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

Issue 10 - Evidence

OTTAWA, Wednesday, May 2, 2001

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-8, to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions, met this day at 4:00 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.


The Chairman: Honourable senators, I see a quorum. We are here today to discuss Bill C-8. I will ask our first witnesses to proceed.

Mr. Gary Seveny, President and Chief Executive Officer, CS CO-OP Community Financial Services: Honourable sena tors, I wish to thank you for inviting myself and my colleague, Ms Gallant, to appear before you today to discuss Bill C-8.

CS CO-OP strongly supports the stated objectives of this legislation, those being to promote efficiency and growth of the financial services sector; to foster domestic competition; to empower and protect consumers; and to improve the regulatory environment.

I would like to focus my remarks today on what I believe is an important element missing from Bill C-8, that being provisions that would allow for the cooperative ownership of banks. We believe that such provisions would serve to enhance the stated objectives of the bill.

We recognize the importance of passing this piece of legislation in a timely manner. For that reason, we are not asking that the committee recommend amendments to Bill C-8, allowing for the creation of banks organized on the cooperative principles. Rather, we are asking the committee to send a strong signal to the government stressing that the committee continues to believe that cooperative bank legislation should be a priority of the government and tabled as soon as possible.

Let me provide some background that may help remind honourable senators of some of the reasons why this committee strongly supported the concept of cooperative banks in the past. This will help to explain my concern that the government move ahead quickly to introduce legislation allowing for their develop ment.

Beginning in 1996, and following extensive consultations and thorough review of information relating to the future of the financial services sector, including the development of cooper ative banks, the MacKay task force made the following recommendation in its report released in September 1998. It states, in part:

Federal legislation should permit co-operative banks and other financial institutions to be chartered as new institutions with ownership and governance to be based on co-operative principles.

This recommendation was not made lightly. The task force conducted a thorough review of the issues related to the creation of cooperative banks in coming to this conclusion.

In its December 1998 report, "A Blueprint for Change," this committee strongly endorsed the MacKay task force's recommen dation, stating:

The Committee strongly supports the recommendations of the Task Force relating to the co-operative sector. It is the Committee's view that these recommendations are essential to the goals of enhancing competition and encouraging development of domestic competitors in the financial services sector.

Furthermore, this committee believed that there was some urgency that the government act on the task force's recommenda tions, including legislation to allow for cooperative bank ownership.

The report states:

This Committee believes that if credit unions are to develop into strong competitors, it will be important for the Task Force's recommendations to be acted upon expeditiously.

That was over two years ago.

I would like to remind the committee of some of the reasons why it recommended measures to allow for the creation of cooperative banks in 1998. I might add that nothing has changed to reduce the importance of providing this option.

During their extensive review of the financial services sector, the MacKay task force and both parliamentary committees heard numerous calls for a second tier financial institution to increase competition and, in particular, to better meet the needs of small business and consumers.

Cooperatively owned banks would provide an important alternative to major banks with strong ties to local communities. Such ownership flexibility would allow individual cooperatives to maintain their cooperative principle of one member, one vote, that is so highly valued by its members, while allowing them new opportunities to grow on a national basis.

Cooperative banks would empower consumers by giving them a greater voice in how their banks are run. They can be better positioned to serve their members on a national level, and to attract new members and serve businesses in many remote and rural communities where large banks are closing branches.

Honourable senators, I believe there is some confusion about the difference between a provincially regulated credit union owning a bank, which is presently allowed under legislation, and the conversion of a credit union to a cooperatively owned bank, which is not in the legislation.

Credit unions are currently permitted to own a bank. However, cooperative principles cannot be attached to that bank because the customer of the bank is not also a member and "owner" of that bank. To illustrate this point, CS CO-OP recently became sole owner of the CS Alterna Bank, a federally regulated chartered bank. Unfortunately, without the provisions to allow for cooper ative bank ownership, the customers of our bank, CS Alterna Bank, cannot enjoy the benefit of being owners of the bank with a share and a say in how their bank is run.

Furthermore, it is impossible for a credit union in another province to join forces with CS CO-OP or CS Alterna Bank while allowing its members to retain their ownership rights based on the principle of "one share, one vote."

Mr. Chairman, we hoped that when the election was called last year there would be a window of opportunity for Department of Finance officials to work on developing the amendments needed to provide for ownership of cooperative banks. Unfortunately, because a major effort was made to ensure that Bill C-8 included no policy changes from Bill C-38, Bill C-8 does not include provisions for cooperative banks, even though the committees in both the House of Commons and the Senate have previously endorsed them. Despite this setback, we were encouraged by the statement of Mr. Peterson, Secretary of State, in the House of Commons earlier this year. He said:

We have been working with the credit union movement to find out exactly what type of co-operative bank legislation should be brought forward...we have continued to study it and we will continue to study it, running on a parallel basis to Bill C-8. When the model is in place we will issue it...

It is our understanding that the government intends to seek the views of interested parties, likely through a consultation paper, on the model and requirements for cooperative banks, before introducing legislation to allow the cooperative banks. CS CO-OP has clearly indicated that it is ready and committed to work with the government to move this project forward as expeditiously as possible. This consultative process must be focussed on develop ing legislation within as short a time frame as possible.

Things are changing very rapidly in the financial services sector, and Bill C-8 will only accelerate the pace of change even more. We simply cannot afford to be left behind because of further delays in bringing this legislation forward for needed cooperative banks.

I would like to conclude by reiterating that Canadians and the financial services sector will benefit from the creation and growth of cooperative banks. Therefore, I ask this committee to send a strong message to the government that it expects the government to move quickly to introduce this needed legislation.

