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

Issue 38 - Evidence - Morning sitting


TORONTO, Wednesday, November 4, 1998

The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 a.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).

Senator Michael Kirby (Chairman) in the Chair.

[English]

The Chairman: Senators, our first witnesses this morning are from the Mutual Group, Mutual Life Insurance Company, specifically Mr. Bob Astley, who is the CEO.

I am delighted to have you here, sir. You have appeared before the committee many times in the past. I see that you have given us an opening statement. Will you please proceed with your opening statement, and then we will be delighted to ask you questions.

Mr. Robert Astley, President and Chief Executive Officer, Mutual Life of Canada: It is a real pleasure to be here this morning. With me today is Frank Bomben, manager of government relations at Mutual.

I will make an opening statement that will précis our submission and may help to focus the discussion and generate some questions.

I will start by noting that Mutual supported the creation of this task force as an effective means to scope out the framework for the future of the Canadian financial services sector. We have indeed participated in the consultation process, submitted briefs to the MacKay task force, and met privately on a couple of occasions.

In general, Mutual supports the focus of the report, and we endorse the four themes around which the 124 recommendations are grouped. Today I will speak briefly about a number of issues in two categories covered in these recommendations.

First, I will comment on five recommendations that we believe should be acted on immediately, and in the second category, I will comment on two specific areas that require further examination and consultation. So let me move on to touch briefly on those five issues that, in the view of the Mutual Group, call for immediate action.

The first is demutualization. We noted with great pleasure that the MacKay task force enthusiastically endorsed the demutualization of the four large Canadian mutual companies; that is, the conversion to stock company status.

Mutual was the first of the four large mutuals to announce its intention to seek policyholder approval for this historic step, and we are ready to proceed with a process that will unlock the ownership value in the company for some 900,000 Canadians.

I should mention that, somewhat unique to Mutual, 99 per cent of the eligible policyholders are Canadian residents, and the balance purchased their participating insurance at a time when they were in Canada, but may have since moved outside of the country.

Mutual Group and the three other large mutuals have worked cooperatively with the federal government to help create a functioning framework, and as you know, draft regulations were issued in August. Since then, Mutual has consulted widely with policyholders to educate them about the demutualization process and to address many concerns.

We have responded to letters and have used toll-free telephone lines. We established an interactive web site and conducted 12 policyholder meetings across the country over a two-week period. We also commissioned Angus Reid to do both qualitative and quantitative policyholder research. The highlights of that research are attached to our submission, and we have provided detailed copies to OSFI.

We believe it is urgent that the government release the final regulations and make the minor legislative amendments that are required to facilitate this process. This can and should be done before the end of 1998.

Moving on to the second issue in this first category of those recommendations that call for immediate action, and that is the question of ownership regimes. In general, we support the new ownership regime proposed for financial institutions, including the relaxation of the 10 per cent rule for widely held companies to the 20 per cent permissive rule and a common regime for all financial institutions based on size of equity.

We agree that demutualized insurers need to be free from both takeover bids and amalgamation overtures during a short, three-year transition period. That recommendation from MacKay was broadly consistent with the draft regulations released in August. However, there is one important nuance in the recommendations with which we disagree, and that is the recommendation from MacKay to allow voluntary amalgamation transactions during this transition period.

In practice, we believe that amalgamation overtures can be as coercive as hostile takeover bids. Demutualized companies need to be free for a short period from having to defend themselves, and we believe the proposed three years is appropriate.

The third topic relates to capital taxes on financial institutions. We strongly endorse the recommendation that capital taxes on financial institutions be eliminated. Financial institutions account for 20 per cent of federal income and capital taxes, but for less than 6 per cent of total corporate profits.

As one little anecdote, Confederation Life, when it was in difficulty, indeed after it had gone into receivership, continued to pay capital taxes. That is an indication of how silly capital taxes can be for a company that is not earning a decent profit.

We believe that the current capital tax system increases the cost of products and services for consumers, and equally importantly, creates disincentives for companies to retain capital and increases the cost of raising new capital.

The fourth item I will speak to in this category is access to the Canadian Payments System, and I will be quite brief here.

We strongly endorse the recommendation to allow insurers to become members of the Canadian Payments System. This facility has been in the law since 1992, but the practical effect has been that insurers have been prevented from gaining full access by a variety of measures outside the framework of the Insurance Companies Act. We believe that it is important for all financial institutions to have access to the payments system in order to meet the growing needs of customers, particularly as electronic commerce becomes more and more prevalent.

Finally, Mr. Chairman, under this category of issues calling for early action, is that of consumer insurance plans.

We agree that CDIC and CompCorp should be put on an equal footing, because the current government guarantee provides customers of deposit-taking institutions with greater comfort and confidence. We urge the government to consider moving early on the two proposed models, and variations thereof, with the goal of choosing the most effective method.

Mr. Chairman, I will touch briefly on two other issues that we believe require further discussions or consultations before action is contemplated. The first of those is bank retailing of insurance.

The task force's recommendation to expand retail insurance powers and allow use of customer information files is premature. It will take some time for the positive impact of the proposed changes to CDIC and the payments system to be felt, and to provide some levelling of the playing field. Indeed, those are two of the considerable competitive inequities between insurers and deposit-takers, not to mention the sheer size and market concentration of the large deposit-taking institutions, particularly the banks.

We strongly support the recommendation in MacKay that regimes for prohibition of coercive tied selling, preservation of privacy of information, and licensing of intermediaries, should be required before any changes to the current framework are contemplated.

Finally, on the broad theme of empowering consumers, we support the need for enhanced customer knowledge of financial services products and transactions, and for best practices with respect to disclosure, corporate citizenship, and accountability. However, we do not support further regulation and compliance measures to legislate behaviour in this area. The ones proposed are onerous, costly, and do not, I believe, serve the public interest.

Financial institutions guard their reputations with consumers very carefully, and in our opinion, self-regulation and collaboration with consumer groups is the best way to ensure compliance, preserve competition, and encourage innovation in the marketplace.

Mr. Chairman, I will conclude with the comment that Mutual is pleased with the focus of the MacKay report. It provides an excellent reference point and guide for the important public policy debate in which we are engaged. Canadians expect and desire a financial services sector that is competitive, innovative, secure, and responsive to their needs. We believe that the task force's recommendations are worthy of discussion, and of early action in the cases that I mentioned.

The Chairman: Thank you, Mr. Astley. I want to ask you one question that you have heard me ask before.

On the bottom of page 3 of your report, you state the industry's historical, classic position after the collapse of Confederation Life. This was not the industry's position a month before that collapse, but it is a statement that says that because CompCorp does not have access to government funds, there are, in your words, "competitive inequities." In fact, you go on to speak of "considerable competitive advantage in the marketplace" for deposit-taking institutions.

Ever since the industry started making those kinds of statements, I have been asking for proof. The responses I have received do not constitute proof, and I will describe them to you so we can take that issue off the table.

The CLHIA was kind enough to send me a survey that focused on one question that essentially asked people, "If you had an opportunity to buy a product guaranteed by the federal government or by a life insurance company, which would you buy"? Given the size of the federal government, if you offered people a choice between buying a refrigerator guaranteed by Maytag or one guaranteed by the federal government, they would probably choose the federal government in that instance too.

That people prefer one plan over another says nothing about competitive advantage. Competitive advantage implies that customers are choosing one product over another on the basis of this competitive difference. Every time I have asked for proof of that, I have not received any, and indeed, all the evidence I have seen points the other way.

You will recall that when Confederation Life collapsed in August of 1994 amid dire predictions of what was going to happen next, the industry switched from hating government involvement to seeking it. It was an amazing change in the space of three months. Nevertheless, at the beginning of 1995, the insurance industry had exactly the same market share of RRSPs, GICs and other such products, as they did before the collapse.

I understand that the industry would like to gain access to the funds. That is a request. I do not understand the argument that there is really a competitive advantage, and I assume that that implies there is some proof. Do you have it? I promise I will not raise this with any other members of your industry, because I have done so with everybody, and did not get an answer. How do you defend your statement?

Mr. Astley: It is difficult to make a direct, causal link between consumer behaviour and a specific aspect of the product and services environment. However, it is our strong belief that, based on consumer attitudes, and the "halo effect" of CDIC coverage on banking, that there is a tendency on the part of consumers to gravitate towards those institutions, particularly for those who are risk averse and looking for absolute certainty.

Now, can I prove that by saying consumer "A" purchased a CDIC-insured product rather than an annuity product with somewhat similar characteristics? We do not have evidence that this is happening in "X" per cent of cases.

We do know of instances where corporate plan sponsors have specifically chosen to award group RRSP business to bank-related institutions and bank-related plans with CDIC insurance, rather than to broadly equivalent plans from insurance companies. There are a handful of those cases.

The Chairman: Are you suggesting that in those cases, the decision was made purely on the basis of the CDIC insurance?

Mr. Astley: Some of our member companies have been given that as the sole reason for choosing a plan sponsored by a financial institution with access to CDIC for its guaranteed-term investments.

The Chairman: I think the answer is that the industry has a concern, but it is hard to prove. I will just make one other comment.

Of course, your proposal creates another, totally different, set of inequities, as I am sure you understand. It brings many other products, because they are sold by the insurance industry, under a government insurance plan. We will then receive requests from other parts of the financial services sector to also be included under government insurance, on the grounds that we have now created a new class of insured products sold by insurance companies that cannot be offered by others.

It may solve your problem, but I think it creates another, bigger problem. In any event, I think we ought to understand it.

Mr. Astley: May I make one additional comment, Mr. Chairman? You mentioned the "sea change" in attitudes that occurred at the time of the Confederation Life failure in August of 1994.

The Chairman: A sea change in industry opinion, not necessarily among consumers.

Mr. Astley: You are quite right. Going back in history, CompCorp was put in place in 1989, a relatively few short years prior to the failure of Confederation, and it was not then anticipated that there would be a call on the fund. There had been no insurance company failures in the history of the industry, and economic conditions at the time were quite good.

As you know, we headed into the worst real estate slump in the country`s history in the early 1990s, and that was a major contributor to the failure of Confederation Life and two other small insurance companies.

We in the industry observed that because CompCorp had no access to the consolidated revenue fund and there was no government involvement, the federal government had less interest in working out a solution to the failure of Confederation Life. That was indeed an important part of the change in thinking, as were consumer perceptions.

The Chairman: Thank you.

Senator Austin: Mr Astley, would you support, and do you believe that the insurance industry would support, product-specific rather than institutionally based insurance. Would that make any difference to your view of the CompCorp-CDIC equation in the MacKay report?

Mr. Astley: In one sense, both CDIC and CompCorp coverage are already product-specific, in that only deposits with certain characteristics and up to certain limits are covered. In the case of CompCorp, annuities, life insurance, and disability payments within certain parameters are covered up to certain limits.

In that sense, there is already some product redefinition. However, it is institutions that fail, and not product segments, so there is a need for one institution to be the primary organizer of either CDIC or CompCorp coverage.

For example, we could consider a system whereby only guaranteed-term annuities broadly similar to GICs would be covered, but not life insurance or disability insurance payments. However, it would be difficult, in the event of a failure, to arrange access to the consolidated revenue fund for that portion of the business only. It would raise some serious issues, because it is the institution as a whole that gets into difficulties.

Senator Meighen: I want to ask a question or two about demutualization.

Where are you at with demutualization? Since draft regulations have been issued, do you know if there is any impediment to going ahead in 1998, which you say is important?

Mr. Astley: That is my understanding. Conversations among the industry and the Department of Finance and OSFI officials indicated that there were a few minor technical changes needed in the regulations. Those have been proposed and discussed, and I believe essentially accepted by the Department of Finance. There are no substantive policy issues that I am aware of to hold this up.

I think that in five years, when we look back at the history of financial services in Canada compared to other regimes, we will say that demutualization in Canada is the best in the world, based on the current set of regulations.

It offers a very high level of consumer protection. It avoids any of the criticisms of improper dealing raised in other countries, and I am sure that Canada will be proud of the work of the four insurance companies under the regime put in place by the federal government. From my point of view, there are no substantive issues to cause further delays in moving ahead through the normal legislative and regulatory process.

Senator Meighen: Is there not though the possibility of a roadblock being placed in the way of demutualization by somebody outside our control? I understand the Michigan regulator has raised some concerns about the process. Do you know if those concerns have been satisfied?

Mr. Astley: I know that there have been quite frequent discussions among the Department of Finance and OSFI and Michigan. I believe those issues are capable of, and are indeed nearing, resolution. Based on the information I have, I expect that the Michigan concerns will be resolved in the very near future.

Senator Meighen: Until they are resolved, is it practical to go ahead with demutualization?

Mr. Astley: Mutual Life of Canada is in a somewhat unique position. As I mentioned earlier, all our eligible policyholders are or were Canadian residents and their coverage was purchased under Canadian law. All of our U.S. business is carried out by subsidiaries, so in our case, that kind of dispute would not be a factor.

However, I know there is a desire to have a comprehensive set of regulations that will apply to all, and I believe it is very important to resolve the issues that Michigan has raised. I have seen the letter from the Michigan commissioner, and he was raising preliminary issues, not making a definitive statement. I believe that those issues will be dealt with in a way that is quite satisfactory both to Michigan and to Canadian officials.

Senator Meighen: Assuming that demutualization is completed by the end of this year, you have stated that your company is in favour of that three-year transition period during which there should be no friendly or unfriendly takeovers permitted.

You said that friendly takeovers can sometimes be as coercive as unfriendly ones.Will you expand on that, and also touch on the fact that Manulife`s position, I think, is slightly different from yours, in that they have said yes to friendly takeovers but no to unfriendly ones during the three-year period.

Finally, do not your policyholders get the short end of the stick, in that presumably a takeover provides for a higher price for the shares of the policyholders, or the shareholders, as they will become?

Mr. Astley: Please remind me if I do not cover all those aspects.

I have argued that the three-year period should prohibit both friendly and unfriendly takeover offers, and "friendly transactions," because a supposedly friendly transaction can put the directors in a very difficult position. Even though transactions would have to be friendly in theory, a proposal to make a public offer for all shares at "X" premium could be put in front of the directors privately. Depending on the state of the markets at that time, and whether or not there was recognition of the potential value of the company as it was moving to establish itself, the directors could be put in an extremely difficult position. They would be consulting all the best lawyers to find out what their personal liability was in that circumstance.

I think that the distinction between friendly and unfriendly is not borne out in practice, and that is why we hold the view I expressed. From the beginning, we at Mutual have said we do not believe that the policyholders, who would become the shareholders, should be denied the opportunity for enhanced value of their shares through performance, alliances, or indeed takeover offers, in the fullness of time.

