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

Issue 39 - Evidence - Afternoon sitting


OTTAWA, Thursday, November 5, 1998

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

Senator Michael Kirby (Chairman) in the Chair.

[English]

The Chairman: We have with us Ms Laurie Rektor, Executive Director, the National Anti-Poverty Organization. Ms Rektor has distributed a statement from that organization, and I have asked her to summarize it, particularly with respect to NAPO's attitude to recommendation 90 on page 215 of the task force report.

Recommendation 90 talks about access to financial services, and in particular, about bank accounts for low-income Canadians, and we would value the views of NAPO on that issue.

Ms Rektor, this is your first appearance before this committee, but we have had very interesting dialogues with your predecessors. Please proceed.

Ms Laurie Rektor, Executive Director, National Anti-Poverty Organization: I am very happy to be here.

Many of you are familiar with NAPO and what we do, but I will give you a little background. We have been around since 1971. We are a non-partisan, non-profit organization and our mandate is to work toward the eradication of poverty in Canada. Obviously, since we have been around since 1971 we have not quite achieved our goals yet.

The main, unique feature of NAPO is that our board of directors -- and there are 21 directors -- is composed entirely of people who are either currently living in poverty or have significant life experience of living in poverty. They inform the staff and give the organization direction. They ensure that we are in a position to provide input into issues of social policy that affect low-income Canadians in such a way that those opinions are respected and valued.

The main issue, from the perspective of low-income Canadians, is access to banking services, and the secondary issue is the responsibility of financial institutions to the community and the stakeholders involved.

I will first talk about access. When I talk to people, including my brother here from Prince Rupert, about access to basic banking services, at first they are puzzled about why that is an issue. That is fairly representative of the attitude and the lack of knowledge of the average Canadian who is not on a low income. They have no difficulty dealing with banks, opening bank accounts, getting credit, and having a bank machine card, and so they have great difficulty conceiving of having difficulty in accessing those types of services. Access to banking services for low-income people is an extremely important issue precisely because there is a lack of understanding even of the types of barriers that they face.

The task force report did quite well in bringing those concerns to the surface, and increasing public awareness of some of the issues that low-income people face when dealing with financial institutions.

We know from the task force report that about 8 per cent of people who live in families with an annual income of less than $25,000 do not even have a bank account, and we know that there are other areas of difficulty in accessing bank services. There is difficulty in cashing cheques without having a hold put on them. There is also the attitude and the tone with which people of low income are treated by banking institutions.

A National Council of Welfare report that came out this summer, just prior to the task force report, described how a social service worker in Vancouver followed a front-line worker around for a day. They accompanied a woman on social assistance with two young children as she picked up her welfare cheque and took it to the bank to try to cash it. The first bank that she went to would not even let her in the door. There was a security guard at the door who said the bank was not cashing government cheques that day. The second bank also had a security guard on the door, and he said, "Yes, we're cashing them. We are letting you in one at a time, and you will stand in line outside the bank in the rain until it is your turn." She stood in line for about an hour before she was able to cash her cheque.

The person who recounted this in the National Council of Welfare report was shocked at this treatment, but the woman herself, having experienced this type of thing before, was not that upset because she was used to it. It was not such a bad day; she was able to get her cheque cashed without too much difficulty. However, her reaction does not mean that it is okay that she was treated in that way, and that is why we are concerned with access.

The task force also talks about several "mystery shopping" studies or other things that have been done to see how well the agreement that was made in 1997 to make access easier for low-income Canadians has been implemented. There have been different percentages of success in the two things that those mystery shopping tours tried to measure: Could a low-income person open a bank account, and could an apparently low-income person cash a government cheque in full without having a bank account at the institution in question.

The task force had only a 43 per cent success rate when they did their own mystery shop. A Montreal study in 1996 came up with a 35 per cent success rate. The Canadian Bankers' Association did their own study this summer and came up with a 59 per cent success rate on being able to open a bank account. I looked at that survey in some detail, because NAPO had provided some input on it. A number of attempts that people made to open a bank account were discounted by the survey, specifically, people who were told they could not open an account because they did not live in the neighbourhood. If you add those attempts back in and count them as failures, then the success rate for opening an account was only about 44 per cent.

Given that it has been almost two years since this agreement was made between financial institutions and the federal government, I would echo the sentiments in the task force report to the effect that we have not achieved a significant level of success in dealing with this problem.

The report quite correctly notes that it is not a problem with the agreement, but with underlying attitudes and beliefs about poor people on the part of people who work in banks, and indeed people who work anywhere in society. There is systemic discrimination, stereotyping, and attitudes about who needs to be treated well and who can be treated less well.

This afternoon I walked to this building from the NAPO office, because we are located on Dalhousie and I thought a little walk to clear my head would be good.I did not bring my wallet or my keys. When I checked in downstairs, a man asked if I had any identification. Because I was wearing a fairly nice coat and had a file folder with some papers in it -- and I do not want to get anyone in trouble downstairs -- he let me in without any identification.

Senator Kenny: An honest face, Mr. Chairman.

Ms Rektor: At the present time, all 21 of the board members of NAPO are living in poverty. Some of them do not have bank accounts; some of them do not have telephones. If one of those board members had come here to speak with you this afternoon, she or he may not have been allowed into this building this afternoon without identification. That is the type of systemic discrimination that we are talking about.

NAPO is cognizant of and appreciative of the work that the Senate has done already in passing Bill S-11, the bill to amend the Canadian Human Rights Act to include discrimination on the basis of social condition, which is tied in with the issue of access to banking services. The passing of that amendment would go a long way toward enabling us, and low-income Canadians, to deal with the issues of access, since there would be a public and a federal government recognition that this type of discrimination exists.

Banking and other services offered by federally regulated institutions are so important because most poor people walk outside of mainstream society. People who are not poor, whose neighbours are not poor, whose family members are not poor, really do not know the day-to-day reality of people living in poverty. Including social condition in the Canadian Human Rights Act will say to the general Canadian public that we acknowledge this is a problem, and we acknowledge that poor people need to have access to the same services that the rest of Canadians enjoy without question.

There are a number of other recommendations on access in the report that you have in front of you, but the underlying theme to problems of access is social condition.

A second concern from the perspective of low-income Canadians is accountability of financial institutions to their stakeholders. Stakeholders certainly include shareholders, but also include bank customers, the community at large and bank employees. Stakeholders, low-income customers and bank employees are most affected by the closure of bank branches in low-income neighbourhoods.

From the work that we do at the National Anti-Poverty Organization, we know that there are several things that can lead to people becoming poor, not the least of which is losing their job. When banks, which are very large employers, close branches or institute massive layoffs, they contribute to the number of people that may eventually end up in poverty through loss of employment. Because branch closures tend to occur in low-income or rural neighbourhoods, there is no ready access to immediate other employment in the neighbourhood for the employees.

The closing of bank branches in low-income neighbourhoods contributes to their disintegration, since when there is no local financial institution, it creates difficulties for businesses. When people have to leave their own neighbourhoods to access cash, they will likely spend it on the way home rather than in their neighbourhoods.

We have a growing number of communities in Canada that are essentially dying because of withdrawal of basic business services such as banking. A report by Human Resources Development Canada calls them "distressed communities," where there are high percentages of young people not in school, of unemployment, and of families receiving a good portion of their income from government transfers. When an institution such as a bank withdraws from a neighbourhood, that contributes to the disintegration.

The task force report did a good job of acknowledging that banks are unique in our society. They are not retail operations, and yet they are not public, government institutions. They are somewhere in between because of their special status and legislative protection, the charter that enables them to operate, and they have a higher level of accountability to the community.

The task force report acknowledges that part of this responsibility is to give back to the community, and to do so in ways that are profitable, but that profitability should not be the only deciding factor. NAPO's recommendations are listed on the last page of its report, where it states that the task force does not go far enough in acknowledging the difficulties surrounding branch closures. For instance, recommending four months notice of branch closures does not address the concerns and issues that arise when a community loses its only financial institution.

We were pleased with much of the task force report, but we were a little less pleased when we came to the recommendations. Given the research and input that the task force had access to, we felt that it did not go far enough in some of the recommendations addressing the needs of low-income Canadians and focusing on the two issues that we are interested in: access and accountability to the larger community.

The Chairman: I want to ask you about a recommendation in the report that you did not comment on, that Canada adopt the same policy in effect in the United States, where all government cheques to individuals are paid by direct deposit. That came into effect in the U.S. this year.

This idea was first kicked around in Canada probably a decade ago. We had discussions then with your predecessor, who pointed out its impracticality, since a significant number of people receiving social assistance cheques did not have bank accounts. You have to deal with the account problem before you can deal with the direct deposit problem.

I inferred from the MacKay report, and some of the background material, that it favoured using direct deposit as a means of forcing people to open accounts. Rather than have people open an account and then arrange direct deposit, the report was trying to go in the opposite direction.

Historically, that has been a non-starter from the point of view of organizations such as yours, but things are changing elsewhere in the world. What are your views?

Ms Rektor: One of our recommendations is that people should have a right to open a bank account, and we would have liked to see the task force report address that concern.

I personally do not like direct deposit, and because I am not a low-income person facing difficulties in dealing with financial institutions, I am not forced to use it. For a lot of the individuals that we deal with, to make it mandatory would be a problem, although having it as an option would be useful for those who prefer it. Poor people are like everyone else; they have their preferences.

The Chairman: You state in your brief that having a bank account should be a right, and I understand that, but many people have rights that they do not exercise. It is one thing to say that people should have that right, but do you agree that people should not be forced to open an account?

Ms Rektor: That is correct.

The Chairman: That is a matter of choice?

Ms Rektor: Yes.

Senator Stewart: The witness referred to various surveys of access to bank services, and I assume, subject to correction, that these were made on a national basis.

Are there variations from one province to another or from one region of the country to another, and what is the situation where there are active credit unions?

Ms Rektor: The only national survey that I know of was done this summer by the Canadian Bankers' Association, partly because they had the necessary resources. On my reading of that survey, there were no regional differences. They conducted the mystery shop in low-income neighbourhoods across Canada, so there is consistency on that issue.

There are differences with credit unions. The 1996 study in Montreal had a second component in which they looked at access to banking for someone presenting as a low-income person at credit unions. I do not recall the exact numbers, but people were more successful in opening an account and cashing a cheque without having a hold put on it.

Senator Stewart: I am interested in your statement about the special public responsibility of banks, where you seem to be saying that they are not like other major business corporations. Yet the banks appear to want to get into automobile leasing and so on. Does the fact that they have a special status, and therefore a special responsibility, mean that they should not be eligible to get into what I will call "non-traditional" banking operations?

Ms Rektor: NAPO has not considered that question from the perspective of low-income Canadians, and at this point, we have no special concerns.

Senator Oliver: One section of your report states that branches are needed in low-income neighbourhoods. As this committee has travelled across Canada, we have repeatedly heard that the whole financial system is changing, at least in part because of technology, which has decreased the reliance on bank branches.

Earlier, you spoke about direct deposits. When your employer pays you, instead of walking down the street to the bank and depositing your cheque, it is deposited electronically. Also, many of our basic bills, such as telephone bills, power bills and so on, can be paid electronically.

Several witnesses told us that some of their banking operations are no longer done in a bank, but in a grocery store like Loblaws, or Canadian Tire. Today the ING Bank has a relationship with Canadian Tire, and people will be able to do banking there. Is that the kind of banking that you envisage when you say that branches are needed in low-income neighbourhoods? In other words, if low-income people could go into the Canadian Tire store to do their banking, would that solve the problem?

