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

Issue 38 - Evidence - Afternoon sitting


TORONTO, Wednesday, November 4, 1998

The Standing Senate committee on Banking, Trade and Commerce met this day at 1:00 p.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: Thank you very much for coming. You have circulated a long brief. Let me just warn you about one thing. Because our schedule this afternoon is very tight, we should like you to hit the three or four main points in the brief, and then we will move on to a discussion and questions. Obviously we will read your brief before we do our final report.

Ms Lillian Morgenthau, President, Canadian Association of Retired Persons: CARP, which is the Canadian Association of Retired Persons, is actually an association for people 50 years old and up, whether they are retired or not. We are a national organization with 370,000 to 400,000 members across the country. We do not take any funding from government, so this is simply the expression of our members, and we are addressing here a number of important issues.

We are talking about the MacKay report, and it is CARP's policy to provide practical recommendations to deal with the concerns rather than just carping about them. Before I turn to the four issues that you have asked us to speak to, I should like to say that we understand that the current proposed mergers will not be dealt with by this committee at this time and that the committee will decide whether to hold public hearings. CARP has always felt that the Canadian population should have a chance to discuss important issues and we should like to see public hearings on that.

What makes the financial services sector special to the Canadian economy? The answer to this question seems to us to be self-evident. Without the financial services sector, there would be no Canadian economy. The financial services sector, including all of the elements dealt with in the MacKay report and others, is central to the Canadian economy. Its magnitude encompasses a large share of the economy by any standard: service, capital, employment, and investment. Both its centrality and its magnitude necessitate careful nurturing of this sector. In other words, we really need the banks. We need them so that they can service our population and be a credit to Canada.

How do we see the future with or without the changes in the MacKay report? It seems to us that there are several types of answers to that question. On one level, answering the question is like gazing into a crystal ball, except that the future usually becomes clearer in hindsight. I do not know what will be tomorrow. How can any of us tell you what will be in the future? However, when we look back, we always can tell you what we should have done. My feeling is that we should do what we can to make sure that the future does not say that we did the wrong thing.

We can extrapolate present trends, such as increased globalization, increased computerization, and technological innovation, into the future and hope that they are right. By the way, while many seniors deplore the dehumanization of banking through the reduction of the number of tellers, 10 per cent of seniors are on the Internet and the largest growth in Internet users is among those 65 years of age and over and those under 20 years of age, according to Statistics Canada. There is no reason to believe that the closing of bank branches in rural areas, in small towns and in the poorer and, for the banks, less economical urban sections will not continue with or without the proposed bank mergers, although the mergers may accelerate the process.

The same is true for downsizing of staff. However, Mr. Barrett, the CEO of the Bank of Montreal, has suggested that if mergers are not approved, his bank will focus on its core business, which seems to imply that the closing of domestic branches and the downsizing of staff may accelerate. Whether this is blackmail or not, I cannot tell you, since about 35 per cent of the aggregate net income of Canada's banks is already derived from international and global transactions.

On another level, the answer depends entirely upon whether the recommendations in the MacKay report are adopted. For example, can the trust companies, credit unions, caisses populaires, mutual funds and insurance companies assume the financial role on a national level enjoyed by the banks? By lowering the current standards for opening, owning and operating new banks -- that is, by raising the current 10 per cent ownership rule to 20 per cent, reducing capitalization, and introducing a 10 year tax holiday -- will new banking institutions appear to service the rural areas of our country, the small towns and the poor urban sections where branches are currently being closed even without the proposed bank mergers? Will more foreign banks enter Canada? If they do, will they service the other smaller markets?

Is the MacKay task force's belief that these developments will occur based on pious hopes or solid evidence? Currently, the evidence demonstrates that only one of the 44 foreign banks operating in Canada, the Hongkong Bank of Canada, is engaged in deposit-taking.

Senator Kelleher: BCI, the Italian bank, has 14 deposit-taking branches in Canada.

Ms Morgenthau: Statistics Canada and the MacKay report do not reflect that.

Senator Kelleher: Well, I can assure you that that is the case.

Ms Morgenthau: That is good to know, and I am learning something from you.

Senator Poy: The Bank of East Asia Canada does, too, and the Bank of East Asia would love to have more business outside of the Asian market.

Ms Morgenthau: That is going to be difficult. Apparently, they have not taken the opportunity because of the heavy expense involved in technology and infrastructure and because of the limitations on market share.

Let us look at the market structures. As I have noted, we are sceptical that the institutional developments recommended in the MacKay report are feasible. However, we suggest that the proposed bank mergers should be put on hold for the next ten years following the Australian model. During that decade, we suggest that the structural changes recommended in the MacKay report be allowed to continue. Those changes include enabling the national growth and development of banking abilities and networks by trust companies, credit unions, the virtual banks and the other banks in the country, foreign banks, insurance companies and mutual funds. At the end of that decade, mergers of the magnitude currently proposed could be reconsidered.

Moreover, as the MacKay report points out, economies of scale do not exist when assets of merged entities are over $10 billion, although they do exist below $5 billion. Of course, the assets in the two newly merged megabanks will be well over $10 billion. Nor will the proposed merger banks benefit from economies of scope, that is, extending their areas of business, since all the parties in the two proposed mergers engage in the same areas of business. Nor will the merged banks become more effective in international or global financial markets, since the Scotiabank, which has been left out of the proposed mergers, already has a very effective international presence, if not the most effective international presence among the top five banks.

The MacKay report indicates that Canada's banking services are already among the most concentrated in the G-7 nations, and they will be intensified even more. Currently, the top five Canadian banks control 81 per cent of the domestic market share of banking services, compared with 13 per cent for the top five banks in the U.S.A., and 63 per cent in Holland, which has the next largest concentration. The banking structure in Canada will be narrowed even more, to the detriment of domestic competition for small business and consumers.

We will look at the regulation of the financial services sector. While we believe that the regulation of the financial services sector must be constantly reviewed, we also affirm that the sector must remain regulated. Over the years, sound regulation of the financial services sector has nurtured the safe and secure growth of the Canadian banking system, ensuring confidence in customers.

Since 1923, only one bank has failed in Canada compared to 17,000 banks in the United States. The soundness of our banking system must be sustained. As I noted previously, we do not believe that the recommendations in the report to increase competition in the financial services sector by loosening the current regulatory framework will work. Therefore, we oppose the MacKay report's recommendations to reduce capitalization for new banks, to increase ownership from the current 10 per cent, and to provide a 10-year tax holiday for new banks.

On the other hand, we have made a number of recommendations in our brief to enhance the soundness of and consumer confidence in our banking system, such as increasing deposit insurance from the current $60,000 maximum to $100,000 maximum as exists in the United States. A form of deposit insurance or policy guarantee should also be extended to insurance companies for life insurance policies, whole life, term or any other variation to prevent the loss of coverage should an insurance company default, especially now that demutualization of insurance companies is in the offing.

Since I have mentioned life insurance, let me note that we oppose allowing banks either to sell insurance or to lease cars, because these developments would decrease competition as well as widen the possibility for coercive tied selling. In fact, we believe that tied selling should be prevented by legislation

CARP generally supports the recommendations in the report to empower consumers. In our brief, we have presented a number of recommendations to enhance and extend that empowerment, such as increasing the number of tellers in branches as a safeguard against frauds and scams directed at seniors and reviving the idea of a consumer advocacy board attached to the Office of the Superintendent of Financial Institutions that would, among other things, provide consumers with comparative information on the service charges of financial institutions. There should be no secrets about that. It should be open to public scrutiny.

We are extremely concerned about the current wave of branch closures, which has a negative impact on rural areas, small towns and the poorer urban sections. Curtailing physical accessibility will make extending financial services to low-income, poorer Canadians, as recommended in the MacKay report, that much more difficult. You would be shocked at the tons of letters about the bank closures that we have received from people right across the country. They tell us about having to go to machines when they really do not want to; they want regular people. Unfortunately, I did not go to the office before I came here, but I have a huge stack of letters to bring to you from ordinary people who say that their bank has closed and they have to walk or take a tram to a new bank, and that is not what they want. That is not why banks were originally started.

Originally, the banks were started for people to bring in their money and have it safe. Now, when you take your money to the bank, you do not even know who the teller is. In my own bank, there have been at least six turnovers. When I was growing up in Hamilton, I would walk into the bank and the manager would come out and say, "Hello, Miss. How are you? How is your dad?" People used to have an affinity with their bank tellers and managers.

When you go into a small town today, you may find only one bank and you have to change everything to that. The credit unions love it, but we really want a bank, and that is what we are hearing in the letters.

We recommend that liberalizing lending policies for small businesses should be legislated, if necessary, since other efforts seem to have failed to achieve this goal, according to the MacKay report.

We recommend the creation of a national securities exchange commission to enhance the stock market and mutual fund sectors.

We also recommend that any and all remaining interprovincial barriers to investment trade and commerce should be removed as quickly as possible.

Since CARP has the largest Web site for mature Canadians in our country, we endorse the MacKay report's recommendation on the regulation of financial services provided on the Internet.

Finally, I must compliment the authors of the report for the depth, clarity and comprehensiveness of this report. In particular, we applaud their development of an integrated vision of the future for Canada's financial services sector. While we question their vision, we applaud the context that it provides for understanding their rationale and direction.

The Chairman: Thank you very much. I have one question on a point you did not mention that has bothered me about the MacKay report.

You talked about creating a consumer advocacy board somehow attached to OSFI. The task force talks about a similar concept, establishing a financial consumers organization, and recommends that governments should work with the sponsors to facilitate the organization's success, which I translate to mean that governments should fund the organization.

Ms Morgenthau: Money is the key to everything.

The Chairman: Over the last five or six years you have put together an incredibly effective organization with a large number of members. Am I correct that you have never had government funding of any kind?

Ms Morgenthau: You are correct.

The Chairman: It is also generally true that the consumer movement in Canada is not nearly as active as it is in the U.S., with groups like Nadar's, or in Britain, which has an active volunteer consumers organization.

What is your reaction to the idea that government should create such an organization using public money? Should we instead take the view that if consumers have not been able to get it together, if consumers organizations have not done what you have done so superbly, then that is just too bad?

Ms Morgenthau: I think that you are misunderstanding what I am saying.

The Chairman: No, I understand your point. Your point is very clear, which is that there ought to be an advisory panel to OSFI with consumer input.

Ms Morgenthau: I think that it would be wrong for government to put in consumers as a blob. This is nothing against the way they do things, but we have discovered that agencies, associations, and charities depend upon government for funding. When government gets tight, the funding dries up. We feel that anything that is needed should be funded by its members. What we want you to do, Mr. Chairman, is to put together a board where a consumer or a group such as us can sit and talk to you.

There are many provincial, local and municipal groupings and agencies and we think that is good, because it breaks it down to where a person lives. However, there are very few national organizations, no more than about five. If you put together a board that discusses national issues, I think that is where we should be, and I do not think that they should be politically appointed. I am suggesting that CARP would like to sit on it, because it has the pulse of the ordinary person over 50 years of age.

The average age of all of our 400,000 members is 62. That is not an older person, and not a younger person, and as I have often said to you, people are not homogeneous. You have to talk about a decade. Somebody between 50 and 60 years of age or 65 years of age is very different from somebody who is 65 to 75 years old or over age 75. Many of their needs and their concerns may be the same because they are basic, but the individuals are really different. This board would have to reflect that.

The Chairman: That is right. By the way, did you say 400,000 members?

Ms Morgenthau: Yes.

The Chairman: Thank you. That is amazing.

Ms Morgenthau: We grow by approximately 100 to 125 members per day and that is all by word of mouth, because we are a very poor non-profit organization.

The Chairman: Do you not advertise?

Ms Morgenthau: We do not have not the moneys to advertise and to get out there like other organizations.

The Chairman: I am one of your members and I trust all my colleagues will be if they are not already, except for those of you who dare to try to tell me you are under 50 years of age.

Senator Tkachuk: Welcome, Miss Morgenthau. You mention items like lower counter seats and magnifying glasses. Are you lobbying the banks directly on all of those issues and are they responding?

Ms Morgenthau: No. I was asked to speak to the Canadian Bankers Association. I am sure that they felt that I would come in with the ordinary type of thing, but my first sentence was that banks are anti-senior, and that is the truth.

We gave them a number of simple recommendations that make life easier for someone who walks in and needs a little attention. We suggested lower counters with chairs for people who want to sit while talking about what they are doing. That was done in many banks. Canada Trust has done it. I am not sure about the other banks because I did not go right around.

All of the bank pamphlets have such small printing that you cannot read it. We suggested that the print should be enlarged but I have not seen that done. We said that there could be a magnifying glass where the pen is at a teller's desk, so that customers do not have to go rummaging through their purses for hours to find their glasses. That is much simpler.

All of the things we suggested were very simple and would not cost, but many of them have not been done because, actually, they do not want you to go to a teller. They want you to use the machine which they charge for.

Senator Tkachuk: Sure they do.

Ms Morgenthau: I am not against banks, but I am against some of the things that they do.

Senator Tkachuk: I think your point is well taken. According to their remarks before our committee, the majority of foreign banks are not interested in retail bank branching, and it does not seem like there will be a large competitive opportunity for us.

Ms Morgenthau: They will only go into the big cities. They will not go into the places where they are needed.

Senator Tkachuk: You are ahead of me. I was going to ask that question.

In item 15 of the recommendations in your brief, you oppose raising the 10 per cent ownership rule, the reduction in the amount of capitalization, and the 10 year tax holiday. I am with you in not giving them a 10 year tax holiday, but do you support the MacKay recommendations that would allow for easiest access into the banking business with lower equity requirements? Does your organization support that?

Ms Morgenthau: I think the answer is no.

Senator Tkachuk: Why is that?

Ms Morgenthau: I think that we should have more banks in the country. I think that we need more competition. I think that we need to allow the population to decide where they want to bank and not force them to go to a particular bank.

In small centres you will find only the big banks. Maybe the people there want change. Maybe they do not like the bank manager or what is going on in that bank, but they have no choice. I think the time has come when we need choice.

You have to remember that Canada is very multicultural. It has all kinds of people in it today. It is not just one or two groups anymore, and I think it is time that we allowed this multiculturalism to come into the banks as well as into the country.

Senator Tkachuk: Just so I understand, do you support the easier access into the banking system?

Ms Morgenthau: Yes. That is right.

Senator Tkachuk: Do you think that individuals or others can take advantage of these recommendations?

Ms Morgenthau: Yes, as long as they stick to the rules.

Senator Tkachuk: And pay the same amount of tax as everybody else.

Ms Morgenthau: Actually, I would like them to pay more, but that is all right.

Senator Tkachuk: I have only one more question. I am a little perplexed by your seventh recommendation, which reads:

The spread between interest rates on savings accounts and interest rates for loans should be increased, among other reasons, to make banking services more available for low income Canadians.

What do you mean by that?

Ms Morgenthau: I think that there is a big spread between the interest rates that the bank gets when it puts out money and the interest rates that we get when we put in deposits. The banks are not getting 3.5 per cent on my money.

Senator Tkachuk: They are getting 7 per cent.

Ms Morgenthau: At least.