Mr. Chairman, that concludes my presentation. I would be happy to answer any questions.

Senator Tkachuk: As committee members know, I very much support your position, sir. When you say move quickly, do you mean by this fall? I would like to see legislation presented this fall, but you would know a little more about the consultation process that is going on. How long do you think that it will take? Do you have any idea as to when that will be tabled and preparation can begin for presentation of a bill?

Mr. Seveny: I, too, would like to have something by this fall. In discussion with the Department of Finance the message we have received is that the process will likely consume most of this calendar year.

We are disturbed that we do not have a timetable yet. After all, our discussions occurred during the last federal election. We had expected that a timetable would be developed.

This is a project that does not have an end date at the moment. Without an end date, it may never get delivered. Therefore, I have concerns.

Senator Tkachuk: When you are asking that we send a "strong message," what do you mean?

Mr. Seveny: Mr. Peterson has given assurances to us and to our efforts, that a parallel track will occur for the development of this legislation. He has advised us that dedicated resources in the Department of Finance will be put into play to start work immediately.

With regard to parallel track, Bill C-8 is moving down the track and this legislative development is moving down the track almost in synchronization. While we recognize that the legislative change would still have to go through the parliamentary process, we know there will be a disconnect at some point. Not everything will be achieved at exactly the same point in time.

We will lose competitive advantage. We know that. However, we do not want to be competitively disadvantaged for too long.

It is difficult for us to give a timetable. I was expecting it within this calendar year. I was advised that the process itself would consume this calendar year. There is the House and the Senate part of it that would follow.


Senator Hervieux-Payette: I had the impression that you had obtained a large part of what you had been asking in the context of the legislation.

From a technical standpoint, it is harder for us to understand that issue, because some of us - including myself - did not keep track of the changes within the cooperative movement in details. Currently, the legislation would not allow any such operations. Those which are allowed are limited and would be consistent with the cooperative members' principles.

While I thought we had been striding forward, here you are now virtually asking us for a new legislation in order to give you what you originally asked actually quite a long time ago.

Ms Gallant: The provisions contained in bill C-8 rather address the Credit Union Central of Canada needs. The current legislation does not allow banks to operate the way cooperatives do. The intent is more to make it possible for them to have a professional association for the Canadian credit unions rather than to allow the creation of cooperative banks.

Senator Hervieux-Payette: Then, the concept of cooperative banks would not be reflected in the provisions of the bill. At the outset, I was under the impression that you were asking us to ensure that you could become a cooperative bank, but the bill does not allow you to go that far.

Ms Gallant: Indeed.


Senator Tkachuk: I do not think you answered my last question. I want to know what you would like us to do. I have several ideas regarding what we can do, but I want to hear what you think.

Mr. Seveny:: From our basic understanding of how this process will work, we are seeking some greater endorsement of our initiative to feed back to the government, to try to put some urgency to its delivery. If this committee believes, as it has in the past, that this is important, to give some idea from CS CO-OP's perspective.

We are just one credit union with a desire to become a bank. We have been on this from the mid-1960s, when the federal government began decentralization. We have sought from the federal government a national charter from that point to present. In 1974 we came close to getting some accommodation and an election was called, I believe, around that time.

We have been waiting patiently and earnestly. We have made representations to the various committees over the years and this is the closest, I think, that we can get. Given the changes that are occurring in our industry, and the willingness to see change from a government perspective, we have to strike while the iron is hot.

Senator Kroft: Please excuse a preamble to my question, which is a very simple one. For three years we have observed the MacKay report, the process of legislation, the search for change and update in our financial institutional structure, and the need for competition that is paramount. We have also continually looked to the credit union movement and the possibility of credit union banks as a source of effective competition in the banking system. There is a broad level of support for that concept around this table.

My question is rooted more in my experience as a Manitoban. I grew up in an environment where credit unions are an important fact of life and a positive force. I also grew up involved in the grain industry and the broader concept of the cooperative movement was very much a part of my understanding of how things worked in the prairie economy. I have some sense of what has made the credit union work and what has made the cooperative movement so successful.

Do you still have the confidence that the spirit, the dynamic and the relationship of the individual member of the cooperative entity can translate into a financial institution that does not have the kind of heart and soul, perhaps, in which your movement is rooted?

That is the question that has been left with me all the way through. Is this a translatable spirit and a translatable drive that will carry into the competitive world of banking?

Mr. Seveny: Thank you for that question. CS CO-OP may be unique compared with credit unions in Canada if for no other reason than the word that identifies us is "co-op."

Our name originally was Civil Service Cooperative Credit Society Limited. It was established as a financial cooperative. Credit unions did not exist when we were founded. We have maintained our identity as a co-op. We are, under necessity, under legislation that was developed almost 30 years after our founding, under a Credit Union Act.

Therefore, the terminology "credit union" is not shown in our name. We are still well thought of as a cooperative, if you separate the two in thinking.

What we are asking for is a cooperative bank, because the bank is the only national financial institution that we can move to. A cooperative bank founded on the same principles as theCS CO-OP would have the same heart and soul. There would be no difference.

By getting larger, would be there a difference? I think that is the question. Do you start losing some of your identity by getting larger? You have to work at maintaining that kind of identity. There are some large credit unions in Canada and in the United States that work at maintaining the identity of cooperative ownership. I keep stressing "cooperative" rather than the terminology "credit union" because our 145,000 members understand what a cooperative is. They understand the passion of a cooperative. As we work with other credit unions in Canada, their members have an affinity with the understanding of cooperatives, because credit unions are also associated with other cooperatives such as the wheat pools, insurance companies and others that have existed over time.

