Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 10 - Evidence - Afternoon Session
OTTAWA, Wednesday, October 2, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day at 2:00 p.m., to examine the state of the financial system in Canada (review of financial sector legislation).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we have a long afternoon before us. Based on our experience yesterday, it could turn out to be interesting.
Our first witness this afternoon is Ms Catherine Swift, whom we all know is the president of the Canadian Federation of Independent Business.I would ask her to proceed at this time.
Ms Catherine Swift, President, Canadian Federation of Independent Business: Mr. Chairman, we appreciate this opportunity to speak to you today. With me today is my colleague Garth Whyte who is our Vice-President, National Affairs and Research. He has been involved with related issues in the past, just as he will be in the future.
We have put together a brief statement in which you will find a number of charts appended. Because of some recent data which we have, we thought it would be helpful to give you the small business perspective on some of the issues touched on in the white paper.
Naturally, any such review is of considerable interest to our constituency. Currently, we have approximately 87,000 members from small- and medium-sized businesses across Canada. They are represented in every sector of the economy and every region of the country. It is a diverse and comprehensive group.
The most important financial issue is not one that was directly addressed in the white paper. Nevertheless, there are elements of the white paper that do affect it. I am speaking of the whole issue of access to financing on fair and affordable conditions.
Naturally, the state of competition in the financial sector is a key factor in which our members are keenly interested. They do not believe, nor have they historically, that small business has been particularly well-served by our concentrated financial sector. In retrospect, this is one of the main reasons our membership strongly opposed the unlimited entry of the large banks into the areas of insurance retailing and automobile leasing.
I should like to refer the committee to the charts on pages 3 and 4 of our submission. The first chart on page 3 shows data which we collect on an ongoing basis. It is a kind of rolling survey. We have this data going back 20-odd years. This particular chart is an indication of overall problems with the availability of financing to our members, something which we find disturbing. Naturally, when times are tough lenders are a little more tight-fisted than usual. Over the last few years we have seen low interest rates, and we have had a growing economy -- not robustly growing, but one which, nevertheless, is growing. Typically, during a period such as this, we would have seen a reduction in these problems. However, we have not seen such a reduction.
Naturally, there are a few different factors which are combined in our members' responses to these questions; yet we find the overall financing problem disturbing. If we look over this period of time set out in the chart, we see that it has been on an increasing trend, although it does bop up and down somewhat with economic conditions, interest rates and so on.
There is another chart in this package which sets out Bank of Canada data on lending to small business. It shows that although lending to the larger corporate community has increased since the recession of the early 1990s, it has been flat. It shows that, if anything, it has dropped somewhat for loans under $200,000, which is typically viewed as small business lending, although the average small business loan is about $70,000, not a huge amount of money.
There are a few other issues noted in the white paper on which we should like to comment. With all the references to strengthening consumer protection and consumer issues, we would like to encourage you to consider small business as consumers in this context as well. A small business customer of a financial institution has more in common with an individual than does a large corporate customer. As a result, we find that many of the so-called consumer issues are also germane to our membership.
The issue of service charges is important to our members. These charges are increasing, and have been increasing for some time. In and of itself, that might not be a concern if there were actually value being provided for the increases in service charges. Generally speaking, our members do not believe this to be the case. There are some charts in the package which pertain specifically to those issues.
What bothers us somewhat is that the smallest of firms, typically, have the worst experience in terms of costs and availability problems with financial institutions and service charges. All of the job creation data show that it is these small firms -- indeed, those with less than five employee -- swhich are most active on the job creation front. This does not seem to be a particularly helpful macro-economic approach when the most prodigious job creators are those which have the most difficulty with various elements of financing. Again, if our market had a fair degree of competition, then these issues would not be as important. However, particularly in rural areas, there is virtually no competition. Even in urban areas it tends to be fairly limited for our constituency, the small business consumer.
Self-dealing is also an interesting issue. As a result of this review, we have only some very generic information on self-dealing issues. However, we conduct a comprehensive survey of our membership on financing issues roughly every three years. We are now coming up to that time. We will be including a number of questions on self-dealing concerns. They seem to be emerging particularly as our financial marketplace becomes more concentrated.
The foreign bank issue has been of considerable interest to this committee. Our members are quite divided on this issue. As you probably know, as an organization, we form our policy positions exclusively on input from our members as a result of various types of surveys, polls, et cetera. In July of this year we asked our members whether foreign banks should be permitted more liberalized entry without the establishment of a branch network. The data are in the submission. They show that 30 per cent of our members were in favour, 47 per cent were against and approximately 13 per cent were undecided. There seems to be a general belief among the small business constituency that a Canadian entity has some value to it. On the other hand, these data are also just a preliminary look at the whole issue. It is an issue upon which we probably need to do more in-depth research before making a conclusive statement.
We have found the approach of some U.S. lenders, Wells Fargo being a notable example, to be quite interesting. I understand that they will be appearing before you at which time they will explain in detail what they are doing. We find some of these U.S. approaches interesting and wonder whether our members would change their views if, perhaps, they were given more information about them.
Generally speaking, however, our members would welcome a more competitive market. We have a very concentrated structure in Canada. There has been some discussion to date about the advent of electronic banking and how it may ultimately be somewhat of a solution to the concentration question. We think there may well be some advantages to our constituency. It is early days yet, and it is hard to tell.
We should also like to mention that we see potential problems as well in so-called virtual banking. We know, for example, that many services to individuals -- mortgages, typical car loans, et cetera -- are fairly easily standardized. Many services to small businesses, however, are not easily standardized and need a custom element and personal involvement. Although we see potential advantages to the whole notion of electronic banking, we also wonder whether depersonalizing it further will end up disadvantaging the small firm sector. We cannot pass judgment on that now, obviously, as it is down the road apiece. We throw it out as a potential caution.
We have welcomed what that the House of Commons Industry Committee has done in terms of ongoing monitoring of how well the banks are serving small businesses. We believe these institutions are responsive to ongoing scrutiny and recommend continuation of this kind of thing.
We have also asked for more detailed data from the banks and other financial institutions on how they are serving small business. Currently, Bank of Canada data simply are not disaggregated or comprehensive enough to give us a proper picture of what is going on in this market. Our own updated market share data which cover the first half of this year are found on page 6 of our brief. It shows that the financial institutions that seem to be making more of an effort to serve our constituency are finding increased market share. Their profit numbers suggest they are not exactly suffering on that front either. We certainly feel that better serving this market is not just a win for the economy, obviously, and a win for the small businesses who are able to receive better services, but that it does not seem to hurt the financial institutions either.
In closing, Mr. Chairman, I would like to make a point we always feel compelled to make. That is because the whole issue of financial services and how they affect small business is not the only issue. Our relatively highly taxed and highly regulated environment in Canada is also a major impediment to small firm survival. We feel the combination of a more small business friendly tax and regulatory environment, along with improved access to financing and financial services generally, would be a positive combination in terms of our economy generally and job creation.
Thank you, Mr. Chairman. We would be happy to try to answer any questions you may have.
The Chairman: Ms Swift, before turning to Senators Meighen and Austin I should like to ask you a question which ties into some of the other testimony we have heard.
What role are credit unions playing in some of your smaller communities, not just in Western Canada but in general? I ask that because on page 1 of your brief and, indeed, in your oral comments, you talk about small firms, particularly those in rural areas, often having limited choice in the selection of financial institutions. The perception we have from the testimony of the credit unions is that in a number of parts of semi-rural or rural Canada they are becoming a significant competitive force to the banks. Is that the sense of your members, too?
Ms Swift: Yes, it is. On page 6 of the submission you will find a chart which shows market share data. It is indicative of what is happening. You can see for the period 1988 to 1996 that the credit unions go from about 10 per cent to 15 per cent.
The Chairman: You have lumped together the credit unions and the caisses populaires, have you?
Ms Swift: Yes. However, that could be disaggregated because the Caisses are regionally focussed.
The Chairman: That would help.
Ms Swift: We can disaggregate those data. Even if we include the caisses, we are talking about only 15 per cent of the market. As we know, the big six have the remainder, which is roughly 80 per cent. The general level of satisfaction of our members in dealing with credit unions is higher over all, which is a positive thing. Naturally, the notion of truly competing in terms of local presence is, nevertheless, still a pretty big challenge.
The Chairman: On the other hand, as I look at the big five, certainly, I see that their share has decreased steadily while the credit unions have increased steadily.
Ms Swift: That is right.
The Chairman: To the extent that the credit union movement expands, it will expand in the amount of competition in the rural areas.
Ms Swift: They have had an increased willingness to serve our market. That was not always the case. I think it is not simply presence; it is also what markets are targetted by those institutions. There is no question that they have viewed our market more favourably in the past decade than they had previously.
Mr. Garth Whyte, Vice-President, National Affairs, Research, Canadian Federation of Independent Business: Mr. Chairman, you brought up the issue of credit unions. I should like to point out that an issue that is off the table is banks expanding into insurance.
The Chairman: It is off the table.
Mr. Whyte: Yes. However, it could get in through the backdoor because, as you know, credit unions are regulated provincially. I do not know whether this topic will be discussed or not.
The Chairman: In some provinces, notably Quebec and British Columbia, credit unions are entitled to get into the insurance business. It is off the table in the sense that it is not an issue being discussed here. On the other hand, I am fairly intrigued by what it was you were about to say if it were on the table. Why not say it any way?
Mr. Whyte: I was intimately involved in the west. As we talk about market share, and as we have found in the west, credit unions are picking up market share, as is the case in Quebec. Likewise, I suppose the debate will open up provincially in other provinces where they do not have that licence to expand. They will be pushing to do so.
The Chairman: You favour that, do you?
Mr. Whyte: No, we do not.
The Chairman: I am not talking about banks but credit unions.
Ms Swift: With respect to insurance specifically, no. We do not favour it with respect to any financial institution.
The Chairman: That is interesting.
Ms Swift: We do not differentiate. We feel a financial institution is a financial institution.
The Chairman: You comment on the issue of the area of service charges being of concern. Have you seen any comparative data in this regard?
Ms Swift: Do you mean by institution?
The Chairman: No. I am much more interested in comparing comparable data for Canadian and U.S. banks.
Ms Swift: The U.S. is higher than Canada, typically.
The Chairman: By quite a bit?
Ms Swift: I have not seen any really recent data in that regard. Service charges have definitely been a recent sore point. We try not to isolate these data. The service charge issue came up in the context of the white paper which is one reason we mentioned it. We also had some recent data on it. What we try to look at is the overall cost of credit, service charges being a key component of that. The other two components are collateral requirements and interest rates charged.
When we are comparing the U.S. and Canada we find that on service charges alone the U.S. tends to be higher, while on the other two factors they are often lower. As a result, this overall cost issue is the one that we feel is the most relevant. You cannot separate out one piece. The other factors typically tend to be more favourable. We believe availability, generally, is more favourable in the U.S.
The Chairman: Do you have any data on that?
Ms Swift: We have some old data. We do not have any recent data. We did a study a few years ago with a small business organization in the states.
The Chairman: That was about five years ago, something which you and I have discussed.
Ms Swift: We do not have any at the moment. We could possibly scare some up.
The Chairman: It seems to me that at some point that information would be of value to the committee, simply in light of the fact that the financial services sector all over the industrialized world is changing. Simply looking at the Canadian context without looking at it in its more globalized context can sometimes provide a misleading picture.
Senator Meighen: Welcome to both of you. I was wondering about the dealings of your members with other financial institutions. What about the leasing companies? Can you tell us anything about whether your members are dealing more or less with such companies?
Ms Swift: Our data supports that, but it probably needs to be disaggregated yet further. Part of the reason the share of the chartered banks is falling is not simply that the more typical financial institutions are taking it up; they are also using totally alternate sources of credit. Unquestionably, leasing is one of them. Through the recession the banks really tightened the noose on many of our members. We had a lot of things to show for it, such as high bankruptcy rates and so on. We also had people going to alternate sources and suppliers extending credit and so on. There was more diversity, perhaps, in terms of the sources of credit sought by small businesses. Leasing was one such source.
Senator Meighen: Would that be keeping pace with what I think you referred to as the concentration by the chartered banks? In other words, are there more credit sources available to your members now than there were a while ago?
Ms Swift: I would say that there are. We are still looking at three-quarters plus of the market being dominated by six players.
Senator Meighen: That is a diminishing percentage.
Ms Swift: You are right, senator. It has diminished as compared with 10 years ago, which is positive from our standpoint. There is also the issue, however, that that does not hold right across the board. Often geographic and sectoral elements are very different. Competition may exist in those areas where there are many players available from which to choose. Of course, that is not always the case. There is diversity.
We believe there are more options now than there have been. Again, with various technological changes, we are hoping that will only improve down the road.
Senator Meighen: What about the Crown financial institutions? Are your members finding them an increasingly interesting place to do business?
Mr. Whyte: We made a submission to this committee on Crown financial institutions about a year ago. Yes, they have a slight market share. However, the Federal Business Development Bank is a marginal player. It does not have that many branch outlets. We are hearing rumours that the Farm Credit Corporation is actually creaming in certain communities.
Senator Meighen: You sound like a spokesperson for the banks.
Mr. Whyte: We do not disagree with them on everything. The issue is competition. In Quebec, for example, where they have the caisses populaires and the National Bank, there is better competition and less dissatisfaction with service from the bank than in other communities.
If a government entity is to compete directly with the private sector, not filling a need but just trying to pick off the best loans, then we do not believe it is serving the people it is supposed to be helping.
Likewise, we pushed, as we believe Senator Kirby's committee did, for an amalgamation of all the different groups which exist; ACOA, the Western Diversification Office, the Farm Credit Corporation, the Federal Business Development Bank and ADC. They have niche markets but they are not really serving the needs of many of our members.
Senator Meighen: We have failed miserably to convince the government of that.
Mr. Whyte: Not in our minds.
Ms Swift: Generally speaking, we do not believe that there is a place for those institutions unless they are serving something the market will not address. However, that is not happening, and it has not happened in the past. We remain optimistic always, of course, with the new mandate of the business development bank, for example, but these are early days yet. In the past we have not found them to be significant players or filling the niches in which we feel there would be a role for Crown institutions.
Senator Meighen: In the second paragraph of page 2 of your submission you state:
Concerning foreign bank entry, small businesses are divided on whether foreign banks should be permitted to establish a branch network without a Canadian subsidiary.
As I read it, that makes the assumption that if foreign banks were allowed to come in without a subsidiary, they would obviously automatically establish a branch system. Are you sure that is so?
Ms Swift: No, we are not, but this was the question at the time. We tried to be relatively specific in these questions and it was debatable as to how exactly we should come at it. This was the question that was settled on. I agree with you; there is certainly not necessarily any indication that would happen.
Senator Meighen: Why would they want to? It costs money.
Ms Swift: Yes, it is very costly.
Senator Meighen: If they were allowed on that basis, they could financially fuel themselves from across the border; they could buy one office and away they go.
Ms Swift: Yes, which has happened, to some extent.
Mr. Whyte: We are meeting with Industry Canada tonight to talk about the Internet and the whole area of electronic commerce. That is another way of opening up competition, and it is an intriguing way.
Ms Swift: This just happened to be the most recent question we asked on this issue. I think we need a better read, with more depth, on this issue from our membership because I think we are getting mixed signals as to what the answer to this question really means.
Senator Meighen: I am suggesting that you are putting the wrong question.
Ms Swift: That is a point well taken.
Mr. Whyte: We did not have the sample size to break it out by sector. It may be an awareness issue. Certain sectors may have had a much higher response in favour, but we have not had a chance to break it out.
The Chairman: Forgetting about the exact question, because I agree with Senator Meighen that it was probably, in the current state of affairs, not quite the right question, I am troubled by a position which sounds like you want to have your cake and eat it too. The logic of your argument seems to be: There is too much concentration in the banking sector, therefore we want more competition; but, by the way, we are not in favour of the most obvious way to get more competition, which is to allow foreign competitors to enter the market, so we really want more competition using only Canadian institutions, which we agree is probably impossible to achieve.
Therefore, I guess my dilemma is: Do you really want more competition or not?
Ms Swift: That is a good point. As we have touched on this issue with our membership over the years, we have received different types of responses. I do not know that what you just said necessarily accurately reflects the views of our members.
The Chairman: I was trying to reflect reality.
Ms Swift: I am not sure that is the case, but right now we do not have the detailed information on this particular issue to give you the right answer.
Mr. Whyte: We suspect that policy makers are ahead of the general public on this. It is sort of like Canada Pension Plan reform. On Canada pension reform, you know that our membership does not like payroll taxes, but once we laid out the information on CPP they realized that Canada Pension Plan or QPP has to increase. Likewise, they are ready for open competition but they are concerned, I would imagine, about weakening the current structure. We have to look into it in more detail.
Senator Austin: Mr. Chairman, I had prepared a few questions in the same area as was addressed by Senator Meighen, that is, whether there was an effectiveness on the part of Crown financial institutions and regional agencies. I think I have the answer to those questions.
You are probably aware of the evidence which the Minister of Industry, the Honourable John Manley, gave here on July 3. He said that these Crown financial institutions and agencies will have the needed flexibility to meet the changing needs of Canadian SMEs and underserved market niches. So you were very generously allowed some time before you must do a balance sheet on the Canada business service centre network and all that will go with that.