Senator Tkachuk: They get 8 per cent. Actually, they get 100 per cent. They are doubling.

Ms Morgenthau: Quite honestly, in the past that was not true, because the banks were not so greedy. Also, now the service charges are monumental and while that is good for the bank shares, it is not good for the people. In other words, there is really very little give and take like there used to be and there is very little competition.

Senator Kenny: You just mentioned service charges. Are you aware that service charges in Canada are amongst the lowest in the world?

Ms Morgenthau: They are not low enough.

Senator Kenny: Okay. You mentioned early in your presentation how comfortable members of your association are using computers.

Ms Morgenthau: It is very sad.

Senator Kenny: Are they or are they not comfortable?

Ms Morgenthau: The majority are not comfortable. Many of our members grew up in a time when there were no computers and they are not ready to go on the computers. Even if they were, they would still like a friendly face to talk to.

Senator Kenny: I understood that. I thought you were also making the point that a surprising number of your members are pretty good with computers.

Ms Morgenthau: That is not what I said.

Senator Kenny: Could clarify what you said for me?

Ms Morgenthau: I said a small number of our members are on the Internet.

Senator Kenny: You mentioned that what your membership really wanted was a bank. Now, do they really want a bank or do they want a financial institution that gives them all the services they need?

Ms Morgenthau: They want an accessible financial institution that they feel comfortable with. That could be a bank, or a trust company, which has already been swallowed by the banks. The competition in trust companies is gone except for Canada Trust, I think. Many members are using credit unions now because they feel more comfortable. People are more comfortable when they know who they are talking to.

Senator Kenny: Of course. Are they happy with credit unions or do they object to dealing with credit unions?

Ms Morgenthau: They are using them because they have no choice. There is no competition out there, and many of them do not want this movement of small branches out of their area.

Senator Kenny: Now that your members have tried credit unions, do they like them?

Ms Morgenthau: We have had a number of letters, but not enough to really give you an answer. I do not want to go on record about that. I am not touting the credit unions. What I am saying is that we need to have a financial institution that Canadians are comfortable with.

Senator Kenny: Is the underlying theme of your brief that you would like to see a transition strategy that goes for 10 to 20 years, that really picks up the gap until a younger generation comes along that is comfortable with computers and with banking machines? Are we going to see a different older generation 20 years from now?

Ms Morgenthau: You are going to see a generation that will not take what my generation took, and I am only 49 years old in a few months. My generation grew up where the doors were open, people walked in, they spoke to you, you knew they were telling the truth.

We are trying to teach our members about scams and frauds and trying to train them to say no, to not let anyone into the house unless they know exactly who that person is. We just got a very sad letter from someone looking after a lady now who was scammed out of $35,000 for a vacuum cleaner. We do not want that person to feel that she cannot go to her bank. We saved one of our members from a bank scam because the teller was smart enough to phone us because she said she was a CARP member. We got the police there that time, but how many are being scammed?

We are talking about a generation that will not go to a machine, that is having trouble, that wants to have a financial institution that they are comfortable with. Let us not overlook them; they are one-third of our population.

Senator Kenny: Actually, my question was: Looking ahead to 2010 or 2020, will the older generation then be different from today's older generation? In other words, do you feel that we will see a generation that will be more comfortable with these innovations that the banks have been bringing in?

Ms Morgenthau: The baby boomers, of which there are 9 million, are going to be everything you think that a mechanical, well-aware person will be. They are good on the computers. They have been raised with them. They are everything, and they are demanding. They will not stand for a lot of things that we accept today. They will be way ahead of us, as far as machines go. We may never even have to go to a bank, because even today you can bank by telephone, and they will be that kind of person.

Senator Kroft: I would like to pursue one particular area that I have come to be very interested in, and that is the issue of the human relationship to computers and electronics. That is an important aspect of many of the things that we have heard as we have gone across the country. Certainly, the type of concern you expressed is a familiar one and I am very sympathetic to it. I believe that everybody born after 1960 has a chip in their head that the rest of us do not have.

I was driven to computer literacy at the age of 59 so that I could receive my grandchildren's e-mails. I should like to try to turn around this business of hostility toward electronics.

Given normal life expectancy tables as I understand them, if the average age of your membership is 62, that means that the average member has a life expectancy of close to 25 years, under current insurance tables.

Ms Morgenthau: The statistics say that if a male reaches age 65 he will have another 15 years. If a female reaches age 65 she will have another 20 years.

Senator Kroft: Grant me 20 years. My point is that we have this the wrong way around in trying to build a system. Certainly we have to look after all of the needs that you were talking about, but I am trying to encourage you to look at another approach. Whether your members have 10 years, 15 years, 20 years or 25 years, why use all of your energy trying to keep the world the way they were comfortable with it?

I think that computers and particularly the Internet are the most liberating thing possible for older people, particularly those who have various levels of limitation of movement and confinement. My mother is 88 and I am dying to get her on to the computer. We have to deal with the problems you raised, but while we are doing everything that you talked about, can we not use some ingenuity, some imagination and some lobbying to computer companies and to educational programs to do something about giving your membership the possibility of not only learning to live with, but thriving on the potential of computers and the Internet? It is possible and I wonder why we take such a negative rather than an opportunistic attitude toward it.

Ms Morgenthau: What you are talking about is going to happen. However, you do not throw the baby out with the bath water. We still have a third of our population who are not on computers and we have another third coming up that are definitely computer-wise, so we have to accommodate both. Just because we are going into the millennium does not mean that the banks or financial institutions will not have to have banking institutions that you can walk into.

Senator Kroft: I did not believe that for a minute.

Ms Morgenthau: We have here a transition area, but as far as education is concerned, we are already getting computer areas, lessons in high schools, and so on. However, there is still a definite percentage of people who do not want computers, who say they cannot cope with them. Do we take that 10 per cent or 20 per cent of our people and say, "You have to stay home. You cannot use a financial institution"? We have to make good on the promise that the MacKay report made that there will be availability of financial institutions for everyone.

I am not negative about it. I even learned to use the computer and every time I get a glitch and lose my stuff, I pick up the phone and call my expert, and he comes and gets it back. My expert is 13 years old, lives around the corner, and is called "grandson." I am not saying that we are not supposed to be prepared for the boomer institution grouping and everything else that is coming up. What I am saying is that we must be prepared to service both.

Senator Kelleher: I wonder if I might go back to your recommendation No. 15 where you oppose the reduction in the amount of capitalization, tax holidays, and things of that nature. Are you aware that the MacKay task force put this in because it is modelled on the community banking system, the small, local, rural banks in the United States? It is because of the small capital requirement and the different tax regimes that they get those community banks. Here the task force is suggesting that if there are bank mergers, there will be fewer branches and less service in small rural areas, and they feel that rules like those would assist in the creation of smaller banks in those smaller communities. I wondering if perhaps there is a misunderstanding here as to why the MacKay committee made those recommendations.

Ms Morgenthau: All of those measures really encourage the creation of ethnic banks in ethic communities. If we had a number of ethnic communities, those small banks might do very well, but we are talking about banks that are part of the five-bank system. They should remain in small communities and in rural areas because people like to bank at a financial institution where they have done business for years, but they cannot because those branches are being closed up.

Senator Kelleher: I understand that, but if the big banks are, in fact, closing branches in the smaller communities, would it not be worthwhile to bring in a form of legislation for small banks with smaller capitalization so that small banks would open in those communities to replace the branches of the large banks that are closing?

Ms Morgenthau: I really do not think that would happen. No matter which way we cut the cake, Canada is 28 million to 30 million people. You are not going to get a whole rash of small community banks. You still will have to have representation of other banks, and allowing the 10 per cent to go up is not the way to do it.

The Chairman: Thank you very much for coming. That is great.

Senators, our next witnesses are Mr. David Banks, the chief executive officer of Newcourt Services and Mr. John Sadler, the executive vice-president

Thank you for coming, gentlemen. I am told you do not have a brief. What I would like you to do is to proceed with your comments. We will then open the floor to questions, beginning with Senator Kelleher.

Mr. David F. Banks, Executive Chairman, Newcourt Services: First of all, let me thank you all for inviting Newcourt to address this committee and say that, ladies and gentlemen and distinguished senators, we are delighted to be here. I need to dispel one thing, I am the chairman, not the chief executive.

Let me first say that, in my opinion, the MacKay task force report was excellent. It was a clearly written document. I think the people who put pen to paper should be heartily congratulated. It is also organic, which, as a lawyer by training, I can appreciate. This debate undoubtedly is going to put pressure on people's thinking. A rigid and static document, which could not stand the growth dynamics the report has, would be useless.

The proposed bank mergers and the recent international financial crisis that we face today have taken centre stage at the report's expense. That is unfortunate because it is an excellent report. I think we, as a company, would want to commend the MacKay task force for looking beyond traditional financial institutions, and, in our words, "thinking outside the box" in their review of financial services. Their recognition of the importance of what we might call "niche" institutions, which are alternates to the more traditional financial providers, is a very strong part of the report. That dynamic competition needs to be ensured for the future so that consumers will have a choice. That will go a long way in shaping the debate as we go forward.

We want to strongly support the task force's approach to regulation of the financial services in recognizing that, and I quote, "the regulatory environment should allow for different degrees and types of regulations." That is wise. As the report points out, "Asset-based lenders, such as Newcourt Credit Group... because they do not take deposits from individuals, are not regulated institutions." Obviously, we agree; we think we should not be regulated.

In contemplating our remarks for this committee, we thought it would be a useful exercise to take a look at Newcourt's experience to determine if there were any practical examples and lessons that can be learned that would encourage the entry and growth of other alternate financial services providers in Canada. We think that is something that benefits business and consumers alike.

Newcourt is a homegrown alternative to the more traditional financial institutions and is a significant provider of financing to Canadian commercial clients of all sizes, particularly small and medium-sized institutions. Because of the publicity Newcourt gets, you tend to associate it with the Lucents, the Dells, and some of the larger financial transactions. In reality, we have 600,000 customers, and most of them are small and mid-sized businesses. We have learned to listen to these people and provide them with financial services that make sense. That is what pleases the larger manufacturers that we serve.

What is truly unique about Newcourt is the fact that we have achieved an international size and scope in a highly competitive market. There is no question it is a tough market out there. We have had to be on our mettle in order to take market share and grow to be the company that we are. We are competitive in Canada, in the United States, and in Western Europe. We do not have a large position in Asia or Latin America, but we certainly do in Europe and we are just as competitive there as we are here.

Today, Newcourt is the world's second largest asset finance company with over $34 billion in financial assets that are either owned or managed. We have the capability of servicing global asset financing needs of some of North America's largest and most successful manufacturers such as Dell Computers, Lucent Technologies, Western Star, and Yamaha. We believe we have been a good business ambassador for Canada.

The establishment and growth of Newcourt was, I believe, a result of two factors. First, we saw an opportunity to fill a gap in the commercial asset finance market that was not well serviced by traditional service providers, particularly the commercial banks.

In the period of recession of the 1980s, many commercial banks pulled out of this industry, creating an opportunity for a new commercial finance company like ours to enter the market. Newcourt does much of its financing through relationships with equipment manufacturers and distributors. We provide sales financing and sales aid to help people sell their products, which we finance, so that they can purchase equipment. From the kind of processes we engage in -- assessing the credit of the underlying buyer, providing capital and managing the loans so that we get paid back -- the manufacturers, in essence, become our branch network.

For example, Newcourt is the financing partner for Lucent Technologies, a leading manufacturer of communications network and systems. This company has a great success story and it has been a wonderful partner for us.

We created a joint venture alliance called Lucent Technologies Product Finance, a very unusual but creative venture. We have been asked to write a Harvard Business Review article about it. It is not a legal entity; it is what we call a VLO or a virtual leasing organization, with both partners, a manufacturer and a financier. We provide the financing to meet the needs of Lucent's business customers worldwide, and you can be sure if we do not do that, Lucent has us on the carpet instantaneously. We assess the credit. Newcourt provides the money and manages the loans.

One thing that is unique and exciting about this alliance is that, for countries where Newcourt is not represented, we have a platform to find people who can provide the financing. We adjudicate that financing and arrange it along with Lucent. This ensures consistency of service for Lucent by providing sales financing for its customers all over the world. It also gives us a global platform with a minimal of international investment and infrastructure. This is unique. There is no other organizational entity like it anywhere else in the world.

What is particularly interesting about the Lucent model is the extent to which it can be used as an example of how Canadian financial institutions can service the international financing needs of their clients through partnering, without incurring the costs or risks associated with a full global infrastructure.

Newcourt has over 300 similar relationships. However, only Lucent and Dell are in that rare category of what we refer to as a mega-relationship. It is a very intimate relationship, very productive for both partners. We also finance equipment that ranges from trucks, computers, printing presses, airplanes, and trains. We have relationships with developers of infrastructure such as highways and power plants.

For example, building on the relationship that Newcourt established with the Canadian Highways International Corporation in the construction of Highway 104 in Nova Scotia, we are now the financing partner to the CHIC-led consortium selected to construct the cross-Israeli highway. You might well ask how a company in Toronto could pull that off. We pulled it off and succeeded in spite of some very tough competition centred in London.

The second reason behind Newcourt's existence, and perhaps the most important one for this debate, is that, during the 1980s after the real estate debacle, insurance companies were seeking to diversify their investment portfolios. This drive for diversification was particularly acute with the collapse of the commercial real estate market. The regulators decided that they should only have approximately 10 per cent of their assets in real estate. Commercial asset-backed loans provided a very attractive alternative to real estate.

Because of the nature of the funding to whole life companies, they were seeking investments in two categories: Three to five-year investment pools and 10 to 20-year investment pools. They also wanted undoubted credit quality and documentation that was friendly to their industry. Newcourt provided an efficient means for the whole life insurance companies to invest in these assets without having to build the infrastructure. Therefore, Newcourt found a niche in the market where it could place debt with the whole life industries. It was a wonderful relationship and it is still very vibrant.

You could say, therefore, that Newcourt began as a conduit for the whole life insurance industry to assess the commercial and corporate lending market for the creation of assets for that industry.

Based upon Newcourt's experience, I would argue that an important condition for the growth of the new financial service providers in Canada is to ensure there is a committed, competitive market with alternative "non-bank" sources of funds for new entrants into the market. If the whole life industry were not there, Newcourt would not be here.

What does this mean for the process we are currently engaged in, the MacKay task force recommendations, and, of course, the big question on everyone's mind, the banking mergers?

First, I would like to state that, at Newcourt, we believe that Canada and Canadians have traditionally been very well served by their financial services providers and that Canada has excellent commercial banks. I have read some of the reports in the paper and I have listened to some of the comments. However, I have lived in New York, London, Tokyo, and Hong Kong. Personally, the banking services that I get from the CIBC and the Bank of Nova Scotia are absolutely first rate. It is a great banking system, and I do not take that lightly. I know the banks can become a scapegoat sometimes, but we do have a first-rate banking system and that should not be forgotten.

Let me also state outright that we support the bank mergers. We believe in free markets, and we believe that size is important in today's global financial markets. I wish that were not so, but it is. If you read what Lowell Bryan has written, there is no question that size matters. Lowell Bryan has emerged as probably the principal analyst of financial institutions in the world. He advises governments, banks and regulatory agencies in a dozen countries.

