Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 9 - Evidence - Morning Session
OTTAWA, Tuesday, October 1, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:00 a.m., to examine the state of the financial system in Canada (review of financial sector legislation).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Our first witness this morning is Mr. Bill Knight, Chief Executive Officer of Credit Union Central of Canada. Some of you may recall that he last appeared before the committee two days before he moved from the position of vice-president to CEO. This is his first appearance before the committee as CEO.
I understand, Mr. Knight, that you have some brief opening remarks. You have also distributed a page containing the specific issues you would like to comment upon. Following that, we will turn to questions. Please proceed.
Mr. William Knight, Chief Executive Officer, Credit Union Central of Canada: I have held my position as President and CEO of the Credit Union Central of Canada for approximately one year. Undoubtedly, the honeymoon period is over.
I appeared before the committee approximately October 31. At that time, we discussed the Crown corporations of the federal government and the Crown lending agencies. This committee has since delivered a report. In response to our system, the Department of Finance, through the Minister of Finance, responded to us by outlining some follow up to this committee's report, which we discussed last year. The references to creating a council of Crown financial intermediaries by the government is something in which I am interested. I have been involved many times with Crown corporations and, should the Department of Finance decide to pursue this route, I would be happy to assist in the follow up to reviewing those Crown corporations.
You will recall from our last presentation that credit unions across Canada are the financial cooperative outside the Desjardins system, which is located in the province of Quebec. We represent a major portion of the market, particularly in the west. That percentage is sometimes as high as 34 per cent market share in the province of Saskatchewan, or well over 20 per cent in the province of British Columbia.
We have about $44 billion in assets. We have about 4.5 million members across the country. In the marketplace, we are trying to provide a competitive alternative to the banks by enhancing our trust service through our trust companies, and our insurance services through insurance companies. We have a new brokerage company starting up in British Columbia, Credential Securities, of which I am pleased to be a board member. It has run the gauntlet, as you must in Canada, from one regulatory body to the next in order to provide full brokerage services across the country.
We also have a growing mutual fund company, Ethical Funds Inc. Through VanCity, our largest credit union in Vancouver, we are applying for a bank charter to start up a "virtual bank" for those inclined to do their banking on the Internet and to participate in a banking facility of the future.
In terms of the review of this legislation, we are looking for four specific areas that would assist us to have greater flexibility in the marketplace and to continue to enhance full service to our members and give consumers choices.
We have distributed a paper to members of this committee and to the Department of Finance which goes into the details of these issues. First, the proposed elimination of the federal regulation of regional centrals, which was contained in the white paper, is heading in the wrong direction. Upon examination of federal regulation, we strongly believe that federal regulation of our provincial centrals and Canadian central should continue. The federal regulation brings common rules and understanding to doing business across our system.
All the areas I just mentioned to you, as well as other commercial services, will require greater cross-border activity on the part of the credit union system. Therefore, we think that moving our regulation to the provinces is a backward step. We ask that we maintain a federal act and federal regulation.
Second, restriction on the delivery of retail financial services at our central levels is inhibiting us in the provision of full services to credit unions and members within the provinces and across provinces. We felt that we would get into this area after the 1992 financial institution reforms.
Often a credit union is the only service provider in a community. In order to provide a retail service, they will often go to their provincial central. They want the provincial central to create a unit which provides those financial services to all the credit unions in the province.
In 1992, we had underrated the drive to consolidate those retail services through their centrals. In the 1992 reforms, we did not push to be able to provide that retail service at a provincial central level.
Third, the bill contains a requirement that auxiliary business corporations be controlled by a single central.
With regard to control by a single central, as the market changes so rapidly, we are trying to rationalize our own system in delivery of services. For example, a particular central, such as the Ontario or Manitoba central, will have to say that the primary leaders with the card company are the Saskatchewan and Alberta centrals. So that ownership will shift around the ownership of the card company. It will shift, for example, to the two prairie provinces.
However, the 10-50 rule that we are governed by nationally says that one central must own the whole thing. It is inflexible in allowing us to have broad, joint ownership across those provincial centrals, including Canadian centrals. If flexibility is given in this area, we can enhance some of the companies we already have and the ownership question could be resolved with new ones we create.
Fourth, there are restrictions around joint venture arrangements. I mentioned earlier our brokerage company, Credential Securities. At this time, Midland Walwyn is our partner in that venture; the last truly large, independent brokerage house in this country. We have an opportunity, through that partnership and our market size, to be a player with them in terms of positioning with regard to the banks and competitive alternatives.
That partnership is working very well in British Columbia. We will have to do more of that joint venturing. The 1992 rules foresaw much of the operations of our entities strictly within the family of operating companies and centrals within the credit union system. In this day and age, we will be looking on a dozen fronts for partners who at one time might have been competitors, or a portion of their business may have been competitive, but we need them as partners to go into certain markets. We are looking to loosen that up.
Mr. Chairman, I would be happy to answer any questions.
The Chairman: Thank you, Mr. Knight. You seem to suggest that there are a number of cases in which individual credit unions within a province are allowed to provide certain types of services but when you try to amalgamate them at either a provincial credit union central level or the level of your own national credit union central, because the switch moves you from provincial regulation to federal regulation, that makes the provision of those services by the centrals illegal.
Am I correct that that is what you said? If so, could you give us a couple of concrete examples in order that we can fully appreciate it?
Mr. Knight: The individual credit unions are saying to us, as has been stated in this city, that we must get into the medium- and small-sized business commercial lending, and we must provide full services when we do that. If you want to deal with a biotech company in Saskatoon, you want to provide them with more than a loan. You will try to provide them with card services and other services.
We are in the business of establishing a corporate banking unit to provide those full financial services in a focused way to that business so that we can respond to a lot of demand both from our member credit unions and from individual members. We have had a good record with them in terms of providing certain services from the local credit union. Now, we want to combine those services. Essentially, we will be retailing that service out of a central. We had not anticipated combining forces to retail them through the central. We are looking for a greater flexibility in order to do that.
The Chairman: I understand that your individual members can provide the service because, under provincial regulation in Saskatchewan, which you used as an example, they are allowed to provide that service. However, the central is not able to provide it because it falls under federal regulation. Is that the essential problem?
Mr. Knight: That is the essential problem. You then get a challenge, for example, on the size of loan, because you will be dealing with certain sizes of business. Using the same area as an example, you will get a business operating out of Wakaw, or a smaller community, where they are quite happy to do their deposits and all the rest of it with their local credit union as part of the system. However, if there is to be some lending in a certain size of loans, then we want to move it up to the corporate banking operation. We are limited in doing that now because of our own internal rules which allows the local credit union to handle only a certain size of loan. They might be able to handle a $1-million loan while these people need a line of credit of $5 to $10 million. We need to consolidate in order to do that. The central would be the place to do it because it is covered by both federal and provincial regulation.
The Chairman: Given the inconsistency between provincial and federal regulation, which is causing you your problem, there are two ways to go. The first is the way proposed in the white paper, which would say, "Fine, we will get out of federal regulation and let the centrals be regulated provincially." You have rejected that option in favour of one which makes the federal system more flexible. Why have you rejected the first option?
Mr. Knight: The business we are dealing with does not work within the boundaries of that one province. We may well be doing commercial lending across provincial centrals. We were exactly where you were in this regard.
To be fair to the government, a number of our provincial centrals would have reacted instinctively by saying, "Let us have just provincial regulation. We want to get away from dual inspection because it costs us money." However, in a commercial lending practice with individual businesses, they are not paying attention to borders. As a matter of fact, they are not paying attention to the Canadian border, let alone a provincial border.
We have had to turn our head around and say, "We want to maintain the flexibility of both federal and provincial legislation at the provincial central; but many of the administrative headaches, such as inspection, should be able to be worked out between the two levels of government." We are still optimistic that we can clean it up so that B.C. does not have to spend an extra $300,000 to $500,000 on inspection.
With some changes to federal regulation, we see that the flexibility would exist. The federal act does set some common rules across our own industry, which has its advantage in that.
Senator Angus: Have you discussed this issue with representatives of the Department of Finance? What are their main arguments? Is it more to accommodate your provincial members or to harmonize things? I am not sure how big this issue is.
Mr. Knight: This is evolving within our own system. We work very well with people in the Department of Finance and OSFI. As the situation has evolved, it has become clear to us that everything we are dealing with is interprovincial in terms of providing services. Everything we deal with is not boxed in, if you like, any more in the community per se in the province. We must move ourselves out of our own territoriality. We are an awful lot like the country. If you have a $16 billion asset base in British Columbia, you do not have to think about the rest of the country in terms of the business must do. You must pay attention to your business.
In order to grow the business on the virtual banking model, for example, we are finding that it still must be beyond the borders of British Columbia. Thus, we find the federal act responds to that.
At the same time as we are appearing before both the House committee and this committee, we are talking to the Department of Finance and OSFI. Frankly, we are bringing an even greater clarity to this issue at this point in time. Interestingly enough, we do not want to be farmed out to the provinces.
In that context, we understand that our first cousins in the province of Quebec have strictly provincial legislation -- that is, the Desjardins. We work well with them. I will be meeting with them in October or November to talk about how we can do some more business together.
They have a different history. They are not easily compared to the national credit union system, which has had to cobble together these provinces in order to deliver common services across the country. They have a history of culture and unity which allows them to operate in the province of Quebec. They have positioned themselves strategically within their context in that they have the flexibility to pick off a bank and build insurance and trust companies in a unified market more easily than we can. We have to jump through more hoops than they do. They met the challenge by taking Laurentian, et cetera.
Senator Angus: The caisses stay within the province, do they not?
Mr. Knight: Franklin is extremely adept at getting beyond the borders of the province by getting into their other company and services through their subsidiaries. They have a holding company operation. They function aggressively and successfully in international markets because they build around operating companies. I say this in a complimentary way; others might not.
In the context of our marketplace and our structures nationally, which is a three tier structure, evolving the federal act will give us the flexibility not to be restrained strictly within provincial boundaries. It will not work any more.