I do not think we lose the heart and soul by becoming a bank, providing we can identify in that bank, first and foremost, its cooperative structure. It is cooperatively owned, cooperatively operated, and provides access to all of its members to the running of its organization, as we do now.

Ms José Gallant, Vice-President, Finance and Chief Finan cial Officer: If I can add to that; we recently did a survey within our target markets of the interest of younger Canadians, what we call the "nexus generation," of the cooperative bank and the principles that that bank would operate upon. The interest was quite high. It was over 40 per cent, although I cannot give you the exact number. We had different cooperative principles listed in that survey and the response was quite positive. These are not our members necessarily; they are potential clients for the bank or for a cooperative bank.

Senator Kroft: I appreciate your answer. The question could be much more directly put as to whether or not this whole thrust is top-end executive driven or if it really has what we in our business might call a "grassroots membership" drive to it.

Mr. Seveny: We have appealed to our membership through various town hall meetings and annual meetings to find out their thinking on this matter and to ensure that it was not just developed at the top. We have tremendous support. What we cannot do is put the question before our membership before we can legally provide them with the alternative. We have talked to them about it in concepts, and they have likewise talked to us in concepts. The end result is a cooperative bank.

We talked about creating some other form of cooperative entity at a national level. However, when it came down to it, they recognized that a cooperative bank was the federal entity that it had to be to get the national trademark established.

The Chairman: Thank you for being with us. Your comments are on the record. We will do our best to help you.

I now ask our next witnesses to proceed.

Mr. Said Zafar, Chairman, Committee on Islamic Financial Institutions, Canada: Mr. Chairman, let me express my thanks and appreciation for the opportunity to express our frustration at the lack of legislation or guidelines in Canada that would permit the operation of Islamic financial institutions offering the various products of western banks. Before I do that, I would like to extend the sincere regret of my colleague, Saleem Ansari, who could not be here with me today.

Globally, the world is changing politically, economically and culturally. Some 30 years ago when I migrated to Canada, items such as yogourt and salsa were not readily available. Today, the level of consumption of both is such that they are available at every convenience store.

The point is simply that the changing needs of the populace must be acknowledged and every attempt be made in the democracy that Canada is to satisfy these needs. Every community has certain needs. Within the Islamic community, the pressing need of the day is the existence in Canada of a financial institution providing custody and management of funds according to Islamic financial principles and offering the wide range of personal and business banking products available in the existing banking institutions.

There are more than 150 Islamic banks around the world, managing in excess of U.S. $200 billion. Islamic financial institutions are not only popular in Muslim countries, but are rapidly gaining ground in Europe where conventional banks are now operating Islamic windows and counters offering Islamic financial products. Among these are ABN Amro Bank, the National Commercial Bank of Saudi Arabia, Bank Misr Egypt, Banque National du Paris. Kleinwort Benson, ANZ Grindlays PLC, and Citibank. In fact you may be surprised to learn that London may well be described as the centre of Islamic banking in the western world.

Why do we need Islamic banking in Canada? Given the large Muslim population in this country - approximately 600,000 - significant sums of savings are lying idle and untapped waiting to be channelled into Islamic financial products. This unutilized reservoir of savings in Muslims' hands should be put into use as a source of working capital and venture capital for small- and medium-sized Canadian corporations, thereby further boosting the engine of the Canadian economy. Small- and medium-sized companies do find access to venture and working capital challenging.

The Canadian economy is based on free enterprise. Major economic decisions are shaped by the economic forces of supply and demand, and by profits, markets and competition.

What is Islamic banking? Is it about money or religion or the religion of money? The answer is that it is neither. "Money has no religion," remarked a leading Middle East banker.

Briefly, the Islamic banking approach implies beyond religious implications a conceptually different yet realistic and balanced approach between finance and economic activity: the lender-bor rower link is superseded by equity risk sharing between the providers of capital and the entrepreneur.

Islamic financial principles, similar to the Judeo-Christian principles, prohibit the payment or receipt of interest. This is called "riba." Riba consists not only of conventional bank interest but also of any financial benefit bestowed in return for the receipt of a sum of money when accompanied by the unconditional obligation to return such sum.

As a consequence, the financing operations of an Islamic financial institution are non-interest bearing forms and are briefly characterized as follows.

First, "Morabaha" refers to the financing resale of goods. Islam acknowledges the function of trade and commerce. Using the Morabaha form, the bank purchases goods from a third party at the request of its clients to whom it provides such goods on deferred payment terms, receiving the client's unconditional obligation to such a sale price on a future date or dates. The bank may obtain collateral from the client to ensure payment.

Second, "Modaraba" refers to trust financing. The banks supplies funds for use for strictly defined purposes in exchange for a percentage share in a defined revenue stream. The bank does not receive the unconditional obligation of its client to return the principal sum invested with a guaranteed profit, but closely monitors the use of funds. For its management and expertise, the client receives an agreed percentage of the profits obtained as its management fee.

Third, "Musharaka" refers to equity participation. This is identical to the Modaraba except that, in addition to providing management and other services, the client shares with the bank in providing equity. Risks and rewards of capital investment are shared by both the client and the bank prorated to their capital share.

Fourth, "Ijara" refers to leasing. This permits the financing of equipment, buildings and other facilities by the Islamic institution as requested by a client against agreed rental.