In our view, three years is a reasonable period of time for the shares to reach full value, and for the company to get on its feet. That is why we have said, right from day one, that we believe that in the longer term, a converted mutual company should not be exempt from the normal rules of the market. As a management team, it is our obligation to create value for our new shareholders.

MacKay has essentially said that three years is the transition period. After that, the normal rules should apply to all financial institutions.

Senator Meighen: I have a question then on the payments system access, which you obviously strongly favour. How do you see it working out between different institutions?

For example, once you are in the payments system, will you be on exactly the same footing as everybody else, or do you see banks, for example, guaranteeing other banks and insurance companies guaranteeing other insurance companies?

Mr. Astley: In the first place, participants in the payments system must meet tests of soundness and prudential regulation. I believe both John Palmer from OSFI and Mackay have made that point. All insurance companies and banks are regulated by OSFI, and I think that is one safeguard for the security of the system.

If an insurance company is a participant in the payments system, as electronic transactions are being cleared, its obligations are commensurate with all its other obligations to policyholders and to debtors and so on.

These are some of the mechanisms to ensure that our financial institutions are well supervised and well regulated. I do not believe that principles of safety and soundness would require insurance companies to specifically guarantee all other insurance companies. It would be on an institution-by-institution basis in order to ensure that the payments system was not at undue risk.

Senator Tkachuk: Before I ask questions on bank retailing of insurance, I just want to point out that of the 131 life insurance companies operating in Canada, 45 are Canadian and 86 are foreign. The Canadian companies have $208 billion in assets, and the foreign companies, $24 billion.

We have already experienced a tirade from a bank chairman to the effect that I am, or other members of this committee are, supportive of U.S. companies over our Canadian banks. Bearing that in mind, I have had concerns about the selling of insurance through the banks. That is not because it creates competition for the insurance companies, who can look after themselves, but because of the issue of the privacy of information that banks have on customers. Also, I believe banks have a competitive advantage in casualty and life insurance products over your business.

Yesterday, the chairman of the Canadian Imperial Bank of Commerce said that life insurance companies are going to enter the banking business. He left the impression that this is going to be a positive, significant change, in that there are going to be all kinds of people in the banking business, and his bank will be just one of many.

From what you know of the industry, do you think your company will be in what would normally be considered core banking, taking deposits and making loans?

Mr. Astley: I do not expect that Mutual Life of Canada will be competing head on with the Canadian chartered banks in the core banking functions of chequing accounts, deposits, money transfers, and lending on the basis of funds flowing in and out of commercial accounts.

In business terms, I think that would be quite foolish, because the Canadian banks have a very, very strong position, and I do not believe that we could supplant them by going head-to-head.

However, all of the players in the financial services sector compete in what is broadly called "the wealth management business." Thus my company is involved in selling mutual funds, retirement annuities, and all forms of RRSPs, and we have a trust company subsidiary that sells guaranteed investment certificates.

We are already in the business of wealth accumulation for retirement or other purposes, and we see that as a growth opportunity. As far as access to the payments system is concerned, we want to be able to provide some of the services around wealth accumulation that customers may increasingly call for. In an age of electronic commerce and transfer of funds, all those activities are increasingly relevant to consumers.

It will probably soon be possible to disburse all health and dental claims payments electronically, directly to individuals or to their banks. We may be able to set up accounts within the insurance company on which customers will be able to draw, or from which they will divert premiums for other insurance contracts and so on.

That was a long answer, but I do not expect that we will go head-to-head in the core banking business of taking chequing deposits. As an insurance company, we are not allowed to take deposits, but we do want to be in the wealth management business.

Senator Tkachuk: The wealth management business was never a traditional banking activity. They got into it because of the competition for cash. They wanted deposits. Other people were selling RRSPs, and then they got into it.

I am concerned about the people who go to banks for their business loans, and have to supply all their personal financial information just to transact ordinary, let alone extraordinary, banking business.

Will there be other new entrants to the market in your industry? I know you cannot speak for all other companies, but are others thinking about it? Is the purpose of demutualization to form alliances with other financial institutions that may be in the business?

Mr. Astley: Creating alliances that might be cemented by cross-ownership would be one option available to any converted mutual company.

Looking at some of the existing players in the market today, I will mention ING, which is headquartered in the Netherlands, and in Canada has both a bank, ING Direct, and insurance companies selling property, casualty and life. I do not know what their strategic plans are, but based on their other worldwide experience, they may indeed see opportunities to sell more products to consumers.

Coming back to your original point, the banks' key advantage is the wealth of information they possess on individual clients. That information was given for certain purposes, including the granting of credit, or indeed was just acquired from the flow of funds in and out of accounts or credit cards. That flow of information gives the banks a huge competitive advantage over other providers.

Senator Tkachuk: Do you think that laws prohibiting tied and coercive selling are feasible and enforceable? We already have many laws we cannot enforce because offences take place in homes or other private places. If we had such a law, how would offenders be caught?

Mr. Astley: The point is a very real one, that behaviour at the grassroots level in one-on-one transactions is difficult to regulate.

I have argued in the past that it really requires practitioners who work with customers and their representatives in the field every day to deal with some of these issues, rather than dealing with them in theory.

There is a need for commitments from all of the institutions, and for effective redress when tied selling does take place. We also need to make an effort to educate consumers about their rights and options if coercion is attempted.

I agree that it is not easy to legislate behaviour in one-on-one transactions.

Senator Tkachuk: It is also subjective, is it not? I cannot speak for others, but my view is that this is a psychological and emotional issue. It is not easy for people to ask for a loan, especially when they need it badly and are not sure they are going to get it. The bank has tremendous power over the person to whom it is extending credit.

Therefore, the person granting the loan does not have to say anything. A piece of paper is put in front of you and it is pointed out that you do not have insurance on your mortgage. You are asked if you would like to insure it, and when you say yes, you are asked to sign the piece of paper. I think we all know that that happens, and I think the same thing will happen with casualty.

I do not know how you can prevent that, but if you or others can come up with an idea, I would be happy to hear it. I have no more questions.

Senator Austin: I was very interested in your answer to Senator Tkachuk about your vision for the future of the life insurance industry. The MacKay report's vision is much more expansive than the picture you gave us this morning. On page 57, the report foresees the non-bank financial institutions becoming much more competitive with the banks across a range of financial services, and its aspirations are at their highest when it comes to life insurance companies. I am quoting:

The Task Force believes that life insurance companies can become very significant forces in the Canadian financial services sector, operating in more product lines and offering much greater competition to deposit-takers, including banks, than they have in the past. Over time, some insurers are likely to become leaders of major financial services conglomerates, as has been the experience in other industries.

They then go on to say:

Public policy should ensure that there are no unnecessary barriers blocking life insurance companies from full participation in a broad range of financial services.

It is on the basis of that expectation that it recommends access to the payments system, demutualization, and the merging of the functions of CDIC and CompCorp.

What do you think are the challenges to your industry becoming full-service financial product suppliers? Is it the bank branch networks? How can electronic banking improve your competitiveness, for example? I would like you to tell us whether this dream of competition from your sector is realistic and what your challenges are in making it happen.

Mr. Astley: Indeed. My first point, senator, is that my company, as one important example within the Canadian life insurance sector, is already competing with the banks on a number of fronts. In particular, in the very important area of wealth management, we have a significant mutual fund operation.

We hold very significant savings and retirement funds that have been built up in annuities. We have tracked our share of the total Canadian wealth management market over the past several years, and at around 2 per cent, it has been meaningful. That is out of all the different players in that modestly growing sector.

Our biggest challenge is to ensure that we understand and respond to consumer needs in a very rapidly changing sector. Mutual Life of Canada has been successful, and is the second largest insurer in the Canadian market. As I stated, we have had a significant and modestly growing share of the total wealth management market in Canada.

We are asking for a regime that will allow us to continue to serve consumers in that way, and to provide them with other valuable services that they may require. Depending on the evolution of the financial services sector, there are many different routes that we could follow, but we do want to continue to be a significant player.

Does that mean that we will grow larger and outshine some of the big banks? I do not know, but I think that is a very tall order. Will we be an effective competitor? Absolutely. We have been in the past and we will continue to be in the future.

We are not asking for special protection, but we are asking for the elimination of some of these competitive inequities that have built up over the years. Then we are prepared to compete head-to-head, within our framework and with our historic strengths, for the favour of Canadian consumers.

Senator Austin: Do you see yourself as credit and debit card issuers, and as players in the electronic banking system?

Mr. Astley: That is conceivable. I do not say that the day after the payments system issues are resolved, we would immediately launch into whole scale assaults on some of those sectors. However, we would indeed be looking at different parts of our business where we could take advantage of some of the available electronic commerce opportunities that we believe would be valuable to consumers.

We are not sure that Canadian consumers need another credit card choice, and we would have to do a great deal of research to ensure that would be worthwhile, but there are other areas where we would indeed want to provide our customers with options.

Senator Austin: I was thinking more of Interac, where if the system were fully functional, your clients could make their annuity payments and receive their benefits. They could use money market facilities in a fully electronic way, and you would be operating in a quite analogous fashion to bank deposit functions.

Mr. Astley: Indeed, and you raise a very important option, that is, within the entire family of mutual funds that a customer may own, those funds would be available, and unit values determined, on a daily basis, and immediate access would be provided.

Mutual Life of Canada customers have about $4 billion in mutual funds. Currently, those funds have to be transferred to a bank account, and then the customer must write a cheque and calculate when the funds will be credited to that account. Electronic access would allow the customer to use those funds to make a payment on a credit card balance, a down payment on a home, or another investment deposit. That is a very fruitful field for providing more convenience and choice to consumers.

Senator Austin: I think that is more a question of the playing field than CDIC-CompCorp. Would you like to see the government adopt the migration up or the migration down option?

Mr. Astley: There are advantages to both, and indeed there may be variations that will maintain the essential themes of putting the two on an equal footing and providing access to the consolidated revenue fund in a way that would facilitate industry evolution.

We are urging that those options and variations be subjected to early study by representatives of the insurance industry, the banking sector, and the government, to decide the way forward.

We do not want to see a three- to five-year time lag before some of the issues are brought to fruition, but rather something in the order of 12 to 15 or 18 months. These are complicated issues needing detailed study.

Senator Austin: I am curious to know why the MacKay report did not reflect upon the interesting topic of whether the large banks should be allowed to acquire the large life insurance institutions. However, that is not for you to answer.

One vision of competition holds that the banks should not be allowed to acquire widely held, demutualized insurance companies, in order to preserve competition and discourage horizontal consolidation of the various pillars of the financial services industry. The public policy rationale depends on whether or not the life insurance industry really is an effective competitor with the banks.

What are your views on the banks acquiring life insurance companies?

Mr. Astley: I return to the two key notions that I believe are important in any of these debates.

One is the maintenance of a strong level of competition throughout the financial services sector, and the other is that customers are offered a full range of choice of different models.

MacKay did discuss the experiences of other countries where there have been alliances between banks and insurers. Indeed, I believe one of the senators said -- perhaps it was you, Senator Austin -- that he foresaw insurance companies heading large financial conglomerates.

From my perspective, given those two frameworks of competition and consumer choice, no attempt should be made within the overall structure to keep the players completely separate.

In fact, the banks already have the power to buy insurance companies, and the insurers to buy mutual fund companies and banks, if it is within their means. Some banks are a little large for Mutual Life of Canada to contemplate acquiring, but nevertheless, as I mentioned earlier, we do have a trust company in our family of companies. We have made use of that over the years, and I believe there should be the possibility of different forms of alliances down the road.

Senator Austin: You may not have the capacity to buy a large company, but a large bank has the capacity to buy you, and that is the public policy question. I know it is difficult to answer. Thank you.

Senator Kelleher: On the last page of your presentation, under the heading "Empowering Consumers," you state:

We do not subscribe to the view in the Report that would propose increased regulation and compliance in this area. Such procedures would be too onerous for both consumers and the companies, would add to administrative costs, and would not be conducive to a market place, which is being driven by rapid competition and innovation.

Even if I agree with that statement, and certainly I am against over-governance, obviously the MacKay committee felt that something was needed to protect the public here or they would not have recommended it.

Since the MacKay committee is suggesting we do it their way, as the head of a large corporation in the industry, what are you proposing as an alternative plan?

It is one thing to be critical of the MacKay report in that respect, but what do you propose to alleviate their concern that more protection is needed?

Mr. Astley: First of all, I would mention that the insurance industry is different in a very significant way from the banking industry. A significant portion of our activities are regulated at the provincial level, whereas banking activities are not.

I make that point because the possibility of duplicate regulation and over-regulation is significantly stronger for the insurance organizations than it would be for the federal banking institutions. However, I would like to stress, senator, that I, as well as my colleagues in the insurance industry, are by no means opposed to voluntary measures, codes of conduct guidelines and, indeed, where necessary, legislation to deal with important areas of consumer concerns.

For example, there have been requirements in the provincial law for years about training and licensing of intermediaries, which we fully support and which, in concert with provincial regulators, we continue to hone. There are insurance councils and various supervisory bodies.

My fear was that, if legislation and regulation were put into place in all of these areas, it would rapidly be out of date, burdensome and overly onerous. The insurance companies, and I believe the banks as well, have taken very significant steps towards self-regulation. We put in codes of conduct around privacy. There are a number of guidelines that are a condition of membership within CLHIA, where companies are expected to comply with those guidelines in terms of good consumer behaviour.

As a broad theme, my sense is that regulation and legislation should be reserved for those areas where it is demonstrably necessary to protect the public interest and where industry self-regulation is not working. That is the broad perspective I would bring.

We live and die by consumer confidence, therefore, my company wants to ensure that it, as well as our competitors, live up to the expectations of consumers. We believe we can do that best within a balanced regime of regulation and legislation where necessary, but self-regulation in the main.

Senator Kelleher: As a result of this proposal in the MacKay report, which obviously is the result of a feeling that there is inadequate protection, has your industry put forward any set of proposals, in addition to what exists now, for self-regulation and protection of the consumer?

Mr. Astley: In the area of privacy, for example, back in the early 1980s, we were the first industry in Canada to adopt voluntary privacy guidelines.

Senator Kelleher: I understand that, but in response to the MacKay report, where obviously they feel it is inadequate, have you or your industry put forward proposals to allay this concern?

