Proceedings of the Standing Senate Committee on Banking, Trade and
Issue 33 - Evidence, October 27, 1998
SASKATOON, Tuesday, October 27, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at
8:00 a.m. to examine the present state of the financial system in Canada (Task
Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Senators, we are here for the start of our second day in Saskatoon
hearing evidence on the report of the Task Force on the Future of the Canadian
Financial Services Sector.
Our first witnesses this morning are from CompCorp, led by Mr. Al Morson, who is
the President and CEO. As many of you will recall, CompCorp is the insurance
industry's equivalent of the Canada Deposit Insurance Corporation. It is the
organization that ensures that if an insurance company goes into bankruptcy,
policyholders are protected. You will note that on pages 222 and 223 of the
summary of the MacKay report, recommendations 117 and 118 call for the merger of
CompCorp with the Canada Deposit Insurance Corporation, CDIC. Mr. Morson is
here to address that issue in particular, as well as other issues that may
arise from the report. Thank you very much for coming. I think, Senators, you
have a copy of Mr. Morson's brief. Would you proceed with your opening
statement, please, sir, and then we would be delighted to ask you questions.
Mr. Alan E. Morson, President and CEO, CompCorp: Mr. Chairman, with me is Gordon
Dunning, who is Executive Vice-President of CompCorp.
We believe that the task force has produced a thoughtful, comprehensive overview
of the financial services sector and the challenges that it faces in a rapidly
changing global financial services market. Within this very broad overview, the
task force identified several issues in relation to Canadian consumer
protection in the event of the insolvency of a financial institution.
The task force acknowledged that consumer choice of product should not be
influenced by the different levels of government support provided to an
industry's compensation corporation, and recommended levelling this competitive
playing field. The task force recognized the increasing trend towards industry
and product convergence and the need for compensation corporations to respond
to this trend. It also focused on the current consumer confusion about the
existence of consumer protection plans, the level and limits of coverage, and
the identity of the provider of consumer protection for any particular product.
After identifying these issues, the task force went on to consider specific
solutions. It recommended two potential models. In doing so, the task force
made reference to the continuing different nature and extent of the risks
associated with life insurance companies and deposit-takers. However, the task
force did not place particular emphasis on this aspect; rather, it focused on
the similarities. We believe this particular issue requires more thoughtful
study during the next phase of implementing changes to the compensation
corporations. Detailed consideration also needs to be given to the appropriate
level of federal government involvement, provincial government involvement, and
In addition to the two potential models that the task force has recommended as
solutions, CLHIA, that is, the Canadian Life and Health Insurance Association,
recommended a third model in their submission to the task force. As a major
player in consumer protection, we feel we should comment on both the issues
raised and the solutions suggested.
At this stage, it seems appropriate to assess the validity of the issues raised
and affirm the need to address them. However, before making any decisions about
how to change or combine the compensation corporations, we recommend that
further detailed work be done by knowledgeable plan, industry and government
representatives to determine the best way to address the issues raised by the
task force, in light of some other relevant issues which we will address.
I would now like to ask Gordon Dunning to comment on the issues that have been
raised directly by the task force.
Gordon M. Dunning, Executive Vice-President, CompCorp: Thank you, Mr. Morson.
The first issue I should like to address is the level competitive playing
field. CompCorp fully supports the idea that consumers should receive the same
level of government support in the event of an insolvency, regardless of the
type of financial institution that fails.
Currently, consumers who purchase their products from deposit-taking
institutions receive both a government guarantee of protection and almost
immediate access to their funds on the insolvency. This access to funds is
achievable because of the liquidity support the government provides to CDIC.
Life insurance policyholders receive neither the government guarantee, nor the
benefits of the liquidity support.
This inequity has not resulted in reduced protection to policyholders up to this
point. CompCorp has met all its obligations in the three insolvencies it has
faced. It is true that in the case of Confederation Life, some consumers did
have restrictions placed on their funds, but the impact of this was alleviated
by the adoption of a hardship committee. Such hardship committees have been put
in place in all three insolvencies. In a different interest-rate environment,
i.e., if interest rates were rising, obviously it would be more difficult to
satisfy policyholders in the future. The availability of liquidity support from
the Consolidated Revenue Fund would facilitate greater consumer access to their
funds on insolvency and provide them with more choice at that point. Despite the
past successes, the general public still perceives CompCorp's insolvency
protection to be second-class coverage. It is, therefore, a very important
competitive issue for both consumers and the industry. CompCorp believes that
the same level of government support should be available to both deposit-taking
institutions and life insurance companies. While we do not advocate any
particular level of government support at this time, we do consider that models
with reduced government support would be entirely consistent with the general
direction of public and government attitudes.
I should now like to comment on one of the other issues raised by the task
force, which is the convergence of industries. Here the task force highlighted
the increasing convergence of industries, which causes potential difficulties
in the insolvency of a conglomerate. When more than one type of financial
institution is in a conglomerate, more than one compensation corporation will be
involved with that insolvency. That is an increasing problem.
If a financial conglomerate were to fail, poor bookkeeping, which is typical of
companies close to being insolvent, and assets in transit will blur the
ownership of assets between members of the group. It may be practically
difficult to establish which assets belong to the life company, the bank, the
trust company, the mutual fund company, and the property and casualty company
within that group.
We endorse the task force's concern and believe that if that issue is to be
properly anticipated, further study is required, and this study should
encompass not just the deposit-taking institutions and the life insurance
companies, but should cut across all the financial institutions, including
mutual fund companies, investment dealers, and property and casualty insurers.
The merger of CompCorp and CDIC is clearly not the only way and is unlikely to
be the best way of addressing this particular issue.
The task force also highlighted the issue of the convergence of products, and it
correctly identified the important overlap between the products issued by life
insurance companies and the products issued by deposit-taking institutions.
This overlap is likely to increase as products continue to develop within both
However, in its report, the task force did not place much emphasis on life
insurance, disability insurance, or life annuity products. Those products are
sold only by the life insurance companies, and they are unique to our industry.
They are not just unique products; they require very special consideration on
insolvency. The consumers of these products do not require cash compensation;
what they require is continuation of coverage. They also, in the case of life
insurance, must continue to pay premiums into an insolvent company, otherwise
their life coverage will cease. That basic difference also fundamentally
changes the way that we approach the insolvency of a life company as compared
to the insolvency of a deposit-taking institution.
With a deposit-taker, the task is to liquidate the assets and pay out the
claims. The approach with life insurance is to discontinue sales activity, but
continue operations. This allows for continuation of coverage for policyholders
while we seek new carriers for their policies, and also the continuation of the
long-term investments which life companies hold so that we can work out the
Another issue identified in the task force report was customer confusion, which
can be summed up by saying that consumers are confused about which compensation
corporation covers which product. The confusion not only exists regarding the
difference between deposit-taking institutions and life insurance companies,
but spreads across the other arms of the financial services industry, including
investment dealers, mutual fund companies, and property and casualty companies.
One of our current concerns is to ensure that consumers understand that mutual
funds are not covered by compensation corporations, and that segregated funds
sold by life insurance companies, the compensation guarantees from CompCorp,
are limited to the guarantee provided by the life company itself. These
communication issues are important to us and we have already started working
with the other compensation corporations to try to address some of these
communication issues with policyholders.
I should like to turn back now to Mr. Morson.
Mr. Morson: Regarding the two models for combining CompCorp and CDIC, the report
talked about maintaining two assessment pools, one for the deposit-taking
institutions and one for the life insurance companies. The task force
acknowledged that the insolvency risks and costs faced by the two sectors are
different. CompCorp has developed expertise in monitoring the insolvency risks
of life companies, and, as Mr. Dunning just outlined, special procedures are
needed to continue policyholder coverage should the institution fail. If
healthy lives take their business elsewhere, leaving only unhealthy lives, the
averaging principle of insurance is frustrated and the cost of failure
increases. The ability to manage these specific risks must be retained by any
new form of compensation corporation.
Mr. Chairman, I should also like to develop a couple of other considerations,
which were not specifically addressed or not addressed in any detail in the
task force report.
The first of those is the advisability of a national plan versus a federal plan.
In life insurance, while solvency is primarily a federal concern, consumer
protection and contractual considerations are under provincial jurisdiction.
CompCorp bylaws require the agreement of all 13 jurisdictions in Canada, the
ten provinces, two territories, and the federal government. Any changes require
the involvement and the approval of all of these jurisdictions. The basis for
sharing the risks and costs of coverage is national. That is, the cost is
spread right across the country. That is a strength of our current plan, which
is national, and that must be recognized and taken into consideration in the
final model that is agreed to.
A second issue is industry involvement. While some form of ultimate government
support may be required to provide the confidence considered necessary for
consumers and to deal with the unlikely, but possible systemic risk, there
needs to be important industry involvement.
We believe that the industry role is required not only to ensure that the plans
remain relevant to the ever-changing products and the risks involved in the
different financial services, but also to minimize the cost to policyholders
and depositors who will be expected to bear that cost. The more industry
involvement there is, the fewer the bureaucratic costs that necessarily
accompany government involvement there will be. At all levels of government,
ways are being sought to reduce government involvement.
In conclusion, Mr. Chairman, we believe that the task force has performed a
valuable service by identifying the issues of consumer compensation which need
to be addressed, and by putting forward two potential solutions. We urge the
committee to recommend acceptance of the proposal for a level playing field and
further study of the most appropriate way to address that and the related issues
of institutional and product convergence and consumer confusion. There are a
number of models which could address these issues and we are anxious to
participate in any future discussions regarding the most appropriate solutions.
Mr. Chairman, those are our prepared comments, and we would be most pleased to
attempt to answer any questions the senators may have.
The Chairman: In your discussion of the level competitive playing field that you
seek, you made the argument that access to the Consolidated Revenue Fund as a
means of liquidity support is important, and you made that argument on the
grounds that the Canada Deposit Insurance Corporation has that. Yet, when you
talked about the difference in the ways you and CDIC handle insolvency, you
point out that when a deposit-taking institution goes under, CDIC pays off the
depositors. In your case, on the other hand, you keep the life insurance policy
in force and simply discontinue sales. Obviously, therefore, your demand for
liquidity is substantially less than that of a deposit-taking institution that
goes under. So I do not understand and have never understood why access to CDIC
funds is regarded as so important by your industry. Many of your CEOs have made
the argument that CDIC protection, because it is backed by the government,
gives a significant competitive advantage to the deposit-taking institutions. I
asked the CLHIA for evidence, which they sent, but, in my view, their evidence
not in any way, shape, or form allow that conclusion to be drawn. That being
said, you are not the people to debate that with, so I will do that down the
road, perhaps when we get some more CEOs in Toronto next week.
Given that you handled Confederation Life so well, can you explain to me why you
need access to the Consolidated Revenue Fund, other than the fact that it would
Mr. Morson: Mr. Chairman, first of all, I would say that the issue is primarily
a competitive issue as opposed to an operational issue. There is an operational
issue; as you say, Confederation Life was handled well, but one of the reasons
for that was the interest-rate environment. The products that Confederation
Life sold in the years preceding their failure were at high interest rates, and
those interest rates, the contractual interest rates, are continued. When, as
we expect, Confederation Life policyholders get 100 cents on the dollar, that
will include interest at contractual rates from the time of the insolvency to
the date in which they are paid out. When any financial institution fails there
is a lot of uncertainty, and people would like to get their funds and take them
elsewhere. In the case of Confederation Life they were not allowed to do that.
Surrenders were frozen for four years. We had a hardship committee that met on
a weekly basis to look at all requests. If the person had a good need, then the
funds were provided, but if the intention was to put the money with another
financial institution, that was deemed inappropriate. In the end, about 85 per
cent of those requests were approved. As it happens, we were playing "big
brother" to consumers, because they got better rates by leaving their
money there, but if the interest rates had gone up, I think they would have
looked at it very differently and would have complained a lot more loudly than
they did. We are simply saying that the funds were frozen for four years,
whereas with Confederation Trust, a subsidiary, they all got their funds within
The Chairman: I have two comments. First of all, we should congratulate you on
your performance with respect to Confederation Life. When we held those
hearings, it looked like the policyholders might well lose several hundred
million dollars. Clearly, you and your staff have performed tremendously in
that regard. Secondly, you said it is primarily a competitive issue. Please
explain to me why it is a competitive issue.
Mr. Morson: It is a competitive issue, because, over a number of years of
polling, both before and after the case of Confederation Life, the industry
found that a high percentage of consumers from the general public said they
preferred the government backing. In good times, like now, it is not a
particularly big issue, because when the outlook is fine consumers do not ask
the question of their intermediary. However, when there is financial
instability, like after the failure of Confederation Life, when buying a
product everybody asks about the nature of the consumer protection. Polling
indicates that the issue has always been there, but it is only important when
there is an unstable economic environment.
The Chairman: I will turn to Senator Angus, but I cannot resist just one
comment. When polling, they got the answer they did because they asked the
question that would get the answer they wanted. If you ask, "Would you
prefer the security of the federal government verses any other element of
security?", people will always say they prefer the security of the federal
government. That is not a competitive question whatsoever. It becomes a
competitive issue only if consumers decide to put their money with a
deposit-taking institution rather than a life insurance company because of the
protection, and that is not what consumers are doing. The CLHIA has told me that
that is their evidence also, but I understand how to design questionnaires to
get answers to make a case, and that just does not make the case.
Senator Angus: I thought you were very diplomatic in your presentation and I
salute you for that, but as you will notice, our chairman likes to get right
down to the issues. In your comments you mention that the issues alluded to by
the task force report really require more "thoughtful study". I
interpret that in the larger context of your comments to mean that you think
they did identify the issues all right, but the solutions they proposed are
completely out to lunch.
Mr. Morson: Senator, I did not wish to imply that they are completely out to
lunch, because I do not believe they are. I believe that the solutions that
they put forward have potential, but I feel there are other issues that need to
be studied in some detail to see whether or not those are the appropriate
solutions, or whether there might be other solutions. We believe there are other
Senator Angus: Better solutions, I think.
Mr. Morson: Well, we are not sure yet, because until we have talked to CDIC and
government officials we will not be quite sure what would and would not be
acceptable. However, as we said, we think that the issue of a national versus a
federal plan is significant. We have a national plan, and we think that there
is a lot to be said for spreading the base of cost right across the whole
nation, rather than having separate provincial plans versus a federal plan. We
think that must be taken into consideration, but what the final solution will
we are not sure, and we do not wish to prejudge. In essence, we are saying that
we have not sat down with CDIC or government officials to discuss this. In
coming up with its recommendation, the task force did not talk to us about
whether or not these were workable solutions.
Senator Angus: Right. That is basically what I thought you were saying, and
indeed maybe I could put it another way, too, in terms of degree. Would you be
prepared to state that the status quo is better than the solutions they have
proposed, because of the complexities you have outlined?
Mr. Morson: No. I think they have identified some very good issues, and I think
some changes are required because the face of the financial services
marketplace is changing. We feel that the industry's concern about a level
playing field is valid.
Senator Angus: I am also interested in your discussion of the convergence of
industries. Although this is a larger issue, the task force report talks about
different structures that could be explored within the financial services
industry, including the holding company model. That has preoccupied us quite a
bit here. You indicated that there is overlap and confusion of assets in a
liquidation situation with different types of insurance companies and
institutions. Could you develop your comments a bit on the holding company
model and its regulatory ramifications? Would that model be something similar
to the one they are considering in the U.S.?
Mr. Dunning: Once it comes down to insolvency, the particular structure of the
conglomerate is not our main concern. I think we can respond to any sensible
structure of conglomerate. The real issue is that the conglomerate spreads
beyond both the life insurance industry and the deposit-takers, because there
are other entities in that group. Of course, with an unregulated holding
company, there is the further problem of the difficulty of identifying whether
the assets are in the regulated entities or in the non-regulated holding
company. So we share some obvious concerns about non-regulated holding
companies as well.
Senator Angus: Of course, you are familiar with the Royal Trust situation. We
have often heard that had there had been another structure, that situation
might have ended up quite differently. I understand that in insolvency you are
not that concerned about the structure. However, is there a particular
structure that you would prefer to, say, a parent-subsidiary model? Is there
something you would recommend?
Mr. Dunning: I think that we would need to look at that issue further.
Obviously, the simplistic answer is that we would prefer life insurance
companies to be downstream and nice and simple, but that is not the reality of
the marketplace. We should not be driving the structure, we should be
responding to it, I believe.
Senator Angus: You made a good point about industry involvement generally and
the need to have people who understand the specific nature of your business
involved in the solutions. We hear a lot about the issue of demutualization and
about how the rules originally proposed were so complicated as to be
inhibiting. Is there anything you can tell us in that area that might be helpful
Mr. Morson: Relating to consumer compensation?
Senator Angus: Yes.
Mr. Morson: As a compensation plan we are not concerned by demutualization. We
hope that it can proceed as expeditiously as possible, because obviously
management's eyes are on more than one ball when that is going on. There are
stock companies and there have been mutual companies; the stock companies work
very well, and that is what mutual companies will become. I think the process
that is in place is a very good one, and we hope that it proceeds expeditiously.
Senator Oliver: You said that you should like to see some different models
advanced for the protection of policyholders and consumers in the event of a
breakdown and of a default. I should like to know if you have done a study of
the models of other countries. If so, what types of new models have you
encountered? In particular, I would be interested to find out whether there are
any models that include some degree of self-regulation and self-insurance, not
just federal or provincial government insurance. The reason I ask is that in
your presentation you said, "While we do not advocate any particular level
of government support at this time, we do consider that models with reduced
government support would be entirely consistent with the general direction of
public and government attitudes". Implicit in that statement, it seems to
me, was a suggestion that maybe we can have some kind of protection for the
public outside of government. If so, what would that be in your models?
Mr. Morson: By "government and public attitudes", I meant Canadian
government and public attitudes, not worldwide government and public attitudes.
As far as other countries are concerned, we are somewhat familiar with a model
that has been looked at in the U.K. Currently, they are studying a plan which
they hope to put in place in 1999 or 2000 under the financial services
authority. It is a government scheme with three different plans, one for
insurance, one for deposit-taking, and one for investment dealers.
As for private-sector plans, the only one we are familiar with is ourselves. In
their separate submission to the task force, the CLHIA said they came up with a
model which had CDIC stepping back from government support and CompCorp
stepping up to get a little bit more government support, making them both
industry plans with the government as the lender of last resort. With the
government as lender of last resort, consumers would be assured that the
government was there, if needed. Also, systemic risk could be addressed because
a process would be in place if major problems did arise.
Senator Oliver: But do you countenance any system wherein the government is not
the lender of last resort in any of the models that you think would work?
Mr. Morson: CompCorp has worked so far, therefore it is not impossible. I do
believe, however, that systemic risk has to be addressed, either in advance by
having a process in place, or else after the fact, possibly in a chaotic
environment. I do not think systemic risk is a big problem for deposit-taking or
life insurance in Canada, but it is not impossible at some time in the future.