The other area I want to ask you about relates to tied selling and whether your members are bringing you examples of the pressure of these financial institutions to aggregate all of their business and whether it is tied or just, in your view, normal aggressive marketing.
Ms Swift: I did have a couple of sentences on that in our formal statement. Somehow I skipped over them. Excuse me for that.
Yes, they are bringing us questions and problems along those lines. Our data indicate that about one-half our members at any given time actually need the bank. There are many of our members who are well established in business and will use a bank for clearing, a line of credit and so on, but if push comes to shove they are more valuable to the bank than vice versa. Typically, our members are better established firms which have been in business longer than the majority of businesses. The other 50 per cent we view as the vulnerable business consumers who would be a more likely target for a tied selling pitch. We have had complaints along these lines, which is another area on which we will be gathering more detail in our next banking survey, which we are starting to put together now. We presently have anecdotal evidence that it is happening, but in terms of frequency, severity, and results of refusal to take a line of credit, for example, we would like to have better data. It is definitely happening, but it will be a few months before we have a more scientific view in terms of frequency and severity.
Senator Austin: Part of your political mandate, as I have always understood it, is to represent not only your membership but other independent business entities, particularly the more junior and intermediate before they get to your own level, but you try to speak for them all.
Ms Swift: Yes.
Senator Austin: That is so because it is a particular area of the economy.
Of course we would look forward to anything you could give us as it affects the small business community. Moving slightly away from the tied selling issue and looking at the question of the availability of investment advice to your members, do you believe that the concentration of ownership in the financial industry is affecting the quality or diversity of business advice that is available in the marketplace to your members, or are there others coming into the marketplace that give you an adequate range of investment counselling and money management business advice?
Ms Swift: I have heard that argument. We have not surveyed on it specifically. If something is bothering our members, we will hear about it, whether or not we are asking them about it. They will spontaneously let us know about it. We have not had a lot of problems come to our attention on that front.
Our typical small business member has 10 employees and not huge amounts of money. Their investment tends to be in their own business more than anywhere else. There are some who may have lots of dollars to invest, but by and large their concerns about concentration are more that, for their typical financial needs, they feel they do not have enough choices or they see things like insurance or leasing getting encroached upon.
Part of it is philosophical in the sense that they feel more players is better; it is a free enterprise kind of orientation. However, part of it is also that most of our members have not had the most happy track record with the chartered banks, so they are not that receptive to the notion of them taking over yet another element of services.
We have not heard a lot of spontaneous complaints on that front, but perhaps it is an area that we should investigate in the future. However, I do not think our members were ever big consumers of those services at the outset.
Senator Austin: My last question probably has no answer, but the concern is that the financial institutions, particularly the banks, are not sufficiently responsive to the independent business community. Yet, you know their position is that they have to be risk avoiders, they have to make assessment, and your sector is usually the most vulnerable to risk and the banks becoming a piece of the equity exposure rather than the lending side.
Is there any way you see that the dilemma can be shifted, or is it just the eternal debate between two different interests? Let me give you one suggestion. I am not advocating this; I am just putting it out for fun. It is the question of bulk buying of credit. Could your members come together as a group to set up a line of credit with a financial institution, buy credit in bulk and then portion it out? Is there any way you can get an edge in that way?
Ms Swift: That is an interesting suggestion.
Senator Austin: I am thinking of the telephone business buying lines.
Ms Swift: I have a couple of comments on the bigger issue.
There will be debate eternally, and probably should be. There have been times in the past, and the late 1970s come to mind, when some of the large banks were actually too free with credit to the agriculture sector. We had some major commodity price collapses, et cetera. These people were told by bankers, "Please, take this couple of hundred thousand dollars and buy yourself a new combine." Those people ended up being foreclosed on.
A certain tension in that relationship is healthy, and we believe in that. However, bankers have told us that, notably in the last recession, they were incredibly quick to move. We have had bankers in Ontario tell us that, for example -- and I thought this was an interesting example -- Ontario bankers had not seen a recession because the early 1980s were not as bad in Ontario as they were in other parts of the country. Many of these people being relatively young, I guess, had not seen such severity in their careers. They got very scared and pulled the plug long before they had to do so. They admit it now, but that is now history. They put a lot of businesses out of business and a lot of people out of jobs. Maybe it is cold comfort, but at least it is good that they have come to that realization.
We believe that there are many things banks can do to affect their internal culture which can be positive overall. We believe some of them are attempting to do it now. Again, it is early days. A couple of years is not enough to judge a big institution like a Canadian chartered bank and how quickly it can turn around. However, we think such measures as much better training of their account personnel will make great improvements, and the financial institutions themselves have conceded that they need to do a lot more in this area.
It is important to have within their culture in the institutions the motivation to view a market as a profitable one. Most banks, up until a few years ago, looked at an account not in its totality but at each element separately to determine its profitability. We have had bankers tell us that the small business clientele, together, is the most profitable part of their business.
We believe that the banks must educate themselves better internally to realize that they are not offering charity but that this business is very profitable and good for their bottom line and that of their shareholders as well. The culture differs so dramatically between a small firm and a large entity like a bank that you need that kind of thinking to translate into the needed policies. The Bank of Montreal and the Bank of Nova Scotia are two notable examples of institutions which have had made serious attempts over the last few years to improve their service to their markets. Their market share is improving and their profits look pretty good. Therefore, we do believe that there are things that can be done.
Your suggestion is an interesting one. It is so necessary for banking services to be customized, as compared to long-distance telephone or other things that are more of a commodity. That makes it tough. Institutions already do that because they are looking at their risk across their whole portfolio. Even though small business is often thrown out as being so-called risky, we have not seen billions of dollars flow out of the banking system due to small business as we have with some of the huge corporate fiascos. In fact, as an aggregated sector, it is incredibly stable over time, and small businesses are the loyal customers of the financial institutions too.
We believe that there are many things that can be done. It is not easy, obviously, or we would not be here. We also think the fact that some of the institutions are trying to pursue real solutions is very positive, and we want to see more of that.
Senator Austin: According to the numbers I have seen, more than 60 per cent of small business formations are led by women. Would you agree that that is the case in Canada?
Ms Swift: It is currently moving toward 50/50.
Senator Austin: I am talking about units of business rather than value.
Ms Swift: It is a huge number, yes.
Senator Austin: Do you find that the banks treat small business applications from women with neutrality as compared to small business applications from men?
Ms Swift: We have done much research on this over the years. We have found different results at different times. We have done some rigorous statistical tests in addition to the anecdotal evidence that we have that there is different treatment. However, we found that during the recession the problem was a lot worse. It is hard to know whether that is because, when things were rough anyway, bankers felt more beleaguered. We do believe that over time the situation has improved. There has been much attention paid to this issue. Although we still hear spontaneous input from female members that there are problems and that they do often feel they are treated differently, we think the problem is lessening and that financial institutions are making a real effort to give equal treatment.
The Chairman: Thank you very much for appearing, Ms Swift and Mr. Whyte. We really appreciate it. If you could provide us with that extra data, that would be helpful to us.
Senators, our next witnesses are from the Canadian Life & Health Insurance Association Inc. We have with us Mark Daniels, the president, and Mr. Bob Astley, who is the president and CEO of Mutual Group. Please proceed.
Mr. Bob Astley, President and CEO, Mutual Group, Canadian Life & Health Insurance Association Inc.: Thank you, Mr. Chairman. In addition to Mark and myself, there are a number of staff with us from CLHIA. If we happen to get into any technical areas on which we are not able to provide satisfactory answers, we may call upon them.
As members of the committee will be aware, our industry has appeared several times before this committee over the years. We appreciate the opportunity for dialogue, as well as the views of the committee.
It is in this spirit of constructive cooperation that we offer our thoughts and observations on the white paper today. We do not consider our appearance here as the end of a process. Indeed, I do not think there ever is an end to legislation, regulation or policy in any area of our economy.
However, we do see it as one important step forward in a process leading to the passage of legislation before the current mandate of legislation expires at the end of March, 1997, which is only seven months away. Clearly, as that process proceeds, my industry colleagues and I are at your disposal to make further contributions to your committee's work on these matters in whatever way you would find most useful.
First, let me provide committee members with a brief overview of the industry's views regarding the white paper, before making comments on the main points of our submission.
The industry is strongly supportive of the white paper, both with respect to the basic policy judgments and with respect to most of its specific proposals. We agree with the government that the framework put in place in 1992 is, in large measure, working well and should be kept largely intact. Major changes are simply not required. We also agree that adjustments are needed to ensure that the legislation works even better in the real world of everyday business.
We also strongly agree with the white paper's commitment to put revised legislation in place by March 31, 1997, when the current acts expire. The timely passage of this legislation is very important to maintaining certainty and continuity in the Canadian financial services sector.
As this committee is well aware, in the financial services industry, certainty and continuity are vitally important to our clients and to our ability to serve them well. Confidence is everything. They are also essential to ensure that we can compete in international markets. It is our view that timely passage of revised legislation will best serve the industry's millions of customers and stakeholders in Canada and, indeed, around the world.
Mr. Chairman, let me turn now to our submission. As you will have noted, our submission focuses on two broad groups of issues. First, we present our comments on the white paper proposals requiring legislative action by March 31, 1997, and then we deal with other issues in the white paper.
Let me turn now to the issues needing legislative action before March, 1997. First, with respect to those issues regarding the self-dealing regime, I would like to draw the committee's attention to the proposals to modify the self-dealing regime put in place in 1992. The white paper contains a number of proposals designed to streamline the self-dealing regime, including narrowing the scope of the definition of "related party" and exempting certain transactions between subsidiaries of a financial institution from those self-dealing requirements.
Let me state clearly that the industry strongly supports effective self-dealing rules. History would indicate that that is indeed good policy. We do believe, however, that the amendments proposed in the white paper do not go far enough in streamlining the current rules to create a system that is truly workable in the real world.
While the white paper proposals will reduce the number of related parties of an insurance company, the list of related parties potentially remains very broad. Such an open definition makes the determination and tracking of related parties almost impossible, particularly in the case of companies with affiliates abroad. Our suggested amendments build on this philosophy and are specific in nature. They would result in greater clarity and workability for the related party regime.
For example, we believe that the superintendent's discretionary power to allow exemptions from the general ban on related party transactions should be made more effective. This power is important because it is impossible to foresee and to legislate every kind of transaction that should be permitted under the self-dealing regime.
The industry also recommends improving the flexibility of the regime by removing some of the self-dealing rules from the statute and moving them into regulation.
As business transactions and corporate structures become increasingly complex, statutory self-dealing requirements can become obsolete quickly. We are encouraged to note that the Senate committee adopted a similar position in its comments on the Canada Business Corporations Act.
Turning to the area of corporate governance, we recognize that the committee has had a special interest in this area, and we have noted with interest the recommendations contained in your August report. One area upon which the committee's report focused was board residency requirements. Members will note that our submission contains a recommendation that the board residency requirements for Canadian insurance companies be harmonized with the CBCA by requiring that a majority of the board be composed of resident Canadians. This would provide insurance companies with a larger pool from which to select directors and would be consistent with the fact that insurance companies derive some 43 per cent of their business from outside Canada.
The white paper suggests several amendments relating to corporate governance, something to which we have responded in our submission. I do not propose to go into the details of our comments in that regard. However, Mr. Chairman, I would note that the full range of issues of corporate governance was thoroughly reviewed in 1992, at which time major revisions were made.
The intense analysis and discussion of policyholder rights leading up to the 1992 amendments resulted in a new regime that significantly modernized and enhanced the rights of policyholders. Our experience over the past four years shows that this new system is working well. Consequently, the industry recommends that, for the present, the existing regime should remain intact. We do not believe there is sufficient reason to disrupt what has emerged as a very successful exercise accomplished as recently as 1992.
Moving on to some of the technical amendments, the white paper contains quite a number of these and we have commented on them in our submission. We have added others as well.
Let me dispel any notion that these so-called technical amendments are unimportant. They may be non-controversial but they are far from unimportant. They would make a very substantial contribution to ensuring that the legislation works well in practical terms.
I should say at this point, Mr. Chairman, that we have been pleased with the cooperation that we have enjoyed with the Department of Finance and the Office of the Superintendent of Financial Institutions in working on some of these matters.
Mr. Chairman, the white paper raises a number of other issues which are not proposed for legislative action at this time but which will be the subject of a consultative process over longer time frames. The first I would mention relates to privacy. With regard to that issue, the life and health insurance industry has long recognized the importance of protecting the confidentiality of personal information and has acted to address concerns in this area, something which is acknowledged in the white paper.
The industry was a leader in adopting privacy guidelines in 1980 and has made respect for the privacy of customers a condition of membership in the association. We have updated these guidelines as recently as 1993 and are currently under review to see if further updates are needed particularly to bring them in line with the new Canadian Standards Association model privacy code.
The industry believes that widely implemented self-regulatory privacy codes, which meet the same standards as the CSA model code, would serve consumers' privacy interests well. On the other hand, if the government decides to move ahead with the proposals in the white paper, we believe the government must be careful not to create jurisdictional conflict at the federal-provincial level, as well as overlap and duplication at the federal level.
With regard to the question of the availability of basic financial services, the white paper indicates that the government will work with consumer and community groups and with financial institutions to develop and to implement a strategy to improve access to basic financial services. While we understand that the focus will be on basic services such as cheque cashing and opening of deposit accounts, the industry would be pleased to participate and provide input that might be useful.
Turning to a matter which has been very much on the minds of the industry, the industry welcomes as a very positive step the white paper's announcement that the government will be establishing an advisory committee to study payments system issues. As this committee would be aware, the industry has been calling for reform of the payments system for a number of years now. We believe that reform is fundamental to creating a level playing field for all financial institutions, including life insurers. It is needed to ensure that every kind of financial services institution can provide customers convenient access to their money.
In our submission to the Department of Finance in December 1995, entitled, "The need for payment system reform", the industry stated that its goal is to participate fully in the payments system. This participation has three fundamental aspects. The first is direct access to the payments system, without being forced to use either a subsidiary entity or a competitor. The second is meaningful participation in the governance of key payments system components, such as the Canadian Payments Association and Interac. The third is a genuine voice in the evolution of the payments system. Accordingly, the industry welcomes this important review and will be pleased to participate and provide input in whatever way we can.
Finally, the industry applauds wholeheartedly the announcement in the white paper that the government will undertake a comprehensive review of the appropriate framework for the financial services sector in the 21st century. As members of the committee will recall from the industry's appearance before this committee in April 1995, one of our recommendations was for a broadly based public examination of the future of Canada's financial system and the establishment of a task force to assist the government with this review. We also made some suggestions at that time regarding the process for this study.
We suggested that the review should pay particular attention to the increasing concentration of ownership and control of Canada's financial institutions in the hands of a few large institutions. We recommended a methodology that is fully impartial and accessible to all stakeholders. This methodology, in our view, should not only involve formal analytical projects but also consultative forums which would take place throughout the duration of the examination process. These consultative forums should encourage public participation in order to identify the perspective of consumers on important issues. Mr. Chairman, we believe that those suggestions remain valid and we recommend them to the government.
To conclude, we in the industry believe that the white paper is an important step toward the completion of the 1997 review. The industry looks forward to working with government officials and members of Parliament to put new legislation in place by March 31, 1997. We also look forward to participating in the consultative forums that are proposed in the white paper.
Mr. Daniels and I would be glad to try to respond to any comments and questions you may have.
The Chairman: Thank you, Mr. Astley. Before turning to Senator Angus, I should like to ask you one question or make one comment. First, may I congratulate Mr. Daniels and his staff on something. The format in which you do your briefs is the best of anyone around by a long shot. I am emphasizing format as opposed to content. The marginal notes are helpful.
Mr. Astley referred to the recommendations of this committee with respect to governance changes under the Canada Business Corporations Act and, specifically, the composition of the board which you would favour. It would help us -- indeed, it would help the government -- if you could look through our final report and tell us strictly with respect to the governance recommendations, which are likely to be included ultimately, we are told, into the CBCA, whether there are any of those with which you disagree. You know as well as I do, Mr. Daniels, that if certain changes are incorporated into the CBCA there will be a tendency to incorporate those changes automatically into other legislation. Since I am told that the odds are high that all our recommendations with respect to governance will be incorporated into the CBCA, it would be helpful for us to know if there are some which you do not like. I appreciate the fact that you commented on one that you do like. If there are some you do not like, it would be helpful if you would let us know.
I have one overview comment on your report. I found myself quite surprised by the position you take on corporate governance and on the proposed best practices paper of OSFI. I get a sense that you really are not in favour of any of the proposed corporate governance changes outlined in the white paper, most of which would be aimed at opening up the process. I think in particular of the comment concerning affiliated persons being broadened, as well as the mirror boards issue which specifically arose out of this committee some time ago. I refer also to the recommendation with respect to making the accounting of participating accounts more open.
Forget for the moment about the specific instances, the flavour that comes through is one that says, "The status quo is okay and, perhaps, we really should not be in the business of changing, opening up and broadening corporate governance procedures." On the basis of the hearings that my colleagues and I held extensively across the country last spring, that is not the mood of the public or of investors. Frankly, I am surprised that that is your mood. Do you want to respond generally without necessarily getting into the specifics of each of your rejections?