Mr. Astley: In the last six weeks, I would say, no, we have not put forward those proposals. However, I would mention one instance, which was part of the evolution. It occurred around the beginning of September after being announced last May or June. The Consumer Information Centre, which CLHIA has operated for 25 years as a toll-free service for consumers, was renamed the Consumer Assistance Centre. It was also expanded by the addition of an ombudsman service to assist consumers to resolve issues that they might not have been able to resolve with insurance companies.

That is one example of a voluntary initiative that we believe was an evolutionary response to consumer needs for assistance in complex and difficult areas.

Senator Kelleher: One final question, Mr. Chairman.

I refer to page 8 of your report, under the heading "Ownership Regimes." I would have thought that under this heading you might have addressed the recommendation of the committee with respect to the expanded use of holding companies. Do you have any comments with respect to that particular recommendation in the MacKay report?

Mr. Astley: Yes, I do have a comment, senator. We chose not to focus on that particular aspect in our submission, because we wanted to highlight the areas we believed were extremely important.

We support the proposals to allow financial holding companies. We see this as somewhat of an evolutionary process. There are financial holding companies in most other jurisdictions around the world and we believe that they have proven to work. In existence today, there are some holding companies for insurance companies and trust companies that go back many years and they have worked satisfactorily.

In broad terms, we would support that recommendation. We chose not to highlight it in our comments.

Senator Kroft: I would like to go to the big picture and continue where Senator Austin was going.

In looking at page 35 of the MacKay report, I remind you of a couple of sentences:

Allowing life insurance companies and money market mutual funds to offer payment services will create new and powerful competition for banks and other deposit-taking institutions.

And:

...eventually distribution channels and financial institutions will change so significantly and become so integrally intertwined$ What we now describe as banks, trust companies, credit unions, insurance companies, mutual fund companies and security dealers may well be unrecognizable within the coming decade.

Yesterday, Mr. Flood from the Bank of Commerce quite passionately said he hopes the word "bank" disappears from the vocabulary and that, in the future, we talk about financial institutions.

My preoccupation in what we are about is not to necessarily see that the public has another mutual fund to purchase. As I look at the list of mutual funds available in the financial pages, I do not think that is the short commodity.

My preoccupation is that core banking is the availability of credit to individuals in businesses, in particular, small and medium-sized businesses. In many ways that is, and, to the extent that it is not, should be the main thrust of the MacKay report.

Like Senator Austin, I think there is a cumulative package here that the suggestions made are not just random suggestions. They are, in fact, preconditions to putting insurance companies and other institutions in a position where they can provide real competition. That is the background.

However, when I listen to you, I do not hear a glimmer of possibility that you foresee, in any way, bringing an element of competition to the process of core banking, in other words, participating in the broadening of credit available to consumers, whether they be individuals or, more importantly, small businesses.

You like the opportunity of broadening into money management. I do not see that as a goal of the MacKay report, that is, using the insurance industry to bring something to the expanded credit offerings of the country. Is that an unfair analysis?

Mr. Astley: Perhaps what I should do, senator, is describe briefly the kinds of investing and lending activities that my company is involved in. It could be a place to start in responding to your question about lending to small businesses.

Senator Kroft: And those not so small.

Mr. Astley: The lending that Mutual Life of Canada believes it can do effectively while generating value includes a wide range of activities. We are investors in single family mortgages. My company has a significant share of the house construction financing business in Toronto, Calgary and Vancouver in direct competition with the banks where we are financing home builders.

We provide credit to a large range of leasing companies, which lease equipment to small businesses. We provide commercial mortgage financing to landlords who house small and medium-sized businesses as well as large businesses.

I will be very blunt, in the very specific area of lending for operating funds, we do not believe we could compete effectively with the chartered banks because we do not have access to the day-to-day flows of funds.

Some of my current banking colleagues, as well as my former banking colleagues, talk about small business lending and the practice of reviewing the cash flow every day as an indication of how a loan should be managed. I know that is a field in which Mutual would not be effective. Therefore, I cannot turn to you and say that one particular aspect of lending to small and medium-sized businesses is an area that we would be active in.

We do lend and provide funds to businesses in many different ways, but not in the day-to-day operating lines of credit for inventory and receivables and those kinds of flows. Indeed, there is not a strong possibility that Mutual would be a competitor in that area.

Senator Kroft: Thank you. That was my only question.

The Chairman: Mr. Astley, I should like to ask you one last question. I am not quite clear on exactly what you are trying to say in your statement. When you say:

...the Task Force's recommendations to expand bank retail insurance powers and allow use of customer files seems premature. We believe the federal government should further examine the impact of such a decision and gain a better understanding of the competitive inequities that still exist through discussion and dialogue with both insurers and deposit-taking institutions.

Having read that several times, I can come up with three possible interpretations, and I would like you to tell me which one is correct.

The first interpretation is that the industry has had a genuine change of heart on this subject in relation to the very adamant opposition it has historically had on that question.

The second possible interpretation is that the industry thinks that the MacKay report contains a number of things that it likes and that it believes a trade-off has to be made. Therefore, it has to give something in order to get something. The trade-off you are prepared to give is the retailing of insurance by banks.

The third possible interpretation, by talking about being premature, further dialogue and so on, is essentially a stall technique designed to get all of the things you want out of the MacKay report and then to find that, the further discussion and dialogue lead absolutely nowhere, you do not have to give up on the retailing of insurance.

Which one is a correct interpretation of what you were trying to tell us?

Mr. Astley: The first one was a change of heart?

The Chairman: Right. The second one is a straight political trade. To get the things you want, you are prepared to give up something. The third one is what I would call a stall technique, which is designed to get the things you want and then embark on opposition on this one.

Mr. Astley: Mr. Chairman, not to be too obtuse, but I would say that there is a fourth one, which is none of the above.

The Chairman: I am happy to have you explain exactly what you were saying. You see, it cannot be coincidental that an industry that has been adamantly opposed to the retailing of insurance suddenly has changed its mind. My question is why? The only thing I can see is that you think that you are going to have to change your mind in order to get the positive things that you want out of this.

By the way, I understand trade-offs and I am not opposed to that. I am just trying to understand if that is what you think you are doing.

Mr. Astley: I will speak for my company. It was a very conscious decision not to make the bank retailing of insurance a single issue. We did not want to come to this committee, or the House of Commons committee, and say that the issues concerning bank retailing of insurance are the only things that matter in the MacKay report. There are some serious consumer issues as well as competitive balance issues.

If you characterize the position of my company and others in the insurance industry as pathologically opposed in the past, that was when a single issue was presented, given the state of competition at that particular time and the evolution of where consumer markets were.

What I have said is that those issues concerning coercive tied selling, the privacy of consumer information, competency and licensing of intermediaries, are very real and important issues. I said that, before a decision could be made or a discussion could take place about whether or not to expand the retailing of insurance powers, those issues would need to be addressed.

However, it is important to recognize that bank subsidiaries have exactly the same powers to deal in insurance matters as my company does. The insurance subsidiaries of the banks can do exactly the same things that my company does. Therefore, we are not here opposing their involvement in the insurance sector. They have been given that right by Parliament, and we will deal with that competition as we deal with any other competition.

There was a conscious choice on my part in framing the comments and the recommendations not to make the bank retailing of insurance a single issue because we believe that the whole MacKay report includes a much more comprehensive set of issues. Having said that, we do not regard these as trade-offs, one for the other. We believe those issues deserve to be dealt with in the way that I have mentioned.

The Chairman: I think I understand what you said, that the MacKay report is a comprehensive series of proposals; that it is a package; that you take some things in a package that you like, and some things that you are not so keen on, presuming that you can settle the consumer issues. As I heard Senator Meighen say as you got into your answer, it is a trade-off, which I do not have any problem with. I was trying to understand where we were.

Thank you very much for coming. We appreciate it.

The Chairman: Senators, our next witness is Mr. Dunbar Russel from the Canadian Association of Financial Institutions in Insurance, which I assume, Mr. Dunbar, is what all the rest of the world would call bank insurance companies. Is that correct?

Mr. Dunbar Russel, President and CEO, Toronto-Dominion Life Insurance Company, Chairman, Canadian Association of Financial Institutions in Insurance: That is part of our membership.

The Chairman: It is only part of your membership. I see. You might tell us just a couple of words about your organization, because as I recall, unlike most of the other witnesses that we have had, you have not actually testified before this committee in the past.

I understand you have a statement. It is fairly lengthy. I wonder if in order for us to be able to proceed with questions fairly quickly, you might hit the highlights. We are happy to take your statement as read in terms of our record, but it would be helpful, given time constraints, if we could proceed with the questions sooner rather than later.

Mr. Russel: With me today are my colleagues Mr. Bernard Dorval and Mr. Isaac Sananes. Thank you, Mr. Chairman and members of the committee for giving us this opportunity to provide you with our views on the MacKay task force's vision for the Canadian financial services sector.

Let me start off by talking a little bit about the Canadian Association of Financial Institutions in Insurance. CAFII was established last year to provide a voice for financial institutions involved in selling insurance through a variety of distribution methods. We represent a substantial amount of insurance business conducted in Canada today and we are growing. CAFII members include the largest provider of travel insurance and the two largest direct-response writers in the country. Several of our members are ranked in the top ten issuers of new life insurance products in Canada.

The Chairman: What is a "direct-response writer"? That is a term I have never heard.

Mr. Russel: An example of direct response would be when you get in the mail an offering for life insurance and you respond directly to the insurance company, no face-to-face contact, or you turn on your PC.

The Chairman: Would it include telephone solicitation?

Mr. Russel: Yes.

The Chairman: Thank you. I just did not understand exactly.

Mr. Russel: Our membership base is broad and includes retail representatives, cooperatives, like Desjardins, insurance subsidiaries of banks and trusts, and other organizations. Our members provide life, property and casualty, travel, credit, reinsurance and other products. We sell through call centres, agents and brokers, travel agents, deposit-taking branches for authorized products, direct mail, and the Internet.

We are the only insurance organization today whose members are involved in all lines of business. Our diversity enables us to take a broad view of the regulatory regime governing the insurance marketplace. We have a common desire to promote the greatest possible choice for consumers purchasing insurance. We create new jobs and serve new customers in Canada everyday. We have created nearly 2,000 jobs since 1993. CAFII represents the future of the insurance industry.

Our vision for the industry is focused on our customers. We want to offer them the greatest possible range of choices, multiple access to products and services, low costs and good value. Along with consumer choice and benefits, we believe that consumers deserve respect and information. Creating jobs for Canadians is a natural outcome of our growth and service to customers.

We applaud the task force's recommendation to allow consumers to buy insurance through branches of a deposit-taking institution and to receive information tailored to their needs. The consumer benefits driving this policy recommendation are threefold: lower distribution costs, enhanced service delivery, and improved access to insurance for more people.

Because of the growing market, the task force has discredited the notion that opening up the insurance competition in Canada would inevitably lead to massive job losses by brokers and others. International and Quebec experiences clearly demonstrate that a number of different distributors can exist side by side and continue to thrive. There has been little market disruption as a result of the European bancassurance activities.

A good example is Quebec. The task force observed there that insurance agents, brokers and companies continue to be strong competitors despite insurance retailing by deposit-taking institutions for the last decade. In fact, in the decade following the entry of the Caisses populaires Desjardins into property and casualty insurance, the number of licensed P and C insurance brokers in Quebec has remained relatively stable, declining by 216 licensed brokers. That is on a total sample of 5,000. At the same time, employment at the Caisses populaires Desjardins related to insurance has tripled to 1,625 positions.

Also of interest to our group is that the task force specifically supported the appropriate use of customer information for insurance marketing in recognition that this could be a great benefit in terms of customer convenience and reduced costs. It should also eliminate the waste, the expense and the annoyance factor of the current policy that requires marketing to a universe of customers rather than specific subsets. That results in promotional mailings to customers who could not possibly need or want the product being offered. For example, information on auto insurance ends up being sent to people who do not owns cars, and children receive mailings promoting retirement products.

CAFII understands that privacy is a very important issue for consumers. This is why all of our members have policies in place to ensure that customer information, like medical information that we receive in the selling of some insurance contracts, is treated with the utmost care. We support the goals and the spirit of the task force recommendations in this area and look forward to working with government officials as specific policies are developed.

With respect to coercive tied selling, I cannot emphasize strongly enough that CAFII members do not condone such practices and have developed policies to ensure that coercive tied selling does not happen. This is a serious matter and should be dealt with as such. However, it is critical to distinguish between cross-selling or product bundling, which can be beneficial to consumers, and coercive tied selling. The task force confirmed that the ability to purchase multiple products from one source should not be denied because of tied selling concerns.

We support the overall approach to protecting consumer information that is taken in the privacy bill now being considered by the House of Commons. We also support the tied selling provision of the Bank Act that recently took effect and feel that should be extended to other areas of the financial service industry.

The MacKay task force has done its work; now it is time for us to take action. Further delay is not justified, and it would put Canada further behind other world markets. This committee has the opportunity to end our patchwork approach to insurance retailing. Cherry-picking of recommendations should be strongly resisted. It is time for Canada to position itself in line with the rest of the world. It is time to give all Canadians more choices, better access to insurance and more competitive products for insurance.

Senator Kelleher: This may be hard to believe, Mr. Chairman, but I am at a bit of a loss for words after hearing this report. I never expected that somebody in this industry would come before us and say that it would be okay for banks to sell insurance at their branches. You have taken the wind out of my sails. I do not have any really nasty questions for you, but I should like to ask perhaps one.

This committee has had some trouble finding out exactly why the insurance companies are so adamantly against the banks selling insurance within their branches, and yet you have come along and told us that you do not see this as a problem. What, in your opinion, is the basis for such strong objections from the insurance industry to the banks selling insurance within their branches?

Mr. Russel: I will begin the answer, but my colleagues might add to it, because we are a tag-team and each of us has some views.

We cannot speak for the rest of the industry, but I know that there might be concern to have more competition in the marketplace. Our particular association and the businesses of our members are very market-focused and consumer-focused, which means that we are concerned about what consumers want.

We know from our research that they want choice. We know from good marketing that they want access. As an industry, we need to put our products in places where the consumers can trip over them. We especially want the middle and lower classes, which are the mass markets, to have an opportunity to purchase insurance, because Canadians are underinsured.

With better access, whether through direct marketing or branches, our members have an opportunity to be able to distribute products far more cost-effectively, which would enable them to pass on those benefits to consumers. When we talk about our mission as being one of pro-choice for consumers, that basically supports our argument. I think you would have to ask some of our competitors why they are so adamant about the consumer not having that.