Senator Hervieux-Payette: It is not just because it is at Canadian Tire, but that there is no cost for the transaction, and so in terms of access, it is difficult to do better. However, there are not thousands of Canadian Tires throughout the country.

Ms Rektor: Certainly the banking structure is changing, but many low-income communities are rural, where access to anything, including a Canadian Tire store, is a challenge.

Most people are doing more of their banking electronically, but there is still an element of comfort and importance in that personal contact when meeting with your bank manager, and having him know you and your family. A bank can provide that in a more effective way than a Canadian Tire store, where it is one more thing that they are selling.

A woman wrote to us this summer stating that she was very concerned about her personal access to banking services. She was a single mother who had achieved a university degree, and I do not know where she obtained the necessary financing, but the costs had depleted her financial resources. She had had a fairly long-standing banking relationship with one financial institution. She was offered a full-time, permanent job in a community approximately 300 kilometres from her home. She was out of money and needed to rent a car to get to work on Monday morning and get herself out of financial difficulty and into a secure situation.

She went to the bank that she had dealt with for years, and where she had had a loan that she had managed to pay back while she was a full-time student. She was hoping to cash a cheque from a personal friend, but because she had no money in her account, she was unable to do so.

Ideally, if we make the kind of changes that NAPO is advocating, that bank would not treat her that way because they would know her and her history. They would have been able to say: "We remember when you struggled to pay back that loan. You have been a good customer. Congratulations on your job, and this is what we are going to do to help you to be able to start work on Monday." I think she would be less likely to be successful in that situation at a Loblaws or somewhere similar, and so there is still a need for a full-service bank in low-income communities.

Senator Oliver: A grocery store chain in England has similar arrangements, where people do not just make deposits and withdrawals, but can arrange basic residential mortgages and capital loans. You do not think that that would be useful?

Ms Rektor: It would depend on whether or not there was the opportunity to build up the kind of rapport and understanding that I spoke of.

Service charges are another issue. There is a bank with seven branches in low-income neighbourhoods in Ottawa called Money Mart that charges people an exorbitant amount. Your example is not be ideal, but it is an alternative that would provide people with banking services at a reasonable cost.

Senator Oliver: Senator Stewart asked a question about credit unions. When your clientele go to them, do they feel more at ease there than at one of the Big Six banks?

Ms Rektor: The people we represent come from a broad range of circumstances, so yes and no, depending on who the person is. In general, credit unions treat low-income people better than banks do, but the requirement to buy shares can be prohibitive for people who are financially strapped.

The Chairman: That requirement has disappeared from most credit unions, and within the last couple of years, most have opened themselves to the community and anybody can open an account.

Senator Oliver: Can you tell me whether or not many of your clientele have credit cards, and if not, why not? Is it for the same reason that they do not have bank accounts?

Ms Rektor: Yes, they do not qualify, and it makes it very difficult for us to do our work, because our board members are all across Canada. When we want to have a meeting, we have to send people cash, because they literally do not have the financial resources to take a cab from their homes to the airport. Many of the people we work with and represent do not have credit cards.

Senator Oliver: What percentage of the people that you represent and work with have telephones or access to telephones?

Ms Rektor: I do not know the statistics, but on our current 21-member board of directors, two of them do not have telephones because they cannot afford them.

Senator Oliver: And therefore would not have fax machines?

Ms Rektor: It is very difficult to get hold of those board members.

Senator Kenny: I find myself in sympathy with a lot of the concerns that you have brought to the committee, and I would like clarification on a few points.

The second recommendation you made was:

Legislation should be introduced to require financial institutions to open an account for any person who has sufficient identification.

I am comfortable with that on the face of it, but what constitutes sufficient identification in your mind?

Ms Rektor: Our interpretation is a little different from that in the 1997 agreement. Approximately nine out of those 11 pieces of ID can be difficult for a low-income person to obtain: a driver's licence, a bank machine card, a credit card, those type of things. We support the task force report recommendation that the government provide a low-cost ID to meet the requirements of financial institutions.

Senator Kenny: Social insurance numbers are sometimes misused or used for unintended purposes. Do you therefore see a potential risk in your suggestion for a national identity card?

Ms Rektor: That is not the kind of identification that we are recommending. There is a stereotypical view that poor people are more likely to lie. If people come to a bank with their library card and whatever else they have, such as a birth certificate, I would like to see that accepted. They are opening a bank account, so presumably they are going to be returning and continuing to have contact with that bank. I am not looking for some kind of smart card ID, but for something that would be easy for people to obtain and that would reassure the banks.

Senator Kenny: When somebody opens a bank account, they deposit money, and at some point somebody is going to come along and make a withdrawal. Part of the issue is that the banks want to ensure that the person making the withdrawal is the same person who made the deposit. That is why they need a form of identification in which they can have confidence.

Ms Rektor: But once you open the account and sign your book and verify all those things, then those guarantees are in place.

Senator Kenny: For example, if the initial identification you are using is a library card, and someone wants to access your account later on, it might not be too difficult for that person to obtain a library card and gain unauthorized access.

Ms Rektor: I am assuming that once you have a bank book and an automatic teller card, with initial identification based on your library card, then you should be the only person able to access your bank account. However, I do understand your concern.

Senator Kenny: Your third recommendation states:

At least one low cost account option must be provided by every financial institution with no minimum balance required.

Will you explain what you mean by "every financial institution?"

Ms Rektor: We are looking at the chartered banks.

Senator Kenny: I do not have any difficulty with the fourth recommendation on cashing all government cheques, as that seems to be a reasonable suggestion.

The fifth recommendation advocates prohibiting holds on all government cheques if sufficient identification is provided, and I am comfortable with that.

The sixth recommendation states:

Legislation should be introduced to fix the maximum hold time that financial institutions can place on non-government cheques.

I know of situations, particularly with the elderly, where someone presents a cheque that seems extraordinary, and the teller is worried that perhaps the individual has been defrauded. I am talking about an individual who normally withdraws $100 at a time, and suddenly appears with a cheque for $7,000.

Banks are sometimes cautious about cashing cheques because they are afraid that there may be an element of fraud involved and they want to protect their depositors. I can see that potentially causing a conflict with your sixth recommendation.

Ms Rektor: To us, a reasonable amount of time is the time that it takes for a bank to ensure that that cheque has cleared. Some banks have hold periods of up to 10 days, and I am sure it no longer takes that long to verify the source of a cheque.

Senator Kenny: The seventh recommendation suggests the Department of Finance be responsible for semi-annual monitoring of the degree to which financial institutions are providing access to basic banking services for low-income customers. We have heard testimony suggesting that this is essentially a training problem, that banks want to do this, efforts are underway, and performance is improving. Of course, we have also heard testimony that these same institutions know when the interest rate changes the next day and do not have any trouble communicating that to their employees.

Is this something you want to see legislated, or would you be just as happy with some form of publication of poor performance, at least as a first step? Perhaps moral suasion and the glare of publicity for poor performers should be tried first, and then we can go to legislation if necessary.

Ms Rektor: We are running out of patience with moral suasion, as it is almost two years since the banks agreed to make things easier. Training is one part of it; general attitude is the other. We believe that banks do a very good job of letting their employees know of all kinds of changes, and they happen quite quickly. There seems to be a lot more difficulty in implementing this one.

Legislation is a more powerful and useful tool when you remember that we suggest this recommendation be combined with amendments to the Human Rights Act, so that we will be trying to change attitudes and ways of dealing with low-income people on two different levels.

In our experience, banks are not overly concerned with negative publicity from poor people, since they are not a constituency with a lot of influence and do not wield a lot of power. However, that is changing. For example, the Canadian Bankers' Association has produced a training video for their staff. To answer your question, the time for moral suasion is up, and we need something more to make sure those changes continue to happen.

Senator Di Nino: You are a very eloquent witness and a wonderful spokesperson for the organization.

In my view of this issue, you believe that the chartered banks -- not Canada Trust or credit unions -- should create an environment where they would in effect be subsidizing this segment of the market that they serve.

Ms Rektor: I do not see it that way.

Senator Di Nino: I understand that, but let me carry the argument a little further. You are suggesting that opening a bank account should be a right. Whether that is the case or not is immaterial, but you want the banks to open accounts for poor people without hassles; you want this bank account to be free of charges for a certain number of transactions. There are costs associated with opening an account, record keeping, and the transactions that will take place.

Are you indirectly saying that they should be prepared to subsidize poor people because of their social condition?

Ms Rektor: That is where our perspectives differ. It is very difficult, if not impossible, to function in our society without access to banking services.

Senator Di Nino: I do not disagree with you.

Ms Rektor: Then making that possible for people who are not, at this point in their lives, in a position to deposit their Government of Canada or welfare cheque and let it sit there for a number of days, because they need the money immediately to buy food, I do not see that as subsidizing. I see that as offering the same service to which other Canadians have access.

Senator Di Nino: At no cost?

Ms Rektor: Correct. Banks are not currently having a terribly difficult time making money, and so I am not particularly concerned that some accounts are more profitable for them than others.

Senator Di Nino: You referred to welfare cheques and Government of Canada cheques. Obviously there are many working poor receiving pay cheques, be it from a manufacturing concern or the service industry, where somebody flips hamburgers at McDonalds, and so forth. Are their problems compounded by the fact that these are not government but private sector cheques?

Ms Rektor: Are you asking if someone whose cheque does not come from the Government of Canada is insured in the same way?

Senator Di Nino: Does it make it more difficult to open an account and conduct a banking type of relationship?

Ms Rektor: Depending on the source of the cheque, and on the bank's relationship with the individual, it can be much more difficult, yes. Many of the people who use cheque-cashing services are low-income individuals working for minimum wage.

Senator Di Nino: I wanted to make sure that that was on the record. We talk about welfare and pension cheques, but there are many people whose income from private and public sector sources is even smaller than that from some of the pension and welfare cheques, and they have a similar problem.

Ms Rektor: Absolutely.

Senator Di Nino: One of the witnesses in Toronto yesterday dealt with a very similar issue, although the question of fees and charges did not come up. We came to the conclusion that it might be easier for a low-income individual to conduct a banking relationship primarily through an automated teller machine, or through some of the other electronic means currently available. Do you share that opinion?

Ms Rektor: That would facilitate things for some people but not for others.

Senator Di Nino: Would you care to guess whether 20 per cent or 80 per cent of the problems could be solved this way?

Ms Rektor: I could not wager a guess at this time. I am here representing poor people, and in my comments so far, I have not included people who have incomes from jobs that make them poor as well. Poor people are not a uniform collection.

To partly answer your question, one subset of poor people is single, elderly women living alone, and they are generally much happier conducting face-to-face banking transactions. Electronic banking is not the answer for them, and there is not necessarily one answer for everyone who is poor. There is a range of things that can work.

Senator Di Nino: I understand that, but could we solve some of the problems by making it easier to access electronic banking, as opposed to, as you suggest, convincing banks that they should open branches in many areas where they are reluctant to do so?

Ms Rektor: The answer is still yes and no. Some people's problems with access to banking services could be solved that way, but there is still a need for branches in communities.

Senator Poy: Can you give me your definition of poor people? You said that there is a difference between those on welfare and those on a low income.