Senator Oliver: When Senator Angus tried to get your real reaction to some of
the recommendations of the task force, it was like pulling teeth, and you did
not articulate what you think the weaknesses of the recommendations are in a
way that I could understand. If more study is needed, could you identify now
what specific things need to be studied and why? They may be things that this
committee might be able to do at a later time.
Mr. Morson: There are two key things that we think need to be addressed with
respect to the question of how to bring the two plans together in such a way
that CompCorp's strengths are maintained. First, when a company fails, CDIC's
mode of operation is to sell the assets and pay out the liabilities. CompCorp's
approach, on the contrary, is to keep a life insurance company operating, to
keep premiums coming in and to find other carriers for this coverage before the
healthy lives disappear. We wish to see that strength retained.
The second point is that CompCorp is now a national scheme. All ten provinces,
the two territories, and the federal government are involved. In terms of
assessing risk, dealing with risk, and paying for costs, it is one national
scheme with a pan-Canadian base of 25 million to 30 million people. A federal
plan would not deal with the provincial companies; therefore, either we would
have to have separate provincial plans, which would have a smaller base, or
some way would have to be found to factor those provincial companies into the
federal plan. As you know, there is CDIC and there is QDIB, and that was
negotiated over many years with a great deal of difficulty. We do not think that
that issue has been addressed, but it should be. It is a strength that we have
got now which we think it is in the consumer's interest to maintain, if
Senator Oliver: Have the life insurance companies come to you to talk about
models for changes that they would like to see for their policyholders?
Mr. Morson: Yes, they have. Actually, they made a submission to the MacKay task
force on that, and they recommended that CompCorp stay in its basic current
state, that CDIC be privatized, if you like, so that it would be an industry
organization comparable to CompCorp, and that a federal liquidity authority be
established through which either of those corporations could access the
Consolidated Revenue Fund if they required liquidity or had a problem.
Senator Oliver: And is that liquidity authority the government?
Mr. Morson: Yes, it is, but really only as a lender of last resort. From a
consumer point of view you can say that the government will be there in the
end, and, therefore, the plans will not fail. On the other hand, the government
would not be involved unless there were significant problems.
Senator Meighen: Would the idea be that the government would be there for both
industries to the same extent for each individual claim? In other words, CDIC
has a maximum of $60,000, if I recall correctly. Would that pertain to the
CompCorp side also?
Mr. Morson: CompCorp has $60,000 for its accumulation annuities, which are like
GICs, but for life insurance it has $200,000.For non-commutable life annuities
that are in the process of payment, it is $2,000 per month.For health
insurance, it is $60,000 in claims. For disability insurance it is $2,000 a
month. For segregated fund guarantees it is up to $60,000. Earlier we said that
the task force had focused on the similarities, such as GICs and the deferred
annuities, but the industry has a lot of other products that are quite
Senator Oliver: On GIC-like products, though, it would be the same?
Mr. Morson: Yes; $60,000.
Senator Kelleher: Let us refer to page 3 of your brief, the last paragraph under
the heading "Convergence of Industries". We have a compensation
scheme, CDIC, and in that paragraph we have your scheme. You say that we should
take a look not only at the deposit-taking institutions and the life insurance
companies, but also at the mutual fund companies, the investment dealers, and
the property and casualty insurers.
You are suggesting that we should get these industries involved, and that
frightens the heck out of me. Frankly, I hate to see the proliferation of all
these government-sponsored bailouts or plans of last resort. I think it is bad
enough that we have what we already have. Are you suggesting that we will end
up with a whole bunch of other plans as well?
Mr. Dunning: There is, in fact, a compensation plan for the investment dealers.
Senator Kelleher: Yes, I am aware of that.
Mr. Dunning: And there is another one for the P and C companies. The point we
are trying to make it that there is not a plan for the mutual fund industry.
Our process points out that there needs to be some form of cooperation between
all the compensation plans, because in an insolvency we are all going to have
to deal with the consumers, and we are going to have to cooperate to do that. We
definitely need a mechanism that will allow us to do that. The MacKay task
force has suggested that we put ourselves together with CDIC. That might cover
some of the issues in most circumstances, but it will not cover them all.
Senator Kelleher: With respect, I do not think you are answering my question. I
want to know whether or not you think the government should come in and play
some role in these schemes. Should it provide some funding or some measures of
Mr. Morson: We accept the issue. The issue is there, and we are saying that, in
terms of consumer confusion and coverage of products, the issue is not just
between banks and life insurance companies. It goes beyond that. That is why we
are talking about a further study. We are not advocating any particular level
of government support. What we have said is that, in the deposit-type products,
it is important that there be a level playing field.
Senator Kelleher: The point I want to get at is whether or not you advocate some
additional form of government support.
Mr. Morson: No, we are not advocating that.
In talking about those other products, it is important to realize that mutual
funds do not have a consumer protection plan.
Senator Kelleher: I understand that.
Mr. Morson: But a lot of people do not understand that. We are saying that this
is an important issue, and that it needs to be addressed. We are attempting to
address that issue through consumer protection plans at the moment. All we were
trying to say is that merging CompCorp and CDIC will not solve those problems.
Senator Kelleher: A year or so ago, Mr. Chairman, when our committee examined
the CDIC report, we were so bold as to recommend that there should be some
deductible. That is, the consumer of these services should bear some
responsibility for having put his or her money into a particular institution.
What is your opinion of the principle of some form of deductible or
co-insurance, if this were to go ahead?
Mr. Morson: In my opinion, that point was conspicuous by virtue of its absence
from the MacKay task force report. It may be that there is not much more to be
said on it, because it has been recommended before.
The Chairman: Perhaps they saw how badly this committee was hammered the three
times that we suggested it, and they decided the safe way out was to say
Senator Kelleher: We are a stubborn bunch on this committee.
Mr. Morson: The industry that we represent is not unanimous on this, but my own
personal feeling from involvement is that some form of co-insurance is a useful
thing to have. The deductible should not be a lot, because consumers cannot be
expected to understand the complexities of an insurance company. In my opinion,
however, they should care where they put their money. That is not necessarily
the opinion of everyone in the industry.
Senator Kelleher: No. In our opinion, though, you are certainly on the side of
Senator Callbeck: Do you have a board of directors?
Mr. Morson: Yes, we do.
Senator Callbeck: Is there representation on the board from the 13
Mr. Morson: No, but the 13 jurisdictions receive notice of every meeting, and
are able to attend those meetings. Once a year we have John Palmer, the
Superintendent of Insurance, attend a board meeting. The Inspector General of
Financial Institutions in Quebec also receives a special invitation to a board
meeting once a year, and discusses overall issues with us. Representatives from
the jurisdictions can come, but they do not come.
Our nine directors are all independent. They have no association with any of our
members, but they are knowledgeable people. Several are retired CEOs of life
insurance companies. Mr. McKinlay, who is Chairman of CDIC, is a member of our
board. We have lawyers and accountants, and we have a very strong
representative board, but the directors are independent.
To answer your specific question, yes, the regulators can attend our board
meetings, but they generally do not do so.
Senator Callbeck: How are the directors appointed?
Mr. Morson: The directors are appointed by the industry members. At our annual
meetings, a nominating committee of the board puts forward the directors, and
they are voted on by the membership.
Senator Callbeck: On page 4 of your brief, you talk about consumer confusion. In
the last sentence you say that you have started to work on these communication
issues with other protection plans. Which protection plans are you working with
Mr. Dunning: We have had joint meetings with CDIC, the mutual funds, the CIPF,
and the Investment Dealers Association of Canada. We have just started the
process of comparing coverage and comparing communications. We are trying to
come up with a joint communication plan to stress some of these issues. These
issues are very difficult to get across to consumers in good times, because
consumers are generally not interested until there is a problem.
Senator Meighen: I would be interested to know to what extent you are proactive.
My parents used to say, "People in glass houses shouldn't throw stones,"
but you are ranked sixteenth in terms of the clarity and completeness of
information available to consumers.
As senators and politicians, we are used to being at the bottom of every survey
done, so it does not particularly bother me, but I am wondering what you are
doing about it. What are you doing about the controversy surrounding the
clarity and completeness of information, and the issue of vanishing premiums?
Do you support the recommendations of the MacKay task force with respect to
disclosure and transparency?
Mr. Morson: This is disclosure and transparency of the insurance companies as
opposed to the consumer protection plans, is that correct?
Senator Meighen: Yes.
Mr. Morson: No, at this point we are not at all proactive in that. We have left
that up to the industry association and to the members. The consumer protection
that we are involved in is the solvency aspect of it, as opposed to the other
aspects. Ours is the solvency area, rather than the protection area.
Senator Meighen: In terms of your responsibilities vis-à-vis solvency,
can I assume that you have no objection to MacKay's recommendations on
transparency and disclosure?
Mr. Morson: No.
Senator Kroft: I would just like to turn your minds to a slightly different
aspect of a recommendation of the MacKay report. We have been talking
exclusively about the protective side of things. In recommendation 112(b), the
MacKay report says:
b) Given the importance of effective competition in the Canadian financial
services sector and the rapidly changing competitive environment, the OSFI
mandate should be revised to make it clear that OSFI has the responsibility to
balance competition and innovation considerations with its present statutory
obligations in respect of safety and soundness.
This brings in another range of responsibility, and certainly does broaden the
mandate. I was wondering what your observations might be on the benefits,
complications, or other results of that mandate extension.
Mr. Morson: That is going to be a difficult issue for OSFI to handle. If it is
solvency that we are worried about, I think that the other side is long-term
solvency with a good competitive environment. Our concern is that, unless
competition is taken into consideration, we may be fine in the short term, but
there may be a problem in the long term. I have no difficulty with that
recommendation, but I think it will be difficult for OSFI to take on properly.
I am sure they will be struggling with that.
The Chairman: This committee was intimately involved in the hearings following
the collapse of Confederation Life. Since you are here, could you just take a
minute to give us a rundown of what has happened? From what you said earlier,
my understanding is that you do not think that there will be losses, in spite
of the fact that numbers like $400 million were being kicked around when
Confederation Life went under.
For the benefit of the committee, could you just summarize where we stand, and
perhaps give us a word on how you got there? This is a real live example, and
it is always useful for us to understand how these things have been worked out.
Mr. Morson: I will ask Gordon Dunning to do that.
Mr. Dunning: The current situation is that the policyholders, under the CompCorp
limits, continue to receive 100 per cent of their benefits. Policyholders'
overall limits are currently receiving 90 per cent of their benefits.
The Chairman: As I recall, your limit was $200,000 on life insurance. Is that
Mr. Dunning: Yes, $60,000 on accumulation products, $200,000 on life products,
and $2,000 a month on life annuities and disability annuities. Policyholders
with surrenderable products got access to those funds about 18 months ago.
Consumers therefore have their choice back again. There has been no run on the
bank, and consumers now have confidence that the liquidator will pay.
The financial statements that the liquidator produces and presents to the court
are now showing that the policyholders are expected to get 100 per cent. He
says that there will be an approximately $100 million surplus.
The Chairman: Policyholders beyond the $200,000 limit?
Mr. Dunning: Yes. Beyond our limits. This is the over-limit policyholders, and,
in fact, our own recovery. The estate is showing a $100 million surplus today.
Before the liquidator can distribute that to policyholders, however, there has
to be certainty, and certain things have to happen.
The liquidator has to remove more of the difficult assets from the books, and
that includes the mortgage portfolio on some of the private placements. Those
are high-risk assets. We need to turn those into cash to get certainty. We also
want to remove some of the liabilities from the books, in order to increase
How did we get there? I think we have seen that the long-term workout strategy
works. If we had tried to get rid of the liabilities quickly, there would have
been substantial losses to policyholders. We have held a steady course on the
liquidation. This goes back to August, 1994, as the senators know.
One of the key things was to sell the life insurance business quickly. The
individual life insurance business was sold to Maritime Life. The group
insurance was sold to Manulife very early on in the liquidation, and selling it
quickly allowed them to capture goodwill in that business. The long-term
assets, the long-term annuities, and some of the accumulation products have been
kept back, and we have seen a recovery in the Canadian economy and an ability
to realize good value on some of those long-term assets. That is the broad
picture of how we have carried on.
Senator Austin: The thrust of the task force recommendation on bringing the two
plans into congruence, as I read it, basically relates to the issue of
competitiveness, which dominates the task force throughout its recommendations.
The task force offers no evidence that the industry lacks competitiveness, and
I wonder whether you have a view on that.
As our Chairman has said, there is no evidence that the consumer is tilting
towards products that are CDIC-insured and against products that are
CompCorp-protected. In conceptual terms, there are three options.
First, we can bring the insurance industry level with CDIC, which is the
recommendation of the MacKay task force.
Second, we could bring the level down, which is what I hear you saying, and work
with the government as the lender of last resort.
Third, we could remove deposit insurance completely, and let the consumer make
decisions. The playing field would still be level, and there are jurisdictions
in the world which do not provide deposit insurance.
I have come back to my first question. Is the insurance industry unable to
compete with the banking industry for savings deposits because CDIC creates an
unlevel playing field?
Mr. Morson: This is better left to the industry, I think, as a competitive
consideration. There are two ways in which they have addressed that, however.
First, they do have some anecdotal evidence of that, which I think was provided
to the MacKay task force.
Surveys have been done. The chairman is somewhat sceptical of them, but they
have been done a number of times, and they have demonstrated a problem.
The problem is of particular concern in bad times. You mentioned the three
solutions. From our point of view, either ratcheting up government support of
CompCorp or ratcheting down government support of deposit-taking would level
the playing field. We do not think that getting rid of deposit insurance would
do that, however. If co-insurance has not worked, getting rid of deposit
insurance completely probably would not work, either.
Senator Austin: When the hardship committee was set up, my understanding was
that the insurance industry's obligation to support it with funding was a
business decision. There was no legal obligation to provide those funds.
Mr. Morson: That is correct, yes.
Senator Austin: If the interest environment had been different, it would have
been a larger hurdle for the industry to deal with.
Mr. Morson: We would have dealt with it in the same way, it is just that there
would have been a lot more consumer stories. I think it is amazing that, with a
failure of this size, so few, if any, consumer stories of hardship got into the
press. With the interest environment being different, I can understand that
there would be an awful lot of pressure for moving fast.
Senator Austin: One feature of the recommendation and your own position is that,
if the government is lender of last resort, the industry does not have to
produce the liquidity. It may have to pony-up to the liability at some point,
but it does not have to produce the liquidity. That would be the advantage that
the industry is seeking.
Mr. Morson: There is an economic issue in there, too. Not providing funds on
demand probably saves money in the longer term, and it is the policyholders of
strong companies who are paying for it. There is a difficult issue in there.
Senator Austin: One of the underlying competition issues relates to large and
small institutions within the system; the CDIC system, for example. As you
know, the large banks argue that this is unnecessary and simply a subsidy for
smaller financial institutions. If you want to encourage competition, however,
that is an okay situation. In the insurance industry, how do you deal with the
competitive situation between the large and smaller institutions?
Mr. Morson: We do have a similar problem. There are 138 life insurance companies
operating in Canada -- direct writing companies -- and the system is working at
this point in time. The industry is becoming more concentrated, however. Now
the seven largest companies have perhaps 60 per cent of the business because of
the mergers that have taken place, and these issues will come up more. So far
our system has worked, though.
Senator Austin: If you buy the philosophy of the MacKay report, which is to
stimulate and create new competition, then any system we recommend should have
the capacity to shelter small institutions. That is my observation. You do not
have to respond to that.
Senator Angus: My question is a follow-up to Confederation's liquidation. I
think they had been issuing commercial papers, and they have defaulted on quite
a few. Do you have any knowledge of that? Did they pay these back?
Mr. Dunning: No, the commercial paper holders and the subordinated debt holders
are the major losers at this time in Confederation Life. They are unlikely to
get paid, although they may receive a small amount.
Senator Angus: You mentioned the amount of money that was left on hand. I
understand that amount is segregated for policyholders?
Mr. Dunning: No, in fact that is a surplus over what is reserved for Canadian
Senator Angus: Over and above necessary reserves?
Mr. Dunning: Yes, we believe that we can pay all our Canadian policyholders and
still have a surplus. That surplus will then be used to help meet the
obligations to U.S. policyholders. If both sets of policyholders' obligations
are met, there may be some money left for the junior creditors, including the
commercial paper holders and the subordinated debt holders.
Senator Angus: What is the amount of those in Canada?
Mr. Dunning: I do not know the amount in Canada. There is between $500 million
and $1 billion worth of junior creditors.
Senator Angus: As you can see, Mr. Chairman, the picture is not so rosy. The
amount is between $500 million and $1 billion.
The Chairman: I knew it was a sizeable number.
Senator Angus: It is a regulatory fiasco.
The Chairman: As I said however, the picture is better, in comparison with where
we were at the beginning.
Thank you very much, gentlemen, for coming, we appreciate that you took the time
to be with us.
Mr. Morson: Thank you very much.
The Chairman: Senators, our next witness is Mr. Keith Martell, who is the Chair
of the First Nations Bank of Canada. Some of you may recall that the idea of
the First Nations Bank of Canada was discussed with the committee back in 1992
or 1993. It was not the focus of a set of hearings, but the idea was discussed.
I can remember discussing it in particular with the TD Bank, which has since
helped in the launch of the institution.
Thank you very much for coming, Mr. Martell. We are glad to be in your home --
at least I believe this is where your head office is. Is that right?
Mr. Keith Martell, Chair of the Board, First Nations Bank of Canada: Yes, you
are in the hometown of the head office of the First Nations Bank of Canada.
The Chairman: We would like to hear your opening comments, and then we will ask
you a number of questions. Perhaps you might just take two minutes to tell us
how the First Nations Bank has proceeded since it was incorporated four years
Mr. Martell: I just want to thank the committee for the invitation to appear
before you this morning. I believe that the structure, processes, and
operations of the First Nations Bank are very unique in the Canadian financial
services sector. I also believe that the type of institution that we operate for
a specialized market of First Nations people in the country really provides
some of the competition recommended by the task force report.
I will talk a bit about our structure and operations, and give you an idea as to
how we operate. Then perhaps I will talk about the specific recommendations
that we think will either impact or support our future development of the bank.
I am the chair of the board of directors of the First Nations Bank of Canada. We
are one of only 11 national chartered banks in this country. In my opinion, the
report recommendations, if taken in their entirety, offer a fair and balanced
approach to the evolution of the Canadian financial services sector. I believe
our bank and our customers will benefit from the application of the report's
To understand how a small niche player can benefit from this restructuring of
the playing field, I believe it is important to understand the structure of our
bank and the goals and aspirations of the founders of our institution. We, as I
said, are a very unique institution. We were created as an economic venture,
working together with the TD Bank. We are, though, on a self-imposed plan to
become an independent, widely-held national aboriginal financial institution.
That is a very important phrase, "widely-held national aboriginal
We are clearly a niche player, but we believe that the Canadian economy has the
scope and size to make us viable, to allow us to offer the products and
services that we need to offer, and to give our shareholders a return on their
investment. We are confident that the recommendations of the report will enable
our development stage, in partnership with the TD Bank, to proceed at the pace
that we have planned. We are also confident that the recommendations will
enable us to be a stronger, more independent financial institution after our
partnership with TD ends, and we become fully independent.