Senator Kelleher: I understand that point. However, we seem to be having difficulty getting answers from the life insurance and P and C companies. We do not like to draw conclusions, although I think we have all drawn some conclusions. Therefore, we should like to hear from you, if you do not mind telling us, what you think the reason is that they are so adamantly opposed.

Mr. Russel: Speaking from the point of view of someone who worked in the insurance industry for 25 years on the other side before my current position, I think that there is a real fear that the industries are consolidating. It is very competitive and there is a fear that the type of new entrants that our association represents and the new marketing techniques, including the branches, will steal a great deal of share from the marketplace. That is an issue in countries where the industry has opened up. In the U.K., Europe and other places, 15 per cent to 20 per cent of the market have opted to purchase their insurance through the type of means we are talking about.

My short answer is that I think they are concerned about having new competitors in the marketplace, because that will reduce margins, reduce prices to customers, and force more creativity into the marketplace. We think all of those are good things, and the consumer should see them as good, too.

Senator Kelleher: I am sure you are familiar with the new legislation that has just been proclaimed with respect to tied selling. Do you feel that the new legislation will be adequate to address the majority of the concerns that have repeatedly been expressed about the banks doing tied selling if they get into insurance?

Mr. Bernard Dorval, Executive Vice President, Insurance, Canada Trust, Vice Chairman, Canadian Association of Financial Institutions in Insurance: I think the brief summary of our presentation spelled out clearly that as an association, our group does not endorse tied selling in any way, shape or form and that our members have put practices and policies in place to ensure that that does not happen. I think that it is a very serious issue, and we have said many times that we are quite ready to work with the regulators to help design whatever needs to be designed to give the regulators the comfort that they need regarding that.

This is a complex issue and we have to look at the difference between tied selling and cross-selling. Cross-selling works to the advantage of the consumers in terms of convenience and additional access to more products. Fundamental marketing rules will tell you that a good business case should be made for customers who buy more than one product from you. I do not mean that you force people to buy products from you, but if it is done well, selling more than one product to a customer creates loyalty. As a principle, that works against any interest from anybody to do tied selling.

Senator Kelleher: That answer is commendable, but what I asked was if you would comment upon and give us an opinion about the effectiveness of the new tied-selling legislation that just came in. Do you think that it will allay many of the concerns with respect to tied selling?

Mr. Russel: We support the current legislation. We believe that it will be effective. We are concerned about the application of this legislation in cases of telephone sales and sales done by electronic means where you cannot get some form of written disclosure about tied selling in front of the customer. However, we believe that that can be overcome. Most of our members who market directly using those means actually tape all conversations so that there is a record of the conversation. We believe that the customer can be informed about tied selling, as the bill says, over the electronics.

The bottom line is that we are supportive; we feel that the new legislation will do the job. Let us try it and see. It is a complicated issue, and as a senator said earlier, it is a perceptual thing. We are encouraged by the new piece of legislation and hope that it will do a better job than the perceptions of the past.

Senator Oliver: In your brief and in your presentation you made some general statements about privacy. I should like to try to flesh out some details. You say, for example, that your organization understands that privacy is a very important issue for consumers. I think that generally everyone agrees. However, you say that all of your members have policies in place to ensure that consumer information is treated with the utmost care. That does not give too much assurance.

Today, one of the things that the financial services industry is really about is data mining in customer information and private information. That is evident in the statistics of credit card companies that sell financial products; those companies not only know about individuals' liabilities and assets, they know about their lifestyles. Companies dealing with insurance also have private information on individuals' medical health. It seems to me, therefore, that we need more than a statement acknowledging that privacy is a very important issue for consumers.

What are you doing about that? Can you tell us specific things that you have done to ensure that medical information is not used in determining whether you will sell some other financial product?

Mr. Isaac Sananes, CEO, Canadian Premier Life Insurance: Our members ensure that medical information is not used to determine issues such as creditworthiness.

Senator Oliver: How do you ensure that? What do you do? What is your procedure?

Mr. Sananes: Our company is a direct-response insurer. At the time of enrolment, we do not have access to medical information. We have only the person's name, credit card, address and telephone number. Medical information is not the basis of our marketing strategy.

Senator Oliver: Does your company ever get medical information on any of your customers?

Mr. Sananes: Except for at the time of claim, no.

Senator Oliver: Do you get it then?

Mr. Sananes: Yes.

Mr. Russel: We do get medical information on some of our customers. We do not get medical information initially, but if the case is large enough or complex enough, we do get medical information. It goes to a separate area within the insurance business.

Senator Oliver: Does it go to a separate area within your branch?

Mr. Russel: We have a centralized office. We do not have branches across the country. The information flows directly to professional underwriters who look at the medical information with medical experts to determine whether an individual should be rated, declined or just given a normal rate. That medical information is kept confidential. We have very stringent privacy policies and the information is never used anywhere else.

Senator Oliver: Who has access to the area where that medical information is kept? What are your procedures for ensuring that people who are not involved in using that information could not get to it?

Mr. Russel: According to the policies of our specific organization, only those underwriters or members of the claims professional group who need that information have access to it. Nobody else in the entire organization has access to that information.

Senator Oliver: What determines need? What if an underwriter says he needs that information, but he wants it for someone doing a credit check? Do you have a test?

Mr. Russel: In our financial institution, there is an absolute wall between the insurance operation and the rest of the financial institution. Moreover, we have guidelines on the use of that information. For instance, we need permission from the customer to utilize the information in any way other than the underwriting of the contract. That is stipulated. In fact, we have mystery shoppers who phone our organization to try to get information. It is continually tested. In fact, coming from the insurance industry into what I call a bancassurer, I can tell you that the rules and policies are far more stringent in the financial institutions than they are, in my experience, in the industry altogether.

Senator Oliver: So far I have not heard much that would reassure any customers who may be watching that their medical information would be protected if it got into your system.

You said that there is a wall. What does it consist of and what protection does it afford consumers?

Mr. Russel: We physically separate the insurance business from anything to do with the financial institution. Those documents are hard copy documents; they are not on computer files. They end up in a locked area that is accessible only by four or five people who actually do the underwriting.

Senator Oliver: Do those four or five people have to sign before they go into the vault to pick up the files and sign when they go out? Must they give the reason they need the information? Do you have that kind of security?

Mr. Russel: To be honest, I am not sure that we have those security measures. Certainly there are rules stating that those are the only four or five people who can access that information. The information would not be given to other people who asked for it, because they should not have a use for it. Our organization is small and I assume that they probably do not have to sign out. We keep track of where those files are.

Senator Oliver: Regarding banks and financial institutions selling insurance in their branches, you cite the Province of Quebec as a positive example, but some of the statistics you rely on are two years old. Do you have any current statistics and data that prove that brokers are not losing their jobs, that the system is working, and that there is no prejudice against the brokerage system?

Mr. Russel: Interestingly enough, the MacKay task force did not gather statistics from Desjardins, one of our members, which of course has a major experience in the Quebec marketplace. I believe our information is the most up-to-date information on that particular marketplace.

We are not saying that we will create a huge number of jobs if you open up the marketplace. We are simply trying to dispel the myth that others promote that there will be a huge number of jobs lost if we open up the marketplace. There is no risk of that and, in fact, probably more jobs will be added. That has been the experience, not just in Quebec, but also in European countries that have opened up.

We do not have firm statistics for those other places but we do for Quebec, and since Quebec is very close to home, we thought those might be of interest. In fact, when we appeared before him, Mr. MacKay asked us if we could supply the task force with specific information relative to Quebec.

Senator Oliver: Do you not have any data that is any newer than two years old to support your contention?

Mr. Russel: Is our data two years old?

Mr. Dorval: This is the most recent data that we have access to at this point in time.

Senator Oliver: I ask because a number of brokers in many provinces have complained that the information that you are giving is old and unreliable. I was hoping you had something a little more sophisticated and a little bit fresher.

Mr. Russel: I wonder where you came up with a date of 1993 or 1994 for our information. To our best knowledge, our information is current. It was gathered within this calendar year for the MacKay task force. I think others are trying to discredit our information because they have an axe to grind.

Senator Tkachuk: Does the Toronto-Dominion Bank own the Toronto-Dominion Life Insurance Company?

Mr. Russel: Yes, it does.

Senator Tkachuk: Does Canada Trust own the Insurance of Canada Trust?

Mr. Russel: Yes.

Senator Tkachuk: There should always be more competition, but with respect to banks retailing insurance, I am concerned about the use of material that is provided in the bank.

You referred to the survey done by the MacKay task force that showed that 17 per cent of low-income Canadians do not have insurance. Is there any demographic information attached to that? For instance, are those low-income Canadians senior citizens or young people? Sometimes 22-year-olds are classified as poor because their income is below $12,000 a year, but so what? You are young. You do not have insurance or your parents have insurance for you.

Mr. Dorval: We have not had access to that sort of detailed research or to the methodology used in that particular survey. I think the MacKay task force did consider the broadening of the offering and the advantage for the low-income Canadian market. From our standpoint, it is clear that some of the products that we have distributed in the past, including, for example, mortgage insurance or loan insurance, have in many instances been the only insurance products or the base insurance that Canadian households have had access to, because those products have been provided to them in a convenient way at a convenient time. I think that marketing insurance at the retail level has proven to be quite useful to the Canadian population.

Senator Tkachuk: The average size of creditor insurance is $30,000. Would the banks give a low-income Canadian a $30,000 loan or is that a $30,000 mortgage?

Mr. Dorval: That would be an average of probably all kinds of loans or mortgages. It could be a $100,000 mortgage or it could be a $5,000 loan insurance product, or a $50,000 mortgage or a $2,000 loan insurance product. It is a cross-section of a number of products.

Mr. Russel: Senator, maybe I could extend Mr. Dorval's answer and say that we were not surprised by the numbers in the research by the MacKay task force, because some of our research is on countries that have opened up the system. In Canada, the penetration rate for life insurance is in the area of 53 per cent, while some European countries have penetration rates in the low to mid-60s.

We believe that the current system, which has done well in Canada, is now starting to service more wealthy people. The traditional agency face-to-face system will continue, but agents today cannot afford to be spending time selling to the low and mid-market. They have to move up market in order to make a living. Therefore, there is a whole market that is not covered. In other countries, those customers tend to go to financial institutions for other services where they are then also offered the choice of getting access to insurance. Those customers probably would not be served by the current system as well as they would be served if we opened up the system.

Senator Tkachuk: Are you saying that the European market has a share larger than 17 per cent of poor people who have insurance?

Mr. Russel: No. I am saying that in Europe 63 per cent to 64 per cent of the total population has insurance compared to 53 per cent of the Canadian population. That is why we were not surprised when the MacKay task force noticed a gap in the low-income and mid-income area with respect to the number of people who have insurance.

Your point is well-taken. Some people might not be able to afford insurance and they are part of that 35 per cent in Europe who do not purchase insurance. We believe that because of the current regulations there is an under-served market in Canada today. If we opened up the system and gave consumers choice, that would decline.

The under-served market becomes a social responsibility, does it not? If people die with no insurance or other assets to accommodate their families, the government is called upon. Therefore, we feel that opening up the system would benefit society as well as business.

Senator Tkachuk: More people buy insurance in Europe than do in Canada. Do you think that is because banks sell insurance rather than because the insurance companies are aggressive in that market?

Mr. Russel: Yes.

Mr. Dorval: I think it is worthwhile to ask where the growth of the traditional insurance market has come from over the last ten years. The statistics quite clearly demonstrate that all of the growth has come from the savings and investment products as opposed to the insurance products. There is less and less of a preoccupation. From a traditional distribution standpoint, it makes more sense for some products to be distributed through the traditional distribution system than it does for the life insurance product. Allowing more competition and more channels for retailing insurance, we would actually increase the offer of the product.

Senator Tkachuk: Senator Oliver raised a number of questions regarding privacy. I am concerned, because in your brief you talk about using direct marketing and you say that having the banks retail insurance would somehow reduce costs and increase convenience for the customer. Are you saying that you would actually use the information that you have access to from the bank to direct mail in order to market insurance?

Mr. Russel: Under the current legislation, in our institution and others there is a wall between the information that the bank has and what the insurance business can utilize. We have members that are financial institutions and members that are in the retailing side of the business, which has customer information.

We are primarily interested in generic customer information that helps us profile and target our offerings to people who have a need for a particular product. That is information that insurance agents in insurance companies normally have. We are not necessarily interested in all the medical and other confidential information.

Senator Tkachuk: What kind of generic customer information are you referring to?

Mr. Russel: We are interested in where people live, their postal codes, ages, names, addresses -- that kind of information. As you start making offerings in the marketplace according to that information, you get information back on who responds and who does not, and you can make your offers more effective with the information you get back. We use our own customer information, not necessarily the information of other institutions. We can buy much of this information from other organizations.

Senator Tkachuk: Exactly. In other words, will the bank sell you a list? They may not sell it to you, but they will give you the list of the kind of profile that you just wanted. There is the name, the address, the phone number perhaps, and some other information that the bank can provide which may be useful, including perhaps income, credit, et cetera. Then you can better target your products to your market and therefore save money. Is that not correct?

Mr. Russel: I do not think I am saying exactly that. I think you are putting words into my mouth.

Senator Tkachuk: I know something about this business.

Mr. Russel: You may know a lot more than I do.

Senator Tkachuk: I am just telling you that you are indicating to us that you will have this information and that you will get it from the banks.

Mr. Dorval: What we are saying here is that provided that we have the customers' consent to use the information to market other products, yes, we would use the information to market. We would be willing to use information to market other products, because that provides actually two benefits. On the one hand, it provides an easier, cheaper way to bring the products to the customer. On the other hand, it provides us with the ability to offer the right products to the right customers, and not to offer car insurance or annuities to children, for example. Again, we must have the consent of the customers; we have a code of marketing conduct in place that requires consent for us to do such a thing.

Traditional insurance distributors already have access to similar information and in many cases more information than we have on a daily basis, because if somebody does a financial plan for a customer, they have all of the information about their taxes, their family situation, their assets and sometimes even their will. The use of information to market effectively other products has been going on for a long time in the traditional insurance industry. Provided that consent is given it can lead to a win-win situation.

Senator Tkachuk: Should that list be available to other insurance companies then? If a customer at the Royal Bank or at the Toronto-Dominion Bank says that his list can be sold, should that list be sold not only to you at the Toronto-Dominion Bank, but also to other insurers that may want a copy of that list?

Mr. Russel: If consent was given to sell the list, why would it not be sold? However, our customers probably would not give permission in many cases for that kind of information.

Senator Tkachuk: In other words, would customers likely give permission only to the insurer of the bank, but not to any other insurer, because that would be bad?

