Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 11 - Evidence - Afternoon Session
Upon resuming at 2 p.m.
The Chairman: With us this afternoon are witnesses from the Task Force of Schedule II Foreign Banks. Mr. Buhler is their chairman and CEO of the Bank of America in Canada.
Mr. Buhler, although I have met all your colleagues, will you please introduce them to us? After your presentation, and on the basis of a discussion I had with you and your colleagues one week ago, we will then get into a discussion of some of those subjects.
Mr. Fred Buhler, Chair, Legislative Reform Task Force of the Schedule II Foreign Banks and Chairman and Chief Executive Officer, Bank of America Canada, Task Force of Schedule II Foreign Banks: Thank you for the opportunity to appear here today. With me this afternoon are Mr. Willem Veger, President and Chief Executive Officer of ABN AMBRO Bank Canada; Kenichiro Tanaka, President and Chief Executive Officer, Fuji Bank Canada; Stephen von Romberg-Droste; President and Chief Executive Officer, Deutsche Bank Canada; and Mr. Munholland, Senior Vice-President and Managing Director, Deutsche Bank Canada.
Approximately nine months ago, I was asked by the executive committee of the Schedule II foreign bank subsidiaries to chair a committee representing the Schedule II foreign bank subsidiaries in their discussions with the federal government during its review of the Bank Act. My colleagues and I are here as representatives of the foreign banking community.
We have come today to ask the committee to recommend in its report on the white paper that the federal government permit international banks to establish direct branches for wholesale banking activities in Canada as part of the 1997 reform of the Bank Act. In our view, and as more fully explained below, direct branching will create a more competitive domestic banking environment and the international banking community in Canada will make a more significant contribution to the Canadian economy.
We are also here today to comment on other aspects of the white paper directly relevant to the foreign bank community in Canada. The white paper recognized that wholesale banking operations that do not accept retail deposits should be allowed to opt out of the Canada Deposit Insurance Corporation. This proposal is important to the foreign bank community and we support it fully. In addition, we support the proposals in the white paper to relax the current requirement that non-bank financial subsidiaries be held directly by the Schedule II subsidiary of the foreign bank. However, these changes, while welcomed, fail to address the issue of direct branching, which is the subject of our presentation today.
At this point, I should like to ask my colleague, Mr. Tanaka, to address the question: Who are the foreign banks in Canada and why have they not been more successful?
Mr. Kenichiro Tanaka, President and CEO, Fuji Bank Canada, Task Force of Schedule II Foreign Banks: Who are the foreign banks in Canada? Canada has 45 active Schedule II foreign banks from all over the world's major trading areas. Included are 17 European banks, 9 Japanese banks, 8 Asian banks and 10 American banks. Without exception, the Schedule II foreign banks are international banks that, in addition to their international activities, have a major presence in their home market. Some foreign banks have focused on Canadian communities with ties to their home countries. These banks typically supply a variety of personal and business banking services to individual consumers as well as small- and medium-sized companies. Other foreign banks focus on corporate and investment banking services, including financing the international trade activities of Canadian companies.
You might ask why the foreign banks have not been more successful in Canada. It has been said that their lack of success is primarily due to not having a large branch network in Canada. While the existence of a national branch network may have some impact on a bank's ability to provide services to its retail customers, it has almost no relevance to its ability to service its business customers.
What is significant is that operating through a subsidiary adds costs and places unnecessary restrictions that limit our activities.
The 45 foreign banks operating in Canada today include a number of the world's largest and most successful financial institutions. Because of the subsidiary requirement, what Canada ends up with, with a couple of exceptions, are 45 small local banks owned by large international banks. These 45 small banks are significantly restricted in the size and scope of their activities in Canada. This would not be the case if these banks were allowed to operate as direct branches of their parents.
I should like to introduce my colleague, Mr. Veger, to talk about benefits of a strong international bank sector in Canada.
Mr. Willem Veger, President and Chief Executive Officer, ABN AMBRO Bank Canada: Mr. Chairman, I have seen enormous changes in international banking over the last 20 years. When I started out in this business, foreign branches were established primarily to finance international trade flows.