Newcourt has achieved this scale of what we consider to be good size through a number of strategic alliances and acquisitions, culminating in the acquisition of AT&T Capital earlier this year. The economies that have come from that merger have stood us in very good stead. I wish we had had more time to get through our integration. I also wish we had a single "A" rating that would have come from the product of that work, because it would make our funding and our liquidity management in this turbulent market easier. However, that is not so.

Nonetheless, our size and scale has given us a huge advantage over some of our smaller competitors. We have just completed a $1.1 billion securitization deal that you will read about in The Wall Street Journal. Many companies who have relied on securitization do not have access to the capital markets today, but we do. Certainly, there a lot of companies that have limited access to the market and could not raise a billion dollars in the capital markets today by securitization, or any other means. We did it, however, if this were two years ago, we would not have been able to tap into the market in that way. Size does matter. Size matters in the way that you are able to array your information technology and in the way that you are able to spread your costs over a larger amount of assets and a larger breadth of customer base.

From another perspective, I believe that the mergers will compel the Canadian banks to begin looking outside of the Canadian domestic market for their future growth. This may seem ironic, but we are involved in a global community, whether we like it or not. What happens in Japan and in China does have an impact on us. When there are problems there, there will be problems here, particularly in a country that depends upon raw materials and exports. In terms of a global community, we do suffer the risks and responsibilities, but we do not always reap the rewards. By giving Canadian banks a bigger platform, they will be better able to respond to global competition and serve their Canadian customers.

As a second issue, I would like to address the concentration in financial services. This is an issue that I believe the MacKay report did not give the attention it deserves, particularly in recognizing the effect that their recommendations may have in creating greater concentration. To date, most of the debate on concentration has focused on banking assets and deposits, and has been limited to concentration within the traditional pillars of financial services. We would argue, however, that today financial services is about more than banking or particular services provided by one institution type. Financial services is really about access to funds for individuals, for companies, and for financial institutions.

As we move forward, we believe that the Minister and public policymakers should be concerned if the banks, rather than expanding globally to meet their global competitors head on, propose to continue their expansion domestically by, for example, taking control of the top five life insurance companies. This is a particularly realistic scenario coming out of the recommended demutualization of the life insurance companies that would eliminate a current barrier to bank ownership for four of the top five life insurance companies.

Please, do not misinterpret my comments. I fully support demutualization, and I am not saying that the government should inhibit or, in any way, not permit banks to distribute insurance in their branches, or disallow bank ownership of insurance companies.

We simply want to flag the potential problem for the entry of new competitors in the creation of second tier institutions stemming from too great a concentration and the elimination of competition at the level of access to funds. If at the end of the day the only place that a non-bank or a new entrant can go to fund its lending activities is the Canadian banks, then we will constrain the growth of new alternative competitors to the banks.

As a world leading financial institution, Newcourt has access to a variety of funding sources, both domestic and international, including financing on our own balance sheet. However, I would argue that, had there not been a strong independent life insurance industry in Canada at the time the company was developing, Newcourt might not exist today.

We, therefore, recommend that the consideration of future mergers and the formation of future financial conglomerates also include a test for concentration by way of a rule of reason in the access to funds for potential new entrants and new financial service providers.

The issue may become particularly poignant if one of the Canadian banks were to be acquired by a foreign banking interest where you had an additional constraint of what may happen in another jurisdiction.

Related to the issue of concentration is the cost of funds. Now, in our industry, in the bank's industry, funds, monies, or however you would like to characterize them, are the raw materials. The banks have the ability to acquire their raw materials more cheaply than we do because they have access to retail deposits and a higher credit rating stemming from regulation.

I know there are two sides to regulation. People who are regulated do not like the paper, and they do not like the constraints that they feel are put on them. However, there are also strong advantages to regulations; they provide access to cheaper deposits.

There is an interesting quote from Alan Greenspan, Chairman of the U.S. Federal Reserve Board, that goes straight to the heart of this point. He says:

I have no doubt that the costs of regulation are large, too large in my judgement. But no bank has turned in its charter in order to operate without banking regulation... To do so would require both higher deposit costs and higher capital.

There is the nub of the issue. This cost of funds is a competitive advantage that should be considered, in particular in relation to concentration of financial services under the banks and the proposed holding company structure.

As the MacKay task force rightly points out, the holding company proposal is a very technical and complex issue. The proposed structure in the background paper to the MacKay task force report attempts to address a number of the more fundamental aspects of those issues. However, as they say, the devil is in the details and it will be critical to ensure that a regulatory structure is put in place that addresses both the prudential concerns and the competitive issues associated with having a regulated and a non-regulated institution under the same structure.

We recommend that any holding company structure which includes a regulated institution be regulated itself, and that this committee take an active role in reviewing any proposed legislation and regulatory structure. In such a review, due consideration must be given to the ability for the regulated institution to transfer the implicit subsidy in the access to cheaper deposits that come from being a regulated to the less regulated or non-regulated entities within a holding company. That is a mouthful and I do not envy you. It is a complex approach to a problem.

In conclusion, I would like to say that Newcourt agrees strongly with the MacKay task force's approach to regulation and the observation that niche players, alternative financial suppliers, and tier two institutions are a very important part of competition and providing a real choice to the consumers in the Canadian financial services industry. We believe that the task force's vision for the future of Canadian financial services is a very good reflection of where the industry is, where the industry should be going, and that it is an excellent platform for future debate.

The Chairman: Thank you, Mr. Banks. You commented on why you thought it was desirable for a bank holding company, or a financial services holding company, to be regulated.

Mr. Banks: Yes.

The Chairman: Was that because you felt that all its subs should be regulated, or that you thought that, in order to adequately ensure the safety and soundness of the regulated organization, it was important that the holding company could be regulated? In other words, do you have any objection to a regulated holding company owning unregulated subs?

Mr. Banks: I am holding out a yellow flag issue that I would state somewhat differently. It is difficult to answer the question as you pose it and get my point of view across.

I am concerned that, by allowing a holding company to own regulated and unregulated companies, it is going to have an unfair price advantage when it takes its raw materials and applies them in our market.

I realize this is somewhat of a controversial point of view as well as a technical point of view. However, when that company goes to raise equity finance and debt finance in the markets, it will be viewed as a consolidated entity. Commercial banks have a much higher leverage because they are regulated and, therefore, have much greater access to capital markets than we do. You give them an unfair advantage if you say that, somehow or another, you can firewall off this regulated industry from an unregulated industry and allow only one side to be regulated.

The Chairman: I think you have answered the question I was going to ask you directly. I am right in concluding that what you do not want is a bank subsidiary competing with you in the same unregulated market that you are in, if the bank subsidiary is also unregulated. In other words, you do not want a level playing field in that sense between the rules governing the bank subsidiary that does asset-based lending and you.

Mr. Banks: That is correct

The Chairman: That is what I thought you were saying.

Senator Kelleher: Welcome to the committee, and congratulations on the success of your company in a very short period of time.

I am hoping to get some advice from you with a problem the committee is struggling with. Since you are in the leasing business and understand the leasing business and the costs of funds, perhaps you can help us. One of the more heated debate issues before us, believe it or not, is the one between the desire of the banks to get into auto leasing and the desire of the GMACs, Ford Credit, Chrysler Credit and the auto manufacturers to keep the banks out of it. That is the nicest way to put it. We are hearing all sorts of claims from both sides.

Needless to say, the financial institutions for the automobile manufacturers are preaching gloom and doom. The banks say that it is not going to cause a problem.

Since you are in the leasing business and understand it, could you give us a view on this debate as to where the credibility lies? I am sorry, this may be a tough question.

Mr. Banks: No, it is a very valid question. I will give you our history so that you understand some of the nuance of my answer.

We got into automobile leasing, where you have to be a huge player if you are going to take residual value and compete with the automobile manufacturers. They have a lot of people to keep employed in manufacturing automobiles, and they can lower the cost of an automobile to make a lease more attractive. They call it zero per cent financing. It is a package and they have the ability to transfer price. It is pretty tough.

We had about a billion-dollar exposure in the automobile leasing business. That was about one-tenth of what you needed to have the staying power to be competitive in that business. It is a tough business, and who wins in that? The consumer. That is the attraction of it, and we chose not to get in, not to really expand that business. To the extent that we can work with the banks and help them be more competitive in financing their dealers, we would certainly like to do that.

We believe the banks should be allowed to be in that business. We think it will result in more competitive terms, which will benefit the consumers. However, we are not big enough and we have not been good enough to make money in that industry. If the banks want to do it, and they have the balance sheets to be able to provide cheaper cost of funds, I wish them well. We have been drawn into both sides of this debate, to talk to the automobile manufacturers and to talk to the commercial banks. Our view is yes, the commercial banks should be allowed in it.

Senator Kelleher: It will not bring the doom and gloom that the other side is forecasting?

Mr. Banks: No, and I will give you an example of the doom and gloom everybody suffered in the fourth quarter of 1997. During the recession, there had been a pent-up demand to buy new cars. When it started, it started with a vengeance and I think the automobile manufacturers did not know when to stop. At the peak of that period, the bottom fell out of the used car market. If you had a residual position in automotive paper, you were in huge trouble. The write-offs have not stopped yet. There is a lot of blood on the floor. The manufacturers just keep on manufacturing and absorb those losses. The rest of us got punched in the side of the head. It was tough.

Senator Kelleher: Let me switch gears here just bit. The question of cost of funds is something you have already touched on. It is part of automobile leasing.

A number of people who have appeared before us on behalf of various vested interests have said that we cannot let the banks do this or that; that they cannot compete with them because of the cost of funds; that it is not a level playing field. As you mentioned, the banks have their own deposits and they can draw on those funds.

This is a concern for us, but just how valid an argument is that? Is it a reason to keep the banks out because they can get funds more cheaply; or is it a partial concern, which you vaguely touched on, that perhaps we should look at some form of control in this area? Am I incorrect?

The Chairman: I should like to ask an additional question, and then you can answer both at once. In the United States several of the major banks have, in fact, subs that are unregulated, asset-based lenders; is that correct?

Mr. Banks: That is correct.

The Chairman: In which case, tell me why is that okay in United States and not in Canada.

Mr. Banks: I am not saying that it is okay in the United States. I just said they are doing that.

The Chairman: You are saying it exists in the U.S. and you do not want the competition here in Canada.

Mr. Banks: Well, it is not a question of not wanting the competition.

The Chairman: You are so successful against them in the U.S. What is the problem?

Mr. Banks: Let me try to answer one question.

The Chairman: Yes, I am sorry. It was an additional question.

Mr. Banks: No, we are not saying that we think that the banks should be kept out of our business. We have to compete with the banks day in and day out. We also work with the banks in joint ventures and we have a number of strategic alliances with a number of commercial banks in different locations, not just in Canada, but in the U.S. as well. That is not the point that we are trying to make.

I would not agree with some people who also say to keep the banks out of our business because of cost of funds. What we have said is a little bit more complicated than that. We said do not allow that advantage of cost of funds to be masked by a holding company vehicle that somehow will allow you to say that you can firewall off a particular industry and give it an unfair advantage. We said keep it fair and keep the playing field levelled. If you are regulated and enjoy the benefits from that, stay regulated.

Now, as to your point, that argument did not go very far in the U.K. I lived in London for 19 years. They have holding companies there, and they are very pleased. If you ask regulators -- and I believe you did visit the U.K. -- and talk to people at the Bank of England about what their view is, you will see that they are very pleased with the holding company legislation. We are just holding up our hands and saying that is a big visa; please do not give it too easily to people that could use it to the detriment of free competition.

Senator Kelleher: As a supplementary to your answer, are you saying yes, there are concerns in this area, which need to addressed?

Mr. Banks: Yes.

Senator Kelleher: That being the case, in your opinion, does the MacKay report adequately address all of these concerns, or have you some suggestions you might like to give the committee, concerns that you think have not been adequately provided for or taken care of in the MacKay report?

Mr. Banks: I do not think that there is enough detail in the MacKay report to say that it addresses this point. We just said this is a point of sensitivity to us.

Senator Kelleher: Yes, but that is not much help to us as a committee. Can you be a little more specific. We have to start writing our report, believe it or not, in another week. If the MacKay report is not adequate and you are aware of concerns that are out there, it would be very helpful to us, to yourself and others as well, if we could bring these to the attention of the government in our report.

Mr. John B. Sadler, Executive Vice-President, Corporate Affairs, Newcourt Services: We can produce some additional detail on this issue. There are issues around the cost of funds advantage, which accrues to a regulated financial institution by virtue of the fact that it is regulated.

The point that our chairman was making is that the concern we have is, under a holding company model, there is the potential of having the benefit associated with that regulation transferred over to the unregulated entity and creating a relatively unfair competitive advantage for the unregulated entity, as far as costs of funds are concerned.

This is an issue that Greenspan has addressed in a number of presentations. We quoted one sample of that. His principle focuses on making sure that the benefit associated with regulation not be inappropriately transferred. He sees it as a subsidy, a public sector subsidy that has accrued to the regulated entities. He does not want to see that subsidy transferred over to the unregulated entities within a holding company structure. All we are saying is we understand and echo that point of view.

The Chairman: It is quite true Greenspan has spoken on that issue, but it has not changed U.S. policies.

Mr. Sadler: No. We understand the point. We are echoing his concerns and saying we understand that there is the argument around the cost of the issue of transferring that subsidy. There certainly are people who disagree with Greenspan on that point. It is not a universally accepted position.

Senator Kelleher: If you can let us have any additional information, that would be helpful for us in preparing our report.

Senator Meighen: At the risk of flogging a dead horse, I want to come back on this unregulated entity and the points that were raised by the Chairman and Senator Kelleher. We have a situation where what you do not want already exists in the United Kingdom and the United States; am I correct?

Mr. Banks: If you took the commercial finance industry and asked how much of it is owned by the commercial banks, it is not a big enough percentage. With respect to the commercial banking assets in the industry, it is not a big enough percentage to worry the regulators. The answer is no, I do not think it has become large enough an issue to be on a radar screen.

Senator Meighen: I am sure you have said this and I missed it. Is your position not to go down that route at all, or is it, if you want to go down that route, go down knowing the problems that can arise and be prepared to fix them?

Mr. Banks: I think it is the latter. It would not be right for us, as a free marketeer, to stand up and put a point of view as strongly as your first alternative. We just wanted to point out the issue.

If you said it another way, look at our numbers, what our profits would be if we had the leverage that a bank enjoys for the cost of funds, we would be five times as profitable. GE Capital could not compete with us. We would run them off the street. Before giving somebody that kind of an advantage, you need to think with a 360-degree view as to what that will do to the market. That is all we are saying, be aware of that and have some sensitivity to it.

Senator Meighen: Regulation has many facets. Would you not prefer to be unregulated rather than regulated?

Mr. Banks: Absolutely.

Senator Meighen: I have a general question on regulation in terms of how you think the MacKay report has succeeded.

Some members of this committee think, as you do, that the MacKay report was an excellent report. If there is a concern, it is that there are more and more opportunities, if I can put it that way, for regulation, political intervention in the best sense of the word, and so on.