The first explanation I always have to give is why -- that is, what is the
philosophy behind the First Nations Bank? Why do aboriginal people want their
own bank? Why not just invest in one of the Canadian financial institutions, or
better yet, be a customer and have them serve you and your needs?
Historically, the chartered banks were created when a community or a group of
business interests saw a need for financial services that were not available
from the existing institutions. One of the predecessors of the Toronto-Dominion
Bank was the Bank of Toronto. It was formed in 1855 by a group of Ontario
flower producers, who saw that their existing banks did not serve their needs
for growth and expansion. The Bank of Toronto, like many of the other banks
formed at this time, grew and flourished with the Canadian economy as
Confederation established a country. These institutions grew with our country
to be the global institutions that we see today.
In Canada, the First Nations are at a point where we perceive a need for a
financial institution that will grow, merge, and flourish with our emerging
economies. In essence, our economies are not very different from Canada's
economy in 1867. We are the base level, and we are beginning to grow, to
develop, and to diversify. We see this institution as an important step towards
the economic self-sufficiency of aboriginal people, and we see economic
self-sufficiency as a major step toward political self-determination.
That is the philosophy behind our bank. That is why our founders wanted us to
establish a national chartered bank that would serve aboriginal people.
The history of how the bank was formed is also interesting. In 1982 the
Federation of Saskatchewan Indian Nations established the Saskatchewan Indian
Equity Foundation, which was the first Aboriginal Capital Corporation in
Canada. It was established because they saw a lack of capital to develop and
expand First Nations businesses.
The First Nations people had no credit ratings, very little equity, no history
in business operations, and very little experience with financial institutions.
At this time, then, we were starting to get control of our own economies, get
control of the finances at the First Nations level, and we had very little
ability to develop the businesses that served our communities. The stores in our
communities were being run by people from outside of those communities. The
buses were being purchased by Indian Affairs, and run by Indian Affairs. There
was very little ownership of any business enterprises on our First Nations.
The Saskatchewan Indian Equity Foundation was successful. It grew to a capital
base of over $7 million in the 12 years after it was established in the early
1980s, and it issued and recovered loans of over $30 million. Our studies
estimate that it created 3,000 jobs in First Nations in Saskatchewan alone. It
also achieved -- and this is very important -- a loan loss ration of less than 1
per cent by 1995. It was no longer a development loan fund; it was really a
commercial loan fund.
Beginning in 1993, the Saskatchewan Indian Equity Foundation saw a need to grow
its Aboriginal Capital Corporation to meet the needs of its customers and of
First Nations businesses in Saskatchewan. SIEF met with a number of major
financial institutions to seek a partnership for the development of a
full-service chartered bank. The options at this time were to go for a regional
trust company, a regional credit union concept, or a national bank.
When we assessed the history of small regional-based institutions in one sector
of the economy, we thought that a national bank that included the scope of the
aboriginal economy across the country was what we needed in order to make our
institutions successful. Two proposals from existing institutions were
accepted, and, after due diligence was completed, we accepted TD's offer to be
our partner in creating this institution.
Negotiations with the TD Bank for the formation of this venture were started in
1994, and we received our Letters Patent of Incorporation under the Bank Act on
November 19, 1996.
The structure of this bank was finely crafted to meet the needs of the Bank Act.
It allows for the initial control and operations to pass from TD to the First
Nations investors over a period of time. It recognizes the value of TD's
experience, systems and technology in the creation phase of the bank. It also
recognizes the market accessibility, the impetus of our customers to deal with
their own institution, and the knowledge that our First Nations staff and board
of directors have in serving First Nations people in Canada.
The operations of the First Nations Bank are open to all customers, aboriginal
and non-aboriginal. We have personal and corporate services, and we even have
some government clients.
Through the partnership with TD, services will initially be available through
all 949 TD branches. Our advantage is that we have the services, the systems,
the products, and the customer access of a national chartered bank, even though
we are a very regionalized, specialized niche player in the market.
I will now deal with some of the task force recommendations. I believe the most
talked-about aspect of the task force is the recommendations for the assessment
of the proposed bank mergers. I agree with the report, in that these mergers
can be a valid business strategy to develop banks into world class competitors.
The report recommendations that ensure a strong, competitive, domestic financial
services sector are fundamentally the most important issues, however.
My investors and my customers are First Nations people. Their economy is still
local, as are their issues. They have local service needs. They have domestic
investment and cross-investment requirements across the First Nations in
Canada. The operations of a bank in Southeast Asia, South America, Africa or
Europe are not as important to my customers as they may be to some of the
investors and customers of the large chartered banks.
Having said this, my opinion is that mergers will not be a detriment to the
development of our institution. Our interests lie in lowering the operating
costs of our partner bank, and we believe that that will be accomplished
through the mergers. Our customers and our bank will benefit from the lower
costs of the merged banks, whether achieved through increased application of
technology, or by the economies of scale that we believe they will achieve
through the mergers.
Second, in our development phase our customers will benefit from expanded access
to services through the increased number of branches our merged partner will
have. We will be better represented in some sectors and parts of Canada where
TD currently does not have branches, and where we have not yet expanded.
Lastly, our bank will continue to focus on the needs of our customers, not on
the merging process. I am a chartered accountant by training, and I have been
through a number of mergers in the accounting industry.
As I see it, every time there is another merger, you get another spinoff of a
local or regional firm. That spinoff can better address the issues of its
customers. It can focus on what the customer needs, and provide the cost, the
consistent people, the service, and the products that customers want.
I do not believe that the merged banks will retain their merged market share,
and we can benefit from that in our target markets. I also think that the
effects of the mergers will be positive for the First Nations Bank of Canada.
Some of the specific recommendations of the task force deal with what we would
call levelling or restructuring the playing field in which we operate. Such
recommendations are very important to a start-up institution such as ours.
The recommendation to eliminate the minimum $10 million of capital would provide
more flexibility for banks in the development stage. Even though we are a very
small institution and are not using our capital to its full extent to leverage
and to provide return to our investors, we are required to input a minimum $10
million capital right from the beginning.
The recommended ten-year capital tax holiday would also be extremely beneficial
to a start-up institution such as ours. Currently the First Nations Bank of
Canada will pay hundreds of thousands of dollars in capital tax before a return
of profit for our investors. This is a significant barrier to entry in the
industry. This is especially true for a Saskatchewan-based chartered bank,
because Saskatchewan adds another capital tax on top of the federal capital
The recommendation for expanded functionality of the ATM network would be a
positive development for smaller banks. It would open access to the larger
network of ATMs. It would also provide more options for our customers, and
provide us with access to those customers without the heavy capital cost of
establishing a widely distributed ATM network of our own.
The report also suggests a reduced regulatory administrative burden commensurate
with the size of the institution. This would be a very welcome recommendation.
Currently we have the same complex regulatory and reporting processes applied
to our small institution as are applied to the largest banks in Canada. It is a
very heavy administrative burden on the small institution.
The report also recommends that a regulated widely-held institution could hold
up to 100 per cent of the shares of another regulated institution. This would
allow for a special circumstance like the Toronto-Dominion assistance in the
development of the First Nations Bank.
Although we hold true to the goal of independence from TD, we also recognize
that right now the Bank Act restricts TD's investment in our institution to a
ten-year period. This recommendation would not change our goal of independence,
but it would provide more flexibility in ensuring that, when we do want to part
company with the TD, we will be able to be successful on our own.
The First Nations Bank depends on the TD bank to clear the electronic
infrastructure that is increasingly owned and operated by a few large banks in
Canada. Fair competition for customers should be a factor of customer service
-- that is, the selection of products and the service provided. The cost of
clearing services should not provide unfair access to the clearing systems and
operations of a financial institution in Canada.
There is one last issue that applies specifically to the aboriginal community or
other inner-city, economically-disadvantaged groups. In the United States there
is a Community Reinvestment Act environment. U.S. institutions have to prove to
the central regulator that they do not only skim the best businesses out of
communities, and avoid the actual business of banking in those communities.
They have to prove that, when they serve a community, they serve all the needs
of that community.
This process, if applied in Canada, would serve niche players like the First
Nations Bank of Canada by compelling the larger banks to be competitive in all
aspects of our niche market. If they are going to seek the more profitable
sectors of the business, they must also be there to provide capital for the
housing, the car loans, and the consumer loans that the people in our
communities rely on.
This is something that was a major impetus towards creating the First Nations
Bank. Once the treaty land entitlement process became established in
Saskatchewan, and $450 million-odd dollars were dropped in as capital to First
Nations, the banks were very interested in doing business with our communities.
Before this they were not as interested. Our communities soon found out that
they were very interested in managing and taking that $450 million on deposit,
but were much less interested in the development of a store or in loaning
capital to a bus driver, or in starting up a new logging venture in northern
These are my takes on some of the specific recommendations. I would be happy to
answer any questions you may have.
Senator Austin: Thank you for your presentation. The origins of the bank go back
to when I was Minister of Social Development, and it is really fascinating to
see how far the organization has come. There are a few issues that I want to
take up with you. First of all, how do you structure loans to loan applicants
in terms of the size of the loan and the risk profile?
You have an excellent record of recovering your lending. You have what would
normally be considered to be a somewhat higher risk profile, because you are
dealing with small enterprise. Do you have a special model in this particular
case for deciding what your risk acceptability is?Is it different from the
Mr. Martell: When lending to First Nations people, a lot of the banks say, "Well,
we cannot get security on a house in northern Saskatchewan so we cannot put a
mortgage on that community." We do not see ourselves as being in the real
estate business. We see ourselves as being in the business of loaning and
recovering capital, paying our shareholders, and operating a financial services
network within the community.
We use a lot of existing community structures to allow for that. For instance,
we have the band council basically backing individuals. We have also
established a housing authority in communities, where individuals can become
part of a larger housing authority that retains a base of capital to back
mortgages. We are piloting that project in Northern Quebec right now. We use a
lot of the community's needs to be part of the economy.
If you want to protect your assets from encroachment or security, then you have
to recognize that you are going to have less access to capital. The
Saskatchewan Indian Equity Foundation established that right from the
beginning. They told the people that they were talking to and lending to that
they were not just borrowers, but also owners of the institution. We
established the same relationship as a First Nations Bank. We expect a lot of
the major communities that we do business with to also be investors in the
bank, and it is not in their best interests to walk away from loans. We
therefore use a lot of those processes to manage risk.
Senator Austin: Peer group pressure within the aboriginal community has a
disciplinary effect on economic behaviour?
Mr. Martell: We believe so, yes.
Senator Austin: How do you deal with the management quality issue? Does the bank
take a special interest in training, entrepreneurial training for business, and
guiding business development? Does it take a more proactive role with these
communities and your borrowers than the normal large bank would do?
Mr. Martell: We are not pursuing the role of a development bank. We are a
commercial institution, a chartered bank. There are 33 Aboriginal Capital
Corporations in Canada, and we will tie heavily into that network because they
know the local customer and they know the local people.
The stage of development of most First Nations businesses requires us to be very
hands-on in customer service, however. We are going to have to attract
management and staff who know their aboriginal communities, can service them,
can deal with their issues, and know when they are real issues that are a
concern to the bank, and when it is just something that needs some assistance.
Senator Austin: Are you focused on this first ten-year period for a return on
equity consideration? I assume you want some return on equity, but, for the
time being, are you operating the bank on lower return on equity considerations
than a normal commercial bank would do?
Mr. Martell: Yes, we are, and there are two reasons for that. First of all,
start-up is a costly process. Second of all, the minimum $10 million
capitalization does not allow us the leverage that other banks would have.
Senator Austin: The gearing-up capacity.
Mr. Martell: Right. Lastly, we are spending a lot of time getting into the
communities, and developing systems processes so that we can stand on our own.
All of the earnings from the first ten years are basically being "recapitalized"
into the bank to allow our independence to grow.
Senator Austin: With respect to the aboriginal community and your lending, what
I understood you to say is that you see your constituency as nationwide, rather
Mr. Martell: Right.
Senator Austin: Are you lending outside Saskatchewan?
Mr. Martell: Our second branch is in Northern Quebec -- Chisasibi, in the James
Bay Cree territory. We are currently doing business in every province and
territory in Canada. There is a lot of opportunity, especially with the
mergers, to do some things, such as buy some of the branches of the existing
In some markets -- such as Iqaluit and Nunavut -- the only two banks in town are
the Bank of Montreal and the Royal Bank. If the mergers go through, there would
only be one institution there. We are therefore definitely interested in that
market, and we would be very comfortable going into it.
Senator Austin: What would be the maximum size of any loan that you would make
Mr. Martell: There are internal restrictions, and then there are Bank Act
restrictions. Currently under the Bank Act, single credit loss restrictions
would be 25 per cent of our capital base, so about $2.5 million with our
capital base of $10 million.
Senator Austin: You do not lend up to that level, do you?
Mr. Martell: We have done so in some instances. The other issue is that, with
our partnership with the TD Bank, we use a lot of the credit adjudication
services of that bank. We have looked at projects that involved hundreds of
millions of dollars. We syndicate the back end of those loans, and normally the
lowest cost syndication is to our partner, because they have really done all the
work to assess the package already for us.
Senator Austin: What is your success rate in attracting deposits from aboriginal
Mr. Martell: It is slower than I would like. We only got our branch up and
running in June of 1997, so we have a little over a year in actual operations.
Our Chisasibi branch was opened in June of 1998. One of the big hurdles that we
face with First Nations is the human resource capacity at the First Nations
level to do the kind of work it takes to change a financial institution.
A lot of time is spent on changing systems, ordering new cheques, getting the
band council resolutions and the guarantees, having the automatic debits
changed, and all those things. One of the things that we focus on is that human
resource deficit at the First Nations level, which is generally felt on the
financial services side of the First Nations Bank.
We have put together a task team to go out and assist them, and to scope out the
opportunity for us so that we can tender on it. Once we have tendered on it, it
goes back a couple of other times to help them implement the bank change. I
hope that this will speed up the process.
Senator Austin: Peace Hills Trust is a comparable institution, although it is
obviously not a chartered bank. Your presentation suggested that a combination
would be desirable at some future time, however.
Mr. Martell: I do not think I said that in my presentation, and I hope I did not
do so. There is no plan to merge with Peace Hills Trust. The Peace Hills Trust
knew that we were being created. In fact, the president of the Peace Hills
Trust was on the board of directors of the Saskatchewan Indian Equity
Foundation when we undertook to establish the bank project.
The only difference in philosophy is that we saw ourselves as a widely-held
institution. They are still owned by the one First Nation, which still has 100
per cent control of the capital there. We saw that the economies of scale and
the growth patterns would allow us to be more successful if we were national in
scope, and that is why we went that route.
Senator Meighen: Speaking of loans, can you tell me how it actually works in one
of the TD branches, for example? I assume it would be a branch of the TD. You
do not have separate operations anywhere, do you?
Mr. Martell: Yes, we do. We have two of our own branches.
Senator Meighen: I see. Well, let us take the TD branch where you have an
operation as an example. Is there a separate wicket, or a sign, or is there an
office that is dedicated to the First Nations Bank?
Mr. Martell: Not right now. We have focus branches, and they would have all the
forms and processes on hand. Any TD branch can request that information. If a
customer wants to go into a TD branch and deal with First Nations Bank, he or
she can request that that information be sent to the branch, and they can deal
with our customer. We have a 1-800 number, and a customer can use phone banking
or electronic banking to establish his or her service.
The customer can also go to focus branches. For example, some TD branches are on
or near a target market of ours, and those would be focus branches. They would
have in-house knowledge of how our systems work, of how to add a customer to
our side of the back end system of the bank, and they would have the bank's
systems and sign-up forms all on site. That would be a focus branch.
Other than that, when you access our bank through the ATM network, for example,
you are treated as a First Nations Bank customer at any of the more than 1000
Senator Meighen: Do you have a credit card facility?
Mr. Martell: It is too costly to get into credit cards right at the beginning.
We have an affiliate card with TD, but it is basically just a TD card with our
name at the bottom. The size of the market was not sufficient to get into that
business at the beginning.
Senator Meighen: You said "affiliate card." Is that the same as an
Mr. Martell: No, not really. It is still a TD card. When it becomes an affiliate
card, then it will have a First Nations background.
Senator Meighen: In the MacKay report there was a recommendation that
legislation be enacted so that movable personal property situated on reserves
could be used as security. Do you endorse that?
Mr. Martell: The Saskatchewan Indian Equity Foundation has been operating
without that change. We sit on a panel with the other banks on access to
capital for First Nations, and the other banks are very adamant that they need
that in order to do business at the First Nations level. We are not as
stringent about that.
Senator Meighen: It would seem that you are a real prototype for the development
of the small business loans that always seems to bedevil the Canadian banking
industry. Do you price for risk at all? Small business complains that it is
willing to pay a higher rate -- that what it needs is access to capital, and it
cannot get it even if it is willing to pay that higher rate. Have you followed
that route at all? That is, have you raised rates in order to make riskier
Mr. Martell: We hope not to have to make riskier loans. We think there is a way
to do business with the First Nations where it does not have to be riskier. For
example, if you take a mortgage portfolio, most of the housing is zoned at a
community level. When you go into a community, then, if you package a mortgage
package for a First Nation, you are not doing 30 or 40 individual mortgages, but
packaging one community mortgage for $40 million. In essence, we see very
little risk in mortgages, but when you package those community loans together
we see that there actually can be some lower risks.
Senator Meighen: Fair enough, but surely you get applications for loans that are
promising, perhaps, but quite risky? For example, the individual is well known,
well respected, but does not have much to put up in support of the request. Are
you prepared to go to prime plus 4 or 5? The chartered banks always tell us
that they do not do that because, if it went sour, the public outcry when it was
discovered that they were collecting on a loan at a high rate of interest would
be too damning. They feel that it would be a public relations disaster. It
might be a less of a disaster for you, since it is in within an identifiable
Mr. Martell: Our parent company is an Aboriginal Capital Corporation, and there
are pockets of capital around the country to address those loans that may not
meet a bank's criteria. The Saskatchewan Indian Equity Foundation has become
bankable. That is why we have created it -- to deal with that sector.
Perhaps, as you say, there may be some that the Equity Foundation cannot bank,
and we may have to deal with those. Again, however, we tell our shareholders
that it is their equity that we are putting behind these loans.
Senator Meighen: If I were a member of the First Nations and I came in and
requested some banking services, and I also said, "Look, I need some
insurance as well", where would you direct me?
Mr. Martell: Currently we do not have plans to get into that market. David Ross,
the president of our bank, spoke to your colleagues in the House of Commons
finance committee last week. He told them that he sees insurance as an
opportunity that allows for better use of facilities, that he would not see it
as a problem, and would, in fact encourage it. We had a lot of opposition from
the independent insurance brokers in the room at that time.
