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

Issue 36 - Evidence - Afternoon Sitting

TORONTO, Monday, November 2, 1998

The Standing Senate Committee on Banking, Trade and Commerce met this day at 1:00 p.m. to discuss the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).

Senator Michael Kirby (Chairman) in the Chair.

The Chairman: Good afternoon, senators. Welcome to our first afternoon session in Toronto. Our first witness this afternoon is Mr. Charles Baillie, the Chairman and Chief Executive Officer of the Toronto Dominion Bank.

Thank you, sir, for taking the time to be with us. I would ask you to read your opening statement, which you have distributed to us, following which we will have several questions for you, I am sure. I have already four senators on my list.

Mr. A. Charles Baillie, Chairman and Chief Executive Officer, Toronto Dominion Bank: We are very pleased to have this opportunity to present our views to your committee at this critical time in the financial services sector.

Last month when the TD appeared before the House of Commons committee, we talked about a long-term vision for the financial sector. We posed the following questions: Where would the government like to take the financial sector in the next century? What kind of industry do we want for Canada?

We discussed two scenarios. One vision of Canada would have our country in the front ranks of the global financial sector as a key provider of financial services in Canada and abroad, giving our country the potential for six to eight major world-class financial institutions that are Canadian-controlled and Canadian-headquartered.

The other vision would see Canada slipping further from the top tier, becoming a declining influence in financial affairs and, indeed, in world affairs. In that scenario, Canadians could well continue to enjoy a reasonable domestic financial marketplace, but that marketplace would be based on growing domination of more sectors of financial services by foreign suppliers and the ongoing erosion of market position by Canadian institutions.

In our presentation to the Commons committee, we said that the MacKay report has a set of recommendations that will, if taken in their entirety, allow for the first scenario -- that is, the vision of Canada as a home of vibrant, competitive, world-class financial institutions. We said that these recommendations are balanced and fair, and that cherry-picking these recommendations would upset the balance, ultimately hurting consumers and the financial sector.

We would like to expand on that today to discuss the MacKay recommendations that go to the heart of the changes in the structure of the financial sector and that would reshape the sector for the next century.

When we say the MacKay report should be looked at in its entirety, we do not mean all 124 recommendations. A lot of the 124 recommendations are good and timely. Many would benefit Canadians, and all warrant serious consideration. However, most of them would have little or no impact on positioning Canada's financial services providers for the 21st century.

We have identified a dozen of the recommendations that would have such an impact that would indeed shape Canada's financial services industry depending on whether and how they are incorporated into legislation.

As a group, these recommendations would encourage Canadian ownership of major institutions. They would allow major institutions to pursue their strategic goals in the changing global marketplace. They would allow for a very competitive but level playing field in Canada, and they would increase foreign competition in Canada.

That is the balance that would lead to the vision of Canada as a home of strong, vibrant, competitive institutions, and an open competitive marketplace delivering benefits to consumers.

I will devote most of my remarks today to these core recommendations and then close with some comments about our vision of TD, our vision of being an integral part of that strong, vibrant, Canadian financial sector through our merger with CIBC.

I will start with two recommendations that relate to national ownership. These are recommendations number 3, that large regulated financial institutions should be Canadian controlled, and number 39, that big Canadian financial institutions can be bought by widely held foreign financial institutions, subject to the approval of the Minister of Finance.

With these two recommendations, Canada will encourage Canadian ownership of major institutions without precluding foreign ownership of some major institutions in our country, as may suit the national interest. These are vital to the vision of Canada as a home of strong world-class financial institutions.

Now for the four recommendations that would provide financial institutions in Canada with the flexibility to pursue their strategic business goals, to chart their course for being strong, competitive and world-class. These include: number 26, that financial holding companies be permitted; number 38, that demutualization of insurance companies be permitted; number 45, that there should be no policy that prevents mergers be they banks, insurance companies, mutual fund companies, investment managers, or others; and number 42, that the office of the Superintendent of Financial Institutions and the Canadian Institute of Chartered Accountants should resolve goodwill accounting principles.

This group of recommendations is vital to allowing our institutions to make the acquisitions, divestitures and mergers they judge to be appropriate in the pursuit of their strategic business goals. This, in turn, will allow the emergence of a strong group of world-class financial institutions, not just the TD and CIBC, and not just banks, but also insurers, mutual fund companies, and others.

Next, there are three recommendations -- 12, 18 and 13 -- that would level the Canadian playing field, removing barriers and increasing competition within Canadian markets.

Number 12 would combine CDIC deposit insurance and COMCORP insurance protection, which would open up the deposit-taking industry.

Number 18 would allow deposit-takers to sell insurance through retail branches, opening up the delivery of insurance in Canada and, we believe, lowering the cost for Canadian consumers.

Number 13 would be most significant to the reshaping of our entire industry, as it would open up the payments system. This would give new powers to insurance companies, money market mutual funds, and securities dealers to provide operating deposit account equivalents with wide-ranging transaction privileges in direct competition with the banks.

Next, there are two recommendations that would provide greater access to Canadian markets for foreign banks. These include number 8, removing the withholding tax on interest on arm's-length loans, and number 9A, allowing foreign banks to operate through branches as an alternative to subsidiaries, as long as they do not take retail deposits. These moves would allow major foreign banks to move directly into our corporate, commercial, and small business loan markets without having to establish Canadian subsidiaries.

That adds up to 11 core recommendations that would reshape our financial sector profoundly. The twelfth recommendation that is key to the vision of a strong Canadian financial sector in the 21st century is the very first recommendation of the MacKay task force, number 1, that the government should move now rather than waiting until 2002.

That is vital, because the change in the world around us is so rapid. If we do not take the opportunity now to put the building blocks in place that will allow for world-class Canadian-owned financial institutions, then we may well end up too far behind our foreign competitors to ever be a significant factor.

With the changing face of global banking, the new benchmarks for globally competitive institutions have changed dramatically. In just the past year, consolidations and mergers elsewhere have created huge competitors that have new advantages of scope and scale, capital and technology.

We believe that the package of a dozen recommendations sprinkled throughout the report is fundamental to the creation of a globally competitive financial system. That system would open up our markets to competition, which would be good for consumers, and at the same time allow the emergence of major world-class Canadian-owned institutions. The danger would be in picking and choosing, opening up competition and ownership to foreign institutions, for example, without giving Canadian institutions the chance to respond by merging and creating the scale and scope to be domestically and globally competitive.

There is one other recommendation upon which I would like to comment, because it could have a negative impact on the thrust of the legislation you develop to reshape the sector. That recommendation is number 47, which endorses the Competition Bureau's policies for reviewing bank mergers. We certainly agree with the need for Competition Bureau review, but we are concerned about the bureau's policy to restrict its view on the competitive impact of technology to a two-year time frame. We operate in a world where technology is changing day by day and is transforming the marketplace. As senators, you will be responsible for developing legislation that will be in place for many years. We believe that a two-year focus falls far short of what is necessary for such long-term legislation. We also caution against over-regulation of the sector, in the context of a rapidly changing environment. The businesses in the sector need to be flexible to be able to respond to the competitive environment.

We are not asking for protection. We are not asking you to keep competitive global suppliers out of Canada. We are just asking for the opportunity to build the scope and scale we need to fight back. We are asking you not to tie our hands while we face aggressive competition from global giants. We believe it would be better for Canada if Canadian companies were able to stay in the front ranks of these financial businesses, which are vital to Canadian consumers and to Canadian industries.

World-class industries require world-class banks. Our vision of Canada is a Canada that has both. Back in the 1950s, the Bank of Toronto and the Dominion Bank faced an uncertain future. Both were mid-sized banks that were losing major customers because those customers were outgrowing the capacity of those two banks. When those banks merged in 1955 to create the Toronto Dominion Bank, we were able to keep pace with our customers, with their needs, and with our competitors. We are at the same crossroads now, and we want to keep pace. We want to meet our customers' changing needs and compete against the global giants while ensuring we can continue to meet the needs of Canadian consumers in a highly competitive domestic marketplace.

Canada has a choice here. We have what it takes to be globally competitive, if we are given the opportunity now to join forces, as TD would like to do with CIBC. Countries that do not have that opportunity are now dominated by foreign owned or controlled financial institutions. Belgium, Mexico and Argentina are examples. Surely, it is in the national interest for Canada to encourage strong and competitive Canadian-headquartered banks.

We also believe, as we have stated elsewhere, that having the ability to pursue our growth strategies will ultimately mean more jobs in Canada, better returns for shareholders, more taxes paid here, and greater opportunities for our institutions to continue providing a full range of competitively priced products and services to consumers and businesses.

We acknowledge that there are no guarantees of success in any of these areas in today's rapidly changing markets. We know that you have very real concerns about the impact of mergers on consumers, rural communities, employment, and small business. We know that these concerns must be addressed, and we are committed to working with you, the House of Commons, and other stakeholders on this because the public interest includes our customers, our shareholders, and our employees.

I go back to one of the core MacKay recommendations, that the government should move now and not wait until 2002. The rest of the world has been moving aggressively. The rest of the world is not going to wait for Canada to keep pace. The longer it takes the government to move, the harder it will be to retain in Canada the headquarters of world-competitive financial institutions in the 21st century. The opportunity to achieve the vision of Canada maintaining its valuable worldwide influence as the home of major international companies and banks must be grasped.

We are committed to the vision of a Canada with a group of world-class institutions. We want to be one of those institutions. We want to be able to succeed in the next century. We believe that a healthy, vibrant, competitive financial sector with some world-class, Canadian-owned financial institutions is in the national interest, and we seek the opportunity to contribute to that interest.

Senator Austin: Good afternoon, Mr. Baillie, and welcome to our committee. Having you here reminds me of a metaphor that, as a young child, I came to appreciate. The metaphor is of a candy counter with 300 choices and five cents that buys only one or maybe two of those choices. Of course, the five cents is the time available to ask you questions about a very important topic, and there is not a lot of time.

First of all, I would like to ask you about where a merged TD/CIBC and a merged Montreal/Royal Bank would stand, by assets, in the world banking community if denominated by, say, U.S. dollars? Have you some numbers? First of all, what would the asset size be?

Mr. Baillie: When we announced, the Royal/BMO would have been about 12, and we would have been about 14.

However, in market capitalization, which is really the important measure -- if you recall, at the time of the announcement the prices were much higher. I think at the time we were around 22nd in the world, but we would be much lower than the combined, merged bank. I have not looked at it lately, but I suspect we would be somewhere in the range of number 40 to 45.

Senator Austin: Looking at a listing of the top 10 banks in the world by assets in U.S. dollars -- this is roughly at the end of 1997, but there are some 1998 numbers in it -- UBS, at $698.5 billion, is ranked as the largest, but Citigroup is roughly the same size.

Mr. Baillie: I think it is $1 billion less, if I am not mistaken.

Senator Austin: Right, it is $1 billion less, exactly. Further down the list, Société Générale is listed at $441.1 billion.

What I am interested in knowing is where, in terms of assets in U.S. dollars, the two merged banks might be, give or take a few billion dollars. Just give me an approximation.

Mr. Baillie: We are not looking at asset size anymore because you can get into what they call the "repo" market and have incredibly high assets, and we do not think that matters much. It is really market capitalization that is important and what allows you to invest in your businesses and to raise capital.

Mr. Stephen McDonald, Vice-Chairman, Group Administration, Toronto Dominion Bank: Actually, in terms of assets, we would be larger. The two merged banks would rank higher in terms of assets than we would by market capitalization because of the growth of the Canadian banks, for reasons that my colleague here has explained, growth largely in trading securities and repos. Even by North American standards, the combined banks would be large. They would rank fifth or sixth largest amongst the U.S. North American banks.

In terms of assets, we would be quite large. In terms of market capitalization, since the announcement, we have slipped a fair bit, as the Canadian market shares have dropped. The American bank stocks have dropped as well, but they have come back a bit. Thus, we have lost some ground there.

Mr. Baillie: The combined bank would be a little over $300 billion in U.S. dollar assets.

Senator Austin: In effect, it would have the kind of market size asset base that would allow you to be fully competitive in North America at least.

Mr. Baillie: We would not be. In terms of market cap, which is what we look at, we are nowhere near Citicorp. Right now, our market capitalization in Canadian dollars on a merged basis would be about $26 billion. Although we are not in the league of a Citicorp, we believe that that gives us enough scale, believe that we will be a lot more competitive than we would have otherwise.

My belief is that, in the longer term, to be a real factor in Canada, with the borders coming down, you will have to be a factor in North America. If we can merge, we will be big enough, in a high probability, to be an acquirer in the U.S. If we do not merge, we feel we are condemned to be in the "acquiree" league.

Right now, if we were to do something on our own, even a merger equal with a U.S. bank, they would be with banks that you probably never heard of because the market caps on every bank you would be familiar with has become much larger than ours.

Senator Austin: In terms of profitability, are the four Canadian banks about equally profitable with the American banks, industry to industry?

Mr. Baillie: The American banks have a higher return on equity than do the Canadian banks. There are different reasons for that. I would tell you that it is because we have been more competitive in this country. The service charges are about 50 per cent lower in Canada than in the U.S., and our loan spreads are lower in this country. Therefore, given that, we, out of necessity, will have a lower return on equity.

Senator Austin: The question I am trying to lead to is whether, given the merger, you anticipate enhanced profitability as a banking institution or whether your real issue is defending yourself against acquisition by an even larger institution. Alternatively, perhaps it is a combination of those factors and others.

What is your response to that?

Mr. Baillie: In our opinion, by combining we should have synergies and we should be able to have a more profitable operation, which would allow us, in turn, to buy something in the U.S. and to be truly competitive in North America.

If that does not happen, I worry that the big American financial institutions -- for instance, MBNA or Bank One or Capital One in credit cards, or Countrywide in mortgages, or Fidelity or Scudder or Templeton in mutual funds, or Norwest or Heller or Finova or Associates in consumer and commercial finance, or ING in electronic, or Wells Fargo in small business. I worry that those companies, which are specialized, are coming in and going after our best customers. You might say to me, "Well, you seem to be doing all right," but virtually none of those institutions was here five years ago, and they do have lower costs.

Let me give you an example. There was a time when we would have spent as much on technology as does MBNA. Last year they spent $150 million on credit card technology; we spent $6.5 million. Thus, we think they will be able to develop products -- because banking is more and more technology-oriented -- that will make it difficult for us to compete.

Therefore, by merging we will be able to spend more on technology. If you asked me the number one reason for merging, I would tell you that it is to protect our domestic franchise, to make sure we can continue to compete and to have Canadian institutions that can compete with the best.

Senator Austin: As you are well aware, Mr. Baillie, the concern in Canada is that the result of the merger, although it might make you more competitive and your return on equity competitive, would be at the expense of the Canadian consumer. The concern is that by downsizing your unit costs in Canada, reducing your labour force, whether by attrition or otherwise, you are essentially making yourself more competitive in the U.S. market at the expense of the Canadian consumer. I would like you to respond to that.

Mr. Baillie: Well, if my theory of merging is correct -- that is, that we should be able to be more efficient -- then we should be in a position to pass on at least a good part of those savings to the consumer. In our proposed merger, we have not been specific on what we can offer because we do not know what flexibility we will have, what will happen, vis-à-vis the Competition Bureau.

I would be very surprised if we were not able to offer lower service charges to both the consumer and small business. After all, if we cannot do that, why would we merge? We are merging to become more productive.

On the job front, we have equivalent to 74,000 fulltime employees, between our two banks. We have had natural attrition of roughly 8,000 a year. Thus, we believe that the vast majority of job losses can be handled through attrition. In some of the urban locations, there may be areas we can retrain and reassign people. In the smaller, more rural locations, it might be more difficult, but we will be looking at things like job guarantees, or whatever makes sense there.