Driven by the globalization of financial markets, the role played by international banks today has changed dramatically. They deliver a far greater range of financial products, they facilitate the movement of capital between countries and they provide information and business contacts across the world. In every major financial market, foreign banks play an important role in complementing the services provided by domestic banks.
For example, foreign banks provide depth to the loan syndication market by participating with Canadian banks in major corporate loans. Through international bank participation, domestic banks are able to better diversify credit risk, while competition helps lower the cost of funds to borrowers. In Canada today, however, the subsidiary requirement effectively limits the ability of international banks to lend to Canadian corporations.
Foreign banks provide significant trade finance services for Canadian exporters. According to the government's own figures, every $1 billion in Canadian exports adds 11,000 jobs to the Canadian economy. In particular, international banks facilitate the participation of Canadian companies in the rapidly growing emerging markets of Asia, Latin America and the former East Bloc countries. Because of their global networks and their expertise and willingness to take risks in markets with little or no Canadian bank presence, international banks can offer trade services that otherwise would not be available to Canadian exporters.
Likewise, global banks can act as a source of expertise and financing for foreign direct investment in Canada. Their relationships with companies in their home markets and elsewhere provide them with opportunities to find investment partners or forge joint ventures to the ultimate benefit of Canadians.
Banks like ABN AMBRO, Deutsche Bank and Bank of America have considerable experience in lending to small and medium-sized businesses in other parts of the world, including Europe, Asia, Latin America and the United States. However, Canada's subsidiary requirement acts as an effective barrier to the entry of international banks that would like to serve the SME market. The up-front capital requirements and additional operating expenses of a subsidiary discourage exploratory entry into these markets.
Finally, the international banking community provides jobs, occupies real estate, uses local goods and services and pays taxes.
I should like to ask my colleague, Mr. Buhler, to speak to the implications of the status quo.
Mr. Buhler: Financial institutions constantly evaluate the performance of their operating units in order to reallocate scarce capital and resources to maximize returns. Unless Canada provides an environment where international banks can prosper, resources will be redirected to those markets where such opportunities exist. Over the past decade, the number of international banks with a presence in Canada has fallen from a high of 59 to the current level of 45; and an additional two will close shortly. If the government delays action on the branching issue, we expect to see more foreign banks leave this market. Those remaining will continue to face difficulties competing for resources within their respective companies.
Every major world financial centre has an international banking community that complements its strong domestic banking sector. A common thread found in each of those centres is the ability of international banks to choose the form of establishment or operation. Canada stands out as the only advanced economic power that does not allow international banks to operate through a branch structure. The most recent Global Survey of the Institute of International Bankers found that, of 40 countries responding, only Canada and Mexico require international banks to carry on their activities strictly through subsidiaries.
International banks have been urging the Canadian government to permit direct branching since before the 1980 amendments to the Bank Act. As noted earlier, the subsidiary requirement is a major reason why Canada does not have a more vibrant international bank community and why there is not more competition from foreign banks in the domestic banking sector.
I will conclude by trying to anticipate a few of the questions you may have. First, you may ask whether we could not achieve our objective of making a more important contribution to Canada if the federal government would simply relax the current restrictions on Schedule II foreign banks. While changes to the requirements for Schedule II banks would be welcomed, and indeed this issue is the subject of ongoing dialogue with the regulators, it is unlikely to address the core difficulties faced by the foreign banks in Canada; the relative lack of ability to access effectively their parents' capital base and funding capability, technological resources and international risk management experience.
Second, you may be concerned with whether direct branching will create risks to the safety and soundness of the Canadian financial system. In our discussions with the federal government, the foreign bank community has been careful to emphasize its willingness to work with the government to design and implement a system of prudent regulation similar to the system of regulation which is in place in other developed countries. In addition, we have conceded to the federal government that direct branches would engage in only wholesale banking activities and foreign banks would need to establish a Canadian subsidiary to undertake retail deposit activities, even though a number of our members would prefer to have the authority to establish retail branches as well.