Senator Angus: In terms of the white paper itself, only one of your four points dealt with it negatively. I refer to the point about provincial-federal jurisdiction. Are there other items in the white paper which are of concern to you?
Mr. Knight: To be clear, we saw the white paper respond to the direction set in 1992 wherein it was said that they would focus on getting the screwdriver out to fix the 1992 legislation, where required. On the deposit taking side, the financial services sector had to measure that carefully in the context of the time having changed.
We used to deal with a business problem in the financial institutions industry by saying, "We have two or three years to deal with this problem." I believe that the time frame is now 90 days to 120 days. This is a radical change of management structure and style for financial institutions. Collectively, we are all responding.
The legislative-regulatory situation will not go away easily. A committee to review the payments association is being set up and we will try the task force model. However, if that is what we are doing, then we better do it and get at it as fast as we can. We need to obtain a substantive report from those two operations and place it before committees like this one so that, collectively, we can decide on the rules that govern us because they will not stand still.
Senator Angus: That was my point. Obviously, in an expanded way, these are matters which you will be bringing to the attention of the task force.
Mr. Knight: We take the whole exercise on the part of the government very seriously. It is complex and challenging. We must review how we relate to foreign banks. We want a competitive marketplace within the Canadian marketplace. Frankly, we are pushing ourselves to be one of those players in that marketplace. The banks have done a first-class job of positioning themselves within the Canadian market, but we offer an alternative.
Senator Angus: You did mention in your remarks and in this paper as well your involvement in the international scene. Without getting deeply into the foreign bank issue, which is of great concern to many people, what restrictions do you face when you go into other jurisdictions outside Canada?
Mr. Knight: We almost have to wear two hats here. Historically, our role outside the borders of Canada has been developmental -- that is, developing credit unions throughout the world. We were the first credit union system to go into South Korea, for example, to help the Koreans develop a credit union system. It is very basic developmental work.
Historically, when we met with them -- and, we worked with CIDA and the federal government -- it was all around developmental issues such as, "Do you need more assistance? Do you need technical people?" This fall, they are meeting with Canadian Central and some of our operating companies, and they are looking to do $100 million of software business, et cetera. It has nothing to do with development. It is probably the best case for development work and putting in money and investing it. It may have taken over 20 years, but we are now soul mates with the fastest growing credit union system in the world, and it will be looking for hundreds of millions of dollars of commercial business. We are having to organize ourselves nationally, and otherwise, in order to do that business. Much of it we can now do, but if we go beyond the borders on the lending, we have to test the fiduciary basis of that. Most of it now is just partnering and commercial business.
Senator Angus: In terms of the foreign bank issue -- and, correct me if I am wrong -- it is inherent in what you are saying that you would be in favour of much less regulation and opening up of the excess rules.
Mr. Knight: We are not sure if you can resist that, frankly, with the power of the marketplace. Having said that, I would always buy more running room in the marketplace for us to grow and expand and respond. We are looking internally at trying to analyse that.
To be quite candid with you, if time were on our side, there are a number of large and successful cooperative banks internationally -- and, we have not had the opportunity to do this -- that I should like to sit down with and ask, "What role would you like to play? Perhaps you would like to be an international member of Credit Union Central Canada, throw some capital in, pay some dues, get some services, and provide a back-up to our 950 retail and financial credit unions on certain aspects of lending, et cetera." We are not there, so we are cautious in how we respond to that.
Senator Angus: Will you be touching on this at the task force?
Mr. Knight: Yes, we will.
Senator Angus: I was not quite sure if you specifically answered my original question. In your discussions with the Department of Finance and OSFI, what arguments specifically were they putting forth to you for getting out of the federal jurisdiction?
Mr. Knight: To some extent, they were responding to some interest raised by our own system on that. Now that we have our dots lined up, we will review it all in a cooperative fashion, which is our style.
Senator Stewart: Would you amplify the remark you just made? To what were they reacting?
Mr. Knight: They were reacting quite legitimately to a number of our large provincial centrals. I believe at first blush that they thought perhaps it would make doing business easier if federal jurisdiction was dropped. On reflection, and reviewing how we are doing business with each other, we have come to the conclusion that we want to stay under a federal act at the central level.
Senator Stewart: I asked you to amplify that because my first question dealt with your speculation concerning the motivation of the federal approach. I wanted to ask you whether they were taking the Quebec model and applying it to each of the several other provinces, or if it was primarily to achieve simplification and get the federal regulators out of this area.
Mr. Knight: We have worked and will continue to work very closely. Quite legitimately, it is a combination. The combination does involve the Quebec model, but outside of Quebec it does not fit the same in the marketplace. We have a varying size of centrals and power within those provinces. Not all those provinces are of equal size to the province of Quebec in terms of a marketplace, and so it does not fit.
As well, it was a response over the issue of duality of inspection and trying to rationalize that. I do not think we need to do that legislatively; we need to do that administratively. If we have the wherewithal to get at that, we can cut some costs for us but rationalize it for the federal government as well.
Senator Stewart: As I listen to you describe the kinds of businesses that you are now doing provincially, federally and internationally, I begin to ask myself whether the credit unions are gradually becoming virtual banks. I am not objecting to that, but I want to understand the evolution here. Is this really what is happening, except for the ownership down at the unit level? It is probably unfair to ask you to make a comparison between the credit union system on the one hand and the banking system on the other hand, but is there some place where one could get a reliable description of the difference between the two systems?
Mr. Knight: Yes. We can supply the committee with our structures, systems, and the values driving us in terms of our vision and mission. In terms of that community base, we stay consistent. The one member-one vote and the ownership of capital continues to be on the same basis. We have not moved away from that structure.
One of the principles of financial cooperatives is cooperation among cooperatives. We have, therefore, been able to combine forces to provide those services.
From time to time -- because we are a wide and diverse system -- we may have an individual credit union which thought of moving itself to virtually a bank versus a virtual bank. But it never works because the premise and values on which we were structured were different. We have had to be five times as adept at answering change and moving with it.
Let me wander for a second, because I do not have a answer to this. Frankly, I do not think any financial institutions do. Most of them probably just pretend. We now have this massive world-wide Internet structure which offers some of the most exciting changes that are taking place in this information age. It actually creates a community of its own. People who play on it will have common interests across that Internet, which creates a whole new idea of community.
We are very adept at community. That is the basis of our success.
The community, for us, 40 years ago, could have been a closed-bond operation of all the workers in GM,or of those within a nurses' association, or a teachers' association, or whatever. We then went community-bond in response to the fact that there was a wide geographic community, for example, VanCity, East End.
We are now entering a new age where there is a community, even on the most modern of communications systems, where people hook up together because they have a common interest. Maybe it is just the interest of the Internet.
Our working model, VanCity, is that of a virtual bank on gaining the charter, where we may begin to provide those services. The great challenge for the next one to five years -- and it is not just from us as we meet those marketplaces -- is the regulatory challenge.
That is why we refer to the task force and the review of the payments association. We have to be on it and at it. This relates to what you are talking about.
We think our value system is intact, as are the general principles under which we operate. We are very adept at manoeuvring within that marketplace. We are trying to continue that full service.
It is like the Spanish armada. We know we are up against the big guys who have all the troops and all the equipment. All we have to do is figure out how to go around them to get our chunk of the market.
Senator Stewart: You will provide us with the documentation for your "yes?"
Mr. Knight: Yes. I thought I should also put it on the record.
Senator Meighen: Mr. Knight, do you mean that you want to end up quacking like a bank and looking like a bank but not being regulated like a bank?
Mr. Knight: We probably have double the regulation because of our federal-provincial structure on the regulatory side. In a different way, we still meet the same fiduciary requirements of financial institutions. We have all the deposit-taking insurance, et cetera. We must provide services similar to banks but, because of our structures, we must provide them differently in creative structures.
We are aiming to be an alternative in terms of full financial services but, over time, sometimes those services have been different between communities.
Senator Meighen: If the world unfolds as the Credit Union would like, where will we be in 20 years in the financial sector in Canada in respect of credit unions and banks?
Mr. Knight: If it unfolded in the way I would like it to unfold, I would see the following. Rather than the old-days' vision of buildings and offices, I would see a distinguished senator becoming very frustrated with his financial institution, which happens to be a bank. The first thought in his head will be to go to his credit union. In Quebec, that might not be a problem.
The Chairman: You talked about the current regulatory problems. Forget about the task force and the payments task force for a moment. You have difficulties now getting into some areas such as joint ventures, retail, and so on. Are those difficulties legislative or regulatory?
I want to know if it is possible to make relatively simple changes now, in advance of the task force doing its work, to remove those barriers for you, recognizing that, by the time legislation arising from the task force is law, we will be in the year 1999 at best or, more realistically, in the year 2000.
Can we recommend something presently to relax -- that is your word -- your regulatory burden without undercutting the whole system which the task force will be examining? Are there incremental or marginal changes with which we can help and which would deal with some problems while leaving the broader issues to the task force? Would they be legislation or regulation changes? I am not sure which you require.
Mr. Knight: We require some regulatory change; that is correct. In the end, we would need legislative change. We have a combination there. That is why we have an on-going, working relationship with OSFI and the Department of Finance. So that we can start to move incrementally in that direction, that is correct.
The Chairman: Some of those incremental changes could be made without usurping the broader-picture mandate of the task force.
Mr. Knight: Absolutely.
The Chairman: Will you give us those?
Mr. Knight: We will detail those in a follow-up. We will show where they break from one to the other. For retailing financial services in general, we need a change to the act. For example, there may some regulatory changes available in that area. That is just one example.
The 10-50 rule is a change that probably affects all financial institutions. We need to come back to you on that.
The Chairman: Can you do that sooner rather than later -- that is, within the next four weeks?
Mr. Knight: Yes. That is not a problem.
The Chairman: To the extent that we understand precisely the changes required, that would be a help.
Mr. Knight, thank you very much for appearing here today.
Our next witnesses are from the Canadian Bankers Association.