Mr. Russel: Do you mean bad from the customer's point of view?

Senator Tkachuk: Why would it be bad? Why would that be a negative rather than a positive? It seems to me that if the name is available to you as an insurer, then it should be available to other insurers that want to market competitive products.

Mr. Russel: We are in a competitive business and loyal customers are an asset. Therefore, we want to ask our customers for permission to use their names in order to be able to offer them other products and services within the organization. If a customer were to say, "Give my name to any other organization you want," I think that would involve a separate strategic decision on the part of that organization. I cannot speak to that, because each business has its own strategy.

Senator Tkachuk: Would it be suitable to you if the deal was that a customer's information was to be given to no one, including insurers owned by the banks, unless the customer expressly gave permission?

Mr. Russel: I think our position is that the customer should give consent, positive consent, to utilize the list.

Senator Tkachuk: Is it secret unless the customer says you can have it?

Mr. Russel: Yes. Consent is easy to get during a face-to-face sale, because you are sitting opposite the customer and you can ask. However, if the sale is made over the telephone or through other electronic means, we believe that there should be a means by which the customer can give consent. Maybe we need to tape the telephone conversation so that we can demonstrate that the customer did give that consent.

Senator Tkachuk: If you call me, you must already have my consent. You do not give consent over the telephone.

Mr. Russel: I may call you blind even if you are not on the list of any of our customers. Direct marketing does not only use techniques or customer bases within the bank or within our institution.

The Chairman: Thank you, gentlemen. We appreciate you taking the time to be with us this morning.

The next witness is Mr. Dominic D'Alessandro, President and Chief Executive Officer of Manulife Financial, who is appearing this morning under two hats. He is appearing as the president and CEO of Manulife Financial, and as this year's chairman of the Canadian Life and Health Insurance Association. With him is Mr. Mark Daniels, who is the president of the CLHIA, the Canadian Life and Health Insurance Association.

Welcome, gentlemen. Mr. D'Alessandro, I assume when you respond to our questions, if your response is not an industry position but a company position, you will tell us.

Mr. Dominic D'Alessandro, President and Chief Executive Officer of Manulife Financial: Yes, I will, Mr. Chairman.

The Chairman: It is important that we keep that distinction. We have now talked to four or five insurance company presidents, and there does not seem to be an industry position on many issues. On all the serious issues, the CEOs are all over the lot. There is nothing wrong with that, but I think it is important that we understand whether you are making a statement on behalf of the industry as a whole, or on behalf of your own company.

Mr. D'Alessandro: I will make that clear.

The Chairman: We are used to a monolith position from the industry, and it is wonderful to see some fragmentation. I am sure it does not make your job any easier, but, in some ways, it helps ours. Anyway, thank you very much for coming. Would you proceed with your opening statement?

Mr. D'Alessandro: Mr. Chairman, honourable members, thank you for the opportunity of addressing your committee today on behalf of the Canadian Life and Health Insurance Association, and to contribute to your important deliberations. As mentioned, Association President, Mr. Mark Daniels is with me today.

I will devote the initial portion of these opening remarks in my capacity as Chairman-Elect of the Association, on behalf of the industry. At the conclusion of that discussion, I will make some additional remarks in my capacity as President and CEO of Manulife Financial.

Mr. Chairman, our association represents 84 member companies, which account for over 90 per cent of the life and health insurance business transacted in Canada, and which protect more than 20 million Canadians and over 10 million other policyholders around the world. Moreover, the industry provides direct employment for about 100,000 people in Canada.

We believe that we are facing today one of the most critical periods in the history of the evolution of the financial services sector in Canada. Both government and business have a responsibility to work together to shape a sector that remains among the very best in the world. It is important that we get it right.

The submission we have put before the committee and our testimony today are based on an extensive process of dialogue among our industry leaders.

While, as we just mentioned, the industry does not agree with every task force recommendation, we do agree that the report makes an excellent contribution to the continuing evolution of the legislative and regulatory framework for our sector.

The task force has set out a vision of a desirable financial services sector with three key dimensions, namely, what consumers should expect, what an appropriate institutional structure should be, and what kind of regulatory framework would be most effective to support those expectations and structure.

The task force has concluded that Canada's current financial services sector fulfils much of that vision. By the same token, the task force has also determined that there is room for improvement in many areas, and its recommendations address these.

As the committee is aware, last fall, our industry provided the task force with five submissions that profiled the industry and its public policy framework. A brief overview of those documents is included as Annex 2 of our industry submission to this committee.

Those submissions to the task force also embodied a broad vision. Although there are some exceptions, in many instances, the industry's perspectives on what should be done to fulfil the vision coincide with those of the task force.

Mr. Chairman, there are two particularly important elements of the task force's vision that we share.

The first key element of this shared vision is that our markets now are highly concentrated. One of the greatest public challenges is to encourage vibrant, alternative institutions that can compete head-to-head with the large banks across this country.

The second key element of this shared vision is that insurance companies, with their strong base and long-standing international focus, will become even more important and visible members of the Canadian financial services sector in the years ahead. As the task force has stressed, it is very important for Canada, and for its evolving economy and needs, that insurance companies succeed in this regard.

Turning now to specifics, Mr. Chairman, one important dimension of the task force's vision is "an open and accessible payments system that continues to be efficient and prudentially sound." The task force has therefore recommended that access to the system be expanded and governance of the system be improved.

As members of this committee are aware, our industry has sought this access and governance change for several years now, including the issuing of payment cards to our policyholders.

Our industry pays out almost $100 million a day to, or on behalf of, individual Canadians. Making these payments as efficiently and as conveniently as possible, in the way consumers prefer, is essential to meeting customer needs and remaining competitive.

Therefore, we encourage this committee both to endorse the task force recommendations relating to the payments system and to reinforce the task force's view that the changes should be implemented as soon as possible.

Another important dimension of the task force's vision is consumer confidence in, and support for, their financial system. Consumer compensation arrangements have an important role to play in achieving that vision.

As this committee is aware, there is a significant anomaly in the current structure of consumer compensation arrangements. It arises from the fact that CDIC has access to Crown financial resources, and CompCorp does not.

The Task force has recognized this anomaly by concluding that "...it is important and timely to address this competitive inequity" and that "...the time has come to put CDIC and CompCorp on the same footing."

The main policy objectives here are to achieve fairness between depositors and policyholders; and to strengthen competition and competitiveness. Our industry strongly agrees with the task force. Therefore, we urge this committee to recommend that the government move forward promptly to develop, and to adopt, a specific approach for putting the plans on the same footing.

I now turn to the subject of insurance distribution by deposit-takers. Mr. Chairman, you and your committee members are no doubt aware that the Bank Act has included special provisions governing insurance activities since 1923. This reinforces the fact that the public interest is at stake.

The task force recommendations identify four dimensions of the public interest that would be affected by changes to the framework for insurance distribution by deposit-takers. These are: competition and competitiveness; freedom from coercive sales practices; protection of personal information; and appropriate competence of intermediaries.

We agree these are the four relevant considerations of the public interest that must be taken into account. But we believe the public interest objectives would be best served by a different approach than that suggested by the task force.

The task force, of course, recognizes that there are a number of policy and legislative inequities that provide competitive advantages to deposit-takers over life and health insurers, and the task force recommends correcting a number of these inequities.

However, we believe the task force did not sufficiently recognize that it will take considerable time to strengthen competition and competitiveness through initiatives such as opening up the payments system and putting CDIC and CompCorp on the same footing.

We also believe the task force over-estimated the need to expand the insurance distribution activities of deposit-takers in the interests of more competition.

The fact is that the current framework already provides extensive scope for insurance distribution by deposit-takers and competition within our own industry, among more than 130 competitors, is already extremely intense.

Standard & Poor's, in fact, has called it "Tooth and Nail Competition" in a recent report on the industry. The task force report itself notes that consumers are well served by this intense industry competition. It cites the low life insurance premiums paid by Canadians, the second lowest premiums among a group of eight industrial countries that the task force surveyed.

Therefore, our industry urges this committee to recommend that changes to the payments system and consumer compensation arrangements should be fully implemented before any changes to give deposit-takers more insurance distribution powers are made.

By the same token, we urge this committee to recommend that legislative safeguards must be in place fully to protect against coercive tied selling and misuse of personal information, as well as to ensure strong competency standards, before any changes to give deposit-takers more insurance distribution powers are made.

Speaking of privacy, the task force has recommended that the current ban on deposit-takers' use of customer information for marketing insurance should be removed. This committee may be interested in the results of a major national survey, which we have included as Annex 3 in our submission to this committee.

The results of that COMPAS study were quite clear that:

Canadians are massively and uniformly opposed to the use of personal financial information by the banks to market life insurance products.

Only 3 per cent to 6 per cent of respondents said that such practices should be allowed.

Taxation is another area of public policy interest that the task force report deals with extensively, and which we highlight in our industry submission to this committee.

A recent Statistics Canada study determined that our industry had the highest average growth rate of income taxes and capital taxes of any industry between 1988 and 1994. Overall taxes quadrupled to more than $1.8 billion over a 10-year period from 1987 to 1997.

Obviously, this situation creates serious business challenges, but the implications go far beyond this. In fact, the task force has concluded that the level and structure of taxation, for our industry and for the sector more broadly, have significant negative consequences for the public interest.

Specifically, capital taxes create incentives that are inconsistent with sound prudential management; the competitive position of Canadian companies is damaged; and costs to customers increase.

Our industry agrees strongly with the task force that the public interest is damaged by the current level and structure of taxation. Therefore, we urge this committee to call on federal and provincial governments to implement the task force's recommendations.

Mr. Chairman, the final chapter of our submission deals with recommendations in 14 other areas that could affect the industry's capacity to fulfil the vision set out by the task force. In the interests of brevity, I will only touch on one of these today -- the recommendations for significant change to the Office of the Superintendent of Financial Institutions' mandate and governance. Specifically, it is proposed that the mandate should be modified to focus on competition and innovation, not just safety and soundness.

Our industry has serious concerns about this direction. The additional roles in promoting competition and innovation, and in enforcement of consumer protection, could significantly divert OSFI's attention from the essential task of ensuring safety and soundness.

Therefore, Mr. Chairman, our industry proposes that this committee recommend that such major changes to OSFI's role and mandate must be given extensive further study before any action whatsoever can be taken.

Mr. Chairman, that concludes my overview of the industry's response to the task force report on behalf of the CLHIA. I would now like to change my hat for a few minutes to address this committee as head of Manulife.

I said earlier that the industry shares with the task force a clear vision for our sector. Indeed, within the context of that vision, we have the opportunity to create a truly broad array of first-class financial institutions, and I believe that this can be achieved.

However, certain changes will be required in our public policy environment to make this vision a reality. In addition to the changes I have discussed from an industry perspective, there are three other areas that require immediate attention, which I will discuss today. First, the widely held ownership rule; second, demutualization; and third, the treatment of mergers and acquisitions. They will all have a major impact on our ability to meet our shared vision.

Manulife supports the task force recommendation that the widely-held ownership regime -- also referred to as the 10 per cent shareholding limit -- be retained for large institutions in perpetuity. This policy has served our industry and our country well. Without it, I am convinced our sector would not have evolved to become strong, competitive, independent and domestically controlled, as it is today.

Mr. Chairman, Canada's mutual life insurers are very much part of the widely held tradition. However, we have now reached a critical juncture in our evolution as we transform, through the process of demutualization, to publicly-held stock companies.

Demutualization will improve our competitive position by allowing us to raise equity capital and, thus, to compete on a level playing field with most other financial institutions. Demutualization will also expose us fully to the healthy discipline of the financial markets, and demutualization will improve our ability to attract and retain quality management.

As important, demutualization will also provide substantial benefits to our policyholders. They would receive equity shares or cash representing 100 per cent of the value of the demutualizing companies. At the same time, their policy entitlements would not change.

The task force strongly supports demutualization as being in the best interest of policyholders, the companies and the future of the entire sector. In fact, Mr. Chairman, we believe demutualization will also have a very positive impact on the Canadian economy. An estimated $10 billion will be distributed to about 2 million Canadians, at an average distribution of $7,000 in Manulife's case. This distribution of equity will provide an important stimulus without imposing a fiscal burden on the government. In fact, tax revenues will rise as policyholders realize their new wealth.

We hope this committee will agree that it is urgent to complete the process. We ask you to support the earliest possible passage of necessary legislative amendments, which we have been advised by the government will be introduced imminently.

Demutualization is a worldwide development that is underway in South Africa, Australia, the United Kingdom and the United States. In all of the demutualizations that have been realized to date, policyholders have voted overwhelmingly in their favour. We expect they will do so in Canada as well.

I will now address the third key area, the treatment of mergers and acquisitions, which, from my point of view, requires immediate attention.

Mr. Chairman, we must recognize that the modernization of our ownership structure is just the first step in the transformation of our companies. It will take time for the markets to adjust to our new public company status, and it will take time for us to make the internal cultural changes required.

In Manulife's case, given the quality of our franchises and the strong potential of our businesses around the world, the reality is that, once demutualized, we and other demutualizing companies would represent very attractive takeover targets.

The task force has recognized that this transformation will require great effort and has recommended a three-year transition period free of hostile takeovers and merger proposals. However, it is Manulife's view that a three-year period is too brief and that a five-year period is required. This would be a more realistic timeframe in which to establish ourselves as a strong, stand-alone public company.

The task force further recommends that the ban on merger transactions should not extend to friendly transactions among the demutualized companies themselves. It is believed that a prohibition of such mergers would unnecessarily restrict the industry's ability to consolidate.

Manulife agrees with the task force and strongly recommends that mergers between "consenting" demutualized life insurance companies be permitted during any transition period. At the same time, it should be noted that, after the transition period, the task force recommendations would allow the takeover of a large demutualized life company by a chartered bank. The acquisition of one or all of our demutualized companies is easy to predict.

It could be argued that such takeovers would be counter to the vision put forward by the task force of independent life insurance industries competing vigorously with the large established banks.

Indeed, in all of this discussion, one cannot escape the reality that banks already command an extraordinarily dominant position in our sector, and we do not believe that this dominance will change in the near term.

Earlier, I made the essential point that favourable public policy considerations will be necessary, if life insurers are to have the desired opportunity to blossom. These considerations would include, among other things: access to the payments system; government support for consumer protection plans; a widely held ownership regime; and an extended transition period.

Mr. Chairman, I believe that the recommendations we are making today greatly increase the prospects for the emergence of yet more Canadian based, world-class financial enterprises. I hope that you all agree with me that this is a very worthy objective.