Mr. Astley: Mr. Chairman, I would be glad to try to respond to that. We could come back to any of the specific items that you mentioned.
First, let me say that our objective is the same as the government's objective, which is to put in place a regime which is sound from a philosophical point of view and one which protects the interests of the stakeholders but one which is also workable. In the areas of corporate governance, a large number of initiatives have taken place such as those suggested by the Dey committee for the TSE, and some changes were put in place in the 1992 act itself for all financial institutions.
At the board level, a tremendous amount of attention has been given to board practices, the composition of committees, mandates, and those kinds of issues. The life insurance sector specifically is not unmindful of that direction and shares the views of the government that good corporate governance is one of the hallmarks of an effective financial services regime. We are trying to ensure that all of these pieces are workable, particularly when we talk about the self-dealing regime. We know from practice over the past four years that it has become somewhat of a mechanistic process because of all the requirements.
We think about the evolution and the number of other steps that are under way, including a board self-assessment of internal practices in 10 different areas and the standards of sound business practice that are under way as a joint development between OSFI and the industry. Many of these things are going forward.
We agree with the objectives, but we want to be sure that any new initiatives, such as a best practices paper, would truly add value. On that particular score, we are not convinced that a specific set of best practices guidelines aimed at the financial services sector would add value with all of the other debate and attention that has been given.
The Chairman: The issue of "add value" may be seen quite differently by management as opposed to policyholders, shareholders or the general public. The issue of adding value is also seen differently by people who are not management because of the importance that the process not only be fair but that it also be seen to be fair. It is in that light, for example, that the affiliated persons suggested changes to bring it in line with the independent director definition that was originally proposed in this committee approximately six or eight years ago and which has now been adopted by the OSC. This committee objected to the use of mirror boards on the grounds that it was unclear to whom the subsidiary board is responsible, et cetera.
From the perspective of management, they may well not bring value and might be a bit of an annoyance and a hindrance, but that is not a legitimate reason for public policy makers not to proceed with them. I had the feeling that with respect to many of the suggested changes in the corporate governance part of the white paper, most of which were regarded as progressive, the industry appeared to be going in the opposite direction. That is what surprised me.
Senator Angus: Generally, it appears that you are quite happy with the direction that is being taken. It is reflective of what you said the last time you appeared before us. The status quo is your preference. The review before any radical legislation would happen with the task force is more or less a response to your own suggestions -- that is, apart from two or three minor technical things regarding, for example, the self-dealing point that you make in your brief. In other words, you are comfortable with that. Is that a fair interpretation?
Mr. Astley: I would characterize it a little differently, perhaps. When we talk about the status quo being acceptable, we have referred to the large number of amendments emanating from the white paper as technical amendments.
Senator Angus: Yes. You say they are important.
Mr. Astley: The lion's share are important because they are a better way of governing companies and providing a regime under which companies could operate.
Senator Angus: With that caveat and the fact that they are being brought in, you are comfortable with the white paper and how it has responded to the need for these technical amendments, are you not? In other words, you have nothing major to add at this time.
Mr. Astley: That is true. Concerning the issues for the future, the task force on the payments system and on the future of financial services in Canada are important consultative forums. We applaud their existence and to look forward to contributing to those as well.
Concerning the updating of the legislation itself, we are content with the amendments that have been put forward. We agree with them for the most part.
Senator Angus: As you can imagine -- and, as you have read in the newspapers -- we have had a number of representations from people who are not that happy with it. There are those who are not happy with the idea of foreign banks and the fact that if they wish to do business here they must continue to do so through a subsidiary, et cetera. Do you have any thoughts on this? Does this issue of the foreign banks affect your industry at all?
Mr. Astley: That issue speaks to the issue of concentration and access to new competitors. That is a fitting subject for the task force on the future of financial services in Canada. That is the kind of issue that should be explored fully by that task force. In terms of the update in 1997, we do not have any strong views on that issue.
Senator Angus: Do I understand you to mean that had, for example, the white paper gone that far -- that is, had it lowered the entry requirements for a foreign bank and made it easier for them to come in here at a reduced cost than at present, and so on -- that action would require a full review? We have seen evidence, for example, that the number of foreign banks operating here has decreased from 59 to 47. In fact, only two U.K. banks now operate here. You would consider that a matter of such substance that it should not be approached in a tinkering way -- that is, it only should be done after a full review. Is that right?
Mr. Astley: Yes. It is very much a part of the philosophy of the entire financial services business. We would offer our comments on it in that context.
Senator Angus: On page 3 of your brief, you state that the proposed white paper amendments aimed at streamlining the self-dealing regime do not go far enough to improve the system. You have a specific recommendation in that regard contained in your brief. Have you brought that to the attention of OSFI or to the Department of Finance?
Mr. Astley: Yes, we have. I would ask Mr. Daniels, or some of our colleagues here, to help me in that respect.
Mr. Mark Daniels, President, Canadian Life & Health Insurance Association Inc.: Mr. Chairman, with respect to self-dealing and several other items contained in these early pages, such as governance and some of the governance questions, we are making representations to OSFI and to the Department of Finance on these matters. We are being heard on them.
Senator Angus: That would be my next point. If you are having discussions with them, has the response been satisfactory?
Mr. Daniels: It is always satisfactory in a business sense. But you do not know the end result until you see whether there are proposed amendments or the positions contained in legislation when it is tabled.
There is no question that we are being heard. Again, it is not that we are quarrelling with the philosophy of the self-dealing point. We are trying to provide a better operating environment in terms of the experience we have had over the last couple of years. The paper itself is trying to loosen up these strictures. We are saying, "You missed one." I think we are being heard, but I cannot say how well we are being heard.
Senator Angus: This might be one amendment that you brought to their attention originally. However, it was left out of the technical amendments which they listed; or I may have been one that you may not have adequately made representation on earlier.
Mr. Daniels: This was always on our list. In 1992, it was latched down pretty tightly and there was a lot of discussion at the time. Events have demonstrated that it is a bit constraining.
Senator Meighen: Welcome, Mr. Astley and Mr. Daniels. On page 6 of your submission you mention in the marginal note that the industry supports the white paper proposals for in-house information processing and specialized financing activities. That was a specific recommendation, of course, in the white paper, one which we all read and about which we said, "Yes, that makes a lot of sense." Someone then suggested to us that, perhaps, there was more to this than meets the eye. Particularly in the context of privacy, why would we be moving information processing and specialized financing activities in-house, where it is probably more difficult to ensure privacy and confidentiality through Chinese walls or other mechanisms than if that were outside in a subsidiary and one could say, "Thou shalt not transmit from the subsidiary to the parent"?
First, do you agree with that statement? Second, in this day and age it did not seem that there was much cost saving. We are left wondering what the reason is for this suggestion in the white paper and why you support it, which may tell us the reason.
Mr. Astley: This particular comment from us concerning information processing activities reflects a view that the 1992 act provided some general business powers to insurers, as well as to the banks and trust companies, and that most of those could be performed either in a subsidiary form or within in-house activities. It was our view that information processing was in that category, that depending on a company's own arrangements or own corporate structure that it made sense for that kind of choice to be there as well.
I would also note that a subsidiary which is controlled 100 per cent is in some ways like an arm of a parent company. While it may have the form of a completely independent arm -- indeed, in that it is completely controlled -- it has many of the attributes of an in-house department. It was that kind of philosophy that was behind it.
To be candid, we did not think in this respect about privacy aspects. Indeed, we would want to be sure that this particular issue was dealt with adequately and researched regardless of the form, whether it be in a subsidiary form or in an in-house department. There ought to be the kind of operating rules, Chinese walls and other effective mechanisms, for instance, to ensure that the use of personal confidential information is addressed adequately. We were not seeing this as a privacy issue but as more of a general policy issue on in-house activities or subsidiary activities being a choice by the company depending on their own arrangements.
Senator Meighen: Mr. Astley, I assume that you do not necessarily see it as a cost issue either.
Mr. Astley: It would not predominantly be a cost issue.
Mr. Daniels: Mr. Chairman, on the margin, it was seen as a kind of pulling down of a constraint that may not be necessary. We are aware that the committee has been looking at whether or not there are some privacy implications to that. Frankly, we had not thought about them in those terms. If they are there, then this is of concern to us. We have been here and talked about that under other guises. If there are substantive issues out there, then it is obviously something that needs to be thought about. It was certainly not in our mind set when we put down the position on the white paper.
The Chairman: Can we ask you to review the testimony of Jim Burns who appeared before the committee yesterday on precisely this point, given his vast experience in your industry? Can you give us your views as to whether or not his view or your view is where you were when you thought about the issue from the perspective that he raised it? That would help us.
Senator Perrault: Mr. Chairman, there have been references to the need for confidentiality and the strengthening of provisions in that area today. Let me ask you this: Do you see a future for the industry on the Internet? We are talking about banks, near banks and branchless banks. It seems to me a great deal is happening there but there is no reference to it in your submission. Surely, it is possible to market some of your products via the net. If so, what kind of regulations should be put in place to preserve confidentiality and the credit card information which seems to worry some people?
Mr. Astley: We are not unmindful of that at all, senator. Indeed, many companies have home pages on the World Wide Web.
Senator Perrault: It is a vast proliferation, but I notice that there is very little from insurance companies. What is the reason for that?
Mr. Astley: There are a handful of companies on the Internet, mine being one of them, and a number of other larger insurance companies. I know of at least one insurer in the United States who is actively marketing through the Internet. All of the issues around confidentiality and the security of data flows are there for insurance as they would be for credit card and banking transactions. The big unknown is the extent to which consumers will avail themselves of this service or whether they will use it primarily for information purposes.
Senator Perrault: Travel insurance, for example, should be relatively easy to market via the Internet.
Mr. Astley: It may be. We do not have any experience so we do not really know. The point you are getting at, I think, is that an electronic highway such as the Internet raises all kinds of regulatory questions to which no one has an answer.
Senator Perrault: I was looking for some references in your presentation to that, but perhaps it is too early. We are just starting in this process, presumably.
Mr. Astley: The issues around the regulation of Internet activities and other electronic commerce is really an emerging field that no one has any really clear views on at this point. I know that regulators around the world are struggling with it.
Senator Perrault: I was rather surprised at the outmoded references to the distribution of information contained on page 7 of your submission. You say that the application of shareholder corporate governance principles which reflect the shareholders' role as investor is not appropriate in the policyholder context. You state that the cost of sending notices to a large number of policyholders are extremely highly when compared to the cost of mailing to shareholders. Why do you not put this on the Internet where you will have all this circulation virtually free of charge? Is it not sort of an old-fashioned approach to say that there would be too much paper to send out?
Mr. Astley: That is a good suggestion, senator. I am sure that more and more companies will be doing just that. We cannot be sure that we will reach them. The Internet makes information available.
Senator Perrault: It may be an idea to have one mailing saying, "If you want to find out the very latest about this company, look to WWW, whatever." It seems to me that there are many questions posed by the emergence of this information highway, as you say. However, perhaps that is for a later study.
Mr. Daniels: May I add a point, senator? When you raise the question of distribution through the Internet and so forth part, of the reason you are not finding anything in here on the subject, or for that matter anything in the white paper directly, is that the whole area of distribution of insurance products is a provincial matter. We are dealing with that, unfortunately, in 12 jurisdictions, including Yukon and the Northwest Territories. Those questions are coming up increasingly. Frankly, it will become another of those regulatory whirlpools that from time to time descend upon us.
Senator Perrault: Are there any companies outside Canada now engaged in selling insurance products via the net?
Mr. Astley: Yes, there are.
Senator Perrault: What percentage of their business would be represented?
Mr. Astley: It is a tiny fraction of the new sales of the entire industry. It is certainly a small fraction of 1 per cent of the sales. However, there is an emerging field which is difficult to predict, just as it was difficult to predict the penetration of home banking, whether that be by telephone, PC and so on. Everyone knows the technology is there. What no one can predict is how quickly it will be accepted and embedded in most customers' daily lives.
Senator Perrault: I suppose one of the challenges is because it requires some expertise on the part of the customer to access it.
Mr. Astley: There are habits and patterns that are not easily changed.
The Chairman: Mr. Astley and Mr. Daniels, thank you. I look forward to getting the requested written replies from you within a couple of weeks if possible.
Senators, our next witness, the Privacy Commissioner, Mr. Bruce Phillips, cannot appear today due to illness.
We will proceed to hear the President of Beacon Securities Limited.
Mr. Lonsdale W. Holland, President, Beacon Securities Limited: Mr. Chairman, thank you for this opportunity. In my very short brief, I tried to outline, from our narrow viewpoint, how important things are. It is like people talking about being "a little bit pregnant," but there is no such thing. This really represents a very major start to a very significant process.
Nothing is too small to be well done. The weakest link in the chain dictates how strong the chain will be. A pile of sand is nothing but many grains.
I would like to address just one of those grains of sand. We are a small regional dealer. We read in the paper recently that RBC Dominion Securities and Richardson Greenshields would merge and probably no one who did less than about $250,000 would remain with the firm after a certain number of years.
In my firm, there are 12 RRs, as we call them, or IAs, on the retail side, only one of whom does that kind of business. We are really dealing with a personal type of business in a small area with small clients. It is a question of trying to serve them properly. We have clients who like to deal with us because they have been unhappy with the service at some of these larger firms or, in some cases, some of the banks.
When the client's form arrives in the bank requesting transfer of the RRSP, the client gets a call to please come in and discuss their whole loan portfolio or loan program with the seeming suggestion that, if that piece of business is moved away from the bank, then may need to look at the whole thing again, after which, perhaps, the client's credit will not be there.
I have 12 salespeople. Three have come to me and told me of clients who have had that experience. That represents 25 per cent of my sales force. I have not asked the others whether their clients have had similar experiences. Maybe I should have, but I do know it is happening.
This is really not good for the economy nor for individuals. It is particularly not good for the smaller individual in the economy who, in many cases, is the one who most needs help and the one who is most often hurt.
As someone said, if you get in bed with an elephant, you must be careful. It is the small person who will need to be most careful and who will require the most help.
Slightly farther along this line, the industry today is controlled by five players to over 80 per cent. Ours is a business of greed. We all want more. That may be what makes the thing go around, but at some point it needs to be regulated.
I will give an example. Take an underwriting group with four leads and ask all four leads whether it would be better to have only three in the lead group. Assuming that the one answering would be one of the three, each lead would answer "Yes". If you took it to two and then to one, they would all agree. Why? Because of greed. They would perceive that they would do more of the business.
Most of the underwritings which take place in this country are run by the five major firms. There are over 100 small firms, like mine, across the country which very often do not get a look-in. Consequently, a whole level of the population is forced to deal with a big firm. In some cases, if consumers are not big enough to deal with a big firm, then they have nothing at their disposal except a bank or a mutual fund dealer. There are no full-service operations available to them.
Yesterday, there was a Nova Scotia province issue and today there was a New Brunswick issue. In both cases, 5 per cent was available to selling groups. I happen to be an underwriter in both of them so those issues are not a problem for me. Many other firms out there have tried to or would like to join a selling group, but there was not enough product for them to try to satisfy even a small part of their requirements.
I have discussed these problems with my colleagues across the country. Some, like me, are a little long in the tooth and have watched the business for a long time. Senator Angus referred to Midland. I worked 31 years with them. Eight years ago, I started my own firm. We are profitable, having fun and enjoying it.
I would be happy to give a story later on about what happens when a little firm like ours tries to renegotiate a mortgage. That would be a new point. I will just stop there.
The Chairman: I understand your concern about the big five controlling roughly 80 per cent of the market. I do not know what public policy can do about that. I do not know how you could constrain the system that would enable us to prevent the 80 percent figure from rising.
Mr. Holland: I do not have a problem with them controlling the 80 per cent. I do not think it is good for the economy. I do have a problem where one of my salesmen asks to have their account transferred out of the institution and the institution calls them and says, "Really, we do not think you should move the money from where it is now." An RRSP loan is not part of anyone's security, at least not to my knowledge.
In another case, an individual had an inheritance which happened to be from a parent who had dealt with the same institution.
The individual was going to move the money out and was told, "If you do that, there will be implications for what you are doing here with us, but if you go to our associated investment firm, we might be able to give you better terms on something else." These are things on which we cannot compete with them. What I am trying to say is that if there were a Chinese wall, we would not have the problem.
Senator Angus: It is well known among investment dealers that there is only so much government business out there -- indeed, there is only so much business in Canada. Someone told me the other day that when someone working for one of the big five goes out to make calls these days, there is only X number of calls he needs to make, whereas it used to be five times X. I do not know if you agree with that or not. You are competing in making those same calls. Let us say that BCE has an issue. I gather you are saying it is very hard to get in on the sale.
Mr. Holland: I am saying two things. First, it is hard to get in, yes. Second, a large percentage of the Canadian public is precluded from participating, period.
Senator Angus: I know that.
Mr. Holland: That is really not good for the economy.
Senator Angus: How do we deal with that as a matter of public policy?