Mr. Gordon J. Feeney, Chairman, Executive Council, Canadian Bankers Association and Vice-Chairman, Royal Bank of Canada: Thank you, Mr. Chairman, for the opportunity to appear today.
With me today are Mr. Ray Protti, President and CEO; David Phillips, Vice-President and General Counsel; and Doug Melville, head of the Financial Sector Policy Group.
I assumed the chairmanship of the CBA executive council in June of this year. This is my first appearance before your committee, but I have been actively involved in the CBA for many years now. During that time, the banking industry has had a very productive dialogue with your committee and has benefited from the valuable leadership and debate on reforms to the Canadian financial services industry. The committee's views with respect to the supervisory and consumer protection arrangements are clearly reflected in many of the changes that were passed through Bill C-15 earlier this year.
These are important times for development in the financial sectors of our nation. I know this committee will continue to play a leading role in that process. We look forward to continuing that useful and productive dialogue with you today and in the future.
In our preliminary assessment of the needed changes for 1997, you enunciated some important yardsticks to assess the appropriateness of reforms. Foremost among them was that reforms must serve the consumer of financial services and not the providers. We fully agree with that point of view.
In the discussions prior to the release of the white paper, a number of issues were raised such as the question of banks, networking insurance, or leasing automobiles. Other issues included: the question of whether insurance companies should have deposit-taking powers or be able to participate more fully in the payments system; whether banks should be allowed to merge or not; whether there is need for further deposit insurance reform; or whether foreign entry rules should be eased further.
Many of these issues are expected to be reviewed through the Task Force on the Future of the Canadian Financial Services Sector and the Department of Finance Advisory Committee to Review the Payments System.
I will not take up the committee's time by going over those issues again. There will be further opportunity during the next year or so to address them, I am sure.
We welcome both the intention of the government to conclude a full review and its commitment to act upon the findings of the task force in a timely manner.
However, I would like to make some broad comments on two themes related to consumer benefits. These relate to the concentration of power within the banks and the degree of competition in Canada's financial markets.
There is a view that the concentration of power within banks has reached unprecedented levels. This is very unfortunate because it is not based on fact. The fact is that the share of the largest banks in the Canadian financial services industry has generally been declining since Confederation. In 1870, banks had 79 per cent of the privately held domestic financial services industry. By 1945, the share had fallen to 58 per cent. In 1982, it was 50 per cent and, by 1994, it was 45 per cent, despite all the recent acquisitions of trust companies and securities dealers by the large banks.
The point is that in the domestic private sector financial services industry, the share of banks is lower today than it has been at other times in our history. There is no indication that this will go back to previous levels, an important reason being the emergence of entirely new types of financial intermediaries in the post-war period which compete with the banks for deposit and lending services. The greater cross-border integration of independent financial markets is another reason. Both of these trends are expected to continue and intensify.
The same relative decline of Canadian banks is apparent in the international arena. While the overall concentration of banks in Canada has been declining, banks have increased their share in some markets while losing in others. The four important markets in which banks have gained share are: consumer credit, residential mortgage credit, securities brokerage, and mutual funds. In each of these, bank entry led to increased product innovation, improved consumer access and generally lower prices, all the hallmarks of competitive markets.
Take the consumer credit market as a example. In the 1960s, a car loan could cost as much as four times the prevailing bank prime rate. As this market was opened in 1960s to the banks, which offered broader competition, loan spreads declined dramatically. Today, a car loan can be arranged at just one or two percentage points above the prime rate.
The same, although less dramatic, story repeated itself in the residential mortgage market, which banks were only allowed to enter fully in the 1960s. While prices in this market were more reasonable to begin with, what banks brought was coast-to-coast uniform and consistent pricing, tremendous product innovation, and flexible options to suit the needs of individual consumers.
In July of this year, bank-financed residential mortgages stood at $192 billion compared to slightly above $1 billion in 1960. At that time, banks accounted for 9 per cent of the market. Today all banks taken together account for 55 per cent and the "Big 6" have about 49 per cent of the market. Banks have gained this market share because we were there to help finance the housing needs of the growing population of young Canadians, when many other established suppliers previously supplying this market were either unwilling or unable to meet the demand.
More recently, the same competitive vigour can be seen at work in other markets that have been opened to greater competition. The mutual fund industry is a prime example. Since 1987, when the market was opened to broader competition, including banks, the industry has expanded to more than six times its former size and there has been a proliferation of funds and different options made available.
The securities brokerage industry is another example. Commission rates have fallen dramatically since 1987 as banks and other institutions, both foreign and domestic, entered this market, bringing innovation such as discount brokerage operations.
A fundamental characteristic of any market is that greater openness and lower restrictions on who can participate will increase competition, improve the quality of products and services, lower prices, and generally improve access and availability to customers.
The examples I have given lend support to this view. It is not just banks that have entered new markets. The financial sector reforms of the past have opened entry into banking. So that, while there have been new opportunities for banks, the non-bank sector has equally obtained banking powers and increased competition. For example, insurance and trust companies now have full powers to engage in business lending. We welcome this competition and suggest that it has been good for consumers and business clients alike.
Sometimes it is argued that restraining competition is necessary to give certain institutions protection or time to adjust. If the objective of reforms is to be consumer-focused, it is hard to justify such arguments in 1996, especially since moves to open the marketplace have been signalled and acted upon in varying degrees since the mid-1980s. The principal group that stands to lose from such delays in enhancing competition are the consumers in Canada.
One of the strengths of Canada's financial system has been that legislators have generally moved in a timely fashion to eliminate restrictions that impede competition. Periodic changes to banking and non-banking legislation have spurred the emergence of a very strong and efficient financial sector. This is in sharp contrast to the situation south of the border, with its large number of failures, its instability and generally more costly financial services. We hope that the approach that has been seen in Canada will continue.
In this respect, I should like to raise the issue of our openness to competition in the payments system. Let me state clearly that the CBA supports the government's decision to review the payments system. We agree that the important issue of systemic risk must be carefully examined and, subject to systemic risk considerations, participation should be permitted to as broad a range of players as possible. Notwithstanding the comments of some critics, we are not calling for a "closed shop", but we do feel that the integrity of the payments system must be protected.
In the same vein, I should also like to make some comments about the regulation of foreign banks. The participation of foreign banks in Canada is vitally important. After the Bank Act was changed in 1981, many foreign banks, who were already here as provincial finance companies, converted to Schedule II bank status while others came in through the establishment of new operations. While these banks initially faced some growth restrictions, U.S. banks have been exempt from these restrictions since 1989, and, since January of 1995, so have all other foreign banks.
In 1987, when foreign entry was permitted into the securities industry, still more foreign financial institutions established operations in Canada. More recently, you will have seen that ING, a large Dutch insurance group, has announced its intention to establish a deposit-taking subsidiary in Canada. This is a prime illustration of how our markets are changing, as this will be a totally electronic financial institution, or, in the common jargon, a "virtual bank".
Despite the fact that greater access has been steadily provided to foreign participation, their overall experience here has not been encouraging. With a few exceptions, they have not been able to gain market share or earn sufficient profits.
To some extent this was inevitable, given the very competitive nature of Canada's financial services industry. Nonetheless, while all the limitations on their participation have been removed, and they can operate pretty much as any other Canadian bank, it could be that some additional measures are needed.
The fact that foreign banks have to come into Canada as subsidiaries rather than branches is one such issue. While it is our understanding it is not to be on the table for the 1997 round of changes, it is an important issue that we hope will be studied.
Canadian banks have always supported open markets and measures to increase competition. A vibrant foreign bank presence in Canada, as long as it is achieved on a level playing field, is vital for the continuing competitiveness of the Canadian financial market and its associated benefits for Canadian customers who are increasingly becoming global in their outlook.
There is the question, however, of unregulated financial services providers in Canada, some of which are very large and many foreign owned. For example, Ford's financial arm has a global income of some US $2 billion. It seems to us that such large players who compete with us in Canadian credit markets should operate under the same regulatory rules as we do in Canada.
Enhancing competition should take precedent over protecting any particular type of player in the market, so there can be no justification for the view that restrictions are necessary to protect Canadian banks or any other financial institution in Canada's domestic market. In any event, Canadian financial institutions, including banks, are up to the challenge, and we do not need the protection and certainly do not want it. The same rationale for encouraging competition applies to other areas, be it insurance, leasing or the payments systems.
I should like now to address the immediate issues and the specific proposals targeted in the white paper for implementation in 1997 and which are listed in your invitation to us.
The committee has received our submission on these issues. The banking industry supports most of the proposals. In particular, we share the white paper's objectives of strengthening consumer protection, easing the regulatory burden on financial institutions and keeping legislation current with evolving trends.
I have already touched on some of these themes. I should now like to highlight our particular views on one of the important major themes in the white paper, namely, the issue of consumer protection. These highlights are drawn from the two-page executive summary at the beginning of our submission.
Under the broad area of consumer protection, an important issue is privacy. Protection of customer privacy is a fundamental cornerstone of banking. The Canadian banking industry has taken a leadership role in establishing one of the highest private sector standards of privacy protection. We are committed to refining our practices to ensure continued high standards of privacy protection in the face of changing market realities and customer needs.
I should mention that our industry received tremendous encouragement from the recent endeavours by the interest and insights coming out of this committee.
Another important consumer protection issue is the disclosure of fees and services to customers. We are committed to continuous improvement in this area, where we already meet or exceed practices of other financial providers in Canada. We will continue to work with government and other stakeholders to determine if additional voluntary measures can be introduced to help customers understand the features and the prices of financial products and services without limiting the array of products and services provided to meet their differing needs.
We are very committed to ensuring adequate access to basic banking services by low income and disadvantaged segments of the population. The banks are continuing to work with consumer, social and community groups to identify and address the underlying problems so that the banking needs of all Canadians are fully met.
In addition, the industry is planning to meet with all levels of government in the coming months to determine how governments can provide residents with appropriate identification and how banks can provide easier access to social assistance payments.
