditional banking model to provide loans in the real economy should necessarily be different from the prudential approach to a large, shareholder-owned internationally exposed bank whose books are built by moving complex and potentially high-risk financial instruments. From this perspective, different regulatory approaches are evidence of a sensible response to the risks involved in two very different models of banking.
As the only domestic competitors to the federally chartered banks, credit unions have for decades used the verb “bank” and the term “banking” to describe what we do and to help Canadians identify the other regulated financial service options available to them.
Subsection 983(2) of the Bank Act places limits on the use of the terms “bank,” “banking” and “banker” by non-bank entities like credit unions. However, as members of this committee know, there is more to any law than just its text. Parliament’s intent in this section of the act is to prevent consumers from being misled into thinking they are dealing with a bank when they are not. OSFI has recognized and cited this intent. In a 2004 ruling, the regulator said:
. . . the basic objective of section 983 of the Bank Act is to protect the public from incorrectly assuming they are dealing with a Canadian bank . . .
Credit unions respect the intent of the act and have worked hard to operate within it. They have used the verb “bank” and the term “banking” for years without incidents because we have used the terms the same way Canadians do: to describe the kinds of transactions they do at a regulated financial institution.
In June of this year, OSFI issued an advisory, to which the chair has referred, ordering credit unions and other non-banks to cease use of these terms. This was unusual for two reasons. First, the advisory put aside many decades of OSFI’s own common-sense enforcement of section 983 of the Bank Act. Second, it put aside Parliament’s intent in that section to prevent consumers from being deliberately misled.
Credit unions don’t want to be confused with banks, but we do want to be able to continue using the same common terms that Canadians are using.
Credit unions outside Quebec are independent financial institutions. As such, they generally use their advertising, websites and slogans unique to those entities and appropriate to their own markets and membership.
While credit unions carefully observe the act’s restriction on the noun “bank” in trade names, use of the verb “bank” and the gerund “banking” is not unusual to see. A ban on the use of these terms would cost credit unions an estimated $80 million in changes to their signage, website and advertising. It would also put credit unions in the unimaginable position of having to popularize phrases to replace words like “online banking” or “bank” with a credit union.
CCUA welcomes the decision by Finance to roll this question into their public consultations for the financial institution’s framework review that is now underway. We also appreciate OSFI’s decision to suspend their compliance advisory until their review and public consultation has been concluded.
We recognize that concerns exist with the emergence and growth of the fintech sector in Canada and the desire of some of those entities to use these banking terms. But credit unions and caisses populaires are regulated deposit-taking financial institutions with over 100 years of history as the only domestic competitors to the banks. We are in a category of our own.
For these reasons, credit unions have urged the minister to amend the Bank Act to make it clear that credit unions may use these terms in the same way that Canadians are using them.
I want to acknowledge the support of many of you around the table on this issue. We are asking this committee to urge the Minister of Finance to amend the Bank Act and make it clear that credit unions can continue to use the verb “bank” and the term “banking” to describe their services.
Thank you. I look forward to your questions.
Bernard Brun, Director, Government Relations, Desjardins Group: Mr. Chair and honourable senators, on behalf of the Desjardins Group, I would like to thank you for inviting me to appear before you today.
Thank you so much for inviting me here today. It is always a pleasure to be in your company.
I am pleased to be here today with you and with the Canadian Credit Union Association, with whom we have had a very positive and close relationship for many years. We work together very positively and frequently on diverse issues and major files common to both our organizations. So it is a pleasure for me to be with you to discuss a topic as important as the use of the word “banking” for credit unions.
As I mentioned earlier, my name is Bernard Brun, and I am the Director of Government Relations for the Desjardins Group.
Although my remarks will be mostly in French today, I will be happy to answer your questions in both languages.
First of all, please allow me to briefly introduce the Desjardins Group. Our presence, particularly in the Ottawa region, dates back to the very beginnings of the Desjardins Group, when it was established 117 years ago. It was here, in Ottawa, across the street in the House of Commons, where Alphonse Desjardins was an official stenographer for over 25 years, that the idea came to him to create a financial cooperative movement, following a debate in the House of Commons on loan-sharking.
At the time, only the wealthy had access to banking services. He wanted to find a model that would meet the needs of people with small savings. So he did some initial research on the topic at the Library of Parliament. Today, the Desjardins Group is the largest cooperative financial group in Canada, and sixth in the world, with assets of $270 billion. I should also mention that it is also the largest Canadian financial institution to be wholly Canadian-owned. We have some 1,100 offices and service centres in Quebec and Ontario, and our virtual platforms and branches across Canada provide services to over seven million members and clients. It should be noted that a third of our service points are located in sparsely populated areas.
From wealth management to insurance to business services, our approximately 48,000 employees and 5,000 elected officers are dedicated to serving and meeting the diverse needs of our members and the Canadian public.
The Desjardins Group has also made a name for itself through its involvement here in Canada, and internationally, where we are active in some twenty countries thanks to Développement international Desjardins. Here, closer to home, we are actively involved in communities through donations, sponsorships and, most importantly, our involvement in the milieu.
More specifically, with regard to the issue being studied, I am very happy that your banking, trade and commerce committee is looking into the use of the word “banking” by credit unions, a matter that is at the heart of Canada’s financial activities. This issue deserves an in-depth study, and one that credit unions must be consulted on. Above all, their opinions must be considered.
First of all, it is important to recall that the adjective “banking” and its variants have been used for decades to describe the financial services offered by federal deposit-taking institutions, as well as by deposit-taking institutions not regulated by the federal government, including credit unions, savings cooperatives and provincially chartered trust companies. So we can talk about a real situation, specifically an inclusive interpretation by the federal regulator.