Selling insurance is not part of our current plans. On the other hand, however,
in some cases we will go into a First Nation of 1,200 or 1,300 people in
Northern Canada. We would not establish a branch there; we would establish
operations in conjunction with a post office or a store. We would make us of
electronic banking, and the store employees would also be part-time bank teller.
It is very important to make use of facilities in those communities, and if we
can offer more products and services through those facilities, it reduces the
cost of the technology of the systems, and also provides more services to that
community. If insurance became a product that we could sell to those
communities, that might add to our profit.
Senator Meighen: Would you also like to be permitted to lease small vehicles?
Mr. Martell: Leasing small vehicles is also a service that banks should be able
Senator Meighen: Are there any recommendations that you do not like in the
Mr. Martell: I am sure I could dig around and find something. Taken as a whole,
I think it is a fair and balanced approach. If there is something we do not
like, there are offsets for that. I think MacKay speaks directly to allowing
niche players to become part of the market, thereby addressing the competition
issue. That in itself addresses the needs of a niche player like us.
Senator Angus: Are you a member of the Federation of Saskatchewan Indians?
Mr. Martell: The 72 First Nations in Saskatchewan are the member bands. I am a
member of one of the First Nations in the federation, yes.
Senator Angus: And you are the Chairman of the First Nations Bank?
Mr. Martell: Right. The lowest paid bank chairman in Canada.
Senator Angus: Are you the CEO as well?
Mr. Martell: No, I am not. It is currently a non-executive position. It remains
a non-executive position for the first two years, and after that, in February
of 1999, we will reassess the situation.
Senator Angus: I see that Mr. Ross is the COO. Who is the CEO.?
Mr. Martell: Right now there is no CEO. It is basically a CEO by committee. We
use a lot of the services of the TD senior management. Our board of directors
includes three senior TD vice-presidents who have extensive experience in
banking, and the former vice-chair of the TD as well.
Senator Angus: That is Mr. Somerville, is it?
Mr. Martell: Urban Joseph is the former vice-chair.
Senator Angus: Do you have direct access to the Canada payments system?
Mr. Martell: Not directly, no. We use our access through our partner, the TD
Senator Angus: I thought so, yes. At the beginning of your comments, you made a
big point that your ultimate goal is to become a widely-held national
Mr. Martell: Right.
Senator Angus: Like Senator Austin, I was fascinated by the development of your
operation and the fast way it has caught on. I was trying to figure out who the
competition would be, other than the obvious. For example, is there a
possibility that other First Nations banks might spring up, or do you think
that any banking initiatives from the First Nations people would come under your
Mr. Martell: We would hope that they would come under our umbrella. We looked at
the size and scope of the First Nations economy in Canada, and we believe that
somebody else would have a hard time putting together a business plan that
allows both of us to be at that scope and level. Somebody else may disagree and
be able to, and all power to them. But with the partnership of TD we had the
ability to jump-start, get our processes out and become a national institution
without going through creeping growth. We have a branch in Saskatoon and the
other branch is in Northern Quebec. We have our bookends and we will fill the
Senator Angus: Yes. I was just thinking of some of the well-publicized areas in
which there seem to be substantial pools of capital developed amongst the First
Nations. I was thinking, in particular, of the Sawridge Band in Alberta, in
B.C. and so on. I just wondered if there was a concern on the one hand or
perhaps an opportunity on the other for expanding or other competition?
Mr. Martell: There used to be fairly significant regional jealousies amongst
First Nations. It was sort of like, "If you have one, well, I have to have
Senator Angus: Yes. That is what I was wondering.
Mr. Martell: They have become more and more pragmatic over time and see that the
economies are scaled for the human resource capacity, the capital, all of those
kind of issues. We are really, I think, the first First Nations enterprise that
has moved across border, and we hope that that trend will continue. Our board
of directors includes people from Alberta, Manitoba and Quebec on the First
Nations side, and we have been, like I said, from coast to coast, and we have
customers in every province and territory.
Senator Angus: I cannot resist this question. I am sure it isn't the case, but
is the Nations Bank a First Nations thing or is it just a coincidence that the
names are so similar?
Mr. Martell: I wish it was a First Nations bank. No, it is not. We are a
founding director, though, of an organization called the North American Native
Bankers Association. It includes Peace Hills Trust, First Nations Bank and
eight tribal-owned banks in the U.S. We deal with a lot of the issues specific
to First Nations, aboriginal lending, business development, those kinds of
issues. We have a full-time director that operates out of Oklahoma. That
organization has really caught on. It has a lot of good research capability,
like the Canadian Bankers Association for aboriginal banks.
Senator Callbeck: You mentioned in your opening remarks about the Community
Reinvestment Act and as we know, of course, that was brought into the States
because there was a perception that banks would not lend to poor areas and that
they also discriminate against certain classes of people. Now Mr. MacKay in his
report did not recommend that because they said it could not be established that
similar conditions existed in this country today. I am wondering, did you make
a presentation to the MacKay task force?
Mr. Martell: Yes, we did, and we think that there has to be some process to
ensure that banks serve the whole community. When we got land claims, the
deposits were very welcome -- the big money business was very welcome -- but
the rest of it wasn't really addressed. We have had a good look at the
Community Reinvestment Act through the North American Native Bankers
Association, and we think it is a model that works. You are right, it was not
directly recommended, but we do think that that is something that is required.
Senator Callbeck: How do you feel about the recommendation that rather than
having the Community Reinvestment Act, that there be a community accountability
Mr. Martell: Effectively, when you look at the Community Reinvestment Act in the
U.S., the annual reporting process of the major institutions is the most
effective part of the whole act. That is why I think that the recommendation,
although it did not go to the full extent of the Community Reinvestment Act, of
having to publicly come out and say, "Here is how we do business in this
sector" is the most effective part. The U.S. banks, for example,
capitalized our North American Native Bankers Association to the tune of
$150,000 in our first year of existence because they have a need to show the
public that they are doing something to make sure that all sectors are being
served. So that is sort of a reporting requirement; making sure that people
show publicly that they are doing something is the most effective part of that
act. If that is accomplished in the recommendations, we think that will be
Senator Tkachuk: Mr. Martell, I have only three questions. In your vision of the
First Nations Bank, you talked about setting up branches in retail operations
and post offices. Is it your vision to have independent branches across the
country as being dominant or a mixture of both, or basically using other retail
sectors as your branch offices?
Mr. Martell: The communities where our populations are concentrated tend to be
small, rural and remote. To be cost-effective, many have to be shared
operations, and we expect a lot of our expansion to grow through the agency
model, where an agent bank exists in another institution in the community. We
hold a lot of hope out for electronic access. First Nations people are
surprisingly very accepting of electronic technology, computer access, and we
see that as a real growth opportunity. Cash card technology, for example, is
very interesting to First Nations communities. They spend a lot of time and
effort getting cash up to a community, it circulates through and 99 per cent of
it circulates back out, and that is a pretty costly process. We just cannot
wait for the electronic cash card. We think that is a real opportunity for
First Nations to operate their communities and their economies more
Senator Tkachuk: In terms of your partnership with the Toronto Dominion Bank,
have they given you any indication that perhaps with their merger with the
CIBC, that they would be willing to sell branches to your bank in areas that
they would be leaving?
Mr. Martell: We have not had any formal indication of that. We, ourselves, would
initiate some of that discussion because we are interested in some of the
branches that those banks may have in some of our focus markets.
Senator Tkachuk: Earlier on in your presentation, you mentioned the reluctance
of the traditional bankers. Even though they were willing to take the deposits,
they were not necessarily willing to make the loans and extend credit to the
First Nations people. With your bank up and running, have you noticed a change
in their attitudes towards the First Nations people because of the competition?
Mr. Martell: Absolutely. They are very competitive. When we were created, almost
overnight some of the larger First Nations, like La Ronge First Nation in
northern Saskatchewan, were offered branches, after trying to get a branch on
their reserve for years and years. We made a presentation before we even had
our Articles of Incorporation to the Kamloops Band in B.C. We made a
presentation about how our bank was going to be structured, how it was going to
work, and their banker offered to renegotiate their mortgage package. They
saved thousands of dollars because they saw competition. So far, the First
Nations have benefited not so much from the First Nations Bank directly, but
from the competition it creates.
Senator Kroft: Yes, I have questions in two areas. I understand that your share
structure is such that 100 per cent of the common shares are now owned by the
founding institutions. All the Class Bs are owned by TD Bank, and then there is
a million dollars of convertible preferred. What do you see happening in your
ideal scenario in terms of the ownership? Do you see it moving toward
Mr. Martell: Absolutely. The private placement offering for large First Nations
investors is complete now and will be rolling out in the next couple of months.
Some of the members of our board that are not from Saskatchewan are definitely
interested parties who have followed the development of our institution right
from the beginning, and they do have access to capital in their communities. So
we want to be widely held. We see a scenario where we creep towards control and
then ensure that our management systems capabilities are there at the board
level through training and making sure that people are actively involved in the
development of this bank, and then take TD down. The regulators have to approve
TD to lose control of the board. So that swap is going to happen, but if the
rules stay the same, we have a 10-year end and, effectively, we have an
eight-year deadline because we need a couple of years for people to stand back
and watch us operate.
Senator Kroft: It says here that the ownership of common shares is restricted to
persons of aboriginal ancestry. As you begin to market, I do not know how that
will stand with the Charter. How do you maintain that position?
Mr. Martell: We can maintain that position. It becomes difficult if you want to
list the shares on a public market. It may or may not stay that way forever,
but the reason we created it is that we looked forward and saw the value of a
bank licence in Canada. We saw that it may be very attractive for another group
to take out the small regional bank and change the focus. The focus of the First
Nations Bank will remain, as long as we have aboriginal people controlling the
banks. That was our intent.
Senator Kroft: And can you do that, legally?
Mr. Martell: OSFI tells us that we can do that, yes.
Senator Kroft: I am moving into a completely separate area. In terms of your
marketplace, how active are either or both of the Business Development Bank and
the Farm Credit Corporation in your markets? Are they a competitive factor in
your market or a co-operative factor?
Mr. Martell: The Business Development Bank has tried to become more and more
active in First Nations markets. They have some capital to give loans and
perform some business services. Our problem is the same problem we have with a
lot of banks that want to get into our market. They have no history with
Aboriginal people. They do not know the culture, the communities, the inherent
risks or the inherent opportunities. There are maybe pockets of success, but we
do not see them as being the best way to serve our communities. We have the
Aboriginal Capital Corporations structure, if we are talking about the
development fund, and they are run by the communities and for the most part
they have been successful. When we took over the lending processes, when we
created the Saskatchewan Indian Equity Foundation from the government, the
government's loan loss ratio was like 80 per cent. People just didn't see it as
part of the community. They saw it as a grant, not a loan, and we do not see
those kinds of institutions as serving our communities. They have to make the
people responsible for their own affairs. That is what we see our institutions
Senator Oliver: The Farm Credit Corporation was here and they said that they do
a lot of work for farmers. If you had some aboriginal people in various parts
of Canada who want to do some farm financing, what would they gain by coming to
you rather than to the Farm Credit Corporation, which is staffed by farmers and
people who understand agriculture and who have some pretty competitive rates?
Secondly, one of the main areas where aboriginal people need money and need cash
is to finance lawyers and other experts for massive land claims. If they were
ever successful, that would bring in a large pool of money, which would make
nice deposits in your bank. Are you financing a lot of these land claims across
Canada, and if not, why not, and to what extent are you financing them?
Thirdly, you kept referring to your being a niche bank. One of the things that
we have heard in our travels across Canada is that there is a new form of a
niche bank. A niche bank is not someone like you who is very small and trying
to do a little bit of everything in terms of traditional banking practices.
Instead, niche banks are taking credit cards and mortgages, leasing autos,
cutting their costs, becoming very competitive and making a lot of money at it.
So which kind of niche bank do you really want to be?
Mr. Martell: We call those more category killers than niche banks. I must get
two mailings a week for these low-cost credit cards from U.S. institutions that
have no operations here at all. Those are category killers. They basically
whittle down the local banking operations to an unprofitable business because
they have creamed off all the basic good business of a larger institution. We do
not think that the First Nations market is ready. They tend to deal with the
institutions that they know and trust on a community-wide basis. We think that
we are a niche bank that offers a full range of products because we are niche
players and because 50 per cent of our staff are aboriginal and can speak the
language of the local communities they operate in. That is where we are going to
be a niche player.
Farm Credit does not pretend to be everything to everybody. If some of our
Indian farmers have issues that are more farmer issues than Indian issues, we
would encourage them to look at Farm Credit as an option. In fact, there are
some security issues. Farmers are more protected security-wise than Indians are
sometimes, so there are some issues that Farm Credit deals with better than
banks do. We actually have a Saskatchewan Indian loan company, too, which is an
Aboriginal Capital Corporation dealing directly with our farmers on the
development loan side. So we would encourage them to go to the best institution
to serve their needs.
Senator Oliver: In terms of financing land claims?
Mr. Martell: We would have to see more promise in terms of the government
settling land claims. Right now they seem to spend a dollar fighting land
claims for every dollar they spend settling land claims.
Senator Oliver: Are you in the business, though, of lending in order to finance
these huge lawsuits?
Mr. Martell: It is very difficult because there is no guarantee of when these
things are ever going to be settled. Just from a banking point of view, we
would have to tie up other assets of the First Nations in order to finance
this. A lot of them are struggling to finance the costs, but I think all sides
are financing a huge cost to settle these land claims, including the government
The Chairman: In the report, they talk about the desirability of having
community banks with, by the way, roughly the same range of initial capital
that you have had, which is $10 million. When this committee was in the States
talking to U.S. community banks, the range of initial capital was $10 million
to $20 million -- that was our assessment. You are the only living example in
Canada of a community bank that has started in recent times. Now your community
bank is different from the usual definition of community bank, which is a
geographic community. You have picked the cultural community. Just on the basis
of your experience, what is your assessment of whether or not a community bank,
and let us make it a geographical community bank, could survive and prosper if
it began with the same sort of initial investment that you had? You have a very
unique definition, which gave you a marketing advantage that other institutions
could not have had. Is that the only type of small community bank that can
invest in Canada and appeal to a particular set of customers, or do you think
small community banks could survive if their appeal was a geographic community
rather than an ethnic community?
Mr. Martell: Being from Saskatchewan, we see those kind of banks existing
everywhere. They are called credit unions and they really operate with that
level of capital, with that local interest, local service. Really, we turn down
the credit union concept not because it was foreign to what we wanted, but
because it didn't offer us the national expansion capability. Really, we are a
customer-owned bank, that offers service in the form, language and the type of
service they need. We understand their issues and that is why we are
successful. We think that that could be successful on a smaller community
basis. We made a business case for it with the travel and costs of running a
bank from coast to coast. We think that an institution could be made viable
with a million people in a region like Saskatchewan. It would be successful as
long as its founders hold the philosophy of their bank true to the philosophy
of the people that they represent. That is how it is with our customers and our
shareholders, and in our case they are one and the same people. So we think
there is an opportunity.
The Chairman: You are saying that the secret is that community banks work,
provided they are, as I read you correctly, targeted at a very clearly-defined
community. They must also reflect the value structure of that particular
community, whatever that value structure happens to be.
Mr. Martell: Right. The majority of the members of the North American Native
Bankers Association, and all of the U.S. members, are basically community
banks. Most of the large investors are the tribal organizations that own them
or members of the community in which they operate. Some of them have expanded
to become some pretty good-sized regional operations in the San Diego area,
some in the southern U.S., the Florida area. They are very successful. It is
basically the concept on which we were created, and that is why we were happy
to see that concept in the report because we think we are one of the first
institutions that was formed in that same way.
The Chairman: Mr. Martell, on behalf of the committee, I want to thank you for
giving a very articulate presentation of what your bank is doing. We will look
forward to being kept up-to-date on what you are doing because I think it is a
very fascinating and very rewarding experiment.
Mr. Norm Halldorson, Chairperson, Finance Committee of the Saskatchewan Chamber
of Commerce: On behalf of the Saskatchewan Chamber of Commerce, we welcome this
opportunity to provide our input.
We had the pleasure a month ago to hear a presentation from Harold MacKay to the
board of directors of the Saskatchewan Chamber of Commerce. And that gave us
the impetus to appear here today and share our views with you.
As I am sure you can appreciate, an organization such as ours does not have
expertise in specific areas, as our members would. We represent between 1,400
and 1,500 businesses across Saskatchewan of varied size and varied interests.
What we try and do is monitor the pulse of our members in terms of what is
important to them, and what do they see as important to order to have a
thriving and growing business economy in Saskatchewan.
At our annual convention this spring, we identified a number of issues. The key
issues are related to enhancing business competitiveness in Saskatchewan. In
doing that, there were specific recommendations in a number of areas, including
taxation, infrastructure, taxation services including financial services.
So as a general view on the MacKay report we, by necessity, are trying to pull
together the feedback we have had from a number of members. Our comments will
therefore be quite general in nature.
Our position can be best summarized as one of being supportive in principle to
the four cornerstones of enhancing competition that MacKay enunciates in his
report. Certainly the broad cross-section of our members are telling us that
that is important to them, and something that they support. We do not have a
problem endorsing that concept.
The second concept of empowering consumers, we think, is very important.
Saskatchewan is a large area with a low population. We think some of the
opportunities for empowerment are going to be very important, whether it is
electronic commerce, which the preceding speaker referred to, or access; where
branches in remote locations simply are not possible, other forms of access are
welcome. That concept of empowering consumers is important to our members. They
certainly endorse the concept of plain language documents.
The third principle in the report deals with the expectations of corporate
conduct. It is important that this process proceed on the basis of expectations
that financing will be available for small business across the province; that
it will address issues such as aboriginal concerns that Mr. Martell was
raising. Certainly, increased access rather than decreased access is important
We certainly do not have a problem, conceptually, with the fourth principle of
an improved regulatory framework. We understand that the mechanics of how that
might be enacted could cause concerns for various players, either in banking or
in insurance or for members. We feel that in those types of areas, those bodies
can best speak for themselves, because they are the experts. We, as a group
representing a wide cross-section of business, do not have that expertise.
We generally endorse the MacKay report and look forward to a very full dialogue
from our interested members directly through the appropriate channels. We look
forward to seeing how they will proceed in implementing those general
principles that appeal to our membership.
The Chairman: My question comes from your comment on the desirability of banks,
to make sure the loans are "community accountable" is the way you put
In the report, they talk about asking the financial institutions to file annual
community impact statements; "community accountability statements"
the report calls them, on the way the corporation has behaved with respect to
various geographic communities.
As business people, I am curious as to what your reaction to that is. I say that
because we have had a bit of a mixed reaction from witnesses. We have had
people who say that this is a great idea, and other people who say it is a kind
of regulation gone mad; that it is excessive government intrusion in the
marketplace. I am curious as to where you would stand on that question.
Mr. Halldorson: I would expect that our members would have views as diverse and
varied as you have just described. Really, as a provincial chamber, we do not
have a specific view on that. I think individual members would let their
concerns be heard. We are really endorsing the general concept of "do what
can be done to enhance competition, and make more choice available to our
Senator Tkachuk: As members of the chamber in Saskatchewan, do they believe that
they are well served by the banks now from a business standpoint in gaining
access to capital or lines of credit?
