Proceedings of the Standing Senate Committee on
Banking, Trade and
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
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
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
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
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
Next, there are three recommendations -- 12, 18 and 13 -- that would level the
Canadian playing field, removing barriers and increasing competition within
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
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
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
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
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.
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"
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
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
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
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
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
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
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
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
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
Senator Oliver: What do you think is the source of these strong and persistent
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Kroft: For your internal purposes, what is your definition of small
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
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
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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
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
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 --
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.