However, the Office of the Superintendent of Financial Institutions recently ruled on the matter, as you mentioned, and at the end of June 2017, issued a very restrictive notice on the use of the words “bank,” “banker” and “banking,” a notice that prohibits the use of these words to describe services. It includes brands, trade names, divisions, business units, titles, advertising and descriptives in any kind of media.
Obviously, this news came as a surprise and was a great disappointment to credit unions, including the Desjardins Group. Let’s be clear: we all know that the financial sector is constantly changing, and that it can, and sometimes even must, be required to clarify certain rules. In this case, we were very surprised by the contents of the notice communicated, without prior consultation, to prohibit the use of the appropriate description of “banking services”, an expression that is part of everyday vocabulary, not only for our members, but for all Canadians.
We think this issue requires in-depth reflection and consultation with industry stakeholders. We have been in touch with the federal government on this issue, which is why we were pleased with the August 2017 announcement that the federal regulator was suspending its notice following a consultation with the Department of Finance on the use of the word “banking.” Desjardins Group is pleased to participate in this consultation, the deadline for which is tomorrow, as well as to have a discussion with the committee on this particular issue.
As for the Desjardins Group, we think that depository institutions monitored and regulated by a Canadian authority — federal or provincial — should be able to use the word “banking” to describe their activities and services. It is an appropriate and recognized descriptor that adequately reflects some of our day-to-day activities, and this expression has been used in everyday vocabulary for decades.
Our approximately seven million members and clients understand and frequently use this expression. They know that when they use the adjective “banking” they are referring to operations and services sometimes provided by their credit union. They know that the Desjardins Group is not a bank, but a financial cooperative that provides banking type services in branches and online to meet their various needs.
However, we think that preventing the use of the word “banking” would create not only confusion but also a lack of understanding by the public. This change would also have the adverse effect of generating additional costs, undue costs, for provincial institutions, which would help to keep the government from its objectives of stability and competition.
Therefore, with a view to rigour and clarification, Desjardins Group believes it is appropriate to update the legislation to allow the use of these words as descriptions of services provided by institutions under prudential oversight in Canada, such as credit unions or savings cooperatives.
In closing, I would like to thank you again, Mr. Chair, for inviting us to appear before you today to address this issue, and I would like to reiterate the position of the Desjardins Group. As I have just mentioned, we think it is justified to allow financial institutions under prudential oversight — it is important to point out that these are institutions that are supervised by a government authority in Canada and are deposit-taking institutions — to use the word “banking” to describe their activities. We hope that the Minister of Finance and the government will move forward with this decision, this position that has unanimous support among credit unions.
I will be pleased to answer your questions. Do not hesitate to contact us for any additional information. Thank you.
The Chair: Thank you very much.
Senator Wallin: To all of you, a question about what you think is actually going on here. When you talk about the common sense issue, we all agree we know what the word “banking” means or to “bank on” or “do online banking.”
These changes were proposed, the actions were taken in June, and then very quickly in August they went right back and said, “We’re going to study it.” Is it your sense that they have figured this out and they’re trying to find a way to backtrack, or are you really fearful that this is going to go ahead?
Ms. Mentzelopoulos: We remain concerned that it will go ahead. Governments struggle with risk questions all the time, and you see it from time to time. As a very young staffer in a minister’s office in the 1990s, I remember dealing with an issue where government wanted to ban raw-milk cheese, and it was because there had been one incident of somebody getting ill. Those things tend to create exposure that governments grapple with. In terms of what is happening now, it’s my sincere hope that they’re looking for a way to strike a balanced approach, but we are very concerned we will still end up with something that’s too restrictive in terms of what our members need.
Mr. Brun: I have something I would like to add. There is always a fear that the government will move forward with a very rigid position. That is why we mentioned it in our opening remarks; it is an issue. The financial system is changing. There are all kinds of new players entering the financial sector, and it is entirely appropriate, even justified and wise, for the government to put it in order, to see where the chain of financial operations is located and to provide a more flexible framework for banking and banking services.
I am not in the government’s mind. Is it simply collateral damage where, in wanting to cover a little too much, we have included financial cooperatives and the Desjardins Group in this approach? That is why we are insisting that a regulated standard be created with regulated financial institutions in Canada, as opposed to unregulated and unsupervised businesses that may represent levels of risk. The government, in perhaps moving forward too quickly, has taken too broad an aim. Simply reducing the scope of operations to something more reasonable and more focused will enable it to achieve its objectives.
Senator Wallin: Has anybody come up with any other words?
Ms. Mentzelopoulos: Well, no. If the policy intent, as stated, is to avoid consumer confusion, you actually have a greater risk of creating consumer confusion by inventing a new language. These are words people use. They use them in all kinds of sectors. They’re well understood. They probably apply most heartily to credit unions given that is real economy, and describing them in other ways will not be meaningful.
Marc-André Pigeon, Assistant Vice President, Financial Sector Policy, Canadian Credit Union Association: Even if we were able to come up with some alternative, the act anticipates that and says that if there are equivalent terms, those too become subject to the restriction. I think we’re caught between a rock and a hard place. First of all, the words don’t exist, and even if we’re able to work really hard to get something out there, we could get subsumed under this restriction anyway.
Senator Wallin: Very interesting. Thank you.
Senator Massicotte: Thank you for being here today. This whole tempest in a teacup is typical. These are words, and word usage changes. People do not really make a difference between a bank, a credit union and a savings cooperative. You would think that there is an easy, reasonable and practical solution.