Mr. Halldorson: I would expect that certainly some of them feel that they are
very well served, and others do not. It depends on the nature of the
organization, its location, the type of business it is in, its capitalization,
its potential in the eyes of the lender, et cetera. So we see quite a variety,
and some are clearly satisfied, others are not. I do not think that there is
one easy thing that affects every single member.
Senator Tkachuk: Is there any geographically-based, or a type of business or
size of business that has expressed concerns to the chamber regarding
difficulties with the banks?
Mr. Halldorson: Smaller communities, where banks are closing, have expressed
concern regarding access.
But that trend is happening and most of our rural businesses are part of that
trend. They are consolidating; they are growing. They realize that a lot of
their business banking is being done with commercial banking centres at remote
locations, as opposed to a local bank.
Senator Tkachuk: Are they happy with that?
Mr. Halldorson: I do not know whether they are all happy with that. Some of them
are, some of them are not. But I think that access is of key importance to all
our members. If you need to have access to a business banking centre, if you
can have that through a computer terminal rather than jumping in a car and
driving 200 or 300 kilometres to get to it, that probably is not going to be
offensive to them.
Senator Tkachuk: Right. But say a store in Rosthern has $2,000 worth of cash at
the end of the day and there is no bank branch there; that is a problem for
Mr. Halldorson: Absolutely. That is a problem across rural Saskatchewan caused
by the demographics of fewer and fewer people in those local communities.
Senator Tkachuk: Have your members expressed, then, a concern about the mergers,
that this will just exacerbate the problem even more?
Mr. Halldorson: We have heard comments all over the map on that: some for, some
against. The way we read the report was that it was not dealing exclusively
with mergers by any stretch of the imagination. It simply had a process that if
mergers were to go ahead, onus would have to be placed on the parties to
demonstrate that the community interests would be addressed. I guess that
principle or concept seems to be welcomed by our members, that the community
interest has to be a major factor.
Senator Tkachuk: On this committee we are trying to come to grips with certain
competitive aspects. To ensure competition in the marketplace and in
Saskatchewan, we have very unique problems because we are a rural province,
with a well-spread population, and the merger question does come up.
Has the chamber not studied it and determined its point of view, because this
issue will arise quickly?
Mr. Halldorson: No, we have not.
Senator Tkachuk: Yesterday we had quite a contingent of insurance brokers from
around the province. They had made a presentation on the selling of casualty
insurance through the banks. A number of them told me that the chamber has
basically said that they would like to see the banks sell insurance through the
bank branches and they were quite unhappy about that.
Is that your position? If you endorse the MacKay task force report, does the
chamber support the view that insurance could be done through the branches, and
that the banks could lease?
Mr. Halldorson: I am pleased to hear that they have been here representing
themselves, because I think they can do that far more capably than we can on
By endorsing the report, we are saying that we agree with those basic principles
of enhancing competition. But conceptually, if you are levelling the playing
field, that does not mean you have to learn how to drive the grader and
bulldoze it flat and lay the sod.
The details and the implementation are prospective at this point. We are
assuming that the process of the casualty insurers and the life insurers and
the banks, and the other interested parties representing their vested interests
will be heard, and that the mechanics of how you level the playing field will be
We are simply saying that by endorsing the principles of the report, we are in
favour of enhancing competition for the general benefit of our membership.
Senator Tkachuk: I know we are all in favour of more competition. But the MacKay
task force report made two explicit recommendations: one is that banks be
allowed to get into leasing; and the other is that the banks be allowed to sell
insurance in their branches. Do you agree with those?
Mr. Halldorson: We have not studied the implications, and quite frankly do not
have the knowledge of the banking industry or the insurance industry to make an
intelligent response. We have endorsed it on the basis of the principle, but
have not studied the mechanics of implementation, and really cannot comment
further on how you would go about achieving that enhanced competition.
Senator Tkachuk: We are trying to study the report and make recommendations, and
are looking for your help on this. So even though you endorse the principle,
because you are not aware of some of the intricacies of the problem, you are
not in support of it, or are you in support of it?
Mr. Halldorson: We are saying that it is difficult to go on individual
recommendations, and say we are for or against it, if we do not understand all
of the implications of those individual recommendations.
Rather than do that, we are sharing with you what we believe is the consensus
view of our members as espoused at our most recent directors meeting. That
said, in general principle, the concept of increased competition and more
empowerment should be welcomed. We appreciate that there will be all kinds of
hurdles, and there will be certain parties that feel their vested interest is
compromised and there are others that will feel it is enhanced. But we will let
that dialogue come from the affected parties that have the expertise in their
Senator Kroft: I am anxious that we not leave here, denying the people of
Saskatchewan any opportunity to be heard. Therefore, I will stubbornly persist
a little bit with Senator Tkachuk. I understand your position as that of a
broadly- representative, umbrella organization. You are trying to give us a
broad point of view and a set of principles.
But if we were to carry away two or three specific things in our minds, that are
particular preoccupations of the business community of Saskatchewan that you
represent, can you try to tell us what those might be?
Mr. Halldorson: I can make an attempt at that and I certainly encourage my
fellow panellists to jump in if they have things they want to add. I think one
of the key things we would like to see is the plain language documents. That is
Secondly, I think we would like to see privacy protection. If we accept
electronic commerce, we want to know that there is some privacy protection in
The third is improving access. We recognize that you will not have a branch in
every small town, but there has to be some form of access.
Those are the three key messages that I would want you to remember.
Senator Kroft: On questions such as the possible mergers of the banks, you are
not expressing a particular view as to whether you think that that would help
or hinder any of these objectives?
Mr. Halldorson: That is correct. We are looking forward to the banks having to
demonstrate how the community interest will be served. The report places the
responsibility on the banks to provide this.
Senator Callbeck: The MacKay report says that the relationship between small
business and banks must be enhanced and it mentions three areas that they feel
should be looked at. One is that they feel that banks should price for risk. In
other words, the riskier the loan, the higher the interest rate. How do you
feel about that?
Mr. Halldorson: Speaking as a businessman myself, I think they are doing that
now. Certainly we see a wide range in pricing on loans. I think it is a basic
economic principle that risk and reward go hand in hand. I think that is
Senator Callbeck: When you say a wide range, you mean prime plus how high?
Mr. Halldorson: We see spreads anywhere from at prime to prime plus 3, 4, or 5
per cent. Most often there is simply a lack of lending if the risk is perceived
to be too high. That is one area where we would hope that there is some careful
evaluation being done to see if there can be additional financing on start-up
Here in Saskatoon, we are a high-technology centre. We have some people coming
out with new ideas and no capital and it is very, very difficult for them to
get financing. If they are looking at risk, certainly those are higher risk,
but they can be high reward.
Right now, I think it is difficult to secure financing. I have no answers of how
that is going to be solved, but I certainly welcome discussion of the issue as
to how to better address the risk relationship of lenders to business people?
Senator Callbeck: When you say prime plus 5 per cent, are you talking about
Mr. Halldorson: No, not specifically. We are looking at just the general cost of
financing. It could be in a lease; it could be in a loan from a chartered bank
or from others.
Senator Callbeck: The report, as I said, talked about three areas. The first was
pricing for risk. The second was the turnover of account managers, the fact
that they move so quickly. The third area was that the report said that there
was more of a problem with equity than with debt. They encouraged the
institutions to increase the equity in small businesses. Are there any other
areas that you think should be looked into to enhance the banks' relationship
with small business?
Mr. Halldorson: No other recommendations come to mind. Does anyone else want to
offer anything? No. I think the key concern is, as I mentioned already, access
-- improved access -- particularly in remote areas.
As for the issue of competition, we find that rates are better where there are
more people trying to get the same account than if there is only one. So if we
can broaden the competition by offering more choice, that is welcomed.
As for privacy protection, if we are doing a lot of stuff electronically -- and
quite frankly, we think that is inevitable in this province -- we do not think
that the status quo is an option. The demographics are such that we are seeing
that in all facets of our business, whether it be grain companies or hardware
stores or financial institutions. There are fewer and fewer out in the remote
areas and there has to be a substitute that allows business entities to operate
in those remote areas.
Quite frankly, we see electronic commerce as being very attractive and very
empowering, and hope that it can be implemented. We are encouraged by the fact
that it is one of the things being considered here, and that the issue of
privacy protection in the process of implementing that is at the forefront.
Mr. Kent Smith-Windsor, Executive Director, Saskatoon and District Chamber of
Commerce: If I might, I do have some questions about your process in terms of
what happens after you go through across the country, hear all of these things,
what happens next?
The Chairman: Oh, I am happy to tell you that. Both our committee and the House
of Commons Finance Committee will be reporting to Parliament through our
respective Houses, and thereby to the government around December 1, more or
At that point the government, therefore, will have input from MacKay obviously,
because his task force is out there. We will have the results of a set of
public hearings held both by ourselves and the House of Commons.
The government will then be in a position to start deciding what it will do with
the various recommendations from MacKay. There is no fixed timetable that I
know of for the government announcing what its decisions are. From their point
of view, I think that it was important that they not only have the task force
report, but that they have information as to what the various people across the
country thought about the task force report, before the government finalized its
I assume that it will take a matter of months. I mean, I do not think you are
talking about a year but you are certainly talking about two or three months, I
would presume, for the government to decide what it will do with respect to
MacKay on the basis of the two sets of public hearings by us and by the House
of Commons Finance Committee.
Mr. Smith-Windsor: Is there going to be a follow-on opportunity? When you look
at the 124 recommendations, it is difficult to go down it as a grocery list and
say, yes, no, yes, no. Will there be an opportunity for further interventions?
We have specific industries that have specific points that they want to raise
and, where are they able to do that aside from here, or will there be that
The Chairman: I do not know that a definitive decision has been made on that,
but let me tell you what I think is the sort of thing that would happen.
Either by using a white paper or by using draft legislation, typically in an
area as complex as this, once the government has decided what technical details
seem reasonable, those details in fact are subject to a consultation process,
sometimes run by parliamentary committees, sometimes run by the government
I think it is pretty reasonable to assume that before anything becomes law or
regulation, there would be some other means of consultation. I think it is just
not clear whether it will be done by, say, ourselves, or whether it will be
done by the bureaucracy itself. Both methods have been used repeatedly over the
years, and I do not know that the decision has been made.
I think you can pretty well rest assured that before the fine print was locked
in on changes, there would be another opportunity, particularly in relation to
specific industries, to give feedback on it.
Mr. Smith-Windsor: That is encouraging, because in our discussions of the
recommendations, we tried to find common interests in the positions of the
Saskatoon Camber of Commerce, and we saw this as a good framework in which to
raise the debate in each of those areas.
Incidentally, I think we were the ones who were guilty of fomenting the kind of
discussion you had on the insurance industry. There is a high level of
suspicion in that industry about whether or not this report goes far enough in
terms of levelling the playing field. I am certainly not capable of addressing
all of their concerns in that area. I should like to think that their industry
would have an opportunity to raise that point.
Here is another point that you could also take away with you. If we could
pretend for a moment that the MacKay report had never occurred, the issue of
coercive selling would still be important. I think that there is a strong level
of concern within a number of the adjacent financial industries that the MacKay
report does not go far enough in addressing that issue.
The Chairman: We have, in fact, had evidence from adjacent financial
institutions, effectively competitors with the banks, on precisely the issue of
coercive, tied selling.
In the meantime, this process is evolving. If you have members with specific
concerns about levelling the playing field, it would help us a lot if in the
next couple of weeks they just wrote us a simple letter. Keep that in mind when
you are thinking about your recommendations, but it has to be in the next
couple of weeks, because we will finish this process by the end of November.
Mr. Smith-Windsor: I will certainly encourage them to do that, and we will have
a chance to review that as well to help with our education process.
Ms Diane Brisebois, President and CEO, Retail Council of Canada: Good morning,
and thank you for taking the time to hear and discuss the views of retailers in
Canada as they relate to the MacKay task force report. Throughout these
hearings we will refer to the Retail Council of Canada as RCC
My confrere, Ken Morrison, is RCC's financial services consultant. Mr. Morrison
was with the Royal Bank for 32 years and for 25 of those 32 years served on
several CPA and Canadian Bankers Association committees. He was also RCC's
expert witness in the Interac case before the Competition Tribunal, and
represents several other interveners with similar interests. He also spends
considerable time outside Canada, working on the structure of banking systems
and networks in emergent countries.
You have received the RCC folder, so you are aware of the documents that we will
be referring to. The document entitled "Restructuring the Canadian
Financial Services Sector: The Views of Canadian Retailers" is RCC's
The other two documents are surveys. "Retail Finance Executive and
Owner-Manager Survey: Restructuring Financial Services in Canada" includes
not only approximately 350 independent retailer results, but also 75 in-depth
interviews with mid- and large-sized retailers across the country. The "Survey
of Retailers' Experience With Payment Systems" was done in June of last
year and produced in November of 1997. Highlights of the results of both
surveys can be found in the main body of RCC's submission.
We will be brief. We will focus our comments and recommendations on a number of
issues: the stability and soundness of the system as it relates to retailers'
views; the competitiveness of our financial services sector as experienced by
retailers; the implications of the market structure and regulations for
retailers and their customers; and, finally, the impact of new technology as it
affects retailers, their customers, and indeed all Canadian consumers.
Allow me to give you a quick overview of the Retail Council of Canada. You will
find more detail obviously in the submission. We are a member-funded,
not-for-profit, industry association. We represent more than 7,500 retailers
across the country, and they represent 65 per cent of the value of retail sales
in Canada. Our industry employs over 1.4 million Canadians. About 90 per cent of
all of our members are small, independent retailers who operate one or two
Our members represent every segment of the retail trade, including specialty
stores, grocery, discount, mass merchants, gasoline, department stores,
category killers, big boxes, and last, but certainly not least, independent
operators in every community in this country.
To get to the core of our submission, let me just summarize some of our
conclusions and recommendations.
Retailers have an enormous stake in decisions that could significantly alter the
competitive structure of the financial services industry and its services to
Canadian communities. Making the right decisions could deliver sizeable
benefits. Making the wrong decisions, we believe, could blaze a trail toward
less competition and higher prices for banking services, leaving retailers in
many communities without convenient access to the financial services they
require to operate their day-to-day business.
Retailers operate in communities of all sizes across Canada and know how vitally
important it is to have local financial institutions that appreciate the
realities of their markets and understand their businesses. They value the
strengths of Canada's national banking system, the stability and financial
soundness of banking institutions, and the presence of local bank branches
providing a broad range of services. Those are core attributes of the Canadian
financial system that retailers appreciate and believe must be maintained.
For several years, retailers have expressed the need for more effective
competition in the financial services industry. They have expressed concerns
about the deterioration in personal service from financial institutions that
are shortening their branch hours, closing branches, and passing on to
retailers a growing share of the cost of new consumer payment services.
Retailers understand the growing possibilities offered by technology. They also
know technology is far from being a complete and adequate substitute for
services provided by local branches of competing financial institutions.
I should like to draw your attention to pages 11, 12, and 13 of our main
submission. Here we have tried to give you a sense of how retailers across the
country use financial institutions, what types of services they require, and
the frequency of use of the services. This is a key part of our submission, so
that you can better understand how retailers rely heavily on local branches to
operate their day-to-day business, regardless, by the way, of the size of the
retailer. We mean a one-store operation, a regional chain, as well as our
largest national retailers.
This is a reflection of the reality our retailers experience on a daily basis
when dealing with financial institutions. We thought that it would be helpful
to give you a sense of the relationship between the financial sector and the
The report from the task force, although very comprehensive, did not address
several important retailer concerns. There is substantial focus on consumer and
financial services, technology, and the possibilities for more competition.
There is little mention of day-to-day banking services that retailers must
obtain from a local branch to run their day-to-day operation and respond to
The report is silent on how to ensure that all of the services needed by
retailers and indeed all other businesses in Canada will continue to be
provided at competitive prices.
In the analysis published so far on proposed mergers, there are gaps in
assessing the impact on individual products and possible legislative remedies
that will be necessary to guarantee adequate competition. For example, mergers
involving the four largest banks will result in an enormous concentration of
market strength in supplying Visa and MasterCard services to retailers. The
question of credit card duality -- and we will be pleased to discuss that a bit
further if you should like later on during the hearings -- must also be
Retailers encouraged the Bureau of Competition Policy to address all of the
financial services and products individually. They also encouraged the bureau
to insist on real evidence to show which services new competitors will provide
and in what locations. The risks to retailers are far too great to allow
changes based on speculative estimates.
Retailers appreciate the need for Canada's financial institutions to be
competitive globally and to operate efficiently. We can assure you that many of
our retailers live that reality today. They recommend, however, that mergers be
scrutinized with a view to ensuring that the new structures in the industry
meet the needs of retailers and all Canadians.
Specifically we recommend that, in fact, each of the MacKay task force's
recommendations pertaining to banking services be analyzed thoroughly with
respect to the results each will produce for businesses and consumers and in
what time frame. Also, we recommend that each potential new form of competition
should be assessed in terms of how it will in reality bring benefits to Canadian
consumers and to businesses. This should include analysis of what products and
services each will provide, to which customers, and in what locations.
More effective competition is essential and cannot be left to chance. There may
be a need to enact measures to manage the supply of services, particularly
during the period while the market adjusts to changes. As we mentioned earlier,
the Bureau of Competition Policy should examine competition on a
service-by-service basis, including duality.
Proposed mergers between large banks should be assessed in detail using the
process recommended by the task force, which we support. Bank mergers should
not be allowed to proceed in advance of financial sector reforms that open
markets to more effective competition, and before having solid evidence that
such competition will indeed be a reality and will respond to business and
Measures should be introduced to ensure more open access to the payments system
and electronic services networks. This is necessary to facilitate competition
in the market to provide quality services at reasonable prices. As you know, we
have not been silent on that issue over the last few years. That would entail
enabling retailers to continue to provide electronic payment services to their
customers when the electronic system fails. I am sure that those of you who have
used debit cards have experienced that.
Opening up access to the payments system through retailers through the creation
of alternate processing structures, providing payment service to both consumers
and other business, and finally allowing retailers to more directly participate
in the clearing and settlement of retail transactions without incurring the
costs of establishing a bank-like entity are measures which we would like to
All of these respectfully submitted. I hope we were brief enough and concise
Senator Kroft: Obviously, your membership has a great sensitivity, as you
touched on, to the availability, timeliness, and convenience of financial
services; you need them where you need them, when you need them.
I think the tables you presented are extremely valuable, because they are a very
useful reminder that more is involved than just the one or two things that any
one of us may think about. Looking at two or three pages of those products and
services brings me back to my question in an even more important way.
With regard to this matter and even beyond, we work with an overall assumption
that the world is in chains, the status quo is gone, and somehow electronic
connection is going to meet all of our needs in everything.