Tied selling is another consumer issue that has been raised in testimony before the house finance committee in recent weeks. We agree with Minister Peters' statement in testimony before the House Finance Committee that there is no evidence of any tied selling problem. Officials from the federal Competition Bureau echoed the same view in previous parliamentary testimony.
There has been some confusion between the cross-selling of products and services and anti-competitive tied selling, which is covered under the Competition Act. We feel that the existing legislation, coupled with a highly competitive marketplace, provides solid protection for consumers in this area.
The white paper has also raised a number of other issues in the area of consumer protection, such as the subject of prepayment of mortgages. Our submission has some detailed views on this matter, which I will be happy to elaborate upon, if you wish, during the question period.
Canada's banks look forward to working in partnership with all stakeholders to address the challenges that affect the ability of the financial services industry to meet the future needs of Canadian consumers and businesses as we move into the next century.
That concludes my opening remarks and overview of our submission. My colleagues and I look forward to discussing and elaborating on the various issues.
The Chairman: Perhaps you could clarify one point, which may have several parts.
We will be hearing from a number of witnesses over the next three days, particularly from foreign institutions of various kinds, which regard the foreign banking rules as too restrictive in the sense that the institutions do not want to come into Canada and be a bank; they want to come into Canada and provide a specific service. Capital One Financial Corporation is an example of a firm that wishes to come into Canada and provide a credit card service. Wells Fargo is an example of a bank wishing to come into Canada and provide a small business loan service.
I am not exactly clear where you stand on the question of what an appropriate response should be to a firm wishing to come into Canada and not be a full-range, full-service financial institution but simply wants to come in with a single, specific product or service targeted at a specific segment of the Canadian market. Do you believe that kind of operation should be subject to all the current constraints of a foreign bank, or do you believe that there should be a more flexible set of rules dealing with those niche marketing operations?
Mr. Feeney: Our response would be fairly simple. Those in the business of banking should be regulated. It protects consumers and it ensures stability of the system. Now, there are financial institutions that may very well want to be regulated on a functional rather than an institutional basis. However, only the federal government has the authority to regulate banks. In fact, companies wishing to go into the banking business, as defined in Canada, should come under that regulation.
On the other hand, if Canadian financial institutions were regulated on a functional basis, obviously Canada's Schedule I banks would structure themselves differently as well. There would be many advantages in being functionally regulated rather than being regulated as a bank.
I come back to a well-worn phrase, namely, "a level playing field" -- both in the interests of the consumer and in the interests of Canada in general and the federal government.
We very much feel that functional regulation is not the way to go if people want to enter the banking business. It is no different than Canadian institutions going to other countries in the world.
The Chairman: Basically, you are saying that even if an institution that is a bank in its home country wanted to come into Canada and provide a single service, it should be subject to all the regulatory schemes of a Schedule II bank -- that is, it should have to come in under the rules of a Schedule II bank.
Mr. Feeney: Only if the service they wish to provide is currently defined as "banking" in Canada.
The Chairman: On the issue of subsidiary versus branching for foreign banks, you are prepared to live with branching. Is that correct? If you can go to branching, that eliminates many problems.
Mr. Feeney: Yes, perhaps.
The Chairman: Is that like "yes, but"?
Mr. Feeney: There is some confusion concerning what "foreign bank branching" really means. We view this in the same way as we view insurance distribution, auto leasing and the sale of annuities. Each offers the opportunity to increase competition in the Canadian financial services marketplace and to help the consumers and the business clients in Canada. So that foreign branching will not bring branches on street corners across Canada.
There is some confusion about that throughout the country. It is not the intent of these institutions to provide consumer services on the various street corners across the country.
Basically, branch banking will provide them an opportunity to provide wholesale banking under slightly different terms than they do today. It avoids the costly regulatory issues of setting up a subsidiary, reporting separately, and those types of things. Here again, we come back to the level playing field. If people wish to enter into a given line of business, they should be regulated.
Mr. Raymond J. Protti, President and Chief Executive Officer, Canadian Bankers Association: To add to my chairman's comments, we support foreign bank branching. It is as simple as that. Mr. Feeney has indicated that there are some different perceptions as to what that means. We want to make it clear that we will not all of a sudden see an explosion of retail branches across the country. It is in the mid-market.
Although this is not by any means a precondition to our support of this concept, we raise a number of public policy issues which the government must consider. Do they understand the regulatory implications of the move? Do they understand what it means for oversight? Do they understand what it means for taxation? Do they understand what the added risk of banks operating without capital in this country will mean?
Those are issues which the government needs to consider from a public policy perspective. If the government is satisfied with its answers to that issue, that is fine, let us go. We are ready.
The Chairman: You have clearly concluded in your own mind that it is possible to answer those questions in a way which makes branching all right for Canadians.
Mr. Protti: It may very well be from a public policy perspective.
Senator Angus: I wish to welcome you here, Mr. Feeney and Mr. Protti, as well as your colleagues. We have been looking forward to your appearance before our committee.
At the beginning of your remarks, you stated that there is a perception in Canada, at the provincial and federal government levels, across the system and amongst consumers, that there is an undue concentration of power in the hands of the major banks.
Mr. Feeney: That is right.
Senator Angus: You then said that this a wrong perception and made a very eloquent plea as to why it is wrong.
Why do you think that wrong perception exists?
Mr. Feeney: Mainly because over the past 12 months, if not 12 years, the basic argument put forward from many corners in the financial services sector, and at the political level as well on occasion, is that there is this tremendous concentration, that something should be done about it, and that it should not be allowed to grow.
Today, the major six banks have 60 per cent of Canadian deposits, but they lend out 68 per cent of consumer credit. There is no question about contributing to the financial requirements, mainly of young Canadians on the consumer side, having a smaller percentage of the deposits.
Of the total market, we hold 49 per cent of residential mortgages and 24 per cent of mutual funds. In non-residential mortgages, the figure is 19 per cent, which is more your business. However, of the short-term business credit, we hold 80 per cent.
I only mention those figures because they demonstrate that the intermediation role that Canada's large banks play is being carried out, particularly when the lending side is a much higher concentration in small business and consumer business than the consumer deposit side. That speaks positively in terms of the banks, but any of those percentages would indicate that it is not an unreasonable level of concentration. As a matter of fact, in many other industries in Canada the level of concentration by the top three or four companies is much larger. I will not use the airlines as an example because there are only two, but that is the case with oil companies and insurance companies. The banking industry is not any different in the structure of Canada.
Mr. Protti: I have been in this job for three and one-half months. I have had an enormous amount of difficulty in sorting out the contesting claims that have come from all sides of this issue with respect to the size of the financial services sector in this country, who plays in what part of it and what share they have. Indeed, one of the salutary benefits of having a task force is that, before long, we should finally have a comprehensive, non-partisan assessment of the size of the financial services sector in this country and of who has what share of it. I am looking forward to that because it is a bewildering set of data.
Senator Angus: Exactly. Your predecessor, Mr. Brock, was in here earlier this year deploring the bank bashing that occurs. It is now time to clear the air. Frankly, there are other perceptions which exist, for example, that we have one of the finest banking systems in the world, that the systemic risk is minimal in our country compared to that in some of the other banking systems in the OECD countries, that our payment system is a very sound one, and so on. These are good things.
I wish to ask you about your method of setting these bad perceptions to rest. We can do many things with statistics. I have taken careful note of your statistics. In terms of market share, it appears that you are diminishing, in a national, domestic and global context, your concentration of power. Therefore, there is a sympathetic ear here.
Let us take the example you used of the payment system and the question of a level playing field. If the name of the game is to diminish risk and to preserve the integrity of our system, are there other players who can effectively compete with the banks without creating some element of risk?
Mr. Feeney: The answer is "yes". There is no suggestion that this would increase the systemic risk. When the review is done over the next year or so, the task force must keep its eye on the ball in terms of protecting the consumer and the businesses in Canada so that when they receive a payment, finality of payment is guaranteed as well. That is why we say, "Open it up. Set the rules that guarantee that for Canadians and let in all the players who meet the guidelines." People will then make a decision as to whether they want to be in or out.
Today, there are many institutions that can be direct clearers in the payment system. They elect not to do and go through a direct clearer, mainly because of the volume of their payments relative to the costs of the systems they would have to set up to meet regulatory requirements, to settle, and this type of thing. Generally, it is easier to outsource that function to large banks who provide it as a service. For many years, banks have provided that service to fairly large trust companies as just another corporate service.
Many who have the opportunity today do not really go that route. Much of the noise on the payment system side of it is from non-financial institutions. This is where the Department of Finance and regulatory bodies in general have to look at how to build regulation around that.
The Canadian Payments Association is chaired by a senior officer of the Bank of Canada. The number of bank directors on the board is a minority. It is not a bank-driven club. This change was made seven or eight years ago, if not longer.
Senator Angus: I am one of those who would like to see these false myths dispelled. I believe there is another approach that can be taken. You talk about believing in a level playing field for all who want to play in offering financial or banking services as currently defined. The emphasis is on the word "currently". May I take it from your comment that there might be room to redefine what constitutes banking services and to carve out a cadre of financial services which do not involve the same kind of risk to the system and, therefore, may not require the same amount of regulation? You are painting with a very broad brush.
Mr. Feeney: Risk to the system involves the payment system, as such, which we set aside. However, from a public policy standpoint, government needs to look at this notion of carving out.
As Mr. Protti mentioned, there are five or six issues which must be looked at, not the least of which is a capital base in Canada in case an institution gets in trouble; that is to say, the actual payment of corporate taxes. There is no question as to which is the most heavily taxed industry in the country. Carving out and allowing, in some respects, foreign players to play in a different sandbox to avoid a number of these things would not be good public policy for Canada. This is one of the issues.
Senator Angus: That is one of the issues for the taxpayer, yes.
Mr. Protti: In the last three months, we witnessed four different announcements which speak directly to the point that Senator Angus has raised. There were announcements concerning Trimark, AGF, VanCity and ING, which speak directly to the incredible pace and rapidity of change in the industry. Fundamentally, they raise the issues which you have just put on the table, Senator Angus.