Mr. Brun, in your presentation, you gave a very specific interpretation of the words. Have you heard from the regulator as to whether or not it will accept the argument?
Mr. Brun: No, we have not have any response or indication from the regulator that one word is acceptable or not.
The question of whether there is another approach or another description, it is clear that we are talking about financial services. We are sometimes told that we should describe them as financial services. In financial institutions that see themselves as quite diversified, such as the Desjardins Group, where we have wealth management services, life and property and casualty insurance, if we are told that, at Ontario Desjardins Financial Services, we cannot use the same language, people will get the impression that they have a wealth management advisor, not someone in their institution who will give them a transaction account, a kind of bank account.
We have presented some expressions, but we are still waiting for the regulator’s reaction.
Senator Massicotte: Do you think that these are reasonable people who are listening? Or are they people who love power and hide behind bureaucracy to demand changes from you?
Mr. Brun: At first it seemed more closed, but now the discussion is ongoing. There is steady progress from the government, from stakeholders in the sector, and that is what we are pinning our hopes on. The work of your committee that is looking into this may get to a reasonable point that allows the term to be accepted.
Senator Tannas: Thank you for being here. Just to Senator Wallin’s question about how this came about, do you think it’s maybe a coincidence this happened at the same time as the first federally regulated credit unions were approved? It seems to me that that’s the differentiator — right? — is provincially regulated institutions and federally regulated institutions. I just happened to look up a federally regulated trust company that has “banking” all over its site, and I don’t know that they’re taking aim at those institutions. We haven’t heard from them.
Second, one of the things that we’ve seen in the last while, although I have to say maybe it’s tailing off a bit, has been credit unions that didn’t want to admit they were credit unions. Vancity Savings goes a long way to not talk about the fact they’re a credit union to try to widen their market. Coast Capital Savings also comes to mind. They don’t make it obvious — it is not in their signage — that they’re an actual credit union.
If we’re going to go down this road — and I totally agree we have to — what would you call online banking if it wasn’t online banking? I don’t know how you would describe it. The horse is already out of the barn. Does it make sense to put an onus on institutions that aren’t banks to say they aren’t banks, to not come up with middle kind of descriptions that hide the fact that they’re a credit union?
Ms. Mentzelopoulos: I’m going to start on this, but I think Marc-André, and no doubt Bernard as well, will comment. I am going to turn your question a little because the fact that the federal government provided space for continuance of credit unions into being federally regulated actually helps us in our argument about the use of “bank” and “banking.” I think they contemplate and see that that is what these institutions are doing. That is the way that they describe their activities.
In terms of the awareness of the institution that you are dealing with, first, we are not proposing that the word “bank” be used in a corporate name, and it is not now. We wouldn’t propose or anticipate any change there. However, if you think about the process of membership for a credit union, we have looked closely at the touch points. It would be difficult to join a credit union, to purchase a membership, without knowing what you are doing. From the very first time that you walk in the door, you have to pay for a membership and you sit down and have an understanding from a representative of the credit union about what that means. There is the use of the full legal names in legal contracts, notices about annual meetings and calls for volunteer board of directors. There is a long list. It is not only that you learn about it upfront but you are reminded of it for however long you retain that membership.
Senator Tannas: In your view, nobody could say, “I thought I was dealing with something different”?
Mr. Pigeon: It is important to walk yourself through the scenario. If you go into a bank and open an account, they don’t ask for 10 bucks to buy a membership share. If you go to a credit union, they ask you for $10, $20, $50, and you are wondering what this is all about. The conversation immediately follows, “You are a member of this credit union. You get to vote for the board and put your name forward for the board.” It is a completely different conversation that will stick in someone’s mind. I have talked to people who say, “Why do I have to pay $10 to be a member of the credit union?” That jumps out at people. I think people may not appreciate how significant that is for people’s awareness, but it is a big part of it.
To go back to your earlier question about the federal credit union, Athana made a really important point. The federal credit union framework is predicated on the basis that credit unions already provide banking services. It has to assume that we are doing the same thing. So there is no debate that credit unions provide the functions of banks.
It is interesting that this conversation is happening at an important moment in policy around function-based regulation versus entity-based regulation. The government is pivoting to function-based regulation and yet in this issue insisting on entity-based regulation. There is a bit of incoherence that is worth exploring. I bring your attention to that. It is an interesting policy conversation that is worth coming back to.
Mr. Brun: To add to that, I agree with Athana and Marc-André’s comments.
Regarding the use of the word “bank,” we are not a bank and we pride ourselves in not being a bank. That is why we put the emphasis on the description of the service. Up to a certain point, you have to admit that you provide similar services.
In 2010, for example, Desjardins was awarded the world’s safest bank, the bank of the year by Bloomberg magazine and the strongest bank. Even if we called Bloomberg or anyone else, they won’t change the title of this prize. It is because you are providing banking services. For us it is clear: We are not using “bank” or presenting ourselves as a “bank.” We are just describing the services we are providing in a very different way, but providing, yes, similar services.
Senator Moncion: Thank you for your comments. Coming from your sector, I understand the issues very well.
I want to go back to Senator Wallin’s question of why it is important to look at the banks’ objectives now. For example, we know that the words “caisse populaire” and “credit union” are protected in provincial legislation. A small institution on the corner could not open its doors and call itself a “caisse populaire” or “credit union.”
Over the years, some financial cooperatives have moved away from the words “credit union” and “caisse populaire” because they had a more local connotation, whereas they wanted to broaden their activities across the province.
Today, credit unions are financial institutions that provide banking services. When they are located in major cities, they are in direct competition with the banks. When they are in small communities, quite often the banks are not there.