Thank you for this opportunity. We welcome your questions.

The Chairman: Thank you, Mr. D'Alessandro, for a very thorough statement.

In your statement as the CEO of Manulife, you state that the highest priority must be given to public policies that support the retention of an independent stand-alone life insurance industry in Canada. You then go on to talk about the dangers of the banks buying the companies, once they are demutualized.

Are you, in effect, proposing that we roll back the clock to pre-1992 and recreate the four pillars again? The policy you are suggesting goes exactly in the opposite direction of ensuring that there are no cross-pillar mergers. That is the opposite direction of the 1992 changes in Canada and, indeed, the changes that are taking place, and have taken place, in most other industrialized countries.

Mr. D'Alessandro: No, I am not recommending anything of the kind, senator. I may not have communicated my ideas clearly enough.

Our idea is quite simple. The day after you demutualize a company like Manulife, its profile in the investment and institutional markets has yet to be created. The company is owned by 700,000 people around the world who do not know they own it and who have no ability to assess the value of the enterprise. We would, therefore, be sitting targets for someone to come along and make an offer.

The Chairman: I understand that.

Mr. D'Alessandro: Therefore, we have asked that there be a period of time during which the nearly demutualized company gets a chance to prove itself. We have asked for a five-year period. However, after the five-year period, if we have not grown or developed a capability or a franchise that can stand on its own, we are not saying that, no, we should not be part of another institution.

The Chairman: That was not clear from the way your statement is written or what you said earlier. During the five-year period you cannot be acquired by anybody, including banks. You are saying after the five-year period, you could be acquired.

Mr. D'Alessandro: Yes, and I am predicting that the industry will be acquired.

The Chairman: Thank you very much for clearing that up.

Mr. D'Alessandro: I just wanted to add that the five-year period that we are asking for is not inconsistent with what is being accorded to other demutualizing entities in other jurisdictions.

The Chairman: Thank you.

Senator Meighen: Just following on from Senator Kirby's question, did you say that you are predicting that, after the five years, you will be acquired by a bank?

Mr. D'Alessandro: I was saying that --

Senator Meighen: Why wait five years?

Mr. D'Alessandro: Let me give you a complete answer to a serious question. When I was saying "we," I was speaking broadly as "We, Manulife." If we do our jobs properly, we are hopeful of emerging as one of those institutions that I described as being world-class and reflecting well on Canada and Canadians. That is what our corporate vision is. It is to create such a company. What we are asking for in public policy is favourable consideration, so that we are given a chance to do that; and we think that that is worthwhile. We think you should want us to do that. MacKay wants us to do that. He is stating in his report that there needs to be more vigorous competition in Canada.

Now, let us say we all demutualize and it is three years down the road and all of us are demutualized companies. Right? I mean, the banks have signalled their intention. You will recall that the Royal Bank did make an offer to buy London Life, and, if you will bear with me a minute, the reason they did that was that Great West Life was not available and the other four companies could not be bought because they were mutuals, but now they are no longer mutuals. Do you think their appetite for owning an insurance company will disappear? I do not think so. Obviously, there will be four potential entities there for them to buy. I used the Royal Bank, but it could be any bank.

Our strategy calls for us to buy to a size where maybe we have an opportunity to be autonomous and to be someone who is delivering a service to Canadians and competing around the world and competing well.

Senator Meighen: And then to be perhaps a "takeoveror" rather than a "takeoveree"?

Mr. D'Alessandro: It could be. I mean, that has happened in other countries. You know, the ING Group has as its root an insurance company, not a bank. There is an insurance company in the United States called AIG which has a market capitalization that is bigger than that of Citibank's and Travelers' put together.

Senator Meighen: Correct me if I am wrong, but I hear you describing a financial institution that is quite akin to the one the bank spokespeople described to us as world-class, world size, full service, very efficient, able to stand on its own feet here and abroad, and selling all kinds of products. Am I right?

Mr. D'Alessandro: Yes. I hear you describing an institution that has a lot of the attributes that our banks currently have; right.

Senator Meighen: That may be. I guess that is an area with respect to which some of the banks would say they are not big enough yet, but is that what I hear you describing? Is that what you would like to see, perhaps, for Manulife?

Mr. D'Alessandro: As you know, I have had a long history in banking and I do know something about them. I think they are fine institutions. I think that they reflect well on this country and that we have a financial sector that is second to none in the world. One of the reasons I am here is that I think this is a financial sector that is worthwhile preserving. As we said in our remarks, it is important that any changes we make to the sector be well-thought-out, because we have something here that is quite special in the Canadian economy.

Senator Meighen: I think I understand, but am I hearing you correctly that you think that for Canada and for Canadians it will be beneficial to have large world-class, multi-product distributors in the financial sector?

Mr. D'Alessandro: No, I did not say multi-product distributors, although I think there will be a convergence. I did not say that, but I would not have an objection to that description. However, senator, I am going to try to jump to where I think the end of your question is. If you are asking me whether we want to be a bank, my answer is no. We want to be a financial services enterprise.

Senator Meighen: But you have a bank now.

Mr. D'Alessandro: We have a bank within our entity. It has a very specific mission. However, what I would say to you is that large deposit-takers are world-class institutions, whereas we operate in the insurance business. We have, you know, a nice profile; we are a great company that is admired by a lot of people; but, you know, if you add up all the demutualizing insurance companies and put them together, you still do not get an institution that is the size of the Royal Bank of Canada.

I think that there is argument to be made that the growth that we need in order to fulfil our vision is quite a bit more substantial than the growth that our existing banks need to fulfil their vision. None of the Canadian insurance companies, in fact, enjoy the position in the domestic market that our banks do.

Senator Meighen: You want the opportunity to demonstrate that you can achieve that.

Mr. D'Alessandro: Yes. I think maybe we are spending too much time on the Manulife situation. Manulife is today an international company. We generate 65 per cent of our revenue outside Canada and roughly the same amount of profits, or maybe slightly more, and we intend to remain that way. We have no intention of dominating the domestic insurance market or the domestic financial services market, although we do want to have an important enough position in this country, since this is our home, and is where we are regulated and where we hire our people. It is important for us to be significant in our market, but we do not have any desire to dominate it.

Senator Meighen: I have a couple of very specific questions to end up. I understand there is a difference between three years and five years, because the task force and the proposed regulations vary. I think the proposed regulations said two years, the task force said three years, and you are asking for five years. Has five years got any magic to it as opposed to six years or four years, for example?

Mr. D'Alessandro: It just seemed like a reasonable time frame and, as I said earlier, it is not inconsistent with what other regulators in other jurisdictions have felt appropriate to give their institutions as an opportunity for transition. We are an institution with thousands of employees. We operate in a dozen or so countries. You do not make these changes overnight; as I said, the day after we demutualize, we will have to be in touch with 700,000 shareholders -- individuals, not institutions -- and those individuals comprise one of the largest shareholding bases in this country. Just to communicate with them, since they are spread all over the world, requires a big effort, and it is unreasonable to think it will all be done in a year or two. I just do not think that that is practical.

Senator Meighen: I understand. It is ironic, though, I suppose, that from your perspective it is going the wrong way, in the sense that the task force says three and then the draft regulation says two; but let us leave it at that. I understand, I think.

I have one other question on the "widely held" provision. I think we have heard a fair amount of agreement on the 10 per cent rule, although we have heard some people suggest that it be increased to 20 per cent. I think they did so on the ground, if I am paraphrasing their reasons for support accurately, that you would have a more substantial, more important, and more influential shareholder at 20 per cent than at 10. I am no accountant, but perhaps more important is that once you get 20 per cent, you can then do equity accounting. Could you comment on that argument?

Mr. D'Alessandro: Yes. I think with respect to the 20 per cent in terms of the equity accounting that you mentioned, it is only significant if the investor is an institution that needs to tabulate earnings on a quarterly basis. If it is an individual, whether they have 20 per cent interest or 19 or 21 does not matter. It is an accounting consideration.

I think there is something more important than that. We have in Canada a very concentrated economy already, and maybe having a 20 per cent ownership limit in a widely held company is a good idea. You know, in many companies that is control. I do not think the Ford family, for example, has more than 20 per cent of the Ford Motor Company; yet you can see that the name of the young man who just became chairman is Ford. Of course, he is probably very brilliant, but it could be that his name being Ford has something to do with the fact that he is now the chairman of the company.

I think that you would want to be careful not to have your deposit-takers, frankly, fall under the control of anybody. The argument that in the absence of a strong, controlling interest they are going to misbehave is no longer apt; maybe it was all right for the old days. However, the institutions that own stock in these companies up to the 10 per cent limit and so on -- the institutional investors, analysts and so on, and the rating agencies -- are all very vigilant and they are held to a standard of performance that is every bit as high as it would be if they had a 20 per cent owner.

Now, I agree with the task force's recommendation that flexibility be allowed in order to accommodate transactions that could only be possible if you expanded the ownership limit from 10 to 20 per cent for a temporary period of time. I agree with that.

Senator Meighen: Thank you. I had a question on access to the payments system, but maybe somebody else will ask that.

Senator Kenny: I want to pursue Senator Meighen's line of questions for a bit, if I may. First, are there any other ways of encouraging Canadian ownership, other than the 10 per cent?

Mr. D'Alessandro: I am not sure I understand your question, Senator. I am sorry.

Senator Kenny: You have used the 10 per cent rule as a way to ensure Canadian ownership, and my question to you is whether you can think of other ways to ensure Canadian ownership aside from the 10 per cent rule, or is that your sole form of protection?

Mr. D'Alessandro: Well, first of all, there were two rules, the 10 per cent and the 25 per cent. The 25 per cent rule has been done away with, if I understand correctly.

The 10 per cent rule does two things: It is not just Canadian versus foreign ownership; it is also within Canada. If, for example, you think back to five years ago, some very well-known large conglomerates were having difficulty. The rule precludes the ability of those institutions from owning a bank, and therefore, not exposing that bank to the moral hazard of having to deal with its owner.

What would happen in cases where, you know, there is extreme pressure on a holding company and it has a bank in its midst? Would you feel totally comfortable with that? Is it not desirable that you do not have that situation and do not have to deal with it?

Senator Kenny: There are a couple of areas in here that relate to the 10 per cent rule that frankly puzzle me.

Mr. D'Alessandro: Did we resolve that one? The 10 per cent rule does not just deal with the foreign situation. It also deals with, and goes right to the heart of, concentration.

Senator Kenny: Yes, sir. Your answer is on the record.

The first area that puzzles me is the 10 per cent rule, in that it does not prohibit American ownership. You could have 10 Americans each with 10 per cent and have 100 per cent American ownership of your corporation; so why are you bringing this up as a proposed defence?

Mr. D'Alessandro: As I said in my testimony, these rules have served us well. Among other things, they have helped ensure that the industry remained Canadian. For example, our company will be owned in the majority outside Canada without necessarily a 10 per cent owner. When we distribute our stock, it will be because of the huge --

Senator Kenny: Well, you do business there.

Mr. D'Alessandro: They own the company today, but we are still a Canadian company. We are regulated under the Insurance Companies Act and the law requires that our head office be in Canada and that our board of directors be 75 per cent composed of Canadian residents; so, from a practical perspective, the fact that your stock is owned in one jurisdiction as opposed to another is not the defining element.

I think that it is important for the banking system to be domestically controlled. That is my personal view as a citizen. I do not know any country as advanced as ours, with the possible exception of New Zealand -- but New Zealand is the size of Brampton, I think -- that allows its banking system, which is at the nerve centre of its economy, to be controlled by non-residents.

It was not that long ago that we were really worried in this country about our petroleum, oil and gas sector, when they had shortages. Do you remember that?

Senator Kenny: And is anybody worried about it now?

Mr. D'Alessandro: I think they should be.

Senator Kenny: But are they?

Mr. D'Alessandro: I think they are. That is why you are hearing people say that the 10 per cent rule is a good rule.

Senator Kenny: No, I am talking about the oil and gas industry.

Mr. D'Alessandro: Well, I do not know if they are worried about it now.

Senator Kenny: No, they are not.

Mr. D'Alessandro: Things have changed.

The Chairman: I think that is a long supplementary.

Senator Kenny: With respect, Mr. Chairman, the two points I had that have not been addressed are, first of all, with the 20 per cent rule, would it not improve your share price and would you not have a better opportunity of serving your stockholders better?

Since the chairman is on my case, what about discipline of management? Are you not really fireproofing yourself with the 10 per cent rule? How come we do not see more heads rolling when companies are not well managed? One suspects that it is the 10 per cent rule that protects them.

Mr. D'Alessandro: You have asked a lot of questions there. Let me tell you a story. I worked for a company that did not have a 10 per cent rule; it did not have any per cent rule. We were owned by our policyholders -- 700,000 people around the world who were owners of the company as a result of buying an insurance policy. They had no intention of being owners of the company; that was just a consequence of something else. Yet that company disciplined its senior officers and that company took the action required to replace its CEO, and so on and so forth.

It is not absolutely essential that you have a controlling shareholder, if you have a good board of directors; moreover, in Canada, corporate governance has emerged tremendously and directors are much more cognizant of their responsibilities to their shareholders.

I think shareholders themselves are a lot less bashful. Shareholder activism is alive and well in this country. Every year there are groups out there. I think the system has rehabilitated itself and we need not say that the only way you are going to have discipline is if you have a controlling shareholder.

Now, you also raised the issue of whether, if you have a controlling shareholder, that raises your stock price. You are senators; I am not, but it seems to me that we ought to be looking at considerations that are broader than just "market value." I have to tell you that I get absolutely revolted by all the discussions we have about market value, as if we are idolizing the market, as if the market can do no wrong and, if we just let the market decide everything from day to day, we will absolutely make the right decision.

Let us look at some facts. Microsoft, by itself, is worth almost what the entire Toronto Stock Exchange is worth. If we were to let the market have its way, well, then, we would just let them buy everything in this country. If the market had had its way, the way some are arguing today, we would not have a banking sector in Canada. TD Bank would have been acquired back in 1958 or whenever it was that Chase wanted to come up here. That is how we got the 10 per cent rule in the first place. They would all have gone like dominoes.

I always joke when I talk to parliamentarians that, if we really want to carry it to the logical conclusion, we would outsource your jobs, too.

Senator Kenny: The difficulty is that the speeches, sir, that we hear at annual meetings seem to have a lot to do with share price and the speeches that we hear at senate committee hearings have to do with nationalism, if you will, and I just want to know how you rationalize the two.