Mr. Holland: As a matter of public policy, it might be effective if you were to say that 10 per cent of any underwriting had to be offered to a selling group, and there are 100-odd members who would be available to come into it. Many times there is no selling group on a deal.
Senator Angus: I remember, for example, when CN and Air Canada were privatized, these points were made. There were selling groups set up for local distributors or firms like yours. Am I correct on that?
Mr. Holland: We ended up being an underwriter, but there was a selling group on top of that, in which other dealers who were not involved in the deal were participating. Again, I think the selling group was 5 per cent. However, there were many people out in the public, particularly the small individuals, who could not get anything. Many times, you will not satisfy all the demand, but you would certainly get a much broader distribution, which would be good for the company, the economy and the public.
Senator Angus: Let us say we were to recommend that there be a restriction or requirement such as 10 per cent, for example. Where would that appear? How could we do that?
Mr. Holland: As a policy, all you would have to do is say to the industry that you would like to see the distribution process be more encompassing.
Senator Angus: I take your point, and there are certainly sympathetic ears here on that. I remember one witness years ago who had started up Midland. It was a small firm. One client told some friends in Montreal about it; they hustled and it grew. I see witnesses coming this afternoon from the successor firm of that original small firm. We have seen little firms start up in Montreal, such as Beacon. They hustle because they feel they have to try harder. Is it so concentrated now, especially with the banks owning the majority of those big five dealers, that there is just no way that even the hardest hustling little firm like yours can succeed in the market?
Mr. Holland: Not at all. We have been profitable since day one and we continue to grow. For different reasons, there are many more firms in the industry today than there were 10 years ago. Mind you, collectively, they have a smaller piece of the business than they did 10 years ago. Conversely, the majors have a larger piece of the business than they did 10 years ago. That trend may continue.
There are opportunities for companies like ours, from many points of view. Many people do not want to do all their business with one bank, two banks or whatever. They want to do something away from them. In some cases, the banks may be their competitor, directly or indirectly, so there is an opportunity for us.
There is also an opportunity for us, inasmuch as we may have a small niche. We put on an investment seminar every year, which we have done for six years. I was in St. Andrews. I had 42 Canadian money managers and four American money managers there. I had the three ministers of finance, and the deputy from P.E.I. since the Minister of Finance was busy with another event and was unavailable. I had the presidents or the CEOs of four public utilities present, plus 17 presenters over two days. We do something that is unique in our part of the world.
Senator Angus: It is a marketing program.
Mr. Holland: Yes. And I am told that two of the major companies, two or three years ago, approached some of the people who make presentations at this event and said, "Is this something we should be doing?" All we did was copy what Pemberton Securities out west did very successfully for many years. These two major houses were told by different people that there was probably room for only one. We have chosen to do it. They probably do not have to reinvent the wheel because we have done it. That is fortunate and fortuitous for us because it gives us visibility.
If I may, I would like to address a point on mortgage refinancing. We own our own building. Just over a year ago, I went to refinance it. I had half the mortgage on demand and the other half had one year to go. My mortgage with the one-year term to go was at 7.65 per cent. At that point in time prime was 8.25 per cent. A one year mortgage rate was 9 per cent. We were forced to pay three months' interest to the bank, while the bank at the same time would be able to take our cash and pick up 1.35 per cent. They were charging us to help them improve their position. I do not know what the rationale of it was other than that they were probably quite upset that I was taking the business away from them. They were penalizing me. I was quite uncomfortable. When I read this note in the white paper, I thought it was something I should comment on.
Senator Angus: This issue of the so-called tied selling and cross selling is very troubling. While you were speaking, I was thinking of the five dig dealers. They are all owned by one or another of the banks, so when there is an issue, it doubles. It multiplies the concentration. On the one hand you have the banks, while on the other you have securities firms. If you are dealing with the bank, which are now in the investment counselling business as well, they may say, "We notice you have done a few trades with Beacon. They will probably not get any of this issue. If you want some of it, you should deal with Wood Gundy or RBC." Is that what you are getting at?
Mr. Holland: That is not what I was getting at, but that will probably be out there where, again, all the banks have their major investment counselling firms. They are managing $20 billion plus and they are doing an underwriting, if it is of interest to them. They will certainly get the first refusal. Again, it will be more difficult for the small individual.
I was not concentrating on an account that is with a dealer because an account with a dealer comes across easily without any coercion. But when an account is with a bank, the banks become protective or heavy handed. In some cases, individuals feel that it is threatening because their credit line is important to them. They do not know how far they will be pushed.
Senator Angus: You are a relatively small individual -- I do not mean your salary here -- but have you been involved in a situation where, for example, a typical client of your firm has a small business or a consumer loan for "X". The bank knows that they have a portfolio, so they want the whole portfolio as collateral. They downgrade its value so that they have the portfolio. They then say, "If you do not want to put it up as collateral, you have to deal with us."
Mr. Holland: We have not had to deal with something like that, but we have experienced a situation where the client's RRSP is held by a bank. I do not have the exact numbers, but in the three cases that I am thinking about, one was less than 100 and the other two were slightly over 100. The individuals went to move them. A lot of pressure was put on the individuals to the point where they were not moved. The individuals were not in a position where they felt strong enough to move their RRSPs. They wanted to move them because they were not getting the performance from the individual who was looking after their investment at the bank.
Senator Angus: Were they self-administered plans?
Mr. Holland: They were in mutual funds at the bank. The funds were not big enough for them to go to their dealer because they are looking for bigger accounts than that.
Senator Meighen: Mr. Holland, obviously you are filling a niche. You have been profitable every year. Obviously, people want to deal with an independent institution -- at least, a number of people do and attach some importance to it.
You mentioned one thing here that might be of assistance to you in terms of being able to participate in a selling group. Is there anything else in that line that would be of assistance in an organization such as your own?
Mr. Holland: We have an institutional business that deals right across the country with the major household names in all the provinces. We have a retail operation that deals only with private individuals in Nova Scotia who, by and large, are on the smaller side. We have had difficulty trying to increase that kind of business, which is the niche that we are going after. We are not trying to compete with the RBCDSs, the Wood Gundys, or whoever, because they have people who have different support services than we have. We have professional people. We give a personalized type of service to a client who they, by and large, are not interested in servicing.
Senator Meighen: An organization called CARP appeared before us yesterday. This organization is for seniors. The point was made forcefully to us that the large finance institutions sometimes have neither the degree of competency in their employees nor the desire to deal on a one-to-one basis with seniors who are, in many cases, apprehensive and confused about what is available to them. That is a group to which I am sure you would appeal.
Mr. Holland: We are trying to deal with these people and with others in similar situations. Our people are much more professionally qualified than the individuals with whom these people are dealing at the banks. They are being precluded from moving their business to where they will be better served.
Senator Angus: For the same reasons?
Mr. Holland: Yes.
The Chairman: Thank very much, Mr. Holland, for appearing before us today.
Our next witnesses are from the Independent Investment Dealers Association, led by Mr. Robert Schultz, the Chairman and CEO of Midland Walwyn. I would ask him to come to the table.
I have circulated to all of you a prelude of Mr. Schultz' comments, which appeared in today's Globe and Mail. All of us have the article, which describes where you are going. Welcome to the committee. Please introduce the colleagues who are with you to the committee. You may then proceed with your opening statement. On the basis of your media piece and your document, we will then have a number of questions to ask you. Thank you for taking the time to come up from Toronto to see us.
Mr. Robert Schultz, Chairman and CEO, Midland Walwyn Capital Inc., Independent Investment Dealers: Thank you for providing us with the opportunity to speak to you today about tied selling, Mr. Chairman.
With me today is Peter Bailey, CEO, Gordon Capital Corporation; and Lorie Waisberg, Q.C, Partner, Goodman Phillips and Vineberg.
In 1987, the four pillars were removed. Apparently, they fell in only one direction, permitting the banks to get into everyone else's business. Why we should not be able to undertake some of their business activities is not clear to me. We understand that the agenda for this round of hearings is determined by the department's white paper. However, we think that some major issues regarding the structure of our financial services industry are being ignored because of the way the review has unfolded. It is vital that these issues be addressed by the task force on the future of the Canadian financial services sector.
Today, we will talk to you about tied selling because that is the major competitive issue raised in the white paper that the non-bank-owned dealers have to deal with on a day-to-day basis.
Over the last 10 years, the investment industry has become dominated by the major Canadian chartered banks. Recently, the banks have been busy integrating the operation of their investment dealers with those of the banks. This has created the tied selling problem both for individuals and corporations.
Tied selling is described in the Department of Finance white paper as something that occurs when a firm requires a customer to buy one product as a condition of purchasing another.
Four main objections have been asserted to the proposed extension of the existing Bank Act ban on tied selling to include all financial products and services. These objectors say, first, that tied selling does not take place; second, if it does, it is isolated; third, that the Competition Act provides adequate protection against tied selling; and, fourth, tied selling is being confused with beneficial cross-selling or relationship pricing.
Let me deal with each of these objections. First, on the question concerning whether tied selling takes place, most people are reluctant to talk about tied selling on the record because to talk about the incident would only jeopardize the credit that the customer was nervous about in the first place. I have received numerous complaints from my investment advisers and clients. While most people are reluctant to speak for the record, recently some Canadians have been prepared to tell their story for attribution. I am pleased to provide the committee with details of three of the incidents that have been related to my office in the past few days.
Second, the banks have argued that if tied selling occurs at all, it is isolated and rare. That is not the point. As the Consumers Association of Canada recently said, a consumer who has been coerced should not have to prove, as is now required under the Competition Act, that the particular institution made a practice of coercing its customers, only that the individual was in fact coerced.
We agree. One coercive tied sell is too many. No Canadian consumer should be subject to an abusive tied sell, even if it is an isolated incident.
Third, it has been suggested that the Competition Act is the place to go to redress this problem. I will tell you why the Competition Act does not properly address the problem. Under section 77 of the Competition Act, the director can apply to the Competition Tribunal to seek an order remedying tied selling. In Canada, tied selling is not illegal until the tribunal determines that the behaviour is inappropriate. To make this determination, the tribunal must find that the tied selling is a practice and that it would result in a substantial lessening of competition.
The evidentiary hurdles are significant. We believe that section 77 of the Competition Act is not an appropriate response for a coercive use of the credit granting power.
Regarding the fourth objection, of course we understand the difference between tied selling and cross selling. The difference is coercion. We are not seeking to outlaw beneficial cross selling or relationship pricing. We are seeking to outlaw coercion by precluding the use of the credit granting power to pressure or coerce consumers into buying a product or service from a supplier that the consumer would not freely choose.
I should like to now call on my colleague, Peter Bailey, to describe the remedy that we are seeking.
Mr. Peter Bailey, CEO, Gordon Capital Corporation, Independent Investment Dealers: Mr. Chairman, in the United States, anti-trust acts have regulated tied selling and other anti-competitive behaviour in all sectors of the economy for over 75 years. Notwithstanding that, in 1970, Congress specifically amended the Bank Holding Company Act to prohibit tied selling by banks. We are asking that similar protection be extended to Canadians. The Consumers Association and the Canadian Federation of Independent Business, the two principal voices of financial services consumers, have indicated their support for this.
Section 416(5) of the Bank Act currently prohibits coercive selling of insurance products by a bank. This section provides that a bank may not pressure a borrower to place an insurance for the security of the bank with any particular insurance company. This prohibition has been part of our banking legislation for years. Now that the banks can operate in all areas of financial services, we believe that the section should be broadened to prohibit banks from the coercive selling of any financial service or product.
Our proposal is that section 416(5) be amended to read: "No bank shall exercise pressure on a borrower to purchase or obtain any financial product or service from any particular supplier, but if a financial product or service is required in connection with a loan, a bank may require that a supplier chosen by a borrower meet with the bank's approval, which shall not be unreasonably withheld".
You will note that the operative words in section 416(5) require a bank to exercise pressure in order to commit an offence. In this way, the pitfall of inadvertently banning beneficial cross selling or relationship pricing would be avoided.
In summary, we believe that tied selling needs to be addressed. We believe that our solution is consistent with the thrust of the Bank Act and is a reasonable solution to a real problem.
We welcome any questions you may have about our proposal.
The Chairman: Thank you very much, gentlemen.
I want to be clear on your proposal. For a considerable period of time, as Mr. Bailey said, the existing Bank Act has prevented banks from making a requirement for the purchase of insurance -- which they often require as security against a loan in case someone borrows money or takes a mortgage and then dies before it is paid off -- from an insurance company which it directs. They can offer it from their own company but they cannot require that you buy it from their own company.
You are essentially saying that, given that banks are now in a series of other financial services, now that the pillars have, in effect, collapsed, a similar prohibition ought to exist with respect to directing business to a particular investment dealer, trust company or whatever. Is that essentially what you are proposing?
Mr. Bailey: Yes.
Senator Angus: I think it is quite clear what they are proposing.
Gordon Capital is not connected with any bank, is it?
Mr. Bailey: No, we are not.
Senator Angus: I thought you were at one point connected with the CIBC.
Mr. Bailey: No, we have never been.
Senator Angus: Not at all?
Mr. Bailey: No, sir.
Senator Angus: Witnesses from the credit unions this week told us about a relationship with Midland. Is there a joint venture going on?
Mr. Schultz: We are the servicing arm for a securities or investment business that the Credit Union Central is trying to establish within its organization. We are providing back office services for a price. To help them to get this operation started, we provided some financing by way of a loan. That was an earn into 20 per cent of their operation, but they have the ability to pay that off at any time, after which we will just be a third party supplier of services.
Senator Angus: I am not suggesting that there is any tied selling deals between your firm and the credit unions, but just in terms of credibility I wanted to raise that immediately.
Mr. Schultz: We bid for that against other competitors.
Senator Angus: Fair enough.
You have tabled three cases. Could you briefly explain the cases and tell us how your proposed amendment to section 416 would deal with them?
Mr. Schultz: I will explain the case of John and June Gallin of Guelph, Ontario. They are a retired couple who have been customers of the Royal Bank for over 50 years. In May of 1996, they sold their country home to purchase a new home in a retirement community in town. To effect that transaction, they required bridge financing of $145,000 for a period of one week. They approached the Royal Bank for the bridge financing. They were informed that the loan would be made but they would have to pay a fee for paperwork of $1,000. They were informed that if they would transfer all their financial assets -- specifically an RRSP at our organization -- to the Royal Bank, the paperwork fee would be waived.
The Gallin's sought to meet their branch manager to discuss the offer, which they believed to be quite unreasonable. They were unable to obtain a meeting with the manager, which I find interesting since they were clients of the bank for 50 years.
This sell is blatantly coercive in its essence. On the surface, the bank's offer to waive the paperwork fee for the Gallins would appear to be an example of relationship pricing. Common and acceptable instances of relationship pricing include routine offers to lower an interest rate on a mortgage by a quarter of 1 per cent if a consumer will consolidate his or her business with the bank. A paperwork fee of $1,000 is utterly unreasonable. Expressed as an interest rate on the loan, it would amount to approximately 38 per cent per annum. As a service charge, it is equally disproportionate. Indeed, the offer to waive it suggests it is wholly arbitrary and intended simply for use as a coercive lever against the customer. This is clearly an example of the type of exertion of pressure which we feel our proposed amendment would prohibit.
Senator Angus: Have any of you heard of a paperwork fee? I have heard of standby fees and various other kinds of fees which banks charge when you are doing a lease-back type of agreement, for example, but I have never heard the expression "paperwork fee".
Mr. Schultz: No. I am just quoting from their story.
Senator Angus: So this is perhaps a new mouse trap.
Do you do not feel that that is illegal at present?
Mr. Schultz: It is illegal presently under the Competition Act. The evidentiary hurdles are significant.
Mr. Waisberg: In order for it to be illegal, there would have to be a proceeding before the tribunal in which two things would have to be established; first, that it is a practice and, second, that it has the effect of substantially lessening competition. Arguably, this would not meet that second hurdle.
Senator Angus: I understand that. However, it is not illegal under any other law of which you are aware.
Mr. Waisberg: If it were a little higher, it might be usurious.
Senator Angus: Thirty-eight per cent is fairly usurious.
Please proceed with the case of Rhonda Oxley.
Mr. Schultz: It is the case of Rhonda Oxley of Orillia, Ontario, who works for the Retirement Council of Canada. She has been a customer of different financial institutions. When Ms Oxley's mortgage with the Laurentian Bank came up for renewal, she decided to approach other financial institutions in search of a better mortgage.
Senator Angus: Do you mean a better rate?
Mr. Schultz: Better terms, et cetera.
She approached the Bank of Nova Scotia where she was informed by the mortgage officer that it would be easier for the bank to approve her mortgage if she had other dealings with them. In particular, it was suggested that she transfer her VISA from CIBC. This is a blatant example of tied selling. The clear inference was made that approval would be denied if she did not transfer her VISA. No other interpretation by the consumer would be possible. It is clearly an example of the type of "exerting pressure" that the independent dealers' proposed amendment would prohibit.
Dr. Vernon Bowes, from Dartmouth, Nova Scotia is the Chief of Laboratory Medicine at Dartmouth Hospital and has been a customer of different financial institutions. In 1996, he approached the Royal Bank of Canada for a consumer loan with which to pay some back taxes to Revenue Canada. At the time, he had four current debts, including a mortgage with the Royal Bank and the CIBC.