We welcomed the creation of the task force. We hope it will move speedily because everything is changing so rapidly on us. What we have witnessed over the last decade -- and this is happening even faster now -- is a blurring of the distinctions between all the players in the financial services sector. Is a life insurance company a trust company, a bank, a securities dealer or an insurance company? Collectively, we need to think through what that means for this country. More important, we need to determine what it means for the type of regulatory system we will have in place.
We will be emphasizing two or three points of principle over the next 12 to 18 months. The first is competition; and, yes, we believe in it firmly. We believe we can handle it successfully. The second is that we need a financial services sector which serves the interests of consumers. That is where we will be. We will be looking at every proposal that comes forward from that perspective. Third, we want a level playing field.
The specific point you make is: Do we need more flexibility in the way in which we organize and regulate ourselves? The answer may be "Yes"; but our principle will be that if you give it to someone who is selling a particular product, then we want the same flexibility as well. Otherwise, we will not be able to compete. That issue alone may change fundamentally the way in which governments regulate financial institutions in this country.
Senator Angus: In terms of the level playing field argument, you focused on unregulated players coming into the Canadian credit markets. You gave one example, which is the Ford automobile leasing and financing organization. Could you give us some other examples of unregulated players? It is not too scary when you hear of Ford, for example. However, there may be others which imply more risk to the system.
Mr. Feeney: There are several which fall into that category. One can use GM or GE Capital as examples. The issue is not so much how many are here today. The issue is how many will be here in two or five years if we do not put in place the regulatory environment.
All financial institutions and so-called non-financial institutions around the world are looking for new markets outside their home markets. The ING example coming in as a virtual bank is an example of a financial institution, a large insurance company, looking for new markets. That is why we believe that if there was ever a time to review the regulatory environment in Canada and get it right to protect us and Canadians into the twenty-first century it is now, with this review.
Senator Angus: I do not want this to be taken in the wrong way; however, it is in your interest to avoid being seen as wanting to have it both ways.
Mr. Feeney: That is absolutely right.
Senator Angus: We senators can sometimes get away with that. On the one hand, we hear, "We are willing to have open competition in all these segments." When you were asked in the early part of the questioning by the chairman about the foreign banks, it sounded to me like you were saying, "Oh sure, we are happy that they can come in, but..." You then gave some examples. I want to be sure that the position of the CBA and its members is that you do not have a problem.
Approximately last week, we were visited by a minister from the U.K. who was deploring the fact that the number of foreign banks in Canada had gone from 59 to 47 and that there were only two U.K. banks here because of this huge regulatory burden and they could not get any return on capital. She said that it was too bad for Canadian consumers and the industry in general in terms of access to capital and that we have it all wrong. She made a persuasive argument. I was hoping that you would say, "Yes, we agree with her fully."
Mr. Feeney: We do not want to put any "buts" around what we say other than the caveat at the top, or at the bottom, that the regulatory environment treat all institutions in a particular business, such as banking, in the same way. Basically, that is the only caveat that we place on it. However, there are a number of technical things.
Senator Angus: They are huge, though; they become the ultimate roadblock.
Mr. Protti: If the Government of Canada thinks this is a good idea, it is fine with us. We are ready.
Senator Angus: No "buts"?
Mr. Protti: No "buts". Some thinking has gone on inside the Government of Canada for some time on this issue. From a public policy perspective, make sure the regulatory implications are understood. Do not be surprised with what may happen on the taxation side. Should the Government of Canada decide that this is a good thing, fine, we are ready.
Senator Angus: Intentionally, I did not mention anything about mergers of the big six. I will leave that to my colleagues.
Senator Kenny: Mr. Feeney, thank you for appearing before us. If I heard you correctly, you said that any form of banking activity should conform to the regulatory requirements that apply to banks. In effect, that sets up a barrier of sorts to people who want to come in and cherry-pick different aspects of the work that banks do. You could argue that, ultimately, that affects the competitiveness in that sector.
Senator Kirby, or one of you, went on to say, "Have you considered whether or not the regulations should take place by sector?" You replied quickly to that. Your bottom line was, "No, I do not think we should. We should keep the status quo."
Was that an answer upon which you have reflected, or was that an answer you would like to reserve comment on and reflect upon further, or is that the final word we will hear from the Canadian Bankers Association on this issue?
Mr. Feeney: Basically, I went on to say that if it was decided, in the wisdom of people, to regulate by product, then the minimum there would be that the same approach would apply to Canadian banks. Basically, that is what we are saying.
Senator Kenny: My question is: Would you like that to happen to Canadian banks? As an organization, have you had a chance to reflect on that? If you have, what is your conclusion?
Mr. Protti: There are two things at play here. First, if you are to come in and cherry-pick in the market as you suggest, Senator Kenny, under whose rules should you be allowed to cherry-pick -- under the existing ones, which all of the existing players are playing by; or should there be a new special set of rules for you and only for you? Our answer to that question is, "No, there should not be."
The second question is: Should we basically change the basis upon which we regulate financial products and institutions in the country? That is an excellent question to which we do not as yet have a definitive answer.
Senator Kenny: That was my question. Do you anticipate reflecting further on that as an organization and coming back to us with a view on this?
Mr. Protti: There is no doubt we will be doing some substantial reflection on that because that is one of the principal questions that the task force will be asking us. Do we have a definitive answer to the question: Do you prefer function or product regulation to institutional regulations? At the moment, no we do not.
Senator Kenny: You do not now, but in six months you might come back with a different view?
Mr. Protti: That is right.
Mr. Feeney: If it was the conclusion or leaning of the task force that that is the way they felt Canada should go, then, with many years of experience in the industry in total, we would want to put a position on the table in terms of making sure any gaps in regulation or any pitfalls in thinking are on the table. The decision can then be made from there.
Senator Kolber: I am slightly confused on the question of branch banking for foreign banks. From what I understand, I do not believe it has anything to do, as you pointed out, with setting up branches on various corners in Canada. Is it not a question of how it is capitalized?
Mr. Feeney: Absolutely.
Senator Kolber: I do not think that has come across. My understanding is that a branch bank, for example Chase Manhattan or Citicorp, could come here without bringing a penny into Canada and then compete with Canadian banks to try to cherry-pick -- or whatever words you care to use -- to get the large corporate loans and government business. With people the size of Goldman, Sachs & Company, who are ten times the size of Dominion Securities, will not the Canadian securities business be in some danger of being shifted to Wall Street?
Mr. Feeney: Absolutely. That is the point that we were trying to underline, namely, that many Canadians and many people involved in the debate have a misunderstanding that this means more competition at the consumer level. Our point is quite the opposite.
Senator Kolber: You did not make that clear. You talked about the possibility of branches on corners. One has nothing to do with the other.
Mr. Feeney: No. I want to clarify what I said. It does not mean branches on every corner and it does not mean what a lot of people think in Canada. It does not mean more competition at the consumer level. Basically, it is wholesale banking and is a way of structuring from a capital standpoint as much as anything. You are absolutely right.
Senator Kolber: If it would put a section of our industry in jeopardy, it is something we should be aware of. If you could present a page on this subject, it would be helpful.
Mr. Feeney: Yes, we will.
The Chairman: I want to make sure I understood your response to Senator Kolber's question.
Your response seems to be that Canadian banks need protection from large, foreign competitors for fear that if they entered this country, they would seize a significant segment of the market. That is the Goldman, Sachs & Company example. That is my interpretation of your response. Is that correct?
Mr. Feeney: We are saying that we welcome the competition. However, the government and policy makers, from a public policy standpoint, need to understand clearly and regulate certain aspects to protect Canadians and Canada.
Senator Angus: From what?
Senator Meighen: From what?
Mr. Feeney: Mr. Protti, will you pick up on those points?
Mr. Protti: I wish to clarify Senator Kolber's point and what Mr. Feeney said.
When we are talking about branching, we are not talking about retail banking, consumer banking; we are talking about wholesale banking.
The Chairman: We are familiar with the issue. We understand that.
Mr. Protti: We are comfortable with any decision the Government of Canada takes on the issue of branching. We are ready to meet the competition in whatever form it materializes. However, there are two or three issues that the Government of Canada needs to think through. It needs to think through the regulatory issue, the issue of capital taxes and the recourse to assets in case of solvency difficulties. That is all we have said. They have done some thinking in the Department of Finance and OSFI about these issues. If they can sort out their thinking and say, "This makes sense," then we are ready.
Senator Meighen: If that is the case, then, notwithstanding the access to huge pools of capital across the border, you are prepared to accept whatever impact that may have on the street corner?
Mr. Feeney: Absolutely.
Mr. Protti: Yes. We are ready for the competition.
Senator Angus: However, you are sounding a warning. I hear you say, "We are ready, let us go, but you better watch out. You better warn Canadians what will happen." That is what it sounds like.
Mr. Feeney: We are simply putting up a flag saying, "Be sure to regulate systemic risk, capital taxes and government things."
Senator Meighen: Suppose we were able to do that. Is our branch banking system in no risk of foundering, in your opinion?
Mr. Feeney: No. Our branch banking means our basic consumer and small business.
Senator Kolber: That is retail. If you talk about capital taxes, there will be no capital.
Mr. Feeney: That is our point.
Senator Kolber: You should make that point.
My second question is about Wells Fargo. I find this a bit astonishing -- that is, if I have the facts right. It indicates that Wells Fargo has been doing to small business lending what Capital One did to credit cards. In other words, they are offering a credit scoring system by direct mail and they have been offering small loans, meaning under $100,000, to small businesses in the United States. By keeping the applications and processing simple, they can reduce the fixed cost. However, they have been informed by OSFI that an application under section 521 would be denied, even though they seem to be a true bank.
If they are so good at lending money of that size and they have a system which is obviously not a secret, why can we not do it in Canada? It bothers me that parliamentarians bash the banks, mostly because of loans to small business. In my opinion -- without meaning to hurt any sensibilities here -- the CBA has not been doing a good job of explaining it. I do not think the CBA meets with members of Parliament and does all the things it should be doing to explain. Perhaps the explanations will not hold water, but they should at least try. If these people at Wells Fargo are so good, why can we not do it?