Mr. D'Alessandro: I think that I have given you a rationale today that they are not necessarily inconsistent. You can be a nationalist and be for profit. Why can you not do that? I am also saying to you that profit, for you as legislators, should not be your sole driver. Of course, who am I to tell you what to do? But profit should not be your sole driver. It should not be your sole consideration.

You are precisely in a position to look at broader issues, and I suggest to you that who controls your financial system is very important. How can you have a country if you do not have control of your financial system. I think that is a self-evident fact.

Senator Kenny: Thank you, sir.

The Chairman: I have just one supplementary on Senator Kenny's supplementary.

This is an issue we have struggled with for a long time. To what extent does the 10 per cent rule avoid the problems of closely held companies? You correctly pointed out, Mr. D'Alessandro, that there were a number of cases, particularly in the late 1980s and early 1990s, where closely held financial institutions got into trouble; but, you know, on the other side, I think of Confederation Life, of CCB and of Northland, just to take a random sample of three widely held institutions that also got into trouble.

What we find difficult -- I was almost going to say frustrating, but it is not -- is that for every position we can think of on these issues of ownership, we can find five examples that prove one side of the issue and five examples that prove the converse. In the end, am I right in saying it is not really a provable proposition? In the end, we have to come down to some judgment.

For example, we want Canadian ownership, and even though the 10 per cent rule does not guarantee Canadian ownership, it gives you a better chance at it than removing the number entirely; but, in the end, it is a pure judgment call, because none of these propositions are provable. For every proof, I can give you a counter-example. Is that a fair statement?

Mr. D'Alessandro: I think that is a fair statement, but I would say that my proposition, that it is better to have a plurality of providers --

The Chairman: I was just talking about the ownership issue. I was not talking about the plurality issue.

Mr. D'Alessandro: But it comes to your issue. I travel the world, particularly Asia, because we have so many businesses in all of that region, and one thing that strikes me about the region is the weaving together that exists between the political and the private sector. In a country like Korea, and this is not a secret, five companies represent 50 per cent of the GDP. Now, is that bad? Well, I do not know. I do not know how you can have an independent parliament if you have so much of the economy dependent on five companies that are controlled by five families. Is that reasonable? Is it democratic? Do you have a debate and do you have the healthy give and take that you have in other places where you do not have that concentration?

I guess my position would be that I would tend to favour public policies that create a diffusion of economic power as opposed to those who would tend to concentrate it.

[Translation]

Senator Hervieux-Payette: Mr. D'Alessandro, we pardon you for leaving Montreal; I know you are still contributing to the Canadian economy. This morning, I must make a comment that you may perhaps have invited, and that is that, if our businessmen are still talking about Canadian culture and the Canadian economy, while defending our institutions, I believe our country is doing well.

My remarks concern the question of the payments system that Senator Meighen wanted to ask. Obviously, your sector, as well as the securities industry, would like to have access to the payments system. I am very interested in this issue since we have been told we have approximately 16,000 points of service across the country. It should also be kept in mind that, as we speak, the banks already have restrictions among themselves in that you can only make withdrawals; you cannot conduct all transactions. So when you talk about gaining access to the payments system, do you want access to a number of transactions, to intercorporate transactions so I can use your access card even if I do business with another company?

Lastly, does this service exist internationally? Can we access this type of service in countries where you operate, since you are very active outside the country? Do you have any experience in this field, or is Canada a unique example, being the biggest user of automatic payment machines?

Mr. D'Alessandro: With respect to the last part of your question, are insurers in other countries members of the payments systems? No, not to my knowledge. That is not the case in the countries where we operate. I would be very much surprised if there were places where that is possible. As regards the first part of your question, we are asking to join the Canadian Payments Association because we want to be full-time members. We do not want any restrictions. We want to be in a position to use the same powers as a full-fledged member.

Senator Hervieux-Payette: And could I pay my monthly premium with my bank card?

Mr. D'Alessandro: Absolutely.

Senator Hervieux-Payette: Because, for the moment, I cannot make payments at my bank, except for my telephone and hydro bills, and I can't make interbank transfers through my automatic teller. You have no objection to me using the branch or machine nearest my home to access your services?

Mr. D'Alessandro: What you are asking, senator, is a technological question. I believe that, despite the capabilities of these machines -- for example, the fact that you can give them instructions to withdraw money from your account, let's say at CIBC, and to send it to your account or to a trust account at the Toronto-Dominion Bank -- they have only evolved for certain services or certain suppliers. They have not been developed on a large scale. I repeat that we are not requesting a membership that gives us limited powers. We are seeking membership that will make us full-time members of the payments system.

Senator Hervieux-Payette: Take consumers, for example. You will understand that, for our committee, it is in the public interest that we provide access to financial transactions for all Canadian consumers. So if the automatic teller in my neighbourhood is with a particular institution, I believe that, if I want to be a good consumer, I will want all my payments to be made there. Consumers should have as good access to their brokers as to their insurance companies.

Mr. D'Alessandro: Giving access to all those who qualify as members will definitely result in a broader innovation. Who knows where that innovation will lead us? We currently have a system dominated by a small group that innovates, but that does so at a pace that is convenient to them, that suits them, and we will never know whether that pace of innovation could be greater, faster. Look at what happened when the communications system was deregulated in the United States a few years ago. There was a genuine explosion of ideas, services and suppliers, and consumers benefited as a result. It is somewhat for this reason that we are saying that opening the payments system to people who are qualified to be members will be a good thing. Will all insurance companies start giving cheque books to their customers tomorrow? I doubt it. I do not know. Some will; others will not. Everything will depend on their strategy and position, but I believe this will be a good thing on the whole.

Senator Hervieux-Payette: It has been observed that the debit card is currently used very little, even though tens of thousands of businesses are said to have access to them. If I want to pay at my drugstore or supermarket and at all the other businesses that use it, I can do so. We know at the outset that, with a card, we can make payments for thousands of transactions in thousands of businesses. This is technologically feasible. Canada has the best fibre optic network in the world, and I believe our government has had something to do with that since it issued a policy providing for this possibility.

So there are no technological barriers. I am specifically asking you this question because I believe that, if there are people in your industry who go into this business, you will have to introduce new services to be competitive. First of all, you will want to alter the cost structure because, in my view, debit card costs are too high and constitute a barrier to the card's use, and, second, you will want to have a competitive cost structure for using the bank card, that is to say the card that gives you access to the payments system, because fees are always charged to consumers. Which means that a competitive system that will work to the benefit of consumers can be introduced into this transaction. Obviously, I want to have a commitment from a company or industry such as yours that you will compete and not join a small club which currently does not compete on charges, but makes millions of dollars in profits on millions of transactions.

Mr. D'Alessandro: As the President of Manulife, I must tell you, as I told you earlier, that it is not our intention to become a bank in Canada. We are an international company; we are expanding in all countries where we operate, and our strategy is to continue that expansion. We may begin to participate in the banking field in Canada within a few years, but that is out of the question for the moment. There may be other members of our association that are not involved in as big an international expansion as we are and that believe they have more opportunities or have taken a different read on the situation. I am convinced that those companies will use these advantages and, as you said, will give consumers choices to prevent a repetition of the current situation, in which there are no choices and things are not moving.

[English]

Senator Oliver: I have three questions that follow logically from Senator Hervieux-Payette's line and they are on CDIC.

As you know, earlier this week, CDIC appeared before this committee here and they raised a number of concerns that the task force proposals might well put at risk the whole concept of safety and soundness if CDIC's role were in any way reduced. CDIC also stated that the market disadvantage of CompCorp is misplaced since it relates only to deferred annuities of five years or less, representing only one-third of their annual business. Finally, CDIC said that it was concerned that the proposed solution substantially increases the financial exposure of the government while at the same time solving only a very small problem for the industry.

I was wondering if you could comment on what I have just recapitulated as part of the position of CDIC.

Mr. D'Alessandro: I will try to. My mind was trying to keep track. I guess with respect to the fact that it will only cover one-third of our business, I would mention this: it covers a very important one-third of our business.

The insurance industry, if you think about it, basically consists of two broad arrays of services, one being the protection services, the traditional whole-life, death-benefit thing, and the second being the newer services, which are all related to wealth accumulation and investment management. Because of demographics and so on and so forth, the protection that the conventional life insurance people think about, when they think about a life insurance company, has not been growing, but has been stable, and the way to grow that business is to get somebody else's business.

However, the business that has been growing tremendously is all of the wealth accumulation businesses; therefore, the availability to our institution of access to the same protections is very important; in other words, the ability for us to represent to our clients that they are protected in the same way as if their moneys were placed in a bank is very important.

In many cases these products are identical to the product that a bank offers. There is a convergence of product offering again because of --

Senator Oliver: Mutual funds.

Mr. D'Alessandro: Exactly. What others who have studied the issue have recognized is that, to the extent that we have the same protections, we have available to us the same considerations that the people we compete with. What is wrong with that? If we want to have a sector that emerges as a viable alternative and want to keep this healthy competition that has prevailed in Canada, why not give the sector the same consideration as is made available to the banking sector?

It is not insignificant, though. To get right to your point, it applies to a very important part of our business and a growing part of our business in Canada.

Senator Oliver: It strikes me as being a little bit self-serving on the part of you insurers that, on the one hand, you want to get into the payments system so that you can compete more directly with the banks, and you want to have CDIC and CompCorp on the same footing, but, on the other hand, you do not want the banks retailing insurance in the branches right away; you want that deferred. That strikes me as being a bit self-serving.

Mr. D'Alessandro: We have tried to put cogent arguments behind each of our recommendations. We do genuinely believe that having the banks retail tomorrow would be very disruptive. We are not quite sure that it would, in fact, be as benign as everybody else has suggested. It might well be. All we are saying is that, if you are going to do that, make sure you do it having taken the appropriate precautions, having put in force the appropriate legislation, and having given these institutions the time to train their people, and so on and so forth. That is what we said, and we think that is logical. It may sound self-serving, but that is just a coincidence.

Senator Oliver: Let me put it to you this way: Maybe the banks should not be allowed to sell the insurance in their branches; at the same time, maybe you should not be allowed into the payments system. Let me tell you why I say that -- and it is not even my thought; it is the thought of Mr. Rousseau of the Laurentian Bank.

When Mr. Rousseau appeared before us in Montreal, he said something that I think was really quite cogent; he suggested that perhaps it is time that insurance companies determined who they are and what they really want to be. If I may, I will just read a bit of what he said:

Clearly, if the objective is to encourage Canadian institutions to consolidate and to create new institutions that will compete with the large Canadian banks, then let us maintain the differences their respective powers grant them, so that by consolidating their respective competencies they contribute to the greater incentives of consolidation. For example, an insurer may have a greater interest in consolidating with a bank if it does not have access to the payments system, and, by the same token, a bank will have a greater interest in consolidating with an insurer if it cannot retail insurance through its branch network.

What do you say about that?

Mr. D'Alessandro: I think that his conclusion there is right. If you close off these avenues, you may create appetites that did not exist before, but I do not think that that is necessarily --

Senator Oliver: You still want in the payments system.

Mr. D'Alessandro: I know Henri-Paul very well. I hired him to replace me at Laurentian Bank, and I know how he thinks.

Senator Oliver: We think this is a pretty important statement.

Mr. D'Alessandro: Well, I think it is an important statement, but I think it fails to recognize that the market is changing. It was all very well when we had the four pillars, and we did our thing, the trust industry did their thing, the securities dealers did their thing, and the banks did their thing; but a lot has happened since then. Technology has evolved tremendously; consumers have shown a greater appetite for certain things, such as designer products; there has been an enormous convergence. If you can tell me the difference between one of our deferred annuities and a GIC, please be my guest. In other words, these institutions have evolved in response to a whole set of forces, and they have, I think, evolved rather well.

We have a financial services sector in Canada that is second to none. I repeat: I have lived all over the world. I have lived in Europe, I have lived in the Far East, I have lived in the States. We have nothing to be ashamed about in our financial services in this country, and that is because we have done a number of things right. We have had good public policy. We have had vigorous domestic competition. These institutions have not been led entirely by inept people, notwithstanding that they have not had controlling shareholders.

We ought to look at what is positive about our system and how we can modify it to keep going forward. Well, I am saying the obvious here, but the way we should modify the system going forward, or the way we think it should be modified, is what we suggested in our paper; we think that these powers should not be dramatically revisited in the manner that is proposed in the task force.

However, if they were, could we live with that? Sure. It would not be putting us out of business. We are just using this opportunity to tell you how we would proceed to protect the public interest.

Senator Oliver: I was just trying to test the philosophy of where you wanted to go and how you wanted to get there, because I see a stark difference between what he suggests and what you have been saying today.

Mr. D'Alessandro: Everybody advances arguments; everybody preaches to their own parishes, as they say in French, and that is what Mr. Henri-Paul Rousseau was doing. He sees this as perhaps an approach that might work well for his institution. It is not an approach I would suggest should be adopted as policy for the reform of financial services in Canada, because, essentially, he is saying that, if you do not give anybody any powers, we will all be forced to merge with one another. Well, you know, is that a good thing? I do not know.

Senator Austin: I am intrigued by one page in the document by the Canadian Life and Health Insurance Association regarding the task force. I refer to page 6 of Annex 1, which comes at about page 47 of the main report.

This is the first time I think the committee has seen this number, $34.854 billion, for total benefits and dividend payments for 1997. I think "billion" is the correct way to put that. It says "million," but I would use the American style and call it "billion." That number did not appear in the MacKay task force, to my knowledge, although I have not combed through it. That is quite a remarkable flow of benefits in cash to the Canadian public.

Let me note also that it says at the bottom of that page that 91 per cent goes to living policyholders as annuity and disability benefits, reimbursement for health care costs, dividends, cash surrender value and matured endowments.

Why I mention the page is that it strikes me that this flow of cash, if it can be retained within the life insurance industry's financial services, gives you a major starting point, if that is the right word, or a major lift, in any event, in being a competitor in the financial services industry. Am I going in the correct direction or am I overstating the value of the cash flow to you?

Mr. D'Alessandro: Yes, it is cash flow and it definitely does provide a base for those who have made a determination that they want to compete with the deposit-takers. This certainly gives them a little more than a standing start to begin with.

I do not want to mislead the committee. As I said earlier, it is not Manulife's intention to steal away the banks' customers. Given all of the other opportunities that are available to us around the world, we think it would not be a good use of our capital or of our management resources to go head to head with the banks to try to steal away their customers.