Dr. Bowes was informed that because of his existing debts, his debt servicing capacity was probably insufficient for the loan to be approved. The loan officer undertook, however, to seek approval from the bank's loan centre. She subsequently informed Dr. Bowes that the bank would extend him the loan provided he consolidated all his existing debts into a single loan with the bank. They also would require him to transfer his RRSP to the bank in order to provide the bank with security.
This is confirmed in an "In Progress Credit Application" document given to Dr. Bowes by the bank which states:
This consolidation would be contingent on all business being transferred to us -- RRSP-mortgage -- upon renewal.
The tied sell in this case is more subtle but is, nonetheless, an attempt to coerce the victim's business. There is nothing wrong with the bank requiring consolidation of existing debts. However, it is illegal under the Income Tax Act to use an RRSP as security against a loan. It is impossible that the bank, both at the branch and loans centre level, would not have been aware of this. Given this awareness, the portrayal of the demand for Dr. Bowes' RRSP as a security issue can only be viewed as a thinly disguised tied sell.
The bank chose to demand his RRSP as a condition of granting credit while pretending that it was needed as security. This is an instance not only of a tied sell but of misleading a consumer. It is clearly an example of the type of exerting pressure that the independent dealers' proposed amendment would prohibit.
Senator Angus: I inferred from what you said that these are merely the tip of the iceberg; that it is difficult to get people to come forward; it is not easy to get the evidence. Is it your submission to this committee that this is a widespread practice by the major banks?
Mr. Schultz: We believe that it is widespread but we do not think that is the point. The point is that one tied sell is too many. It is a question of the impact on the consumer. There are a number of former bankers working for our organization who have confirmed this goes on to a considerable extent. However, as I said, that is not the point.
Senator Angus: It is partly the point, surely. Why is one too many? I suppose it is because it is a practice which is contrary to freedom of choice.
Mr. Schultz: It is an act of coercion on consumers. It is a point with which the consumers association agrees. They are the primary body lobbying on behalf of consumers. Any individual facing such coercion is in a very difficult situation. They should be able to take their business wherever they feel they are getting the best service.
Senator Angus: I believe your two firms are members of the IDA?
Mr. Schultz: That is correct.
Senator Angus: The IDA appeared before us as well. Is this the type of issue which might be vented at the IDA?
Mr. Bailey: The purpose of the IDA is as a self-regulatory body. As you gentlemen well know, our industry is very heavily regulated. The IDA spends much of its time on that. Over the last ten years, the members' businesses in the IDA have grown quite a bit apart. Therefore, we do not have a cohesive front on all subjects at all times, as we did in the old days. People are now marching to the beat of different drums. I do not think it is really an IDA issue.
Senator Angus: In any event, it is not an issue you have brought to the IDA, is it?
Mr. Schultz: The IDA would find itself in difficulty with this situation because it is made up of independent firms as well as bank-owned firms. It is difficult for the full-time staff of the IDA to take a position on this. This is not the first issue on which there have been different viewpoints between members.
Senator Angus: Quite apart from your appropriate position that one tied sale is too many, is there no other benefit to you independent investment dealers in stopping this practice?
Mr. Schultz: What we are after here is to level the competitive playing field. We think that if we could achieve that, there would be benefits not only for us but for the consumer. That is the main point.
Senator Angus: Obviously, you have had a look at the white paper, which has specific provisions related to tied selling. Do you have any other comments you would like to make on the government's white paper with regard to the March 31, 1997 proposed legislation?
Mr. Schultz: With regard to the white paper, that is the major issue as it pertains to us. There are other issues, such as Canadian Payments Association and Interac membership, which are being dealt with by a separate committee outside the white paper, as I understand it.
Senator Angus: Have you had occasion to discuss this particular issue with OSFI or the Department of Finance?
Mr. Schultz: We discussed it with the Department of Finance last fall.
Senator Angus: With regard to your proposed statutory amendment, the one you have elaborated here, did you put that idea to them?
Mr. Waisberg: Yes.
Senator Angus: However, it does not appear in the list of technical amendments.
Senator Meighen: My comments are directed in the main to Mr. Waisberg. I think we all agree that we have the moral authority, the precedent of the Bank Act and the feeling that tied selling is not a practice that anyone -- certainly not a legislator -- wishes to encourage. I do not know how to phrase my question without appearing to be disrespectful. To the contrary, Mr. Waisberg, I know of your reputation and your talents. Have you researched quite thoroughly the wording and the suggested proposal with regard to section 416(5)? For example, is there a difference between the words "pressure" and "coerce"?
Mr. Waisberg: I can tell you what the section now states. The amendment was designed to minimize change. The existing section 416(5) states that no bank "shall exercise pressure on a borrower to place insurance for the security of the bank with any particular insurance company". It then has the saving provision.
Senator Meighen: In looking at The Globe and Mail article I see that there is a response in the three cases, however adequate, from the financial institutions. Indeed, there would seem to be a contradiction, at least in terms of the Gallins, as to what actually was said or not said. It would be, perhaps, a reasonable challenge to convince a judge of the veracity of one version or another. You say here that the wording you have suggested making as its operative word the word "pressure" would thereby avoid the pitfall of inadvertently banning beneficial cross-selling or relationship pricing. That is my concern. I am wondering whether that is the case as you say it is. Have you anything further to add to reassure me in that respect?
Mr. Waisberg: We do not see cross-selling or relationship pricing as marketing techniques that have pressure associated with them. They have economic factors associated with them. They have relationships associated with them. "Let us show you what we can do for your RSP. Here is what we have done for others. Bring your mortgage here with your other business and we will give you a quarter point off." Those are things which do not have pressure. The consumer is free to make a choice based on what is offered.
What we think is distasteful is the exertion of pressure so that the consumer is required -- unless it has ample resources -- to deal with that vendor.
Senator Meighen: It seems to me that is a form of pressure, although there is a quid pro quo -- "I will get a quarter point off if I bring additional business." In the Gallins' case, depending upon whose version you accept, the bank was saying, "We will waive the $1,000 fee or we will reduce it." What is the difference?
Mr. Waisberg: It is a question of extent. That is why we have finders of fact. You are not the finders of fact right now.
If the so-called paperwork fee had been $100, for example, one would not have been as offended by it. However, $1,000 in the context of the loan and the time it was outstanding, et cetera, is over the line.
Senator Meighen: Suppose the truth was the bank had said, "We will waive it."
Senator Angus: That is the truth.
Senator Meighen: "We will reduce it, then." In other words, in your view, is there a distinction to be made there? Is it the $1,000 that makes it unacceptable, and illegal under your proposal, or is it the waiver or reduction?
Mr. Waisberg: It is not the waiver or the reduction.
Senator Meighen: It is the $1,000, then?
Mr. Waisberg: No, not necessarily. If the $1,000 fee is justifiable in economic terms, for example, "We charge all our customers $1,000 for bridge loans of a week," and that is appropriate in terms of the work involved in doing that sort of thing, then that is well and good.
Senator Meighen: I think the line is a fine one. That does not mean that we should not try to make it more difficult to engage in distasteful practices. If tied selling is one, then perhaps this will do it. I think it will be tough. Do you know of many cases under the present section, Mr. Waisberg?
Mr. Waisberg: There are no cases under section 77.
Senator Meighen: Does that mean in your view or the view of your colleagues that it does not happen?
Mr. Waisberg: There is clearly tied selling. The problem is whether or not it is tied selling that has the two essential ingredients; that is, first, that it constitutes a practice and; second, that it has the effect of substantially lessening competition. Those are heavy duty requirements.
Senator Meighen: I am referring to section 416(5).
Mr. Waisberg: I thought you were talking about section 77. I assume that the banks know it is there and they do not engage in the practice because the consequences are fairly adverse for the bank and the employee involved.
Senator Meighen: That may be so.
Senator Hervieux-Payette: When this was reported to you was it via your customer? Did the people come to you and say, "This is what happened to us when we went to our bank"? How did you get to have these cases reported to you?
Mr. Schultz: These people called my office to put their stories forward after it was reported in the press that we had made a submission last week to the House Finance Committee.
Senator Hervieux-Payette: I must say that they are very courageous to give their names, addresses and phone numbers. I give them my congratulations.
If this happened to me, I wonder if the new creature called the ombudsman would solve the problem of the individual, saying, "Well, I want the mortgage. I want nothing else. I do not want a VISA card. I have one."
When I open a file in a bank for a mortgage, I almost have to tell the life of my grandmother as well as mine and that of all my family. It is a very extensive inquiry. When we open an account in an institution like yours, do we have to tell our life story? Again, there is a question of knowing about almost every financial aspect of our lives. Of course, they know they have all the other services they can offer to us. Do you have a less rigorous procedure when we open an account?
Mr. Schultz: We have an obligation under the Securities Act which is called the "know-your-client rule". Therefore, when you open an account, we have to ask certain questions about your background, investment experience, objectives and other inf ormation regarding financial wherewithal.
Having said all that, it is not as extensive as the information that you give to a bank when you are going for a loan or a mortgage.
Senator Hervieux-Payette: Are some of your members offering a credit card service?
Mr. Schultz: We do.
Senator Hervieux-Payette: So you do not give us tips on the stock exchange?
Senator Angus: Yes, they do.
Senator Hervieux-Payette: If there are only three cases of courageous persons, that number is not large enough to prove that there is a common practice. However, on the other hand, there is almost no one who would dare to defy all the banks in this country. In order to protect consumers, I would support clarifying this in our recommendations.
The Chairman: Although you stated your request for the amendment to section 416 of the Bank Act, am I correct in making the assumption that you would expect and indeed favour similar clauses in respect of other deposit-taking institutions, specifically credit unions and trust companies?
Mr. Waisberg: That is correct. We regard the major evil here as the larger financial conglomerates.
The Chairman: It seems to me that there is something to be said for a level playing field, particularly in light of the fact that some of you have connections with the credit unions.
Mr. Waisberg: It is no worse if done by a trust company or a bank.
The Chairman: I understand the cases were designed to make your point. However, one could, if one so desired, draw somewhat different conclusions from your cases.
In the first case, Midland Walwyn ended up lending the individuals the bridge financing. Therefore, one could draw the conclusion that the competitive market is alive and well and that when the banks ask too much by way of a fee, someone else steps in. I think there is a potential second interpretation of that case.
Mr. Schultz: Senator Meighen asked earlier about the relationship between pricing and cross-selling versus tied selling. The point is that we do train our people to try to get all of the assets of the client; however, we have to earn that. We have to provide the service. We do not have any means to coerce people. We certainly cannot say, "If you do not give us all your trade, we will not do this trade for you." It is the coercion that is the point here.
The Chairman: I just point out the Gallins in a sense rejected the coercion and found an alternative source, as one would expect one to do in a competitive marketplace.
Indeed, in the Rhonda Oxley case, even in your own notes you say that the bank suggested that she transfer her VISA from CIBC. The fact that the bank merely suggested that could not be defined as pressure.
It is not totally clear to me that these three examples would have been caught even had your suggested amendment, which I already indicated I think is a good idea, been in place.
The difficulty is, just as Mr. Waisberg stated in response to Senator Meighan's question, as to whether there had been any charges under the existing section 416. Mr. Waisberg indicated he did not know of any because he felt the banks played by the rules, given that that was the law. I think financial institutions will always play by the rules. However, as these examples indicate, there is a sometimes a very fine line between what is pressure and what is not pressure.
I am not 100 per cent certain that your three cases make the point you wish to make. Your argument is that the powers of financial institutions have been expanded substantially from the days when the only other financial service the bank provided was insurance, and if it made sense to have section 416 there when they could sell insurance, it makes sense to have it there when they can provide a range of other services. That is a very logical step.
I do not have any difficulty with that argument; however, I do not find your examples convincing. I could have counter-argued them quite easily. Nevertheless, I fully understand the logic of your position.
Mr. Schultz: Unfortunately, I do not think those three individuals share that point of view. You have their phone numbers, and any one of you could call them and ask them whether they felt they had coercion exerted upon them or not.
The Chairman: Thank you very much, gentlemen, for your presentation.
Senators, the next witnesses are from the Canadian Fraternal Association. Mr. Richard May is the director and chairman of the Canadian Fraternal Association, legislative committee.
Please introduce your colleague, give us your opening statement, and then we will proceed to questions.
Mr. Richard May, Director of the Canadian Fraternal Association and Chairman of the Canadian Fraternal Association Legislative Committee: The Canadian Fraternal Association has been represented at Senate committee hearings in the past; however, neither myself nor Ralf Hensel have been present, so this is a new pleasure for us.
My name is Richard May. I am employed by Lutheran Life Insurance Society of Canada, located in Waterloo, Ontario, but I am here in my capacity as a director of the board of the Canadian Fraternal Association and as chairman of its legislative committee.
Ralf Hensel is a member of the legislative committee, and he has been involved in a fair bit of the detail and negotiations with respect to some of the legislative changes.
The Canadian Fraternal Association is a voluntary association, and it represents 21 fraternal associations in Canada. The fraternal associations in Canada represent about 300,000 members. They have in force approximately $9 billion of insurance.
The Chairman: Face value.
Mr. May: The assets of these organizations are in the order of $1.6 billion.
The fraternals are covered by the Insurance Companies Act, and there is a specific section of the act which relates to fraternals. We are here to help explain some of the differences between fraternal benefit societies and the insurance companies which are regulated by that act.
By and large, I would say fraternals are certainly smaller than the insurance companies, and they do not have the same types of resources available to them. A large part of their focus is on non-financial transactions. A large part of our operations are focused on benevolent, social, and cultural activities. These are often lost when looking at legislative activities related to financial institutions.
A copy of the CFA response to the white paper has been given to each of you. In my opening remarks, I should like to highlight four key points which I think are particularly important to the CFA. Certainly we are in support of the white paper proposal to establish a task force on the future of the Canadian financial services sector. We look forward to offering our assistance and providing input to that task force.
We also endorse efforts to strengthen consumer protection by protecting the privacy and confidentiality of personal records. A caution here which relates to one of the unique natures of fraternal benefit societies is that the members of fraternal benefit societies do gather from time to time for benevolent, social, and cultural purposes. As such, they may need to contact each other to arrange meetings and so on.
I can share two specific examples. If a new lodge, branch, or court is about to be formed in a particular area, those members interested in creating this branch, court, or lodge would need to contact other members, and they need to have access to the identities of such individuals to be able to do so. Similarly, in the election process for positions within fraternal benefit societies, you may need to have nomination from a number of members. You would need to contact other individuals to seek such nomination. Therefore, a certain amount of information would need to be available in order for fraternals to continue to practice the way they do.
We also support efforts to ease the regulatory burden. This objective has been clearly stated in the white paper. This is particularly true for the smaller societies where onerous corporate governance could threaten their very survival. Just for information purposes, many of the fraternals in Canada have less than ten employees on their staff, and a good many of those have less than five employees. Heavy corporate governance requirements would be quite a burden for them to carry.
Efforts are being made to fine-tune the legislation which was implemented in 1992. This is most true for the sections related to fraternal benefit societies. There were several significant errors and omissions which occurred in the fraternal section of the act. These are recognized as oversights, and we have been working quite closely with the Department of Finance and in the Office of the Superintendent of Financial Institutions to address these particular items.
Our perceptions of the white paper proposals are quite favourable. We are encouraged by the consultative process, which is a recurring theme, and we look forward to doing our part to assist regulators and legislators in implementing an effective governance system.
Ralph Hensel and I express our appreciation to the numerous officials whom we have met from the Department of Finance and from OSFI. We have been greatly encouraged by their support as we endeavour to address some of the deficiencies identified in the fraternal sections of the act.
We also thank you, the members of the Senate committee, for seeing us today.
The Chairman: Thank you. Your brief does not ask for specific amendments. Essentially, it states that you agree with the direction of many of the changes, but that it is important, given the size of some of your companies, to avoid much of the governance overhead which applies to billion-dollar companies. Essentially you plead for detailed regulatory and, indeed, legislative changes which would take into account the fact that, for example, all insurance companies are effectively not the same. Some are tiny; some are large.
However, as I read your brief, I did not notice any specific targeted changes which you would like. Am I correct that you did not state two or three or five specific things which need to be done?
Mr. May: We deliberately did not get into that in our submission. As mentioned, we have been in discussion with the Department of Finance and with OSFI. We have covered much detail on the particular items which we would like to see addressed. We have been very appreciative of the support which they have shown. I think we are very close.
The Chairman: In other words, you sense that you are getting a responsive hearing from both OSFI and the department itself. Are you reasonably comfortable now that the viewpoint of your members will be taken into account when the fine print is done on both the legislation and the regulations?
Mr. May: We are very pleased with the way it is going, yes. We are very pleased with the response. How far that responsiveness might carry up the chain is a little more difficult to understand. In fact, that is part of our purpose in being here today -- to help you have a better understanding of what fraternals are about and the kinds of issues which might be on our agenda and to give you a chance to come to know us a bit better.
The Chairman: It has been helpful. You are not one of the organizations which we seem to see on an annual or semi-annual basis. Are there specific changes -- and you may answer this by letter -- which would help you achieve your objectives?