The Committee on Islamic Financial Institutions in Canada submits that the establishment of Islamic financial institutions as regulated financial institutions be allowed in Canada. We realize this would be very difficult because of the interim system of interest.

We submit that necessary legislative guidelines be incorporated into Bill C-8 so as to allow Canadian banks to accommodate the niche market and offer Islamic financial products in Canada at their retail branches through Islamic "windows."

We further submit that the Government of Canada should move toward obtaining observer status at the Islamic Development Bank in Jedda, Saudi Arabia.

Senator Kelleher: Under the existing Bank Act, what prevents a chartered bank, whether it be a Schedule A or a Schedule B bank, from opening, as you call it, an Islamic window within their system? Is there something that says you cannot?

Mr. Zafar: I am not aware if there is. I have been in contact with two banks, the HSBC and the Bank of Nova Scotia. We have been having discussions with them for two years. They have said that unless and until legislative changes occur they will not be allowed to have interest-free banking under such a window while carrying on interest banking. There would have to be two systems. People who want interest-free banking could come to the window. Those who want to pay interest could continue to do so. As you know, all of us love interest.

Senator Kelleher: Banks do, certainly.

Mr. Zafar: That is why they want to put it in the form of a legislative note.

Senator Kelleher: With the greatest respect, you really have not answered my question. Has it been spelled out for you that the existing legislation specifically prohibits this window?

Mr. Zafar: Yes. We have not been given it in writing. However, I have talked to the Canadian Bankers Association, who is the godfather of all banks. They told me that because of provisions contained in the Canadian Deposit Insurance Corpor ation legislation they are forbidden to have an interest-free bank.

The Chairman: Could you explain to us why you say interest free? If you are going to start a bank, you have to pay salaries. You have to have premises and either pay rent or own it. You have to make a profit some place.

Mr. Zafar: Yes. How do we make profit?

The Chairman: You do not call it interest. It is just another form of income.

Mr. Zafar: Yes.

The Chairman: Why could not any bank do that? I do not think you have answered the senator's question. If it looks, walks and smells like a horse, then it is a horse. You do not want to call it interest, but it seems to me that it is the same thing.

Mr. Zafar: In the Judeo-Christian terminology interest is fixed interest, which is unchangeable. You have a fixed rate given by the Bank of Canada and you take whatever percentage it is. You cannot go down or up.

The Chairman: There are all kinds of money instruments that are offered to people by banks that have variable rates of interest.

Mr. Zafar: Yes, but variable rates of interest do not change on a daily basis.

The Chairman: It can. Why not?

Mr. Zafar: Really?

The Chairman: We are not debating with you. We are trying to understand.

Mr. Zafar: In our system we would not allow a fixed rate of interest.

Senator Setlakwe: Would you earn your income by sharing the profits?

Mr. Zafar: Yes, or losses.

Senator Setlakwe: You become a shareholder.

The Chairman: I understand, but do you have a fixed percentage of the profits?

Mr. Zafar: No. Suppose, Senator Kolber, that I am a banker and you say, "I need $100,000." If you come with a fixed amount of money and say, "I want to start a Tim Hortons doughnut shop, so I need $100,000." I will say, "Okay. What can we agree on as to profit and loss?" You might say, "Look, you are giving me $100,000. I have put in $150,000, so I will give you a25 per cent share on profit or loss."

The Chairman: That sounds fixed to me.

Senator Tkachuk: That is equity.

Mr. Zafar: No, it is profit or loss.

The Chairman: I understand that, but it is still a fixed amount.

Mr. Zafar: There would always be a fixed amount. Fixed salaries have to be paid. The janitor has to be paid.

Senator Meighen: It is pre-established as opposed to variable.

Senator Kroft: We understand your institution as being more of an equity institution. Rather than being a lender you want to be a co-investor.

Mr. Zafar: Yes. It is a form of merchandising.

Senator Kroft: You might say, "Take a piece of action." There would be risk up or down, either way.

Mr. Zafar: Yes.

Senator Kroft: Is it an oversimplification to suggest that that is really what you are talking about? You want an institution that is, perhaps, a form of merchant bank. Basically, you are providing equity rather than debt; is that really the essence of what you are talking about?

Mr. Zafar: Yes.

Senator Kroft: The provision of equity, as opposed to debt, does not come within the definitions of the banking legislation because, for instance, the deposit insurance corporation would not understand how to cope with a sharing of equity. The essence of a bank is that they are taking people's money and that money is being loaned out. You are not part of that process at all. These are a series of individual transactions where you would participate on an equity basis. People do not come to put their money on deposit with this bank and then you loan it out to third parties; is that correct?

Mr. Zafar: No, sir.

Senator Kroft: Why do you think it is a bank at all as you understand the Canadian definition of banking?

Mr. Zafar: As I explained, there is a concept called modaraba, which is trust financing. A person comes in and says, "I have $100,000. I want to make a deposit over three years. I want you to use that money in whatever business investment you want. I want a 10 per cent return." Or it could be an 11 per cent return, or a 12 per cent return, or a 5 per cent return. This rate would not be fixed for three years, but on a monthly basis.

Senator Furey: Does the bank not take anything? Does the other 90 per cent go back to the client who deposited the funds?

Mr. Zafar: No, he comes to deposit $100,000 with me as a trust fund.

Senator Furey: Do you go out and invest that money?

Mr. Zafar: Yes, and whatever profit is made is split between the depositor and the bank.

Senator Furey: So the bank does get money for it; it does receive a rate of return for it.

Mr. Zafar: Of course, it does.

Senator Furey: Because it is not fixed it is not conventional; is that what you are saying?