Referring specifically to the chart and to the needs of retailers, I want to
understand the role of the physical branch operation, and by that I mean the
traditional office with people located in an area convenient to the customers,
as opposed to banking done by pushing buttons either in a kiosk or at home on
your television screen.
Is there a general acceptance that we are massively moving away from
interpersonal contact for a number of these services? Will an electronic world
replace personal contact? I am trying to reach a level of comfort in my own
mind on these questions.
I have views on this on a more broadly humanitarian scale, but for the moment
let us talk about the needs of your customers. I think that we risk here
getting carried away with certain assumptions, so it is good that from time to
time we have witnesses who bring us another point of view.
I think it was Mr. Clark from Canada Trust who said that anybody who thinks that
the days of the branches are over is wrong. He said that the branches are the
core of their business, where they build their business, and they want more of
them, not fewer.
However, generally, we are going down the path to where electronics will replace
human interaction. I know it is a very broad question, but I would really
appreciate your thoughts on that as it relates to the kinds of services that
your members require.
Ms Brisebois: That is an interesting question, and very apropos for retailers,
which is why we included the chart on pages 11 to 13.
Since the MacKay report and representatives from several financial institutions
talk about the electronic world, we thought it was important to make the
committee understand that a lot of functions are still done at the branch
level. Some of those functions are related to business, but there are also
humanitarian functions. We cannot ignore that. It is amazing how many of our
independent merchants have told us that they feel extremely insecure not having
a relationship with their branch manager and the people working in the branch.
That relationship is not just a security blanket. Rather, those merchants rely
heavily on their branches for advice, to discuss the future of their
businesses, and to look at other financial options for business growth. I
believe it would be very naïve to think that all of those functions could
be done electronically, certainly in the next three to four years. However, we
are concerned that the communities served by those financial institutions might
not have a choice in the matter.
Additionally, we are concerned about the fact that electronic communication is
still not considered completely secure. A lot of our merchants, specifically
our independent merchants, are very uncomfortable dealing with electronic ways
of doing business with financial institutions. Mr. Morrison might be able to
give you more information because he has been involved in some of the
one-on-one interviews. Certainly there is an enormous amount of discomfort.
Again, I think the chart shows that there are many services that still need to
be provided by the branch in order for a retailer to operate his business or
her business on a daily basis.
Mr. Morrison: Let me give you four very specific examples of the importance to a
retailer of a local branch.
First, there is the deposit of cash and cheques, which, in spite of the great
strides made with electronics, still represent more than 50 per cent of the
payments deposited by retailers on a daily basis. Often the deposit must be
made during the day in order to make sure that there are sufficient funds in
the deposit account to pay cheques that have arrived at the branch on that same
Second, after the bank has closed for the day, retail stores that are open late
into the evening need the facilities of a night depository.
Third, for all of the electronic services we refer to -- cash management
services, letters of credit that can now be done electronically, the Interac
debit card service, electronic credit card services -- the retailer must go to
the branch to negotiate. Technology does not replace the benefits of sitting
across the desk and negotiating the prices for services and the terms for
quality of that service.
The fourth example is the negotiation of a loan. While there are great advances
in teleconferencing and video conferencing, those are not substitutes for a
local branch manager or a local bank representative living day by day in a
community. That branch manager or bank representative knows the state of the
local economy, which organizations are on strike and which are not, and the
exact level of unemployment. That person is able to sit there with the retailer
and understand very specifically what influences there are on that business and
can negotiate operating lines of credit.
Senator Kroft: I want to move now to your feelings about the rights of a
financial institution to open or close a branch at will. I should like to know
what you think about the questions of notice of that closure and limitations on
Do you feel that it would be appropriate to restrict the right of a financial
institution to close a branch? How would a member of your organization who runs
a supermarket feel about a similar sort of restriction? I am trying to look at
a broad concept of equity regarding the limitation of freedom of action in the
Ms Brisebois: Are you asking if there are differences of opinion between
different types of retailers, for example a grocery retailer versus another
type of retailer, in a community where a branch might close?
Senator Kroft: Well, no. I was asking if the rights of a supermarket operator to
close his store would be the same as the rights of a banker to close his
Ms Brisebois: I do not think there is any question that retailers would
understand if it were necessary to close a branch. Retailers do not expect
financial institutions to offer charity; they understand the business
environment. Certainly I think retailers are in the best position to appreciate
what financial institutions are struggling with in regards to branches.
Retailers are in one of the most competitive environments. I think retailers
have difficulty understanding why there is so much discussion about branch
closing because, in the last four years, the retail market in Canada has been
more competitive than it has ever been in the past. We have not seen fewer
retailers; we have seen more retailers. We have not seen fewer services; we have
seen more services. We have not seen price increases; we have seen price
decreases. This is the reality of the retail environment.
Consequently, it is very difficult for retailers to understand the need for
consolidation in the financial services sector. They do not understand why
service fees seem to go up but never down, and they lack what they perceive as
a good, strong, solid relationship between the customer and his or her banker.
There is no question that they understand the marketplace, and they understand
the reasons for rationalization. In this case they have a hard time accepting
them, for what I would suspect are all the right reasons. They live in a
competitive environment. They understand why those decisions need to be made.
They do not understand the rationale behind the decisions that are made at this
Senator Kroft: Do you think that there should be restraints or restrictions on
the opening and closing of financial institution branches?
Ms Brisebois: Generally, our retailers have said there should not be. Retailers
have always been extremely uncomfortable with suggesting legislative measures
to protect a market, for example. However, they are not convinced that
financial institutions are closing branches for all the right reasons. I think
that is where lies the dilemma. But I do not suspect, based on discussions --
and Mr. Morrison, please feel free to add -- that our members would support any
kind of legislation that would force financial institutions to keep certain
Mr. Morrison: I think we also need to consider in this particular question that
retailers cannot change their banking relationship overnight if the branch
Changing banks involves a number of steps. Forms must be signed to open up new
accounts. The new financial institution, if in fact there is another local
financial institution, must become acquainted with the history of the
particular business, in order to transfer operating lines of credit. Accounts
and electronic services must be moved. And there are many details like printing
new cheques with the name of the new financial institution. So while retailers
are not opposed to branches closing, they certainly need time to make that
Senator Kroft: In other words, even though your members do not like interference
in the marketplace and would not support denying a branch the right to close,
would you be comfortable with the idea of rules regarding notice periods?
Ms Brisebois: Certainly any rules that would assist a retailer to continue to
operate his or her business effectively would be supported. I think the point
here is that we encourage more competition.
Senator Kroft: Is that not what Mr. MacKay says he is all about?
Ms Brisebois: Yes. We would agree, however, with the group that appeared before
us. The recommendations are interesting and encouraging, but there is not much
meat on the bone.
Mr. Morrison: Much of the answer to this question also depends on what local
alternatives are available for a retailer. For example, it is just not possible
for a retailer to close a store between 10:00 a.m. and 4:00 p.m. every day to
drive a number of kilometres to a new bank to make the daily deposit of cash
and cheques. There is a dimension of practicality, especially if there is no
local alternative available for that particular retailer.
Senator Oliver: One of the things I hear you both saying is that these modern
changes are wonderful, but the technology has not caught up to the banking
needs of retailers on a local basis.
Certainly it is wonderful to have all of these new category killers who do not
have the big infrastructure offering services at lower cost, but when you list
all of the things that your small retailers still need on a daily and weekly
basis, technology has not caught up. The privacy is not there, the security is
not there, the speed is not there, and the personal contact is not there with
this new technology. So your presentation is extremely important.
Before this committee got the MacKay task force report, we had an opportunity to
travel to Europe, the U.K., Holland, Switzerland, and in the United States, to
Washington and New York. We learned a fair amount that is helping us, and I
should like to run a couple of things by you to see if there are ways in which
the Retail Council of Canada can take advantage of some of those new changes.
In the United States, General Electric and Ford, which are unregulated
non-banks, are now two of the largest financial services companies. GE is
expanding vigorously in Europe and in Japan in direct competition to local
providers of financial services.
In the United Kingdom we actually saw Sainsbury's, Marks & Spencer, and
Tesco, all with strong brand names, taking deposits and also making loans to
the retail customers right in their grocery stores. One of them actually had
deposits of <#00A3>2 billion just in one year. That is a huge success for
Specialized companies, many of whom we are now seeing in Canada, are also
targeting markets for credit cards, mortgages, and the leasing of the certain
types of equipment. Obviously, the decrease in the cost of technology is
driving the surge in specialized providers of financial services.
What is your view of the role of unregulated entities in the financial
marketplace here in Canada and elsewhere, and what can you as a council do to
harness that role to favour all of your clients, the small stores?
Mr. Morrison: In response to our survey, clearly we are already seeing a role
for the specialized financing organizations, particularly the extent to which
our large retailers are engaged in providing some of the capital financing
requirements. So they are in that role.
The credit card issuers, for example GE, which you mentioned, and Capital One,
that are active outside Canada, and the ones active inside Canada, including
Capital One and MBNA, are not providing service to retailers. In fact, we
question whether or not those sorts of organizations will really enter into the
business, or see the benefits of entering into a business.
Senator Oliver: Can you be specific? What is it that MBNA and Capital One are
not offering to retailers? Where do they fall down? What else do you want from
Mr. Morrison: There are two sides to the credit card business: one is the
issuing of cards to a consumer; and the other is taking the transactions that
are initiated with those cards from retailers and putting them on deposit for
They do not provide that service to retailers or indeed to any other business
today that accepts cards. They are issuing credit cards to consumers, but they
are not accepting the transactions at this date. There is nothing to prevent
them from entering that business. We just have not seen any evidence of them
entering that business to date.
Even in Asia there are organizations, including some of the large U.S. banks
like Citibank, that are very heavily involved in the issuing side of the credit
card business. They see the profitability of the consumer side of the business,
but not necessarily of having an infrastructure that will take those
transactions from the retailer, and they have not made the investments in
technology necessary to do that.
Senator Kroft: Would you be a bit more specific, so that I am sure that I know
what you mean?
Mr. Morrison: As I said, there are two sides to the credit card business, if I
can refer to it that way. One part of the business has to do with issuing cards
to the consumer, maintaining the credit card account for the consumer
cardholder, providing statements to the consumer, and earning money on the
amounts that those consumers borrow.
The other side of the service is an organization that will say to a retailer, "I
will take your credit card transactions from the terminals on your counter. I
will handle the authorization of those transactions by connecting to the
issuing organization. At the end of the day, I will give you credit in your
account for the credit card transactions that have taken place in your store."
There is a very distinct separation of the two sides of the business, not only
in Canada, but also in most other countries. In fact, the separation is more
visible in the United States than it is in Canada.
Senator Tkachuk: Could you also tell us more about the charges that are incurred
and the competition, with respect to charges, between Visa, American Express,
and Diners Club, for example?
Mr. Morrison: Yes. Again, that pertains to the issuing side of the business. The
organization providing a service to a retailer charges that retailer what is
called a discount fee, which is a percentage of the total purchase that the
organization deposits on that particular day. That is in the range of 1.5 per
cent to just over 4 per cent for all credit cards. There are some differences
between them, but they are generally in that range.
There are some other fees as well, including, for example, a fee for putting,
the actual deposit into the account, which is just a once-a-day fee. The main
revenue to those organizations is the discount, what is called a discount rate.
Senator Tkachuk: Does American Express now offer cash on deposit, or do you
still have to hang around and wait for those guys? With Visa and MasterCard,
you deposit and you are done, right? Do American Express and Diners Club offer
same-day service now when you deposit?
Mr. Morrison: They are all getting better at shortening the time, but still not
the same day. However, there are exceptions. If you are a good, hard
negotiator, have enough volume and accept enough of their cards, you will get
same-day credit, if that is the deal that you want.
Senator Oliver: Mr. Morrison, I cut you off when you were actually answering my
main question. Please feel free to complete it if you would, and then I want to
ask a question about credit unions.
Go on about the European countries and the companies and grocery chains that are
setting up banking right there.
Ms Brisebois: You might want to do the analogy with Loblaws and Wal-Mart and
what is happening there.
Mr. Morrison: We are seeing similar types of entities formed in Canada with
alliances between the Canadian Imperial Bank of Commerce and Loblaws, and
between the Toronto Dominion Bank and Wal-Mart.
Senator Oliver: Is that not beneficial to you?
Mr. Morrison: It is certainly beneficial to the consumer in terms of delivering
services, and it is certainly beneficial to financial institutions, because it
will increase their outlet and reduce the traffic in their branches.
There is still some question as to how beneficial it will be, in fact, to
retailers. In our survey, more than 60 per cent of smaller retailers said that
they would be interested in looking at the option of using a larger retailer
for some services, such as obtaining the daily or weekly supply of coin needed
to give change to customers, or perhaps even making deposits.
But for a large retailer, or any retailer, to provide the electronic services
that retailers need -- that is, the Interac or debit card services, or
authorization of credit cards -- they would require access to those electronic
networks that the task force talks about. However, there are still restrictions
on that, even though there was some opening up by the Competition Tribunal
In the end, those restrictions would force a retailer to establish some form of
financial services entity in order to be able to participate, which of course
is an up-front cost again, even though there is some possibility that the
initial capital requirement to form that entity might be reduced. The concept of
a holding structure might allow some form of alliance. But challenges still
remain to be overcome to enable retailers to provide those services to smaller
Senator Oliver: On page 17 of your report, you outline a number of what are
really deficiencies in the MacKay task force report with respect to the current
daily needs of retailers. The issues you raised are not the sort of public
policy issues that we can respond to; really they are matters that need a lot
I suppose that implicit in what you are saying is your hope that before any
massive mergers take place and so on, there be something in place to ensure
that the small retailers are protected and can still have their basic banking
needs looked after. Is that a fair statement?
Ms Brisebois: Yes, it is. And I would say that the needs of small retailers are
very similar to those of most small businesses across the country. Apart from
some specialized services that small retailers require because of the type of
business they run, I think their concerns were very similar to those of most
small businesses in the country, and a big concern is access to service in their
local operating area.
Senator Oliver: As the Retail Council of Canada, the national organization, what
do you say about whether or not credit unions should be able to help fill a lot
of this void if they are given a bit more freedom to grow?
Ms Brisebois: There is no question that we support that. But the questions that
need to be asked are, one, will they be prepared to make the investment to
offer the services that are now available through financial institutions, and
two, will they have a national network? That is also very important.
The point I should like to make is that this does not just apply to small
businesses. The report also explains how mid-sized chains across Canada work
and operate. They operate in their local markets very much like small retailers
do. They require the night deposit, the services of money exchange, coins, and
It is important to understand that the recommendations we are making are not
simply a response to the needs of independent merchants. In fact, in our study
we noticed that most of our retailers, with the exception of four or five very
large retailers, function similarly in local markets. They have a very close
relationship with their branch.
Senator Oliver: You both have mentioned coins. I was in the United States a
couple of weeks ago in a grocery store in Atlanta. They had a machine there
that encourages people to bring in their coins from coin banks at home, put
them in, and the machine will give bills in exchange. The grocery store takes a
2 per cent to 3 per cent commission for making that change for you. Most people
put their coins in, get the dollars, and then go and buy groceries, but the
machine also provides coins. That is something we should be looking at here in
Ms Brisebois: Let me just add that retailers are very innovative, and 2 per cent
or 3 per cent is a good pay-off. However, there is a danger that those types of
services will simply encourage financial institutions to transfer to the retail
store many of the services they currently provide to the community. I think
that we need to balance those services and make sure that indeed they do not
create unfair competition within a certain market.
There is no question that we will see more and more of those financial services
offered through major retailers. We are already seeing that in Canada and they
might be extremely helpful in smaller communities. We do not discard that as
one possible solution. But again, there are certain services that retailers
cannot provide that need to be provided by financial institutions.
Senator Austin: I have one brief question, which is really a bit of an
observation. Most of the banks that exist today grew out of the needs of
commercial producers and retailers in the 19th century.
After listening to you and reading your brief, I am tempted to ask you why you
do not create a Retail Council of Canada bank that services the retail system
the way you want it serviced, because your sector has the collective financial
capacity to do that. Is there a constraint?
Ms Brisebois: I should like to ask you to sign the submission with me. Yes, I
think that we would totally agree with you.
However, the reality is that there are limitations and constraints. Certainly
today, that would not be possible. I think Mr. Morrison might be able to give
you more information on specifically what would prevent us from doing that
Senator Austin: The task force wants more competition and wants more tier-two
activity. Obviously the shaping of our questions is all designed to discover
how that competition can be fostered. So I am really pressing you, why not look
after your own interests with your own financial institution?
Mr. Morrison: Regulations are perhaps not the easiest part to change, but
certainly they are changeable to enable that to happen.
Page 37 of the task force's "Background Paper #1" shows the
distribution of the assets of the financial institutions, and of course the
larger banks are at the top end of the scale.
We have a system that has grown up in a very protective environment for many
years. While the idea of retailers establishing that sort of infrastructure is
a good concept worthy of discussion, it takes time to make that sort of
investment, to get agreement, in fact, and to capture enough of the business
out there to make a Retail Council of Canada bank profitable. While it is
practical, there is certainly a period of adjustment when changing from a
system that has grown up in a protective environment to a system where
entrepreneurial organizations of that nature could develop. There is also a cost
for doing that.
Certainly the thought of tax breaks during the early periods is appealing as
well, if in fact those could become a reality.
Senator Austin: What is the relationship between ownership structures and new
Mr. Morrison: There are organizations with ownership structures that do not have
rigid caps on them. If an organization like the Retail Council of Canada bank
became very successful, at a certain level it would face some hurdles, and at
that point would be forced to change its ownership structure in order to
Senator Austin: Would you not like to be there right now, facing that $5 billion
Ms Brisebois: Yes.
Mr. Morrison: Yes. You can say yes.
Mr. Brisebois: I said yes.
The Chairman: My questions are in two areas, the credit cards and the electronic
payments. On page 17 of your report you say that you are opposed to duality.
Why? Could you also first say a sentence or two to explain what duality is,
because a lot of people watching on television might not really understand it.
Mr. Morrison: Duality is where one bank operates two competing credit cards, for
example, Visa and MasterCard. The two cards would be under one roof, as opposed
to the situation we have today where Royal Bank has Visa and Bank of Montreal
has MasterCard, for example.
Mr. Morrison explained earlier that when retailers accept credit cards in their
stores they also pay a merchant fee to the bank that operates the card. In
today's environment, MasterCard is more competitively priced than Visa.
The biggest concern our members have is that if those two cards end up being
under one bank there is no indication that the merchant rate for Visa would be
drop; on the contrary, we believe that the merchant rate for MasterCard would
increase to match the rate that now exists with Visa.
As an example, our members are paying through the Retail Council program
approximately 1.45 per cent as a MasterCard merchant rate and approximately 1.8
per cent as a Visa merchant rate. They do not believe that if those two cards
were under one roof that indeed the Visa rate would go down to 1.45 per cent;
rather, it is probable that the contrary would occur.
There is also a question of market concentration. Those two banks are not the
only ones who offer MasterCard or Visa, but probably they would have the
largest concentration if that were to happen.