One cannot predict the future, but I am convinced that if we were allowed to merge the combined bank will, five years from now, employ more people than would be the case if we were left on our own. If we merge, we will be able to compete. We will be able to invest in technology, and we will be able to compete for lending with the big players. We will remain vibrant; we will reinvest in our customers and reinvest in services in order to continue to offer a high level of service. If our proposal to merge is not accepted, I am afraid we will be less strong all the time and less able to reinvest.

Senator Austin: Just to be clear, when you talked about employment numbers, did you mean employing more people in Canada or more people in the TD Bank?

Mr. Baillie: I would anticipate employing more people in Canada. However, hopefully, we will employ more people in the overall bank as well.

Senator Austin: Some of the articles I have been reading with respect to bank mergers have raised the question of whether the large bank mergers of the last few years that have seen banks become more integrated are taking place at a time when the demand for financial products is becoming much more disintegrated, where consumers of all types are now cross-shopping for their banking services. Consumers are spending more and more of their time with specialized financial institutions whose functions are carried out very effectively and a large integrated or universal bank is in some ways perhaps more cumbersome and less manageable financial, and therefore less profitable. I would like your comment on that vision.

Mr. Baillie: Whether or not we are allowed to merge, the financial institutions that will be successful are those that will become a little more specialized. I was talking about technology and its importance and necessity to banking.

Two years ago we made the decision to drop out of the custody business because we could not afford the capital spent there. We were much better off to have it in some of our other businesses. This year, we dropped out of payroll for the same reason. Over time, there will be more businesses.

If we were allowed to merge, we would not need to narrow the focus as much as we would have to if we were not allowed to merge. We will all look a little more specialized over time.

Senator Austin: You do not intend to be a State Street Bank type of bank then. You would love to make their money.

Mr. Baillie: In a country that large, State Street can really specialize. Canada just does not have enough of the type of business that State Street offers to make it viable for anyone to specialize in a business that requires that scale.

Senator Austin: We often hear the concern that if the mergers were permitted very large banks would control 67 per cent to 70 per cent of the retail banking business in Canada and that this would be asymmetrical with the situation of any other country in the world. There is concern that it would naturally lead to a non-competitive environment for the consumers because there would be price setters and market leaders with whom no one could compete. I would appreciate your response to that.

Mr. Baillie: Well, if you call it a certain percentage of the banking market, that is one thing. I would look at it as a percentage of retail deposits.

There was a day when we used to have most of the retail deposits, but we do not anymore. There is a lot of competition, whether it is from, say, Caisse Desjardins or the credit unions or the trust companies.

A study done by Goldman Sachs revealed that if the mergers take place then once we have all merged the three largest banks in Canada would have something like 55 per cent of deposits. In California, the three largest banks have 52 per cent. In Florida, the three largest banks have 59 per cent.

Those figures, which compare the Canadian situation to the one in the States, are indicative of the situation in Canada where the mergers have already taken place; conversely, the Americans are still merging. We would not be out of line in a place like Florida or California. We are certainly not out of line with northern Europe or the Netherlands or Switzerland.

Senator Austin: I visited the Netherlands. They have three major banks, and those three banks have 85 per cent of the retail business there. However, it is a small country and there is a lot of competition. There are so many outlets in the Netherlands that they virtually compete with 7-Eleven operations.

Mr. Baillie: I believe we have more branches per capita than any other country in the world. Canada is large geographically, but it is not a big country population-wise.

Senator Oliver: On Thursday last, we were in Vancouver, where we had a presentation from Jusef Nassar, the chief executive officer of the HongKong Bank. If I could summarize in one sentence what he had to say to us, it would be that full functionality of automatic banking machine networks is the way for us to be going in Canada today. He said that it would substantially improve consumer choice and that it would facilitate entry of new firms into the market. He said that full functionality would instantly provide each new entrant with 19,000 new locations to offer their services.

What is your comment about this proposal? Do you agree? Second, how would it be paid for?

Mr. Baillie: The last part is the tough part. Theoretically, it is wonderful. We asked the Interact group to look at that question. One of the things we have not solved yet is who bears the brunt if there are fraudulent deposits. If there is access by groups that are not creditworthy, what can be done here? For example, will you delay crediting deposits made through ATMs, or not allow withdraws? A lot more work has to be done in the area of fraud as it relates to automatic banking. Use of automatic teller machines is way up in Canada. You have probably read the articles.

To answer your question, in principle I do not have any trouble with that. Our bank has decided that manufacturing product is not our particular competence. Our strengths lie in the area of distribution and in our relationships. We would like to put more of other people's products through our branches, and we have been able to do that with mutual funds and with commercial paper. We would be happy to do it with other people's lending products, and so on, and we are negotiating with some now. This functionality strategy would fit into that. However, a lot of details, particularly in the area of fraud, still have to be worked out.

Senator Oliver: What is you saying, then, is that although fraud is your main concern it sounds like a good way to give more competition and give more access to a greater number of Canadians. Am I correct in my interpretation?

Mr. Baillie: I am not sure. It gives more competition right away and so it does broaden Canadian's choice of whose service they want to use. If you can get it for free and you are a new entrant, then it is wonderful; if you have to pay a lot for it, then it is probative.

Senator Oliver: Have you given some consideration as to the cost and what the fees would be for a new entrant to get into the system?

Mr. Baillie: We have in a backhanded sort of way. We have a bank in the U.S. called Waterhouse National Bank, strictly an electronic bank. We would like to get full functionality in the U.S., and we do not know yet at what cost. We talked to some different parties and we are trying to get a sense of that.

Mr. McDonald: We have been supportive of a controlled opening of the Canadian payments system, and that should have a very profound impact on how retail banking is conducted. ATMs are one part of that overall picture. If access is granted to qualified players, as Mr. Baillie indicated, then you have got to be careful as to the membership because, if you are not careful, you could have problems with fraud. You could also negatively impact the excellent service and system that we have in place today, in terms of clearing times, et cetera.

If you look five years out, after you have opened up the Canadian payments system, there will be a dramatically different competitive environment.

Senator Oliver: In other words, intrinsically, you are not opposed to it if you can clear up the fraud problem.

The Chairman: I wonder if I could just make a supplementary observation.

All the points Mr. McDonald made about the risks inherent in changing the Interact system were exactly the arguments made by the industry for several years on which they managed to stall the opening up of Interact prior to the Competition Bureau decision. It was always couched in terms of safety and security and those kinds of issues. Therefore, you will pardon my uneasiness when I hear the same arguments being resurrected the next time we want to change the system.

Mr. Baillie: The one problem, though, is that if you do allow a lot of uncreditworthy people in, the other clearers will put delays on their payment system. The result will be similar to the American system, and we do not want that in this country.

The Chairman: This committee has fully recognized that and that is why we have talked about allowing other financial institutions in and not opening it up beyond that.

Senator Oliver: In your opinion, what are some of the weaknesses of the MacKay report, and where is the report deficient? I am aware that you have made an application to merge and that therefore you do not want to say anything too negative, but it would help us in our study if you could tell us what is wrong with the report and where it really falls down.

Mr. Baillie: The area of regulation is one that concerns me. Had we been guilty of tremendous abuse, and so on, I would see a need for far more regulation.

Senator Oliver: Are you referring to tied selling and privacy and the way that MacKay wants to legislate?

Mr. Baillie: Yes, that part, but throughout the report there is the suggestion of a lot of additional regulation -- at least in someone whose keen hands it would be a tremendous amount of regulation. We are a big industry. We have been pretty good in terms of integrity and tied selling and privacy, and so on. We have some warts, but we have been pretty good in the areas I mentioned. I just worry that it will increase the cost, not just to us, but to any player in the financial services industry.

Senator Oliver: Anything other than over-regulation that sticks out?

Mr. Baillie: The other one that worried me was the encouragement of small banks with low capital. I say that because our bank, as one of the participants, has just finished paying off the bailout of the Canadian Commercial Bank and the Northland Bank. Hence, I appreciate the need for more competition but I would like the competition to be wellfinanced.

Senator Oliver: Are you also including credit unions and the MacKay task force recommendations on credit unions?

Mr. Baillie: No. The credit unions have been around for a long time. They have a lot of experience and a good base of clientele. We are very supportive of that part of the report.

What concerns me is forming new banks with very little capital. One never likes paying for someone else's mistakes, and we have had to do that.

Senator Oliver: Throughout your statement and in your reply to questions from Senator Austin you talked about your desire to merge. However, there have been strong and persistent rumours in a number of the financial papers in Canada that your plans to merge may fall apart because of a change in the share value of your company, and so on.

Can you tell us today whether or not you have such plans? Are you serious about merger, or are they likely to fall apart?

Mr. Baillie: We are serious about our plans for a merger. If the approval is forthcoming, we feel we can work out any of the impediments between the two banks.

Senator Oliver: What do you think is the source of these strong and persistent rumours?

Mr. Baillie: Our merger partner's last quarter earnings were not very attractive, as they would be the first to say, and therefore our stock has not traded within the exchange ratio. That is, I think, the area in which people are asking questions, whether we would change the exchange ratio, whether we would call off the deal, and so on.

Senator Oliver: You are saying there is nothing to that?

Mr. Baillie: Well, there is a long time to go before the deal is consummated, if at all, and before we receive the approval. At that time, I think we would look at what is best for our shareholders.

Senator Oliver: Matthew Barrett told this committee that if he were not able to merge he would not envision his bank as a full service bank doing all the things that they do today. What do you say of the TD?

Mr. Baillie: If you included custody and payroll in full service, we are no longer a full service. We would continue to be what you would call a full-service bank, but gradually, because of the technology, particularly the technology-spending capability of some of the new competitors, we would not be able to compete. There will be more of that type of competitors if we do not merge than if we do merge.

Senator Oliver: Could you give one example?

Mr. Baillie: Well, the one I worry about is the credit card business, and that is a good business for us at the moment.

Look for example at how much MBNA is spending. They have taken away from us York University's Affinity program. They won it. Someone else won the Esso credit card business from us -- American Express won it, I think. Hence, the credit card business is an area in which we are seeing tremendous inroads, an area in which there is a requirement for technology spending.

Senator Joyal: Mr. Baillie, Mr. McDonald, I would like to commend you for your presentation. Your brief is one of the very few where witnesses have tried to give us a general overview, a balance, of the various recommendations dealing with the future of the sectors. It has been helpful to us.

Taking into account the scale of the economy of Canada, is not our future, as a whole, to define some niche and to be the first one in those niches, as you have been yourselves with the discount business in the States? You are a total success story. I am quite sure that your board would be very happy with the report figures that you give to them on your activities in the American market and those grounds.

Since, in fact, you have had a success story of major inroads in the world market, as you like to put it, is not the future of Canadian financial sector institutions to identify a niche for themselves and come with an unbeatable product, therein being a world-class financial institution? As Senator Oliver said, being all things to all people, in the world of specialized capacity of today, is something that might be of the past. Since you have had success in the past -- and we certainly commend you for that -- is it not, in fact, the way that you should go in the future; that pooling capacities with other financial institutions the way that you have been able to do with the three pillars is not the way that you should look in the future, whatever merger is allowed or not?

Mr. Baillie: Senator Joyal, I think you make a very good point, and I think that it is the same one Senator Austin was making. Even if we were allowed to merge, I think we would be dreaming if we thought we could be one of the top ten universal banks in the world. Canada is just not big enough. We are not a reserve currency, and we want to have aspirations, but we should also recognize our limitations.

We are not aspiring to be one of the top universal banks. What we would like to end up with is a bank that is strong enough to compete in Canada in our traditional businesses, and to provide good services in Canada. We would like to be able to invest enough, and then pick areas where we could be effective outside the country.

As to the discount brokerage that you mentioned, we were fortunate in that. We got into it very early in Canada, and we ended up having a high market share here that did not interest the American banks. This is because Bank of America bought Charles Schwab years ago, but it did not work out, and they sold it. The banks tended to think that it was not a banking friendly business. We had the time to get to know that business well here, and then to buy in the U.S. and develop our Waterhouse franchise before there was a lot of competition from the American banks.

We are now number two in the world in discount brokerages. It is a critical mass business. It will not be profitable until you get to a certain size but, once you do, it is very attractive, and it is high growth. It is also one where we think we have an advantage.

As we open around the world -- we have opened in Australia, and we just bought a small one in the U.K. -- it is more than additive. When we buy in the U.K., it is not just to allow people in the U.K. to trade securities in the U.K. We have given them good access to the Canadian market, to the U.S. market, and so on, and we can offer other products through that.

Whether we merge or not, we will try and take every advantage possible advantage that comes from being near the top of the discount brokerage business. If we merge, we can justify putting more capital into that business, and opening faster around the world to try and maintain our advantage.

We put an electronic bank in the U.S. for this, and that is another thing. If it worked in the U.S., we could put it wherever we had a discount broker around the world. The export finance side is one we can mention. Trading, another one where we would do it. We had done it, when it comes to trading the lesser currencies in the Eurobond market. We have become very good at that. We are number one in Canada in Canadian Eurobonds, number one in Australia, and number two in New Zealand. I think we are number one or two in South Africa.

We will find niches, and we will push them. As I said earlier, I do think we will be more specialized. Each of us will inevitably have to be more specialized, because there will be characters nipping at our heels who can specialize in that one product, and do it better than you and I could.

Mr. McDonald: Can I add just briefly to that comment? In large part, through national policy and regulation on banking in this country, we have come to be world-class in terms of our retail banking services and our nationwide capability.

In the last couple of years we have seen massive expenditures on technology, database mining, and customer information profiles. Better quality technology, and better usage of it, is the future of banking. We think our union with CIBC gives us a very good platform for competing effectively in the United States.

Our opportunities are largely focused in North America, but with our electronic capability and our retailing capability, it is quite something that we really do have an opportunity to compete effectively in. We have a customer base established in this country, and that can help us grow in the States. Our experience with technology in the nationwide platform can also benefit us in a big way in the States.

Senator Joyal: I have a question on the economy of scale that you alluded to in your brief. Most of the economists in studies that have been made available to us tend to show that, beyond a certain level -- say $50 billion to $100 billion -- it is not proven that the benefits of mergers are that wide. In fact, the studies seem to conclude the opposite; that there are almost no benefits. Sometimes there may even be a negative impact, and mergers fail. There is no magic recipe in that approach.

It is a difficult road, especially when you are over and above a certain level of capitalization. It is not as easy as saying, "Oh, yes, give us the authorization to merge, we will have a large economy of scale, and it will be passed on to the consumer."

In fact, as I said, the studies seem to conclude that, over a certain level, there are very few benefit, and some of the mergers fail. I think there are even statistics that say that one out of two fail -- that it does not produce the result that we want.

Taking that into account, should we not, as you described, support initiatives where you define some specialized products and forge strategic alliances with other groups abroad? In that way you can maintain the position that you already have in some fields, and you could find some others in the years to come. How do you respond to that argument?

Mr. Baillie: I would not be a responsible banker if I had not read those studies too. For a long time, I hoped that TD could continue to compete the way that it was and still be a full-service bank.

My conclusion is that I agree with you on those studies, but the world has changed since they were done. Our competitors have become much larger. It is fine if your competitors are not that much larger than you are, because their lending limit is not that much larger than yours is. Our customers have become larger, however. They have really grown in scale, and they will go to other banks if we cannot meet their needs.

We are very proud of our record in syndicating loans. In the figures for the first half of the year, TD was number seven overall in leading loans in the United States. That is underwriting the whole loan, and then selling it. We were number two in what they call "leveraged syndications," which are the higher risk ones that are more lucrative. No other U.S. bank was on either list, and we are feeling pretty good about that.