Mr. Zafar: Yes.

The Chairman: Mr. Zafar, we will have to check and decide as a committee whether there is anything at all we can do for you and whether this really belongs in Bill C-8. It strikes me that it is outside the purview of what we have been asked to deal with. You are asking us to put something in that is brand new.

Mr. Zafar: I am glad you brought that up, Mr. Chairman, because I have come prepared. Bill C-8 provides for competitive ness among Canadians. You should include a notation in your act, saying that conventional banks are allowed to have Islamic banking windows.

The Chairman: We cannot say that because we are not regulators. By the way, the bill calls for allowing anyone with $1 million to start a bank. If you can meet the criteria that they want, start your own bank.

Mr. Zafar: Thank you very much. I will take that advice and start a bank. I will start. I have a million dollars

The Chairman: Well, God bless you, but unless fellow senators disagree with me, I think this goes beyond what we are studying.

Senator Furey: It goes back to Senator Kelleher's original question. What is to prevent you from doing it now?

Senator Kelleher: I do not think there is anything to stop them if the banks want to carry on, as have other banks around the world. The witness has listed them here. Those banks appear to be able to accommodate them through an Islamic window. I do not see what in our legislation would prevent a bank doing that here. I am not satisfied in my mind that the witness has been getting a definitive opinion.

Senator Hervieux-Payette: Our financial system is quite similar to England's. We are not that far apart. You say that London is almost the capital city for these banks. I tend to agree with my colleagues. Is there special legislation for the Islamic banks or do they fall under the regular bank act in England?

Mr. Zafar: I am not sure on this. I cannot respond to you.

Senator Hervieux-Payette: I think we would find the answer in that comparison.

The Chairman: Does it make sense to you? If the Royal Bank, for example, could do business through the Islamic window to the level of 2 per cent or 5 per cent of their assets, who could stop them? As long as it did not get out of hand, the regulator would not bat an eyelash, in my opinion. You would still get the deposit insurance, I think.

Mr. Zafar: We cannot pay the fixed interest charge for deposit insurance.

The Chairman: You have to issue a different piece of paper that would appeal to Islamic borrowers and lenders.

Thank you for coming. We will have to get some advice on what if anything we can do. I cannot promise anything. My instinct tells me it is beyond us.

Mr. Zafar: Thank you for allowing this.

Senator Meighen: Perhaps we could make an inquiry, through the Library of Parliament or otherwise, of one of the financial institutions in London on how they accommodate Islamic banking.

The Chairman: We will try to get better informed on what the problem is. We are giving you off-the-cuff instinctive answers.

We will ask our next witness to proceed.

Mr. Duff Conacher, Coordinator, Canadian Community Reinvestment Coalition: Honourable senators, you should have before you a summary of our key concerns about Bill C-8.

Thank you for the opportunity to appear once again before this committee and to present the concerns of the Canadian Community Reinvestment Coalition. The coalition is made up of over 100 citizen organizations representing anti-poverty, com munity economic development, consumer labour and small business constituencies, representing, in total membership, more than 3 million Canadians from every province and the Northwest Territories. We have been in existence and participating in this policy-making process since the coalition was launched in late 1996.

Our concerns with regard to Bill C-8 are that we feel that loopholes have been left that protect financial institutions, banks in particular, from accountability for poor service or unfair service to customers.

One of our main concerns - given our name, which is inspired by the U.S. Community Reinvestment Act - relates to the public accountability statements. We feel that the statements are not as detailed as they should be. Also, in addition to being more detailed, we believe that they should be reviewed and graded, as the are in the U.S. That should be part of the whole process of the public accountability statements.

Your committee noted in its December 1998 report, responding to the MacKay task force, a concern that these statements would not be detailed enough and would essentially amount to public relations statements instead of public accountability statements.

We share your concern. From what we have heard from Department of Finance officials, the statements will contain a discussion of examples of various areas where the banks and other financial institutions are active in the community and in the economy.

A discussion of examples, we feel, will be too vague and will allow the banks and other financial institutions to highlight the positive while downplaying the negative. It will also make it very difficult to compare between financial institutions because there will not be a set format. Once again, just requiring a discussion of examples will not allow a detailed comparison between institu tions. We feel that comparison is needed to hold an institution accountable.

With the detail and with a review and grading system as in the U.S., we feel it will be a full accountability mechanism. The U.S. Community Reinvestment Act has worked well over the past 20 years since that act was enacted there.

With regard to access to basic banking services, turning to the area of consumer protection, we believe that that right to an account should be clearly defined in the law and not left to regulations. It should be broader. It should apply to more branches and to all financial institutions, including trust companies which are currently exempt under Bill C-8 from that requirement to open an account for anyone who presents identification from a list that will be defined by the regulation.

Similarly, in the area of cashing cheques and holds on cheques - particularly holds on cheques - we believe that the legislation should set out a clear right to access your funds once they have been deposited. That clear right exists in the U.S. We believe there should be a legal limit on cheque-holds. This bill does not address that problem. We feel that this is very much a problem for people with low incomes and it is used by the banks as a barrier to low-income people opening accounts.

We did a survey in the spring of 1999 of 103 bank branches in 11 cities. We found many of them were using check-holds as a barrier to people with low incomes. They would say, for example, that for the first six months, every cheque deposited would be held for 30 days. Yet the Canadian Payments Association says that over 98 per cent of deposited checks clear overnight. We are calling for a legal limit on cheque-holds to be put into the bill.