Furthermore, we would be happy to take any questions you may have about how our respective home countries regulate the direct branches of foreign banks.
Third, you may be concerned that it will be difficult to establish an appropriate system of regulation for direct branches. In particular, you may be concerned that it will be difficult for the federal government to screen out the applications from those institutions which the government believes should not have direct branches. In response, we would note that every advanced economic power has standards regarding the entry of foreign banks as subsidiaries and/or direct branches. Canada already has established high standards with respect to the entry of foreign banks in the context of subsidiaries. We would expect that similar requirements would be established for direct branches.
If members of the committee would like to discuss this matter further, we would be pleased to do so in the question period.
Fourth, you may wonder whether the direct branching can be accomplished within the time-frame set for the 1997 reforms. There will be a number of changes required to the Bank Act. There will also be changes required to the CDIC regime, the payments rules and withholding tax requirements. However, those changes would be, for the most part, ancillary, and would follow naturally from the decision to permit direct branches.
Furthermore, direct branching is not a question of new powers. We simply need more flexibility to exercise our existing powers. If the federal government is willing to consider direct branching as part of the 1997 reforms, we would be prepared to work with officials to ensure that the inclusion of direct branching did not delay other changes already under way.
In addition, you may be concerned about how Canadian banks are treated abroad. As noted above, virtually all of the other major economic powers permit foreign banks, including Canadian banks, to establish direct branches. Direct branching is allowed in each of our home countries.
Finally, Mr. Chairman, to assist the committee in its consideration of these issues, we have assembled, with the assistance of our colleagues from Deutsche Bank Canada, some background information on the systems of regulation of direct branches in a number of European countries, the United States, Japan and Australia.
Australia is the most recent model of direct branching. We would be pleased to provide the committee or its staff with any additional information you may require.
In any case, the essential issue is the impact of direct branching on Canada and Canadians. At the end of the day, this committee and the government will need to ask the question: Is Canada really interested in increasing competition in the domestic banking sector and, by so doing, to have a positive impact on jobs and growth in the Canadian economy?
There is a clear way that this committee can advance these goals -- by recommending to the government that branching be part of the 1997 reforms.
Mr. Chairman, Canada has a long history of excellence in financial services. Canadian banks are respected around the world. Having said that, foreign banks have a legitimate role to play in Canada and can make a greater contribution to this country. To do that, we need the ability to operate as direct branches.
Mr. Stephen von Romberg-Droste, President and Chief Executive Officer, Deutsche Bank Canada: Mr. Chairman, we obviously expressed our views on the white paper in the more elaborate document which is in front of you. For efficiency purposes, we decided today to sit here at the table with the task force, to have a bit more discussion time thereafter.
Essentially, Deutsche Bank has been working with the task force very effectively over the last nine months on the branching issue, and there is no doubt that we fully support that initiative as it stands now. However, we also think that the Schedule II banks must live within the realities of the white paper. I should like to make a few comments there as we see them currently.
We think that the white paper may not achieve, in its current form, the primary objective of easing the regulatory burden for foreign banks in Canada. To us, the white paper recommends four significant proposals affecting all of our businesses here in Canada. The proposal to allow foreign banks to hold securities companies in Canada directly; the proposal to allow near banks to operate as non-related financial institutions in Canada; the proposal to address issues relating to the self-dealing regime; and, obviously, the CDIC opt-out for wholesale banks.
Let me comment briefly on the non-bank affiliates or our securities business. The proposal which would permit the transfer of our wholly-owned investment dealers to other Deutsche Bank entities in the world is very welcome as it relieves serious constraints imposed on us by the asset-to-capital test. However, that proposal triggers additional concerns with regard to related-party rules, capital redistribution and consolidation requirements.
If these are not resolved to the satisfaction of all parties involved, that provision may indeed turn out to be meaningless.