Ms Rektor: For NAPO, the definition of "poor" is based on annual income, regardless of its source, and we use Statistics Canada's low-income cut-offs as a guideline. People living on an amount below the low-income cut-off for their region and family size are considered poor.

Senator Poy: You said that the banks are making huge profits, and therefore it will not hurt them to provide banking services to certain customers free of charge. Since there will have to be criteria, what should those be? Those who fall within that scope might feel discriminated against because they do not like being labelled as "poor people." Where is the cut-off point for the banks?

Ms Rektor: On the first part of your question, dealing with how to determine that, we would have to work out the details.

We recommend the elimination of service charges for eight transactions per month, which would get you through your rent and monthly living expenses, not for an unlimited number.

In an ideal world, poor people would no longer be treated like second-class citizens. If it takes a special kind of bank account for them to have access to banking, that will not make them feel bad. I mentioned the situation of someone who gets around town in a wheelchair and needs a ramp to enter a building. That person does not feel bad because a ramp has been placed there to help them.

Senator Poy: Supposing the first eight transactions were free, would that apply to everyone?

Ms Rektor: We would need a system in place to ascertain who is in a position where a $3 monthly service fee would be a hardship.

Senator Poy: I am suggesting that that should apply to everyone, so that some need not be singled out as poor people. That would be the fairest way of doing it, would it not?

Ms Rektor: That is one possibility, and you are quite right to ask about the details of how that would be arranged. I had a conversation in the summer with the Canadian Bankers' Association, where I put forward our idea of having a no-fee bank account with eight transactions a month. They also had questions about how to do that.

Senator Poy: That is right, without labelling certain people.

Senator Kenny asked about automatic transfer of government cheques, and you said that you did not agree with that because some people do not want bank accounts. How do those people manage?

Ms Rektor: I did not say some people do not want bank accounts, although I imagine there are some people who deliberately do not have them. I said that some people do not necessarily want their money deposited directly into their account. For those people, there is a feeling of control or security in having a cheque in their hands that they can take to the bank, and from the perspective of low-income Canadians, there should be an element of choice.

Senator Poy: Do you think that a majority of the people whom you represent would not want automatic transfer?

Ms Rektor: I do not know what the percentage is, I just know that everybody does not want the same thing. They all want easy access to the money that they are entitled to, but there might be two or three ways to achieve that.

Senator Poy: It would be easier for them to take that cheque to the bank and cash it instead of the money being transferred into an account?

Ms Rektor: Some people would prefer that.

The Chairman: I thank you for appearing before us today.

Our next witnesses are from the National Council of Women of Canada. A brief has been circulated.

Ms Helen Saravanamuttoo, Vice-President, National Council of Women of Canada: We wish to thank you for the opportunity to present today. It is a great privilege to be here.

Ms Elizabeth Hutchinson, President, National Council of Women of Canada: The National Council of Women of Canada is now 105 years old. We have circulated with the brief the archival material which was prepared for our centenary five or six years ago, which you may find interesting to read at your leisure. We work particularly for the benefit of women, children and families in Canada and our policies are formulated through local council initiatives. We will say nothing here, or at any other body, that has not been discussed at local councils of women and local groups across the country and then brought to our annual meeting in the form of resolutions and voted on. We do not speak to any issues except those contained in our policies, and we had resolutions on this matter at our annual meeting this summer.

Ms Saravanamuttoo: We were pleased to be included in the MacKay task force consultations and to see that the report deals with so much more than bank mergers. We felt that the financial institutions spoke as though this was the only item on the agenda, but we have taken a much broader view in our response to the task force.

We believe that a strong, credible banking sector is absolutely essential to the Canadian economy, and this was one of our major concerns when preparing this brief. We note that Canadians gave financial institutions high satisfaction ratings on some counts.

These financial institutions also play a public utility role, because their impact on Canadians and on the financial life of our country is so large. We discuss the need for accessible and affordable banking services, community investment, and for the banks to serve these communities. The workings of a financial institution should be transparent and publicly accountable. Consumers need the opportunity to work together as a balance to the power of the financial institutions.

We strongly support government regulation of the financial institutions in order to ensure a viable financial sector. In footnote 4, we reference material from The North-South Institute indicating that the financial sector is inherently more risky than the sector of the economy that produces goods and services. This is an important point when we are looking at the overall picture.

Ms Shirley McBride, Convenor of Economics, National Council of Women of Canada: My comments refer to pages 2 to 5 in our brief, and I will speak about the following areas: stability in, and Canadian control of, the financial sector; competition; overlap between banks, investment firms and insurance companies; and the currently proposed bank mergers.

The current volatility of international currencies and the use of new financial instruments such as hedge funds have tended to create a climate of increased risk. The National Council of Women of Canada urges the government to proceed with caution in areas affected by the presently unstable world market, and to consider carefully any measures that would put the Canadian financial sector at increased risk or make it less stable.

It is also important that the Canadian government retains control over regulated financial institutions operating in Canada, and we recommend that existing legislative requirements to that end be maintained and strengthened. To enhance competition in the consumer market and promote better service, we support measures that would make it easier for new banks and credit unions to be established, since that would increase the availability of microcredit.

The National Council of Women does not support expansion by banks into areas not traditionally thought of as banking services until adequate consumer protection measures and regulations are in place. A blurring of the divisions between deposit-taking institutions, firms selling securities, and insurance companies is inherently risky because it makes it easy for trouble in one sector to spread into the other two. Regulations to ensure the separation of these three areas were developed after the Depression, but were relaxed during the 1980s. We urge government to proceed with caution on measures that blur these boundaries.

The National Council of Women does not believe that permitting mergers of large banks is in the public interest. Size does not necessarily help banks compete internationally, and merged banks can be more vulnerable to global upheaval. In the United States during the 1980s, the biggest banks took the biggest risks, and many of them ran into serious trouble. Should the proposed mergers proceed and one of the new megabanks run into trouble, would either failure or takeover by the remaining bank be practical options, or would we be looking at a massive government bailout or a takeover by a foreign bank? Would a megabank perceived as too big to fail not be inclined to take ever greater risks, secure in the knowledge that should it run into difficulty, it will be bailed out by government?

We recommend that government not permit the presently proposed bank mergers, and that a public interest review process, enforceable in law, be established to consider all future merger proposals between large financial institutions. Thus, the National Council of Women supports measures that would increase stability in, and Canadian control of, the financial sector, that would increase competition and improve service to consumers, that would discourage overlap between banks, investment firms and insurance companies, and that would prohibit the currently proposed bank mergers.

Ms Saravanamuttoo: The section in the task force report on empowering consumers is most relevant to us, and we note the continued consumer dissatisfaction, particularly with respect to bank charges and levels of service.

We strongly recommend that there be adequate disclosure by the financial institutions, not only in the two above areas, but also on the loan default rate among large business borrowers. We note that the Canadian Bankers' Association's own figures show that the proportion of loans made to small and medium-sized business has actually decreased in the last two years, not increased, as the Canadian banks often claim.

It is important to understand what is happening and to hold the banks and financial institutions accountable. We strongly recommend that a community reinvestment act be introduced requiring disclosure of the following: the costs of doing business versus bank charges; the number of applications for loans, and a report on how they are dealt with; an analysis of loans granted by gender, age, neighbourhood, size of loan, and other appropriate demographic data; an analysis of loans refused by similar demographics; and an analysis of loan defaults by similar demographic parameters, especially by size of loan. We suspect that the larger borrowers are defaulting more often than smaller ones, but we do not know that for certain and it is important to have that information.

We recommend that the community reinvestment act include measures to hold the banks accountable by requiring financial accountability statements, as well as proof of compliance related to these statements.

I would like to talk about access to bank accounts for all residents. I am a social worker and I have visited people in rooming houses with doors that could be very easily forced open. People who live in these places often do not have bank accounts, and you can imagine somebody cashing a cheque and trying to keep the money safe. There are frequent violence incidents in these rooming houses, and I wonder how people manage to keep their money safe during the course of the month.

I often walk home late in the evening along Rideau Street, where there is a bank cashing service, and no matter what time you go by, there are people there. Last night we passed it at 10:30 p.m. and there were a couple of people in there. These are people who cannot afford to pay these extra charges.

We recommend that the government work closely with the banks to ensure that all Canadians have access to bank accounts, and introduce legislation to ensure compliance, because we do not believe that this compliance is forthcoming, even after all the promises that the banks have made.

Ms Hutchinson: Helen spoke about access to bank accounts, but this also implies actual access to a bank or a bank machine. I live in the Laurentians, some considerable distance from any centre with a bank or a bank machine. I am fit and able and have a car, so I can get to a bank, but I know that in Montreal, for instance, there are some areas, like Verdun and Pointe-Saint-Charles, where some of the major banks are closing their branches. The people living there do not have an opportunity to go to a bank in their neighbourhood.

As we mentioned in our brief, there was a report about a banking machine being closed in a rural area of eastern Ontario because it did not generate enough business. However, the local population rose up and proved that it was used all year, not just on a seasonal basis. A similar thing happened at the veterans' home in Sainte-Anne-de-Bellevue, where the bank was proposing to close the banking machine. The residents of the veterans' home were extremely indignant because this was their only access to a cash machine. The banks should be paying attention to where people live and making it possible for people to access bank machines and/or branches.

As the previous witness said, some people do not feel comfortable with bank machines and prefer to have face-to-face service. I know this has costs, but on the other hand, it is our money the banks are dealing with and they are in business to give us service.

Ms Saravanamuttoo: We agree with the recommendation of the task force for an independent ombudsman. We agree with an internal ombudsman to settle complaints at the first level, but we believe that an independent ombudsman is necessary. The proposal is for the ombudsman to report directly to Parliament through the Minister of Finance. We believe that there is also a need for binding rulings, as in the U.K.

The MacKay task force report talks about the differences in knowledge between consumers and the banks, and how this prevents true competition. It recommends the establishment of a financial consumers organization. However, we feel that more is needed than just exhortation on the part of consumers. Consumers need to be given this information, and we are proposing that a one-page flyer inviting consumers to join such as organization be included without delay in bank mailings to their customers.

We are strongly in favour of microcredit. I have seen microcredit operating in Sri Lanka, and it was just amazing to see what happened. The Calmeadow Foundation is doing excellent work in Nova Scotia, Vancouver, in Ontario, and with the aboriginal communities. This is an area that should be facilitated.

The National Council of Women believes that there should be consumer representation on the boards. This would be best facilitated through the financial consumers organization. We believe strongly in gender equality issues. The financial institutions, in their role as a public utility, should be required to subject their business decisions related to human resource policies to gender analysis. We have had a similar suggestion vis-à-vis the loans granted.

Issues concerning privacy are generating a great deal of concern. If the mergers did go forward, there would be too much spreading between the sectors. The danger of releasing confidential information is too great. It is essential to have comprehensive legislation to protect the privacy of consumers.

We do not have any direct policy on the issues of privacy concerns and tied selling, but we feel that this is covered directly by our mission statement, which is to work for the good of women, their families and society.

We feel that tied selling can be very destructive and we understand that it has not had good results elsewhere. We strongly recommend bringing in legislation to ban coercive tied selling on the part of the financial institutions and to ensure that they fulfil their responsibilities to consumers when working to prevent such practices.

[Translation]

Senator Hervieux-Payette: I can appreciate your comments, as a woman who herself had some runs- ins with my bank when I wanted to borrow money to buy my first car and the bank demanded my husband's signature. On another occasion, when I was applying for a mortgage, the bank again asked for my husband's signature. The bank did not seem concerned about my financial status.