On branch closures, we believe there should be a full review of withdrawal of service, including a review of the profit-loss record of the branch. Often banks use that as a reason why a branch is being closed, but they are never required to prove that the branch is actually losing money and therefore has a justifiable reason for closure.

In terms of the creation of the financial ombudsman and the financial consumer agency, those are steps forward but we feel they should be complimented by the creation of a financial consumer organization, using the method that I described to this committee several times in the past. Financial institutions would be required to send out a one-page pamphlet in their mail-outs to customers - bank statements, credit card bills, envelopes that are already going out. That pamphlet would inform people and invite them to join a financial consumer organization.

Your committee, the MacKay task force and the House of Commons Finance Committee all recommended that the govern ment and financial institutions facilitate this happening. Unfortu nately, the Minister of Finance and the department have ignored that recommendation and ignored the fact that a majority of Canadians support the creation of a financial consumer organiz ation using this method.

This is another very big gap that exists. Despite the fact that we are a large coalition and trying to represent financial consumers, we - the 100 groups in the coalition - believe that this is a much better way of setting up an ongoing organization that is self-sustaining, supported and directed by financial consumers. Such an organization would be independent of the industry and government, and would give financial consumers a much-needed voice.

Even though there will be an ombudsman and an agency, consumers will still be on their own when they are complaining to that ombudsman or to that agency, whereas the banks and other financial institutions have enormous resources to present their side of any case. Consumers should have a place to call and this is a very low-cost and effective way to create it.

In terms of ownership and merger issues, we believe that the increase in the share-ownership levels and limits that are in this bill will essentially allow the effective takeover of our Canadian banks, despite the government's stated guarantees to the contrary.

We believe that holding-company structures will also facilitate that takeover and also make it more difficult to regulate our banks and other financial institutions. We believe that Canadian control of our key financial institutions is very important and in the public interest.

Finally, with regard to bank mergers, we have been calling for the merger-review process to apply to all mergers and takeovers by banks and other financial institutions as it does in the U.S.

I know that that this committee was successful in getting included in the review process for bank mergers. We believe that is important, that both the House of Commons committee and the Senate committee play a role in reviewing any proposed merger. Unfortunately, you will probably only get to do that once or twice.

We believe that, as in the U.S., that review process should be extended it to all mergers and takeovers. Also, the review should include a review of the current business record of the banks or other financial institutions involved.

This is the way they have done it in the U.S. for years and years. Essentially, the rule there is that a financial institution that serves people poorly should be denied the right to get bigger and to thereby serve even more people poorly. The Community Reinvestment Act in the U.S. has held that standard for years. We believe it is in the public interest to extend the review process to all takeovers and mergers of banks and other financial institutions.

I will finish with something that goes outside this bill. That is the issue of whether credit-card interest and fee rates are justifiable or whether they amount to gouging. That has not been addressed at all in this bill or in any other way by the government since the February 1997 hearings of the House of Commons Industry Committee. Those hearings did not conclude. There was no report because the election was called.

We call on this committee to examine this issue and to pressure the government to take some action on it. I realize there is a lot of pressure and concern about this bill being delayed any further and that you may feel it is in the public interest to continue to move this bill towards Royal Assent. However, there are areas of concern, set out in your committee's December 1998 report, that have not been addressed.

We feel that taking a few more months to land this bill would make it that much better in ways that your committee recommended in the December 1998 report. That would be in the public interest.

If you do decide to move the bill forward now, I hope you take notice of the gaps and issues and loopholes that I have highlighted and that you continue to recommend that the government close those holes as soon as possible with legislation.

We are into the next round of review already. It is supposed to be taking place by 2002. This process dates back to your report following hearings in the spring of 1995. Everything is merging together. We very much hope that these problems will be addressed, if not with amendments to Bill C-8, then very soon afterwards.

Senator Hervieux-Payette: I will just address one institution about which you made some comments in your paper. The Canadian Financial Services ombudsman should not just cover banks but all federal financial institutions. Why did you exclude the fact that insurance brokerages, trusts, co-ops, would not be included? Depending what kind of ombudsman we are talking about, we could have one independent office that could cover all the services, whether at provincial or federal levels. Once it is a federal office, of course, it would cover just the federal jurisdiction.

There are two types of institutions. In your reflection, why did you just say that it should cover federal financial institutions but not all the institutions?

Mr. Conacher: Our brief is with regard to Bill C-8 and, with Bill C-8, only the federal institutions are required to be covered. From our analysis of how the CFSO is being set up - given that after the initial appointment of the board, the board will replace itself and will choose the ombudsperson - that structure will allow provincial institutions to join or allow provincial govern ments to pass legislation requiring provincial institutions to join.

I hope that provincial governments will follow with a requirement so that we do have "one-stop shopping" in terms of complaints because it is very confusing for financial consumers. That is why we are suggesting that, as a complement, a financial consumer organization is needed. Whether there is one place to go for complaints or not, financial consumers will still need a place to call. That is why we are recommending the financial consumer organization. It will play a great role in helping people to find the correct place to complain.

From our analysis, it seems that the agency is being set up in a way that will allow provincial institutions to participate, because the Minister of Finance does not have control over it after the first board is appointed. Provincial governments will be able to require participation.

Senator Hervieux-Payette: I would like to be reassured that this is the fact but I do not think so.

Mr. Conacher: We have this problem. Again, the National Securities Commission is an idea that is sitting there with, from what I can understand, exactly the same barriers.

Senator Hervieux-Payette: The actual ombudsman that exists now was set up by the banks and is totally independent. Are you happy with the operation of the current institution?