Did the MacKay report go too far in that way? You quoted Greenspan. He also said that, as we move into a new century, the market stabilizing private regulatory forces should gradually displace many cumbersome increasingly ineffective government structures.

Many of us would agree with that. Do you think the MacKay report is leading us down that path?

Mr. Banks: It is almost a question of the glass being half full or half empty. There is not enough detail in the MacKay report, but there is certainly enough latitude.

We are free marketeers. We are for what Alan Greenspan just said, let the market regulate what the market can regulate. However, you all have several different hats to wear. I can fully appreciate that and do not envy the kind of pressures you have to ensure you are looking after depositors and small business in many diverse locations. It is not an easy task.

We are not for rejecting all regulations. We realize that is just not possible, but we would prefer to see less rather than more regulation.

Senator Meighen: Fair enough. You talked about concentration, about tier-two institutions and so on. That seems to really be one of the most benevolent questions we come to. How do we encourage the growth of core banking, retail banking institutions, if we were to go down the path that you support -- the MacKay report having removed any objection in principle -- the merger of the big banks?

Has MacKay pointed the way or do you have any suggestions as to how, given the fact that the field may be opened up a little bit by increased concentration at the top level, we get more of the core banking activities at the local level, be it through credit unions, community banks, what have you?

Mr. Banks: There is a lot of potential. It boggles the mind. Ten years ago, would we have imagined that we would have Internet access to place deposits. If you want to buy a mortgage in North America from somewhere, you can access the Internet and compare mortgage rates.

Senator Meighen: Mr. Banks, I do not want to interrupt, but I am one of those who would not do that. I do not say that with any pride.

Just before you came here, we had a group of people who indicated that their membership in the main would not do that. There are a lot of people who cannot or would not do that.

Mr. Banks: Well, I am on the other side of the block.

Senator Meighen: I know you are. Soon you may be a member of the Canadian Association of Retired Persons like me and we will have to worry about that.

Mr. Banks: No. I am on the older generation side. There are new ideas that have been coming up and Newcourt is one. We found a niche in the market where you could help a manufacturer sell products by applying technology. We have the ability to adjudicate credit in 12 and a half seconds.

If you go into a Yamaha dealership in Saskatoon to buy a motorcycle, you will be taking credit that we have organized. The dealer will be doing his inventory accounting that we have organized. You will never see the name of Newcourt. The dealer will adjudicate your credit before you walk out of that room. He can do it in a couple of minutes. He will give you the documentation. His cash management capability, which we have designed with him, is created by the Bank of Montreal. It is done with so little fuss, it makes the dealer look good because, as far as you are concerned, you think the dealer has done the financing. It is really Newcourt.

We found niches like that to get into the help commerce. As long as you allow people the creativity and the ingenuity -- and it was not capital because they did not have a lot of money when Newcourt was started -- they find these ways of working to satisfy a consumer, and it works. It really does work. The free market can work if you allow it to happen.

I think there will be solutions to banking. Personally, I cannot see bricks and mortar going away. I am not a computer generation person. I do use the Internet, but I can see the applications beginning to grow as to how you can bank. In the far reaches of northern Canada, you can bank by computer. I do not think that will happen in 20 years. I think you will still need a lot of bricks and mortar, but you can build off of that. We do not have the bricks and mortar, yet we touch those people out there.

Senator Meighen: On the question of ownership as laid out by the MacKay report, do you have any comments on the 10 per cent rule?

Mr. Banks: I do not have a particular point of view.

Mr. Sadler: I just have an observation to make. One of the things that is disabling by enforced widely-held ownership is that it removes from any enterprise, be it a financial institution or anything else, the discipline of the capital markets. The capital markets can be a very harsh taskmaster if a financial institution, or any other company, fails to perform to adequate standards on a comparable basis standards in the equity markets. There would be opportunity for someone else to come in and take over that institution and run it better.

When you enforce widely held ownership, one of the benefits that you get is you do not have a concern about takeovers to the same extent that you otherwise would. That certainly is an issue which, from a public policy point of view, needs to be addressed. However, the other thing that it does do is disable, to some extent, the economic discipline, the efficiency disciplines, which the capital markets and the equity markets can impose on a company. That is a two-sided sword.

Senator Meighen: Your head office is in Toronto, is it not?

Mr. Banks: Yes.

Senator Meighen: Is that a worldwide head office?

Mr. Banks: Yes.

Senator Meighen: Are there any factors or existing regulations that would cause you to reconsider that? I do not think this applies to you, but representatives from many financial institutions have said how punitive capital taxes are both in startup situations and in successful operations.

Are there any other factors that would weigh upon your decision down the line as to whether or not you would be encouraged to maintain your worldwide headquarters in Toronto?

Mr. Banks: I am an American as you can tell from the accent. As a company, we are very pleased to be headquartered here and we do not have any intention to change. We have got a strong Board.

I could give you the other side of that argument because I do go down to the United States and I talk to investors in Denver, San Francisco and Los Angeles. This is a Canadian success story, start to finish. I think it is more believable and more plausible and acceptable as a Canadian story than if it were a New York City story.

When you go to Columbus, Ohio, Minneapolis, and a lot of the cities out East, people are much more impressed with a Canadian sense of vision than they are with a New York sense of vision.

Steve Hudson cuts a very tall shadow in the middle of the western United States.

Senator Meighen: I do not deny that but, with respect, I am not sure that, unless by implication, you have answered my question that there is nothing here to cause Newcourt to reconsider the location of its head office. Your business is increasingly outside Canada.

Mr. Banks: That is correct.

Senator Meighen: Fair enough. You are a resident here because it is the world headquarters. However, as legislators, it is in our interest to not do anything that we can avoid, directly or indirectly, to discourage operations such as Newcourt from being in Toronto. I just wanted to know if there was anything that was of concern to you.

Mr. Banks: We have not seen anything that is discouraging. It is a good by-product of a bad situation. The weakness of the Canadian dollar makes it more attractive for us to do our more labour intensive processing here.

Senator Tkachuk: Like other senators, I have been interested in the car leasing aspects. It was difficult to understand why it generated a lot of controversy at the beginning. There have been two strong points of view, one from the banks and one from the companies that represent the leasing companies that are in the car business.

I agree with Senator Kelleher: It is good that you are here. However, my concern is on the safety and soundness issue with leasing, especially car leasing. You talked earlier on about the risk involved and that there was a lot of blood on the floor just a number of years ago in the car leasing business.

Mr. Banks: In 1997.

Senator Tkachuk: We all know that the car companies who do a lot of the leasing have huge sales efforts to get rid of all the cars that are turned in at the end of three years, two years or four years, and that this is a regulated industry. The banks are a regulated industry.

Will the regulators then have to assess the leasing business of a bank, in other words, the car leasing business?

Mr. Banks: I suspect that, yes, they will.

Senator Tkachuk: I suspect they will. Do you really believe that regulators today know anything about the used car business, which is really what this is all about in the end? You are betting on what a car will be worth two, three and four years from now. Do you think that will require a lot more expertise?

Mr. Banks: By telling you about our history, how we had specialists who do nothing but monitor the used car market and how we got it wrong, I was trying to say that it is a tough business and that the Internet has made huge inroads into buying and selling automobiles.

Used car dealers used to take up one block of used cars. Now there are 200-acre used car lots; these super used car lots. The channels of distribution for used cars are hugely efficient. That has created great opportunities for the consumer, but higher risk for the lease providers.

Yes. To get to the heart of your question, I think it will be very difficult. You will have to have very specialized expertise to analyze that risk or you will have to have a very good actuarial view about how you appraise the risk. It puts an extra burden on the regulator.

Senator Tkachuk: Please explain that a little more for someone like me who is not in the leasing business.

Mr. Banks: When I say actuarial, it is someone that might not necessarily know a great deal about cars, but someone who knows a lot about the history of car losses; someone who can analyze the data of what has happened to companies in different cycles.

Many people in accounting firms do risk analysis. They come in to examine our business and say whether our residuals are properly appraised and valued. They do not know very much about a computer or an aircraft, but they know a great deal about how to assemble data and analyze it actuarially as to what has happened in the past.

Senator Tkachuk: You indirectly raised a concern about unregulated companies being a part of a regulated industry. However, from a public policy view, how do we address the concern of the Ford dealer in Saskatoon who is in the car leasing business? He deals with a person who extends credit and keeps his business alive. However, this person is also his competitor. Being an American in the finance business, you know that in the States car leasing is allowed. How does one get around that very sticky situation in a small town in Saskatchewan, or a rural area of Ontario where there is nowhere else to go?

Mr. Banks: Personally, since I have been with Newcourt, I have had conversations with three of the large Canadian banks about how to do just that, because dealers are a large customer target for banks. They want to compete with them in one sense and they want to finance them in another sense. There is floor planning financing that is good business for them and there is lease financing.

Our idea was always to get between them and find a package that would serve the dealers very well. However, it was not a good enough business for us without working with the bank to be able to do it.

Senator Tkachuk: Do you think that Newcourt, or companies like yours, being involved in the business of the bank, would solve the problem?

Mr. Banks: I would not say that that is the way to solve the problem, but that is a solution that we have chosen to pursue.

Senator Tkachuk: Do you have a self-interest in all of this?

Mr. Banks: We do. I do not say that necessarily for the banks, because they are competitors to the car dealers; they are providing the same package; they do not also see them as a customer.

Senator Kroft: I should like to inquire a bit about the structure of your industry in Canada. I followed with fascination your success story and I congratulate you on it. You talked about your mega-relationships and also the striking fact of how many customers you have that do not fall in that mega category.

As you observed, we must also wear many hats in trying to focus on public policy here. Can you tell me briefly about the asset-based lending business in Canada? Who are the players are how competitive is the industry? What is your Canadian, U.S. or Canadian abroad mix? I am trying to get a sense of what we are looking at here.

Is this a marketplace that is as well served in Canada as it should be? I am sensitive to the fact that, not only is it important on the financial side, you are an important ally of a manufacturer in helping that manufacturer get his products to the marketplace.

Mr. Sadler: With respect to the structures of the Canadian industry, there is an organization called the Canadian Financing & Leasing Association, which can give you quite a number of details concerning the composition of the industry.

My last recollection of the membership in that organization is there were approximately 130 members and they comprise a variety of institutions; some of them directly bank-owned; some of them independently operated, such as Newcourt; a number of them affiliated with manufacturing companies, GE Capital being a perfect example of that. Over the course of the last three years, the membership in that organization has gone from just over 100 to approximately 130. There has been an increased level of participation in the sector.

At the same time, there has been a degree of consolidation. It is a very different type of industry from the banking industry, in that the ease of entry and exit to the industry is quite fluid. From that point of view, it is a good breeding ground for new organizations offering incremental credit to the commercial and corporate finance market.

Senator Kroft: What percentage of the business in Canada would you think?

Mr. Sadler: Of our total business?

Senator Kroft: No. The percentage of business the banks would now have in Canada in asset-based lending.

Mr. Sadler: The statistics that I have with me relate to all of North America. I would have to go back and break all those down. In North America, you are dealing with a very diverse population of organizations.

We are the second largest institution in North America behind GE Capital. Just to put it in scale, in 1997 GE Capital had a volume of approximately $21 billion, in U.S. dollars, $21 billion in new loans that they were originating. In 1997, Newcourt had $11.8 billion.

That is the relative scale of the two major players in a total industry that represents about $136 billion. Even GE Capital, given its size and its significant horsepower in that marketplace, is a large player, but it is not by any means the most important. It does not overwhelm the industry.

I would have to go back and run some numbers from the Canadian Financing & Leasing Association on how that breaks down in Canada.

With respect to the distribution of Newcourt's volumes, in 1998, we will see about 21 per cent of our total new business volume originating in Canada with approximately 68 per cent coming from the United States and the rest coming from other parts of the world.

Senator Kroft: I do not want to press you but, offhand, what would be the market share of the banks in the Canadian market? If you had to guess, give or take 10 per cent, I will give you a lot of latitude.

Mr. Sadler: I would not want to guess that. I think it would be imprudent of me to do so. I would be more comfortable going back and getting an actual number from the statistics of the CFLA.

Mr. Banks: You will find that, in certain products that we offer, the percentage domination by Canadian banks will be very high. In operating leases it is non-existent. We and our competitors enjoy the predominance of that. It is only in automotive that we come head to head. In inventory financing, they probably have 90 per cent of the total market.

Senator Kroft: When you are talking about operating, what are you talking about?

Mr. Banks: We own something; we lease it to you and we do the maintenance on it.

The Chairman: Mr. Sadler, did you want to make a comment?

Mr. Sadler: Mr. Chairman, I am sorry. I am trying to see if there is data that I can immediately put on the table. It does not precisely answer the question, but I can certainly leave it with the Chair.

The Chairman: Senators, our next witnesses are from the Canadian version of the CIA, which is the Canadian Institute of Actuaries. They always attract more attention when they use their acronym rather than their name.

Gentlemen, we are very pressed for time and you have written your brief with the usual density with which actuaries present information. The first point in your brief essentially deals with the need for banks to have a risk management officer of the order of chief actuary. As you know, this committee supported that suggestion in its 1992 report, and has argued the point at various times in respect to amendments to the Bank Act and the OSFI Act. I wanted to give you that background, since I know that some of you were not present at previous presentations. Since we are really quite pressed for time, will you highlight your main points very quickly, in five or six minutes, and then we will be glad to ask you some questions.

Mr. Stuart Wason, President-Elect, Canadian Institute of Actuaries: Thank you very much for allowing us to attend the proceedings today. It is really a pleasure to offer the perspectives of the Canadian version of the CIA, as you say, the Canadian Institute of Actuaries, on the report of the task force on the future of the Canadian financial services sector.

With me today are Helene Pouliot, who is a member of our governing council, and Dr. Allan Brender, who participated in the task force that prepared our submission to you, and I believe also had an opportunity to spend some time with the MacKay task force itself.

In addition to our responsibilities for providing actuarial services to our clients, we all hold positions in the Canadian Institute of Actuaries, a self-regulating, professional organization that oversees more than 1,800 fully qualified actuaries currently practising in Canada.

I will give you a very short synopsis on what we do. As you mentioned, most members of this committee are well aware of our activity in light of the consideration of amendments to the Insurance Companies Act under Bill C-15 in 1996.

We are business professionals who apply our training in probability, risk theory, and statistics to problems of future financial uncertainty traditionally associated with insurance, annuities, pensions, or employee benefits. These are only some of the applications of our services.

I will give you a couple of examples to highlight the diversity of actuarial practice around the globe, and I would like to thank Newcourt very much for the comments a few moments ago.

For example, actuaries provide independent risk assessment to a variety of financial transactions, such as parties negotiating leases, both lessors and lessees, for big-ticket items such as transportation equipment.

With our aging workforce, there is a growing demand for actuarial skills in finance and risk management. Actuaries manage and lead the design and pricing of investment products, and are increasingly employed in the fast-growing area of portfolio management.

In England, an actuary sits on each of the committees overseeing the London Stock Exchange`s six major index funds and we have been involved locally and abroad in designing guaranteed funds for stock exchanges.