You see the government as playing an important legislative role. The trend today is toward the government withdrawing as much as possible from the financial sector, whereas it seems you would prefer to see even more stringent regulations. You are asking the government to step in further and to maintain the status quo, if not to take a step backward. Have I understood you correctly?

[English]

Ms Saravanamuttoo: The status quo is not going to stand with the developments of globalization. We are not asking for a great deal more regulation. There is certainly a lot of regulation at the present time.

We are concerned about maintaining a strong financial sector. In my opening remarks, I said that this is an inherently very risky sector. In Canada, we have been well managed by our regulations. We need to strengthen them and apply them so that they serve local communities and are appropriate to this age of globalization.

[Translation]

Ms. Hutchison: Our goal, and that of the government, is to protect the most disadvantaged members of society. In their dealings with the financial services sector, the most disadvantaged need the government's protection.

Senator Hervieux-Payette: The Mackay Task Force had a mandate to look at financial services for all segments of the Canadian population. We realize that in the case of certain client groups, the level of services could be improved and that all client groups must have access to services. One of the recommendations that I am pleased to see you comment on is the proposed consumer organization. Do you agree that there should be a certain number of consumer organizations across Canada? Could these organizations not develop some expertise in the financial sector with the help of financial institutions and a mailing program? Perhaps consumer associations do not have the expertise to analyze financial services. Perhaps we could ask financial institutions to mention several associations, instead of just one, in their mailings.

Ms. Hutchison: I agree with you that there should be a number of such organizations working for consumers.

Senator Hervieux-Payette: In recommendation 14 under gender equality issues, you talk about gender equality at the executive level of financial institutions, but make no mention of gender equality when it comes to bank customers. To ensure that barriers are truly eliminated when it comes to the services offered by banks, do you not think that data on gender issues should be available?

Ms. Hutchison: I believe we cover this point in recommendation No. 7 which deals with loans. I think this ties in with your observations.

Senator Hervieux-Payette: Banks come under federal jurisdiction. Federal laws may apply to the human resources sector, but in the case of insurance companies, trust companies and brokerage firms, you have to understand that these institutions do not come under federal jurisdiction. We are being asked to harmonize the regulatory process. It is important that federal laws coincide when it comes to the four pillars of the financial services sector.

[English]

Ms Saravanamuttoo: I am sure that will be absolutely essential also. What is needed, though, is federal leadership in this area. We do not know how many women are getting loans. We hear from women who say that they are being refused on general policy. We do not know whether or not this is true, but it is essential to find out.

We hear about a few women being appointed vice-presidents of banks. This is not very prevalent and we do not know how much credibility they have in those organizations. If the banks are going to serve men and women equally, it is important that we know these statistics; that we know how many women are being promoted, what positions they are reaching, and how many are getting their loans. At the present time we do not know this.

[Translation]

Senator Hervieux-Payette: With respect to representation on boards of directors, you would you prefer to see not only consumer representation, but women serving on these boards as well. Is that correct?

Ms. Hutchison: Of course.

[English]

Ms Saravanamuttoo: That would be good.

Senator Callbeck: At page 3 of your brief, you recommend caution in a number of areas. You go on to say:

We do not, for example, support expansion by the banks into areas not traditionally thought of as bank services, until adequate consumer protection measures and regulations are in place.

Are you saying that, once the protection measures and regulations are there, you would agree with banks selling insurance and leasing cars?

Ms Saravanamuttoo: We would like to see what happens first. The regulations need to be put into effect so that we can see what the effect is. We are very conscious that this is a changing world and we do not want to say anything black and white. We know what is happening in the global financial markets. However, with so many dangers involved at this time, what is to prevent such volatility spreading?

We know what happened with Barings Bank; we know what happened recently with the hedge funds in the U.S. This happens with big banks. In the Depression things spread between sectors. This is not a time to go merrily on expanding and giving carte blanche to different developments. We have to proceed slowly and carefully to really understand what is happening.

Senator Callbeck: On page 6 of your brief, you talk about the Community Reinvestment Act. You list information that you think should be disclosed concerning lending to businesses. MacKay did not recommend the Community Reinvestment Act. However, he recommended a community accountability statement with a lot of other information, for example, how much the financial institution invests in the community; the amount of money that the financial institution contributes to the local hospital or whatever charity. Do you see that information expanding?

Ms Saravanamuttoo: Certainly. We have policy in this area, so we were not able to broaden it after the MacKay task force. The MacKay task force talks about the defining of the communities and the accountability statements. Yes, absolutely.

Senator Callbeck: On page 8, you talk about the financial consumers organization. You recommend a one-page flyer inviting consumers to join. Do you think that should be fully financed by consumers?

Ms Saravanamuttoo: It would be quite viable if the information were sent to consumers. The expectation is that 10 per cent of people will reply to it. If that were the case, such an organization would be fully viable. However, getting the information out about such an organization is not easy.

Senator Callbeck: The question of the ombudsman has been brought up by several witnesses that have appeared before us. People have complaints about our financial institutions, however, for a number of reasons, they are hesitant to go to the ombudsman. Do you have any ideas on how we can make the whole process more consumer-friendly?

Ms Saravanamuttoo: First, you need an independent ombudsman's office. We hope that the banks can make their internal ombudspeople friendlier. I have never used the service myself, but the banks at the present time are rather intimidating to consumers, especially low-income consumers. Therefore, the banks need to work on that themselves. The independence of the office would go a long way to making consumers feel that they would be heard.

If people fear any issues around privacy, that may prevent them from replying. I heard somebody who is quite well off say, "I am afraid to complain about this because my loan may be cut off." This is a real fear at the present time. We do not know exactly what is happening, and we do not know the effect of complaining.

Senator Oliver: Earlier today, we heard from an official of the National Anti-Poverty Organization. They talked about what they call systemic discrimination against the poor when it comes to getting a bank account and banking services.

I would like to hear more details about women in business and women having access to capital to run their businesses. You have a small section about this on page 6 of your report. We have been told that, with each passing year, more and more small businesses are being run very successfully by women. We have also been told that the biggest problem they face is access to capital, not their ability to do the job and to make money at their businesses.

You have been in existence since 1893. Do you have statistics and data on the difficulties that business women in Canada face in accessing capital in financial institutions in Canada? Can you help us by indicating how serious this problem is?

Ms Saravanamuttoo: We have anecdotal data, like everyone else. We do not know how many women are being refused bank loans. We do know that increasing numbers of women are getting loans, but we do not know how many people are actually applying. We do not have that information, and I do not think anyone else does. It is possible that some of the banks have the information, but they are not making it public.

Ms McBride: If you are turned down for a loan you, are rather unhappy and you are not about to advertise that to your friends and neighbours.

A friend, who lives in another part of Ontario, told me a story a few weeks ago of her own personal struggle to set up an independent retail business. This was a woman who was at the top of business management. She was in her early forties, single, and had everything going for her. She went through all of the required hoops for a small business loan. One bank asked if she wanted to talk to the women's loan manager. It was difficult to pin it down, but she felt that she was not treated as seriously as a man would have been coming into that situation.

Finally she found a bank that gave her a loan and is now operating very successfully. Later, she discovered that, although a number of the banks that had allowed her to prepare and present all the detailed applications sat and listened to her very seriously, their head office had a pre-established policy at that point of not giving loans to small retail businesses. No one had told her. I suppose they allowed her to go through the process because of public relations.

The other thing she found humiliating in a number of banks was dealing with loan managers who were much younger and much less experienced than her and who treated her in a very condescending, patronizing way. However, what really annoyed her was that no one had the courtesy to tell her that she was wasting her time; that they were not allowed to give these kinds of loans at that time because of a ruling at their head office. She found it a rather trying and disheartening experience for a number of months before she finally got what she needed.

Senator Oliver: Because you do not have much data and you do not know anyone who does have any data on this, are you in a position to say, as the anti-poverty group said, that it is so serious, it is systemic?

Ms Saravanamuttoo: We could say that there is systemic discrimination against low-income people. The MacKay task force report opens with a story of bank customers in Vancouver being made to stand out in the rain. I have worked with hundreds of women and low-income people who have not been able to get bank accounts. They are living very precariously and are not served by the banks.

One of my clients had to go across town to get to her bank. I asked her why she went so far. She replied that, if she ever closed her account, she would never get another one like it. It was a no-fee bank account and she thought that they were no longer available. She did not have the money to travel across town each time she wanted to go to the bank, but this was the reality of it.

Senator Oliver: The Royal Bank and some of the other banks have talked recently about a bank specially designed for small business people, including women. Do you think this might be a partial solution to the problem?

Ms Saravanamuttoo: I do not know. What is wrong with making branches more accountable? What is wrong with increasing credit union facilities and promoting them? Why is it necessary? We have the infrastructure there. Why not work with them to make them more accountable.

The Chairman: I would like to thank you for taking the time to be with us this afternoon.

Our next witnesses are from the Council of Canadians. Their brief has been circulated to everyone.

Mr. Peter Bleyer, Executive Director, Council of Canadians: Thank you, senators, for the opportunity to appear here today before you. With me is Jamie Dunn, who is working with us on issues related to the banks.

In our brief we reintroduce the Council of Canadians. The council is probably known to most of you. We are a national non-partisan public interest group and we currently have more than 100,000 members from coast to coast. We do have some serious concerns when it comes to the future of this country's financial services sector. Many of these concerns are coming straight from our members. They have told us they are deeply concerned that further deregulation and the proposed bank mergers present a serious threat to our ability as Canadians to determine our social and economic future.

The MacKay task force represented an important opportunity to address the concerns of our members and other Canadians for a critical sector of our economy that has clearly been affected by years of deregulation. The task force did confirm our growing recognition as a country that the status quo in this sector is not sustainable. The task force also made a series of interesting recommendations that are aimed at protecting consumers in the financial services jungle. Nevertheless, we believe that the report could well be improved by including many of the additional recommendations brought forward by the groups that are part of the Canadian Community Reinvestment Coalition.

From our perspective, unfortunately the positive contributions of the report are dramatically overwhelmed by two key factors. The first is the attempt by four of our largest banks to literally hijack the public agenda with their proposed merger. Attached to our brief are the results of a national opinion poll, which reinforces, we believe, the conclusions of the Ianno Liberal Caucus Committee that was released today. The data that is attached shows that two-thirds of Canadians believe that bank mergers would be bad for them personally. It shows that two-thirds of Canadians do not believe the banks when they claim mergers would not result in closed branches and lost jobs. It shows that 86 per cent -- a massive majority of Canadians -- either want regulations governing the banks increased or at least maintained at their current level. That is perhaps the most interesting of those three statistics.

We believe that the task force failed to truly consider the serious global situation we face today. When it comes to that big picture, the report failed to see that the results that we are seeing around the world, in Russia, Asia and elsewhere, are largely the result of massive deregulation and foreign investment. The situation we face today in the Canadian financial services sector is largely the result of systematic deregulation. Since the mid-1980s, our Bank Act has been relaxed in a number of ways, including the elimination of the reserve requirement that has dramatically increased bank profits, most importantly at public expense. At that time, more competition was held out as the plum that Canadian consumers would grasp. Again, we are hearing the same argument, but we now know that these measures were part of a process that lead to greater concentration and consolidation in the industry, not more competition.