The same kinds of services are provided by businesses that bear different names. I will come back to my main question, and I have gone all the way around the topic to say this: why, when credit unions have been around for 117 years, is it suddenly necessary to prohibit them from using the word “banking”? I understand that you cannot, in your name, use the title “Such-and-such credit union bank.” Why now limit the use of these words? What do banks want by this?
Mr. Brun: The question is very broad, and so is the approach. To address this issue, it should be kept in mind that the financial system has evolved greatly in 100 years and is completely interconnected. So there is an overlap. While some aspects may be federal or provincial, when the government is looking at the issue of financial stability, it must do so in a comprehensive manner. That is why, when the Desjardins Group communicates with the department, it is to encourage the department to talk with its provincial counterparts and to try to harmonize the standards because the services are similar.
Coming back to Senator Tannas’ comments, there is currently some concern from the Department of Finance Canada when it comes to defining the scope of business. The idea may be legitimate, but it has to be done from the institutions’ point of view, talking about the word “bank” and not the operations. The description of the services is not exclusive. Services can be provided in urban centres and communities across the country. So the name must not cause confusion for the public.
Mr. Pigeon: I think Bernard explained it very well, but I would like to add one point. A fintech aspect comes into play here. We see there is some concern about unregulated entities, and we need to know how to identify them.
Our argument is perfectly in line with what Mr. Brun said earlier, which is to focus on the regulated aspect, in terms of whether we are regulated, whether we have deposit insurance, and whatnot. In our view, that’s really the line that must be drawn to describe what we do, what Desjardins does and what the banks do, compared to what the others are doing. If the others ever become subject to the regulations, everything will be fine, and that’s how things should work.
Senator Moncion: That goes back to what you said before: “function-based regulation versus entity-based regulation.”
Mr. Pigeon: There is always a gray area with that, so you do not have to debrand completely. As Mr. Brun pointed out, to describe our services, of course, we should be able to use those words. However, that’s not the case for our name or brand. We believe that this is a line that we should respect and have respected in the past.
The Chair: Maybe I should be asking the other group that is coming next week, but we have the Farm Credit Corporation, the Business Development Bank, the Infrastructure Bank, and they all call themselves “bank” and none of them provide any banking services at all. That is sort of odd. Is it because they can use the word because the legislation says they can use the word? Why do they get to use the word?
Ms. Mentzelopoulos: I think we have gone to the point of underlining in our own engagement with the department that there does seem to be a contradiction there. Marc-André?
Mr. Pigeon: Yes, that is a good way to put it. I would have to take a closer look at the section again, but there might be some exemption for Crown corporations or something to that effect. I am not sure about that.
As Asthana has pointed out, we have illustrated in a number of instances the federal government’s own use of the terms to describe what credit unions do, for example. There are statutes like the Winding-Up and Restructuring Act; there are at least two other statutes that define credit unions as banks for legislative drafting purposes. So the government, even in its own legislative frameworks, puts us into that bucket for drafting reasons. The solution to this will never be absolutely clear, but from our perspective the focus should be on ensuring that credit unions and Desjardins can use these terms to describe our services.
The Chair: People are smart; they’re not lining up at the Farm Credit Corporation willing to deposit money or go to online banking or any of that stuff.
Mr. Pigeon: Right.
Senator Enverga: I know that credit unions are basically regulated by the provincial governments. Do you foresee any conflict there, anything that would say the provincial governments will say that the federal government shouldn’t be doing this?
Ms. Mentzelopoulos: I would have to confirm. Marc-André, maybe you can.
I think some provincial governments have weighed in to say that it’s a reasonable approach to allow credit unions to use these terms. I’m not sure we would see more than them expressing their opinion. It has been very favourable to the position of the credit unions, to the extent that provinces have taken that opportunity.
Senator Enverga: So the provinces more or less agree with these regulations?
Ms. Mentzelopoulos: Yes. I can’t speak for every one of them, but the ones that have made an intervention have been favourable.
Senator Enverga: I was thinking more of the Province of Quebec. Has there been any push-back on this?
Mr. Brun: As Athana mentioned, I won’t speak for the Quebec government or the provincial regulator, but my feeling is that when it is a generic term, neither the federal government, nor any province, nor anyone else, should appropriate a general term in terms of description. But when it turns back to entity and who is regulated by what, yes, there needs to be a clear distinction. That is why we mentioned that banks are federal, and Desjardins will never describe itself as a bank. But in terms of service, it is going a little too far to prohibit the Mouvement des caisses Desjardins from saying it is providing banking services.
We have new Canadians coming into the country and a financial cooperative, a local, especially in Quebec, where Desjardins is everywhere in the community, and especially in low-density areas. We open for them what they call a bank account because they ask for a bank account. We cannot tell these people, “Yes, you can open it, but here it is not a bank account. It will be a financial cooperative savings account, or something.” No. You have to provide a clear description. However, as Marc-André stated, when they open an account, they clearly know that it is not a bank; it is a financial cooperative. It is part of our job to make that clear.
Mr. Pigeon: I’d like to add a bit. Desjardins does this very well. A lot of the credit unions pay patronage returns as well. That is an annual reminder that you are a member, because the volume of that patronage payment is keyed off the volume of your business with the credit union. To my knowledge, banks don’t do anything like that. They don’t call it “patronage,” that’s for certain. As Athana said, there are many touch points that remind us of who you are dealing with.
Senator Enverga: What would be the cost for our credit unions by changing this? Can you tell us what costs would be associated with this?
Ms. Mentzelopoulos: Our members have indicated the cost would be about $80 million to change their signage, websites and various materials.
