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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

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.

[English]

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 industry involvement.

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 industries.

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 asset problems.

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 be nice?

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 three months.

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 solutions.

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 to us?

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 possible.

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 different.

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 last resort?

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 nothing.

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 the angels.

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 jurisdictions?

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 here?

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 right?

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 that certainty.

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 policyholders.

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 ago.

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 recommendations.

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 institution".

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 tax.

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 Saskatchewan.

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 larger banks?

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 than Saskatchewan-wide?

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 banks.

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 be?

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 communities?

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 TD ATMs.

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 affinity card?

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 loans?

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 community.

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 to offer.

Senator Meighen: Are there any recommendations that you do not like in the MacKay report?

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 Bank.

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 aboriginal-owned bank.

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 umbrella?

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 middle.

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 one, too."

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 statement?

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 effective.

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 efficiently.

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 widely-held ownership?

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 doing.

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 side.

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 to us.

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 it.

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 members".

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 them.

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 their behalf.

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 accomplished.

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 respective industries.

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 very important.

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 there.

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 inevitable.

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 situations.

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 chartered banks?

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 less.

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 own positions.

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 opportunity?

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 itself.

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 submission.

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 stores.

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 retail sector.

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 consumer needs.

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 addressed.

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 consumer needs.

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 see.

All of these respectfully submitted. I hope we were brief enough and concise enough.

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 day.

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 that right.

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 marketplace.

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 branch.

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 time.

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 branches open.

Mr. Morrison: I think we also need to consider in this particular question that retailers cannot change their banking relationship overnight if the branch closes.

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 adjustment.

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 them.

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 them?

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 the retailers.

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 ruling.

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 retailers.

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 more study.

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 so on.

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 Canada.

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 today.

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 institutional creations?

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 continue.

Senator Austin: Would you not like to be there right now, facing that $5 billion hurdle?

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 dimension.

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 Association issue?

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 members?

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 further.

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 a suggestion.

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 better.

[Translation]

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 system.

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 Internet?

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 acceptable?

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.

[English]

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 business plan.

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 particular area.

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 complete.

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 commercialization gap?

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 have been.

Senator Meighen: I was thinking more of private capital, private investment at this development stage, where there is, by your own admission, a considerable risk.

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.

[Translation]

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?

[English]

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.

[Translation]

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?

[English]

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.

[Translation]

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?

[English]

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 couple.

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 that back.

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 this.

The Chairman: I wish to thank everyone who participated today.

The committee adjourned.