I repeat that our banking system is a pretty good one and these guys are very capable, and they are not going to sit idly by and let anybody come along and just take away their retail customers. That is a determination I have made. Now, there are others who say, "Well, wait a minute now. You know, their service levels are so poor, they are so unresponsive, that there is a niche for me over here." That is what makes the market. There are people with different points of view.

Senator Austin: Let me proceed with the questioning here, because your answers are very significant to me. The access to the payments system that you wish to have, however, will allow you to serve this base directly, rather than by transfer into a bank, and yet you are indicating that this is not an area of financial services in which you believe you could be competitive.

Mr. D'Alessandro: I guess I should not be so categorical. Our strategic plan today does not have on the radar screen that we would, tomorrow, become a competitor to deposit-takers; but, you know, there are those who think that there are so many evolutions taking place -- so many advances in communications and computing technology, with all of the E-commerce initiatives, the Internet and so on -- that who knows what two years from now may bring.

Senator Austin: Exactly.

Mr. D'Alessandro: So from my perspective, I would be seriously disappointed, even though I do not have the intention tomorrow of going into that business, if I were denied that power. Why should I not have that flexibility? If and when the opportunity presents itself for me to become a participant and to compete, why should I not be able to do so?

I am answering on behalf of Manulife. I do know that there are other members in our association who have made a different reading of the situation, who may not have the same growth opportunities. They are not as diversified as we are, let us say.

Senator Austin: You are giving us the same answer, roughly, as Mr. Astley of the Mutual Group gave us this morning.

Mr. D'Alessandro: Is that right?

Senator Austin: And what I pointed out to him was that the golden thread of the MacKay task force report is "competition." I referred him to page 57 of the report. I will not read the same material into the record as I read to him, but I can summarize it very briefly as saying that it is the promise that the life insurance sector would become a leader of major financial services and create of itself in some way a financial services conglomerate, as is the experience in other countries, that leads them to make the three policy recommendation changes. However, neither you nor Mr. Astley, although you want the policy changes, are really prepared to face up to the competition challenge vis-à-vis the banks. That is a question.

Mr. D'Alessandro: That is a very good question. I guess the way I see it is that we are here today to tell you that the financial services sector is evolving at a rapid pace and there are some forces at work that have nothing to do with the insurance sector; there are institutions that have launched initiatives that, if realized, will irrevocably change the face of our industry in this country. Therefore, we ought to be careful.

I believe that it is very significant for us. We are demutualizing, and how successful we are in the periods beyond our demutualization date will determine whether or not a lot of this gets realized. As I said in the comments affecting Manulife, it is my judgment that unless we get some consideration, we are going to be stillborn. We will be demutualized and six months later we will become part of XYZ Financial Group.

I think Mr. Astley is saying the same thing I am saying. I do not know the way the universe is going. This is the power that I would like to have for my company, because I do not know what technology may bring. I do not know what may happen tomorrow.

Who knows? We may sell all of our Asian network and realize several billion dollars or many billions of dollars and decide we want to reemploy it all in Canada. Having that power, who knows? However, if there is one criticism I would make of the task force report, it is that it has been a little too sanguine in describing and anticipating this mushrooming of competition, whether it is from Canadian providers or from foreigners coming here. The fact of the matter is that foreigners are not going to come here. These monolines are not going to be a serious competition. The banks' position is very dominant. They are very capable at what they do and they are not going to sit by.

You know, the Coca-Cola of banking, Citibank, came up here some years ago and opened up a whole bunch of branches in the Toronto area.

Senator Austin: I like that phrase.

Mr. D'Alessandro: Remember that story?

Senator Austin: Yes.

Mr. D'Alessandro: They are the only bank that has been able to actually make retail banking a worldwide business.

Senator Austin: There is the Hongkong Bank.

Mr. D'Alessandro: And there is the Hongkong Bank, you are right. I am sorry. But perhaps Citibank is even more worldwide than Hongkong Bank, because Citibank is all through South America and Europe and so on. In any event, they went home. They sold their branch network very quietly and went home because they could not make any money. It suggests to me that the Canadian banks are not that bad.

Senator Austin: What does that lead you to say about the possibility that two financial institutions would have 67 per cent to 70 per cent of the retail banking?

Mr. D'Alessandro: I spoke on that issue at my annual meeting as well as when the Royal Bank and the Bank of Montreal had just announced their merger. I predicted that others would respond as a defensive measure.

As a Canadian, I do not think it is a good thing. As a businessman, if I was running one of these institutions, I say that they are doing exactly what we have all been trained to do in business school and in our business lives. You want to protect your entity. You want it to grow to a position where its market is assured, where there is no assailability.

They are doing what you expect a businessman to do. These are animal spirits at work and that is what is supposed to happen. Your job is to see if that is consistent with the national interest. Personally, I do not think it is. You could get five learned studies on one hand and five learned studies on the other hand and, in the end, you have to use your judgment.

In reaching my conclusion, I just look at the obvious. I ask myself, why is it that of all our industries not based on trees, rocks and rivers, the one sector where we have clearly demonstrated a capacity to excel in this country, is financial services. Having worked in different sectors, I conclude that it is because of a happy combination of things. We have had some gifted people, but we have had good regulation and good public policies. To say that the CDIC is a moral hazard creator is nonsense.

There has been intense rivalry among these institutions, and that keeps them sharp. There has been innovation. There also has been an absence of barriers to enter into this sector. Credit unions and trust companies have come into the sector, bringing with them innovation. Daily interest savings, eight to eight banking, and Saturday hours were not an invention of the large banks. This is what you want and you want to perpetuate this environment.

Senator Austin: I appreciate your answer and I want to ask one further question, one that has been asked at our various hearings. It concerns the argument that, as efficacious as the service to Canadian consumers has been by the current financial industries system, the international challenge is forcing changes. The banking sector is finding itself falling behind in competitiveness, particularly in the North American market, its most important market. Ultimately, unless agglomeration is permitted, we will have very small, non-competitive financial institutions -- small by international standards. There is a rationale for mergers of U.S. and international banks and why they are creating very large market caps and asset agglomerations. We have to respond to that.

I know I am pushing you, but you know this industry very well and I wonder whether you, as an individual, not speaking for your company, could answer that question.

Mr. D'Alessandro: I think that the market cap argument is irrelevant. As long as we have a 10 per cent rule so that no one can take them over, what does it matter whether they are worth $25 billion or $250 billion. With respect to the fact that they are a lot smaller than the other institutions that are emerging in the world, I would say two things.

First, we should all fall on our swords because our economy is smaller than the U.S. economy. Some things are a function of our size. Our base is here. To expect that we would have an institution that is as large as the biggest bank in an economy that is 10 times our size is a non-starter. It is not logical that it follows.

Second, if I were responsible for the affairs of this country, I might be happy that none of my banks are among the top 10 in the world. When I look at the list of the top 10 banks in the world, they are all sick. Seven of the top 10 banks in the world are Japanese. Would you like to own a Japanese bank? By the way, how present are they in the international markets; how innovative are they; and how well served is the Japanese public by those institutions, or the Swiss for that matter.

You also want to look into the technology aspect. Citibank used to pride itself on being "the" technology bank. It was always quoted that they spent $5 billion on technology and we only spent $1 billion. They were always five times the size and had many times the number of employees we had. In technology, they include their telephone costs as well as the cost of every computer screen in the organization. By the way, Citibank is outsourcing a good part of its backroom. Bank One, which is a bank that is as big as our institutions, has outsourced its entire data processing to somebody else.

The point is that that technology is becoming more and more available and supportable to more and more groups. You do not have to be a behemoth to avail yourself of leading-edge technology. There are suppliers out there -- not the least of which is IBM -- that will do it all for you for a fee.

Senator Kelleher: I listened with some interest and do not disagree with your observation that opening up to foreign banks is not going to promote a flood of foreign banks into Canada, that it will not provide tremendous competition. I am assuming that is based on the fact that the foreign banks are not going to get into the deposit-taking business across Canada and that they will concentrate more on the large cities and the commercial field. Am I correct in that assumption?

Mr. D'Alessandro: You are correct, absolutely. The only thing I would add is that our market for banking services is relatively mature, and our population is not growing very rapidly.

Senator Kelleher: As you know, the MacKay report is urging that the caisses and the credit unions be permitted to get into the banking business. From the statements provided by representatives of these institutions who have come before us, we see they are quite enthusiastic about this opportunity and they have outlined their plans.

Given the fact that, if the mergers are permitted, there is obviously going to be a lessening of competition and a concern about a lessening of services, particularly in the rural areas; given your experience in banking and your observation of what the credit unions have been doing in the past; do you think there is a possibility that the credit unions can, in fact, fill in some of these areas and provide a certain amount of competition? I know VanCity thinks they can.

Mr. D'Alessandro: It would stand to reason that they should be able to provide some competition. They are doing it now, and they may be able to do more in the future. The observation I would make, though, is that they have blossomed over a period of sustained growth and they are doing reasonably well in the environment that prevails today. One of the strengths of our financial services is that it is national in scope. You would not have that present unless you were able somehow to have a confederation of credit unions that would come together.

Senator Kelleher: That is what they are proposing.

Mr. D'Alessandro: Between proposals and actual realizations of those things, there are a lot of considerations. Consider the Caisse Desjardins, a very well-known credit union in the province of Quebec. I happen to think that it is not very healthy for the people of Quebec to have that particular institution with 44 per cent of the market. There is an absence of vigorous competition. This is a situation where an institution is so big and so dominant in the affairs of the political body that it has an inordinate influence. That is all I wish to say on that issue.

Senator Kelleher: Out West, where we do not have that dominant Quebec situation, do you think that the credit unions could fill in and provide reasonable services and competition if a merger went ahead?

Mr. D'Alessandro: I can see them providing a service to small independent businesses and the retail sector. Beyond that, I do not really see them as serious competitors.

Senator Kelleher: No, they are not trying to carve out that top level, but at the lower level.

Mr. D'Alessandro: Yes. I think that you are looking for competition across all segments of the Canadian marketplace. You want your medium-sized and large businesses to have the same choices. While this might respond at one level for certain geographies within our country, some competition will emerge. It will not emerge in the numbers and as benignly as is suggested in this report.

The Chairman: Mr. D'Alessandro, I wonder if I might ask you one final question which really relates to the timing of the various ownership shifts.

Let me distinguish three time frames. One is a period during which demutualization has taken place, and the newly formed stock companies are in the process of effectively changing corporate culture and getting adjusted to that. The second is a period during which amalgamations among life insurance companies would be allowed to occur. The third is a period in the indefinite future when the companies could be acquired by anybody.

The various reports -- the draft regulations, the MacKay report, the draft demutualization regulations, and your proposal -- do not quite distinguish between those three periods. Most of them have two time frames, not three, and it is a different combination of two.

For instance, MacKay talks about a period during which you could not have any acquisitions within the industry, unless it was specially approved by the minister, and then ultimately, anybody could buy them immediately. You talk about a period during which you could have acquisitions within the industry, but only after that would you be open to be purchased by anybody.

If I look at those three time frames, would it be reasonable to say that, if you had a two-year period during which no acquisitions could occur, friendly or unfriendly, that would allow the corporate culture change -- anyone of us who has been involved in corporate culture changes knows that does not occur easily; and then you had a two or three-year period during which mergers could occur within the industry, but not purchases by outside; then, at the end of four or five years, you were available on the market, in a manner of speaking, unconstrained. Does that kind of scenario over a four or five-year period make sense to you? I am asking this because you did not distinguish what I have called the first time frame and MacKay did not distinguish the second.

Mr. D'Alessandro: We certainly could live with the scenario you have just described. For two years, nothing happens; there is just culture change. Then you have another period of time during which regroupings within the industry itself can take place. Beyond that, anybody can jump on anybody. We could live with that.

I just want to clarify, if I understand you correctly, our task force's recommendations are not at all inconsistent with the MacKay task force. It is just the length of time that we are talking about.

I think MacKay is suggesting that post demutualization there be a three-year umbrella period; that during that three-year umbrella period, any demutualizing companies that want to come together, on a consenting basis, be allowed to do so. We are saying that as well.

The Chairman: Although you have distinguished between friendly and unfriendly mergers, we also have had evidence, as you know, from the mutual company, which argues that there really is not such a distinction. It is a little like the godfather who can make you an offer you cannot refuse. The question is, is that friendly or unfriendly? It can be made in a friendly fashion, but one understands the outcome. Therefore, we have had conflicting evidence on the extent to which that could actually occur.

Mr. D'Alessandro: Well, I think that I do not agree with Bob on that point. First of all, the rules are quite clear that it has to be friendly. If the legislation that gives you this holiday period, during which whatever you do has to be on a friendly basis, and it is always subject to approval by the political authority, how can I make an offer for Bob's company that he and his board reject and then expect the minister to approve it?

Senator Kroft: I am trying to ensure that I am clear on the degree of reservation you have about acquisition of insurance companies by banks after the five-year period. The last words of your report are that no chartered bank receive ministerial approval, unless there be a public interest review.

I do not want to press you further than you want to go, but when you came back in the latter part of your remarks and said that, generally, we should be pleased with the financial institutional structure that we have achieved in this country, how high would the barrier be in that approval process? From what you have been saying, I read that you would be tempted to say no takeover period.

Mr. D'Alessandro: No, if I have given you that impression, I would like to correct it. I am saying that it is reasonable for us to ask to have a period of time during which we could prove that we could add value and be full participants in the process. However, if after a period of time that does not happen, we are still vulnerable to being acquired by somebody that is stronger than we are. If we have not established our following or a franchise to a degree that was necessary, the market should work its magic. However, markets should only behave in conformance with the law of the land. If the law of the land is saying -- and I do not think there is anything wrong with the law that is being proposed -- that there be a public review process of these financial transactions that can have enormous public consequences, then that is what we are saying.

At the end of five years, if somebody wants to acquire, we have had our opportunity. Either we are successful, or we are not. As stated in my report, if you look at the five demutualizing companies at the moment in Canada -- L'Industrielle-Alliance, Mutual Sun, Canada Life, and ourselves -- I do not think it is reasonable to expect that five years from now all of us will be world-class financial institutions; do you?

The market is just not that big. If you add us all up today, we are not equivalent in size to the Royal Bank. Therefore, I think there will be some sifting and some consolidation that will take place after demutualization. That sifting and consolidation after demutualization could include the combination of an insurance company with another financial institution. We are not saying no, banks should never be allowed to take over insurance companies. They should be allowed to take over insurance companies only after five years, and only if they can show it is in the public interest.

The Chairman: Mr. D'Alessandro, Mr. Daniels, thank you very much for coming today. That was very, very helpful.

The committee adjourned.