Mr. Pigeon: We were very conservative in that estimate. Since the advisory landed and our members became even more seized with the issue, they started finding increasing complexity if they were trying to imagine coming into alignment with that June 30 advisory. The work is phenomenal. We are talking about months and months of man-hour work and a huge cost. We are pretty confident that $80 million is actually quite conservative.
Just imagine: We have to go through every single web page and pull the words out. It is not just a search and replace; you have to change the word. The context is there. It’s a huge effort. If you are sitting in Ottawa, you think: I can just do a search and replace and it is done. It is not that simple. It is a massive effort to pull these words out of your lexicon and to educate Canadians about different words that are difficult to imagine.
Senator Enverga: How about the business cost? Do you feel you will lose clients with this?
Mr. Brun: I don’t have a specific number in terms of the cost, but I would say it is almost impossible for a group like Desjardins. For example, in the capital market sector, we have investment bankers and corporate banking. We have different teams like that. They can’t call themselves anything else. There is no alternative to that. So that is a major part. When we talk about online solution websites, it is hard to find alternatives to any of those terms.
Mr. Pigeon: It is important to understand that there are competition elements to this. I think we get focused on the culture and whatnot and we lose sight of the fact that there’s a real competition story here that needs to be balanced against this concern they have about confusing the public. There is the cost that will impinge on our ability to offer the services we offer, but then there is the ability to communicate to Canadians.
Let’s say you are googling: I am at XYZ bank and I am dissatisfied; I want to find an alternative. Maybe I type “online banking” or “banking options” into Google. If your credit union has been told you can’t use those terms, you will not come up in that search engine, so you will be way down the list of potential alternatives. This has a huge impact on competition.
As Athana mentioned in her opening remarks, we and Desjardins are the single biggest lenders to small businesses in the country. There is a competitive economic cost to getting us out of the game by taking language away from us. I think that is something that needs to be foregrounded and maybe hasn’t been given enough attention.
Senator Enverga: Could it cause the closing of certain cooperative unions?
Mr. Pigeon: I can’t speak to that. I don’t know for sure.
Senator Day: I have a couple of points of clarification that I think would help clear the record.
First, Ms. Mentzelopoulos, in your organization, are there only provincial caisses populaires and credit unions, or are there caisses populaires and credit unions that have continued federally in your organization as well?
Ms. Mentzelopoulos: It is primarily provincially regulated. I believe UNI is the one federally regulated, and there is a credit union in British Columbia that is in the process of doing that continuance.
Senator Day: When it becomes a federally regulated entity, it could still be a member of your organization?
Ms. Mentzelopoulos: Yes.
Senator Day: From the point of view of protection of the public, could you describe the difference in terms of a deposit insurance between you and the bank?
Ms. Mentzelopoulos: I want to add to my last answer. Marc-André reminds me that UNI, the one federally regulated, and the other one that is in the continuance, both support our position here today about the use of the terms.
In terms of deposit insurance, I believe it is true to say that the deposit insurance for credit unions is as good or better in every jurisdiction across the country.
Mr. Pigeon: That is right.
Senator Day: So it is tough to make the argument that the public could be hurt and injured by going to an entity they think is a bank but is a credit union?
Ms. Mentzelopoulos: There are some jurisdictions that offer 100 per cent deposit insurance for credit unions.
Senator Day: Good. It is helpful to have that on the record.
My next line of questioning you have already answered a good number of times, namely, the distinction between the term used in the descriptive sense to describe the activity and the term “bank” being used as part of the name of an entity.
At one time, the Bank Act divided the prohibition into those two things, and they were both prohibited. Now the wording that is there is kind of confusing. Would you be happy to accept no use of the word “bank” in an entity other than a federally incorporated bank and not a credit union as a reasonable prohibition?
Ms. Mentzelopoulos: Yes. We are not asking to be able to use the word “bank” in a corporate name.
Senator Day: And the other prohibition you would like to see removed is the descriptive term.
Ms. Mentzelopoulos: Yes. We think it’s anachronistic.
Senator Day: It sounds like a classic trademark case when you think about it in terms of losing the right to a trademark if it becomes generic, like Xerox or Aspirin. You can think of a lot of them, and “banking” is a generic term.
Mr. Pigeon: It’s instructive to know that, in the United States, federal credit unions, who are regulated differently than federal banks, have unmitigated access to use the terms to describe their services.The international guidance from the Bank for International Settlements is clear. It is on the name only, not the descriptive piece. Again, the international guidance is in support of our position. There are some good external cases that are similar to ours that are supportive of our position. The act itself was written with that in mind back in 1880 when it was the Banking Act, and the intention was always to avoid misleading people into going to places that are unregulated, and we are regulated deposit-taking entities.
Senator Wallin: We think you should take back the use of the word “credit” and see how that affects the banks.
Senator Wetston: I was interested in the questions Senator Day was asking because I wrote a note to myself and perhaps you could elaborate on it. It seems to me the term “banking” is like “Xeroxing.” It has become generic. I don’t believe it could obtain trademark protection today, speaking as an intellectual property lawyer on my right.
I want to take that a step further because I have heard your comment on that. If this policy is being considered by the federal government, I would think it might fall into two categories and not an underlying issue of competitive motives of one sort or another between institutions. The policy agenda might be the safety and soundness of the financial system, and somehow or another this affects that. Of course, OSFI would be preoccupied with that on all occasions. I don’t know how this would affect that, so I don’t have information on that. The second part would be consumer protection. There might be other policy agendas but those ring loudly for me.