Mr. Feeney: This will sound like a partisan comment, but in the past two days, in fact, that product has been announced by a Canadian bank. In the past two days, we have had approximately 500 businesses a day requesting that card.
Senator Kolber: When you say "we", it must be the Royal Bank.
Senator Feeney: This product was under development for upwards of one year, with focus groups and small business in Canada across the country, trying to find a product with which the small business person was comfortable. It has been in the mill quite a long time. It is a way of organizing a line of credit and then drawing down on it as you want it. You happen to use a piece of plastic as a key to the bank. Basically, that is what it is. It is credit scoring the same as we use in the consumer business.
Senator Kolber: However, it is a different credit scoring. It is not based on the merits or demerits of the business. It is based on the guy asking for the money, owning a house or a car, et cetera. That seems to be basic in this kind of lending. Why were we not doing it ten years ago?
Mr. Feeney: Yes.
Mr. Protti: I accept your criticism. I think you are correct. In the first three months on the job, I met a few dozen members of Parliament and ministers and senators, and they have told me that precisely. They have told me that we have a good story to tell. We have not put that story out, and it is no one's job except us to get it out. They are quite correct, and that is something on which we will be working assiduously.
Senator Kolber: Stop turning out so many esoteric papers, because no one reads them. My best advice is to go and talk to people.
Senator Meighen: I am sorry to follow along this line, but what Senator Kolber said seems to make eminent sense. Do you really think the Canadian public, without knowing all the facts, will accept at face value that this product that you said has just been announced in the last two years and parallels that which Wells Fargo proposes to bring in would have been announced had Wells Fargo not threatened to come into the country?
Mr. Feeney: Yes.
Senator Meighen: Therefore, a segment of the public says, "We better open the doors to them; otherwise, the Canadian banks will not move until they have to." That is part of the public perception to which Senator Kolber referred.
Mr. Feeney: My answer would be "yes". It would be brought to the marketplace, as with many other products in Canada, as top-line products, both on the consumer and business side.
Canada's financial services sector -- not just banks, but the total financial services sector -- does not need to take a back seat to any financial services sector in any country, U.S. or otherwise.
Senator Meighen: I happen to share your view.
Mr. Feeney: The entire financial services industry is very innovative, not just the banks.
Senator Meighen: To what extent does our branch banking system, nation-wide, when you compare it to the system which exists in the United States, cause an inherent, different playing field or cause problems for us and questions of reciprocity? We are not comparing the same two systems. Therefore, it makes it difficult if we wish to preserve our own.
Mr. Feeney: It does not make it difficult to preserve our own system -- and, by that I mean the Canadian system that exists and has existed for a long time -- because it will be driven by the public, by consumers and by businesses, particularly small businesses, where you have a large network of branches. Even in recent times, there have been many studies done by large accounting firms and other consulting firms around the world about the demise of the branch banking system. It will be at the peril of any bank or trust company or other organization who gets ahead of their customers in closing their branches in this country, because it is so much a part of the fabric.
No, I do not believe that the banking system -- that is, the financial services system as we know it -- is in jeopardy because of that. I believe it is unfair that a Canadian bank cannot go across the border and operate on a national basis, because that is one of the resources that Canada has, namely, a banking system that is pretty good at running some of the largest networks in the world. That is a value added that could be brought to the U.S. marketplace. I would suspect that the spreads for the intermediation business in that country would not be 300 or 400 basis points higher than Canada and the cost of consumer services would not be 55 to 60 per cent higher than in Canada if they had that kind of competition.
Senator Meighen: Without giving me an entire course on the history of the negotiation with the United States, what is the main objection, and do you see any possibility of achieving that in the Canadian market? What is the quid pro quo?
Mr. Feeney: It will come rather slowly because it is not just the rules for a foreign bank going in but the rules for the indigenous banks in the U.S.
Senator Meighen: That is still different.
Mr. Feeney: Yes. We must remember that. That does make a difference. However, on a quid pro quo basis on the cross-border banking, it makes it less attractive.
Senator Meighen: There is a legal opinion floating around that has been provided to one of the organizations appearing before us that the proposed provisions in the white paper are contrary to Canada's investment obligations under NAFTA. Have you had had a opportunity to look at that? Do you have a contrary opinion?
Mr. Protti: I am not familiar with that. I will have to look at it. May we get back to you in writing on that, Mr. Chairman? I have not seen that.
Senator Meighen: Fine. I understand that you will hear about it in the next day or two.
Senator Stewart: Reference has been made two or three times, in passing, to taxation. I am asking this question out of my vast ignorance.
Senator Meighen: Do you mean capital tax?
Senator Stewart: I will put it in my own way. In the case of profits by companies originating outside Canada which provide service on a functional basis, how are our taxes levied and collected by Canadian governments?
Mr. Feeney: Basically, the large Canadian banks earn between 30 and 40 per cent of their profits outside of Canada. We pay taxes on those profits the same as if they were earned in Canada.
Senator Stewart: Where you have a company which has its place of origin outside Canada, but provides a financial service on a functional basis within Canada, do Canadian governments tax the profits made by that company on that service? If so, in what way?
Mr. Feeney: My understanding is, no, they do not get taxes on that profit.
Mr. Protti: I am not sure. I will have to get back to you because I am not familiar with that issue. I will provide a written reply to you.
Senator Stewart: Taxation has been mentioned several times. I want to discover how important a factor it is.
Mr. Feeney: On a corporate tax basis?
Senator Stewart: Yes, but there it would be put in the amalgam -- that is, the whole complex.
Mr. Feeney: Yes.
Senator Stewart: In effect, the profit made on this particular financial, functional basis might be going to subsidize some other aspect of the corporation's operation which might be outside Canada altogether.
Mr. Douglas W. Melville, Director, Commercial and Regulatory Affairs, Canadian Bankers Association: A number of the foreign institutions operating within Canada will fund themselves through loans from their parent company into Canada. The Canadian operation will then pay interest on those loans back out.
If you take the U.S. as an example, there is a bilateral tax treaty in place between Canada and the United States where each government withholds 10 per cent of those remittances. That is an issue which has been raised by one of the foreign Schedule II banks in previous testimony before the House Finance Committee. In our view, that is a matter for the government to deal with on a bilateral basis, government by government, around the world.
Does that respond to your angle?
Senator Stewart: I am trying to discover why you seem to imply that it is not a matter of concern to you but is a matter to be dealt with by governments between themselves. That suggests that you do not feel that the taxation of profits made by those who provide services on a functional basis is unfair to you as banks.
Mr. Melville: The reason the withholding tax is not of the same concern to us is that there is a level playing field there. All players operating in Canada would remit that tax in repatriating interest payments to their home jurisdiction. The same would be true for Canadian operations that fund themselves in a similar way. From our perspective, that is a level playing field.
We did raise the issue of non-bank financial institutions, or other institutions which would come into Canada under a different regulatory and tax scheme, particularly in the area of capital taxes. Those institutions would not be subject to capital taxes calculated for Schedule II domestic banks here in Canada. Therefore, we do have a concern that those institutions would not be operating on the same level playing field with domestic Schedule I institutions.
There are, however, ways that the government can deal with that. For example, in the United States, state institutions can arbitrarily assign an amount of capital as being employed within their jurisdiction and charge a capital tax accordingly.
These are options that are available to the federal government in considering the regulatory tax and prudential environments in opening up competition to foreign players on the Canadian marketplace.
[Translation]
Senator Hervieux-Payette: A study which has been published in Montreal recently drew a comparison between service charges in some branches of a bank and the bank's head office. The example that was used was that of a customer who went to a bank and opened an account and explained his individual needs. He did the same thing at the head office and in about 20 branches, and, 13 times out of 20, the branches contradicted the head office.
Since the main purpose of your white paper is to protect consumers, could you explain to me how the consumer can find his way around when he is shopping for the best bank?
You have been talking about competition with the Americans. Maybe we should also be talking about competition between Canadian banks, since it seems that Canadian consumers do not pay the same bank charges inside the same institution. I am quite worried that even in the same institution, depending on which branch you choose, you do not have the same services charges, the same advice, and the same service. It is even more difficult when one deals with different banks where services are called different names, because each bank has given them different commercial names.
It seems very confusing for the consumer. What are your recommendations to avoid binding regulations and still get some order back in the semantics of bank services, so that consumers can be made aware of services charges and make an informed decision?
Mr. Melville: Thank you for your question, Senator Hervieux-Payette. It is very important to first consider the degree of competition in the Canadian market and not only between banks, but also between banks and other financial institutions. Caisses populaires in Quebec and other institutions give consumers in Quebec and throughout Canada a choice of services and products with the advantages they need.
[English]
There are two other issues which we have discussed with the government, which we feel will bring some benefits to this particular area. One is disclosure. It has been discussed by several consumer groups that there is a need for very clear disclosure of service charges and other charges associated with our products and services as an industry. We wholeheartedly agree.
The question is: How can we, as an industry, best reach those levels of disclosure without limiting competition. There is a trade-off between those two objectives. We are looking at maximizing the competition that serves the consumers' interests. We are also looking at providing adequate disclosure so that the customer is educated and can make an educated choice on financial services.
There is also the use of plain language. If they cannot understand the language which is put before them, disclosure is meaningless. There has been a commitment on the part of our industry to insure that, wherever possible, we are putting the information sheets on the products and services we offer in as plain a language as possible. It is great business for plain language consultants.
Senator Hervieux-Payette: It is the industry that should sit together. I do not mind if you sit with the trusts and the co-ops and everyone else to harmonize the language so that people can compare service fees fairly by comparing similar things.
I have the tables produced every week on mortgage rates and I can see who has the best rates for any mortgage period. Other things can be attached, but at least I have the basic information and can compare apples with apples.