With regard to near banks, the Deutsche Bank supports the government's proposal to allow them to operate as unregulated, financial institutions in Canada, provided that new entrants or existing businesses in Canada are put on an equal footing. In concrete terms, if we were not allowed to restructure our existing asset-based, finance business as a non-regulated, financial institution in Canada, this proposal would be meaningless for us, too.
On the self-dealing regime, the white paper proposes exemption status for subsidiaries of Schedule II banks. No such relief for Schedule II banks is available when dealing with their global networks. We see no rationale for this inequitable treatment.
Finally, we detect that the Schedule II banks are also hoping for relief of other instruments as well. For example, the asset-to-capital test, or the 20-to-1 rule, is an incongruent instrument compared to internationally accepted capital adequacy requirements, for instance the BIS ratio.
We also seem to be missing the large-limit exposure guidelines, which is a restriction on the size of lending to any one entity in this country.
Furthermore, there is an issue about corporate governance. Although we appreciate the prudence and necessity for corporate governance, there is a point of over burdening one's self.
In conclusion, we would recommend that the self-dealing regime be reviewed for the Schedule II banks and their affiliated global networks, as well as their Canadian affiliates domiciled in Canada.
We also recommend abolishing, or at least re-defining, the asset-to-capital test, while continuing to work on the BIS framework as internationally accepted. There would also be a need to review the large-limit exposure guidelines. As well, there should be some relief for foreign banks operating in Canada in terms of the corporate governance regime if the parent is regulated as a bank in its home jurisdiction.
We are more than prepared to work with the government to resolve these issues at any stage in the race.
The Chairman: Even if branching were allowed, you would be providing service only to business customers. Is that correct?
Mr. Buhler: When you say "only to business customers," do you mean wholesale customers?
The Chairman: I am using "business customers" because that is the word you used in your statement. I am happy to have you define that term. I would assume it includes small and medium-sized sectors, so it would go beyond wholesale customers.
Mr. Buhler: It really does go beyond wholesale, yes, sir.
The Chairman: The problem with the subsidiary is essentially not the subsidiary but the capital requirements imposed upon the subsidiary. Is that correct?
Mr. Buhler: It involves two issues: the capital requirements and a variety of legal requirements, primarily corporate governance requirements.
The Chairman: But would the corporate governance requirements be more of an irritation than a big issue? It seems your big constraint in growth is due to the amount of capital which you are prepared to put into the subsidiary, whereas if you could get beyond that to the parent capital, there would be no cap on growth. Is that right?
Mr. Buhler: That is correct.
The Chairman: I understand you prefer some other things to be neater and smoother and to have fewer corporate governance rules, but the fundamental problem is the cap problem?
Mr. Buhler: That is the key issue.
Senator Meighen: Can you pursue that?
The Chairman: I will give my understanding. I am not just speaking to Mr. Buhler. Join in if you want to.
Each of you believes that you could expand your business in Canada beyond the volume of business presently allowed by virtue of the capital adequacy requirements under OSFI's rules and which, in turn, is capped by the amount of capital your parent company is prepared to put into the subsidiary.
Mr. Buhler: That is correct.
The Chairman: That is a layman's interpretation, but that, essentially, is the problem?
Mr. Buhler: Correct. It impacts upon the size of transactions that we can make.
The Chairman: That is right. Otherwise, OSFI will say you are over-extended if your capital adequacy ratios fall below the required norms.
Mr. Buhler: That is correct.
The Chairman: The advantage of a branch over a subsidiary is that the capital available is the capital of the parent company and not merely the capital of the subsidiary.
Senator Meighen: Let us explore why that has been a concern heretofore and why it should not be. Perhaps the concern is ill-founded. The argument went that that gave you an unfair advantage.
Mr. Buhler: I am not sure that it gives us an unfair advantage. We currently are disadvantaged.
Senator Meighen: I do not disagree with that.
Mr. Buhler: It limits the ability or restricts the ability of the foreign banking community to contribute in the way that we think it can contribute to the Canadian economy.
Senator Meighen: I understand that. I was interested in the arguments which have been raised traditionally against allowing you direct access to the capital of the parent company. You must know them.