Mr. Conacher: No, not at all. The ombudsman is selected, paid and directed by the banks, despite some moves they have made to try to jig the board to make it appear more independent. It is still controlled by the banks. We have many complaints on file. Some people have been waiting three years for a response. It is a horrible record, in our minds.

Senator Hervieux-Payette: So you trust the government more than the banks? I like it.

Mr. Conacher: I am the coordinator of Democracy Watch. We do not believe that all the elements necessary for a truly democratic society exist in Canada, but at least we do have elections. If there was shareholder democracy of any effect within the banks, then I could trust more that consumers and shareholders had a bit more control over the executives. For example, shareholders were not consulted about how the ombudsman should be set up. That is one example. At least the government did consult us on how the ombudsman should be set up.

The Chairman: You say you have files on people who have waited three years to be heard. Could you send me one, including the name of the person and what the problem is? I would like to see it.

Mr. Conacher: Sure.

Senator Furey: Mr. Conacher, I have a brief question. Regarding public accountability statements, you indicate that banks and other financial institutions ought to disclose detailed information on their service records for all customers. Is that correct?

Mr. Conacher: Yes.

Senator Furey: What exactly do you see that encompassing and to whom should this information be disclosed?

Mr. Conacher: In U.S., they have details in lending, investment and in service. You are particularly interested in service?

Senator Furey: Your comment says service records of all customers.

Mr. Conacher: First in lending, as in the U.S., there should be tracking of the number of applicants for various loan categories, the numbers approved and rejected. In the U.S., for some categories those are characterized by race, gender, income level and neighbourhood so that discriminatory patterns can be tracked. We have proposed breaking it down by gender and neighbour hood and, in the business area, only by size and type of business

In terms of investment, we are particularly concerned about community development investment, including affordable hous ing. Again, we suggest tracking the number of applicants by community developers for loans, the number approved, the number rejected by the size and type of the developer, and the location of the developer.

Senator Furey: Do you think that customers of the banks will be happy to have that information disclosed?

Mr. Conacher: There is no privacy concern, if that is what you are raising. It would all be done according to Statistics Canada rules. It has been done this way in the U.S. for 20 years.

There is one element that the U.S. does not do and it has detail that we think we need in the public accountability statements - at least according to what we have been told by the Department of Financing. That is the location of openings and closings of branches. They do that in the U.S., but they also track service particularly to people with low incomes. We think the best way to track that is on a branch-by-branch basis. Any complaint that comes in should be tracked, including how it is resolved. Also we should track lawsuits against the bank and how they are resolved. Those two figures should also be in the statements.

To whom should they be disclosed? Those data should be publicly disclosed. In the U.S., these statements under the Community Reinvestment Act are available at every branch. Community groups can use them to hold local branches accountable for whether that branch is serving the community fairly and well and meeting the needs of credit-worthy creditors.

Senator Furey: Do I understand you to mean that the statistics should be disclosed but not the information on the individual customer? You are not saying that?

Mr. Conacher: No, there is no tracking by individual customer in the U.S. It is simply looking at patterns. I urge you, if you have not examined the Community Reinvestment Act system in the U.S., to examine it.

Senator Furey: I am not really interested in what is not written here in your statement. I am more interested in what you have written here. It is a little misleading to say the information should be disclosed on the service records of all customers. I wanted to know what that encompassed and you have answered that. Thank you very much.

Senator Meighen: For my edification, Mr. Conacher, in Section E of your brief on credit unions, I could not see any constructive criticism. Do I assume that you support what is in the bill, as outlined in your section on credit unions, and that you would be supportive, in particular, of the formation of a national co-op bank?

Mr. Conacher: Yes. We have no problem with any moves to create new competitors. We have serious doubts as to whether it will happen, but we do not have a problem. One of the things we find interesting is that if there is an applicant to set up a new bank, the business record of that applicant will be reviewed. However, if banks want to merge, the minister has the power to look at the business record, but the merger review guidelines that must be followed in doing the public interest review for the mergers do not include looking at the current business record of the banks.

In the U.S. they have done that for 20 years and have actually turned down applications. For example, an application by Harris Bank of Chicago, a subsidiary of the Bank of Montreal, to take over an Illinois bank seven years ago was turned down because of its poor current business record in lending, investment and service. Harris Bank had to set out a targeted plan to correct that poor record. That is the kind of measure that we feel should be in existence in the Canadian law.

You are allowing new competitors to come in and reviewing their business record, but you are allowing the banks to do all of these mergers and takeovers in various areas without ever looking at their current business records.

Senator Meighen: Your criticism of the absence of that practice would extend to the credit union as well, would it?

Mr. Conacher: Yes, very much so. There are mergers and takeovers taking place throughout the sector.

Senator Meighen: Between the credit unions?

Mr. Conacher: Very much so.

Senator Meighen: And you would advocate that they be subjected to the same test?

Mr. Conacher: Very much so. They have tried to do so in the U.S. as well, but, unfortunately, the credit unions in the U.S. resisted it. There was split in the credit union lobby, but many did resist. We think we should not allow institutions to get bigger if they have a poor service record in lending, investment and service. It is a good rule that is in the public interest. They have done it for years in the U.S. and we should do it here - not just for one or two bank mergers that may occur, but for all of the takeovers, including in the insurance industry. There will be a massive wave of takeovers and none will be reviewed in terms of whether they are in the public interest or not.

Senator Meighen: Are you satisfied that a poor business record can be objectively assessed?

Mr. Conacher: They figured it out in the U.S.

Senator Meighen: It is amazing what they figured out in the U.S. I would like to see some other examples.