As part of what we see as a deregulatory remedy, the task force suggests that we allow the further entry of foreign banks into this country. The notion that we are likely able to make foreign banks serve Canadians' needs when we failed to make Canadian banks meet our needs makes much sense. Clearly, new foreign banks will head straight for the profitable niches in banking. They will not go for full service; they will not go for the hard-to-reach low-profit corners of the retail sector. They will be looking at skimming lucrative corporate clients off the top.

Canadian activities will inevitably remain secondary for any foreign-owned bank. In the case of an economic downturn in their home market or any other business problem, an error of calculation on the part of their staff, market failure or whatever, assets held in Canada will be rapidly shifted homeward, instantly importing foreign economic difficulties into our country.

For those who see greater foreign competition as the magic bullet to lessen the impact of the proposed mergers, this is a dangerous miscalculation. Allowing foreign banks greater access will require further deregulation. The entry of foreign banks will lead to a dual system of regulation, with foreign banks not being subject to the same controls as Canadian banks. Eventually, of course, Canadian banks will balk at this and will end up with even less regulation overall.

The other serious obstacle to the MacKay report's stated objective, a financial services sector that serves Canadians, is the proposed mergers. Every day the stacks of arguments against the proposed mergers get higher. The tone gets higher too, but the tone of those defending the mergers is probably what you have suffered through most.

The National Liberal Task Force's report, which was released yesterday, made a substantial contribution. The poll that we have released today adds more valuable information, not just on the mergers but also on the question of regulation. Clearly, the mergers are not necessary or useful. The mergers, in fact, are downright dangerous. The extent of concentration in the banking industry is a serious matter, not only because it leads to increased market power for a few corporations, but also because it can and often does lead to undue political power. We have seen some advance notice of this. We have seen analysts doubting whether the federal government has the capacity to stop the mergers. We have seen speculation around the financial repercussions of the mergers. We have most recently seen bank chairmen making very thinly veiled threats about what will happen if we do not allow the mergers to go through.

I would like to summarize some of the recommendations we have laid out before you. This may seem like it is not a recommendation, but we think it is essential. The mergers are a distraction from the real task at hand. The Finance Minister must be urged to close the file on the mergers, to take it off the table so that your committee and other committees and his staff can get on to the important task at hand which is, we believe, renewed regulation. The MacKay recommendations, to protect Canadian consumers, need to be decoupled from the broader emphasis of that report, the deregulatory emphasis. Deregulation and consumer protection are 100 per cent incompatible.

Renewal of regulation has to include a clear rejection of further foreign ownership and a clear stand against further vertical and horizontal integration in the sector. It would include a return to the federal reserve requirement, abandoned by the federal government at great public expense. It would include innovative new ideas, such as a national investment fund. It would look at the global picture and propose ideas such as a financial transactions tax, sometimes referred to as the Tobin tax after James Tobin.

I would draw your attention to the attached poll. The information is there, and we are happy to answer questions on that as well.

The Chairman: I would like to clarify a couple of statements that I do not think are accurate.

You talk about the problems with the Japanese banks. There is no foreign bank investment in Japan. The issue was not massive deregulation; it was an excessive role of government in the banks. Your description of Japan is factually incorrect.

You talked about deposit insurance vis-à-vis foreign banks in Canada. Under the current law and under any proposal that has ever been advanced, any foreign bank in Canada that is going to take insured deposits is required to have a subsidiary, not a branch, and the subsidiary is required to have sufficient funds to be able to ensure that it is protected. That statement is not factually correct, and I could give you another three or four.

I have not seen a brief like this in the last decade.

Mr. Bleyer: You have not seen a poll like this either, Senator Kirby.

The Chairman: After reading this brief, I would say that your general view is that this is not a business. Fundamentally, you want government ownership. Is that a fair statement?

Mr. Bleyer: It is appropriate to deal with this question in front of legislators. What is being overlooked here is the critical role of government. The critical role of government is not to run the banks but it is to set the regulatory framework within which we can ensure that banking institutions and other institutions, for that matter -- it is just that banks are a critical component in our economy -- meet the public interest. The fact of the matter is: (a) those banks have not; and (b) our governments have been going in the opposite direction. Our governments have been removing the framework of regulation. That is a fact that I do not think you would contest in terms of the deregulation that went on in the 1980s and 1990s, perhaps under a different government.

It is up to legislators and government to play its rightful role, which is not to run the banks but to create the context in which those banks are serving the public interest.

The Chairman: Your description of the kind of regulation that would make you happy is a regulation that is so constraining that I am happy to admit that the government would not be technically owning the business, but they would be de facto running it.

You say an unequivocal stand against further vertical integration, which I assume means within the banking industry, or horizontal, that is across other sectors, is equivalent to saying that what you want is an industry which, in spite of all the technological change and everything else that is going on, should be ring-fenced and required to stand still. That is the practical effect of that statement.

Mr. Bleyer: Absolutely not. You are seeing the arguments on the detail from a number of stakeholders. We are not stakeholders. Our organization represents individuals who come together because of a shared vision as opposed to a specific stake. You have heard from stakeholders who made the clear arguments around the impact that we are seeing already and will continue to see as the four pillars become one within the financial services sector.

For example, talking about the impact of integration, there are factual arguments that can be made based on the Canadian record and the likely future of the Canadian financial services sector if we go in the direction of further integration. We may be making a case very strongly and very unequivocally, to use our own word. Somebody has to bend the stick. We have been going quite dramatically in the other direction. There is a report on the table now that, despite the fact that it makes some important and excellent points around protecting consumers, does not meet that question around the role of regulation. We have been running scared from regulation. The message from Canadians is that they expect clear, fair regulation from government and they are not getting it; they have not got it right now and they want to see it.

The Chairman: Many of your comments are based on polls. Is it your view that when you get a very strong poll result -- and I am not disputing your poll results -- that the government should act on the basis of that poll result? My next question from that is that I presume you believe we should restore capital punishment, since the numbers in capital punishment run at about 85 per cent in favour of capital punishment.

Mr. Bleyer: I would not want to cheapen the importance of this poll result. I have been Executive Director of the Council of Canadians since 1992. This is the first national public opinion poll that we have commissioned during that period, far less than most political parties.

The Chairman: I am not objecting to polls.

Mr. Bleyer: We do not think that you should govern by poll. I was going to ask how many people here ran for election, talking about more regulation. I was thinking of the wrong committee.

The Chairman: Some people in this room have.

Mr. Bleyer: I know that many people have in the past, but at that time they might have argued for more regulation. Of the people who now sit in the other House, very few of those parties would have run arguing for more regulation. We are drawing to your and their attention that perhaps they have misread public opinion on this. It is not the determining factor, but maybe it will open people's minds up to the fact that regulation is not this monster that needs to be avoided.

Senator Di Nino: I was going to ask the witnesses if their recommendation was to nationalize the banks, but, Mr. Chairman, you have asked that same thing.

In your presentation you did not deal to any great degree on proposed competition to the existing large financial institutions. Please give us your comments on that.

Mr. Bleyer: There are some recommendations around credit unions and some recommendations from yesterday's report around the second tier, the role that Canada Post and other institutions might play in terms of providing some services. Those are interesting proposals.

Our concern is that the proposal around broader competition that we have seen come forward in the last number of years has not led to competition. They have led to consolidation. I believe that you and I are looking for the same thing. If we are looking at competition, what we want is more service, be that service to consumers, bank services, more wickets for small business loans and so forth, guaranteeing service in rural communities. The proposals on the table will not solve those things. We are convinced that the notion of new foreign entrants coming in will actually deal with that. It will not work.

Within that context, these banks still have room to make profit. But let's set some rules to ensure that the banks we have are doing the best job they possibly can of serving Canadians' needs. That will also include looking at measures around credit unions and allowing some other institutions to compete more effectively with those banks. The notion that we should skip that level of "let's set some rules" is what we object to, first, and, second, that we look to foreign banks, which we do not think are interested or able to provide those services that people want.

Senator Di Nino: Obviously you do not agree with the generally stated principle that Canadian banks are some of the best regulated and some of the best run financial institutions in the world. That is a comment that you hear frequently not only in this country but elsewhere.

Mr. Bleyer: It is not so much that we do not agree with that. It is the trend we want to look at. Let's look at the global financial situation. This week's issue of The Economist qualifies as a diatribe against the trends and banking around the world today. We see crisis after crisis internationally. Senator Kirby and I could debate what happened in Japan, but that is obviously not the point.

Senator Di Nino: I have to agree with Senator Kirby that I think it is over- regulated, not under-regulated.

Mr. Bleyer: I have no doubt, which is why we are coming to you with this argument. Would it be useful for us to come forward to try and make the point around regulation if we thought that everyone at this table was actually convinced of that argument already?

Senator Di Nino: I do not want to continue to debate the discussion you had with Senator Kirby.

As I stated to Catherine Swift of the Canadian Federation of Independent Business, there are segments of the Canadian community, principally the small business community, that has been saying for a long time that their needs are not properly and appropriately solved. It is generally understood that one of the problems has been competition in that field. This is where you see a Wells Fargo coming in with their small business package.

You are saying that the way to fix it is to put more rules in so that the banks are forced to serve this component of business as opposed to increasing competition. Is this what I am hearing you say?

Mr. Bleyer: Overall, for the financial services sector and banking, you are not going to get all of the areas that are not profitable niches dealt with through that kind of cherry picking by foreign banks coming into this area of the sector. That is not a global solution.

You yourself mentioned setting rules for the existing banks in terms of the proportion of their portfolio that should go to small business loans. We have a proposal for a national investment fund, which is even more dramatic than setting rules for the banks. It is actually saying to the banks, "We want you to contribute money, through some process that can be debated, to a fund that will be regulated or ruled over by a number of different stakeholders, that will then provide money to commercial and non-commercial enterprises." We would go a step further than just setting rules. We would say, "Give us some of the money," and we, in terms of the broader Canadian public, will make some decisions about small businesses and so forth.

Senator Di Nino: Do you then also believe that these rules and regulations that you are proposing for the bank should include the availability of services to special groups of Canadians such as the poor and the female segment of the population? Do you start out with the little pieces, and do you say that you have to do this for this and this for that?

Mr. Bleyer: That is an important point. There are some good proposals in the MacKay task force report, as well in the Community Reinvestment Coalition's paper on how we deal with some of those items. As you are inferring, to deal with the big picture, that is nowhere near enough. That, alone, could be counterproductive. A lot of those measures will disappear over time if we allow deregulation, foreign entry and so forth. So-called market forces will eliminate those rules.

We must ensure that poor Canadians have access to bank services and so forth. You cannot do that just by setting up rules in a little package for them. You have to take on the big picture to make it work.

Senator Di Nino: Do you feel that the financial services sector in this country should be a for-profit sector or should it be a service to the community?

Mr. Jamie Dunn, Council of Canadians: You have to look at the context that we are trying to frame and how we are trying to frame this discussion. We are not saying that the government should micromanage banks or that they should not be profitable. But we are saying that they have enjoyed a historically privileged position where they have made huge profits. They are in a position where they can look at international finance. We are saying, "Fine, but you have made it on our money and our parents' money and our grandparents' money and you've done it with a regulatory framework that we, along with our parents and grandparents put in place. What you owe us for that is a basic level of stability and service, and then you make your profits."

The issue is not undoing profits. These businesses are set to be profitable. Their CEOs are paid to make money. It is our job as Canadians and the government's job as regulator to put our interests in place and to make sure that our needs are met by these organizations.