Mr von Romberg-Droste: Do you mean the argument for not allowing us to be a branch beforehand?
Senator Meighen: Exactly. Why are those arguments no longer valid?
Mr von Romberg-Droste: I am not an old veteran, but from my discussions so far I understand that there was a strong desire to have a prudent regulatory regime. There was always an argument brought forward about one international bank, which is BCCI, that had an international corporate failure, but the Canadian entity was relatively protected. That was the main driver there.
Senator Meighen: In the case of incurring a liability, how do you get your hands on the capital that is not here?
Mr. Buhler: Early in our discussions with the regulators, the primary concern was retail depositors and how to protect retail depositors. We conceded the point that direct branches would not accept retail deposits. That solved that problem.
Senator Meighen: I do not think that is a well known agreement that you have reached, at least not in the lay community to which the chairman was referring. That might be beneficial.
Mr. Buhler: That seems to be the major stumbling block to moving forward with this.
Senator Meighen: If that was the major stumbling block, from your point of view it exists no longer because you have agreed that you would no longer take retail deposits?
Mr. Buhler: That is correct.
Mr von Romberg-Droste: You could even go a step further, as we have seen in Australia, where you have the possibility either to branch or to be a separate subsidiary.
Senator Meighen: With different rules?
Mr von Romberg-Droste: Yes, with different rules applying to them. That may be the solution, because many foreign banks in this country are in the retail sector; others are not in that sector. It is the market participant's choice to say, "I go down this route or that route."
Senator Meighen: It seems also, as you have just alluded to, that different banks like to do different things.
Mr von Romberg-Droste: I hope so.
Senator Meighen: That raises the question of whether you regulate by size, or by function or by some other criteria. If your activities, that is, your niche activities, are limited, presumably you should not be regulated in the same way as if your activities covered a broad spectrum, however, you could both be Schedule II banks.
Mr. Buhler: That is a fair notion. The notion of "one size fits all" should not apply here.
Senator Meighen: Can you tell me how other jurisdictions address that problem?
Mr. Buhler: I will comment briefly on the United States. Direct branching is allowed, but they are precluded from accepting retail deposits. Retail deposits may only be accepted in subsidiaries, which is consistent with the approach we have raised here.
Senator Meighen: You have all read Mr. Barrett's comments in The Globe and Mail this morning. What is in his mind when he says Canada should welcome full-scale competition in the domestic market from any nation as long as those countries give Canadian banks equal regulatory treatment.
I think I heard one of you say that that is already a fact of life.
Mr. Buhler: That is correct. According to a recent survey conducted by the Canadian Bankers Association, Canada and Mexico are the only countries out of 40 major economic powers in the world that do not allow direct branching. We are looking at a very unusual situation in Canada, in the sense that Canada is being a tad more discriminatory than other markets. We are suggesting that it amend its law.
Senator Meighen: You are saying that if the measures and changes you are seeking now were passed by imperial decree today, there would be reciprocity in your jurisdictions, which you would obtain here.
Mr. Buhler: That already exists.
Senator Meighen: That already exists in your home jurisdictions?
Mr. Buhler: That is correct.
Mr von Romberg-Droste: For our institution, it is obvious that we have a substantial amount of Canadian dollars in foreign markets. The amount is so serious that, if I were to bring it into Canada, it would not work out for us to do so, because I would have to put up a massive amount of business capital in Canada to maintain that structure. It is not only growing on the old market, but there are distinct businesses in the offshore markets which should be centered in this country and we cannot do that because it is not economic for us.
Senator Meighen: I see.
Senator Kenny: Could you give me examples of distinct businesses that should be centred here so I can understand it better?
Mr. Barry Munholland, Senior Vice-President and Managing Director: An example for Deutsche Bank would be our treasury bill operation. We receive a tremendous number of deposits from central banks all over the world; those are usually received in London simply because of the regulatory environment that that provides to us. One of the currencies we use to offset that source of liquidity is the Canadian dollar. We hold a treasury bill portfolio that varies between $3 billion and $5 billion at any one time. However, we have to hold it offshore because it would take an inordinate amount of capital just to support that business under the current rules. As a result, those treasury bills are lodged and managed in London.