Nations Bank made two loan commitments in the $4 billion range in the last quarter, and that makes me nervous. With our capital, we can just go over $2 billion. If a large customer wants a large loan, that customer will increasingly go to someone with the ability to commit to the whole loan, as opposed to coming to us.

This reality brought me to the conclusion that technology had changed. Earlier, I mentioned that there was a time when we spent as much on technology as Nations Bank. Nations Bank merged a lot, however. Last year Nations Bank-Bank America spent $3.8 billion on technology, and we spent $500 million. I mentioned the MBNA credit card, where they spent $150 million and we spent $6.5 million. A few years ago, though, we spent as much as they did.

We have always had technology in banking, but the primary transaction was always with the teller. Now, however, much of it is done by ATM, PC, or telephone banking. The technology is just so much more important.

Five years from now, the studies will show that the world changed in 1995 or 1996. There were always economies of scale before, but diseconomics in management offset them. The economies of scale are now so great that, as long as your management is reasonable, you will do all right.

Senator Di Nino: The MacKay report talks about allowing the banks to sell insurance products -- both life and P and C -- as well as allowing them to get into the automobile leasing business. Many of the witnesses who have given testimony are very concerned about this and, in fact, they are concerned that the competitive nature of the business will not be there any longer.

Could you give us your thoughts on that?

Mr. Baillie: You have to take what I say with a grain of salt, because I would like to have those powers. I will try to look at it objectively, though. I think you should not listen to my case for my industry or their case for their industry. You should try and look at the interest of the consumer.

The MacKay task force said that 17 per cent of Canadians do not have insurance, and that more than half were not approached to buy insurance in the last year. It also said that the Caisse Desjardins started selling life insurance in 1948. The task force concluded that that was healthier, and that it employed more people in the economy. The life insurance sale side in Quebec is larger. It has done well, and it has broadened the market.

In the MacKay survey, 77 per cent of Canadians said they would like to be able to choose whether to buy their insurance from insurance companies, banks, and so on. I could go into auto leasing in the same way. I think that it is more compelling, however, because the rates are higher. They are 1.2 per cent higher than in the U.S., where banks are allowed to lease autos.

Let me put it in perspective. Years ago, the bank in a community had most of the financial business -- the savings and so on -- of the people in that community. Over the years, however, the insurance people began selling mutual funds to them. Mutual funds are definitely selling, and we are now getting all kinds of competition. Over the years, we have lost a lot of the savings component. We are still high on the transaction business. As Mr. McDonald said, however, the opening up of the payment system will cause us to see our transaction business and account business go down quite a bit.

When I look at our banks, what I really want is more product through our branch system. It does not need to be our bank's product -- it can be anybody's product. The more product we put through, the more branches we can keep open. We are not being merciless if we close a branch. It is just that we did have most of the savings business of the whole community a few years ago, and now that is split. Eighty per cent of the transactions now take place outside the branch. Our branch teller transactions are going down 10 per cent a year, although transactions in total are going up tremendously.

In terms of small business, one of the solutions that we see is selling other people's products, whether it is Finova or a bank in the U.S. that would like to distribute its small business package. It could go through all our branches across the country. That is my pitch on it.

Senator Di Nino: Mr. Baillie, would you not agree that this is quite different? You are talking about a product specific to an industry. They claim that you could put them out of business because of your size, particularly if the amalgamations go ahead.

An example may be what happened in the trust industry in the 1960s, 1970s and the 1980s -- and even looking at the 1990s at this point. The question of whether the consumer benefits or not is really what we have to address, as is the benefit to Canadians as a whole.

Do you have any studies -- any data, for instance -- that would indicate that the loss of the trust industry per se has not affected the benefits to the consumer? For example, would you have data on what the spreads were in the 1980s and what the spreads are in the 1990s? Could you see if the fees and service charges went up or down since you have had a bigger pool of money and a bigger pool of business to work with?

Mr. Baillie: I would like to make clear we did not drive the trust companies out of business. They drove themselves out on real estate. That was a management problem. It was not anything we did.

In Quebec, the caisses have been selling life insurance since 1948, and it does not seem to have dampened life insurance. The agents are still thriving, and the market is a lot bigger. The conclusion, in the MacKay study at least, was that it is much more vibrant than it would have been if the caisses had not been selling insurance. From what we can see, the insurance market is also bigger and broader wherever banks have introduced insurance.

Senator Di Nino: You agree, though, that if you had some information about areas that the banks have been allowed to enter in the last two or three dozen years, that information would show that the consumer has not been adversely affected?

Mr. Baillie: We do have information on when we were allowed to enter the mortgage market, and mortgage prices went down. When we were allowed to enter the consumer loan market, prices went down. We are not allowed in auto leasing, but banks in the U.S. are, and rates there are only 1.2 per cent. The MacKay task force said the rates there are 1.2 per cent lower than they are in Canada.

Senator Di Nino: Obviously, then, you are saying that competition is healthy and you would encourage it. All you are really asking for is a competitive marketplace, rather than an area where you can take over a specific business.

Would you agree that competition should also be encourages in the financial intermediary business? Would you also agree that additional institutions -- as recommended by the MacKay report -- should be encouraged to start up, and that the powers of foreign banks and credit unions should be expanded? Is this something that you would support?

Mr. Baillie: I would be a very strong supporter of the entry of foreign competition, the expansion of credit unions, and the start-up of new banks, provided they are capitalized well. I just do not want to pick up the pieces of a poorly capitalized bank that fails two years later.

Senator Di Nino: That is an argument that we can have some other time. I suspect that some of the big banks have also created huge problems for this country, in that Canadian taxpayers have picked up the pieces in the last 20 or 30 years. I am not sure that it is a question of size.

Mr. Baillie: The Canadian taxpayer has never had to put anything out for the major Canadian banks. There have been times when we have paid lower taxes, but we pay our taxes out of our profits. If we never make profits, we will never pay taxes. That is not the Canadian taxpayer picking up the pieces, however.

Senator Di Nino: You do agree that competition is good, then? You would support increasing competition in the banking sector -- including using reasonable incentives or inducements to increase competition?

Mr. Baillie: I really feel that the more competition we allow in, the sharper we will be.

Senator Tkachuk: You talked about the increasing competition to the banks from other parts of the North American economy and the world. Could you tell me, how does MBNA rank -- you know, the credit card people? How do they rank in size as a financial institution compared to the five major banks in Canada? Would they be larger or smaller?

Mr. McDonald: In market cap, they would be comparable.

Mr. Baillie: Or larger.

Mr. McDonald: Or larger. In market capitalization, MBNA would be comparable to -- or larger than -- the Canadian banks.

Mr. Baillie: I can easily get that figure for you, but I would be speculating if I tried to guess at it now.

Senator Tkachuk: MBNA is a recent entrant to the Canadian marketplace, is it not?

Mr. Baillie: Yes.

Senator Tkachuk: How many years have they been at your doorstep now?

Mr. McDonald: Two years.

Mr. Baillie: That is the thing about all of these characters. They have not been here very long.

Senator Tkachuk: Would they have a significant part of the marketplace now?

Mr. Baillie: They are picking up a significant chunk.

Senator Tkachuk: Why is that, though?

Mr. Baillie: It is because they spent $150 million on card technology last year, and we spent $6.5 million. They can come out with cards with slight variations, and they have spent money on segmenting, so they can pick affinity groups very skilfully.

MBNA has a lot of technology that we do not have. I mentioned York University. I think we lost the University of Toronto as well, and the Esso one, so MBNA is going to do very well.

Senator Tkachuk: How do they compare on credit card interest rates to your bank?

Mr. Baillie: I would have to get the exact figures, but they are roughly comparable.

Mr. McDonald: They would have a myriad of offerings.

Mr. Baillie: Yes, that is the opening.

Mr. McDonald: They would have a host of different interest rates and market structures.

Mr. Baillie: It changes, though. It goes up to the market.

Senator Tkachuk: Part of your argument is that these new players in the marketplace are causing you a problem. The Canadian marketplace is 30 million people, and south of the border you have a marketplace of 300 million people. Are you not causing them grief on the other side? Do you not have businesses that cause grief to the American banks and the American credit card companies because of your expertise?

Mr. Baillie: It is hard to see our expertise in credit cards. We are based in a market of, as you say, 30 million people. They have ten times that, and they have a lot more customers. Bank One, for example, has become a huge factor in credit cards through acquisition. They have a very large credit card base, and they can spread that technology over a lot of customers. It is difficult for us.

The one area where we have become pretty good is discount brokerage, and we got in there early. The U.S. market is large enough to allow you to specialize in one product, and do very well in it. There are not many products in Canada where you can specialize. The marketplace is not big enough to allow us the luxury of specializing in one area.

Senator Tkachuk: Yet you could do that in the States, could you not? I mean, you did it with the discount brokerage business. Could you not do it with other businesses? How will the mergers help you fend off MBNA?

Mr. Baillie: We will have more credit card customers and we will be able to compete with them that way. If our merger takes place, as I said earlier, we think we will have to acquire something in the U.S. to give us an American base on which to build and specialize in some of these things.

Mr. McDonald: We are not saying that, over the long term, we are not going to be losing market share to a very capable monoline-specialist financial services company. We anticipate that that will happen.

Our approach is that we want to have the opportunity to compete effectively against them over time. We need a sizeable enough technology budget to compete against them, and that is our principal concern. The sheer size of those budgets vis-à-vis ours makes it difficult for us to grow market share in the financial services business.

Senator Tkachuk: The combined banks, then, might be able to compete with MBNA by offering a 5.9 or 6.5 introductory rate, and then a 16.5 per cent credit card rate. Is that what will happen? After all, that is why people are getting those cards. They are not getting them because they believe that there is a nicer computer at MBNA headquarters.

Is that not why they are getting them? Is that not why those customers are going to MBNA?

Mr. Baillie: We have short-term introductory offers, too. They are getting them on the affinity programs. They do a very good job.

Senator Tkachuk: They are very good at what they do.

Mr. Baillie: They are terrific. We want to get better, but we are going to have to spend on technology to get better.

Senator Tkachuk: If the first entrants to the marketplace are allowed to merge, is it a foregone conclusion that you will be allowed to merge? In other words, if the Royal Bank-Bank of Montreal merger gets an okay, you get an okay?

Mr. Baillie: You are in a better position to determine that than I am.

Senator Tkachuk: I am not in the government, unfortunately. I would just like to know what you thank about that. Do you think it would be unfair?

Mr. Baillie: Well, they are larger. They will have more Competition Bureau problems. They went before the MacKay task force came in, and they went before us. We would not have gone until the task force went in. I would be surprised if they were approved and we were not. I think we conform to the Competition Bureau guidelines better than they do, just because we are smaller.

Senator Tkachuk: One of the other senators mentioned that, if there were a merger, there would be less opportunity for takeover. I have heard that argument before, but I do not understand it, since we are widely held and cannot be taken over. That is, the Toronto Dominion Bank cannot be taken over.

Are you a proponent, or is your bank a proponent, of removing this and allowing for a straight takeover of Canadian banks? Would you favour allowing someone to own a large portion, so that bank management is more responsible to its shareholders or to an owner?

Mr. Baillie: In the 1980s, I think we saw that the large owner part was not necessarily a positive for institutions like the Royal Trusts. Even before the mergers became an issue, our bank's position on the 10 per cent was that we should get rid of it, if it was there to look after the banks and protect management. Alternatively, if it was good public policy, we should keep it, but debate it, and make it clear. We need to decide which way to go. We do not need it in order to compete.

You say we need not worry about being taken over because the 10 per cent is there. If I had gone to Ottawa 10 years ago, however, and said, "I want to take over the National Trust or the Royal Trust," I would have been told to just forget about it. Two or three years later, however, the banks were part of the solution, and the Bank of Nova Scotia bought Montreal Trust and National Trust.

In my mind, the legislation is not going to protect us if we are not that strong and viable, because it is not going to make sense to keep it in the long-term.

Senator Kelleher: In your presentation today, you have espoused -- and I think correctly -- a level playing field and open competition. You also set out those sections that you feel you can support.

You do not specifically mention sections 22 to 24 of the MacKay report, which deal with enhancing competition in the co-operative sector, and I was just wondering if you support those sections.

Mr. Baillie: I am very supportive of them. What I tried to do here is to pick out those sections that we think are going to change the financial services landscape in the next century. There are a lot of good recommendations, and there are very few that we feel are not good. I did not want to try to go through all the recommendations, however.

The credit unions are trying to do what we are doing. They are trying to merge and become bigger and better.

Senator Kelleher: Do you think they can get in there and be competitive?

Mr. Baillie: They seem to have a good level of support from their members, and they are stronger in some parts of the country.

Senator Kelleher: You will be happy to hear that my last question does not deal with the bank merger question.

We have frequently discussed lending for small and medium-size business, and one of the things that has come up on a number of occasions is risk-based lending. In the States, this seems to be available, and almost prevalent. Here in Canada, however, they say our large banks do not get involved in risk-based lending. We are trying to find out why, and a lot of the answers are, "Well, this is the Canadian way, Canadians would not like that, and it would get us into a lot of trouble, so we are staying away from it." Could we have your thoughts on this, please?

Mr. Baillie: In a sense, it is the Canadian way. I suppose that we would be thought of as usurious if we did it. We have started something called SCC Canada, where we invest with a company called Sirrom out of Nashville. We own 60 per cent, and they own 40 per cent. We invest in Canadian growth companies, buy junior debt in them, and have some warrants. They have not all worked out, but it seems to be working pretty well, and is it about $60 million. Is that right, Mr. McDonald?

Mr. McDonald: Our plan was to do $50 million in deals.

Mr. Baillie: That is one way we can get a higher return, and we are feeling more confident and comfortable with that. We are going to try experimenting with charging a little more. At our last board meeting, we had a presentation on small business. We explained that we had started experimenting, and that we were going to come out with some programs whereby we would charge a little more, and take a higher risk.

The survey by Thompson Lightstone & Company showed us approving 93 per cent of our loans to small business. That is a pretty high ratio. I do not think we are that high, really. We are getting a higher percentage approved all the time, but at 93 per cent, you would probably be approving some that you should not be approving.

Senator Kelleher: A number of the people appearing before us said that they felt there was an appetite out there for these higher based or higher rate loans. They said that they would be prepared to pay those higher rates if it meant they could have that opportunity to move ahead with their business. That was the feeling we got, and we wondered what the chances were of getting more institutions to give this a whirl, so to speak.

Mr. Baillie: We are going to try it, Senator Kelleher. We do not have all the details ironed out, but we are going to try to get a program out there.

Senator Callbeck: I just have two brief questions, and they both come from statements or evidence given by people who appeared before us.

The first one is from the last witness that we had this morning, Mr. Bill Cara. He said it would be helpful to Canadians

...if Canadians banks offered the same charges for precisely the same services -- apples for apples -- as they do for Americans.

He went on to give an example where TD Green Line charged Canadians a $95 commission to buy a stock. In the States, the TD Bank wire house will charge CDN$25.50. We are looking at $95 in Canada, as opposed to $25.50 in the States, and I am wondering why there is such a difference.

Mr. Baillie: I would have to verify those figures. Our regular service charge package would affect more Canadians than our discount brokerage would, and our charges are roughly 50 per cent of the average U.S. bank charge in the U.S.

It is true that our electronic brokerage charges less in the U.S. than our Canadian one does in Canada. Our scale is so much higher in the U.S. that we can justify charging a lot less. If we go through our proposed changes, however, I expect that we will be cheaper here than in the U.S. in 85 per cent of the cases. It is just incredibly lower on the service charge side in Canada than it is in the U.S.

Senator Callbeck: You say you would be cheaper than the U.S.

Mr. Baillie: We are much cheaper.

Mr. McDonald: Absolutely.

Senator Callbeck: In service charges.