Do you have any indications of the impact the use of this term would have on safety and soundness and/or consumer protection issues? We haven’t heard from OSFI. Then I would add a footnote to that, which would engage the Financial Consumer Agency of Canada, or FCAC, and whether there have been any complaints or issues of any sort you have had to address as a result of the consumer protection issues.
To become a Schedule I bank in Canada is a complex regulatory process. You need to meet a huge number of requirements because they are complex multiple-business institutions, whereas I suspect the requirements to become credit unions would also be quite complex but not as extensive as a Schedule I bank. That is a comment I would make but I don’t know.
In the context of my questions, could you try to elaborate a bit on that? I will have a quick second question after this.
Ms. Mentzelopoulos: I am confident my colleagues will want to add to this but, on the issue of safety and soundness, it is true there is a high bar for the federally regulated banks. But it is fair to say there is a high bar for the credit unions too if you look at it from the point of view of calibrating the regulation to the size and scope of the organization.
In that respect, that is why I took time in my speaking notes to reinforce that there is a rigorous regulatory agenda in place for credit unions, and that needs to be acknowledged in this context and in others. It allows for a diverse financial sector in British Columbia, which is important. It is important if there is a shock, for competitive purposes and for innovation. It is important on almost every level.
From the point of view of consumer protection, I am not sure if this answers your question, but for us it is fundamentally whether you can reasonably say people know whether they are dealing with a bank or a credit union. When you contemplate the process for purchasing a membership with a credit union, it is difficult to believe a reasonable person would come out at the other end of that and not know what they have done.
Mr. Pigeon: You were asking about evidence, and the only evidence we have seen is supportive of what we are saying, and it is the objective evidence.
There are two big surveys that are done annually of members and customers. One is by Ipsos-Reid, which does this best banking survey every year, and to respond to that survey, you have to check which institution you are doing business with. For the credit union sector, they list 10 of the biggest credit unions, and then they have an “other” category. Immediately, if you bank with Vancity, which is the biggest, you will see the name and check it right away, but if you bank with any other credit union, you have to have the awareness that you’re with a credit union.
CFIB, the Canadian Federation of Independent Business, does a tri-annual survey of its members, and they just have a credit union box. In both surveys they have others, so if you are confused, you could check “other.”
Both surveys get a strong response rate of tens of thousands of people who know they are banking with a credit union. This is objective evidence and it is pretty robust.
Mr. Brun: A word on safety and soundness: As for the Mouvement des caisses Desjardins, they generally abide by exactly the same standard as the banks. It might be a little different, however, when you look at the system. It goes back to the fact that the federal and provincial governments have to work together on this. When you are talking about safety and soundness, since the financial sector is so intertwined in every aspect, you need the federal and provincial governments working closely as possible. If it is not exactly the same standard, then you are raising it.
In terms of consumer protection, having access to banking services through a credit union essentially goes back to the question of whether you know who you are dealing with, and that has been addressed many times. For us, it is very clear. People know when they are dealing with a bank or a financial cooperative.
Senator Wetston: We were provided with what I think is an opinion here. Who provided it and where did it come from? I think this is Professor Nicholls who writes a lot in corporate finance and other areas and is highly regarded, but I am not sure what the basis for this opinion is.
Mr. Pigeon: I thought the committee might find this of interest. It is not an opinion. It is a historical discussion of the act and how it has evolved over time. We shared it with the group primarily to emphasize the intention of the section, which was to avoid confusion in the context of deliberate attempts to mislead Canadians.
I think you’ll see through this document that he quotes well-recognized thought leaders in this area, like Bradley Crawford, who think this is an anachronistic restriction, for example, and Margaret Meade feels the same way. These are probably the pre-eminent thinkers in this space, and they all find this section deeply problematic.
Senator Wetston: I have read a lot of Professor Nicholls’ work because I have spent time in this sector. Could you ask him to clarify one thing for me and for the committee? I really don’t understand the last sentence of his conclusion. If he could clarify that, I would be most appreciative as a historical document. I hope he is not insulted by that comment.
Senator Unger: Thank you for your presentations. They were very interesting.
Going back to when OSFI issued its June 30 advisory, it said that it had observed increased use of the words “bank,” “banker” and “banking” by non-bank financial service providers. Can you confirm whether your institutions had in fact been using those words more frequently or not? Do you know if OSFI had any concrete evidence of this increased usage that might have led to their concern regarding safety and soundness?
Mr. Pigeon: I can’t speak to how frequent the use of the terms are in our system. We don’t have a centralized model where we can monitor and count these things, so I can’t speak to that within our system, but I would remind you when they’re speaking of non-banks, it is larger than just credit unions. It includes fintech companies. I will say that some fintech companies, and I won’t name any names, have had full-page ads in major newspapers where they have used the terms. I think that has happened, and very objectively that happened for quite a while leading up to this. I can’t speak to what’s been going on in the credit union sector.
Ms. Mentzelopoulos: When you speak about those fintechs, you’re speaking about institutions that are not deposit-taking and not regulated.
Mr. Brun: I can assure you there was no increase of the use of the words “bank” or “banking” within Desjardins. I agree with Marc-André. We saw it with the increase of the hype in the fintech sector; it’s creative. Sometimes they won’t even use the same words, but they sound the same, like “banx” with an X or something different. That’s the kind of thing we’ve seen more frequently, but not in our financial institution.
Senator Unger: For the last point on clarification, have you actually heard about any customer being confused about the institution with which they were establishing a rapport?
Mr. Pigeon: Not personally, but I won’t discount the possibility. Canadians in general might have less than fully formed understandings of the relationships with banks. For example, CDIC has surveys on awareness about the Canada Deposit Insurance Corporation’s insurance, and it is under 50 per cent. That’s telling. How much can we assume about the individual? Is it a heroic individual who works at the Department of Finance and understands all of the policy nuances? Or is it an average individual in the sense that it is a reasonable person? How much understanding do we assume?