The Canadian Institute of Actuaries demands the highest standards of personal integrity from its members, as defined in our guiding principles and rules of professional conduct. I have copies of those if you wish to see them.

Our members are supported by binding professional standards of practice, as well as an established professional discipline process. We take this very seriously, because a key aspect of what we do is safeguard the financial interests of the public we serve. Indeed, our first duty is to the public and is spelled out in the Insurance Companies Act, where we have legal responsibility for protecting consumer benefits promised by insurance companies, as well as in our obligations under pension legislation.

Let me turn to the task force report, where there are four aspects on which we would like to comment. Overall, the CIA is quite supportive of the main thrusts of the report.

The first aspect we want to comment on is the need to enhance and harmonize internal risk management, and to provide tools for effective corporate governance in banking and insurance in an increasingly convergent and consolidated financial services marketplace.

Senator Kirby, you alluded to that as the primary focus of our submission here today.

The second aspect is our support for an amended OSFI mandate to balance competition and innovation considerations with safety, and the need to move cautiously and with greater public consultation.

The third aspect of our submission today is our support for enhanced consumer protection. Actuaries are well equipped to offer opinions on the safety and soundness of an insurance company`s major transactions and we recommend that this role be extended. We also support equity in the design of consumer compensation arrangements.

The fourth aspect is our support for a revised governance structure at OSFI that will equip it to deal with the extraordinary changes taking place in the sector.

I now turn to the first, and perhaps the most important, of our concerns, enhanced internal risk management.

Senator Kirby, you indicated that you have only five or six minutes?

The Chairman: Why don't you elaborate on the other four points, because you have discussed that previously, and as you know, we have been supportive of it. That is not a direct recommendation of MacKay in any event, so why not deal with the others.

Mr. Wason: The second aspect that we wish to bring to your attention is balancing competition and safety.

We were heartened by the emphasis on the need for new entrants into the Canadian financial services sector and the report's recognition of the need to balance that against the preservation of the sector's safety and soundness. We are pleased that the pendulum has not swung too far in the name of competition at the expense of safety.

Indeed, Mr. MacKay's explicit recognition of this issue, and the clarity of his comments to this committee earlier this month, must be borne in mind if the government accepts the recommendations on new entrants. The need for balance is all the more evident in these turbulent times around the world. Consumers should be made aware of this addition to OSFI's mandate so that they understand the dynamics of the regulator's decision making.

In light of our experience in providing advice on safety and soundness, we would be pleased to support the government in finding the right balance, and we see this as a natural extension of our current duties.

In developing the new mandate, we also encourage you to consider explicit reference to OSFI monitoring the cost impact and effectiveness of its regulations, not only to encourage new entrants, but also to encourage a vibrant, efficient sector on an ongoing basis. This too should be part of the balancing act in devising effective regulation for the next century.

On the third aspect, we propose enhancing consumer protection in major transactions, building on the opinions actuaries are required to provide in certain insurance company transactions.

Specifically, there are two areas where other types of financial institutions should adopt rules similar to those in the Insurance Companies Act. The opinion of an independent actuary is currently required whenever insurance companies amalgamate, demutualize, or transfer blocks of business. These opinions cover the security of policyholder benefits, and when participating policyholders are involved, their reasonable benefit expectations also.

In addition, the company actuary is required to offer annual fairness opinions on the distribution of policyholder dividends and the allocation of investment income and expenses to the participating funds. We believe the public would be better protected if an expert opinion were provided on the security of consumer funds and benefits whenever financial institutions merged or traded businesses.

We also strongly support greater equity in consumer protection plans, as we see no reason to treat insurance company products differently, based solely on the Act under which they were incorporated.

The last major aspect of our submission is a revised governance structure at OSFI, where we wholeheartedly support the introduction of a board of directors. We think this will improve governance at a time when the sector is going through enormous change.

Presumably, a key aspect of the board's functions will be to approve compensation policies. This is an important priority for the future, when we will be putting increasing pressure on our regulators to keep pace with an innovative, dynamic sector.

My colleagues and I would be pleased to elaborate on any of these points or respond to your questions. The Canadian Institute of Actuaries is committed to helping ensure the framework for the financial sector is dynamic, innovative, and safe, and we look forward to making our contribution in the coming months.

The Chairman: Thanks you, Mr. Wason. Before turning to my colleagues, I will ask two or three very quick questions.

On page 5 of your brief, I was surprised at the tentativeness of the statement that:

We advise proceeding with care and caution. Moreover, we believe that Canadians place great reliance on the security of their financial institutions and expect the government, through OSFI, to protect solvency. If OSFI's mandate and its policies change in the direction suggested by the Task Force, we believe the rationale for this change should be fully disclosed to and discussed with the public.

Are you saying that you do not think the mandate should be changed, which is how I read that? If that is not the case, I am stunned that actuaries have not taken that position.

Mr. Allan Brender, Member, Task Force on Insurance Legislation: Senator, although we said that we thought Mr. MacKay was very clear, in fact I find that whole area very unclear.

The task force says that there should be some blending of considerations of competition with safety and soundness, but it is difficult to understand the intentions.

The Chairman: In the absence of that, and I do not dispute at all what you said, why did you not just say you think it is a crazy idea? I think that is what you are diplomatically trying to tell me.

Mr. Brender: Our natural inclination is, as I am sure you are well aware, towards solvency and soundness above all, that being our tradition.

On the other hand, I have to tell you that when we look at, for example, the new, 1995 section of the OSFI mandate quoted in the text, although the words are reasonable, we are surprised that the legislation actually states that no amount of regulation can prevent failure. I think that goes against what many of our members, and a large part of the public, have historically believed.

I think that the words are perfectly reasonable, but that it is a surprise to the public to some extent.

The Chairman: Absolutely, but it does not mean it is not true.

Mr. Brender: I am very concerned about how far they are willing to go.

The Chairman: I will try once more to get you to answer yes or a no. Am I correct in reading your statement to say that you do not think the OSFI mandate should be broadened beyond safety and soundness?

Mr. Brender: Not much. You are correct.

The Chairman: I am very close to a no. I will try a second question on page 6.

Is it correct that participating policyholder funds disappear following demutualization, or do they continue to exist in stock companies that participate in segregated policyholder funds?

Mr. Brender: They will continue to be participating funds. The industry's proposals would involve taking most of the surplus from those funds and distributing it to shareholders, but that seems reasonable in the context that initially, the shareholders and the participating policyholders are the same.

The Chairman: For the record, your first complete paragraph on page 6 then states:

Recommendation 25 of the Task Force states that there should be no restrictions on corporate structures available to financial institutions unless required by safety and soundness considerations.

In light of the participating policy fund problem, would you like to add, "unless required by safety, soundness, or considerations of fairness"?

Mr. Brender: That is right.

The Chairman: I understand your intent and I have no problem with it. However, I have a big problem with the wording and I encourage you to think about an alternative.

Everybody uses the terms "fairness" and "level playing field" in making a case before this committee, but we have discovered that those are absolutely in the eyes of the beholder. We have people come before us and argue that something is a level playing field, and the next witness argues exactly the opposite.

We have the same difficulty with "fairness," and I have no idea how the law would interpret that. You do not need to do this now, and I understand exactly what you are trying to achieve and have no problem with it, but you must give me a less ambiguous wording. I have to tell you that if we were to adopt your words, every person who did not want a change in structure would come and argue it was unfair.

Mr. Brender: You want us to actually give you a wording?

The Chairman: Yes, if you can, and in the next week or so. Senators, those were my two questions.

This committee is already on record as supporting the creation of a board of directors for OSFI, before it was recommended by the task force.

We have also previously come out in favour of your first issue, which is the major part of your report, and on which I persuaded you not to make a statement.

Senator Kroft: Yesterday, I asked representatives of OSFI about the availability of resources to meet the demands of the changing world, and I got a "we are doing our best" kind of answer. I think Mr. Palmer said that they had raised the level at the lower end, but had yet come to grips with the upper end, and were supplementing their resources with people in the mature stage of their careers.

I did not hear a resounding "Yes, we have everything we need to do the job. Do not worry." I put that thought aside, but since you have gone to the trouble of making an observation, how big a red flag are you waving here?

Mr. Wason: I think it is a fairly important issue from a number of perspectives. International developments are overwhelming all of us. The trend to uniformity and convergence is not just a national issue, but is really international in focus. I think the regulators are scrambling to keep up with their colleagues in other countries as well and that is a challenge for them.

With the rapid changes in technology, I believe the regulator has to look at new ways of relying on the professions that are active in financial institutions. That reliance mode is a new and challenging style of supervision for them, and it is also a professional challenge for us.

Mr. Brender: I can be a little more specific, because I have spent some time at OSFI, and have also talked to them occasionally about employment.

The passage in 1992 of legislation establishing the appointed actuary coincided with the departure from OSFI of its greatest actuarial talent. I suspect that when OSFI is continually saying that they are in a reliance mode, they actually are in need of employees who are the peers of the people they are dealing with.

What I have in mind is the government actuary department in the United Kingdom, where there are really prominent people on staff who were often actuaries in industry and were then attracted to the government service.

The problem with OSFI has always been Treasury Board and the pay scales. Market salaries for experienced actuaries are above the deputy minister level in many cases, and OSFI cannot match them, although I think that they really need to attract that kind of staff. I can tell you that due to several recent mergers, there are a lot of experienced and qualified people around today who are unemployed. Those people are available, but OSFI is unable to pay the requisite salaries. I have talked to the senior people at OSFI about that.

It seems to me that the establishment of a board would give them the independence to set salaries, and the bottom line is that OSFI's expenses are paid by the industry.

Correctly or not, I have felt there is a good consensus within the industry that they would be willing to pay a relatively small increment in their fees for better regulation. I think that this reliance mode calls for higher qualifications and experience among the staff who are dealing with the institutions and they have to be able to attract it.

Senator Kroft: I have been searching for a clear statement on that and I appreciate your comments.

The Chairman: Just for the record, let me add a piece of information. As you may have seen in the report on international regulation that this committee tabled a month or six weeks ago, we made very strongly, exactly the point that Senator Kroft was just raising, precisely because good regulators are an important element of good regulation. It is my understanding, and I assume this is public, that in fact Treasury Board has given OSFI some form of special dispensation that will allow them to operate outside the rules precisely to deal with this issue.

We found that in the U.K. and the U.S., the regulator was effectively becoming a graduate school for a variety of people who would spend two to five years there, then immediately triple their salaries by going into financial institutions. By the way, this was not just the case with actuaries, but all kinds of people. Clearly, you cannot have a situation in which individuals doing on-the-ground regulation are effectively trainees.

So we have urged that kind of dispensation, and although I am not sure exactly what form it takes, it is our understanding that there is a lot more latitude now. They cannot pay full market salaries, but they are much closer than previously. It is a huge problem.

Correct me if I am wrong, gentlemen, but I think it was the New York Fed that told us that they would hire the best and the brightest right out of either law school or MBA school, and keep them for three years. After that, they moved to somewhere on Wall Street that tripled their salary, and they effectively used the New York Fed for their CV, frankly, gaining valuable experience.

You have identified a very real problem, and I agree, by the way, that an outside board would help to put pressure on government if that became an issue. Since it is not funded out of tax dollars anyway, it seems to me that that ought to be an issue a board could settle.

Senator Meighen: On that topic, as you know, in the legal business it is certainly considered a very good thing for somebody interested in tax work to spend some time at Revenue Canada. Does that help in the actuarial business?

Mr. Brender: No.

Senator Meighen: I do not mean working at Revenue Canada necessarily.

Mr. Brender: People do not go to OSFI for training and then go to work in the industry.

Senator Meighen: Do you happen to know whether it pertains to the accounting field?

Mr. Brender: I do not think so, although I will tell you it did for me.

Senator Meighen: If you were running an actuarial firm, would you see any benefit to having a young person spend three years at OSFI?

Mr. Brender: It is useful to have somebody who understands how they think.

Mr. Wason: If the pay scale issue was settled, then I think it would be of immense benefit.

Senator Meighen: The pay scale surely has more importance at the upper end. It does not really matter at the lower end, where you will still attract people. If it is a good experience, you will get ambitious people going there and you will have intelligent heads of accounting in actuarial firms wanting them to go there, will you not?

Mr. Wason: It would be a very good experience if they could be attracted.

Senator Meighen: If you were 22, would you not go there at a low salary if it were the best experience?

The Chairman: You cannot be a 22-year-old actuary. That is the problem. It takes a long time to qualify.

Senator Meighen: Or an accountant.

Mr. Wason: I think that in the view of new entrants out of university, the more exciting work still occurs within insurance companies, or within a consulting practice, which is unfortunate, because we would like some of them to be attracted to the regulatory sector.

Ms Pouliot, Councillor, Canadian Institute of Actuaries: I will just add that there is a creativity aspect that perhaps is lacking right now in regulatory work. Young people wanting to get into more creative and innovative work like to do so with the insurance companies or consulting firms.

The Chairman: Thank you very much for coming.

Senators, our next witness is Mr. Glenn Agro, who is a partner with BDO Dunwoody Chartered Accountants. A two-page brief from Mr. Agro is available.

Please take us through your brief and then we will ask you a couple of questions.

Are you in the Toronto office?

Mr. Glenn C. Agro, Senior Partner, BDO Dunwoody Chartered Accountants: Actually, I am in the Mississauga office.

The Chairman: To those of us not from Toronto, that is Toronto.

Mr. Agro: I thank you for giving me this opportunity, and clearly I understand the time constraints we are under and we will address you with that in mind.

I am an FCA and a senior partner in the firm of BDO Dunwoody Chartered Accountants, which is a member of BDO International, the seventh largest accounting firm in the world.

Our client base is focused on owner-managed, family-owned entrepreneurial business, which is the heart of the Canadian economy.

I personally spend more than half of my time assisting clients with their financing needs and we consider ourselves the pre-eminent firm in Canada in servicing this market. We believe in a free market environment and want to ensure that our clients prosper in that environment.

Our firm, like many others, is the result of mergers undertaken to better serve the clients, partners and stakeholders, and we see the positive results of the proposed mergers within the Canadian banking industry as outweighing any potential negative consequences. The backbone of our economy is entrepreneurial business and globalization will be the key to success for many of our clients.

We need to be able to take advantage of the opportunities presented by the North American Free Trade Agreement and other multilateral trade agreements that may be negotiated in the future. Certainly, one positive result of bank mergers would be the creation of a stronger global presence that is especially important to clients of the size with which we deal, since it will make it easier for them to grow and expand past our borders. Large, multinational firms will also benefit but are likely less in need of the help because of their size.

The principal negative concern is that fewer banks may mean reduced access to financing, but our experience indicates there will be sufficient alternative sources available. If a transaction is bankable, the money is and will be available. If the transaction is not bankable, it will be difficult, but that is not a change from the current environment. Certainly, the venture capital market that now exists, along with the substantial leasing industry, assists companies in accessing non-traditional financing for what would otherwise be non-bankable transactions.