Mr. Baillie: In service charges. Not necessarily in the discount brokerage, though. I am talking about general banking service charges.

Senator Callbeck: But I understood you to say a minute ago that, in terms of buying stocks, it is higher in Canada. Roughly how much higher?

Mr. Baillie: Are we at about $25 for electronic execution in Canada?

Mr. McDonald: Yes -- $25 or $29. There is a price differential. And the price differential between Canada and the United States does largely depend on volume.

The key point is that, on balance, across all parts of the services, Canadians are much better off than Americans are, in terms of the price that they pay for services. In the U.S., the spread between what a bank borrows at and what it lends out at is twice what it is in Canada. Their return on equity is only about 3 or 4 per cent higher than ours is, however. We think we have a very efficient operation, because that national network allows us to charge less. We certainly would have the evidence on that across the board.

Mr. Baillie: If you look at anything that would be considered to be traditional banking, I am sure we are lower in Canada. Mutual fund management charges do tend to be a little higher in this country. The non-traditional banking services probably are going to be higher in Canada than in the U.S.

Mr. McDonald: The discount brokerage environment is massively competitive in the States, and trades are being conducted below cost in some cases. It is extremely competitive.

Senator Callbeck: We heard from the Retail Council of Canada when we were in Vancouver, and they talked about being in a very competitive environment, where markups are low, but costs keep going up.

One of the things they talked about was Interac. They said that it has increased their costs, because they have to rent the equipment, they have transaction fees, and they have to train staff. They feel that the costs really should have gone down, because Interac significantly reduces the volume of cheques.

They indicated that they felt that when the price of these terminals went down the rental would also go down, but that has not happened. They thought that when the volume of transactions increased, their transaction fee would go down, but that has not happened either, unless you are a large company and can negotiate a separate agreement with the bank.

I would just like to get your comments on that. It seems to me that if the market value of those machines goes down, that should be reflected in the rental price.

Mr. Baillie: I am not intimately familiar with that, I am sorry. We can get you an answer to that that. I do have the figures on discount brokerages now, though: electronically, it is CAN$25 in Canada, and CAN$20 in the U.S.

Senator Kroft: I have one very specific question on your text, Mr. Baillie. On page 2 of your notes, you talked about giving the country the potential for six to eight major world class institutions. That is a much big number than I am used to looking at. Could you suggest who those might be? I mean, that figure seems to be narrowing down to one, two, or three, and now suddenly I am hearing a figure of six or eight.

Mr. Baillie: I was including insurance companies, mutual fund companies, and investment managers. With the demutualization in the insurance sector, I think we have a good chance of achieving a couple there. Perhaps I am being optimistic at six to eight, but that is the thinking.

Senator Kroft: I am a little confused on this subject of efficiency and cost, which has come up frequently throughout these hearings.

On the one hand, we are talking about the need for mergers, and about needing to get bigger and bigger in order to be more efficient. On the other hand, you just said that your service charges can be lower, because you are more efficient than the Americans are.

Mr. Baillie: No -- it is that we are much more competitive.

Mr. McDonald: We have a national network here, and we benefit from having the efficiency of a national network. The technology budgets that our competitors in the States have are much more sizeable than ours are, and that allows them to keep driving the costs down.

Over the last decades, we have benefited from having a national network. They have 9,000 banks in the States. They have contracted sizeably, but they have a long way to go. They still have some very sizeable bank players that do benefit from their larger scales. They can bring their costs down through technology, and that is what we are trying to do. The answer, then, is yes, we do have the benefit of some efficiency, and we are relatively efficient against a good number of our competitors. Our concern, however, is that the ones who will be tomorrow's winners have a budget that is five or six times the size of ours.

Senator Kroft: Your discussion, for the most part, has dealt with your ability to be bigger and more competitive in a larger and more demanding league. I understand that thrust and desire, and I understand why your management and perhaps your shareholders would feel it.

On the other hand, if I were to identify the greatest preoccupation that Canadians have identified at these hearings or in my own experience, it is not that their banks are not playing in a big enough marketplace or doing well enough. It has to do with their ability to get the kind of credit and loans that they need, and meeting the needs of small and medium-sized business. They are also concerned about the management, and about ensuring a lack of arbitrary behaviour.

We have talked for nearly an hour and a half now. We have never really talked about how all of this is going to address the biggest concern of Canadians. MacKay's response would be that creating competition and bringing in new players can achieve a lot, but we know that they have a long way to go.

I noticed that your answer on the credit unions was positive but guarded, which suggests that there will be a major gap before there will be any major competition going on there. On the subject of new banks, again, you were positive but guarded as to effective capitalization. We know that it is not easy, and that the filling up of competition and the creation of new market players is not going to be an easy thing to accomplish.

You are out competing with everyone in this world of giants, and I wonder how this is playing out in terms of helping SMEs. Witnesses appear here and tell us very painful stories about what they feel they need from a banking system, and that they are not getting it. There is a disconnection. Your preoccupation seems to be somewhere out there, and yet Canadians are looking for something that is much more real for them.

Mr. Baillie: Perhaps I was not clear on this, but our main reason for wanting to merge is to be more competitive in Canada. We want to protect the franchise here. It may be slow for new banks to get started and so on, but it is not slow for MBNA and Capital One to come in. It is not slow for Countrywide Building Futures in mortgages, and it is not slow for Fidelity. In the attractive areas, the competition is coming, and it is going to be very fierce.

There has been a lot of political pressure on small business over the years. I think the feeling has always been that we are not interested in small business and that we have to be pressured to go into it. In the last few years, however, we have become very interested, and I know I really pushed on this.

We put a senior officer in charge of small business. We have broken it out, and I am pushing them. We get monthly market share figures, and their goal is to be up in market share every month. We have put small business lending in every branch in the country, whereas previously it was centralized in our major lending.

Senator Kroft: For your internal purposes, what is your definition of small business?

Mr. Baillie: It is under $250,000. That is what we call small business, but the ones that we can do really easily are $50,000 and under. They are homogeneous enough.

Senator Kroft: I think there are lots of problems at the $500,000 to $2,000,000 level. I am trying to be careful not to let it get defined into that very low end. There is a need to reach farther up the scale as well. I have heard from those people, and they do not think that the proposed mergers are going to do anything for them.

Mr. Baillie: Let me cover small business, and then go on to commercial. I will call the larger one commercial.

In the small business sector, you can now borrow in any branch. In the past, we found that a lot of our people were not comfortable making loans, and, unless they had a lot of small business requests, they were not familiar or comfortable enough to do so. They can now send it in, and we will adjudicate it centrally. That lowers the costs, and it has really increased the number of applications coming in. We are gaining market share nicely in that.

We brought out a credit card called the Venture card. It is a no-cost card, and it is used as a business one. Now we also have a business line of credit that runs on overdraft. Our turnaround time is now down to 48 hours, and we can get that down to four hours in a lot of cases.

The medium-sized business aspect is very competitive. We are one of the few countries in the world where people that do not get all their requests answered or accepted are encouraged to come out and write about it in the newspapers and so on. You just do not see that in the U.S., but I cannot believe that our decline or turndown rate is higher than the one in the U.S.

We have commercial banking centres in some of our branches, and we put highly trained mid-market lenders in them. In places like Chatham, Peterborough, or Red Deer, however, we currently cannot afford to put them in. As a merged bank, though, we could have those highly trained lenders there, because there would be enough business for the combined banks to do that.

Our approval or acceptance ratio on small banks is very high. We are currently the highest, and we are gaining market share. We do have to recognize, however, that there are times when the person thinks his or her idea is so good that we are thick between the ears if we do not agree and lend him or her the money.

We will never be able to do everything, but it is a very attractive business for us, and we are working hard on it. It is attractive because we have cut the costs of administering it and approving it. Also, if a small business does well now, we have a number of higher margin products that we can make available to them. That could be something like an interest rate or selling them an interest rate cap, or it might be a private placement. Not many get to that point, but some do.

Senator Kroft: I am from Winnipeg, so I also have a regional concern. What is happening with your borrowing limits? We grow up believing that every decision of any importance is made in Toronto. As businesses grow, however, is it possible for the management to be on-site, in terms of the lending authorities?

Mr. Baillie: About 90 per cent of our Manitoba loans would be made and approved in Manitoba. I think it is over 90.

Mr. McDonald: I think it would be, yes.

Senator Kroft: Can you express that in some sort of a dollar limit?

Mr. Baillie: I think it is $5 million.

The Chairman: When you were responding to Senator Austin, you emphasized that the merger's value to you could be found in the fact that it would increase your market cap. Could you achieve this same market cap by doing what I would call a horizontal merger across the pillars? That is, could you acquire Manulife, for example, rather than moving vertically within the pillars, as you are now proposing to do? Would you feel differently if, in fact, the MacKay proposal for a bank holding company were available to you?

Mr. Baillie: I do not think acquiring an insurance company or merging with an insurance company would get us the synergies on the cost side.

The Chairman: It would get you the cap, but not the cost savings.

Mr. Baillie: No, it would not get us the same market cap. We would not get cost savings. We would get cost savings in a market bank merger, and our market cap should go up to reflect that. That higher market cap would allow us to be an acquirer in the U.S. For us to get that kind of an improvement with the insurance company, we would have to be very successful at cross-selling the products. That is an unproven thing, on this continent at least.

The Chairman: Would it make some significant progress in the direction you want to go, though?

Mr. McDonald: Our desire is not to become more of a universal bank. We are addressing the issues that have been raised here, and specialization is becoming increasingly important. Scale is still required to be a capable specialist in some segments, but the universal approach does not need to be broadened. Canada is a relatively universal banking environment, but, over the long-term, universal banking will probably be challenged by the specialist approach.

The Chairman: That leads naturally to my second question. If that is the case, why do you want a holding company? One of the recommendations in the list of the 11 that you strongly favour is for a holding company. It seems to me that one of the advantages of a holding company would be to go horizontal, which Mr. McDonald says you do not want to do.

Mr. McDonald: We are already in a number of product lines now. The question is, do we want to expand beyond that in a material way?

The Chairman: Why do you need a holding company to do that? What is the upside to a holding company?

Mr. Baillie: First of all, we would not buy an insurance company. Do not hold me to it, because the world might change, but at this point, I would not see that as being attractive for us. I do not see it -- partly for the reasons Mr. McDonald gave, and partly because I am not sure we would get much of a return on it.

As to the recommendation on holding companies -- I did not list the recommendations that we thought were really terrific. I listed the ones that we thought would really change the financial landscape for the next century. We are not certain we would adopt a holding company approach. It would depend upon regulation. For us, the appeal of a holding company would be if some of our businesses that require lower economic capital than regulatory capital could be put into holding companies.

The Chairman: That means that you would run an unregulated holding company with regulated subs, where required, as opposed to a regulated holding company.

Mr. Baillie: Or it could be a regulated holding company with unregulated subs.

The Chairman: We have often wondered why it is that Canadian banks effectively ration credit by risk, rather than by price. We have Wells Fargo coming in here and offering loans of up to prime plus eight. Canadian banks virtually never go over prime plus 2.5 per cent, prime plus 2.25 per cent.

Canadian banks ration credit by risk. They just do not take high-risk loans. What happens in the U.S. is that people ration by price, because they raise the price commensurate with the risk. It is not unique to your bank. I am just curious as to why this is a time-honoured tradition of the Canadian banking system at a time when, first of all, people are concerned about loans to small and medium-sized businesses, and second, people are looking for new markets.

Mr. Baillie: I think it has gone on for so long. I am just speculating here.

The Chairman: Why do you do it today? I do not care how you got there. Why is it the policy today?

Mr. Baillie: We felt that it was usurious, that people would call it usurious, and that we would be pilloried if we called in a loan at a high rate of interest.

The Chairman: You made a political decision. I do not mean that in a pejorative sense. It was a public relations decision.

Mr. Baillie: A public relations decision, yes. The sense that we have had over the past year, however, is that today it would be less resented than it would have been in the past -- or else we gauged it incorrectly in the past. We now feel that we should be trying to do this, and so we have tried it with SCC Canada. We are also going to try it with some general programs.

The Chairman: I am not being pejorative when I say this. Would it be fair to say, however, that a decision was made for corporate image and public relations reasons, and that it has had an impact on the marketing of credit in exactly the market that people in our position get the most heat for?

Mr. Baillie: I think that is true. The other part of that is the American banks tell us that we take a much higher risk on a low return loan than they do. I do not think their approval rates are higher. At A-minus or maybe even triple B, we charge the same as the Americans would charge. After that, though -- and these are large, medium, and small businesses -- we do not seem to differentiate in this country.

The Chairman: Mr. Baillie and Mr. McDonald, thank you very much for taking the time to be with us. I realize that we went over our allotted time, but you were very helpful to us. Thank you very much.

Senators, our next witnesses are from the Investment Dealers Association of Canada.

Senator David Tkachuk (Deputy Chairman) in the Chair.

The Deputy Chairman: The Investment Dealers Association of Canada is represented today by Mr. Joseph Oliver and Mr. Ian Russell. My understanding, gentlemen, is that you have distributed a summary of your brief which you will present, and then we will go to questions. Please begin.

Mr. Joseph Oliver, President and Chief Executive Officer, Investment Dealers Association of Canada: Ladies and gentlemen, I am Joe Oliver, the president and CEO of the Investment Dealers Association of Canada. I am joined today by Mr. Ian Russell, Senior Vice-President, Capital Markets.

We very much appreciate the opportunity to present our views on the future of the financial services industry, of which our members are a critical part. How legislators deal with the task force recommendations will affect the future direction of this vital industry. It will also determine the impact on the Canadian people and our economy as we move to the new millennium.

We have filed a formal submission and I plan to summarize the key points. Of course, we are ready to answer questions.

I will provide a brief background on the industry and the association. The IDA is Canada's national, self-regulated organization for the securities industry. Our mission is to regulate the business activity of member firms and also the selling practices and proficiency requirements of investment advisers. The association also represents the industry to regulators, governments, the Bank of Canada, and the public.

There are 184 member firms, including large, full-service firms, as well as medium-sized and smaller houses, providing a variety of financial advice and trading and underwriting services to retail and institutional clients from coast to coast. Some of them are integrated and bank-owned. Others are independent. Some are Canadian affiliates of foreign security firms and banking organizations.

The size and growth of the industry is significant. Regulatory capital is $8 billion; client assets have reached nearly $350 billion; and there is much product innovation and liquidity, which is critical to the market's viability.

Our industry plays a key role in the Canadian economy and member firms directly employ over 34,000 people. For the last three years, we have raised between $15 billion and $20 billion in equity capital which is, proportionately, double the amount of equity capital raised in the United States. Individuals increasingly rely on our industry to provide the capital they need for retirement.

It is important to realize that Canada is shifting from a nation of savers to a nation of investors. Mutual fund assets have grown from $33 billion in 1987 to something in the order of $275 billion this year. For the first time in history, we are approaching a point where Canadians will have nearly as much invested in mutual funds as in savings accounts and GICs. That represents a real sea change in market participation, with 38 per cent of the Canadian public currently involved in the market. Individuals realize they must increasingly rely on their own resources to provide for the future, rather than on the government. It is critical, therefore, that the industry operates fairly and efficiently, because Canadians are depending on us as never before.

As to the specifics of the task force recommendations, as a general proposition we believe that enhancing competition within the financial services sector is in the best interest of all Canadians. Our industry is not nearly as large as other industries, or as our competitors in the United States, Europe and Asia, but we welcome competition, provided there is a level playing field.

We feel competition leads to competitively priced financial products and services. That benefits consumers, enhances innovation in the marketplace, is efficient in terms of forming capital, and provides the greatest potential for employment. We are therefore pleased with the emphasis on stimulating greater competition, and urge you to move expeditiously on the recommendations.