Senator Hervieux-Payette: I want to bring you back to 1992. The Telecommunications Act was introduced. Competition came in. I think we can make some comparisons.

We have seen a lot of players and investment coming into Canada. Some jobs were displaced but now there are shortages of workers in the telecommunications industry. We now have lower prices for consumers and access to services that were available then in the United States but not in Canada. We have enhanced that sector with new technologies and we are one of the best providers in the world.

Why would things be different in the banking system? How would being open to foreign banking, second-tier banking and various means of delivering financial services in fact damage Canadian culture and heritage?

With convergence, telecommunication has even provided us with even more TV channels. It is going totally in the opposite direction than you are foreseeing in your brief. I would like to know your rationale.

[Translation]

Mr. Peter Bleyer: First of all, I would like to apologize for the fact that our brief is in English only. We will be sending you a French version at a later date.

As mentioned, the telecommunications sector includes television. Recently, we appeared before the CRTC and other groups, such as the Friends of Canadian Broadcasting. We discussed the problems we were currently experiencing in this sector. One problem at this time is that many Canadian communities no longer have a regional television station. The lack of regional and community news is partly due to the withdrawal of the CBC and to certain changes in this sector. If we analyze these different sectors, we note that the picture is not exactly rosy.

Senator Hervieux-Payette: Do you agree with me that services cost less than they did ten years ago, that there are more choices available and that in fact there are more television stations?

Mr. Bleyer: As far as telecommunications are concerned, the services may not be cheaper. It all depends on how you calculate this cost. You heard what the National Anti-Poverty Organization had to say. It is fighting for more affordable telephone rates for low-income earners. Because of the changes in the local and long distance markets, it is not clear whether service charges are lower than they were before. These sectors are also facing major problems. I do not entirely agree with you on this point.

[English]

The Chairman: Thank you for coming today.

Mr. Bleyer: Thank you. We hope you will study the results on deregulation -- and not just because it is a poll.

The Chairman: Our final witnesses today are from Power Corporation.

Mr. James Burns, Deputy Chairman of Power Corporation of Canada and Chairman of Great-West Life and London Life: Mr. Chairman, you have heard from many people. We prefer to use our time with questions and comments. We have appeared before the Commons finance committee and we have a brief, which is being distributed.

First and probably most important, a suggestion seems to be cropping up here and there that there is something wrong with the Canadian financial institutions or with the Canadian institutions, which deal with financial matters on behalf of consumers or business. We find it rather strange that someone would be offering that. We rather think that the clock works quite well.

Most parts of the world are, over time, quite envious of the prudence, the stature and the capacity of the Canadian financial institutions to deal with Canadians and to deal effectively as exporters of their expertise around the world. Our institutions are in fact held in pretty high regard, in our view, everywhere we go.

With respect to the MacKay task force, our first response is that the clock seems to be working quite well. Be very careful if you tinker with it or try to fix it.

A time-to-time review of the status of institutions, their powers and so on, is a very appropriate and useful engagement for government and its ministries.

We are not looking at a part of the whole Canadian context that is troubled or in need of major repair. I have spent a good part of my working life in the United States. Our Canadian fabric is substantially better than the American. There is relatively little in the United States that we could copy that would benefit Canadians.

Our institutions are quite competitive. The best testimony to that is that the two largest American life companies, Metropolitan Life and Prudential, which are huge institutions, have gone home after 100 years. If we did not have a competitive marketplace, they would still be here.

In 1985, the government of the day issued a green paper, which was under heavy attack from many quarters. That green paper was withdrawn and came forward several years later as a white paper. After more debate, by 1992, there were new insurance and bank insurance acts.

Having been heavily engaged in that process up to 1992, we thought that a lot of this had been put to bed for 10 years, which was the traditional sunset time. It was a great surprise that within a three-year period certain of the issues re-emerged and were brought forward very aggressively by certain parties that clearly were not happy with what had happened in 1992 and wanted to change the legislation.

Now in 1998, there are certain aspects with which we take substantial issue. I will focus on the highlights of the ones we are talking about.

The first item is what the banks call retailing of insurance. Our view is that retailing is a misnomer. It really does not have anything to do with retailing, it has to do with access to the data banks.

Selling over the counter is not the issue. The issue is access to data banks of the chartered banks, which are unique and special. No other institution even comes close to having the kind of information that a bank has on individuals and companies.

No one else gets to see where you write your cheques. No one else will ever see where you write your cheques. This is a very unique and special advantage that is held by that particular category of institution.

We feel strongly that giving access to those data banks for the marketing of insurance and other products, which is presently prohibited, would cause grievous and maybe irreparable damage to that huge institution.

Approximately 90,000 people are engaged in a category called the "with advice" sector. These are people that go out and talk to other people. They are brokers, stock brokers, financial analysts, planners and so on.

This is a major and very fast growing part of the total fabric. It is part of a tremendous change in the way Canadians deal with their needs for financial products and advice.

It is not surprising that this advice sector has grown significantly because it is very complicated out there. Our tax laws are complicated and the array of our products, new and continuing, is enormously complicated. By any measure that we have taken, and certainly the MacKay report concurs, the public prefers to deal with people who are there on a continuing basis for their financial advice and product needs.

The small-business sector would be particularly vulnerable to a breakdown in that current band of activity. Small business gets its working capital on credit lines from banks. A relatively small number have equity financing but the vast bulk operate with bank credit.

It does not take one very long to imagine how difficult it would be for the small business owner who is negotiating his line of credit, or the continuation of it, to resist any encouragement that he transfer his group business or his RRSP business to the guy who grants the credit. This is not coercion.

I do not think you could legislate against banks being lenders and providing these products. It is common sense to recognize that in any negotiation a party that has that kind of potential authority over another has an extraordinary advantage. That type of advantage could not be transferred, nor would it be accepted if wielded by an independent broker or consultant.

We see considerable risk to the fastest growing and most significantly changing area in the field of financial products.

The mutual fund industry, which is by far the fastest growing part of the financial world, and has been for five years, is overwhelmingly controlled by independent brokers and advisors. The so-called direct writers are a relatively small part of the business.

There are thousands of funds out there. People are confused as to which one to pick. They expect someone to help them make their decision and to assist them in developing a program for their retirement. Any change that would disrupt or alter that pattern would be difficult.

The service of advice-giving is growing fast because the market likes it that way. The government did not mandate it. No one forced them to do it.

This change is a function of the market pressure rather than a change that is mandated by government or regulation. If the people like it, they will buy it. Institutions that are on their toes are quick to provide it.

The second items, which the MacKay report and government papers deal with, are demutualization and ownership. For some considerable period of time in Canada, there have been various restrictions on ownership of financial institutions.

These restrictions were created from a concern on the part of governments about foreign ownership. The notion that the 10 per cent rule on the banks or the old 25 per cent rule on the life companies had something to do with prudence or careful management is not the case. It really had to do with ensuring that Canadian financial institutions of size were not bought by foreign companies. Those restrictions were to be the stopper.

Under the new regimes, FTA and NAFTA and so on, where national treatment is the case, the only way a government can protect its own institutions is to have that kind of rule.

The position we find ourselves in is that there are really only two players of size in Canada that do not fit into the widely held or the 10 per cent rule. They are Power Corporation and its subsidiaries, and Canada Trust.

In our case, insofar as demutualization is concerned, they have come up with a rule that says that Manufacturers Life or Sun Life could buy you, because they are widely held, but you could not buy them. We find it very difficult to understand who dreamed that up. A chartered bank could buy a Great-West or London Life, but we could not buy a chartered bank.

If there continues to be rationalization in the industry, and I am not saying there is, but if there is, the terms that have been put out there effectively discriminate against us because of our size. We do not find that either fair or equitable.

Power Corporation's experience in financial institutions started in 1969, so next year it will be 30 years. I do not think we have ever had any criticism about our conduct or the prudential management of our affairs or have in any way behaved in a manner that was not exemplary. Consider the Great-West and London Life records. Keep in mind that both these companies have participating policyholders. London has the largest number of any company, including the mutual companies. The participating policy dividend records, the return of premium records, of the two shareholder companies, London and Great-West, rank one and two in the industry over 25 years.

This, we think, argues strongly that having an owner -- for London and Great-West have owners -- certainly did not work to the disadvantage of the participating policyholders in reality. Our policyholders did better than anyone else's over a long period of time.

What is it about ownership that seems to bother people? A massive number of regulations and statutes cover self-dealing and inter-company related transactions. The reality is that even if you had a bent to do it, there is no legal way that an owner could have access to the funds of the regulated financial institution. You cannot do it. I guess you could do it and go to jail, but that never seemed to be an attractive option.

The Chairman: Mr. Burns, I must ask you to wind up. You have been speaking for 25 minutes, and we want to have lots of time to ask you questions.

Mr. Burns: In 1992, the acts of the day determined that there must be a 35 per cent widely held trench in a regulated financial institution. That was arrived at after a great deal of debate back and forth. We find it hard to believe now that they will create another ownership regime, made in Canada, since 65-35 pretty well dictates that there will not be any hanky-panky. You have a 10 per cent regime that applies to the banks. You can see why it is there. It is there to keep the foreigners out. What is the purpose of having a 10 per cent regime in the life companies?

The Chairman: You are the last of approximately 150 witnesses. Only two, you and someone who works for you, have effectively argued for the status quo in anything. I am not saying that everyone spoke in favour of MacKay, far from it. We heard people wanting change all over the place or different kinds of change. What is peculiar about the position of Power Corporation that you would be the only witnesses arguing in large measure for the status quo?

Mr. Burns: I started out by saying that we thought the status quo was not all bad.

The Chairman: I understand that. It is just curious that, out of a large sample, one firm should have that view, and no one else. I am not arguing whether it is right or wrong. Can you explain why that is the case?

Mr. Burns: You seem to make reference to someone coming in here pleading for the government to change something. We argue the point that the market is changing all the time, very quickly. The status quo is not a stationary target. It does not exist. The marketplace is changing under your feet very quickly. At our companies, we try to keep track of the changes and respond to them.

You can perhaps say the status quo with respect to government regulation, but we would say that we would be more focused on the marketplace. We do not think that there is a status quo in the marketplace. It is moving very fast.

I have been reading senators' questions in the transcripts, which we are always interested in seeing. I frequently see questions about the shape of the future. Mr. Chairman, no one can know.

The Chairman: It would be a competitive disadvantage if you could know.

Mr. Burns: Absolutely. You have had all these hearings. At least 100 of 130 people have told you one way or another that things are moving underfoot very quickly, internationally or nationally.

The international aspect, in our view, is somewhat overstated. We do not see it as a big deal. If you have your unit costs right and are dealing with your market properly, you do not need to worry about foreign competition. They are not any better than we are. In fact, perhaps they are not even as good.

Senator Oliver: One thing that we have heard repeatedly from the witnesses over the last few weeks is that the main theme in the MacKay report is competition. A number of witnesses have told us that if there is a serious weakness in the MacKay report, it is that it does not focus enough on the potential second-tier banks. The real question is not whether banks should sell insurance or something like that. They seem to think that, with or without mergers, and given the technological changes that are taking place, a new second tier could emerge quickly. It could come from foreign banks suddenly coming into Canada or the sudden emergence of our credit unions to come up and compete with the likes of the Big Six. Some of us think that this is not too realistic. Could you give us the benefit of your views on where this second tier will come from, particularly in the areas of competing for small business loans, for the types of people you were talking about who need a loan to carry on their business for working capital.