There are all of these touch points, and I think it’s clear there are many opportunities for a person, and even if they momentarily forget, they are reminded. They get a call to vote at the annual meeting. That doesn’t happen at a bank. They get requests to put their name forward at the annual meeting, and that doesn’t happen at a bank. Here are your candidates for the board; you should vote for one of them. Here’s your member newsletter — you’re a member and not a client — and here is your member statement, your legal document with the words “credit union.”
We’re going to schools and doing things on financial literacy for credit unions in a way that the banks don’t do, with grassroots-led education. No one does that like the credit unions do. There are so many ways we are different that will come out through your relationship. I think you would be hard-pressed to stay blind to that for too long, if it happens at all.
Senator Maltais: Thank you for your excellent submissions. Sometimes, we have to look back.
I am an insurance broker by profession, but I sat for a very long time in another Parliament, in Quebec, at the time when the Mouvement Desjardins was progressive by asking the government for deregulation so that it could sell financial products such as property and casualty insurance and life insurance. I was against it because I represented Desjardins at the time. That’s when you became the Desjardins financial group that included trusts. If the deposit insurance of Desjardins or other cooperatives had been less advantageous than that of the banks, you would have failed a long time ago. This has not been the case, because the regulations of the respective provinces are very strict.
In 1987, banks became financial groups as well. Remember, all banks added the word “group” to their name to be able to sell insurance, trusts, and financial products that they did not offer before.
Today, you can get your mortgage, home, life and auto insurance in any bank or caisse populaire. From the moment you become a financial group, the only difference between you and the banks is that, in order to vote at the general meeting, in banks, you have to own stock, which is very expensive, whereas in cooperatives, by becoming members, we sign up for a share, with the right to vote and with all the administrative rights. For clients, there is no change. At the international level, it will cost you money because you are dealing with international financial groups.
Why do banks say that you should no longer have the right to use the word “banking”?
Mr. Brun: The banks are not trying to intervene directly. It was more a relationship with the regulator in defining areas of expertise.
You bring an excellent point about the evolution of the Canadian financial sector. In this context, with diversification, it is a mistake to regulate or prohibit the use of a name when the same services are provided. Certainly, it is in the regulator’s interest to say that it will allow the use of an appropriate name if we are talking about banking insurance or investment services. However, at the same time, in terms of the names of entities, it is extremely important to say that, if an institution is designated as a “bank,” it must be regulated in the financial sector under the Bank Act. The distinction must be made at the level of the corporate name and the name of the entity, not at the level of the description. Otherwise, there will be a negative effect that may well create confusion for the public, because we will not have the same name for a type of activity that has the same features.
Senator Maltais: When banks call themselves “financial groups,” they provide the same range of services as you do for insurance. Why don’t they shift to surety insurance and performance bonds for entrepreneurs, while you can do it through security, with a company you bought? Why don’t banks do it? Is it because it is too risky to issue a performance bond certificate for a bid from a contractor?
Mr. Brun: I cannot comment on a particular operation. It is purely a business decision on their part, probably based on the risk and profit margin that must be attached to it.
Senator Maltais: Outside Quebec, across Canada, insurance companies issue performance bonds and guarantees. In the case of your financial group, Desjardins, an entrepreneur can go to the credit union, and the person taking care of their file will bring in the security specialist, which is a company that belongs to you, and you will issue the certificate.
In terms of the word “banking,” I do not know what shade of meaning the regulator attaches to it, but I want an explanation. There is a difference. You have services that bank financial groups do not offer. I do not see why the word “banking” should be removed from co-ops. Members know at the outset that they are in a cooperative because they sign their shares. What exactly does the regulator want to do? Is this simply the dream of public servants in a 22-storey tower or will it be more profitable for the banks, less profitable for you, more profitable for the clients who do business with a bank, and, finally, less profitable for the clients who do business with a caisse populaire? That won’t do at all.
The Chair: It’s complicated, Senator Maltais, because they’ve taken the word “banking,” which is a function, and turned it into a noun, which is a “bank,” which is an institution. But the actual function is banking, which I learned in Pompeii in 1990, and it comes from the Latin word bench, because they used to trade currencies at a bench a long time ago. That’s where the word comes from. It’s a function.
It’s like Google and Bing. I’m wondering if Bing could advertise to “google it on Bing.” It’s the name of a company which then became a verb, to google something. But you’re also googling it on Bing. I guess. I don’t use Google anymore. I use Bing because Google is too big, I think. It’s my own little protest movement against a monopoly. I’m a credit union kind of guy.
Senator Ringuette: In your presentations, you both indicated that you participated in the consultation stage. When you participated, did you propose appropriate changes to the legislation to reflect your needs? If so, could you provide us with a copy?
Mr. Brun: For us, for the Mouvement Desjardins, first of all, the consultation is not over; it will end tomorrow, on the 29. It is part of a more comprehensive consultation on this entire issue. In fact, we’re putting forward exactly the same views that we are presenting to you, but we do not recommend specific wording. We leave that to the regulator.
The section is already extremely complex. The Bank Act, as it stands, has approximately 28 exceptions, with multiple paragraphs. Basically, perhaps another provision needs to be added or provisions need to be consolidated, but we are really leaving that open for the regulator. We are passing on the message that there may be a prohibition that has no place and needs to be adjusted.
Senator Ringuette: Is it the same for the Credit Union Association?