Our focus is on issues that directly affect the securities industry, such as opening up the payments system and harmonizing regulations. The former is favourably addressed by the task force. The latter is also referred to, but depends to a very large degree on provincial securities commissions, and on the developing relationship between OSFI and the Canadian Securities Administrators, or CSA.

Other issues often impact profoundly, but indirectly, on our industry. Issues such as mergers, ownership, power structure, and foreign competition, impact directly on the banks. Understandably, we are more concerned with the first set of issues than the second.

I will briefly review our reaction to the key proposals. We strongly support the proposal that non-deposit-taking institutions should join the Canadian payments system, provided they meet reasonable criteria for solvency, liquidity, and regulation. Our member firms should be eligible for membership in the Canadian Payments Association.

Access to the payment system would enable security firms to offer chequing privileges on client accounts directly, and would create a more level playing field for security firms to compete with banks for client business and financial assets. It would also enable our customers to fully engage in electronic commerce through direct access to the Interac system.

We also agree that entry barriers for foreign banks, especially prohibitions on branching, and capital requirements, should be eliminated or substantially reduced. This would promote a more competitive banking sector.

We are pleased that the task force agreed with our submission that federally regulated institutions should be given the flexibility to organize into holding company structures. This would level the playing field on minimally regulated businesses such as wholesale leasing and financing.

The IDA committee's original submission to the task force supported a change in the "big shall not buy big" policy, although we acknowledge that some member firms do not agree with this position. I think you have confronted that issue already. The task force recommended that federal authorities vet the mergers to preclude adverse consequences for competition, and that is the position of our association.

The task force also recommended more flexible accounting rules to facilitate acquisitions in both domestic and foreign markets. In our view, the rapid integration of capital markets in North America necessitates that the Canadian Institute of Chartered Accountants aligns Canadian accounting rules as much as possible with U.S. GAAP, particularly in respect of business combinations. We also believe that the provincial securities commissions should permit some flexibility for listed Canadian companies in applying Canadian and U.S. accounting rules. The goal is to give those companies more scope to undertake mergers and acquisitions and thus facilitate expansion. It would put Canadian companies on an equal footing with their U.S. competitors.

We do not believe that investor protection would be compromised by this move. There are often differences without a policy rationale, and conformity or harmonization is in the interests of the Canadian capital markets.

The task force recommends abolishing special capital taxes on financial institutions. If that is not feasible, it proposes more uniform application of capital tax and shifting the tax burden to corporate profits, and we agree with that thrust.

On a subject more directly related to our field, the task force recommends that governments work to eliminate overlaps in prudential regulation, both between federal and provincial governments, and among the provincial governments and the securities commissions.

The collapse of the four pillars enabled banks, insurance companies, and securities firms to offer retail and institutional clients a wide range of products and services. They include debt and derivative products, private placements, mutual funds, and segregated funds. The result is significant differences among institutions in capital rules and sales practices. In some cases, there are regulatory gaps, weak protection for consumers, and increased financial risk for institutions. The different rules often resulted in an unproductive shifting of business to organizations which were believed to be subject to more lenient regulation. This phenomenon, known as "regulatory arbitrage," weakens the overall integrity of the financial system.

We urge the provincial and federal regulatory authorities to achieve greater consistency in regulation. Market participants carrying out similar financial functions should be regulated in the same way.

In fact there has been greater cooperation between OSFI and the securities regulators over the last few years, particularly over banks' securities affiliates. It is important to minimize regulatory overlap, since the IDA has regulatory responsibility for financial and sales compliance of these bank-owned affiliates.

OSFI obtains information from two sources, the banks' own internal audits and the IDA's financial compliance reviews. There are ways to enhance the process so that the IDA can meet OSFI's need for comprehensive and timely financial information, as we have discussed with them.

If both the securities commission and OSFI use the Investment Dealers Association as the single self-regulator, duplication can be avoided and compliance reviews of investment firms limited to one external auditor.

The task force also recommends that securities salespersons meet appropriate proficiency standards that can be harmonized across provincial jurisdictions. Currently, federally regulated institutions that sell securities-related products to the public are not always subject to the same proficiency standards as our member firms.

The IDA is Canada's only national entity with delegated responsibility for securities regulation and investor protection. As a result, it is in a unique position to assist the Government of Canada and the provincial authorities in coordinating and meeting consumer protection goals and policies in the securities field.

At the request of the CSA, the IDA recently assumed responsibility for establishing and managing the Mutual Fund Dealers Association of Canada, the MFDA. This is a self-regulatory organization for fund distributors that will be jointly governed by IFIC and by the public directors. Banks and other federally regulated institutions selling mutual funds will be required to join the MFDA, as will their 50,000 individual registrants. This is a very large and important regulatory endeavour.

The IDA and the four stock exchanges have also proposed a standard for member firms' employees wanting to call themselves "financial planners." This initiative addresses the public interest requirement that individuals using the designation possess a high degree of proficiency and experience. The public thinks people using the term have it, but that is not always the case. Our goal is to develop a standard that obtains regulatory approval and is accepted outside the securities industry, so there can be a uniform standard across the country.

The integration of the financial services industry, particularly the formation of financial conglomerates, the "disintermediation" of personal savings into mutual funds and the impact of globalization, all these trends represent a significant challenge to Canadian policy-makers, and the challenge is to encourage efficient and competitive financial institutions, fair play for consumers, and efficient and liquid markets for issuers and investors, and the IDA stands ready to assist in this critical task.

Senator Oliver: A number of witnesses who have appeared before the committee have told us that the MacKay task force report is deficient in that it suggests that foreign banks would be prepared to come into Canada if just a couple of minor changes are made.

In your brief on page 4, you say, under the heading, "Facilitating New Entrants to the Market":

We agree that barriers to entry for foreign banks, notably prohibitions on branching and capital requirements, should be eliminated or substantially reduced. This would promote a more competitive banking sector.

However, some foreign banks have told us that the cost of going into branching is much too high, and that it is really not what they want to do. They are much more interested in commercial and corporate banking in large urban areas. That being the case, do you think that the entry of foreign banks will create competition across the board and across this country?

Mr. Oliver: We do not believe that this will appeal to every major foreign bank. However, the issue is whether it will appeal to some, and therefore, will engender the sort of competition we are looking for.

The threat of it happening will, of course, encourage Canadian banks to be as competitive and as consumer-oriented as possible, but we are not, by suggesting an opening up of competition, saying that it will guarantee that foreign banks will come in but, generally speaking, that is the approach which leads to more entrants, greater efficiency, and a broader choice for consumers.

Senator Oliver: If it costs $750,000 to start up a branch, and if it takes five years before any profit can be seen, not many good companies will be willing to wait that long, or is that not the case?

Mr. Oliver: Clearly, a number of large foreign banks have the economies of scale to set up branch banking in a less costly way than someone else would if they were starting from scratch. However, I cannot comment on those specific numbers other than to say that they seem rather high.

Mr. Ian Russell, Senior Vice-President, Capital Markets, Investment Dealers Association of Canada: I agree with my colleague Mr. Oliver, but I believe that the way in which foreign institutions offering retail services will come into Canada will be quite different from the paradigm we have seen in the past where, as you say, costs made it very prohibitive. I think ING Bank is an example of a bank coming in through the electronic Internet to offer banking services.

That has proved to be fairly effective in building a retail business. They have been successful in doing that. I would see other foreign institutions penetrating the retail market in the same way.

Senator Oliver: Mr. Baillie just said -- and it coincides with what a number of witnesses have told us -- that one of his impressions from reading the MacKay task force report is that, if all the recommendations were implemented, there would be too much regulation and too heavy a regulatory burden, quite apart from the normal regulations that deal with coercive tied selling and privacy, and so on.

One of the recommendations is that there be legislation to ensure that banks, should they get into selling insurance in their branches, and so on, do not get involved in coercive tied selling.

Do you find that there is an overabundance of new regulation proposed in the task force report and, if so, what areas do you think should be left to market forces?

Mr. Oliver: I think we require a mix.

Clearly, the recommendation of a holding company structure would permit the banks to escape regulation to the extent that the business activity would not otherwise be regulated on a free-standing basis, and that is a movement in the other direction.

The suggestion related to tied selling is not unduly coercive because, clearly, there is a fundamental distinction between tied selling and cross-selling and, as long as the definition is a reasonable one and does not permit cross-selling, then you would be permitting the banks to offer a range of products and to give a benefit to consumers in terms of choice and having them take advantage of some of the economies of scale of the banks without forcing them to participate.

Senator Oliver: The MacKay report deals with coercive tied selling. Can you comment on that?

Mr. Oliver: Yes. No one can really object to a rule which specifies that you cannot coerce customers to use one service if they want to buy another one. I do not think that is excessive.

In our industry, we are very mindful of the fact that the Canadian capital market, while a very efficient, well-respected and well-regulated market, is small. It is about 2.5 per cent of the global capital market and probably declining because of the emergence of India and China, which are so large that even a tiny percentage increase can have a major impact on the size of the global market.

The fundamentals cannot be changed. We will never be a huge capital market in the world but we can be as efficient and as competitive as possible. If we are not, we really will become a backwater.

So regulation should keep a focus on its mandate. In the case of securities, it is inventor protection. It should not extend itself. There should only be enough regulation to achieve the purpose.

Senator Oliver: Then the market should take over.

Mr. Oliver: Yes. The burden of proof should always be on the regulator to justify from a public policy perspective what is being suggested and what would constrain commercial behaviour.

Senator Oliver: I would like to know what your organization's position is on the MacKay task force recommendation that banks be allowed to sell insurance in their branches and also get into the auto leasing of light vehicles.

Mr. Oliver: This area is a little outside our field and I think that we generally support those recommendations, but it is not really directly related to what we do.

Senator Oliver: Do they sound like they are banking functions to you, financial functions?

Mr. Oliver: They are financial functions. We have heard a hundred times that banking functions are what people declare them to be. I mean, the nature of banking is in the process of change as the integration proceeds apace. So I suppose traditional descriptions of what it was are not necessarily a prescription for what it ought to be.

Mr. Russell: Senator, you talked about the chapter in MacKay regarding empowering the consumer, the list of potential rules and regulations, tied selling, coercive behaviour, privacy protection and disclosure proficiency. I think that it is inevitable that as financial institutions generally offer a wide range of products, that it becomes important to focus on their dealings with their clients in those particular areas.

In Mr. Oliver's remarks, I noted a real potential here for the federal regulators to work closely with the CSA, the Canadian securities administrators, who have the oversight for the market conduct of securities firms that are selling complicated products. They have a lot of expertise, particularly in the areas of disclosure and proficiency requirements. Some efficiencies may come from regulation that could come from profitable collaboration with the provincial regulators.

Senator Di Nino: First of all, how many members are in the IDA?

Mr. Oliver: There are 184.

Senator Di Nino: And all the major bank-owned investment dealers and brokers are part of it?

Mr. Oliver: Yes, they are.

Senator Di Nino: Is membership in IDA based on size of company and payment of fees per se?

Mr. Oliver: No. There are certain specific objective criteria. In most provinces there is either in law or effectively in practice a requirement that a securities firm be a member of a self-regulatory organization. That can be either the IDA or one of the exchanges.

In Ontario, a policy, which is put out for public comment, will achieve that same result. We expect perhaps another 50 firms to be joining the IDA in the next year or two. Every firm that puts itself out as a securities firm will be subject to the same rules and monitored in the same way as every other firm. That creates a level playing field of investor protection as well. It is the secondary point of competition.

Right now, I would say that about 95 per cent plus of the business in the country is done by IDA members.

Senator Di Nino: I am trying to determine whether the banks have an undue influence on the organization because of their predominance in size, as far as the major institutions in your industry are concerned.

Mr. Oliver: The banks have not exerted a direct influence on our association. Their subsidiaries are large and important members of the organization but I have not encountered a bank agenda being advanced by these firms. They are important and responsible contributors to the governance of the organization.

Mr. Russell: Roughly speaking, Senator, in terms of the structure of the industry, as Mr. Oliver said, there are 188 member firms in the IDA, of which six are bank-owned members. They would account for roughly half of the capital in the industry. So there is a very sizeable share of the industry that is made up of individual firms. Therefore, the bank-owned dealers do not dominate the SRO system in Canada.

Mr. Oliver: The other thing I should say is that we have a very elaborate governance structure, which involves district councils. We have some 700 people in the industry participating in a variety of committees. Our board is highly representative of all the regions in the country. We have quite a few informal rules that assure that there is sufficient rotation between bank-owned and non-bank-owned chairmen and that we have a board and an executive committee that reflects the diversity of the industry.

Senator Di Nino: Thank you. I have two specific questions on your report or on your presentation. On page five you say that the Canadian Institute of Chartered Accountants "should conform Canadian accounting rules as much as possible to U.S. GAAP."

It is interesting how you phrased that. It was not the other way around. As you know, there is some argument going on between the CICA and GAAP, particularly relating to the accounting of goodwill and other areas. Why did you choose this?

Mr. Oliver: Let me respond to that. I have had a fair amount of interest in this issue. The IOSCO, which is the International Organization of Securities Commissions, is an organization that represents all the securities commissions around the world. Affiliated with that organization are the self-regulatory organizations and stock exchanges.

I happen to chair a committee of those affiliated members, and we have been discussing this issue. The issue of international accounting harmonization may not be a barn-burner to the press, or maybe even to the public, but I have to say that it is an important question.

There is no doubt that the American rules have an influence because of the size and the dynamism of the U.S. capital market. So what we are looking for is sort of an accounting Esperanto, a common numerical language that people can understand around the world. When they pick up a prospectus or an annual report or a quarterly statement from a company in Germany, it has the same meaning as it would if they were reporting under Canadian or U.S. rules. That is not the case.

There is the Daimler-Benz example, where they were showing a profit in Germany, but under U.S. rules they would have shown a loss.

So what is an investor to think of that? While that whole effort is going on, we, in Canada, have to decide where we will position ourselves. They are 10 times our size. We should not be compromising on matters of principle. We should not see our basic values eroded but I have to say, on a matter of an accounting rule, does it really matter? I think the key thing is that we sort of eliminate the differences where, as I say, there is no distinction, and let us get on with it. There is a little bit of pride. There may be a bit of proprietorship on the part of our accountants. But the bigger interest in the capital market surely is served by rules that are more similar. We cannot get the elephant necessarily to go our way. You have to distinguish, it seems to me, when it is important and when it is not.

Senator Di Nino: Your opinion is very useful because this is obviously an issue that we are discussing. I take it then that you are not in agreement with the CICA that, for the purposes of proper disclosure or more fully disclosing items, the Canadian system would be better. Obviously, you disagree with that.

Mr. Oliver: On that particular one, it could well be that the Canadian approach is sounder. It also happens to be the approach taken by more countries around the world. But the fact is that the U.S. market is the most important. Our banks face competition from the U.S. banks, and our banks are put at a disadvantage. Should they really be put at a disadvantage for accounting rules, for the purity of an accounting rule? I think not.

Mr. Russell: Senator, if I could just add to this. In Canada, we are in the middle of a North American trading block under the free trade agreement.

As a consequence, there are increased integrated capital flows between all three countries. Our capital markets have been integrating dramatically over the last four or five years. It seems to make common sense that accounting rules, whatever they are, have to be the same. They have to be harmonized to promote the free flow of goods and services and efficient capital markets. In that process, markets do not wait for accountants, unfortunately.

That is why we are suggesting that if the U.S. GAAP does not look like it is changing to international GAAP, which may be a higher standard, then perhaps, in the interim, we should go to U.S. GAAP in the interest of harmonization.

Senator Di Nino: Thank you for that. I have one other quick question on another subject. You talked about opening up the payments system to allow the investment dealers to enter, obviously, for the purposes of allowing you to be more of a deposit-taking type of institution; is that correct?