I spend a lot of time on a daily basis representing clients, dealing with their bankers, and negotiating on their behalf to help save or expand their businesses. Currently, it is very difficult for most Canadian businesses to grow beyond our borders into the U.S. or international markets and have access to a transportable banking process. If a client or business wants to finance growth and export into those markets, the receivables are not worth the same as they are in a Canadian environment. We put restrictions on them, through the banking environment, that choke off their ability to compete globally, and we need to assess that. We need a banking environment that will allow our Canadian entrepreneurs the strength and the ability to grow beyond our borders.

Senator Meighen: Welcome, Mr. Agro. You will know, of course, from dealing with the public and reading the newspapers, that your point of view is not universally shared.

Mr. Agro: Correct.

Senator Meighen: This is probably a gross over-exaggeration, but it seems that if someone is in the financial business in some capacity, he is likely to be more sympathetic to so-called "bank mergers" than someone who is not. I do not know if my fellow senators would agree with me on that. People who are not in that business, as well as some who are, seem very concerned with two issues. One is that they are not presently being properly serviced, and that if the mergers go ahead, they will be even less well serviced. What is your response to that?

Mr. Agro: On the definition of service, clearly I believe we do have a competitive banking environment. In the market that we deal with, companies are borrowing a half a million to $5 million or $10 million. These are not usually $100 million deals.

If it is a bankable transaction, there will be plenty of banks eager to finance it. Yes, I see transactions that get turned down, and that people are upset about because they think that they are bankable transactions, within the parameters of a common sense situation.

I am not sure if it would be a foreign or a Canadian bank, but there are banks that are willing to finance those transactions. We do not want to see a system that is designed to meet the needs and fears of people who do not necessarily have a solid banking transaction to offer at the expense of the stronger Canadian companies.

Senator Meighen: Forgive me, but I am not a banker or an accountant. When you refer to non-bankable transactions, does that simply mean that the risk level is too high for the banker's appetite?

Mr. Agro: That is traditionally the case. Requirements within the banking environment indicate historically that business failures occur when there is over-trading or the equity level in the business is not sufficient.

There are variances among banks and their credit committees as to what level of risk they are willing to accept, and clearly some banks will accept a higher one than others. However, there are historical parameters within which most companies fit.

When businesses get into high growth, when they get into other areas, then we have to take them into our venture capital markets and our other markets, and ensure that financing is accessible, and/or abandon the balance sheet or leasing environments, and arrange non-traditional financing. Those options are available.

The risk parameters within the banking environment are still there, and I do not think they will disappear, no matter what we do. The banks are saying that credit is available if the transaction is sound, so the complaints tend to come from proponents of ideas that need more equity on the table or that do not justify the risk. These people then go to the venture markets, and it is still not easy because they do not have a bankable transaction.

We are concerned about the companies that are moving outside of our borders, since the receivables that are worth 75 cents on the dollar in Canada to a bank, are only worth 60 cents on the dollar if they are American. That is one of the problems we have run into.

Senator Meighen: We have heard from the small-business sector that they really want access to capital, and that they are prepared to pay a price, but they question the bank's appetite for risk and their willingness to price for it.

We asked a number of bankers about that, and while I cannot speak for my committee colleagues, the best answer I heard was that if loans were priced for risk, and the loan was in default, there would be a public relations disaster.

They suggested that in some instances, American banks, both within the U.S., and, by implication, here, if they were to enter our market, would be more inclined to price for risk and that that would supposedly solve the problem.

Do you see this as a problem, and if so, do you have any better or other explanation as to why banks are not prepared to lend at a higher rate on a more risky venture?

Mr. Agro: Certainly I see the banks lending at higher risk levels, and the American counterparts are willing to come in and make a more structured deal.

What often happens in the mid tier companies is that, with the legal fees, the accounting fees, and the bank fees, the transaction becomes too expensive. If it is an injection of a half a million dollars in a venture market, the fees are out of line, because they are the same as for a $2-million transaction. Therefore, our venture capital markets, our banks, and everything else, tend to only look at higher-level deals.

Some of the banks and some private capital groups are looking at smaller components, but one of the difficulties is how to structure fees that are commensurate with the level of risk but that are affordable to the entrepreneur. Typically, it means that entrepreneur has to give up a piece of his business in order to get off the ground and to flourish, although we are starting to see a change in thinking in our marketplace on that issue.

Senator Meighen: Last question. MacKay did not deal with this to any great extent, although he had some pretty clear comments on the inequity of the capital taxes on financial institutions. We hear a lot these days about the detrimental effect of high Canadian tax levels on businesses such as you deal with.

Do you find that to be so, and does that have an impact on the problems we have discussed this afternoon?

Mr. Agro: Certainly we see it, although I do not believe that it is overly onerous for most companies. I represent a lot of very profitable Canadian entrepreneurial businesses that have grown from small mom-and-pop operations to significant holdings, and the tax regime did not get in their way. If it is a smart business that works, yes, it can be more competitive globally with better tax treatment, more investment tax credits, and things like that, and I am fully in favour of that.

The Chairman: Thank you very much, Mr. Agro, for coming. We appreciate you taking the time to be with us.

Our next witness is Mr. Ned Goodman, the chairman, president and CEO of Dundee Bancorp Inc.

Senators, I think, as a lot of you know, Mr. Goodman, along with Austin Beutel, built up one of the country's best fund management firms, Beutel Goodman & Company Ltd. Now both Mr. Beutel and Mr. Goodman are off doing other things but certainly, sir, your experience in how the financial markets work in Canada is very well known. We are delighted that you took the time to be with us today and that you sent us this brief.

Senators, in the interest of time, please look at Mr. Goodman's brief, rather than at his draft opening statement. I have asked Mr. Goodman to focus on his recommendations, all of which are contained on pages 8 and 9, the last two pages of his brief. Then we can proceed to ask him questions.

Mr. Ned Goodman, Chairman, President and Chief Executive Officer, Dundee Bancorp Inc: Thank you very much for the nice commercial. I could correct it a little bit by saying that, while Mr. Beutel has retired from the business, I chose to go right back into it after we sold Beutel Goodman.

The Chairman: I knew you were in the same business but not the same firm, to be absolutely precise.

Mr. Goodman: That is right. I no longer operate under Beutel Goodman & Company but operate under Goodman & Company, a subsidiary of Dundee Bancorp, which is a publicly traded asset management company.

With me today is Don Charter who is the president of Dundee Capital Markets and Dundee Securities, the investment banking subsidiary of Dundee Bancorp. As you properly put it, Goodman & Company is our investment counselling subsidiary.

Our key product is Dynamic mutual funds, which was established during the Beutel Goodman era. Our company is about $5.5 billion today but is 19th in size of all mutual fund companies in Canada.

I will skip through the speaking notes, which I have made available to all of you, because I know that there is a time constraint. I will try to get to the meat of what the chairman really wants to get to.

Dundee Bancorp is a wannabe bank. We provide all of the services that a bank can provide with the exception of what used to be traditionally called banking and taking deposits. But all the wealth management portions, the investment banking, all those things are in place.

In size, we have a book value of approximately $500 million, which places us at about the same size as the Laurentian Bank.

As recognized in the Report of the Task Force on the Future of the Canadian Financial Services Sector, wealth management is a major and fundamental part of that financial services business. It is a retail product of tremendous importance to the consumer, particularly as the population ages and becomes less reliant on company benefit plans.

The consumer benefits directly from a vibrant, safe and innovative financial sector, all of which results from competition at all levels.

The extensive written brief has been distributed to you. So I will stick to the distribution issue, the entrenchment of the banks, and our recommendations relative to the task force report.

We welcome the recommendation of the report that companies like Dundee Bancorp and others should be allowed to own or become a Canadian bank. But I think everyone has to be reminded that we have a long history of the Big Five banks' entrenchment of bank power, especially with power over the consumer. This has given these big banks a tremendous head start. I will get back to that in a little while.

The key to providing wealth management products is access to that consumer, the retail investor. Without access to a distribution channel, a provider of financial products today cannot compete.

The task force report acknowledges the critical importance of the distribution channel that specifically excludes this vital segment of the financial services industry from getting into any kind of detail.

In this regard, we believe that the MacKay task force report is fundamentally flawed relative to this whole distribution sector.

Our written submission expands upon our thoughts regarding the distribution channel but, as you are all aware, there are four basic distribution channels for wealth management: the branch networks, which are owned by the banking community; securities dealers and brokers, which today are likewise about 90 per cent owned by the bank community; life insurance sales agents which, for the most part, are becoming less and less independent and are distributing proprietary products; and a host of individual independent mutual fund dealers or financial planners that operate from small and large towns across our country.

The report recognizes the dominant position that the bank has in this distribution sector, on page 147. The report also notes that foreign banks have not come into Canada to provide retail banking. Foreign banks know that the Canadian domestic banking sector owns that Canadian retail customer.

On October 7, Peter Godsoe appeared as a witness before this committee. In a response from a question from Senator Joyal, he addressed the issue of distribution in the mutual fund business in Canada. He stated that the area of mutual funds puzzled him, because Canadian banks were not allowed legally into mutual funds until 1987. The Canadian banks have close to 30 per cent of the mutual fund industry already and we have far more of the distribution because we own the dealers. We have switched customers into mutual funds.

Peter Godsoe did not include the many billions of dollars that have been switched to quasi-mutual funds like stock-indexed GICs and the RAP accounts that have been created by the investment banking associates and subsidiaries of the banking community.

The truly independent financial planner, who remains as a true independent channel for manufacturers of products for a company like Dundee Bancorp, provides independent advice with respect to the purchase of mutual funds.

The report states that they are an important part of the system due to their ability to provide advice. It does so on a whole bunch of pages but then dismisses this group of talented people in a very pejorative fashion.

I want to assure this committee that any financial planner who sells mutual funds must, at a minimum, be registered with a securities commission as a mutual fund dealer and, as such, is regulated by provincial regulators. To get registered, they have to meet proficiency requirements.

There is a lot of misinformation with respect to the expertise of these people. A lot of it is overplayed by the media and we are all sometimes suckered in to believe that one bad apple makes a whole barrel bad.

These people are much better trained and experienced in the financial planning sector than bank tellers are and will be for quite some time.

We suggest that it is not viable to consider the financial service sector reform while ignoring the position played by the distribution channel and the domination of the distribution by the banking industry.

The distribution channel is one of the most quickly evolving and quickly reacting areas in the financial sector business. The existing problem in that area has been caused in very large part by the decision in 1987 with respect to the elimination of the four pillars that allowed banks to buy up and dominate investment banking businesses. In a large part, trying to address this now is like attempting to put the genie back into the bottle.

However, it is necessary to deal with that distribution sector in order to meet the goals of financial sector reform of providing competitive and viable services to consumers. This requires an understanding and involvement in the provincial regulation of this sector. Without insuring that provincial regulation results in a balanced -- and I will use this with the full knowledge that the chairman will probably be ticked -- and level playing field for the providers of products, any federal initiatives to ensure competition will be doomed to failure.

Dundee Bancorp recommends that federal and provincial financial sector regulators be required to conduct frequent joint discussions on consumer protection and competition grounds, and that a yearly report of their findings be issued to finance ministers at the annual federal-provincial ministerial meeting.

I can skip through that by saying that we fully agree with the recent thrust that was presented to you I think possibly yesterday or the day before by the Commissioner David Brown of the Ontario Securities Commission. We need that desperately in this country and it seems to be something that always falls under the carpet.

Moving on to the task force recommendations dealing with new banks, we need more banks, not fewer banks, and we support the initiatives set out in the report in this regard. Ultimately, no new bank will succeed if they cannot obtain clients. To create a bank and gain market share requires a very significant capital outlay and, likely, many years of losses. The entrenched banks will have little to worry about from any such challenge. The report's hope is that if kept small, the big banks will leave these new banks alone.

As someone who is considering a new bank, this is not a very strong premise on which an entrepreneur would be willing to risk capital.

Even sports authorities know that when they add expansion teams to an established league, they must weaken the existing teams in order to start the formation of a viable, entertaining product and to level the playing field for new teams.

To form a new bank under the report's recommendations is like starting a new baseball team in a league where the established existing teams start each inning with a runner on third base. What makes it even worse is that the management of the established team believes and wants us to likewise believe that they actually did hit a triple while nobody was looking.

The existing banks have an enormous head start and the creation of new banks will require far more than simply changing the regulations to allow new, small banks to be created. There are incentives that can be provided to ensure that the two levels of second-tier banks can be created and developed.

Let me give you our recommendations with respect to the new bank entrants.

We are aware, Mr. Chairman, that this committee looked at the holding company structure in the study of international financial regulatory regimes. Although no formal recommendation was presented, Dundee welcomes the observation that the decision to use the holding company model or the parent subsidiary model should be a business decision and not be prevented by government.

You also noted that most witnesses believe that the market is and will continue to be the appropriate place to pass judgment on business strategy. Dundee is also aware that numerous witnesses in this present study have asked for clarification of the holding company recommendation to determine if the proposed new structures mean that banks could enter more lines of business, whether or not they relate to banking.

Dundee Bancorp recommends that the task force holding- company provisions not be supported if they lead to greater concentrations or multiplying the lines of business activities undertaken by the big banks.

The second-tier banks require greater assistance beyond the capital tax relief suggested for a start-up period.

Dundee Bancorp recommends that second-tier banks be allowed to have unlimited tax loss carry forwards of operating and capital losses, and that there be no streaming of these losses in the event of a change of control of the bank. In addition, these losses should be permitted to be moved up to the parent company or to the public through the use of a flow-through share mechanism, allowing other Canadian taxpayers to write off these losses in such a manner that the second-tier banks can raise equity capital in a more efficient manner.

An alternative approach to allow for investment in second-tier banks would be the allowance of a portion of the tier-two bank financing to be classified as eligible investment under the labour-sponsored venture capital fund rules. A whole host of venture capital money has been accumulated in these pools of capital, but we have not been successful in finding the right venue to invest.

This recommendation would allow tier-two banks to pass significant tax benefits back to investors and at the same time open up a new worthwhile use for these venture funds.

Due to the pressing need to allow new entrants in this field, Dundee proposes that tier-two financial institutions be granted tax relief for the substantial investment in technology that will be required at start-up. We recommend that accelerated capital cost allowances be provided to new entrants for technology expenses incurred. This would allow the obvious deduction of 100 per cent in the first year, and it is a recommendation that mirrors the current Department of Finance program that Minister Martin announced earlier this year. We would also suggest that these amounts could be flowed through to other taxable entities.

A tier-one bank, before closing a branch, should be required to notify all tier-two banks and sell the branch to a tier-two bank on an auction basis if they wished to purchase that branch. Furthermore, the tier-one bank should be required to advise its customers of the new branch ownership during the closing period.

In an effort to foster the growth and establishment of tier-two banks, the federal government should be mandated to sell its debt, or at least a portion of its debt, through these institutions.

Also, tier-one banks, as part of a subsidy support for the tier-two banks, should be required to offer, for a period of time to be determined and in an amount to be determined, a specified level of syndication participation to tier-two banks as related to securities underwriting and to loan grants.

I want to end with a comment that is quite serious because, as Chairman of Dundee Bancorp, I took very seriously the counsel of some of my employees and other members of the financial institution community that I should be cautious about my involvement and participation in this financial sector reform debate. I was counselled that I could be putting my firm's economic life into some jeopardy.