Mr. Burns: The issue of finance for small business is a subject all by itself. Where will the competition come from? In our view, it will come inevitably from a very rapid growth of niche players. That is where it will come from. I can see why a major Canadian chartered bank would be concerned about this, because they are full-service operations.

Senator Oliver: Are you talking about niche players for core banking?

Mr. Burns: I am talking about them for everything. They are specialists. They come in and do just one thing, such as MBNA and credit cards. Wells Fargo says that it has a system and can do small business loans on the telephone. They are expensive, but they can do that; it is their game and they are doing it in vast volumes. They probably are betting that the statistical odds will work out in their favour, particularly when they are getting paid for the higher risk, which they are.

I believe that it will come from a giant outfit like Fidelity, which is almost as big as the entire Canadian industry.

Senator Oliver: You have mentioned three American firms.

Mr. Burns: ING, the Dutch bank, has come here with a niche specialty. They are very good at that. Their systems are very advanced, their unit costs are low. They will target a particular market area at which they are very good. They effectively manage, therefore, they have very low unit costs. Will this result in ultimately lower prices for consumers or better service? Of course it will. It will drive everyone else to either meet the competition or get out. If you do not have your costs down there, you had better get out.

Senator Oliver: Do you believe that the second tier can be developed from the so-called niche players?

Mr. Burns: I believe so because I do not think anyone will come in here and start a branch banking system. That market is gone. You are not likely to get anyone coming in here to start a full service life insurance company in the traditional sense. They will come here in a big way, and they are already in Canada, with specialists in certain product areas and niches. They are very price competitive. A Canadian company such as ours either meets the price or we say we do not wish to meet the price because there is nothing in it for us and we get out.

The consumer is the beneficiary though because he will get the product at a better rate than would otherwise be the case.

On the smaller business capital, and lending, there are two parts to the argument. Everyone is talking about borrowing money. A very large part of this is where the equity money is. That is what really matters. It is no surprise that the United States has walked away with the computer age. They own it because they have massive amounts of equity capital available for start-ups. They would bet big money on 24-year-olds in a garage to come up with an idea. They did not do it by borrowing money; it was equity.

Part of the financial structure could very well take into account the various tax and other measures that are available to enhance the investment. Small business lending is high risk and small business equity is even higher risk.

Senator Oliver: Are you talking about changing the tax structure perhaps by getting rid of capital gains or bringing up more flow-through shares?

Mr. Burns: We all know that a great amount of capital in Canada is locked in because of the capital gains rate. It is stuck and it is not going anywhere. You do not admire everything that the U.S. did, but certainly their going down to 20 per cent probably unleashed a massive amount of equity capital.

Senator Oliver: We have heard a number of people talking to us in the last few weeks about the level playing field. What was level to them depended upon what their turf was. You know your turf, as you are involved in life insurance, mutual funds and you are in unregulated areas. What is your definition of a level playing field in the financial sector in Canada today?

Mr. Burns: We were involved in the trust industry for a long time too, but we no longer are. What is level? We had absolutely no objection to the chartered banks buying a life insurance company or starting one, which the law permits. They come into the business on the same basis as we come in. What we did not think was level was their having access to this unbelievably powerful database that would be almost impossible to compete with.

Senator Oliver: You have databases with your mutual funds and with your life insurance companies.

Mr. Burns: We are not lenders. We do not clear the cheques. The bank is the only one that clears the cheques. The bank knows where your money goes. The bank not only knows how much, but exactly where it is going. The bank knows if you are buying a mutual fund from Investors Group because they see the cheque. The bank knows, if you are in small business, that you have your group insurance with Great-West Life and it knows how much it costs you every month.

Is that a level playing field if you can do that? I do not believe so. If they wish to be in the insurance business, for instance, the Royal Bank offers to buy London Life, no one complains about that. If they wish to buy it, be our guest, but they must compete the way we compete.

Mr. Edward Johnson, Vice-President and General Counsel of Power Corporation of Canada and Power Financial Corporation: In the short run it may sound very attractive to allow that sort of thing to happen. It will create more efficiency; eliminate all kinds of marketing costs; you will have a more efficient delivery system and it will get to the people with need right away. In the short run that may sound attractive, but what happens when the competition has been eliminated?

Our experience and the evidence suggests that when large oligopolies like the big six banks take over a market sector, we do not see prices coming down. In fact, we have seen, for example, spreads widen in the trust industry since banks have gained control.

Senator Kolber: If you got access to the payments system as being suggested, would that make up for what you are calling an uneven playing field?

Mr. Burns: No.

Senator Kolber: You could not use the payments system to do other things?

Mr. Burns: If someone said that we could have it we would take it, but would we chase around for it? No, not particularly, because we would be a deposit taker.

Senator Kolber: That is precisely what we would like you to be because that is one of the ways we can get some competition into this country.

Mr. Burns: We were a deposit taker for a long time with Montreal Trust.

Senator Kolber: You got out of deposit taking.

Mr. Burns: We took a look at the future and saw that there was no place for us. We are too small; they will eat us alive.

Senator Oliver: Maybe you should just buy a bank.

Mr. Burns: If the Senate committee could persuade the government of the day to get rid of the 10 per cent rule, we might just do that.

The Chairman: Even under the MacKay proposals you could buy Canada Trust, which is getting pretty close.

[Translation]

Senator Hervieux-Payette: One question comes up often when we talk about the banking sector and that is the matter of excessive profits. We often hear this criticism, but no one talks about insurance company profits. For the benefit of the committee members and the public, could you compare for us a bank's return on its investment with that of an insurance company? I am talking in general about companies that sell life insurance, not specifically about your firm.

[English]

Mr. Burns: I will deal with life insurance rather than casualty. The return on equity would depend on the type of business on which the company is focused. The rate of earnings, or ROE, on non-asset accumulation type business is very high, that is, on group and term insurance. That is because it does not take any capital. You do not need reserves. A large part of it is strictly fee business, which gives a very high ROE.

Certain of the mutual companies would have quite a low return on equity because they would be heavily focused on traditional individual cash value life insurance policies, which would not develop a high ROE. Coincidentally, they might not have much fee business.

The fastest growing part of the life industry is segregated funds. They require no capital. It is strictly a fee business. Thus, the ROE on it is very high and very good.

[Translation]

Senator Hervieux-Payette: Obviously, if this sector is more profitable, then the banks will step in. Your tables bears this out. First of all, the banks bought up trust companies and then brokerage firms, but there was no rush to buy up insurance companies. Is that because it is more profitable for them to invest in the former rather than in the latter? Why would they want to get into the business of selling life insurance? Could it be that they want to improve the level of service to consumers?

[English]

Mr. Burns: Apart from the Royal Bank a year ago making an offer for London Life, there has been no evidence of real interest by the banks in the life insurance sector. There are only certain parts of the business in which they would be interested. Like most financial institutions, banks have been moving increasingly to fee business as opposed to regulated spread in other businesses. Certainly, the Canadian banks have been doing it. Why? Because it is more profitable and it does not need equity.

Historically, the Canadian chartered banks were in the market every two years raising equity because they had to have it to get their strength. They have not been there in a long time. They can finance themselves on their retained earnings. Their big business growth is coming from areas of business in which they do not require reserves and a lot of capital. Capital is expensive.

Thus, they gravitate toward the fee part of the business, which, as they see it, is more profitable. The main reason we keep coming back to this point is that they have been relatively disinterested in the insurance business because there is a ban on customer information transfer between the parent and subsidiary. That is why they have not been in it. If that embargo were lifted, you would see them coming pretty fast.

[Translation]

Senator Hervieux-Payette: My final question concerns competition in your sector as compared to competition in the basic banking services sector. One of the main criticisms that has been levelled at the current system is at there are not enough banks. Do companies that sell life insurance or does your group, the Investors Group, face stiffer competition? Our mandate is first and foremost to serve the public and to ensure the availability of all financial products. Is competition fierce in your sector and would the arrival on the scene of new competitors improve the quality of the services or products available to consumers?

[English]

Mr. Burns: I would say that, categorically, there is a high level of competition in the life insurance industry. To illustrate that point, Prudential and Metropolitan Life went home. They would not have done that if the environment were easy and very profitable for them to stay.

Most of the life business that is done these days, namely, group, disability and the whole array of products, is almost totally done by brokers. It would be rare that any transaction would ever take place without a spreadsheet. The broker can place the business anywhere. If he wants, and if he is acting for the customer, he can say, for example, "I have four companies here. These are the numbers. These guys are better at paying claims and more efficient."

In terms of individual policies, I would find it surprising if there is anyone out there today who is not offering a number of competing companies. For example, Investors Group's field organization was dedicated; that is, they only sold Investors Group products. They now sell 10 different mutual funds, along with their own funds. They sell Great-West and Aetna policies under the aegis of the company. An Investors salesman, who is dedicated but brokering stuff out, legitimately and under the rules, has four or five competing products to offer on any transaction.

Certainly, that will heighten the level of competition because if you are not there on a spreadsheet, you do not do any business. You might say, "Well, the guy might do a little bit better because his commissions are better," but I do not think there is that much variation in the commissions. There are different ways of calculating them. Frankly, our system is what we call level. They get paid as much for keeping the thing in force as they do for selling it. Some of the companies are what they call high-low. They pay a big chunk of the commission up front and not very much thereafter.

I think there is a very high level of competition. I think the banks compete very vigorously on everything except price.

Senator Meighen: Welcome, Mr. Burns and Mr. Johnson.

The first question I wish to ask is a theoretical question, something which you will see once I ask it because it presupposes that I am the Minister of Finance.

You have said in one of the recommendations that you want to ensure the long-term health and independent non-bank insurance sector and a non-bank distribution system so that Canadians will continue to have competitive choices. You will find many Canadians who agree with that statement. You have some specific recommendations that we have been discussing.

Let us suppose that all those did or did not come to pass, depending on the tenor of the recommendations you have made. As you know, this committee is not studying only the question of bank mergers. Nevertheless, it does form part of our discussions from time to time. If your recommendations were maintained and we were able to ensure what you say there, what do you feel that I, as Minister of Finance, should do about bank mergers?

Mr. Burns: That is a good question. There is already huge concentration of economic power and reach, and an increasingly enlarged segment of the whole service approach. The trust industry was a competitor that has now disappeared. Investment dealers were unique, but they also disappeared. They are all part of the banking system now.

We have not had anything to say about the proposed bank mergers and I do not think we will have anything to say about it. That concerns the shareholders of the bank and the Minister of Finance, who must consider the issues that affect all Canadians.

There is a higher degree of concentration already than there is in any country of the Western world. The banks have enormous power. If you have that kind of concentration, apart from the prudential aspect of it, does it make a lot of difference whether there are six or four? The issue is not whether there are six or four or 10, the issue is concentration. That is our view.

Senator Meighen: Perhaps you can have as much competition between four as you can between six.

The banks would argue that by saying there is a high degree of concentration you are referring only to banking and not to the financial services sector. They would argue -- and I would like your reaction to this -- that there is considerably less concentration and it is quite widespread.

Mr. Burns: In the financial services, apart from the insurance -- that is, P and C and life, where they are not a factor -- and apart from the financial and other management of pension plans, where they are not a big factor, they are dominant in every other sector.

Senator Meighen: Are they niche players?

Mr. Burns: Yes. They are dominant, directly and indirectly, in every other sector, for example, in mortgages. If you were to take all the consumer uses of financial institutions, they are overwhelmingly dominant, at anywhere from 65 to 90 per cent.