The Chairman: Have you expressed that view to the Competition Bureau?
Mr. Morrison: Indeed we have.
The Chairman: I now want to take you through a series of your comments on the
electronic payment system, because I am not clear how many of them are public
policy and how many of them are technical problems.
The first is on the bottom of page 22 and the top of page 23. In essence, you
say that when the Interac system is down, retailers need another way to process
transactions. You propose various solutions, but you have yet to get any
satisfactory resolution of your problem. Am I correct in assuming that this is
not a public policy issue, not a dispute between two businesses? There is
nothing you would expect the government to do to help you to solve that
problem; is that right?
Mr. Morrison: Working with the Interac organization to find a practical solution
other than paper is not immediately a public policy problem. But, whether we
are talking about the electronic authorization of credit cards or the machine
that takes coin to which the senator referred, once we build a certain level of
reliance on that type of technology, then perhaps there is a public policy
The Chairman: In other words, it is not a public policy issue right now, but it
might become one down the road if you cannot solve the other problem.
Mr. Morrison: More than two billion transactions a year are expected through the
Interac network by the end of the year 2000. Another billion electronic
transactions with a credit card will be signed today, and there is cash
management. So it is getting very close to the stage where Interac is a utility
that requires a very specific and high level of performance, not just for
retailers but for their customers who arrive at the counter expecting that the
card is going to work and who often do not have another form of payment there.
Of course, if the customers then go to a banking machine, assuming there is one
there, to get cash, they usually find that it is down or not working also,
because it is the same system.
The Chairman: Am I right to conclude that, for the purposes of these hearings,
there is nothing you are looking for from us, but there may be in the
not-too-distant future? Is that a fair summary?
Mr. Morrison: That is a fair summary.
The Chairman: There is something on the top of page 24 that, frankly, I just do
not understand. You talk about the fact that as a result of the Competition
Bureau Interac decision in 1996, non-financial competitors were allowed to
enter the business. In fact, they have entered the business and have had an
impact on rates. But it seems that in some sense retailers are not allowed to be
a non-financial-institution service provider. Is that the issue?
Mr. Morrison: The Competition Bureau ruling did open up the Interac service, as
you say, and there is more competition there. But, if I am a thirty-part
service provider today approaching a retailer to offer the Interac service, I
can tell that retailer that I will take all of their Interac transactions. I
might also take and process their Visa and MasterCard transactions
electronically, but I cannot handle the deposits for the Visa and MasterCard
transactions to their financial institution. I cannot become what is called an
acquirer of those transactions. I can only do some of the processing.
The Chairman: Right. Because the acquirer must be part of the payments system
and therefore the acquirer must be a financial institution.
Mr. Morrison: Those are rules of the MasterCard and Visa companies.
The Chairman: Is it a MasterCard and Visa issue, or is it a Canadian Payments
Mr. Morrison: It is a bit of both, but at this point in time credit cards are
not included under the umbrella of the Canadian Payments Association; credit
cards are outside of that.
The Chairman: Therefore it is a Canadian Payments Association issue?
Mr. Morrison: Credit cards are outside of the payments system issue.
The Chairman: Right. I would describe credit cards as a payment. But that leads
logically, then, to your comments on page 26, where you use the phrase "open
access" with respect to providing not only Visa and MasterCard services
but also direct access to clearing and settlement services. Maybe we should
talk about that for a minute here. The Retail Council has been asking for that
for years. Our examination of other countries would suggest that, generally
speaking, it is not available elsewhere.
You state further on that, contrary to the argument often used against it,
allowing the retail sector direct access to the payments system poses no
systemic stability issues. Can you tell us if there is anywhere in the
industrialized world where it now happens? That is, is there any country that
has a payments system that has been opened up broader even than the MacKay
report proposes opening up ours, broad enough to include the equivalent of your
Mr. Morrison: Financial institutions in many countries include the post office,
for example, which in many ways is a retailer, as a member of the payments
system. There are other retailers who are not direct members of the settlement
system, but who are provided with a mechanism, with a line of credit with a
financial institution, so that they may at least participate in processing the
transactions a little further through the stream.
The Chairman: Your illustrative example was the post office, and I think the
answer is no, there are not any other examples.
Let us pursue the definition. If you are not in the settlement system, but you
are in the payment system, how far down that road do you want to go and,
frankly, is it really worth it? It opens up a whole series of other issues that
a lot of us would have serious concern about, I think. For the moment, forget
about whether it is good public policy. Is it even realistic? I do not know what
you gain by going a little further down the road.
Mr. Morrison: As a retailer, no, that is not the issue. Retailers could be those
new competitors; they could establish the Retail Council of Canada Bank. It
could be a Sainsbury's or a Tesco. Retailers in that sort of alliance or
participating in a financial institution structure of that sort should then have
access to a payment system. It is expressed in that context.
The Chairman: Let us take your Sainsbury's example, or Ms Brisebois' Wal-Mart
example. In that case, there is no question that there is access to the payment
system, because the institution running the financial service in that case is a
bank. It happens to be located in a Wal-Mart store, it happens to have a
linkage with Wal-Mart, and there is even a business relationship. It is not an
issue of opening up the payment system to retailers, though. It is only a
question of a linkage between a retailer and a financial institution. The
payment system is a financial institution, and I do not think that even current
Canadian rules would prevent that.
Ms Brisebois: No.
The Chairman: You are not asking for direct access, which is how I understood
it. Since everyone is making observations, I will make one last observation.
Ms Brisebois, it is not written in your text, but in your opening remarks you
essentially made the following statement. You said that it would be really
helpful and desirable if each of the MacKay recommendations were to be analyzed
in detail, in terms of their impact on individual sectors of the economy and on
consumers, before they were implemented.
I understand the theoretical nicety of saying that. My reaction is that, in
practice, it would be impossible to do. Let me tell you why. Let me take my
favourite example from property and casualty insurers, who tell us about the
catastrophic effects if the deposit-taking institutions are allowed to sell
property and casualty insurance. Yet if we look at the evidence in other
countries or, indeed, the evidence in Quebec, where the caisses populaires have
been selling it for a decade, it would suggest that the cataclysmic effects as
described by the insurance brokers are more than a little exaggerated.
I do not know how one could predict in advance what the likely impact of a
change in the marketplace would be. I think we have to make an educated guess.
To go as far as you would like to go would lead to absolute stagnation,
however. On top of that, nobody would ever agree with the analysis, so you
might as well make a judgment and get on with it.
Ms Brisebois: Let me make an observation. It is always dangerous when you know
someone is listening to every word you say.
I did not suggest that we would go that far. In fact, I think your example is an
appropriate one. For many of the task force recommendations, there is data in
Canada, sometimes provincially, or data outside Canada, that may prove
beneficial. That was the nature of my suggestion.
We certainly applaud the Senate committee for having travelled and studied the
system in other countries, as well as in different provinces. I think the
example given earlier on is perfect. I suggest that that is what we are
recommending in our report. There is a lot of evidence in the marketplace. We
are hoping that the House of Commons, as well as the Senate, and, finally, the
government, will have the courage to make those decisions without trying to
protect one market over another.
Retailers, as I said, live in a very competitive environment. They have to adapt
regularly. They certainly have never supported the status quo. They therefore
encourage this committee, as well as the government, to push the bar a bit
Senator Kelleher: The banks that hope to merge have all advised us, either in
person or through their speeches, that they have to proceed now. That is, time
is growing short in order to stay up with the competition and to be able to
compete globally. The banks say that we have to get on with this.
On the other hand, I look at your recommendations on page 32 -- number 5 in
particular. I will read it for the benefit of your audience:
Bank mergers should not be allowed to proceed in advance of financial sector
reforms that open markets to more effective competition, and before having
evidence that such competition will be a reality.
In a way, this follows on Senator Kirby's remarks. Let us take, for example, the
recommendation of the MacKay committee, that one way to fill the void that
would possibly result from the bank mergers is to allow the credit unions to
get into banking.
As I read what you are recommending in number 5 -- I am not quarrelling with
you, but knowing the government, how it gets around to enacting legislation
regardless of who is in power -- it will probably be a year or so before such
legislation would be enacted. You then go on to say:
...and before having evidence that such competition will be a reality.
So we get the legislation in place, but that does not tell us much, because we
do not know how many credit unions are going to get into banking. It will take
a while for us to see the results. By my estimates -- and my crystal-ball
gazing is as good or as bad as anyone else's -- you are probably looking at
about four years: two to get the legislation up and passed and another two years
to be in operation.
The banks are saying that we have to do it now, and your suggestion is to put in
place the legislation that will provide more competition and then see how it
works. I would like your comments on this. Your suggestion is in direct, so to
speak, opposition to what the banks themselves want to see happen.
Ms Brisebois: Senator, let me just make a comment on the process. As you
mentioned, it would take four years to see all of this happen. In terms of
financial services legislation, that is pretty fast. So we are moving forward.
It would be a positive step.
I think we need to put that comment in perspective. It relates specifically to
retailers' concerns about the provision of services at the local branch level.
I would certainly encourage you to put, next to that paragraph, a note to refer
to page 11, because it really is what we mean. We certainly would not want to
suggest how other sectors need to compete or who should be in the marketplace in
other areas outside retail. This paragraph specifically relates to the services
that our retailers need to operate daily.
In looking at the merger, one of our concerns was the temptation of this new
entity to drop some of the less profitable services for high-end services. In
fact, what they would consider to be less profitable services are services that
our members require on a daily basis. We were not sure if there would be
alternatives, other suppliers in the marketplace able to provide that service,
if indeed this large entity or these large entities decided not to provide
those services any longer. I do not know if I am making myself clear. I might
suggest giving you a few examples.
Senator Kelleher: I think I understand what you are saying, so let me put the
question to you directly. Do you think that before the mergers are permitted to
proceed there should be legislation in place permitting other competition? If
so, how long should it be up and running before the mergers proceed?
Ms Brisebois: That is a difficult question to answer.
Senator Kelleher: I know. I do not know the answer, but I thought you might have
Ms Brisebois: If I had the answer, I might not be sitting here. I would have to
take a middle ground and suggest that, in some cases, depending on the services
that we are looking at, at the types of services that need to be provided,
legislation to ensure that someone is providing that service might be needed.
On the other hand, there are natural market forces, and we do not believe that
legislation is the solution for all our ills or all our challenges.
The message that we are trying to convey in that paragraph, and indeed
throughout the submission, is that we are not encouraging legislation as a
solution, as a means to an end but that it is important to realize that a lot
of the services that consumers and Canadian retailers require on a daily basis
need some type of protection during this transition or restructuring. If it is
to be dealt with through legislation, then so be it. If not, then all the
Senator Hervieux-Payette: We were told that the rate of use by consumers of
automated teller machines was currently 60 per cent. In your brief, you mention
that some 15 per cent of consumers use Interac. Automated teller machines have
served the interests of banks by reducing their operating costs. How come the
implementation of Interac is taking place so slowly? As a consumer, I would
like to use it for all my transactions, except that the charges are so high that
I do not use it unless I have a substantial amount to pay, that is, I think it
is robbery below $100. So it forces me to take money out of the bank.
Could your organization negotiate this service collectively? Currency could then
be used less. This would be a solution for pennies, which would become
collectors items. I have the impression there's a hindrance somewhere and that
it is not in the interest of the banks to implement this at the same speed at
which they implemented automatic teller machines. Whose role is it to pressure
the banks to provide this service at affordable prices? Is it not that of an
organization like yours? What sort of mechanisms would it take to pressure
financial institutions so that use of this card would become more widespread?
Ms Diane Brisebois: You mention that this card should be more widely used in
retail stores. The reality today is that the small merchant who offers the
debit card -- do not forget that this merchant offers you payment by Visa,
MasterCard, cheque or cash -- it costs him on average $35 a month to rent the
machine and approximately 12 to 15 cents for each transaction. So, not only do
you have to pay the merchant, but he has to pay bank charges. The third cost is
the cost of the communication line, that is, the telephone line, for using the
As you know, 50 per cent of the employees who work in retail are part-time. So
there is a constant turn-over of staff. This entails a real cost for merchants
to make sure their employees are properly informed.
The Retail Council of Canada does a huge amount of lobbying among the banks to
get them to lower their charges. It seems that the Council has not been
successful so far. I'm not sure it is the role of the Retail Council of Canada.
I think perhaps it is the role of a committee like this one, which could help
us so that there was a lot more competition in the market. It is gradually
happening. But still we know, when we look at the profits of the banks, that
the charges for these services represent a very important aspect. It is hard,
from one day to the next, to decide whether or not there should be charges for
this type of transaction. I think it is a matter of lobbying for the merchants,
communities and consumers.
Senator Hervieux-Payette: When you talk about service charges of $35 a month, do
these charges go towards the purchase or rental of the equipment or just the
use of the service?
Ms Brisebois: Until quite recently, merchants had to rent these machines through
a bank. For a while now, they have been able to purchase the machine and they
are responsible for maintaining it. Most of our small merchants rent the
machine through their banks and so it is actually a rental cost of $35 a month.
Secondly, there's the cost of each transaction. Thirdly, the cost of
communication and training. Finally, the costs for the account.
Senator Hervieux-Payette: In their wish to serve the Canadian public, this is
perhaps a greater priority for your members than it is for the banks?
Ms Brisebois: Yes, senator.
Senator Hervieux-Payette: The government requires that financial institutions
contribute to community projects. Some people say that the banks wont be given
equal treatment. So that implies a cost, and an impact for all users, because
if they are going to give money, obviously it is not the bank and the
shareholders who are going to pay. But eventually, consumers will receive the
bill. Have you studied the part of the report where it says that each year, by
law, the financial sector is obliged to contribute to the community sector?
Does that seem to you to be an idea that should be promoted and supported?
Ms Brisebois: This question was not asked directly. I touched on the issue with
one of the senators a bit earlier. It is ambiguous, because our members live in
a free market. If they are in favour of competition among financial
institutions, they think that we should not force financial institutions to
promote certain projects. It seems to us that these are important community
projects. We encourage this sort of support within the community. But if laws
are suggested to ensure this takes place, we do not agree.
Senator Hervieux-Payette: Do any of your members do mail-order sales using the
Ms Brisebois: We represent several formats. Many of our members, the "brick
and motor" ones have Internet, people are familiar with the catalogue.
Senator Angus: Welcome, Ms Brisebois. What do you mean by the status quo? If I
understood your testimony properly, your members have told you that the status
quo is not good enough. The bank representatives appeared and told us that the
status quo is not acceptable. I think they mean something different from what
your members told you. Can you explain to us which status quo is not
Ms Brisebois: As far as the general meaning of the term goes, I think our
members give us the same definition as the financial institutions. When our
members talk about the status quo, however, they are talking specifically about
the type of competition in the Canadian market. According to their reality and
their everyday experience, our members tell us that we have to change
continually, we have to be on the cutting edge, we have to understand our
consumers and meet their needs. It is not up to me to tell consumers what they
should buy. I have to be on the leading edge and I have to understand market
changes. In our brief, our members are telling us that they get the impression
the financial institutions have not remained on the cutting edge of consumer
and customer demand in general. This is the context of the status quo.
Senator Angus: If I understand correctly, for you, there is currently a lot of
competition in the market and there is always room for more competition.
According to the MacKay report, we are being directed towards other ways of
increasing competition in the market. If I understood your brief properly, you
are advising caution so that we don't go ahead too quickly with the adoption of
the measures mentioned in the MacKay report.
Ms Brisebois: Up to a point, senator. I mentioned, during our discussions with
Senator Kirby, that we have to be realistic. We think there's lots of evidence
on the Canadian market or outside to help make good decisions. We encourage
lots of research and studies. We are not going any further. We suggest that
people must make sure they are well informed before making their final decision.
Senator Angus: According to your members and your knowledge, is it important for
the banking institutions to be Canadian? For example, we already have in place
the 10 per cent regulation. There is always the possibility of allowing foreign
banks to set up here. There is always the possibility of having more Canadian
banks. Do you have something to add in this connection? Perhaps I could give
you the context of my question.
As Senator Kirby and Senator Oliver have told us, the banks tell us that things
are urgent. The banks must be allowed to merge right now; otherwise Canada
could go through the situation Belgium went through when there were no more
Belgian banks. Is there a risk of that in Canada?
Ms Brisebois: I imagine that the parallel would be what happened in the retail
area. If you had asked consumers, 15 years ago, if they would shop in foreign
stores, they probably would have said no. You know what the reality is today.
The priority is to get a good product, a competitive product, good service and
stability. So, if I can speak for our members, I would say there is not so much
concern about foreign investment. There's a lot more concern about a secure
system, a stable system and a healthy system.
Senator Angus: In response to Senator Kirby, you explained the duality of credit
cards. Today we read in the papers that the Competition Bureau has some
questions about credit cards. If we approve the merger between the Bank of
Montreal and the Royal Bank, can you repeat your comments on duality? What are
the problems, in your opinion?
Ms Brisebois: Duality where credit cards are concerned is really when one bank
serves its clientele with two competitive cards. For example, at present, Visa
is offered by the Royal Bank and MasterCard is offered by the Bank of Montreal.
The consumer has a choice to make. If there is a merger, the two competing
cards are going to be under the same roof. The concern exists among Canadian
merchants about the cost to the merchant when he offers this card to consumers.
For example, on average, our merchants now pay charges of about 1.8 per cent a
year for Visa and 1.45 per cent for MasterCard. They think that the charges
will not decrease, and that they are going to increase, and that MasterCard
will be as high as Visa. Hence their concern.
Senator Angus: A representative of Capital One appeared last Friday in Montreal.
He explained to us that MBNA, and we've all received the direct mail for its
cards, are competitors for Visa and MasterCard and they are under the same roof
as the merger between the Royal Bank and the Bank of Montreal.
Ms Brisebois: I think what is important today is to understand the concentration
of the market with regard to Visa and MasterCard, with the merger of the Bank
of Montreal and the Royal Bank. It is fine to say that there are new
competitors in the market. But if the one that is well established in the
country has from 50 to 70 per cent of the market, it is almost impossible for a
new competitor to make a major investment and to assume that he will be able to
have at least 10, 15 or 20 per cent of the market over a short period of time.
So it is very important not only to see whether there is competition or not,
but also to look at the type of investment that this new competitor has to make
to get established in the country. These are serious dilemmas that we are
asking the committee to look into and study carefully.
Senator Meighen: I would have a supplementary question to ask, if you allow me,
Mr. Chairman. Is it not true that the Competition Bureau could ask, in the
context of a merger between the Bank of Montreal and the Royal Bank, to get rid
of one or the other of the two cards? This solution would get round the problem
you raised regarding the interest rate.
Ms Brisebois: That is a dilemma. We cant tell you straight off that it is the
perfect solution. The two banks we are talking about have a major market
concentration. What will happen if we decide not to use MasterCard under this
merger? Will most of the people who used this Bank of Montreal card simply
switch to Visa? We thought about this scenario. It is very hard to imagine a
perfect solution between whether there should be a merger or not of these
banks. I encourage my colleague to tell you a bit more about it because he has
studied the issue.