This committee has grown to understand over the years that rules which are applied in a blanket fashion to institutions ranging from 5 employees to 20,000 employees do not make a lot of sense. Administratively, when you are designing both legislation and regulations, you are intuitively inclined to go that way just because it is simpler and easier.
If there are specific cases where you think we could be of help, let us know. Our experience and our sympathy has historically been to move away from uniformity to the extent that it makes sense, given the relative sizes of various institutions.
Mr. May: I appreciate that. There are areas where, even among fraternals, we have some differences. While most of the fraternals are very small, a few of us could be put into the category of small insurers or medium-sized insurers. The interests even within the fraternal community can be slightly different.
We do not necessarily come to the Senate committee or OSFI or the Department of Finance with exactly the same views. We prefer to see many issues covered with a degree of flexibility, and that can be a very difficult thing to put into a set of rules. We are trying our best to help in that process and to get some recognition for that, and to help people who are in the process of drafting legislation to put that into some kind of a framework.
The Chairman: Thank you.
Mr. Ralph Hensel, Member of the CFA Legislative Committee, Canadian Fraternal Association: As we have set out in the brief regarding corporate governance structure, this is a specific concern to the small fraternals. Mr. May and I represent the two largest fraternals, so we are somewhat biased. We apply many of these rules already because they are prudent and they make sense for us; however, we also have the staff to implement them. Many of the smaller fraternals, as Mr. May mentioned, have very small staffs, and it would be very difficult for them.
We certainly agree with tightening up the corporate governance provisions if there is a need. We feel there should be some recognition of the tremendous size difference among members of our organization. Smaller members should not be choked off by having too much of that regulation.
The Chairman: One of you represents IOF?
Mr. Hensel: I do.
Mr. May: I represent Lutheran Life.
The Chairman: Gentlemen, thank you very much for appearing here this afternoon. If you want us to try to help you down the road, if the responsiveness does not turn into something concrete, let us know.
Senators, our next witness is from the Congress Financial Corporation of Canada, Mr. William Davis. Mr. Davis, please introduce your colleagues for the record before you begin your statement.
Mr. William R. Davis, President of Congress Financial Corporation: With me tonight are Jean Anderson from the McMillan Binch law firm in Toronto which represents Congress Financial and its parent Corestates; Ruth Brader, who is counsel in Philadelphia for Corestates; and we will be joined by Mr. Albert Mandia, president of Cashflex, a Corestates company.
Mr. Chairman and members of the committee, thank you for providing this time from your schedule to discuss proposed changes to the financial sector legislation that negatively impact two non-bank subsidiaries of Corestates Financial: Congress Financial Corporation and Cashflex.
I am the president of Congress Financial, which is a finance company providing business loans. With me is Al Mandia, President of Cashflex, which is a data processing company, both operating in Canada. We will address you separately. I should like to give you an overview of our business and the impact of the proposed legislation on Congress, and Mr. Mandea will do the same for Cashflex.
Congress Financial is headquartered in New York and has been involved in providing asset-based lending, which is a form of business loans, and factoring to small- and medium-sized businesses for over 50 years.
In December 1994, Congress opened its Canadian office in Toronto under the terms, conditions, and authority of an undertaking received at that time. We perceived then and we still feel that there is a real need in Canada for a provider of small business financings to businesses that typically cannot qualify for traditional bank lending.
Recently we have received a letter from the Department of Finance which discussed and introduced to us for the first time this proposed legislation that would force us, as a subsidiary of a foreign financial institution, to become a Schedule II bank. This would cost us a considerable sum of money and add considerable administrative oversight to our operations.We were quite surprised by the letter, since we had been operating in Canada under the undertakings that had been approved by OSFI and the Department of Finance.
Since its inception, Congress Financial Canada has engaged exclusively in providing the small business financing product that we now provide. Many of our clients and prospective clients need working capital financing to stabilize their businesses, turn around a struggling enterprise, finance growth, and provide jobs.
Our initial Canadian research indicated that need did exist, and we still feel it exists today. Since we have been in Canada 21 months, we have reviewed over 300 loan applications from small businesses and have $188 million in outstanding commitments to Canadian companies. We presently have 89 Canadian employees, including our manager, and we plan to open an office in Montreal by year end and hopefully in Vancouver in the near future.
Many of our clients and prospects have been referred to us by banks, accountants, investment bankers, or other intermediaries. Some of these companies have actually been asked to leave the bank to comply with their regulatory guidelines and credit quality, and this causes us some concern if we are faced with similar regulatory issues and examinations as to how those loans will be looked at by the regulators on our books.
Our view that asset-based lending is a viable alternative source of financing is actually supported by the Canadian Bankers Association.In its September-October 1995 issue of the Canadian Banker, the journal of Canadian banks, an article entitled "Filling the gaps" was billed as a bankers' guide to alternative sources of capital for small and medium-sized businesses that currently do not qualify for bank financing. The article provided information on asset-based lenders. This clearly recognized asset-based lending as an alternative source of capital separate and apart from traditional banking. The same issue pointed out that banks cannot be all things to all borrowers.
To summarize our business, we are not a bank but a finance company. Congress borrows its funds under a line of credit currently with the Bank of Montreal and relends the money at slightly higher interest rates to qualified needy businesses. We do not in take deposits; we do not require deposit insurance; we do not use the cheque clearing system; and we do not lend to consumers.
We recently met with the Department of Finance and the Office of the Superintendent of Financial Institutions to explain our business and to express our concern and disappointment over this proposed legislation and its possible implications on our customers and future customers.
We entered the Canadian market under certain economic assumptions and at significant cost under conditions per the undertaking, and it hardly seems fair to us to change these ground rules after we have committed resources, capital, and our reputation to the Canadian economy.
Based on the undertaking, Congress has, in good faith, entered into customer contracts, employment agreements, and leases that would be costly if forced to be terminated. The additional cost and administrative burden of this legislation, which is geared to support a full service bank, would have to be passed on to our customers, which we do not think is fair.
We do not understand what there is about our business that needs this type of regime and oversight. There does not appear to be any benefit to our customers, the Canadian government, its people, or certainly to Congress Financial Corporation. It appears to be legislation for legislation's sake alone; it appears to be an inefficient waste of resources. The proposed regime seems designed only to establish a level playing field and a tidy system that primarily protects banks, not customers.
Our business in Canada is not banking. We do not want to be a bank, and our clients do not want us to be a bank. If we face higher costs, we will have to pass these costs on to our customers, and, if we cannot pass them on, possibly consider exiting the market. We do not have multiple sources of income to absorb these costs such as a bank might have, and we do not have cheap sources of deposits.
Our main competitors, General Electric Credit and Newcorp, are completely unregulated, yet in the same basic business. If we were to sell our business to one of these competitors, they could employ our employees, maintain our loan portfolios, and be in exactly the same business, but in an unregulated scheme.
The focus should be less on who our parent is and more on the activity in which we are engaged in Canada. We are a financial service business that should be conducted on a non-regulatory basis because no solvency or consumer protection issues have arisen under our business. There should not be competition between regulated and non-regulated institutions. We should consider the cost and availability of funds and the impact on Canadian businesses. I would not want to have to explain that our customers are being charged mainly because the Department of Finance has focused on who our parent is rather than the unique focus of our business. It may make sense to revisit bank regulation, but not at the expense of niche providers like ourselves. The focus should be on what Congress provides the Canadian business community and economy, not on our parent.
Thank you for your time.
Mr. Albert Mandia, President of Cashflex L.P. and Cashflex Inc.: I appreciate this opportunity to speak before this Senate committee. My name is Albert Mandia, and I am President and Chief Operating Officer of Cashflex Inc., a Canadian corporation owned by Corestates Bank of the United States.
Cashflex Inc. started its business in May of this year as a result of CIBC's decision to out-source its remittance processing business to Cashflex. Today, many companies are out-sourcing their remittance processing operations because the scale and nature of the business requires significant volume and continued technology investment to be profitable.
In short, in our opinion, to compete in the remittance processing business, you need to be specialized. We are a specialized company. These types of specialized business do not need to be regulated.
The remittance processing business, in its simplest form, is the retrieval of mail from the post office, the opening of envelopes, the scanning of cheques and payment invoices, encoding of cheques, and the capture of data for customers' accounts receivable systems.
Through our out-source contract with CIBC, we have saved the employment of over 100 Canadian citizens who work in our processing sites in Montreal, Toronto, and Calgary. These employees might have lost their jobs.
As a remittance processing company, we do not take deposits of any kind, nor do we have any intentions to do so. We do not participate in the Canadian payment system. We are a processing company, not a bank. Our business requires no activity in the consumer sector.
We compete with a large number of non-banks such as Household Finance, EDS, GTE, Fiserve and Qualtech, a Canadian corporation. Remittance processing services provided by these non-bank competitors are not regulated. If we were to sell our business to, say, Qualtech, a Canadian corporation, the business would go from being fully regulated -- as is proposed by the Department of Finance white paper -- to being totally unregulated without any change in the business.
We are committed to the Canadian market. In this year only, we have entered into long-term leases totalling over $2.1 million in our three sites in Montreal, Toronto, and Calgary, where our 100 Canadian employees work. The passage of the white paper proposal would jeopardize our ability to be a successful Canadian company. Our business is very low margin.
I thank you for your time, and I welcome any questions.
The Chairman: Mr. Mandia, please forgive me, but as I understand what you said, you are not in the business of lending money to anyone at all. You process information.
Mr. Mandia: That is correct.
The Chairman: You scan pieces of paper, but you are not in the business of borrowing money or lending money. You are in the data processing business.
Senator Angus: You are not in the credit card business, or anything else under the definition of the banking service?
Mr. Mandia: I do not know the definition, but as I understand it, we are not a financial service company; we are a data processing company.
Senator Meighen: Your parent is a financial service company, though.
The Chairman: How are you swept in even under these proposed changes, since a sensible definition of a banking service does not include what you do?
Senator Angus: Because their parent is a foreign bank.
Mr. Mandia: We are indirectly owned by a bank.
The Chairman: If you were indirectly owned by a foreign bank and you were running a grocery store, would you be categorized in a different manner?
Senator Meighen: Yes.
Senator Angus: That is the point.
Mr. Mandia: Under the proposed legislation, yes.
Senator Meighen: You are caught by your parentage. We have had other witnesses who are perhaps even more engaged in what might be called a form of banking service. that is, more than Mr. Mandia's organization, but Mr. Mandia's company falls under here because of its parentage.
Ms Anderson, you suggest here that what is proposed in the white paper would fly in the face of the principle of national treatment. We were given a legal opinion by another witness to that effect. Do you have an opinion?
Ms Jean Anderson, McMillan Binch, Congress Financial Corporation of Canada: We have not prepared a formal opinion on that issue to date, but we certainly can do so.
Senator Angus: It is your opinion, is it not?
Ms Anderson: Yes. It is our view that it goes against both the spirit and the technical wording of the NAFTA.
Senator Meighen: In other words, it contravenes the national treatment provision.
Ms Anderson: Yes.
Senator Angus: Both companies are subsidiaries of Corestates either through another entity or directly; is that correct?
Mr. Mandia: That is correct.
Senator Angus: In the U.S., Corestates is a deposit-taking institution.
Mr. Davis: It owns a lot of financial services, and it owns banks that do take deposits.
Senator Angus: It qualifies by any standard under the definition of a foreign bank under our laws here; is that right?
Mr. Davis: Yes.
Senator Angus: Does your counsel agree with that?
Mr. Mandia: Yes.
Senator Angus: Someone came here from Congress earlier.
Mr. Davis: It was Mr. Wayne Eggets.
Senator Angus: Is he still with the company?
Mr. Davis: Yes. He is our resident manager.
Senator Angus: He talked about asset-based and alternative banking or financing sources.
When Congress started up, you mentioned it was on the strength of an undertaking. Was that an undertaking under Investment Canada provisions or was it an undertaking under OSFI?
Ms Ruth Brader, in-house Counsel to Corestates Financial Corp, Congress Financial Corporation of Canada: It was the Office of the Superintendent of Financial Institutions
Ms Anderson: We applied for and received an order of the Governor in Council under section 521 of the Bank Act. In connection with that, Congress and Corestates gave an undertaking with regard to their activities in Canada.
Senator Angus: Did they undertake that they would not do any other banking services?
Mr. Davis: Correct.
The Chairman: When did you get the section 521 Order in Council?
Ms Anderson: September 29, 1994.
Senator Angus: In terms of Cashflex, was it the same kind of process?
Ms Anderson: Yes, the same process.
Senator Angus: Was there the same Order in Council and the same undertakings given?
Ms Anderson: Yes, the same. The Order in Council was given in late 1995.
Senator Angus: You came here in good faith, made these investments in Canada, and put out the money for your leases for Cashflex in Montreal, Calgary, and Toronto. I suppose it was a similar situation with Congress. You did this in good faith. No one brought this to your attention. You did get legal opinions concerning what you had to do. You did do it, and now they are changing the rules.
We heard witnesses yesterday who have exactly the same problem. Their competitors, who have parent companies that are not deemed by any measure to be foreign banks, can operate unregulated. You mentioned Household Finance a moment ago. They were here, as were representatives from Beneficial Finance and Avco.
In some fashion, they are competitors of yours but not directly a competitor of Congress because they are not asset-based lenders and not directly competitors of Cashflex because they are not in that kind of cheque-processing field. They have the same problem because they have people competing with them that are totally unregulated. You have enumerated people who are competing with both of your companies that are unregulated. Is that correct?
Mr. Davis: That is correct.
Senator Angus: We were surprised yesterday -- and we may not fully understand the full parameters of this -- when were given information by these other witnesses that OSFI had told them that they had to treat the white paper as if it were already law and that they should start to comply with the regulations as if they were a Schedule II bank. Has that happened to you as well?
Ms Brader: In our meetings with the regulators, they indicated to us that they would like us to discuss a transitional approach to the situation and that we should discuss with them what we would do in a transitional basis. They did not want to discuss other situations with us. They did not want to discuss the legislation particularly, but how we could move towards being a Schedule II bank.
I should like to add one other point. There is another financial service provider in Canada--and this provider is somewhat similarly situated to us, although they have their own unique issues -- who is also here tonight, namely, V and B Financial Services Inc., a subsidiary of Valley National Bank. They are also endorsing the position that we have taken.
Senator Angus: We are also familiar with another one by the name of Wells Fargo. There are a number of you. As a result, we have asked OSFI to come return here and talk to us about it. It would be most helpful to us if you could provide us, in the instance of your two companies, with copies of the Orders in Council and the undertakings given and any letters that you have received.
I believe you both indicated that you were advised by OSFI to do certain things with a view to transition. If you got this in writing, would you please give us the letter? Are there letters?
Mr. Davis: Yes.
Ms Brader: We did receive a letter; somewhat late, but we did get it.
Senator Angus: Were these letters from Ottawa or from Toronto?
Ms Anderson: It was from Ottawa.
Senator Angus: It would be most helpful to us if you could provide us with copies of those as soon as possible.
The chairman and I have spoken about this and find it incredible. We want to be sure we understand the issue. We do not want to be blind-sided. You have made a very convincing case to us, as have other witnesses. The hearings are short. We try to absorb information as well as we can; however, we have been here since early this morning and were here all day yesterday receiving many submissions on other technical issues.
Ms Anderson, are you quite able to state to this committee of the Senate that in your opinion both businesses are operating in an unregulated fashion at the moment?
Ms Anderson: Yes.
Senator Angus: Is it correct to say that you would be able to continue in our regulatory environment in an unregulated way except for the fact of your parent being a foreign bank?
Ms Anderson: That is correct. We are only required to submit a declaration each year that we are operating in compliance with our undertaking and copies of our financial statements within six months after the year end. Those are our only reporting and regulatory requirements other than as set out in the undertaking.
Senator Angus: Ms Brader, you are from Philadelphia. Did the people at OSFI indicate to you any sympathy for this apparently anomalous situation?
Ms Brader: I would say that they were somewhat sympathetic. They understood that we did not want this legislation passed. They certainly understood our arguments. They did not indicate at all that the regulation was being proposed to protect the safety of the Canadian consumer or the Canadian depositors because, of course, we do not have depositors. It was not an issue of that. It was more that they want to regulate people in Canada and, as we are owned by a bank, we ought to fall within their scheme.
Senator Angus: I understand that an element of solvency is required. As you indicated, you have lines of credit from the Bank of Montreal and you make your money on the spread.
Mr. Davis: That is correct.
Senator Angus: It is good business for the Bank of Montreal, so their ox is not being gored by you being here; is that correct?
Mr. Davis: We would hope not. We think it is good business for them.
Ms Brader: They have made their own credit decision to lend to Congress Corporation.
Senator Angus: And to enable you to be in business.
Ms Brader: Exactly.
Senator Angus: The gentleman from Cashflex named some of your competitors who are not subject to this form of potential regulation. Could you repeat that list?
Also, Mr. Davis, could you give the list of your competitors who would be unregulated and able to be in this business?
Mr. Mandia: Certainly. They are companies such as Household Finance, EDS, GTE and, most specifically, Qualtech which is a Canadian company to which we in fact recently lost some business. They are unregulated. In our business, customers often make their decisions based on price. If we were bearing regulated cost, it would clearly put us at a competitive disadvantage.