Ms. Mentzelopoulos: For us, the consultation period ends tomorrow, so we will make our submission before the deadline. We do propose a change in our submission, although it’s a pretty light touch in the way that it’s described in the submission, unless there are significant changes before tomorrow.
It’s principle-based. We would look for clarifying language, perhaps a preamble. I don’t think we get to that level of specificity in the actual submission, but a preamble that opens up the usage of the language and allows for the reasonable person test in using the language. We think that’s a reasonable approach because the act itself refers to “reasonable” in at least 30 unique places.
We think that’s a good approach, and we think there can be language that is clear we’re not asking to use the word “bank” in a corporate name but otherwise fundamentally preserves the credit union’s ability to use the words “bank” and “banking.”
Senator Ringuette: Can you provide our clerk with a copy of the document you are going to submit in the consultation process? I listened to you carefully and I am starting to worry about the words being used. Sometimes, you said “regulated by a province,” while in other places, you say “under prudential supervision.” In my opinion, there is a major difference. It is important to remember that “regulated by a province” also includes the entire payday loan industry. That’s why I’m curious about the exact words you want to use.
Mr. Brun: Yes, it is quite legitimate. I’m pleased to see the wording to be submitted. It is important in this context. We are basically trying to get back on track. In my presentation, I was talking about an inclusive interpretation; that’s really what we want to come back to. That is why an interpretive text is important.
As for the second point, there are already many definitions in the Bank Act. Financial institutions are defined, and so are cooperative credit societies. So an existing text may be used fairly easily without placing an additional burden on the current text of the act. As you say, at that point, duplication or loose interpretation could be avoided.
Senator Ringuette: We would definitely not want to end up with payday loan services referring to themselves as banks or as banking services.
Mr. Pigeon: There are basically two key aspects. If you accept deposits and everything they entail, there is a prudential factor associated with that in addition to the other factors. We are quite clear in our discussions. Perhaps it was not as clear here, but in our consultations and conversations, we always highlight those two aspects.
Senator Moncion: Perhaps I could point out a little irony with the word “banking”: even banks no longer use it, because they now refer to themselves as RBC, TD, CIBC, BMO and Scotia. They no longer use the word “bank” in their name. That was my first point.
Second, you have proposed that — and I imagine you have included it in your consultation paper — internationally, only that designation be used, that is to say, the word “bank” in the corporate name, and anything that becomes a noun or verb used to describe the operations is not regulated. I find it extremely interesting as an approach and document.
Earlier, we were wondering whether people make a distinction between a credit union and a bank. Yes, except that, generally, when people make a banking transaction, they deal with their bank, whether it’s a credit union or the RBC; they go to the bank, not the credit union. Some do, but most of the time people go to the bank. I have my bank account. So, to make that distinction, you would have to say, for example, “I am going to my financial institution,” “I will make a transaction in my account at my financial institution,” but the average person does not make that so-called distinction.
Mr. Pigeon: Let me make a personal comment on that. My own children do business with the Caisse populaire Desjardins, but they always refer to it as their bank. I can keep telling them that it is a caisse, but it is so ingrained in the culture that it makes no difference. It cannot be denied; even with a dad in the cooperative world, they do not change their habits.
Senator Moncion: My last point is about deposit insurance. Senator Day asked some questions about it. Ms. Mentzelopoulos mentioned that the system was often better in the provinces than in the federal government and Canadian banks. The other point I want to make is that these regulations remove the burden from the federal government. At the provincial level, some financial institutions may pose a systemic risk for a province, especially when they are as big as Vancity and other credit unions. There are also the regulatory and deposit insurance aspects, which help protect against those risks that may become systemic risks, but remove the burden from the federal government.
The part that is less regulated by the federal government is one we talked about with payday loans and all the mortgage brokers who make mortgages much more risky. Those amounts are not counted in the Bank of Canada system at all — I had this discussion with the Governor of the Bank of Canada. There are other aspects that are much broader than the issue with terms such as “bank,” “banking,” and so on. That’s what I have to say about that, and I’d like to hear your opinion.
Mr. Pigeon: Thank you for the question. I think one of the ways in which we are different from banks, and it is an important one, is that we have six or seven credit unions that participate in the fair wage campaign, for example. We also have seven or eight other credit unions that are in competition with payday loan services, but in a much healthier way. That is what cooperatives do differently from banks. We work in those areas, and our members know that is what we do, they know we are different in that way.
There are many ways through which we establish a relationship with our members, and they may not be visible to outsiders, but become visible once you are a member. For instance, we support micro-businesses. We have wonderful programs to support very small entrepreneurs. I assure you that those people do business with a credit union and not with a major bank.
Mr. Brun: There was mention of the school caisse and all kinds of initiatives that are extremely regional, even local, and others that are national in scope. In fact, for us, it is important and, yes, it is a banking type of financial service. But when the word “bank” is attached, it’s usually not necessarily a good thing; it is saying that we act as a bank. Clearly, this is to say that we are not the same thing at all. We have a very different structure in terms of governance and election. Ultimately, the daily challenge is to focus, first, on the needs of members, and second, to see how we can serve them. We are certainly talking about financial services, often related to banking, but the primary objective is to serve the members and the community. That changes the dynamics completely, and I do not think there’s any confusion with a financial institution that we would call a bank.
The Chair: Thank you very much, witnesses. This was a really good session, and it is appreciated.
Just a couple of notes before I adjourn. We are going to be meeting Wednesday and Thursday next week, so you can plan your week. This document that was distributed today was distributed in English only, which is their right, but, at the same time, normally, if we get a document, if have enough time, we’d have it translated. But it just arrived today, so it wasn’t able to be translated. So we’ll do that and distribute it to all members in French as well.