I will ask my colleague, Mr. Morrison, to say a few words.
Mr. Morrison: You nailed the key question -- that is, what is the remaining
market concentration, the extent of market concentration after those sorts of
changes are made? Irrespective of the changes, if it is MasterCard customers
giving up MasterCard and taking Visa, or the other way around, the
concentration amongst a very small number of institutions is so high that when
you relocate some of it you still end up with a challenge.
Mr. Roy Carr, President, POS Pilot Plant Corporation: POS Pilot Plant
Corporation is located in Saskatoon, in Innovation Place. "POS"
stands for "protein, oil and starch", the major building blocks in
the agriculture crops that we grow here in western Canada, in the marine
products from the Maritimes, and in the forestry products from British
Columbia, to give you a magnitude of this.
POS provides entrepreneurs and companies with expert scientists and pilot plant
equipment so they can scale up their concepts to a point where they have a
final product to test in the marketplace. In essence, we provide a contract R &
D service -- and I distinguish between the two.
As a result of these activities, we have started various Canadian companies,
some here in Saskatoon. Many of these companies are hiring. Many of their
products are exported -- to Japan and the U.S, for example -- to many parts of
the world. We are building exports, building jobs for people in this area.
Where does Canada stand in the world as far as research and development is
concerned? On the research side there is considerable funding. We do have world
recognition, as far as the quality of our research is concerned. On the other
hand, Canada usually places about 22nd or 23rd out of 23 countries in
evaluations on small business, entrepreneurship, and the development of that.
Why is that? Why are we so excellent in research but down at the bottom in the
area of development and commercialization?
The first step is research. There is a considerable amount of interest and
knowledge in research in Canada, so it is quite well funded. Some good research
is being done, as I indicated.
The second step is development. That is why I say there is a difference between "R"
and "D". On the development side is what we call "seed capital
needs". The problem is to find organizations that will put some money into
the development area. You need to do the development step in the pilot plant or
scale-up equipment to prove out your produce prototype. From that, you can try
it in the marketplace, using the POS capabilities. Then you can build your
Once you have a business plan in place and know the ROI for that product, if the
ROI is attractive then there are plenty of venture capital people who will be
interested in investing at that point. The problem is getting from the end of
the research and scaling up to the point where you have enough information to
develop your business plan.
In that area, for 15 years we have been trying to involve the federal and
provincial governments, but everybody stands back from the commercialization
gap area; they are not ready to become involved.
The first group that has started to take an interest in this area is the Royal
Bank here in Saskatoon. As a result of discussions, they have set up what is
called a "KBI committee", a knowledge-based industry committee. They
wanted to understand what the problems are, similar to what I am describing
here today. As a result of that, they set up a separate group in Toronto at the
Royal Bank, headed up by Susan Smith. Her efforts have been remarkable in the
area of taking an interest in the emerging new companies we have going in
Canada. The Royal Bank has also provided some support, as best they can,
keeping in mind that they have to make a profit. Risk is a very difficult thing
to assume, by anybody. At least the Royal Bank has tried to do something in that
Just recently, the C.E.O. of the Royal Bank said that the Royal Bank would be
able to do more in this area, if it can grow and be strengthened. So I would
like to recommend today that, in the best interests of Canada, we try to
strengthen our banking industry. My particular interest is with the Royal Bank,
but if all banks were strengthened, by allowing them to merge, they would be
able to become more involved in this area in which there is a weakness in
Canada, that is, the area of the developmental aspects.
I will close at that juncture. Are there any questions?
The Chairman: I wonder if you could just elaborate a little further on the
corporate structure of your firm. I am unclear as to whether it is a commercial
enterprise or more of a research-oriented organization.
Mr. Carr: Well, it is a unique facility. It is partially supported by the
federal government. We have a charter with the federal government and at the
present time -- well, when we started, it was about 95 per cent federal money
and 5 per cent industry money. We have become more practical over the years; we
are now at the point where the incoming money is approximately 30 per cent
federal money and 70 per cent industry money.
Studies have been done on the effectiveness of pooling industry and federal
money into this particular organization, which is a not-for-profit
organization. Dr. Brinkman from Guelph University spent about a year studying
the effects of industry coming in and using our scientists and equipment. He
found that for every $1 that went into POS -- $2 industry, $1 federal government
-- $8 was being returned to the Canadian economy. So the effect of an
organization such as ours is quite profound; the problem lies in preventing its
full use. It is almost like owning a Mercedes but only having two drops of
gasoline in the tank -- you are sputtering down the street.
A lot of these things could be moved more quickly if we had private-sector money
coming in. The example I used is the Royal Bank being involved in the
developmental area, scale-up area, or commercialization gap, as I call it.
Senator Kelleher: Your focus is in the area of protein, oil, and starch
by-products, as I understood it. Are there other non-profit organizations like
yours, like POS, in other industrial fields?
Mr. Carr: Not in that area. There are some provincial groups that are primarily
focused on making the final product; for example, frozen fish and meat products
that are ready to go to the marketplace. Our speciality, developed by industry
demand, is that inside these components -- marine products, even shark -- are
some interesting high-value components that can be used in what we call
nutriceuticals, cosmeceuticals and mediceuticals.
Nutriceuticals make you feel better inside; they relate to nutrition.
Cosmeceuticals make you look more beautiful. Mediceuticals are used in the area
of disease. In Saskatoon, we have an excellent biotech organization in
operation. Its activities are recognized around the world.
The main point -- and I can leave this documentation with you -- is the problem
small companies face in getting support in the development area. It is all
clearly identified in there.
Senator Meighen: Is it essential that an organization like yours be a
not-for-profit organization? Can you see the day when your organization will
turn a profit?
Mr. Carr: That is certainly our ambition. We just finished a $1.5 million
expansion in the area of extraction capabilities -- being able to extract out
of commodities what it is that we need. The demand in this area is growing
fantastically because of the companies that are into nutriceuticals, et cetera.
We have just completed that expansion. It took a lot of money to do that.
Senator Meighen: Where did the money come from, if may I ask?
Mr. Carr: The money was a combination of our own money, plus money from the
Royal Bank, WD, Western Economic Diversification, and the Province of
Saskatchewan. We also had a client buy $400,000 worth of equipment and donate
it to POS because of that activity. So that is how we do business. We get a
little bit here, a little bit there, and put it all together. That expansion is
Our next step is to advance further in the area of self-funding, as we call it.
Our goal at the end of next year is to be at 75 per cent self-funding. At the
same time, we are trying to keep as low as possible our charge rates to the
entrepreneurs and small businesses that use our facility. We are on a tightrope.
However, given the increased demand in the area of us actually manufacturing on
an interim basis for small companies that are starting up -- let me step back
for a moment. We manufacture for these small companies and they put the product
on the market, which allows them to test out the marketplace before going to
the government and saying, "Give me money to build a facility." In
other words, these small companies can prove out their product using our
capabilities. Once they have tested the market and developed their business
plan, as to the value of that technology, an appeal for private sector
involvement can be made. The private sector will not enter at the development
stage. That is the battle we are fighting all the time.
Senator Meighen: You say that you hope to be 75 per cent self-sufficient by the
end of next year. How long have you been in business?
Mr. Carr: The company opened its doors in 1977; I joined in 1984. Initially, its
focus was in the area of new canola products, replacing rape seed. They did the
processing at that time to find a way to get a high-quality product out of both
the oil and the meal. In 1984, I made staffing changes, et cetera, with a view
to becoming more practical. As a result of that, industry has taken off in its
utilization of our facility.
Senator Meighen: How would you explain the reluctance, the apparent reluctance
until you say the Royal Bank came along, of the banks -- to take the example of
them -- to get into this business of closing the commercialization gap, as you
term it, and to get into the development stage? What is the reason for that?
Mr. Carr: It is the risk risk of failure, the fear of failure. Until you can
accept some failures, you will not take any steps forward. That is part of the
reason that we are in 23rd spot, fighting it out with Italy at the bottom of
the 23 technology countries.
Senator Meighen: That raises a very interesting question, one that has come up
before this committee on a number of occasions. We have heard evidence in the
United States, for example, that there is a great deal more of pricing for
risk. We asked the banker, "Why do you not price for risk?" As I can
understand it, they seem to say, "Well, we do not price for risk
essentially because we are afraid of the public relations fallout if we have to
go and collect on our loan." The media will report that banks are charging
6 over prime, that they are a terrible bunch of gougers.
So they think they will stay away from it. Does that make any sense?
Mr. Carr: Venture capitalists will not come in until virtually no risk is left.
In other words, once the risk has been set aside and proven out, the venture
capital companies will come in. That is, in essence, traditionally where the
banks have been in their approach to risk.
What the Royal Bank has been doing is helping out a little bit in the area
before that, that risk area, the commercialization gap I was describing. More
banks need to do that. So, with the mergers we may be able to put some pressure
on the banks to get more into the risk area.
Senator Meighen: In other words, if they are hooked up, they could afford to
take more risk?
Mr. Carr: That is right.
Senator Meighen: Is there any other factor? For example, what is your opinion in
terms of the capital gains taxation regime in Canada, insofar as it may impact
on closing the commercialization gap? If I could wave a Paul Martin magic wand
and either eliminate capital gains or adopt more of the American system,
whereby the rate goes down dependent upon the number of years or the period
during which you hold an investment, would that assist in closing the
Mr. Carr: Well, I think the concept was good, but the way it was executed I
thought was not in the best interests of the people who need the money to move
forward and get their concept or idea commercialized. A lot of the funds that
have been set up, they will invest in a golf course, or something like that,
whereas they are getting tax breaks to be in the risk area. So it has been set
up to try to utilize that risk area.
From my humble observation, I do not think it has been as effective as it could
Senator Meighen: I was thinking more of private capital, private investment at
this development stage, where there is, by your own admission, a considerable
Mr. Carr: Yes.
Senator Meighen: Do you feel that the capital gains tax in Canada in any way
skews the relationship, such that there is a great deal of risk but the chance
of real reward is severely constrained?
Mr. Carr: The more we can take a look at tax implications for people who are
willing to invest -- for example, about two months ago I saw an article that
indicated that Saskatchewan has the highest savings per capita of anywhere in
Canada. We need to find a way to make it attractive enough to get these people
to take their money out of the bank and invest it in some of these small
organizations that are just getting off the ground. How do we do that? We have
to set up income tax benefits for that, I would say. I do not know how to go
about doing it, but it should be done.
Senator Callbeck: I agree with you that there is a real problem in that
development stage. In the province I come from, the research is done, the
product is identified, but the problem lies between that and getting it on the
shelf -- what you refer to as the development stage or area. Now you say that
the Royal Bank has become helpful, is listening.
Mr. Carr: Yes, they are prodding at the area. If they can become bigger and
stronger, they will have more dollars, even though the same percentage, to put
into that area.
Senator Callbeck: You said you felt that, if the mergers went ahead, the Royal
Bank would do more in this area.
Mr. Carr: Their CEO said that; I am just quoting what he said.
Senator Callbeck: I am wondering why they would be more prepared to take that
risk then than they are now, because, as I say, it is a real problem.
Mr. Carr: Well, the banking industry is the banking industry. If you look back
ten years ago, there was no thought of getting into the risk area at all. For
the Royal Bank to get involved in that area is a tremendous improvement, a
tremendous change. We need for them to become more comfortable in the risk
area, to become more involved. For them it is one step at a time, I think. The
banks need to be encouraged to move into that area. Aside from me talking, it
takes outside pressures as well to get the banks more interested in that area.
Senator Hervieux-Payette: You present us with a point of view that can be linked
directly to the report, that is, the traditional role of banks, whether it is
the Royal Bank, Toronto Dominion, CIBC or another one, pertaining to the plan
for the second phase of development after research.
If our committee recommended that the Minister of Finance and the government use
this new structure to allow financial institutions to work in brokerage,
banking services, insurance and trusts, expertise would be developed,
especially in organization brokerage that could create risk capital funds for
development. Is it the role of a bank to invest in development capital?
The return is generally excellent. For $1 million in research, you have about
$10 million to invest in development to reap a turnover of $100 million. It is
always in multiples of ten. If you don't go past the development stage, you
will never have $100 million in revenue. I think that the specialized market,
NASDAQ, has been one of the mechanisms that made a huge amount of money
available for this type of development.
To your knowledge, if the U.S. and Europe are better at development, is it
because it's through the banking system or other financial mechanisms or other
financial institutions? What model could we promote in our report?
Mr. Carr: I was born in Canada but worked in the United States for 14 years with
large corporations, Proctor & Gamble, Weston Foods, et cetera, so I have a
pretty good idea of what is going on in the U.S.A. Then I came back to Canada.
In the United States, the government is becoming more and more involved -- I am
reluctant to bring that up because you are government people here. For example,
there is a program run by the USDA whereby people send in a concept proposal,
which is treated with confidentiality. The program, called ARC, has millions of
dollars, well over $200 million, I believe, available to take a look at some of
these concepts. Support is provided to the ones that appear to have a pretty
good payout; they even include research in that.
If my information is correct, I believe that governments in Europe also take an
interest in this area.
There is more, say, tax alleviation in the United States. I am not sure about
Europe, but the United States is much more liberal in allowing companies in
this area relief from taxation for a number of years. So, in the U.S., there is
more public money in this area, the risk area. In Canada, there seems to be a
fear of failure.
Senator Hervieux-Payette: You are not answering my question. You say it is the
governments. Are the banks involved in the U.S.? You are proposing a model in
which banks invest in this sector. To your knowledge, are the American banks or
the European banks in this sector, or is it simply government organizations
through direct funding and tax measures?
Mr. Carr: I am sorry. I thought your question originally was, "What is the
model that can be used to push that through?" I am certainly not an expert
on banking, but I do have a feeling from talking to people in the U.S. and from
being there that they are a little easier to work with in the risk area. In
other words, the Americans seem to accept a bit more risk than Canadians do.
That is just an opinion though; I have no facts to back that up.
Senator Hervieux-Payette: Your conclusion is that you are in favour of the banks
being able to invest more. But you could not tell us whether the funds come
from the private sector or the public sector in the whole development.
Mr. Chairman, I was the Vice-President of Development at SNC and I did this type
of financing. In general, the banks stayed far removed from development. They
did not know about technology and did not have the inside resources necessary
to assess the risk. Can the banks assess these risks nowadays?
Mr. Carr: I do not know if they have that on their staff. Generically speaking,
consultants are available to be hired to take a look at a technology. I will be
one myself in about six to eight months. Consultants would be available to
evaluate those things and make a recommendation to the bank. I would not expect
the bank to have technical people on staff to do that.
I think we need a combination of the banks getting more involved and the
government getting more involved, and maybe they could work together. The Royal
Bank has a working agreement with WD, for example, and perhaps they could get
into areas of more risk with public-sector and private-sector money working
together. For me, teamwork is the essence of this. We have to work together; the
private and public sectors have to work together to do something about this
problem we have in Canada.
Senator Austin: I should like to focus on what I think is the major point of
your submission, and that is that commercial banks are prepared to enter into
primary levels of support for research leading to commercial results. You have
alluded in general to the role of the Royal Bank. I wonder if you could now
tell us more specifically how much money and what kind of reward the Royal Bank
wants for this higher risk. For example, are they looking for a royalty as a
relationship to the commercial success, or a part of the equity? Are they
acting essentially as venture capitalists at the front end in this area? Do
they have a cap on the size of commitment they will make to any one
recommendation you bring them, such as $500,000 or $1 million? In practical
terms, what exactly are you getting from them?
Mr. Carr: Well, as I say, they are gradually moving into the area, and I do not
think that there are any major guidelines yet. In our particular situation,
they are working with WD and have set up a loan system whereby we can borrow
money at a reasonable rate. We can use that to upgrade our capabilities in
order to serve better the industry people coming in. They have on occasion
invested in a start-up company, but I am not sure whether they had an equity
position in that or whether it was a loan.
Senator Austin: In the first instance, then, they are joining in lending money
to the POS balance sheet, which is generally responsible for repaying that loan
from all of its revenues.
Mr. Carr: That is one observation.
Senator Austin: They have seen your financial performance since 1984 or
whenever. Are they comfortable that in general there is a capacity to repay?
Mr. Carr: Yes.
Senator Austin: So that is one stage. Is the next stage that they will support
research for proprietary ventures, people who own companies with the technology
and who are using your facilities to develop the technology further?
Mr. Carr: Yes. But there have not been that many so far. There have been a
Senator Austin: You will make recommendations when you see a technology you
think has real potential, and the bank will on occasion respond positively. Is
that what you are saying?
Mr. Carr: It has to be up to the client. The client has to raise sufficient
capital to take the next step. In other words, we are just a technical
organization. We have several people on there. In the last ten years, we have
started up a secondary company called NVI, Nuvotech Ventures International. Its
role is to try to help entrepreneurs identify money sources, like IRAP programs
and things of that nature that will help them.
Senator Austin: Has POS set up that activity?
Mr. Carr: Yes. And it is a private, taxable company.
Senator Austin: What is the largest financial support that the Royal Bank has
brought to POS in the market?
Mr. Carr: Well, working in conjunction with WD, they have made a loan vehicle
available for up to $1 million.
Senator Austin: They made a line of credit up to $1 million available?
Mr. Carr: Yes. We have to make an investment before people come to us. We
operated at a certain level and then we found out that what we do seems to
appeal to people, and we had more people coming in the door than we could
handle. We had to put together a package, make the next step of investment, and
increase our capabilities. Then we found out that the small companies out there
are really interested in having us be an interim manufacturer for them.
So we have gone around and now we have this loan package that we can utilize to
buy new types of equipment or to increase our capacity, and gradually we pay
Senator Austin: And when WD and the Royal Bank make this joint venture line of
credit available, do they take security from POS in the normal way?
Mr. Carr: The equipment and things like that, yes.
Senator Austin: Will they take a chattel mortgage?
Mr. Carr: That is right, yes.
Senator Austin: I appreciate having those additional details. Are you familiar
with the B.C. Research Council?
Mr. Carr: Yes.
Senator Austin: Is your role roughly the same in functional terms?
Mr. Carr: Functionally it is somewhat similar, although technically we are quite
different. We are in different areas.
Senator Austin: You are in a different area technically, but operationally, in
both cases, are you not essentially trying to move various technical ideas from
the conceptual level to the pilot plant level?
Mr. Carr: As far as I know, they do not have pilot plant capabilities, or not
really significant ones.
Senator Austin: They used to have. They were downscaled.
Mr. Carr: Right.
Senator Austin: Well, I thank you very much for this insight. It is a factor. I
do not know what kind of a factor this type of bank support can be when we look
at the larger issues of competition, globalization, and intermodal financial
structure, but it is certainly very interesting to hear of this event.
Mr. Carr: We do not think that it will be the total solution, but it will be an
incremental step, and hopefully that will encourage other banks to be involved
and to get even further into this gap area. I think that is step one. We need
to encourage the banks to put their toes in hot water and be involved with
The Chairman: I wish to thank everyone who participated today.