After serious consideration, we decided that more members of the Canadian financial industry, other than just Peter Godsoe and a bunch of associations representing various parts of the industry, should speak up for reform. However, Mr. Chairman, I regret to inform this committee that some of my executives who are working in the trenches are actually losing business and having business cancelled due to our participation in this reform process, as we work with the government to create a better Canadian financial service industry. We will be much quieter about this subject from here forward.

The issue is not about foreign bank entry into Canada. It is ultimately about economic power and Canadian companies, such as Dundee Bancorp, being allowed to offer choice for Canadians.

Mr. Chairman, members of the committee, thank you for allowing us to address you today and I look forward to responding to your questions.

The Chairman: Thank you very much, Mr. Goodman. Before turning to Senator Kroft, I wonder if I might ask you two or three questions almost of clarification on page 9 of your brief, where all but one of your recommendations are.

You talk about not supporting holding-company provisions if they lead to multiplying the lines of business activities undertaken by the big banks. Above that, you talked about entering lines of business, whether or not they are related to banking.

When you say related to banking, do you mean banking or financial services? Do you mean banking in some narrow sense? For example, is leasing a banking service or not? Is life insurance a banking service or not? I am just trying to understand where you draw the line, that is all.

Mr. Goodman: I draw the line where everybody draws the line and any business that the bank is in is banking. Unfortunately, we are in a whole bunch of those businesses. We just are not allowed, by virtue of the Bank Act, to call ourselves a bank.

The Chairman: So it is fair to call it financial services.

Mr. Goodman: It is financial services.

The Chairman: Okay. That is fine. That is what I thought you meant but I wanted to expand it.

Your next two recommendations are essentially ideas for particular tax breaks, which is fine for tier-two banks.

Essentially, your argument is simply that allowing the creation of tier-two banks is not sufficient. We have got to give some fairly significant incentives either by way of taxes or otherwise in order to encourage, to really turn the concept, the idea, of a tier-two bank into a reality. It needs more help than simply making it legally possible. We need some assistance. Your next two recommendations are really designed to achieve that end by suggesting tax rates.

Mr. Goodman: They are in addition to what the MacKay task force suggests. Just saying, "Go out and form a new bank" will not make it happen.

In 1997, 270 new banks formed in the United States. There have been three new banks formed in Canada in the last 10 years. The record speaks for itself.

The Chairman: You are far more of an expert in this area than all of this committee put together. Obviously, you have done a fair bit of thinking about what tax advantages would be the greatest carrot, let me call it that, to encourage tier-two banks to be created. I presume that there are all kinds of financial carrots one could offer.

Is it your view that these are the two that are most likely to be effective in the sense of encouraging banks to be created?

Mr. Goodman: When we searched around and tried to find things that were not actual subsidies from the government, we latched on to flow-through shares, which happens to be an area that I do know an awful lot about. The ability to use the flow-through mechanism allows investors to buy equity in a bank at an after-tax basis at a much better price.

To raise money for your new bank, you will have an advantage to raise the money and that flow-through mechanism and the ability to carry your losses forward. I mean, running up against those seven banks, even for a company the size of Dundee Bancorp with a half a billion dollars of equity capital, will not be an easy task. We will not make money on day one in the banking business.

The Chairman: This is obviously just a guess on your part, but how effective would those two changes be?

In other words, if we made those two tax changes, what would be the actual impact in the marketplace. Do you think it would lead to one or two or five new banks being created?

Mr. Goodman: You would get us, that is one. I think you would have several. I think it is clear, and it is in the larger part of the brief, that Dundee Bancorp as a manufacturer of financial products cannot continue to exist with the trend that has been in place since 1987, since the pillars came down. With the trend of the consolidation of the banking industry -- the trust industry folding into the banking industry, the investment banking industry folding into the banking industry, and today the financial planning industry falling under the Investment Dealers Association's self-regulated authority -- it is only a matter of time before the full distribution process falls under the bank.

Therefore, the concept of being a manufacturer dealing through an independent sales force is over. Dundee Bancorp has no choice. We either sell out to a foreigner who wants to be in the mutual fund business or we become a bank and try to emulate what the bank has done. We would form an investment banking organization, build a retail sales force, and create our own product, which is part and parcel of that unlevel playing field that exists in our industry. Maybe it does not exist anywhere else, Mr. Chairman, but it does exist in our industry and, therefore, I think that others, like ourselves, who are pure manufacturers will head in that direction.

You see today that Trimark has become a trust company. That is the first step. They became a trust company because they could not become a bank. Likely, they would follow right behind us.

I would say that anybody who is serious about creating a wealth management product and distributing it to the Canadian public will have to do it through that banking sector.

The Chairman: They will have to do it through an organization called a bank. By the way, my comment before was not to suggest that there are not unlevel playing fields. It was merely to suggest that everybody always says that whatever field they are in is unlevel, which is a different issue.

Mr. Goodman: I could add that, when we become a bank, I do not mind if it remains unlevel.

Senator Meighen: Mr. Goodman, just quickly to supplement that, let us suppose that the best of all worlds as you describe it came to pass and the government were to adopt your recommendations here. Presumably things would improve and one would develop from a tier-two. Would that be on the basis as suggested in MacKay of asset size? Is that when the benefits would fall away?

Mr. Goodman: That is when the benefits should fall away. We agree with that. We agree that it would be bad Canadian government policy to lose control of the very large banks. There is a $1-billion delineation.

Senator Meighen: Do you agree with those insofar as tier-two?

Mr. Goodman: We have no problems with that.

Senator Kroft: Mr. Goodman, on the basis of what we have heard over the last few weeks, I find myself both interested and more than a little sympathetic to some of your observations.

Can I just get one thing clear? You have addressed the subject of merger by saying that if anybody is counting on keeping the bank small, and that is a relative term, do not count on that as a major protection.

Have you expressed a view? Are you saying that the mergers are not a relevant issue to your particular preoccupation?

Mr. Goodman: I am saying that the consolidation of the banking community whereby the existing five large banks have swallowed the trust companies and the investment bankers has been going on for 10 or 15 years. The merger is not a new innovation of consolidation.

We think it was wrong to allow that to occur in the first place and, therefore, it is wrong to even allow it to become even more so. We need more banks, not fewer banks, and the end result of that consolidation is that we will have one bank because it will all just become one bank. I think that is bad public policy.

If we had to say it, we are not in favour of the bank mergers, but we will accept them if they occur. It is a phenomenon that has been going on. We have been living with it and working with it and we are working our way towards it.

Senator Kroft: You make a suggestion in your proposals about providing tier-two banks with the opportunity, with some advance notice or perhaps some advantage basis, of buying branches that are in a closure process.

It has been suggested, and we know from American experience, that, as a condition of merger and consolidation in the U.S., banks have been required to sell off branches or groups of branches or portions of their operation. I think Canada Trust made the same suggestion to us in their presentation.

I might add that Mr. Nasr of the Hongkong Bank observed that being able to pick assets that were around had been an essential part of jump-starting into a branch system. Do you have a view on the marketplace that would exist for branches?

Mr. Goodman: Unlike the chairman of the banks, I regard the branch system that the banks have as an asset, not a liability.

I know that Mr. Barrett likes to make the comments that every one of his branches has to be a profit centre. In any other business, when you have a salesman on the road, you do not expect your salesman to be a profit centre. The branches are nothing more than a sales force and the sales force sells the products that you manufacture at the head office. You run a loss at your branch and you make your money at the head office. I have no problems with that.

I am suggesting that if bank mergers go through and two corners are covered and one has to be closed, that it not be allowed to close, that it be put up for auction. Some of us who would like to be in the banking business would have an opportunity to get a corner.

Senator Kroft: If it was a condition under a merger scenario, which you would prefer not to see happen, that groups of these assets might be made available, then that would be even better.

Mr. Goodman: That would be even better. It would jump-start us to becoming a bank.

Senator Kroft: This morning Mr. D'Alessandro of Manulife suggested that the MacKay report was, I think his words were, overly sanguine on the expectation that others would rush into fill a new gap in smaller institutions.

The MacKay report seems to be fairly optimistic on that subject. You seem to share the reservations.

Mr. Goodman: I probably share the reservations more so than he. He is already a bank. He is the seventh, eighth or ninth chartered bank in the country.

Senator Kroft: So just going down the list, would you agree that the expectation of foreign banks in terms of entering this market is not something that we should hold our breath about?

Mr. Goodman: Not if the entrenchment is that we have the remains. The foreign banks, like ING, know that they can only get to the consumer through the Internet and places like that. Maybe as that whole process develops, it will happen.

But virtually everybody in this country needs a bank and they have one. My clients not only deal with me as a mutual fund or a wealth management provider, they also have a bank. The bank's client does not need someone else. As long as that situation remains, and it has been in place since 1987, anybody else trying to reach into that territory has a big, big job.

Senator Kroft: Concerning the insurance companies, again, the MacKay report seems to optimistically hold a view that insurance companies would come in and play a major part in filling the void. Really, the effort along the way is to get rid of this word "bank" and to call them all "financial institutions." Everybody will have the capacity to do the same thing. On the other hand, we have not found that same enthusiasm from the insurance companies for banking activities in this country.

Again, we are looking to pools of capital and available capacity to do things. What would be your read on the potential of insurance companies as entrants?

Mr. Goodman: I believe that the insurance companies in this country, with several exceptions, are still struggling to try to figure out how they make money on selling insurance. They have, like the banks, grasped on to the wealth management business as a profit centre -- and it is a profit centre. When they too own a customer and have a sales force and are beginning to be quite successful, the sale of segregated insurance policies, which are nothing more than a mutual fund without a prospectus in disguise, is probably one of the fastest growing wealth management products in existence.

But the insurance industry is captivated at the current moment with demutualizing and getting their hands on some of that public money, which would go a long way to bolstering their balance sheets so that they could possibly become a bank. I do not think they have the financial clout to provide what Mr. MacKay seems to think, and I would bet you that Mr. D'Alessandro would agree with me.

Senator Kroft: Together with foreign banks, insurance companies and existing banks, what expectation can we have that the core banking roles of a person or people with operating businesses who need conventional banking support for receivables inventory and all the things that it takes to build businesses will be targeted?

On a public policy basis, we have to find out where that will come from in the future of this country. I was wondering in terms of your game plan.

Mr. Goodman: You cannot say that the country is not well served today. The banks have been allowed to grow and they have done a reasonably good job of serving their client base. Now, there are some contentions that small businesses are not getting the respect that they should get.

But let us face it, the entrepreneur who runs a small business is also a client in wealth management. If you can provide him with banking business, which maybe does not have the profit margin levels that wealth management has, you will get the wealth management account.

I am not suggesting this is tied selling. Once you own the customer, you own the customer.

I think there is room for competition in that area for the ability to provide traditional banking services in order to get another client on your list.

Senator Kroft: Would it be an area that your bank would pursue?

Mr. Goodman: Yes. We would probably know that we could not be a do-all bank, so we would pick a niche market and try to become experts in an area.

Senator Meighen: Mr. Goodman, I can empathize readily with your plea to open up the tier-two banking sector. Obviously, you feel that if you are a bank, you can almost do anything in this financial world. I can see why you chose your name; it was very prescient of you.

If a tier-two sector were opened up somewhere along the lines that you are advocating, would you be prepared then -- I do not know whether you would be now -- to support an argument that we should have in this country at least one big bank that would be a player in the North American, if not the global, market?

Mr. Goodman: I think we have several of them right now that have the ability to be a player in a global market without getting any larger.

I think that Mr. Godsoe made the point on a number of occasions that Scotiabank operates on a global basis right now. It is probably fifth in size of all the banks. Certainly, the Bank of Commerce has moved quite aggressively into the United States.

I think they have the ability to do it with what they have right now. I think it is very telling that we have gone through probably the biggest boom in financial markets the world has ever seen. Our bank stocks have gone from trading at a below book value on the marketplace to a high of in excess of three times book value. They have now have pulled back to about 1.5 or 1.6 times book value.

During this whole period of time with banks trading at multiples of book value, not one of our Canadian banks went to the public markets to raise any more equity capital.

If size is what is required, then it is dollars that create size. Why did they not go to the markets and just flood themselves with a big bunch of bucks and then say that they wanted to be a global bank?

Senator Meighen: We have had arguments, as you may have heard, that size does count to some extent.

I think that Mr. Godsoe would grant that, while Scotiabank has been a successful player at a global level, it has been in particular selected niches, not across the board.

An argument has been made to us that it would be not against public interest, and may even be in the public interest, to have at least one bank that can play across the board, particularly in this day and age of monolines and opposition like that.

Mr. Goodman: I would also suggest, Senator, that there was a time in history not too many years ago when virtually every American bank of significant size was on its knees begging for capital at a point in time when the Canadian banking industry was the most financially healthy banking institution in the world. Not one of our Canadian banks made a move to take any of them over.

Senator Meighen: The only exception was the Bank of Montreal and Harris, which was a very small move.

The Chairman: I wonder if I could just ask you one last question on your last sentence, which is your last recommendation. I think I understand it. I just want to be sure.

You said, "Tier-one banks should be required to offer a specified level of syndication participation to tier-two banks as related to securities underwriting."

You use the word "tier-one banks". I assume that you mean the investment dealers of tier-one banks; is that right?

Mr. Goodman: Once again, I am whopping them all in. The investment dealer is a bank. They actually call themselves bankers these days.

The Chairman: You then say "or domestic loan grants." Do you mean domestic loans?

Mr. Goodman: Yes.

The Chairman: I assume that you mean corporate loans.

Mr. Goodman: I am saying that the practice today in the banking industry is that most banks do not make and keep large loans. They do syndicate them. I am saying that if they are syndicating, then we should be part of it.

Mr. Don Charter, President and Chief Executive Officer, Dundee Capital Markets and Dundee Securities Corporation: One comment seems to be lost when the focus is on lending practices and small business lending. If you actually were really focused on wanting the banks to do that, then you would tell the banks to get out of the other types of business.

In 1987, when the banks were allowed to swing their capital into much more profitable businesses, that was really the death knell of them taking an active part in the type of lending that everyone is frustrated about now.

When we are talking about banking, we are fighting them off within our industry because they are coming into other industries attracted by the profits with the lower capital costs. They can take the money that they would otherwise be lending, depositor money, and use it to go into other businesses. It is a mathematical formula.

When we say 1987 was a major death knell, that was what was created. You cannot get the genie back in the bottle now.

The Chairman: Senators, our next witness is Mr. Martin Connell, the president of Calmeadow. Some of you will recall that Calmeadow appeared before us when we had the hearings on Crown financial institutions. At the last minute Mr. Connell could not come, and someone else from his organization came instead. We are delighted to see that we have you yourself, sir. I would say that we have known each other for quite a while. I am delighted to see you again under these circumstances.

May I suggest that since your brief is short enough that my colleagues can skim through it when they get back. Do you want to go ahead and start?

Having read your brief, can I ask you a question when you get to the end? The MacKay task force recommendations number 93 to 97 appear to be mirrored very much by the top paragraphs you have on the last page of your brief, although you use different language.