In mortgage insurance, I find that the disclosure is not very obvious. I have taken a new mortgage. I am aware from my friends that I should shop around for insurance conditions for my mortgage in case I have an accident crossing the street. The difference for that service between an insurance company and a bank was between $692 and $1,500. The $692 figure was the fixed rate for 10 years, and there was no flexibility with the bank, which wanted to charge me $1,500. That is a great discrepancy.
When regular consumers go to the bank, they are told that they must insure their loan and they must pay a great deal of money. They do not know that they have a choice. This is the situation within the industry in general. I am not pinpointing one bank. It seems that they are almost offering you a package -- that is, a mortgage and insurance. However, the options on insurance are not clear. Sometimes people do not have time to shop for insurance because the two have to go together on the same day.
Mr. Feeney: If I may speak to the need for insurance, it is not a requirement that a consumer take life insurance when they take out a mortgage. Many people have sufficient life insurance in their normal policies so that they do not need extra insurance. In communities where there are a lot of self-employed people who do not work for larger corporations the ratio of penetration is much higher, but it is not a condition of getting a mortgage that one take life insurance.
Your numbers certainly are impressive in terms of the gap. From your comments, I think that perhaps the bank involved had a larger number. A consumer should not buy insurance from that institution because it is not a good investment.
My opinion about insurance distribution by banks and others is that if the product, the level of service and the price are not right and competitive, they will not sell any. It is only the best product with the best price and convenience that will sell.
I cannot make an observation on the dollars, but certainly life insurance is not a condition of getting a mortgage.
Senator Hervieux-Payette: That is not what I meant. I come from a small community.
Mr. Feeney: The differential is very large.
Senator Hervieux-Payette: I followed your advice. I took the smallest amount. This is to ensure that my children will have no mortgage on the house if I die.
My last question concerns a point in your executive summary regarding tied selling.
You talked about the Competition Act. I hope that you will agree with me that it is not easy to use the Competition Act for this purpose. Sometimes we hear that there is some tied selling in some branches or by some individuals. In your bank's manual of procedures -- which is almost twice as big as the Bank Act -- is there an instruction given at each branch level which states that if someone renews his mortgage, he should not transfer his RRSP into that branch at the same time?
Mr. Feeney: We highlighted this important issue in our opening comments. Anti-competitive tied selling is prohibited by law in Canada. Many allegations made relative to this are not accompanied by specific examples. I know this does happen. There is no indication from government that tied selling has become an issue reported to them. There are no examples of it. Cross selling is very different from tied selling. Customers themselves create the issue of cross selling, or trying to get a better price on a deposit or a better deal on a mortgage, by saying, "I will bring you this amount of business. Surely, you can give me a better rate." Often the customer is the one that prompts that. Some of our competitors then say that that is a tied selling situation because if they brought all the business, they were given a better deal. Our experience in recent years has been quite the opposite in that customers have become extremely professional shoppers on the consumer side. Ever since rates in the eighties were up in the 20 per cent range, customers have been very aware of the value of compound interest and of interest rates in general and have certainly done a lot of shopping around.
Tied selling is unacceptable and there are no examples that have been substantiated of banks doing that.
Senator Hervieux-Payette: Why do you mention that in your executive summary, if it does not exist?
Mr. Feeney: Because a number of other groups, when they have presented themselves as witnesses at the committee, have brought this up. It is important not to shy away from something as serious as suggesting tied selling.
The Chairman: I should also point out that the tied selling issue is explicitly raised in the white paper.
Mr. Feeney: Yes, it is.
The Chairman: Thank you for coming here today.
Our next group of witnesses are from the Insurance Brokers Association of Canada. We have Mr. Rod Jones, President; Ms Joanne Brown, Executive Director; and some others. Thank you very much for coming here today. Please proceed with your presentation.
Mr. Rod Jones, President, Insurance Brokers Association of Canada: We are extremely pleased to see the shift in attitude of the CBA with respect to the issue of competition. We are always in favour of equal rights and opportunities, and it looks like they have finally been listening. We look forward to a level playing field with the CBA.
From our perspective, the 1992 changes affecting our industry have been acceptable. We commend the federal government for its effort on this front. IBAC is convinced that the restrictions on the retailing of property and casualty insurance through the branch systems of deposit-taking institutions have been maintained to the benefit of the consumer. It is our clear understanding, therefore, that these restrictions will not be subject to review until at least 2002.
The Chairman: So that we are clear, I think the white paper says, first, that they will clearly not be subject to review until the task force has reported; and, second, the unspoken implication is that they will be subject to review in whatever legislation arises out of the task force. That legislation will come into effect no later than 2002. I put you on notice that my speculation would be that it will more likely be in the year 2000.
Mr. Jones: Charting a new course for the financial services sector should be the principal challenge of the proposed task force. Its work should flow into the 2002 review and not constitute a midterm assessment of decisions which the federal government has clearly made. The task force should mark the beginning of the development of a much needed policy framework for the financial services sector, provided it does not exclude any of the stakeholders, as has happened in the past.
In addition, a thorough assessment of corporate concentration in the financial services sector and its effect on competition should be undertaken. This concern has been a recurring theme throughout this and the previous review processes.
In early 1995, IBAC recommended to the federal government that it conduct a detailed study of this issue. At the time, we believed that such a study would ensure that future policy decisions are in the best interests of all concerned, in particular the Canadian consumer, and nothing has caused IBAC to change its position.
Further, the government's ability to regulate the activities and behaviour of corporate conglomerates remains a challenge. From a public policy perspective, this area should not be overlooked. In light of this concern expressed by many stakeholders, we suggest this issue can be further explored by the task force and government.
The issues of privacy and tied selling require a deeper understanding before any significant new measures are undertaken. The invasion of privacy and tied selling are linked and therefore cannot be dealt with separately. The financial services sector is unique, and this should be recognized in the development of future privacy and tied selling laws.
Further, as we have stated to this committee -- Senator Kirby, you may recall our discussion about this -- regardless of good intention, it is difficult to regulate perception.
The abuse of accessibility is only one concern. A more fundamental concern centres on what the right to privacy really is. For this reason, IBAC recommends that Parliament or a study group be invited to undertake a more complete examination of the issue of privacy and tied selling -- whether or not it is overt or covert -- as it affects consumers of the financial services sector.
The proposals noted in the consultation paper are favourable moves toward dealing with these issues, and we await the more detailed proposals with interest. Meanwhile, we offer this advice to government. To ensure the utmost privacy of information, we plead that the proposed regulations include a provision that forbids any form of negative-option marketing. Further, they should also state that individuals must specifically authorize the giving out of personal information and specify exactly what will be permitted to be released. Naturally, we believe that no form of blanket consent is acceptable, and regulations should state this explicitly.
For our part, we are working closely with the Insurance Bureau of Canada to adopt a code of conduct that embraces the Canadian Standards Association code for consumer privacy.
With regard to overlap and duplication, IBAC proposes that efforts be undertaken to improve the level of harmonization between federal and provincial insurance legislation and regulation to ensure that the same rules and educational standards apply to all insurance distributors. Specifically, we recommend the establishment of an insurance harmonization working group. This joint government-industry group would make recommendations to federal and provincial financial sector ministers. We have experience in this area and would be most pleased to assist our governments.
With regard to technical matters, we offer the following for consideration. It is important to note that the placing of insurance is only one of several services provided by insurance brokers. For example, we regularly intervene on behalf of customers to resolve claims. Some other duties include risk evaluation, risk assessment, market selection, underwriting, after-sales service and product development. It is for this reason that we feel that the wording of section 416 of the Bank Act should be modified to reflect the intent of the federal government's policy that prohibits deposit-taking institutions from undertaking the activities carried on by insurance intermediaries.
It is also very difficult to determine when there has been a breach of regulations with respect to promotion. We suggest, therefore, that the definition of the term "promotion" should be revised to limit it to the activity of advertising and not to the broad spectrum of promotion that now exists. Further, we suggest that there be a definition included for the term "solicitation". Our position paper offers concrete suggestions to reflect these concerns.
As we have reviewed with members of this committee in the past -- and, once again, Senator Kirby, you my recall our exchange on this issue -- federal policy is clear. The business of providing insurance brokering services is not part of the business of insurance. This distinction must not change. Our concern is that a deposit-taking institution must not own independent brokerages.
In conclusion, IBAC supports the direction and many of the principles of the federal government's consultation paper.
First, the task force on the future of the Canadian financial services sector should mark the beginning of the development of a sound policy framework for the financial services sector. The mandate should be clear and precise.
Second, we and all stakeholders must be active in the formation and the work of the task force to ensure that its members take into account the unique features of Canada's financial services sector.
Third, there should be a thorough assessment of the issue of corporate concentration.
Fourth, privacy and tied selling should be closely examined by Parliament or a study group.
Fifth, some minor changes to the legislation and regulations are needed to ensure that they accurately reflect government policy.
For our part, we will be addressing many of these issues in considerable detail at other stages of the review process over the next few months. Meanwhile, it is with great anticipation that we await the work of the task force.
Thank you for giving us this opportunity to share our views. We welcome any questions.
Senator Meighen: You have indicated your willingness to work closely with the task force in developing responses to some of the problems you have raised. Is there anything in the interim which does not require legislation but can be met by regulation that you see as a matter of pressing concern and that you would want us to recommend that the government proceed with immediately?
Mr. Jones: The issues with which we have specific are outlined in the paper that we have presented. We have concerns with respect to specific definitions, as I have alluded to in my comments. The regulations should be tightened to ensure that they are interpreted properly.
Senator Meighen: What degree of urgency do you ascribe to the work of the task force? Can you put a time frame around it?
Mr. Jones: We have not given a lot of thought to time frames. As prudently as possible, we see a need for everyone to dialogue openly and to put their points forth, including our own. We would welcome the opportunity for that to commence as early as possible.
Senator Meighen: In terms of a parliamentary group or a task force to study tied selling, to what extent is this endeavouring to legislate morality? If there is a clear statement that thou shall not engage in tied selling, at first blush, is there anything more that you think can be done?