The Chairman: We must move on. We only have until 5:30.

Our next witness is ready to proceed.

Mr. Peter R. Downing, President, TG International Ltd.: Thank you for the opportunity to be here. I have a blend of business, academic, government and international development work experience. Since the mid-1990s, I have been researching how to develop a triple-bottom-line reporting approach to corporate social reporting, which, in the 21st century, is called corporate sustainability reporting.

A corporate sustainability, triple-bottom-line report is the annual accountability of a company's economic, environmental and social performance - the same basic objectives as Bill C-8's proposed public accountability statements.

As you are well aware, Bill C-8 will require federal financial institutions with equity in excess of $1 billion to publish annual public accountability statements. These statements are to describe an institution's contributions to Canadian economy and society as well as nine specific reporting requirements. Financial institutions will be required to make these statements available to the public through their branches and Web sites.

The reason I am here today is to ask this committee to recommend to the Minister of Finance that Bill C-8's mandatory public accountability statements be enacted and that the public accountability statement regulations specify the need for a minimum common core of disclosure and transparency reporting practices.

Disclosure practices would govern what minimum information would be provided in the public accountability statements. Transparency would be concerned with the clarity of that information: How understandable is it to the readers who will be using public accountability statements?

TG International's research analyses show why public account ability statement regulations must specify the need for a minimum common core of disclosure and transparency reporting practices.

In our Table 1, the state of the art of community involvement shows the Web page disclosures of the 11 financial institutions subject to Bill C-8's public accountability statements mandate.TG International's research shows that on March 29 of this year, there was a significant lack of common, community-related information on the Web sites of these 11 institutions.

In our Table 2, content of two corporate social reports, TG International's analysis shows that there were major disclosure inconsistencies between VanCity's 1998-99 social report and the Royal Bank's Year 2000 Community Report. Our analysis shows that a laissez-faire approach to public accountability statements will seriously dilute the effectiveness of Bill C-8's legislative intent.

I would like to show this committee what a transparent public-accountability statement could look like. In Figure 1, TGI's rough draft of the Royal Bank's Statement of Corporate Citizenship, we compared the Royal Bank's vital statistics that were disclosed in its 1999-2000 community reports. This analysis shows that, without a mandatory disclosure practice calling for prior years' data and a transparency summary statement, interested stakeholders will not be able to measure the perform ance of the Royal Bank's annual and ongoing corporate citizenship actions.

In our Figure 2, "Two Statements of Corporate Citizenship," allows interested stakeholders to compare VanCity's 1998-99 "Social Report" performance with that of the Royal Bank's.TG International Ltd.'s analytical formats show that this comparison would be an impossible task without common disclosure in transparency reporting practices.

In conclusion, standardized corporate sustainability reports, such as Bill C-8's public accountability statements will become a generally accepted, 21st-century business practice.

In Figure 2, "Two Statements of Corporate Citizenship," we linked each reporting line item with a performance indicator established by the Boston-based organization called Global Reporting Initiatives, or GRI. This organization foresees sustain able reporting becoming a global business practice by the year 2010. GRI is trying to establish an international standard of corporate sustainability reporting practices. As of February of this year, the number of GRI sustainability reports included35 companies and 11 countries: 8 American companies,6 Japanese, 7 in the U.K., 9 companies in six other European countries, 2 in Canada - VanCity and Suncor Industries - and one company each in Columbia, South Africa and India.

Last November, 39 financial investors in the United States, managing more than $140 billion in investments, urged the500 largest U.S. corporations to adopt standardized measures for economic, environmental and social reporting. On March 2 of this year, the Canadian Institute of Chartered Accountants, who also assists in the GRI steering committee, said it was a strong supporter of the GRI.

In our Appendix 2 is the April 2 e-mail that TGI received from a fourth-year Australian university business student. It shows that the concept of triple-bottom-line reporting, or be it called public accountability statements, now has the academic interest of future generations of business persons around the world.

Bill C-8's provisions for mandatory public accountability statements, with a minimum core of disclosure and transparency reporting practices, will be both wise and world-leading legisla tion.

Senator Hervieux-Payette: Did you give these proposals to the department? For anybody to make any comparison, they need to compare apples with apples and oranges with oranges. We need to see what is being done at the community level. We need clear definitions, too. Even Revenue Canada has difficulty deciding what is a charity.

Your proposals sound very logical to me, but what is the reaction of the bureaucracy?

Mr. Downing: Actually, I have sent it on to the Department of Finance. I have not got anything from them other than acknowledgement.

I approached four banks. One of them was very nasty to me because they thought I had criticized them. Another said they would do it if it ever happens. The other two did not reply.

This reporting practice is not yet accepted, but it is becoming a business practice. The idea of what we are asking for in these public accountability statements is becoming expected business practices and banks do not know it yet but it will be good for the banks.

Senator Hervieux-Payette: Should this be part of the regulations, that concept?

Mr. Downing: Yes. The regulations should ask for a minimum. You do not have to do it my way, but if you do not ask for a minimum of a common core of information, if you leave it open-ended, I am afraid you will not get an effective legislation.

Senator Hervieux-Payette: I would like to thank you for your excellent ideas and proposals. It makes sense for me, just as a consumer, and for the rest of Canadian citizens to be able to compare the roles that their banks are playing in the community.

Mr. Downing: That is it.

Senator Hervieux-Payette: Also, I am doing a lot of charitable work, raising money, and then I would know where to go.

The Chairman: Thank you, Mr. Downing.

The committee continued in camera.