Mr. Oliver: Well, yes, in order to level the playing field and broaden consumer choice, I guess. There would be an advantage for a brokerage client to be able to use a debit card and to take money out of an account that has cash in it.

Mr. Russell: Senator, in effect, our members already have client deposits in another name. I mean, client deposits contain significant amounts of cash, so it would be an opportunity for clients to have that opportunity.

Senator Di Nino: I understand that. Let us assume that that happens. Would you also like to be a member of the Canada Deposit Insurance Corporation?

Mr. Oliver: There has been no request to that effect. I guess the reason is that we have a Canadian investor protection fund, which is now up to some $150 million. It is not quite like a guarantee by the Government of Canada, but the fact is that no individual has ever lost money as a result of the bankruptcy of a member firm.

We have done elaborate statistical and actuarial analyses. We feel very comfortable that the fund, the way it is constructed with the backstop of the members, will be adequate, going forward. The members have put the money in and it has not cost the public anything to build a fund, nor has it cost the public anything to discharge the obligations as a result of this limited number of bankruptcies. So far, the system is working quite well.

Mr. Russell: The protections are the same as the CDIC, $60,000 cash and $500,000 in unregistered securities.

Senator Di Nino: In the immediate future, you would not be looking for admission into the CDIC.

Mr. Russell: It would not make sense, I do not think.

Senator Callbeck: Welcome Mr. Oliver, Mr. Russell. I just want to ask a few questions about the complaint mechanism or procedure regarding investment dealers.

I am not sure whether that is something you get involved in or whether it is left up to the provincial securities commissions.

Mr. Oliver: We do get involved, and I would be happy to describe the basic procedure. We would tell a client who has a complaint with a financial dispute or some other dispute with a broker to follow a number of steps. The first is to try to resolve it privately, quietly. Usually it can be done that way. If it is done in a less contentious way, it often could be done quite quickly.

If that does not work, then they should move up to the management of the firm perhaps, depending on the size of the firm, the office manager, sales manager or the president of the company.

If that does not work, register the complaint with the Investment Dealers Association. We would look at it, see whether a formal investigation is required; if it is, we would pursue that. We have a number of mechanisms to address the issue, including disciplining the firm and the individual up to the point of removing the individual from the business.

If there is not satisfaction at that stage, then the individual can go to the local securities commission.

Now, in addition to that, we have an alternative dispute mechanism in two provinces and will soon have one in Ontario and hopefully within a year in the rest of the country. The procedure would be optional for the client but obligatory for the firm and would address financial disputes of up to $100,000. It would be an arbitration system run by a third-party arbitrator, with rules of procedure that are recognized as appropriate. We would like to amplify that with the mediation system and perhaps a rapid third-party evaluation system.

The objective here is to provide a less costly, more rapid, less contentious system for people who have complaints or financial disputes. For the economic reality is that it is very difficult for an individual to use the court system in any productive way for disputes of under $100,000. This would give the individual that opportunity.

There has not been a huge demand for it in Quebec or British Columbia to date, but I think it is an important process to put into place.

It has taken us a bit of time to implement in Ontario because of the difficulty in finding a highly reputable third party to do it for us. We did not think it was appropriate for the IDA to do it because the optics would be that perhaps the process is not objective.

The Deputy Chairman: Is it more difficult to find someone highly reputable in Ontario?

Mr. Oliver: No, that was not the implication, although I can understand why you might have read that into it.

In Quebec and British Columbia, there are government-supported arbitration centres. Quite frankly, there is not much money in running it.

In the United States, it is effectively obligatory for the client and it is run by the National Association of Securities Dealers, which is sort of the SRO equivalent of the IDA.

So for their troubles, first of all, they are criticized as being biased even though there have been analyses to suggest that they are not. Also, from time to time they are sued because there is no ability to appeal an arbitration. So, out of frustration, people who have lost decide to sue the organization that is running the system.

We think that finding someone, a third party from outside, to handle it makes a lot more sense for everyone. That is what is taking a bit of time. But we are virtually there and I think that is an additional mechanism, senator, to deal with complaints.

Senator Callbeck: The MacKay report lists a number of recommendations for federal financial institutions, but they also make a suggestion that the federal and provincial institutions should have one simple redress system.

Do you think that is possible and what do you think of that?

Mr. Oliver: I think the issues are somewhat different. I would have no problem with the banks using a comparable sort of system if they want to. I think that what we are trying to do is set up an alternative dispute resolution system which is fair, inexpensive, easy to access, and has a certain degree of expertise.

The problems that arise tend to be suitability issues. When people complain, it is typically because they have lost money; they feel that they should never have invested in individual stock. It was just inappropriate for them. They cannot sue merely because the market has gone down. However, they can ask for redress if, let us say, they are of limited means or on a fixed income and if somehow a wild, highly speculative resource company was recommended to them.

That kind of issue arises and so a certain amount of specialization and expertise works well. I am not acquainted with the nature of the disputes for the banks. I suspect that they have to be somewhat different.

Mr. Russell: I think, if you look at it historically, the kind of financial products that banks and other financial intermediaries offer the public had an unchanged par value. When you bought it, it had a certain value, and when it matured it had a certain value. It did not carry any market risk and it did not carry credit risk either, to the extent that it was backed by a quality, federally regulated institution.

Because of what is happening in the financial marketplace and the distribution of a wide range of products, in fact, financial intermediaries are distributing to their clients products that have market risk and credit risk.

I think MacKay is really anticipating a problem that will inevitably be there because clients will buy products that they do not understand. They will buy products that fall in value and there will be a lot of issues related to customer redress and that whole process has to be worked out within the context of the federally regulated institutions. As Mr. Oliver has said, it is quite refined in the securities industry.

Mr. Oliver: The other thing I should say is that there is clearly a restructuring going on at the banks. The Royal Bank just last week indicated a restructuring of their organization into a wholesale and retail bank.

So the integration proceeds apace and, as a result of that, I think that bank members of the IDA will have to offer the same kind of arbitration service to their clients as RBC Dominion Securities. So it is coming their way.

In addition, the MFDA, I would think, should contemplate the same kind of structure. It only makes sense, since a large number of the salespeople selling mutual funds are bank employees. They would be caught up in that, too.

So inevitably the financial institutions will be involved in the type of ADR services that we offer but they may well want to maintain a different kind of service for matters relating to what used to be purely banking.

Senator Kroft: Thank you and welcome. I have just one line of inquiry. The MacKay report indicates that your association is one of those groups that has expressed interest in being part of the payments system. You have certainly put it in as one of your objectives.

I have read in your expanded business power section that you think they should join, provided they meet reasonable criteria. It seems to me, as you read it, I heard a little bit of extra emphasis on the word "reasonable."

It seems clear to me that there is a huge range of size within your membership and that size probably reflects differing capacities.

I am just a bit curious as to how this would play out. If you go to the lowest level that would be appropriate for your smallest members, that might then move out of an area that is satisfactory broadly in the payments system.

I am just not sure how you would go about that, and that leads me to the next part of my question. Would it be an all or none thing or, if not, then obviously you set up certain competitive advantages. I am just wondering how you would handle this first.

Mr. Oliver: I guess the emphasis on reasonableness related to some comments that I had heard made by other witnesses in some of the questions by your committee on that issue. I think if you are setting up criteria, they should not be used as a barrier to keeping everyone out.

But I am not prepared today, I have to say, to give you a detailed answer into what these specific criteria ought to be.

Mr. Russell: If I could just elaborate a little bit on that. I think what we had in mind in terms of access to the payments system and participation on the payments system committee was that those institutions must meet proper regulatory standards. Clearly, federally regulated deposit-taking institutions meet the criteria.

Once you move away from deposit-taking institutions, then you may have to adopt somewhat different criteria, but the fundamental bottom line is that the institutions must meet high standards of regulation, whatever they do. We certainly had in mind that all members of the IDA member firms should potentially be members of the payments system because they are all subject to the same standard of regulation. This includes the large bank-owned dealers, the large independents, and the very small firms that, for example, while they carry very little capital, are limited in the business and the risks that they can still carry on.

Whether the small members of the IDA would actually join really gets to the question of the distinction between whether they meet a regulatory standard and whether they meet the economics to join the system because, clearly, there will be significant expenses involved in providing that service to their client. So many small members may decline to join.

But I think what we had in mind is that, at least on regulatory criteria, they should all be equal in terms of meeting the standard.

Senator Joyal: Thank you, Mr. Oliver and Mr. Russell. This morning we had as the first witness a CDIC representative and I wonder if you had an opportunity to read the brief or to be briefed on it.

Mr. Oliver: No. I am sorry, I did not.

Mr. Russell: No. I did not.

Senator Joyal: I would certainly be willing to give you a copy of it. One of the points they made is that in opening the payments association to the life insurance versus the investment dealers and mutual funds, they saw much broader complexities of system. I will quote their conclusion on page 10:

Another factor is trying to assess the extent to which this proposal carries with it potential for a huge increase in the government's financial commitments.

As I understand, the investment business in Canada is divided among 184 members. As you have said, each one is equal in your association. Now, a vast majority of the regulations under which you perform are provincial regulations. You are not all in the same position as the banks in terms of deposit taking nor in the same position as life insurance in terms of subscriber commitments. Could you help us with some of the parameters within which you can work out those difficulties within a reasonable period of time? After all, we do not have a national security commission that would at least streamline and harmonize the regulations into a coherent, efficient and quick way. You are probably concerned about the recommendation. You would like to see that proceed as soon as possible. It is in your business interest to do so.

Could you tell us about the crash program you are putting together to help the government to implement those recommendations?

Mr. Russell: The only point that I would be prepared to make at this juncture, Senator, is that, first of all, there is already a precedent in the Canadian payments system to recognize provincial regulation. The Alberta treasury branch is a member of the CPA. They are regulated provincially.

So I do not think that in itself should be a barrier, but I also agree that securities firm are far more complex in terms of the financial business that they carry out, although financial intermediaries themselves are becoming much more sophisticated in what they do. I can talk more about the process here. We have been involved in the last month with the Department of Finance in terms of this review, providing them with a lot of background information on our industry, how it is regulated, our obligations as a recognized self-regulatory organization with the Ontario Securities Commission.

It seems to me that the department is working quite diligently and quickly in trying to develop the kinds of criteria that you are talking about, but at this point it would be premature for me to make a comment on what the criteria would be. I think they are just scoping that out at the moment.

Mr. Oliver: I have just one other point on provincial regulation. There has been in the last several years a major effort to harmonize the rules, and the approach to financial compliance and capital rules is effectively uniform across the country as it applies to security dealers.

Senator Joyal: It is as if the life insurance company would be in a better position at this point in time to be admitted into the payments system. The investment dealers and the mutual funds would be delayed, taking into account the implementation of a regulatory system.

Mr. Oliver: I would just say that other industries are unlike ours. Financial problems, bankruptcies and the issue of public money reflect on us.

So I do not feel that there is a need to delay in respect of the investment dealer community. But you need more detailed answers and we will be working on them.

The Deputy Chairman: I only have one question. You mentioned the competition for deposits and the fact that over the last while banks have gotten less money, and more people are investing. I mean, that is because interest rates are low and market conditions are good, right?

Mr. Oliver: In part.

The Deputy Chairman: Do we have a responsibility when we make our recommendations to look at the long range? In other words, do you think this is not a permanent part of our culture? I do not mean interest rates and investment because that is bound to change. But do you think, even if interest rates go up, that people will still be more prone to invest even when the market may be going down?

Mr. Oliver: You are asking not a cyclical-type question but a secular, structural one. When people start participating in the marketplace, it seems to be a demographic phenomenon that does not retreat other than in a certain cyclical way.

I mean, you can go back to the early 1960s, when inflation and interest rates were what they are now, but participation in the marketplace was very different. As I mentioned in my presentation, individuals are realizing increasingly that they have to rely on their own resources. They have more resources now. The demographics are obviously a major part of this whole phenomenon, and the demographics do not change overnight. It is one of the slower moving and highly predictable factors in society, obviously.

I think people are more knowledgeable and they look at the longer-term trends in the industry in the equity markets. Taking a longer view, it has been far preferable to have invested in the market in a prudent way than to have invested in savings accounts, although there are no guarantees. But that very much depends on individual circumstances and what the balance should be and so on.

So, no, I think this is a phenomenon that is likely to increase. I think individuals will be more involved in the market, if anything. That is not to say, that six months from now it may decline. In fact, mutual fund assets will be up to $325 billion. Now they are at about $275 billion. Part of that is just the 25 per cent decline in the market. I do not think it has net redemption, but that is the nature of the way the way the equity markets work.

Mr. Russell: Another way of coming at your question, Senator, is by looking at the way institutions are positioning themselves. The kind of structural changes that we are seeing, the acquisitions both in the Canadian and the U.S. markets, I think are indicative of corporate strategies that see this as a permanent secular change.

The amalgamation of Salomon Brothers, Smith Barney and Travelers into Citigroup really sets up a global investment commercial bank to offer a full array of products and services. I think that kind of structural change is a recognition that consumers are much more sophisticated and will demonstrate that over time.

In Canada, we have seen a steady integration of the investment dealer and the banks in trying to develop multiple product channels to meet their clientele.

The Deputy Chairman: There are no further questions. Thank you very much, gentlemen.

We will call Mr. David Nield, who is Chairman, President and Chief Executive Officer of the Canada Life Assurance Company.

Mr. David A. Nield, Chairman, President and Chief Executive Officer, The Canada Life Assurance Company: Thank you for this opportunity to appear before you. I join with others in congratulating Mr. MacKay and his task force members on the timely delivery of a comprehensive and wisely considered report. We now need to translate the recommendations of the report into a new and workable policy framework for the future governance of Canadian financial services institutions. It is readily apparent that there is general support to get on with that job, and Canada Life will gladly offer any support required to assist in that work.

These certainly are very interesting times for life insurance companies in general, and mutual life insurance companies in particular. Many changes are occurring. One of those, which I will not spend too much time on today, is demutualization.

The MacKay task force pointed out that it believed demutualization to be in the best interests of the mutual companies, their policyholders, and the future evolution of the financial services sector. We believe that this is true, and our board has asked Canada Life to prepare a plan for demutualization. We are actively engaged in doing that.

This is a fairly complex process, and one that will involve significant time, energy and money. There are internal challenges in considering how to restructure our company, and how to equitably allocate shares to our participating policyholders. Particularly in Canada, there are external communication challenges as well.

I say there are external communication challenges especially in Canada because in the United Kingdom and Ireland, two countries in which we operate, demutualization is almost old hat to the public. In Canada, however, this is a new process, and we need to educate our policyholders using means that are as broad and varied as possible.

Internally, this is probably the most important structural change since 1961. Let me explain that by telling you a little bit about Canada Life before moving on to the main body of my comments.

Canada Life was founded in Hamilton, Ontario in 1847, and was the first Canadian life insurance company. We were established originally as a stock company. The year 1961 is significant for us, because that is the year in which we mutualized. Some people say if you live long enough, things often come full circle, and that is certainly true in the case of demutualization.

Today, we serve more than 8 million people with individual and group products in Canada, the United Kingdom, Ireland and the United States. As an international company, at the end of 1997 we had company and segregated fund assets under administration of $39.6 billion -- $16 billion or 40 per cent of which were in Canada. The total premium income of my company last year was of $5.2 billion, and we had a net income of $266 million. Canada Life has total insurance in force in Canada and abroad exceeding $260 billion.

To give you an indication of our relative size in the Canadian market, we are the fifth largest life insurance company in assets, but we would not rank on the list of the top 50 global players in life insurance.