Mr. Jones: It is a big issue. We do not have the answer to that question. As we have stated, it is difficult to regulate perception. That is what we feel we are dealing with here. The only opportunity for us to work out definitive regulations is to be able to sit down and talk about it as a group.
No, we do not have any solutions to the problem at this point.
Senator Meighen: Do you feel it is a severe problem at this point?
Mr. Jones: Absolutely. We have examples of people coming to us with concerns of being forced into tied selling proposals by banks. These people will not allow us to use them as examples for fear of retribution in terms of them continuing business operations. We see it as a very serious problem.
Senator Meighen: There appears to be a lack of concrete examples. There is the question also -- whether or not the perception is accurate -- that in some cases the customer initiated the discussion in an effort to get a lower rate, which then could be interpreted incorrectly as tied ceiling.
Mr. Jones: We have some examples available, and we would be prepared to share those with you. Unfortunately, they are not broad in scope simply because when we ask people to allow us to use them as examples, they are fearful of the consequences.
Mr. André Bois, Insurance Brokers Association of Canada: In the United States, the office of the comptroller of currency has issued guidelines regarding tied selling. One of those guidelines is the provision of clear information to the consumer regarding his or her complete freedom as to the purchase of products ancillary to the credit transaction. There are at least a few American examples that could be followed.
One problem is that consumers do not complain. When you are extended credit, you are afraid that your credit line will be jeopardized if you complain about being sold an insurance contract forcefully. The simple problem is the following: When you borrow, you receive money and the banker is the giver; when you take out insurance, you give your money to the insurance company. That might be oversimplified, but in a psychological context and, in the balance of power, when those transactions occur, you have a weak party in the banking transaction and a strong party in the insurance transaction. In the course of the insurance transaction, the person who is the strongest is the insured because the insurance company is seeking the premium. In the banking transaction, the consumer is begging for money. In that context, it is very difficult to seek hard evidence.
[Translation]
Senator Meighen: I can see the difference between the two, but let us get back to the first question. It is recognized that banks have a procedure and regulation manual prohibiting tied selling. If I get it right, you would like to have a statement or regulation from the regulator banning tied selling. Is that right? We would be following the American model.
Mr. Bois: We are requesting an in-depth examination of the matter. Mr. Jones told us before he concluded his remarks that there is a problem. We are saying that there is in fact a problem, and that it should be thoroughly examined. Then, we will be in a position to determine whether we need some kind of regulation. To date, there has been no investigation to determine where the problem is. That was the third point in Mr. Jones' opening statement.
Senator Meighen: The minister himself has determined that there was no problem, but that is another story.
Mr. Bois: I will just repeat what I said a while ago. Consumers are not complaining. As a lawyer, I defended consumers against Desjardins concerning life insurance transactions tied to credit transactions, and most of them, out of fear, do not want to sue.
Senator Meighen: I understand your problem. However, you are a lawyer, and you know that if you do not have any witnesses, you may end up losing your case.
Mr. Bois: Generally, the witness bites, because the borrower is the witness. That is the catch!
[English]
Senator Stewart: I am trying to understand what is being said.
Suppose we have a situation where the consumer initiates what some might regard as a tied relation. I go to the bank and I say, "I have a deposit here. I do a lot of business with you, and I want you to recognize that." Would you object to the confusion of our different lines of activity where I, as the consumer, initiate the confusion?
Mr. Bois: If the consumer is asking for a rebate, saying "I offer you my line of credit and I should like an RRSP with a higher rate of return," of course it is for the benefit of the consumer. This is a clear-cut case. However, the problem in tied selling is the insurance tied to the credit transaction because the person who receives credit is in a weak position. That is the only problem.
Senator Stewart: You are not complaining because of confusion -- because you have already told us that in certain circumstances it is acceptable -- but the fact that the bank is achieving an unfair degree of competition with your industry.
Mr. Rick Frost, Chairman, Financial Institutions Committee, the Insurance Brokers Association of Canada: That sums it up exactly.
I should like to give you an example that happened to me when I applied for a loan with the bank with which I deal. This was a fairly large business loan made to me some eight years ago. At the time the loan application was taken, it was suggested to me that the bank was in a position to offer us life insurance. While it was not the only means of securing that life insurance, it was put to us such a way that we thought it would enhance our ability to obtain the loan. We took that loan and we took that life insurance because we thought that would help our situation to borrow the money. No one put a gun to our head and said that we must buy it. They did say that if we wanted to provide the insurance ourselves -- that is, because we sell life insurance -- we could.
As they have said to us since, the bank wants all of our business. We are not always in a position to say no. Fortunately, today I can tell my bank that we do not require their insurance; we will provide it ourselves.
Our concern is that when a consumer goes to the bank to borrow money for a boat, for example, if the loans officer turns around and says, "While I approve the loan on the boat, we will have Mr. Jones arrange the insurance for you," it would take a very tough consumer to say no. That is why we think these things should be dealt with separately, as they are currently. The banks already compete with us for insurance; they just do not do it through the branch at this point.
The Chairman: Are you familiar with the privacy code developed by the Standards Council of Canada over the past couple of years, which was announced some time in the spring?
Mr. Frost: Yes.
The Chairman: That was an industry consumers association. Quite a cross-section of people were involved. Were you involved in that?
Mr. Frost: Yes, I was.
The Chairman: Are you happy with that code?
Mr. Frost: Broadly speaking, yes. There are a few elements we should like to change, and then we hope to have that approved by the Insurance Brokers of Canada.
The Chairman: Does the fact that the Canadian Bankers Association announced its acceptance of that code and its inclusion of that code in the code of conduct for banking institutions not put your mind somewhat at ease on the privacy question?
Mr. Frost: To a degree on the privacy question, yes.
The Chairman: Why only to a degree?
Mr. Frost: It comes back to the same issue. At the end of the day, you still have human beings dealing with some of these issues. If you gave me a specific example involving privacy, I might be in a better position to answer. It goes a long way to answering some of our concerns. If a banker sits here and you ask him the same question about our code, he will give the same reply. Broadly speaking, yes, it should solve a lot of those privacy concerns.
The Chairman: This committee started the debate on privacy in Ottawa some time ago. Our whole instinct is very much on the side of the consumer with respect to privacy.
On the other hand, in response to something Mr. Jones said in his opening comments and in response to Senator Meighen, I am a little troubled by the notion that we have to legislate to deal with perception as opposed to reality. When you start saying that human beings are human beings and, therefore, they may violate the code, that is always a possibility. Logically, and from a legislative standpoint, I do not know how that can be dealt with. Surely, we must make the assumption that if there is a code -- and, we are talking about banks but, for example, your own organization may have subscribed to that code -- people will abide by it. I get the feeling from your comments that you have this lingering suspicion that that will not happen and that, therefore, something in addition should be done about it.
First, I do not know why we should respond, period, to perception; and, second, I do not know what we would do about it anyway. That is a statement, but I am happy to have you respond to it.
Ms Joanne C. Brown, Executive Director, Insurance Brokers Association of Canada: We are a supporter of the Canadian Standards Association code, although we were not at all involved in it. We were involved subsequently with the Insurance Bureau of Canada's work on it to uniform it down to our industry's code.
The Insurance Brokers Association's main concern about all these codes is, first, that there is a way to inform consumers that they have the ability to approach someone with their concerns if they feel that their privacy has been breached; and, second, a way to inform them exactly what their privacy entails. You must be very clear to consumers about their privacy rights so that they then have a choice to go some place to ensure that their rights have not been abused or, if they feel they have been abused, they understand their right to have an independent review of that matter. Basically, that is our concern. If you are to be punitive to a staff member or to someone who is not following a code, then they must have some recourse. Brokers have some recourse. I can lose my broker's licence if I breach a privacy code.
The Chairman: You are really saying that consumers -- and, if I understood correctly, I completely agree with you -- need to have an appeal mechanism and to understand what their rights are concerning their privacy.
Ms Brown: Exactly.
Senator Meighen: If the solution is that the consumer must be totally informed, what is wrong with banks owning Jones Insurance Brokerage as long as customer Meighen is aware of the ownership? For example, they say, "By the way, if you want to purchase an insurance policy, go to Jones Insurance Broker. It is just down the corner. We own it. We know Mr. Jones very well. He is a very good fellow."
Mr. Jones: The same problem exists as having the retailing directly in the branch. It will be very difficult for the consumer to have the ability to be objective in the decisions that he must make. You are taking away the freedom of choice for the consumer. The consumer is then in a position of being forced to do something that might be contrary to the way he wants to do it.
Senator Meighen: That is the difficulty, namely, that fine line between saying, "By the way, Mr. Jones, customer of the bank, if are you interested, we can sell you a mortgage or an insurance policy. We can also make you a loan. We are a great bank. We can do all kinds of things for you, Mr. Jones, including engaging in tied selling," which we all agree is something that is not, and should not be, permitted.
That is a fine distinction sometimes. What Senator Kirby was getting at, and what I am getting at, is that I am concerned that legislation could solve the problem. I seriously wonder whether it could solve the problem.
Ms Brown: If a financial institution owned an independent property casualty insurance brokerage and suggested to its consumers that it is around the corner, that consumer needs to know -- that is, if it is an independent property casualty insurance company -- that that bank, which may also own an insurance company or may have a preference for an insurance company, will not influence that independent insurance broker to sell that product as opposed to selling the best product to meet the needs of that particular consumer. That is our fundamental issue here. If a financial institution or an insurance company wants to own the distribution system, they should have an exclusive agent. That is to say, they should buy an agent, as Allstate does, and have them operate it. The public will know that that person is not an independent property casualty insurance broker but is an agent that sells the products of that particular company. So that they know what they are buying and they know that they may not receive options.
Senator Meighen: If you are owned, presumably you might not have the right to use the word "independent".
Ms Brown: That is correct. You should not be independent if you are owned by a manufacturer of the product.
The Chairman: Thank you for coming here today. We appreciate you taking the time to do so and thank you for your brief.
The committee adjourned until two o'clock.