With mutual funds, they sell direct funds, but they also control the brokerage industry, which is the biggest player in the sale of mutual funds. About 40 per cent of mutual funds are sold by investment dealers, and investment dealers are creatures of the banks -- at least, they are now. That is concentration. When they are given broader powers, it happens very fast.

Senator Meighen: We are not talking about broader powers in this case.

Mr. Burns: You are talking about merging. The issue is the concentration, not the merger.

Senator Meighen: Whether it is the concentration of four or the concentration of six, does it not matter?

Mr. Burns: That is correct. That does not change it.

Senator Meighen: That is an interesting perspective. It lends credence to what you say here about them opening up to competition and not restricting competition where it still exists to a significant degree.

Wearing your hat as a citizen, let us suppose that I am still Minister of Finance. I grant all your recommendations and I do not import the ownership restriction -- that is, the 10-per-cent rule -- to the insurance business, but I do maintain it for the banks. Would that be wise, or would it be preferable to abolish it?

Mr. Burns: The 10 per cent rule existed for any Minister of Finance in our country over the last 40 or 50 years. It is there to maintain the status of our major chartered banks, which is very important. Because of the concentration, they are the overwhelmingly important instrument of the federal government. I do not think you are terribly interested in seeing that run out of Amsterdam or Frankfurt or New York. The 10 per cent is there for that reason. Despite our wish that it will go away, to be practical about it, I suspect it will probably stay for the banks.

When there is something that concerns the banks, because of their overwhelming importance in the financial fabric of the country it is transferred over to the life insurance industry. Why does that happen? The way things are going, the food distribution business will be run by three companies. I think food is more important to most people than life insurance. They do not have a 10 per cent rule on grocery chains, although that is a significant part of everyone's budget. How far do you want to take this thing?

The Chairman: Mr. Burns, I want to go back to two things you said earlier about documenting the history of the 10 per cent rule and the 25 per cent foreign ownership rule for insurance companies.

I am not disputing that. However, you did not point out, but could have, that the creation of large mutual companies in Canada was done precisely to avoid foreign ownership.

Mr. Burns: Yes.

The Chairman: Therefore, I think you will agree that ensuring that major financial institutions do not fall into foreign hands has been Canadian public policy for 30 years or more.

You then went on to say that we changed the ownership rules in 1992, so why would we consider changing them again now? It is a bit disingenuous in that, when four of the top five mutual companies are in the process of demutualizing, there has been a fundamental shift in the marketplace. There must be some kind of policy because, as you said before, under national treatment you cannot put a domestic ownership policy in place.

If one assumes that the longstanding Canadian policy of 40 years of ownership of major financial institutions in Canadian hands is to remain and if demutualization is to occur, what policy options do we have other than some form of limitation of ownership? We would be happy to look at other options.

The issue is not 10 per cent or 20 per cent, but that is the dilemma we face. We fully understand that it creates a problem for you because you are the one who must be grandfathered because of history. That is why your grocery store analogy is true but not relevant. What has changed since 1992 -- and this is a fundamental change -- is that unless some policy change occurs, four of the top five companies will be on the market and available for foreign purchase. There is nothing we can do about that except change the law. The question is how we change the law?

Mr. Burns: The law that governs us as of 1992 is 65 per cent, 35 per cent widely held. That was arrived at because the original papers started out at 10 per cent. About five years later, we got them up to 65.

The Chairman: You are fairly good negotiators.

Mr. Burns: It is very tiring.

The Chairman: I understand where you are, but you must understand our frustration, namely, that we want to maintain Canadian ownership. We are trying to find a policy. I understand that you do not like the 10 per cent figure, but to follow your suggestion requires that we give up a policy that has been active in this country for decades.

Mr. Burns: Yes, but only for banks.

The Chairman: It has been active for insurance companies. That is why we have had the 25 per cent rule for a long time and that is why we created mutual companies.

Mr. Burns: It was 25 per cent for votes.

When Power Corporation acquired Great-West Life, 55 per cent of the company was owned by Americans, but they could only vote 25.

The Chairman: There may be a way to do it that limits the voting shares. However, since we cannot distinguish between Canadian and Americans because national treatment does not allow that, we need a policy that cannot be based on speculation about whether Americans will buy it or not.

Mr. Johnson: Conversely, will we prejudice Canadian companies and Canadian owners against speculation?

The Chairman: That has been the policy for 40 years in this country.

Mr. Johnson: Let me say, though, that there has been a trend in recent years for foreigners to leave the Canadian industry. We have seen Prudential and Metropolitan leaving in recent years. There has not been a flood of foreigners coming in to acquire major pieces of the industry. Both Great-West and London Life have been stock companies for generations.

Senator Meighen: Why do you think that is so?

Mr. Johnson: As Mr. Burns was saying a few minutes ago, they would not be leaving if they found they were able to make money.

The Chairman: There is a difference, and you know this from your own business, between coming in and trying to set up a business to compete with existing big players and being able to buy one of the existing big players.

Senator Meighen: Hongkong Bank told us that in graphic terms. That is the dilemma.

Mr. Burns: I would say it has occurred to us that in Ottawa there are thousands upon thousands of very brainy people, and if someone asked them to come up with an answer, they probably should be able to come up with it. If they cannot, maybe we will.

The Chairman: All I am saying is that, in 40 years, no government of any stripe has managed to solve it other than through an ownership rule.

Mr. Burns: I am sure you are all aware of the fact that two of the larger companies that are demutualizing are already substantially foreign-owned.

Senator Meighen: My last question pales into insignificance compared to that dilemma that we face, but it has to do with holding companies. Could you talk a bit more about that? It seems to some of us that MacKay said holding companies are great but then he proceeded to talk a lot about the regulation of holding companies, which led some of us to wonder what is the difference between a regulated holding company and a parent-subsidiary relationship. So, back to a sort of unregulated holding company, is it possible to have, whatever the term is, a ringed fence, a regulated subsidiary under the aegis of an unregulated holding company and still maintain a level playing field?

Mr. Burns: I think the OSFI already has the powers and capacity, if it chooses, to reach into the holding company.

Senator Meighen: They think it will be very difficult to regulate it.

Mr. Burns: If they think they have been busy so far, good luck. If they start to get into the holding company, they will have to increase their employment by a multiple of 100. It gets very complicated. What you really want to do is to protect the regulated financial institutions. The depositors, the people with money, are the ones you are trying to protect. The way the thing is structured now, if you took the trouble to really study it, you could not squeeze a mouse through it. What are they worrying about? Are they worrying that someone way up here will do something? If they are doing the job as a regulatory body, they will not worry about that because there is no capacity to attack or otherwise misuse the customers' money.

I guess a regulator would prefer a subsidiary. It is easier because he has the regulated company and just drives straight down into the subsidiary. That is easy. The problem with the holding company is that he has a whole bunch of things going on up there, and all he is watching for is that they do not use the creditworthiness or assets of the regulated company and lose it over selling bananas to someone or some other crazy idea. There are some good examples in the history in Canada of regulated institutions that got into holding companies and lost a lot of money. I can see that they would sooner have it the other way around. It is easier for them to have the problem going on down here than up there. Do they have the capacity now? If the OSFI chose to chase up to our holding company, Lifeco, which is the one that is listed, can they gumshoe around there any day they want? Of course. It would be a big waste of their time because there is nothing there, but they are welcome to look.

Senator Kolber: Leaving aside the question of whether you allow foreigners to buy or not buy, talking about the 10 per cent rule, can you make a really good case that it is a better thing for the financial industry in Canada to allow dominant ownership in almost any company? Obviously you will tell me that the Desmarais family have been terrific stewards of Power Corporation, and they have been. There is absolutely no argument about that. On the other side of the coin, Royal Trust was owned and that went down the tubes. You folks owned Montreal Trust and sold it to BCE, I think, and that went down the tubes. The Belzbergs had First City and that went down the tubes. Central Trust went down the tubes. How would you legislate it? I do not see any empirical evidence that is dominant on either side of the question.

Mr. Burns: I do not think that there is any legislation that exists in the world that will ever legislate good management, to start with. There has been lousy management in widely held corporations just as there has been in closely held corporations.

Senator Kolber: There has been terrific management in widely held corporations, too. The Canadian banks have done spectacularly well over the last number of years, and you might say, they are each the fiefdom of the CEO. How do you come to grips with this kind of thing?

Mr. Burns: We hold the view that no one has been able to prove to our satisfaction, or anyone else's, that one model is better than the other. It is as simple as that.

Senator Kolber: How do you legislate it?

Mr. Burns: How can you legislate it? I guess the marketplace, if it is a real marketplace, has to permit failure.

Senator Kolber: In other words, leave it wide open and the chips will fall where they may.

Mr. Burns: If it is failure due to chicanery, that is the job of the regulator. If it is failure because management was dumb, I do not know how you will pass laws to protect the world from stupid people.

Senator Kolber: The regulator wants to protect Canadians from stupid people.

Senator Kroft: Mr. Burns, your organization has done all sorts of business in all sorts of countries and on a substantial scale. Have you, to your recollection, ever been unable to complete a transaction because your Canadian banker was not big enough?

Mr. Burns: No.

Senator Kroft: The second question is unrelated to the first. This, for me personally, is an important final question. We have heard a wide range of opinions as to the intentions and capacities of foreign, particularly American, banks in the Canadian economy. We have heard, on the one hand, Mr. Godsoe and others saying, "Do not worry about it. They have tried it before, they have looked at it, we are good enough, they are no concern." We have also had others say, "Unfortunately they are of no concern because they are not going to come in and fill gaps that need filling." Then we have had others, most particularly the banking industry, say, "We have to be so vigilant because, if we look away for one minute, they will come in and overwhelm us."

My final question is very general. Based on your experience in the financial industry, what would your perception be of either the threat or the potential threat that American banks pose to the Canadian financial system?

Mr. Burns: The potential for American or any other banks to come into Canada in a hurry and do well would only exist if the sector they were in was being badly run; if it were charging too much or providing sloppy service. I do not know why anyone worries too much about large American banks. They would be vastly more interested in carving their way into California, which is as big as Canada and a lot richer. We are not at the top of everyone's list of most desirable places.

Any foreign institution of size -- bank, insurance company or any other -- would look at Canada as not an easily contestable market. I started out by saying that I think we have a pretty good system here. It covers pretty well all the bases.

No one comes charging into a new environment or a new situation unless they see a fairly quick and easy opportunity. If the unit costs of any institution are too high, they will come in and kill you. The major job of an institution in protecting itself is to get its unit costs down where they cannot hurt you. Fidelity, which is the biggest, runs its business on a little less than 30 basis points.

We were very conscious of that at Investors Group and we decided that we had to get down to 30 because they were going to come here. Sure enough, two weeks later, in they came. They do not scare us now, because we can match them. If they want to start cutting prices, we will cut them too, and we will not go broke. If you want to protect yourself, you had better get your own shop in first class order, then you will have nothing to be afraid of.

The Chairman: Thank you, Mr. Burns and Mr. Johnson, for appearing.

Senators, on your behalf, I should like to thank all our staff; the clerk and his staff, our research staff, and the translators and Hansard reporters who have been with us for the past six weeks, as well as the hangers-on sitting along the back wall who have travelled around the country with us. We really appreciate the work that all the staff has done.

Thank you very much.

The committee adjourned.