The task force set the stage for dealing with the implications of massive change in the highly competitive environment in which our institutions operate. As the highlights of the report note:

It is extraordinary how quickly the world is changing. Driven by technology and new ideas, the world is fundamentally different as we approach the millennium than it was even 10 or 15 years ago.

How true that is.

The volatility spawned by changing events has clearly created the need for this update on the rules for financial companies. In fact, even since the task force began its work early in 1997, the operating and competitive landscape has changed.

Familiar examples would include the purchase of London Life by Great-West Life, and the proposed merger of four banks into two here in Canada. Massive acquisitions and mergers have also occurred in the international arena, such as the merger of Citicorp and Travelers Group in the United States. Other examples would include the continued growth of the powerful ING group in the Netherlands; the international growth of AXA based in France, the bank mergers in Switzerland; and the acquisition of SunAmerica by AIG, which is one of the largest financial enterprises in North America, and is global in its interests. Canada Life itself has been an active participant in that process with eight friendly acquisitions over the past six years. It also has one more pending -- Crown Life.

I cite these examples to indicate two things. First, the pressure of change continues unabated, and the size of financial institutions globally is increasing geometrically. Second, Canada cannot isolate itself from the fact of consolidation in the financial services industry.

Consolidation is driven by two factors. There are too many players at a time when the market for traditional life insurance products is declining, and historic life product providers are reacting to new, non-traditional competitors, particularly in the wealth accumulation business. Mutual funds and banks are major players here.

In this context, I believe the regulatory framework currently under consideration must encourage and foster as much freedom of choice and innovation as possible. It must be prudent free choice, but free choice nonetheless.

It is prudent and necessary to protect legitimate public interests, particularly to ensure that we have financially strong and competitive financial companies. It is also necessary that the regulatory framework encourage and recognize free choice by ensuring the rules of engagement are not unnecessarily bureaucratic, restrictive, or cumbersome.

In my view, most of the MacKay report achieves these goals. I welcome, for example, its recommendations regarding access to the Canadian Payments System, the badly needed adjustments to the capital taxes on financial institutions, and a level playing field in the area of consumer protection.

I also welcome the three-year time frame for protection from hostile takeovers following demutualization. Given the pace and degree of change in the marketplace, however, I suggest that we would want to preserve our ability to undertake a friendly merger during the transition period, if our board and policyholders believed it to be in the company's best interest, and in their best interest.

The MacKay report permits this if it is clearly demonstrated that it would be in the public interest, and if it is desirable to proceed before the three-year transition period has expired. As I will explain later, however, we have some concerns -- both with the public interest criteria, and with the public review process contained in the report.

I see some other areas as problematic. I am speaking here of the recommendations dealing with ownership policies and the proposals regarding mergers and acquisitions. These are critical areas for companies such as mine, which have both a Canadian and an international presence.

As I mentioned, we have been very active in growing Canada Life by acquisitions. Since 1992 we have made three acquisitions in the United Kingdom, three in the United States, and one in Ireland. We are working on our second in Canada. Even with these, however, we have barely kept pace with what has been going on in the marketplace. If new rules were enacted that inhibited or slowed our growth, our ability to enhance -- or even maintain -- our performance would be at risk.

This is not a theoretical argument -- it is reality. Recently, two rating agencies, Moody's Investors Service and Duff & Phelps, gave Canada Life a negative outlook, because both felt we needed to be a bigger player in the Canadian domestic market. Citing the wave of consolidations in Canada, Moody's said large, top-tier companies enjoy a competitive advantage over companies such as Canada Life, which they say now form a second tier. For Canada Life to become a top-tier company, as defined by Moody's, we need to become larger.

Viewed in the context of what might be called a "street reality," I find the MacKay report's somewhat implicit bias against creating larger-sized companies troublesome. On page 112, the report states:

The evidence we have reviewed does not sustain a case that, for most purposes, size is a strategically important variable.

I head up a company that has just been given negative outlooks principally because our domestic presence is not substantial enough. I can assure you, therefore, that size is indeed a strategically important variable regardless of any theoretical arguments to the contrary.

In defining what constitutes a large financial institution, the report uses a criterion of $5 billion shareholders' equity. Ownership rules and public review of mergers are then related to this figure. When defining "large," $5 billion is too low a figure. That amount in shareholders' equity would not put a company in the top tier globally, and it is still much lower than that of major banks. I suggest a minimum of at least $10 billion.

Turning to the ownership issue, the report recommends that financial institutions with shareholders' equity in excess of $5 million be widely held. Institutions with less than $1 billion in shareholders' equity could be held by anyone one who was approved as fit and proper to do so by the Minister of Finance. Institutions with shareholders' equity greater than $1 billion and less than $5 billion would be required to have a minimum of 35 per cent of their participating voting shares widely held and publicly traded.

These three differing ownership requirements, based on size, will add costly complexity, and will leave in doubt what happens when a company moves up or down one or more size categories. The regulatory framework should focus on fostering strong, agile, competitive financial institutions that can respond quickly to a fast-changing marketplace. It should not set up rules that will require difficult interpretation.

Size is also a criterion for the public review process for mergers. The review process is required whenever two institutions plan to merge to form a new company with at least $5 billion in shareholders' equity, and when each of the two merging institutions has at least $1 billion of shareholders' equity.

Mergers, by definition, involve extensive management time, corporate energy, and cost. Requiring a cumbersome public review process for relatively small mergers seems to be an unnecessary additional burden.

The public review process includes consideration of domestic public interests. With the exception of a nod to international competitiveness, the criteria seem to ignore the legitimate interests of our stakeholders abroad which, depending upon the circumstances, could be unfair.

We employ significant numbers of people in the United Kingdom, Ireland and the United States. In fact, our operations in the United Kingdom are almost as large as our operations in Canada. Half of our business and participating policyholders are located outside of Canada, and we have a responsibility to balance their interests. It seems to me that the public interest criteria need to more fully recognize the fact that some companies have significant numbers of important stakeholders outside of Canada.

I began my remarks by saying that I believe the regulatory framework must encourage and foster as much freedom of choice and innovation as possible. It must be prudent free choice, but free choice nonetheless. Canada needs a healthy, vibrant, growing financial services industry. The regulatory framework must allow companies to be agile and to quickly adapt to a changing and complex marketplace.

I believe the recommendations in the MacKay report, taken together with the modifications I have suggested, will go a long way to achieving these goals. Thank you.

I would be pleased to answer any questions.

The Deputy Chairman: You spoke about the ownership issue and the question of how large a company should be before it goes through a regulatory process to merge. You also talked about how large a financial institution should be before it is widely held. I kind of agree with you there, but I wonder what you think should take the place of that? What should happen if we allow closely held institutions? Should we care how large they are?

Mr. Nield: Obviously, there is a limit, and I suggested $10 billion. Part of the problem is a company like mine, which has been international in outlook for over a hundred years. I am naturally conditioned by not only the domestic market, but also by what goes on elsewhere. These days, CAN$5 billion is less than US$3.5 billion, and that is a pretty tiny institution when you look around the world. That is why I believe $5 billion is too small. I believe that $10 billion starts taking the enterprise into a larger category, whether it be U.S. or Canadian dollars.

The other point I was trying to get at is the issue of tying it domestically. That is, my company is viewed as domestic in terms of total policyholder funds, but the reality is that they are spread around four different countries. Right now I have a policyholder surplus of approximately $2.6 billion. Likely just over $1 billion of that relates to Canada. The balance is split between the United States, the United Kingdom, and Ireland. In my view, then, focusing on a domestic review process does not do justice to the other people that I represent.

The Deputy Chairman: Should there be a step process sort of like growing up? That is, first you are privately held, and then you can have 35 per cent of their voting out, and then you can go to the next step? Should there be something in between?

Mr. Nield: I have difficulty with the idea of steps, because what happens when you move up or down? Some companies get smaller over time, and some get larger. If you are grandfathered forever, it will create quite a mishmash out of corporate structures in Canada. I believe really that, subject to fit and proper ownership of a financial institution, an institution should not be required to be widely held.

Mutual companies are moving from quite a different corporate structure to a public structure. We do need a time frame to make the move from one to the other, and for proper value to be determined. After that, however, I believe that the market should govern.

Senator Di Nino: Most of our witnesses have taken a crack at the banks. I notice that, unless I missed it, your presentation excluded that. That is refreshing. Let me add that I am not necessarily showing a bias here, because I truly am not sure which way I would go if I had to vote on the issue.

Does Canada Life have any concern about the banks selling life products in their branches?

Mr. Nield: Perhaps I could give you a slightly long answer. We compete in the United Kingdom and Ireland, and both countries have had bank assurance for over 10 years. We compete very effectively with them, and I do not have a problem with competition per se. In fact, I think that is how we all move forward and serve customers better.

I would make one comment as far as the banks in Canada go. In order to ensure a level playing field, I believe that the regulations dealing with coercive tied selling and privacy should be dealt with before the banks are allowed to retail insurance out of their branches.

At the moment, they can sell insurance the same way any of us sell it, and a number of them own insurance companies. They retail insurance through their own systems. The only area that I am raising is retailing out of the branches, and making use of bank information. If rules are in place to deal with privacy and to prohibit coercive tied selling, I have no problem with it.

Senator Di Nino: You do not think it would be difficult to regulate tied selling? I am not sure I want to use the word "coercive," because there is a difference. I mean, tied selling and coercion are two different things.

Mr. Nield: I agree that it is very difficult to administer. I guess the one example that is traditionally given to me is that a bank is very important to you. You go there for loans. You go there for your mortgage. Some people would find it very hard to turn down if the bank were to suggest that they also buy other products from them.

I do not have a simple answer for you on how exactly that should be administered. I do think that there should be very severe penalties for any bank that is found to be doing this, and continued publicity to inform consumers that the banks are not allowed to do this.

Senator Di Nino: As long as it is a competitive market, though, and as long as you play on an even playing field with the banks, you do not have a problem allowing them to sell insurance, because you think you could beat them at it anyway. Is that what you are saying?

Mr. Nield: I am not saying it will be de minimis, but I think that is the way the world is moving, and I do not believe in trying to hold the tide back. Once the banks were allowed to own insurance companies, it was a matter of time before they would be retailing. All I ask is that the requirements for retailing not put them in an advantageous position relative to the rest of us.

Senator Di Nino: Let us switch to the payments system. Obviously, it is an issue that has come to the fore with pretty well all of the industries that the financial sector represents. Your industry is keen to be admitted into the payment system. Just for the purposes of the record, tell us what that would do for you. What would it really mean for you?

Mr. Nield: We disburse approximately $100 million a day in claims payments. Many of our policyholders have no immediate need for the funds. Typically, they are paid out in a lump sum. They are taken and deposited in a bank.

We believe that, with access to the payment system, we could save a step. They could continue to deal with us, and we could look after their money and provide the extra service. If they do not want to leave it with us, they could move it, but at least we would have an opportunity to look after those funds as the policyholder or beneficiary draws down the money.

Senator Di Nino: What you are saying, then, is that it would go from the payment of an insurance product to some other type of an account that they could have with you, and that would be accessible through the payment system. Is that correct?

Mr. Nield: That is correct, yes.

Senator Di Nino: That would return you to a competitive, level playing field.

Mr. Nield: It would give us an opportunity to continue to service our customers in the way that we would like to. It is very difficult to get customers, and therefore it is important to find ways to serve more of their needs.

Senator Di Nino: It is important to retain customers.

Mr. Nield: Yes, that is very important.

Senator Di Nino: If you are admitted to the payments system, a couple of questions arise. The banks are covered under a policy of the Canada Deposit Insurance Corporation, but your industry is covered by CompCorp.

Mr. Nield: Yes.

Senator Di Nino: If you were admitted into the payment system, would your industry be more likely to want admission to the CDIC, or would you want to remain with CompCorp?

Mr. Nield: We like the fact that the MacKay report acknowledges that there is not a level playing field when it comes to policyholder protection. The CDIC has access to the consolidated revenue fund. We only have access to ourselves. We have dealt with a very large insolvency, and we did it voluntarily. We did it without any government support or help, and we did it very nicely. In my remarks, however, I made reference to the fact that we welcome the MacKay report and its feeling that we should have a level playing field when it comes to policyholder protection.

Several different models that might be used are contained in the report. I do not have a strong view on this, other than that, if the CDIC has access to the consolidated revenue fund, the insurance industry should have access as well. If there is something in between, we should be on the same ground.

Senator Di Nino: What kind of products would your industry like to see covered by a future levelling of the playing field?

Mr. Nield: At the moment, all our general insurance contracts are covered under CompCorp, so we would see a continuation of that. We are covered for a death benefit under death policies of up to $200,000. For policies on wealth accumulation, $60,000 is the CDIC limit. Our annuities and disability income are covered at up to $2,000 a month.

Senator Di Nino: What you are saying is the whole range of products.

Mr. Nield: The whole range has a potential shortfall if a company ran into difficulty. It has always been our aim to protect shareholders.

Senator Di Nino: CDIC, as you know, covers deposits of up to $60,000. There are ways you can stack it.

Mr. Nield: You can stack it.

Senator Di Nino: You are suggesting, if I understand you correctly, that your products, except for the wealth accumulation one -- to use your term -- would not have a limit.

Mr. Nield: No, they do have a limit. At the moment, a death benefit is covered up to $200,000. A disability income policy is covered up to $2,000 a month of benefit. An annuity payout product is covered up to $2,000 a month benefit payout. If it is a GIC type of cash accumulation, it is $60,000, which is the same as CDIC.

Senator Oliver: Is there a growing concern in the life business that mergers will erode the line between life companies and banks? In the future, is it possible that life insurance companies as we know them today will no longer exist?

Mr. Nield: That certainly puts it where it is at, right off the bat.

First of all, the lines between banks and life insurance companies have been blurred for some time now. To give an example of that, 75 per cent of my assets would likely be related to annuity-type products, and GICs would be very common. Our GICs are in direct competition with the bank GICs.

My company has a sizeable business, and we do pay out annuities involving life contingencies. In that particular case, we are not competing directly with the banks, but there has been a blurring of the lines in wealth accumulation. Our segregated and mutual funds do have some similarities, but they also have some differences. We are competing with the banks in that regard as well.

Notwithstanding the arguments in the MacKay report to the contrary, size is a factor in the financial services industry. It is a factor from two points of view. One involves technology -- the cost of coming up with the systems necessary to deliver the services people want. The second is the fact that rating agencies want you to be big. You can cite all kinds of examples where size by itself does not guarantee success, because crummy management can run a big company into the ground just as easily as a small company.

As far as the banks themselves go, I have a dilemma, and I am not sure that I can give you a good answer to your question. I do believe that the banking business in on the cusp of change, much as the life insurance business is. If I were to look forward based on what I believe a bank to be today, I would say the mergers would be very difficult.

The task force's original mandate -- and it was a difficult one -- was to try to come up with an industrial policy for one of the most important businesses in Canada, and that is the financial services sector in which we all have a great deal of pride.

It is difficult to determine what the banking business -- or even the life insurance industry -- will look like in the future, however. Already you can see that the banking business is being pulled apart with lease financing coming in on one side, and credit cards coming in on another. The advent of Internet banking and the move away from bricks and mortar are also very significant. In the short run, I would probably prefer that the banks did not merger. In the long run, however, I do not know what the best answer would be for Canada.

We are in a global era, and technology is increasing it. I attend a lot of meetings outside of Canada. I meet the big players there, and I know what they are doing. We have been very fortunate in Canada to have a very strong domestic industry. It is not clear to me that we can expect to maintain that advantage indefinitely, however.

From a public policy point of view, I think that is the challenge. What are we trying to look at? We need to consider what we can see today, and what we can anticipate three years down the road. Whatever we set in place now, the machinery will be in place to develop for the future.

Senator Oliver: The MacKay report talks not only about mergers, but also about strategic alliances.