Senator Angus: You mentioned that the CIBC is the core client that enabled you to get into the market here.
Mr. Mandia: They made a decision to outsource their business; that is correct.
Senator Angus: But you have other clientele.
Mr. Mandia: Yes, we are starting to book other clientele.
Senator Angus: Is it a big market? I am trying to get a sense for who might want to have a special interest in you not being around here.
Mr. Mandia: We think it is potentially a fruitful market, yes.
Ms Brader: Another kind of customer could be the gas company, for example, or a large magazine company which has many payments being made to it. We would be collecting all of those payments and providing data in electronic format to that particular customer.
Senator Angus: You collect the payments, but you do not actually get possession of the cash?
Mr. Mandia: There is no cash; it is only cheques. We transfer the cheques in batch format to a bank for entry and deposit. We do not deposit the cheques. We have no deposit-taking function.
Mr. Davis: As far as non-bank affiliated competitors, GECC, Textron Financial, AT&T, Newcourt and PenFund come to mind right away.
Senator Angus: Are they all American?
Mr. Davis: PenFund and Newcourt are, I believe, exclusively Canadian.
The Chairman: Newcourt is definitely Canadian.
Mr. Davis: The others are U.S. based with offices here.
Senator Angus: But they are in an industrial or other field at the level of beneficial ownership. There seems to me a loophole here.
The Chairman: On the face of it, the situation, particularly vis-a-vis Cashflex, seems somewhat bizarre.
I have one last question for Ms Brader. When you talked to either OSFI or the department and were told about this change, were you given any indication of the public policy rationale for it? None of us have been able to determine what motivated it, but you have actually talked to the people. They are not scheduled to appear before us until the end of these hearings. What is their rationale?
Ms Brader: I am not sure what their rationale is, sir. As I mentioned, we understand that they are not arguing that it is a safety issue for the Canadian public because we do not take deposits and we are not in the payment system.
The Chairman: So it is not a payment system issue, and it is not a safety of deposits for consumers issue.
Ms Brader: It is not a solvency issue. Beyond that, it seems more their desire to have what they refer to as a tidy regulatory system. They are trying to create a system within which everyone who has any relationship with the bank is regulated as a bank. It is sort of an institutional approach rather than a functional approach.
Senator Angus: Are you dealing at a senior level at OSFI?
Ms Brader: Yes.
The Chairman: The system of regulation in the U.S. is institutional-based rather than functional-based also; however, on the other hand, one would have expected a degree of practicality to have crept into the regulation as opposed to simply a blind-sided, cookie-cutter approach. That is what is strange.
Ms Brader: We find it unusual.
The Chairman: As you can tell, we not only are sympathetic to your position but find it mindboggling. If we find it mindboggling, we can imagine that your reaction was somewhat more virulent than ours.
Thank you very much for taking the time to appear before us.If you have documentation relating to how you were informed and what people were expecting you to do in the next stage, it would be helpful for us to have that in time to discuss it with the witnesses from both OSFI and the department when they appear before us on October 22.
Thank you very much for attending.
Senators, our final witnesses for the day are representatives from Democracy Watch and the Consumers' Association of Canada, from both the national organization and the Quebec organization. I would ask them to come to the table and introduce themselves, please.
Mr. Robert Kerton, Chair, Financial Services Committee and Professor of Economics, Department of Economics, University of Waterloo, Consumers' Association of Canada: Mr. Chairman, I am here in my capacity as chair of the economic issues committee for the Consumers' Association of Canada. I have served on the board of CAC for several years. With me is Ms Marnie McCall who is a lawyer and director for policy for the association. You may recognize Duff Conacher who is here from Democracy Watch.
I wish to spend a minimal amount of time praising the last report of your committee, Mr. Chairman. There has been some progress made with the Department of Finance and the regulatory institutions in shifting from a solvency-alone approach to looking at consumer protection and trying to make the market work so that Canadian firms and individuals are served a little better. Your last report made some progress in that regard.
If you look back several years, it seems that the consumer did not have a problem. In a report done back in the 1970s, consumers in five cities were surveyed. The sample size was 170. They were asked about shopping difficulty. The respondents rated banking and financial services 24 out of 25. In other words, they were not detecting any problems in the early 1970s.
Recently, the Consumers' Association of Canada, in conjunction with the National Quality Institute, surveyed over 9,000 consumers about problems and quality in terms of different services. In that survey you will find some distress over the present situation. You will find, in general, that credit unions and trust companies rank somewhat higher on the quality index than do banks and insurance companies.
You may ask, "What happened in between?" In this regard, I wish to refer to a document from Alberta called the Cashion report. Although it is a 1989 document, it does contain some evidence which might be useful for your report. This is not by way of criticism but building on something you have already seen yourselves.
The report concludes by stating that there is a bewildering array of products.
Development of product lines has resulted in a bewildering array of new products and types of products. The Committee found a marketplace in which new products and services are developed almost daily....Distinguishing between the hundreds of choices at hand is confusing for all but a very few consumers.
You have to be an expert to make an intelligent choice in the financial market now.
There is a lot of noise in the marketplace that does not serve consumers well. If you want to make some improvements in that, which I am sure you do, then you need to work on some deregulation, since removing regulation will allow some competition, as well as introducing some transparency measures. The thing we recommend most strongly is the cost of credit disclosure, something which is dealt with in federal-provincial agreements. Thus far, that is one of the early successes in harmonization. We feel there is quite a bit of progress that could be made by adopting those recommendations.
We would like to go farther than the recommendations and recommend that the annual percentage rate be the biggest type on the document. I have with me a copy of one such document mailed to me by a U.S. firm which meets the U.S. law which has been in force since 1971. You may well ask why, in 1996, Canadians cannot get the same amount of information with respect to their financial transactions. This is an offer to me for an extremely expensive loan. Therefore, I did not want to recommend the seller. I refer to it merely for the truthfulness of the document.
Ms Marnie McCall, Director, Policy Research, Consumers' Association of Canada: Mr. Chairman, we also support the recommendation in the white paper to encourage adoption of the model code for the protection of personal information, which we usually refer to as the CSA model privacy code. We would like to take it a step further. Not only would we like institutions to be encouraged to use that code, we would like the institutions to be required to use it as the minimum standard for privacy.
In addition, the current recommendation makes no provision for auditing compliance or for sanctions for failure to comply. If the code were a mandatory minimum, we would also want to see audit and enforcement measures attached to it.
As everyone is aware, privacy is becoming of much greater concern to consumers, particularly as we move into various forms of E-mail, electronic banking, and Internet services. The opportunities for privacy to be breached are expanding as rapidly as the ability to more easily do one's banking. As we move forward into more electronic ways of doing business, we need to be ensuring that the privacy protections keep in step.
Mr. Kerton: I wish to say something about tied selling. Having discussed this issue at our annual meeting, our association likes the measured stance that you have taken already, which is to say, "Let us have more competition. Let us have banks sell insurance, for instance, but not to sell it in a situation which puts the consumer at risk, that is, right in the bank branch."
I have with me two letters which perhaps I could leave with you. The first one is only copied to us. It is the letter from Peter Grant which you might have seen. It went directly to Doug Peters with a copy to us. This consumer was investigating the possibility of taking out a new vehicle loan. He states that at each interview the loans officer the banker tried to induce him to transfer all his outside financial services to in-house departments at the bank. The forms of inducement included the offer of a discounted loan rate for a vehicle purchase as well as a preferential rate on his home mortgage. These offers were made on condition of bringing his RRSPs inside the bank and utilizing the bank's investment broker for stock and bond trades.
The second letter is addressed to me as a result of some discussion which was reported in the Montreal Gazette. It comes from a person in Prince Edward Island who is an agent for Sun Life. He states that one of his valued clients approached his bank branch to borrow for his RRSP contribution. He was offered the loan with two interest options, (a) X per cent if he bought the RRSP at the bank, (b) X plus 2 and a half per cent if he bought the RRSP from any other financial institution.
That type of coercion is not the end of our concern. It is kind of overt. Perhaps we can have some legislation to disallow overt coercion of this sort.
The second issue here has to do with the fact that when the consumer is in the bank branch, or with any other seller, it is not easy to shop around. You cannot extricate yourself from that transaction to find out that you are being offered one good price and something else at a really marked-up price. That is why we like the current situation in which we could encourage banks as much as possible to make new life insurance products possible without allowing any financial seller to have a consumer in a captured position where you do not have access to information that you need to make the market work.
If we do not allow that kind of choice, then we will drive some of the good sellers out of the marketplace, and we will end up with a system that is even more concentrated than the one we have now.
There are some other issues, but perhaps I can summarize. We have long been in favour of measures to allow honest competition into the marketplace. It is true that some of this competition would be targeted to people with lots of money. That is where you make money. If you are a competitor, you look at Canada, you see some practices that are 10 or 20 years behind the times for other markets, you see a chance to make a profit, so you come in and do that. However, I do not think that rules out any benefits of competition for consumers. Right now, many financial institutions are paying almost zero per cent on your savings. There must be sellers or financial service companies around the world, or even non-traditional sources in Canada, that would be willing to take a crack at getting some money for a little bit more than zero, and the consumers would be served much better than they are.
We know that technical research has demonstrated that, in the highly concentrated markets, the changes in the interest rates are not reflected to the consumers' advantage right away. In other words, in Canada or in concentrated markets, the adjustments usually favour the big institutions, and they are slower to make the adjustments both ways for consumers.
Perhaps I should let Mr. Conacher make a presentation.
Mr. Duff Conacher, Coordinator, Democracy Watch: I hope the level of interest on the committee for consumer issues is not reflected by the level of attendance at this hearing. Earlier today you heard from investment dealers who have been doing their best to pose as consumer advocates, so you have heard some consumer concerns already, specifically tied selling which I will not address since Mr. Kerton has done a more than adequate job of raising the issue.
I hope that, in its report to the government, the committee will reflect strongly the attitude that was expressed in the August, 1995 report, which is that all proposals be judged by the criteria of whether they make the marketplace safer and more secure and ensure price competition for consumers.
With regard to that, there is a particular problem which underlies all of the proposals that the government has made in the discussion paper, and that is lack of effective enforcement. On page 5 of the brief we set out five criteria for effective enforcement. There must be independent and fully resourced enforcement. The financial institutions and the enforcement body must be accountable to the public. There must be appeal mechanisms and sanctions for violations, and the government must support whatever measure has been put in place.
With every one of the proposals that have been made in the discussion paper by the government, those criteria are not satisfied, and, as a result, we feel that the measures will, in the end, be ineffective.
I also discussed in the brief the issue of voluntary compliance and how that has not been proven to be effective as a means of achieving the ends of government. It may be proven to be so in some cases through the voluntary codes project of Industry Canada, but as yet there is not evidence that it is an effective way of proceeding. Therefore, we recommend that in every issue area there be requirements, and strong requirements, in concurrence with the recommendations of other consumer groups.
I will just go through those briefly:
First, regulations to prevent the misuse of personal information are needed. Although they are recommended in the discussion paper, again there is a lack of an independent enforcement body that will have effective powers.
Second, beyond requirements to simply state service charges fully and in advance and in a uniform manner, and as well to state the cost of credit fully and in advance and in a uniform manner, we feel there should be requirements to disclose the cost of providing services and the costs of credit card operations as compared to revenues. Currently, bank profit reports and trust company profit reports do not provide enough information to determine whether they are gouging customer through banking fees or whether they are using fee revenues to subsidize losses in areas such as foreign operations which are of little benefit to the Canadian economy or Canadian consumers. This information should be required to be disclosed, and there are examples from the U.S. which could easily be adapted and adopted here in Canada.
With regard to access to banking services, we agree fully with the findings and the recommendations of the group FS Centre, from whom you will be hearing tomorrow, concerning requirements for banks and trusts to open an account to any person who legitimately requests same, to cash government cheques without charge, and to limit the hold on all deposited funds. We feel their research has made the case for requirements in this area.
There are other areas of concern with regard to the structural issues and so-called technical amendments and fine-tuning corporate governance. We feel there should be strong restrictions on self-dealing and conflict of interest within financial institutions, as well as requirements to ensure that consumer and community interests are represented on financial institution boards and that shareholders can propose social responsibility measures at shareholder meetings. I know not all of this falls within the Bank Act reform, but I also know that you are examining corporate governance issues and will continue to do so. That is why I feel it is appropriate to raise those issues.
With regard to enforcement, we have appeared before this committee in the past specifically speaking on the issue of a financial consumer organization based on the citizen utility board, or CUB, model in the U.S. Developments are occurring. Groups have formed, including the Consumers' Association of Canada and others, and we are meeting and working on developing models for that particular mechanism as well as institutions for consumers in Canada. That is why at this point we simply call on the committee to recommend to the government in your report that this be acted upon when the time comes and when the models have been developed, and to call on the government to act on this even if they cannot do so within the time frame of the Bank Act review and the review of legislation dealing with trust companies and insurance companies which ends at the end of March, 1997.
An independent financial services ombudsman is needed to satisfy the effective enforcement criteria which we have set out. Currently we have ombudsmen who are selected, paid, and directed by the banks and who cannot make binding rulings. This is simply inadequate. Even if we have a privacy code, where will consumers go to complain? Will they have any satisfaction in their complaints when currently the so-called enforcers are in a fundamental conflict of interest?
We also have raised issues which are related to work that you have done in other areas but which we feel should be included in this review. We are calling on the committee to recommend to the government to expand the review and to include these issues in the review before the review ends next year, or, at the very least, to ensure that they are included in the work of the task force which will be looking at broader issues over the next 18 months. Those issues include detailed disclosure of lending statistics and reinvestment requirements to correct lending discrimination.
You have had my brief for about a week and hopefully have had a chance to look at it in a bit more detail.I welcome your questions.
I am sure you realize, given the representations and the usual audience at these hearings, that the sellers are very organized and have many resources to influence you, to lobby you, and to put forward their viewpoint through the media and elsewhere. Some would say that perfect competition exists when we have sellers from various sectors such as the investment dealers putting their case on the market and competing and organizing to represent their interests. From our perspective, perfect competition will exist when not only are the sellers organized but the consumers are organized to a much greater level to be able to be on a level playing field and match the power of the banking, trust, insurance company and other financial sector lobbies. We hope that you will look at the financial consumer organization proposal based on a CUB model as a means towards that end, and we call on the government to act on that proposal.
[Translation]
Ms Plamondon, Service d'aide au consommateur: Thank you, Mr. Chairman, for inviting us to appear before the committee. We gave testimony last week as part of the five-year review of market intermediaries in Quebec. The observations we make today will reflect the position we took last week.
The effect of globalization has been to allow market forces to set the ground rules to the point where governments are less and less inclined to regulate. Control has thus passed from their hands to parties who are often located outside the country, something that never benefits the public.
Consumers depend on government for protection. My hope is that this legislative review will lead to greater protection. There can be no reorganization without a fundamental review of consumers' rights.
I have already had an opportunity before a Senate committee and many other bodies over the last few years to explain our many concerns as consumers. When we appeared before your committee to discuss privacy concerns, Senator Flaherty was present and there was a draft regulation, but the project remained in limbo and then there was a change of government; as a result, we now appear to be back at square one.
Speaking on a television program, Minister Allan Rock said that we would have no parent legislation dealing with privacy issues before the year 2000. We believe it would be unwise to wait until the year 2000 to bring in parent legislation for the financial sector to protect consumers. You have a golden opportunity to demonstrate that you have heard what people have been saying for several years now -- that is high time we got on with it, rather than waiting for parent legislation.
For five years, I sat on a Canadian Standards Association committee dealing with the privacy code. For five years, I was part of the electronic funds transfer system using voluntary codes. That's why I want to emphasize the point that voluntary codes are not sufficient. We did some monitoring of compliance with voluntary codes, but it was illegal in financial institutions. No appropriate recourse was available. At the time, the Superintendent of Financial Institutions told us he could not really act as ombudsman since he might be placing himself in a position of conflict. In other words, the Superintendent might receive a complaint affecting huge numbers of consumers to the point where the institution's financial solvency might be threatened. We need a completely independent process, one that is not subject to the influence of either government or industry, and is controlled by someone who can act independently. I will just leave it at that, given that we have made many representations on the issue in the past.
We carried out four surveys dealing with data confidentiality, including one in financial institutions and one dealing with circulation in the insurance sector. We made representations before a variety of bodies at conferences in both Chicago and Washington. We have also taken part in international symposia held in Ottawa. We come before you today hoping that something will be done. Given the number of senators present today, it is not clear to me whether something will be done now or whether, like Allan Rock, you intend to wait until the year 2000.
We led the battle on bank fees all across Canada, as a result of which banks were forced to publicize their fees. We now have a better understanding of their fee structure. At the same time, it can be difficult to make comparisons, given the number of different accounts and ways of charging fees, sometimes within a single account, depending on the balance maintained in that account, and even to make comparisons within a single institution. Under the circumstances, you can certainly understand how difficult it can be to make comparisons between institutions.
You talked about disclosure of credit costs, which are also fees. Disclosure of credit costs is a matter that comes under provincial jurisdiction. The Consumer Protection Act has already provided additional clarification in that regard. It is important that you take this opportunity to tell the banks to disclose their credit costs. What is needed is the highest standard among the provinces: that standard should be reviewed and then applied across the board.