When you get to the end, can you just tell me whether in fact my reading of MacKay and of your brief is correct? Please start.

Mr. Martin P. Connell, President, Calmeadow: Mr. Chairman, I did not bring a copy of the MacKay report with me and cannot comment on the specifics of that recommendation.

The Chairman: It almost sounds, because I know you had some meetings with the task force, as if they very much liked your idea, and I think that one has simply paraphrased the other. I would like to know if there are nuances; I would like to know what the differences are.

Mr. Connell: Mr. Chairman, senators, I appreciate this opportunity to meet with you and to discuss micro-enterprise. I did not know, Mr. Chairman, if you wanted me to just go through my brief or go straight to the point.

The Chairman: I would love you to go straight to the point.

Mr. Connell: I think that there is a bit of mythology in Canada about micro-enterprise activities. I think there is a perception out there that a magic bullet is available to bring access to credit on an affordable basis to home-based, self-employed people who are, by nature and by tradition, shut out of the credit markets.

First of all, we have no idea at this juncture about the size of this market. It is very difficult to get the kind of analysis of census tracked data or polling data that would give you a sense of what that market size is. We guesstimated 100,000 plus or minus who could use access to this kind of credit.

We also think that credit is available for just about anybody. Unfortunately, it is a cost-rated issue. So if you start at the pawn shop, which is the most expensive source of credit, and work your way up to prime rate credit, somewhere in that continuum people can find money. It comes down to cost.

We seem to feel from our experience that credit card rates, bank credit card rates are probably about the top that people can afford to pay and still make money on their activities, in around the 20 per cent margin.

It costs far more money than the 20 per cent that we are able to charge when you lend money to people who, by nature, need an awful lot of support, a lot of encouragement, and a lot of hand holding. We have been at it for five years and we finally clued in that it is very expensive to lend money at this level.

That, to me, tells us this is social lending because, once you start getting into the realm of having to lend money that cannot cover its own costs, then there is a social dimension to it. Once you start thinking about this thing as social lending, you start to realize that this is not lending for the banks. It is not lending for the government. It is probably best left with those organizations that are community-based and have a solid grounding in their local communities and know who the people are who need access to this kind of capital. Grassroots community-based organizations probably make the best kind of lender for this kind of program. They will never be able to do it at a profit.

When we get down to the recommendations, we are really talking about creating some kind of a mechanism that brings some sort of support or subsidy to the micro-enterprise lender in this country.

This is vastly different than the experience in the international environment where there is a critical mass of borrowers that can give you volume and opportunities to achieve economies of scale and productivity. However, that just does not happen here.

We will have to be realistic if we are to have institutions lending money at a very small level, such as $1,000, $2,000 loans to low income self-employed people. It will require a subsidy -- period.

We also think it is very hard for banks and other financial intermediaries to find their way into this marketplace through one-on-one opportunities through various community lenders. It is very hard for them to make a distinction between who is good and who is not so good at that business.

We are recommending an institutional approach where there would be one significant institutional funder in this country, private sector-driven, financed in part by government and in part by the private sector that would seek out and support those institutions that come forward at the grassroots to provide micro-lending.

We think that if we could do that, then there is a good chance that you might find solutions because we need a lot of activity to find the right kind of models that work. We have been at it now since 1987. We are slowly working our way through the various alternatives and we think we might get to a point where 70 per cent of our costs might get covered by the lending revenues we bring in, but it will never be self-sufficient.

The Chairman: At the top of page 4 of your brief, you are essentially saying that it is just too expensive for financial institutions to do as Calmeadow has done, which is to lend money to people who are looking for small amounts of money. It is just too expensive for them to put all the human effort into arranging these loans.

But you are suggesting that if you could, in some sense, create a national focus for this kind of lending, the volume of loans might well be such that you could at least recover two-thirds to three-quarters of your costs. The 25 per cent to 33 per cent that is not recovered would, in fact, be treated by government as a reasonable subsidy as a way of creating jobs.

Mr. Connell: When you think of a $2,000 loan and a 25 per cent subsidy, we are talking $500 per job being created or supported, which is very cheap.

The Chairman: How would we go about finding that sort of centre focus? I do not know anybody other than you in the country that is in the business. One of the wonderful things about your initiative is that you have embarked on a very novel experiment, at least for Canada. How would one get this group of a sufficient size to make it work?

Mr. Connell: In the United States, under the Clinton administration, there has been a recognition that community-based grassroots micro-lending is a valuable community effort, which deserves support from the state.

In the States there has been a fund established. I cannot tell you the name of it. But it has been operational now for the last two or three years and it basically makes best practices grants to community-based organizations that are driving micro-enterprise lending programs in their local areas. It has led to a proliferation of activities and the more we see happening out there, the more likely it is that there will be some isolated successes that will then become the role models for the rest of us.

There has been a tremendous growth in the United States of micro-enterprise lending, led in part by this initiative.

The Chairman: I was about to look at my copy of the book but you now have it. Would you look at recommendations 93 to 97 and just tell me if they meet what your objectives are, now that you have enlarged on your idea. The recommendations are mainly at the back.

Mr. Connell: Certainly, 94 and 95 are more or less embodied in the concept that I am discussing with you. There is a good model in place right now. It is called the Consultative Group Against Poverty, or CGAP. It is a World Bank-driven initiative, under the umbrella of the World Bank out of Washington. This organization exists to fund on a global basis micro-enterprise activities in different parts of the world. It is responsive to applications and it has a highly polished team of people who are very proficient in the field. They make infusions of grant capital into these various organizations.

I do not see anything wrong with that model, why it could not be adapted to Canada and used on a local basis. It is a creature of government but it is independent of it and of the World Bank. It has its own board of directors, its own policy group that drives it. So I could see a scenario where a separate body like that could be created. Calmeadow would be happy to be involved in the formative phase of helping to get that thing up and running.

Senator Meighen: Mr. Connell, do you have any particular thoughts as to what form this subsidy might take? Would it be just a straight grant to make up the difference? Would it have an incentive component? Would it take another form?

Mr. Connell: I think it has to be incentive-driven. I think there must be hurdle rates and I think there has to be a serious effort.

One of the biggest challenge of running a micro-credit program is collections. I think it is very easy to give away money. It is extremely difficult to lend money and I think there has to be a strong motivation to collect. I think there has to be a strong motivation to go after and target the kind of people we are talking about here.

I think those incentives of targeting the right people and then collecting the money, getting it paid back, can be built into the model. If their incentive relates to that, then I think you achieved your objectives.

Senator Meighen: If the government is to get in to the extent of a subsidy of 25 or 33 per cent, is there an advantage in having the micro-lending organization related more closely to government, with Calmeadow as, let us say, an independent organization, such as a Crown agency?

Mr. Connell: My suspicion is, and this has been borne out by observation over the years, that governments, when they are seen as lenders to people, are poor collectors of debts. People invariably do not feel that they have to pay back the government certainly at this level because it is happening at the grassroots and the community level.

My recommendation would be not to have the government get involved in any direct or obvious way in lending itself but to work through intermediaries, such as non-profits or quasi non-profit organizations that were doing the job.

Senator Meighen: Would you attach any importance to a number of micro-lending institutions being launched under the scheme simultaneously across the country?

Mr. Connell: If an announcement were made tomorrow that there was, for argument's sake, a $2-million fund per annum that would be available for the next three to five years to support the development of the sector in Canada, and if the applications and grants were reviewed by a peer analysis, then I think you would have a proliferation of enterprises step forward and ask for support. I think that would be very important.

Senator Meighen: I am quite happy to blow your horn for you. You said it has taken you five years to work your way through all this. I would be a little leery if I were the government and all of a sudden various micro-credit organizations popped up like mushrooms overnight and said that they wanted in on this.

Would not Calmeadow wish to have a supervisory role of some kind over this?

Mr. Connell: If the grant process is based on incentives and hurdles, I think that you can get away from some of the more obvious abuses that might take place.

I do not think any of us in North America have found the answer as to how to do this right. I believe that the more people are at it, the better the probability of success.

I am not saying that we will ever get the perfect answer but the closer we can get to covering our operating costs, the better it is for everybody.

Senator Meighen: You have not found the secret to success but are you still convinced, Mr. Connell, that micro-lending is a dynamic and useful tool for empowering people in North America?

Mr. Connell: Let us put it this way: If there are 100,000 Canadians out there who could and should be able to prosper better with access to resources, like loan capital, then I would say it is a very appropriate intervention and it is not a big one. I mean, 100,000 people out of the 2.1 million people who are self-employed is not a big number but it is still indicative of the opportunity.

Senator Meighen: I have one last question, if I may. Has it been your experience that the borrowers tend to continue for an indefinite period borrowing small amounts, or do a large number lose interest, or do a certain percentage all of a sudden require a great deal more money because they have been successful?

Mr. Connell: There is a lot of frustration in answering your question. The frustration comes from the fact that we recognize that there is about a 40 to 50 per cent non-renewal rate in our client base, and that means we have to scramble hard to keep up our volumes.

We think that a lot of people try self-employment, take the risk, decide after a year that they do not really like it, pay off their loan and go back and find a job somewhere else in the economy. That is based on anecdotal insights as opposed to any sort of statistical analysis.

The other thing is that people do find their way into the credit market sooner or later. A lot of our clients have been able to graduate out of micro-lending programs like ours into the commercial banking sector as time goes by.

I think those two are the two main reasons why it is difficult to retain our clients.

Senator Meighen: I happen to know that you have worked with at least one of the chartered banks in your work with Calmeadow.

Do I take it from this that you think it is time to cut that relationship and go on your own?

Mr. Connell: We have a relationship with three of the chartered banks, the Royal Bank, the Bank of Montreal and the Toronto-Dominion Bank. They fund us. They provide advisory support. They work with us on two operating committees: marketing and our general overall program. They approach it seriously. They are helping us try and find our market more effectively. They will increasingly be sending us referrals. I think that they do believe that this is a valid and important test. They view it as an experiment, as do we. Until we can come through the proof of principle side of this experiment, they will stick with it.

Senator Meighen: It is interesting that you are prepared to price for risk but the banks are not.

Senator David Tkachuk (Deputy Chairman) in the Chair.

Senator Kroft: I am just fascinated with this area. I think I was first exposed to the concept in Denver. Is there a group based there?

Mr. Connell: There may be.

Senator Kroft: Can I ask, so that I understand, where this fits in the financial structure? What type of a person, what skill set or experience does it take to make the credit decision? I do not think it is a bank credit committee. I am wondering what you can tell me about what goes into making the decision on who should qualify for a loan.

Mr. Connell: For the longest time we worked on the principle of group loans. Basically, a group of four to six people would join together. We would not have anything to do with the formative process. They would have to self-select. They would come forward and say, "Yes, we are all in business. Yes, we all trust each other and, yes, we will all sort of cross-guarantee each other's loans." It was a little bit of a no-brainer for us. We did not really analyse their respective enterprises when we lent them the money.

History has not been our friend on this. It has turned out to be a much more complex process. When two or three people in the group may not make it, it drags down the other two or three. They have a hard time paying back the whole thing.

While we still make those kinds of loans, we still make a growing number of individual loans and, as we get into the individual lending business, we are getting into more traditional types of securitization. We take collateral if we can. The two people who managed the two funds are former managers of credit unions so they have a lot of credit granting experience and they follow fairly traditional approaches to the lending.

We cannot obviously fully secure these types of loans or they would have gone to a bank, so we are taking more risk. So far, our experience is that we are able to maintain our loan losses in the 5 per cent range.

Senator Kroft: You mentioned the credit unions. I was wondering if across the country there are some credit unions that have other types of cultural affinities and interests and if they focus on other economic issues. I was wondering if the credit union movement had any particular interest in this area.

Mr. Connell: VanCity did actually take over a small model program we had in Vancouver and they are still running it and continuing with it. It is inside VanCity and they are operating it as a small micro-loan program. That is the only one I am aware of.

Senator Kroft: I was wondering whether the Business Development Bank has taken any interest in your work. Do you have any programs?

Mr. Connell: We have been in touch. They know about us. We know about them. Again, we are operating at a very modest level of $1,000 to $2,000 loans. We are sort of below the salt, if you will, and therefore do not really fit.

Senator Kroft: I see that. I am not thinking in terms of a direct borrowing relationship. I am going back to Senator Meighen's concept of a connecting element with the government. Might the Business Development Bank form some sort of a bridge that might be useful in a linkage on this?

Mr. Connell: They could. Again, I think that the challenge is best left in the hands of the community-based organizations that would drive this thing forward. I think this so-called institutional umbrella organization could well include representation from the Business Development Bank and from one of the other banks, for that matter.

The Deputy Chairman: Thank you very much, Mr. Connell. That was very interesting.

Mr. Howard M. Greenspan, President, Heraclitus Corp.: Chairman: I have a prepared statement which I have just been told I cannot read. I will address this committee by saying that I am surprised that I cannot read a prepared statement, and that I will not say anything.

The Deputy Chairman: It was not anything regarding the MacKay task force report, was it?

Mr. Greenspan: Why else would I be here? Of course it is regarding the MacKay task force report. Your staff has decided that this is censored material and cannot be read.

Senator Kroft: Is the issue of content or of time? This has come up before in these sessions and we have distinctly said that we would not engage in discussions on an ongoing legal matter.

The Deputy Chairman: Is it regarding a legal ballot, sir?

Mr. Greenspan: Sir, the MacKay report recommends that remedies be effected through civil litigation. The MacKay task force makes three separate remedies available.

One of them is regulation, which the MacKay task force posits substantially with self-regulation. I submit to you that regulation has been ineffective. Regulation has been ineffective and, in fact, federal laws concerning banks are regularly not enforced or are not investigated. I give specific examples in this report.

I have been in correspondence with the Minister about this. I do not name names. I am waiting for a response from the Minister.

The second remedy that the MacKay task force proposes is an ombudsman. The ombudsman effectively has no powers.

The third remedy that the MacKay task force proposes is the right to take a federal financial institution to court, civil litigation. The MacKay task force says that people will have the right to take federal financial institutions to court and they will have the right to obtain punitive damages.

In the words of a famous British jurist, that is something like the right to stay at the Ritz-Carlton Hotel; it is open to all.

The MacKay task force is seriously flawed. The right that the MacKay task force talks about, taking people to court, is a right that exists now.

I, in this prepared statement for the committee, give factual examples without names, which are not libellous, in my opinion, but are directly relevant to this committee and to the MacKay task force, which I believe seriously lacks a reality check. Perhaps the reason it lacks a reality check is because you do not want to hear things like this.

It is within this committee's right to make any kind of decision as to what it will or will not entertain. In regard to what you said, sir, if something is in litigation and is relevant to what is occurring before this committee, the fact that it is in litigation should in no way be an absolute bar to this committee hearing it.

As far as I am concerned, I have been censored by this committee. I will not read this prepared statement and I thank you for inviting me. I have come and I have been told I cannot read something in here that is factual, evidentiary and relevant to this committee, and relevant to this proposal. I think what the MacKay task force needs, and perhaps this committee needs, is a dose of reality. Thank you, sir.

The Deputy Chairman: Thank you very much. There are no questions. The meeting is adjourned.

The committee adjourned.