Mr. Nield: Yes.

Senator Oliver: When Mr. Godsoe appeared before this committee, I asked him a number of questions about strategic alliances. Do you think that a strategic alliance might help you to become the kind of company that you need to be in the future?

Mr. Nield: Strategic alliances might help us on the technology side, if we could find a way to combine with some of the bank offices. We have had discussions, but our products are very different from the banks' cheque clearing operation. That operation is a standard commodity, and they can combine offices and do it very efficiently. Thus far, we have not been able to translate that into our business.

A strategic alliance might help me be competitive in various product lines. In the end, though, it will not help me with my ratings. Unfortunately, ratings are very important -- especially in the U.S., but also to a certain extent in other markets. If I do not have a particular rating, I cannot compete in those markets.

Senator Oliver: In the recommendations to open up the payment system, how do you see the clearing system working? Do you think that the banks will cross-guarantee life insurance companies, or do you think that some new model will need to be developed? The life insurance industry could guarantee payments of its members in the larger payment system, for example.

Mr. Nield: There is no question that sorting out how this will work is a problem. I am not sure I have the instant answer for it, but I do know that the last thing we want is the U.S. style of cheque clearing, where you write a cheque and wait a week or so before it clears.

In Canada, we have grown accustomed to instantaneous clearance. I believe that some mechanism for same-day clearance would be necessary. I do not know whether that would involve going to a bank and getting a letter of credit type-guarantee, or whether the industry itself would be responsible.

Senator Joyal: You mentioned that the size of the life insurance company is important.

You got a negative comment from Moody's Investors Service, even though you are the fifth largest life insurance company in Canada. I have read that this has triggered your board to reflect upon with whom it should consider merging in the future. Are you looking down or up on that scale of 1 to 5?

Mr. Nield: I am not sure. As you have no doubt heard and seen in the press, everybody is talking to everybody. You cannot go to a meeting or a cocktail party without someone raising the question.

What I am suggesting is that we need the freedom to do what is right, rather than being frozen for a period of time. I used to use a three-year planning cycle for strategic planning. I now work on a one-month cycle, because my environment is changing so quickly -- not so much in Canada, but in the other countries. Under some of the freezes that MacKay suggests, we could wait several years before we got everything in order and could move forward. Someone like myself, who operates in other markets, cannot do that.

Senator Joyal: I am thinking about an argument along the lines of the one that the bank merger proponents are giving us. In other words, earlier we had the TD CEO telling us that, in the American market, they work with CIBC -- they have a strategic alliance capacity there.

Do you see a chance of picking up another partner or partners from amongst the other life insurance players in Canada? That might help you to form the nucleus or core of the business that you need in order to be able to compete.

Mr. Nield: Having talked to the rating agencies, it seems to me that, because of the size question, there are clearly three top companies in Canada today. They are Sun Life, Manulife, and Great-West/London, and they are at least double the size of my company.

Now, if I were to merge and get closer, I suspect I would be categorized as being in the top tier. The focus seems to be on total size, not domestic presence. In a sense, if I could find a willing candidate amongst those players, that would give me the opportunity to change my image with the rating agencies.

Senator Joyal: At this point in time, then, the three-year period is a major obstacle against your being able to consolidate.

Mr. Nield: It could be. The way the world is moving right now, three years is an eternity.

Senator Joyal: Did you have an opportunity to see the brief that the CDIC representative gave us this morning? I am, of course, referring to access to the payment system and the opening of the system.

Mr. Nield: I have not seen their brief, but I will get a copy of it.

Senator Joyal: Allow me to quote from that brief. It says:

CDIC had learned from experience that a common factor in failed institutions was poor management, a lack of perception of risk and inadequate controls.

Based on your experience of the business, is that a perception that you share with them?

Mr. Nield: I do not claim to be familiar with all the cases, but that certainly is a factor in the cases with which I am familiar. Poor management is usually characteristic of an institution that gets into difficulty. I would also agree that a lack of understanding of the risk parameters of the business is a factor.

Senator Joyal: The brief continues:

These findings were not captured by quantitative regulations, so the standards were designed to complement those regulations by adding qualitative standards.

What kind of capacity does your industry have to measure up to qualitative measures?

Mr. Nield: I am not sure I can give you a very good answer on that, other than there has been tremendous development over the past five or six years in both those areas. The CDIC came up with its standards of practice for management, and CompCorp has done the same thing. Boards of directors are very sensitive to ensuring that they have the right management in place, and that they have the right policies in place to protect them.

A lot of things have developed over the past five or six years, and they may not have always been as structured as they are now. Speaking for my own company, however, we have a number of structural items in place. The board reviews them, and satisfies itself that management is doing the right thing, and that we have the right controls in place.

The Deputy Chairman: Our next witness is Mr. Bill Davis, from the Task Force on the Churches and Corporate Responsibility. Please proceed.

Mr. Bill Davis, Task Force on the Churches and Corporate Responsibility: My name is Bill Davis, and I represent the Task Force on the Churches and Corporate Responsibility. I appreciate the opportunity to be here this afternoon. I realize that we are squeezed into the end of a fairly heavy day.

You may recall that when we came here before in 1996, we were accompanied by the National Anti-Poverty Organization or NAPO, a Montreal-based consumer advocacy group, now known as Option consommateurs. We also had with us a representative from the Jane and Finch community here in Metro Toronto.

Since then, the churches have maintained links with these same organizations. While they do not accompany us today, they are aware of the document we are submitting to you. It has only one focus, and that is service to low-income people.

Together with these other organizations, we did have occasion to make submissions to the MacKay task force. We went once to the full body in Ottawa, and once to half of the group here in Toronto. I think there is good evidence that they have recognized the problems we identified, and I think it is fair to say as well that the Canadian Bankers Association also recognized those problems.

The CBA included us in its ongoing efforts to deal with providing better banking service to low-income people. There are new guidelines for opening accounts and cashing cheques. Articles appear regularly in the Canadian Banker highlighting these new provisions, and urging sensitive handling of low-income consumers and customers. Good progress has been made in particular communities through joint training efforts, and the Jane-Finch community is a good example of that.

In our written brief, we draw particular attention to recommendation 92 of the MacKay report. The last time we visited you, I recognized that you have a general preference, which is quite in line with recommendation 92. That is, you do not like legislation. It is a last resort, and you like to avoid it, if at all possible.

Recommendation 92 concludes:

Therefore, if significant progress is not made within a reasonably short time to resolve access issues, the Government should legislate the terms of the February and December 1997 agreements, with appropriate sanctions for non-compliance.

That is MacKay's recommendation.

The thrust of our concern is who is to make the decision when sufficient progress is not being made, and what is the time frame? What is a "reasonably short time frame"? How long do we wait, and who is responsible? That is our concern, and the report is quite silent on it. In our brief, we have offered one option, which at least ensures some level of independence, and lodges that task somewhere. Our suggestion is that it be with the Ombudsman. Incidentally, the recommendation for an ombudsman is one that we support.

Option consommateurs just completed its own surveys, one in Quebec and one outside Quebec. These are not extensive, but they are large enough to indicate some limits to the progress that is being made. I brought enough copies for each of you, and I will leave them with you. The material is largely anecdotal, but it has some quantification with it.

Despite the best intentions of the CBA, and the very earnest efforts that have been made so far, it really is important to provide some option to deal with the real possibility that this simply will not meet the basic needs of low-income people. Those people are already marginalized in many ways.

With the level of stability and the innovative capacity contained within the banking system, it just is not good enough to not provide adequate service to low-income people, and that is the gist of our report.

Senator Michael Kirby (Chairman) in the Chair.

The Chairman: Welcome again, Mr. Davis. I understand the rationale for your suggestion that this monitoring process be done by the Ombudsman's office.

I want to ask you a question about the recommendation 80, which is the recommendation for an ombudsman. Essentially, the task force recommended that Parliament establish an office of the Ombudsman, separate from the current structure of the Ombudsman. The apparent belief is that the ombudsman is not now independent.

We met with the chair of the board of the banking Ombudsman. It is a part-time, voluntary position, and she is not the CEO. We went through the appointment process for members of the board and the CEO. We also looked at how the budget is done, and then we read recommendation 80(a).

The first part of that recommendation details what the task force hoped to get by way of independence. The reality is that, in the current scenario, all of the conditions of independence listed are, in fact, existent with respect to the Ombudsman today.

The only exception is with respect to the recommendation that the independent directors be appointed by the Minister of Finance. Today, the independent directors appointment themselves. That is to say, if an independent director resigns, a new one is replaced by the remaining independent directors.

That same degree of independence that the task force sought to achieve would appear to some of us to exist with the Ombudsman today. Frankly, most of the committee did not know that before. Knowing that, however, do you still think it is necessary to create a separate Ombudsman's office as a government agency, or can we proceed with the one we have now?

Mr. Davis: I am not sure that I understand the replacement process that you have described. Where did the first directors come from?

The Chairman: The are six or seven now, and the first couple of directors were appointed by the CBA. There is no question about that. Since then, the additional independent directors have been appointed by the independent directors themselves. There has been no input from the banks, and, indeed, no input from the CBA.

There is an advantage if the ombudsman is not a federal government institution. The instant it becomes one, its ability to bring provincially regulated institutions under its purview becomes infinitely more difficult than it would be if it were not a federal government institution.

Mr. Davis: This is not a matter that we have really considered. I think there is a belief in our organization that someone has to represent the public good, and we tend to think in terms of government when we think that way. I am not sure that that is an adequate answer. I appreciate the jurisdictional dilemma that you are raising, and our concern is to have independence and to have teeth.

The Chairman: Okay, so that is the key issue, and that is why you want that additional clause added on.

Mr. Davis: In looking at the report that we submitted, we had tagged it on as section 80(f). It could, I suppose, equally be built into 80(b) as a part of the mandate.

Senator Callbeck: In your brief, you talk about service to lower income people. You say that there has been an obvious improvement as far as cheque cashing or account openings are concerned, but that the situation is deteriorating otherwise. New hurdles are developing. Can you give us some examples of the new hurdles?

Mr. Davis: That is probably something that comes out of the report from Option consommateurs that I mentioned. Now that we are down to two pieces of identification, we find we need to do credit checks, and it will take five days. There is also the different treatment of NSF cheques. That is, if you have written an NSF cheque, you may not be welcome in this branch when the credit check is done. These are small hurdles that make it very difficult for the person who wants to cash the cheque, or open the account and get on with some banking.

Senator Callbeck: I was surprised that you did not mention the community accountability statement. I would think that that is one way that services to low-income individuals could be addressed every year by the financial institution. What are your thoughts on the community accountability statement?

Mr. Davis: I recall reading it and thinking it made a lot of sense. I would have to go back and put it in context. I think one of the dilemmas is the problem of which communities the banks are most actively seeking to serve. If you are going to be accountable, you have to be in the community. Part of the dilemma of bank closings is that the least profitable community to serve is the one with the highest concentration of low-income people. You might have to refresh my memory as to whether these accountability reports cover that element of service to the Canadian public.

Senator Callbeck: Well, they could. According to MacKay, this came out of the American example of the Community Reinvestment Act, where banks have to satisfy the service and the credit needs of the community. The MacKay task force looked at this, and they felt that we did not have traditions here in Canada that really warranted legislating that. Their recommendation, then, is for a community accountability statement.

The MacKay report mentions a few things that could be included in the statement, but it does not get into all of the specifics. I was thinking, however, that that is one way that the banks would have to report every year as to their services to low income people.

Mr. Davis: The Community Reinvestment Act in the States came out of the incredible reality that money is actually flowing out of low-income, underdeveloped or poorly serviced areas. The little bit of money that is in the banks flows out to be invested in other places. From that, the thrust of making some sort of matching investment where the asset originates makes a lot of sense. I think that is the origin of some of that thinking, and I quite support it.

Senator Di Nino: Mr. Davis, I wonder if you could help me in defining the kinds of services that you feel the less-advantaged need from a banking institution.

Mr. Davis: The simple thing is that they need the capacity to cash a cheque, and hopefully to open an account. They are relatively mobile people -- they move a lot, and sometimes they have their own reasons for not wishing to have a bank account. Anybody who works with low-income people encourages them to have cheques deposited directly, but they have their own reasons for preferring not to do that. When they have cash in their pocket, it tends to disappear even among friends, but it is not easy to obtain the simple ability to walk into a place and cash a cheque.

Senator Di Nino: That is the biggest problem they have? You are not talking about availability of loans. You are not necessarily even talking about other services that the financial institutions offer. You are talking about getting a welfare cheque or an old age security cheque. You want to be able to access this particular service without being hassled at the office of some financial institution. Is this what you are saying?

Mr. Davis: Yes. This is what we talked about a little bit more at length when we had the NAPO and ASEF people with us. Some of that is also captured in the material from Option consommateurs that I will leave you.

One of the reasons that the banks are not all that keen about this, I suppose, is that these people do not need loans. They do not need the kinds of services that make money for the banks. They just come in, get their money, and spend it. There is not much left over. There are no retirement savings programs or investment certificates.

Senator Di Nino: I understand the problem. The changes -- especially the technological ones -- that have taken place should make life a lot easier for this market segment. In other ways, however, they would create a different kind of problem. What is your thought on that?

If someone's welfare cheque or other kind of cheque is deposited into an account using a simple card with all the necessary precautions, would that not make life a lot easier for a large number of these people? They could go in and withdraw $50 or $20 if they wanted, or all $425, if that were the figure. They would never have to step into an actual financial institution. I understand that there is a segment that may not be able to do that, but would that not be at least a partial solution to the problem?

Mr. Davis: Yes. I think that all of us who have been involved in this exercise would encourage that kind of activity. Much of the focus of the training events in the Jane-Finch area and elsewhere has been on trying to encourage low-income people to be comfortable in that sort of an environment. We have also been trying to encourage the service providers, the government agencies, and others, to do direct deposits.

I do not think one should ever assume that low-income people are necessarily adverse to technology. Given a little encouragement, they are quite happy to use it, because it is very convenient not to stand in those lines.

Senator Di Nino: I was not here when you made your presentation in 1996. I would certainly look to someone from an organization such as yours to suggest to the MacKay task force that the low-income segment of the market could be served through the technology that has been developed in the last few years. That technology, I might add, is quite user-friendly. I am not trying to put words in your mouth, but I would have hoped that that would have been a suggestion as to how a large number -- if not the largest number of the segment -- could be served.

Mr. Davis: I have read this whole report, and I have a feeling that there is something in the MacKay report that encourages that. I would have to hunt for it, but I do not think it is missing.

The Chairman: There is one recommendation that suggests that the federal government -- and government in general -- should be encouraged to put all of its deposits directly into bank accounts.

Senator Di Nino: It does not specifically say that an effort should be made to educate the low-income community that has difficulty going to financial institutions, or to make information available to them. That would solve the problem of a very large number of people. I was wondering if that is something that we should put on the record, and that we might possibly look at ourselves.

The Chairman: That is a good point, and it is not in the report.

Mr. Davis: If it is not there, we would certainly be happy to see some encouragement given. And that is part of the reason behind these training events.

Senator Di Nino: I just want to know if you thought that that was a good position for us to take as a committee in trying to solve that problem.

Mr. Davis: I know Option consommateurs did not get to your Montreal hearings. They are a lot closer to the ground on this than the our group is, but I reiterate that there will always be those folk who, for their own reasons, do not want a bank account.

Senator Di Nino: This way you have the best of both worlds. Frankly, it would also be a lot less expensive, because it is less costly to use the machines than it is to use the actual bricks and mortar.

If you agree with that, it is something that we could include in our recommendation.

Mr. Davis: I would be quite happy if you were to put that suggestion in.

The Chairman: Mr. Davis, I thank you for assisting our committee today.

The committee adjourned.