When the Free Trade Agreement first came into force, I was a member of a committee and we ended up adopting the lowest standard, because governments no longer want to regulate when there are international agreements in place. They are happy to go with the lowest standard and thus avoid regulations. It is part of the whole trend towards deregulation. But we have to counter the rhetoric about globalization, the effect of which is to position the financial institutions, rather than protect the domestic market for consumers.
We are not trying to position the banks, we want to protect consumers. When I hear it said or read in the White Paper that we are going to ease the regulatory burden and thus better protect the rights of consumers, well, forgive me for saying so, but I have my doubts about that. How will we know just what is going on in the working group and whether it has given due consideration to the need to protect consumers in easing the regulatory burden of financial institutions?
I have with me a contract chosen randomly from our files, and I'd like to give you an example that will demonstrate why it is absolutely essential that usurious interest rates be reported. This shows that someone borrowed $4,032 from Avco, and over a four-year period, at an interest rate of 40.97 per cent, he will end up paying $4,223.77 in interest. He will pay more in interest over a four-year period than the initial amount he borrowed. An interest rate exceeding 30 per cent should be declared usurious. Large department stores that issue credit cards are now charging an interest rate of 28.8 per cent, and if you don't pay for a year, it ends up being the equivalent of 32.9 p. 100. Consumers are currently experiencing some tough economic times. It is precisely low-income consumers who end up approaching these institutions and paying these rates. It is important to ensure that basic financial services are accessible to all consumers, and that people with higher incomes do not benefit from preferential rates, since they can afford to pay high interest rates. The gap between the richest and the poorest in society is continually widening.
As far as the availability of basic financial services is concerned, we are recommending that when contract clauses are not clear or easily understood, they be interpreted in the consumer's favour. Indeed, Section 1436 of the Quebec Civil Code states that where a clause cannot be understood by a reasonable person, it is to be declared null and void if it prejudices the consumer. Just have a look at the agreement you sign with financial institutions and you will see that you can't make head nor tail of it.
I sat for two terms on the Conseil des assurances des personnes, which included quite a few insurers and intermediaries, and the joke going around was that only widows could figure out what was in an insurance policy. Have a look at the "replacement value" clause in your insurance policy, and let me know if you figure out what it means.
The Service d'aide au consommateur is recommending, with respect to access to basic services, that vendors of financial services be declared advisors. The term "advisor" clearly implies that we have a choice. Right now, the only products being sold are the ones the financial institution tells us to buy. So, the term "advisor" should not be used by just anybody and a variety of products should be available; for example, the consumer should be told that he can provide his insurance policy as collateral for a loan, rather than being sold additional insurance.
We have conducted a number of surveys on credit: credit at any cost, credit cards, problems for consumers and profits for the issuers. This is one of the rare forms of credit where there is no interview whatsoever, either a telephone or a personal interview. And yet the number of people with credit cards who go bankrupt is substantial.
In a report released by the Superintendent of Bankruptcy, he said that in cases of multiple bankruptcies, sometimes only credit cards were involved. We ourselves discovered that some people may have a good credit rating yet are facing bankruptcy. A person may have an A1 credit rating with the Credit Bureau, because he only has to make the minimum payment on his card to continue to be considered a good customer, even though he may be using credit from other sources, like credit cards, a line of credit or a personal loan, in order to keep up his payments.
I will move on now because my time is running out. We agree with the position taken by other consumer groups. If you're talking about reviewing the financial system, it's important to look at how institutions command loyalty from their customers through pre-authorized payments.
People who want to change institutions are often afraid that a payment won't go through or that their pay cheque won't be deposited in their account, and find it's a big headache to make the change if they already have a variety of pre-authorized transactions occurring within a single institution. We strongly recommend that you ensure that the process is as simple and easy as possible when a consumer wants to change institutions; not only does the process have to be easy, but a consumer should not be forced to deposit the equivalent account balance in another institution for transit purposes. Providing customized services is no longer the way to develop consumer loyalty. Institutions don't even see consumers anymore. In fact, the way to command loyalty is to enslave them through pre-authorized payments. A consumer who changes institutions ends up feeling insecure because he has to notify the people who deposit his pay cheque, the pension plan office, and so forth. Consumers who want to change have to go through quite a complicated exercise. Also, there has to be some guarantee that cash will also be accepted everywhere, because increasingly it is refused. They will tell you that the consumers find "plastic" and pre-authorized payments convenient, but the fact is consumers are forced to use them. You cannot buy an insurance policy without signing a contract or pay for cable television or a car without a credit card. Thank you very much.
[English]
The Chairman: Thank you. A number of us receive the tables which you produce from time to time. We find them both interesting and informative.
Senator Kenny: Mr. Conacher, who is Democracy Watch, and who funds you?
Mr. Conacher: Democracy Watch is a citizen advocacy group. We work on issues of government and corporate accountability. We have been in existence for three years. The group was started with the proceeds from a book which I co-authored with Ralph Nader entitled Canada Firsts. It is a compilation of about 180 things which Canadians have done first or foremost in the world.
We are funded by citizen donations, and we have supporters across the country.
Senator Kenny: Is it a democratically run organization? Do you have 10 members, 100 members, 10,000 members?
Mr. Conacher: We have about 300 supporters currently across the country. Our structure is such that when we reach a threshold where we can afford it and where we have a large enough membership, we will have an elected board.
Senator Kenny: At one point in your testimony, you expressed concern about banks losing money overseas. I think you were referring to some South American ventures.
Was your concern that the banks were active in South America, or was your concern that they were losing money?
Mr. Conacher: Our concern is both, actually. We think there should be much more detailed disclosure of those to whom the banks are lending and, as well, of those they are rejecting.
We feel there should be requirements on banks to disclose the number of people who apply in various loan categories; the number approved and the number rejected; comparisons by small business, medium and big business and type of business; and other categories as well. By this, one can determine whether the banks in their lending are serving the Canadian economy and Canadian consumers and job creation and other concerns. Because Canadian depositors' capital makes up 95 per cent of the capital base of any bank, Canadians should have a right to know this information and be concerned about what banks are doing with their money.
Senator Kenny: Do Canadian consumers not have the right to walk with their feet if they do not like the way their bank is operating?
Mr. Conacher: Right now they do not know how their banks are operating because the disclosure requirements are so lax. The disclosure requirements in the U.S. for mortgage, consumer, small business and small-farm loans are much higher than they are in Canada. We are simply asking that Canada adapt a measure which has worked very well in what some would call "the heart of capitalism," the United States, and bring disclosure to bear on the banks so we can tell whether they are discriminating unjustifiably.
The principle that is expressed in our request and recommendation is simply that sunshine is the best disinfectant. If we have sunshine on bank lending practices, then we may see a number of Canadian consumers walk, for example, to credit unions who are required to lend to their members and, therefore, always reinvest in the Canadian economy.
Mr. Kerton: Senator Kenny, you are touching on a very important issue. This issue has caused us some fright recently because banks have talked about merging in Canada in order to compete internationally.
The Canadian banks have done very well in the Caribbean, badly in Mexico, and they have had to withdraw from Europe because they were not competitive. The life insurance companies have done reasonably well in some other countries. Where these successes are achieved by hard work and effectiveness and so on, then we are totally in favour of that kind of expansion.
However, we are concerned, with this recent talk of merging back in Canada, that some cross-subsidy will begin. The captured monopoly market will consist of Canadian consumers who cannot secure ties or go to the international marketplace. They will be paying monopoly prices back in Canada to subsidize these ventures abroad.
That may not be what the banks have in mind, but it certainly sounds like it. Method one of competing in service is dandy. Method two is a carnivorous strategy of devouring the home market to subsidize expansion abroad. That type of growth does not benefit Canada one bit.
Senator Kenny: Let us do one thing at a time. First, do you think the Canadian banking system has served Canadians well on the whole?
Mr. Kerton: Mediumly well.
Senator Kenny: Reasonably well?
Mr. Kerton: If you measure it against the highly ineffective U.S. system, you can say that the charges come out fairly comparable to that ineffective system. Lately, banks have realized that some competition is coming in, whether it is E-Banking or some other dimension, and they have decided to become a little more efficient, and that downsizing and so on has cost a lot of jobs. It is probably evidence that they were not competing as aggressively as they were before. When you have all of these branches giving you money at almost zero, it is a huge advantage over U.S. types of banking situations where they have to borrow and lend in each little market. The Canadian banks had that advantage but did not pass the gains along to the small businesses and consumers.
Senator Kenny: Who do you represent? Are you 30 people who have a nice little operation going and there you are, or do you have reason to believe that you represent a broad mandate of most of the people who use banks?
What is fundamentally wrong with cross-subsidization? Do you think that any organization of any size, for example Eaton's or the Bay, does not have elements of cross-subsidization in it? How do they branch out into a new field, or how do they enter into a new product, or how do they open a branch in a new city?
Mr. Kerton: Eaton's does not have a charter to keep out other department stores. It does not have the Canadian Payments Association as a barrier to new entrants.
Senator Kenny: You have a fair amount of choice, as it stands now. Every time a new branch is opened somewhere, it is being subsidized by the existing branches. Are you suggesting that the bank should never go into another country because they will be subsidized by someone else?
Mr. Kerton: I do not think they should be dining on the Canadian market. Your job as senators is to devise legislation that is ideal for Canadians, including customers, consumers, firms, and banks.
Senator Kenny: That is right. However, presumably if banks are opening up branches in South America, there are some Canadian businesses that will take advantage of it.
Mr. Conway: Not if they are shutting down branches in the lower east side of every city in the country.
Senator Kenny: You seem to like it if they are making a profit in those areas, but if they lose money, you do not like it.
Mr. Kerton: We paid off the bad loans to Canary Wharf and so on. There is a five-year window over which banks can write these things down, and there is $800 million a year earned in the domestic market.
Senator Kenny: What about their good loans?
Mr. Kerton: If they are in the business of making loans, they are supposed to do a good job of it. If they do a good job, terrific, but there is no reason to have the captured part of the market subsidizing some adventures that will not stand economic scrutiny on their own.
Senator Kenny: When you say "investments", then, if I can follow your thinking, you would suggest that real estate investments should be segmented off, and banks should deal with the investments that they are making in real estate as a separate entity. If they happen in a certain year to be losing money in real estate, they should not support that by another part of their business.
Mr. Conway: We should know that. We should require disclosure of the cross-subsidization. It is Canadians' money, after all, that they are using.
Senator Kenny: It is shareholders' money.
Mr. Kerton: Not this time.
Mr. Conway: No, because 95 per cent of the capital base of any bank is consumers' or depositors' dollars.
Mr. Kerton: That should be 92 per cent.
Mr. Conway: Only 5 per cent is capital.
Senator Kenny: I am not here to defend the banks, but I am hearing sort of a hodgepodge, and I am still not clear as to who you folks represent.
[Translation]
Ms Plamondon: I represent some 4,000 people in Shawinigan who have paid their $14 annual fee. So, we have 4,000 members in Shawinigan, as well as in the region and the province. I think that's a representative sample of the population of Shawinigan and a good basis for discussion with the committee. We are in a good position to present consumers' concerns.
Consumers want to know where the company a bank decides to deal with is getting its capital. When we took a stand against allowing banks to sell insurance, we argued that financial institutions would swallow up the insurance sector because the latter was not yet prepared to operate on a level playing field. However, the kind of competition this brings does not benefit the consumer. If a bank has access to large amounts of capital, and can inject that capital into one of its subsidiaries one that can offer the same products and thus compete unfairly, since it is subsidized by bank capital -- we are clearly not serving the interests of consumers.
We believe everyone has to have elbow room and be in a position to compete. In the short term, there will be competition, but in the mid-term, and especially in the long term, that competition will disappear.
Right now, the insurance companies are playing a dangerous game. They have been saying publicly that they don't want the banks to sell insurance, but at the same time they are asking how much they can get for their insurance company and offers are being made on a regular basis. So, a certain amount of centralization will occur, but it will not benefit the consumer.
So, it is important to know how much capital is being injected by the bank into these activities and how that will affect competition.
[English]
Senator Kenny: Mr. Chairman, I know I am stretching my time. I welcome all of you as individuals. I am pleased to have you here, and I think it is useful for us to hear you as individuals. I find myself instinctively wondering when someone talks as though they are representing consumers as a broad group. Before you do that, you need better credentials than just writing a book with Ralph Nader and having 300 people who give you some money. I think it requires you to demonstrate that you have a broader mandate before you start talking for all consumers.
In Shawinigan, if you have 14,000 people --
Ms Plamondon: It is 4,000, and they pay $14 a year.
Senator Kenny: That is a pretty good population for that group. I would be curious to know how you consult them and what sort of mechanism you have.
Ms Plamondon: I have been doing that for 40 years.
Senator Kenny: This is the first time I have had the good fortune to meet you, madam.
Ms Plamondon: People know me in Shawinigan.
Senator Kenny: When people come before a committee and say they are representing consumers, it would be nice to have them say, "Here are our credentials for representing the consumers."
Ms McCall: If I could introduce the Consumers' Association of Canada to you, we are a national, not-for-profit, volunteer-based organization formed in 1947. We have chapters in all of the provinces and territories. We have five regional offices with consumer information, complaint, and assistance lines. We have approximately 10,000 members. We publish a newsletter quarterly, and we have a bulletin which is carried by Consumer Reports six times a year which reaches about 200,000 Canadians. We also have a consumer network of about 500 people at the moment to whom we periodically circulate questionnaires on consumer issues. We also publish questionnaires in the newspaper and bulletin. We also do things such as participate with the National Quality Institute in a survey of 9,000 households. That is who we are.
Senator Kenny: That is very impressive. How are you funded?
Ms McCall: We are funded partly by memberships, partly by donations, and partly by project grants we receive. This year we have support for five projects from the office of Consumer Affairs in Industry Canada. We also have ongoing projects funded by the Department of Agriculture and the Literacy Secretariat of Human Resources Development.
Senator Kenny: You must appreciate that once that is on the table and on the record, that helps put your testimony into context.
Mr. Kerton: I plead guilty to your accusation that we did not introduce ourselves well.
Mr. Conacher: We do not claim to represent Canadians. You will never hear me say "Canadians". In general, we are trying to bring a citizen's perspective to these issues. It would be helpful if you could read our brief. If you are not satisfied with the qualifications of the people who are trying to represent the consumer interests sitting before you, I hope that you recommend that the government act on the proposal for a financial consumer organization which will result -- at no cost to government or financial institutions -- in a very broad-based, well-resourced, consumer organization with hundreds of thousands of members. It would represent financial consumers and only be funded by them and directed by them. It would be democratically structured and represent the interests of financial consumers across the country.
Senator Kenny: I must confess that I did go through your brief. I was not left with a terribly warm feeling when I finished.
The Chairman: In the brief from the Consumers' Association of Canada, you gave a summary of your recommendations. I know from our private discussions that we are basically in agreement. However, I need to ask you about two of those recommendations.
Under foreign bank entry, you recommend that the Bank Act reduce the barriers to entry. I infer from that that you are opposed to what is in the white paper, which clearly increases the barriers to entry.
Mr. Kerton: We are opposed to the parts that increase the barriers to entry. Part of this deals with Interac, the Canadian Payments Association, and charters. With respect to the very large issue you raise, the Canadian Payments Association is the actual delegation of authority to a private body to have a monopoly over who gets to run financial organizations in the country. That is clearly against the public interest.
The Chairman: That is the subject of a separate task force.
In the white paper itself, there are a number of specific recommendations with respect to Schedule II banks or what will now be Schedule II banks. I assume, on the basis of that one line, you are opposed to those changes.
Mr. Kerton: We are in favour of more entry, whether the entry comes from abroad or from other local institutions.
The Chairman: With respect to the availability of basic financial services, you recommend that appropriate institutional policies be developed so that "all" those who wish access to bank and banking-like services can do so.
I understand for purposes of your constituency why it might be desirable to say that, but from a practical standpoint, you do not really mean "all", do you? Is it not somewhat impractical to think of the notion that everyone who wishes to have a service can automatically have it, recognizing that in the banking service many people want services they cannot get? Many people want loans they cannot get. It would clearly be foolhardy for the institution to do that. Many people want life insurance they cannot get because they already have a terminal disease. It struck me as so theoretical relative to the rest of your brief that I wondered if you really meant what you said.
Ms McCall: I drafted this, so it is my responsibility if it is not clear.
The Chairman: It was absolutely clear. I just did not think you really meant it.
Ms McCall: That particular reference was to a basic chequing or savings account. With respect to banking and banking-like services, I had in mind, as Madam Plamondon has mentioned, access to a very basic bank account, whether it is a bank or a credit union or a trust company.
The Chairman: It does not read that way, and it did not strike me as feasible.
Mr. Kerton: Did you think we were carrying the charge for the rich in the country to be allowed cheaper banking?
The Chairman: No. I merely thought that universality in this area had some limits.
Ms McCall: Thank you for giving us the opportunity to clarify what I thought I said.
The Chairman: We look forward to hearing from you again, certainly when we get the task force report, which will be a year from now, but quite conceivably before then.
The committee adjourned.