Proceedings of the Standing Senate Committee on Banking, Trade and
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Meighen: Do you happen to know whether it pertains to the accounting
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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
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