Senator Kenny: Take it a step further and tell me why Canada would be better off if the rules were changed?
Mr. Munholland: Well, the individuals that are involved in managing that portfolio, the systems that were built to manage that portfolio, and many of the risk decisions that were being made to manage that portfolio in the past all resided in London. If that portfolio had been developed and was resident in Canada, those jobs, that technology and the risk management would be resident in Canada.
Senator Kenny: If the rules were changed, do you all promise that that would happen?
Mr. Munholland: I do not think any of us would undertake to do that.
Mr. Veger: It would be a logical conclusion that more of the business would come to Canada.
Mr. Buhler: I will give you a slightly different example in the loan syndication market. With our capital base, we can underwrite transactions up to $200 million. It is not unusual for us to do a much larger transaction; however, under the current regime we are forced to do that offshore. We would bring that business back to Canada if we were able to use our parents' capital here in Canada.
Senator Perrault: On page nine of your brief, you say that you would like to work with the government to design a system of prudent regulations, using as examples some regulations which exist in other developed countries.
What would be the salient points advanced by you in any negotiation with the federal government to establish this regime for these banks?
Mr. Buhler: It is fair to say that from my own experience I am less qualified to speak on behalf of the United States, although I am an American, because I have spent my whole career on the international side of the business. I have worked in 14 or 15 countries and am familiar with circumstances in several others.
Typically, in establishing a regulatory regime, the regulators look more at the risk of the operation than at the legal structure. Without exception, although I have only worked in two countries, Canada and Spain, that required subsidiary organization, in all other countries where we operated as a branch, as a branch manager working with regulators, the type of work we did, the sorts of reports we made, the sorts of examinations that we experienced, were identical. They really do not change.
One key point that needs to be made is that, despite the fact that we are seeking the ability to operate as a direct branch of our parent rather than as a subsidiary, that does not change our relationship with the regulators and their ability to examine us and satisfy themselves that our operations are being run prudently.
Senator Kenny: What sort of reciprocity is there? How are Canadian banks in corresponding circumstances treated in your countries?
Senator Meighen: I have already asked that question.
Senator Kenny: Has that been covered?
Senator Meighen: Yes.
Senator Kenny: Fine.
Mr. Veger: I know a bit about the Dutch regulations, since I come from Holland. In Holland, the foreign banks have the opportunity to have a representative office, branch, or a subsidiary, and I do not think there are more colours available on the pallet.
Mr. Buhler: I will add that in each of our countries direct branching is allowed.
Senator Meighen: Correct me if I am wrong, but everything that is being asked for by these representatives in Canada is available in their home countries to a Canadian bank.
Senator Perrault: Both retail and wholesale?
Mr. Buhler: Retail branching is not allowed in some jurisdictions in the United States in particular.
Senator Perrault: Are there some jurisdictions where they allow both?
Mr. Buhler: Yes, there are. In fact, in most.
Senator Meighen: Most states?
Mr. Buhler: Most countries. The United States is an exception. In the United States, there is only wholesale branching. You may not take retail deposits as a direct branch; you may as a subsidiary. That is similar to what we are proposing here in Canada.
The Chairman: However, you are only looking for wholesale here?
Mr. Buhler: That is correct. We are not asking for the right to take retail deposits. There has been a great deal of interest raised in small- and medium-sized-enterprise lending, for example. We should like to see direct branches have the ability to do a variety of business. The business that we have agreed it should not be doing is taking retail deposits, which is consistent with the stumbling block we have with the regulators.
The Chairman: You say in your brief that it is fairly straightforward to develop guidelines which a firm would have to meet to be allowed to establish a branch, and the guidelines could be tough enough and strict enough, however, to weed out some sort of fly-by-night operations -- in other words, only to let through the screen institutions that truly have a degree of stability to them.
Without asking you to tell us exactly what those rules are, what is the key to those rules? Is it the size of the parent? Obviously, there must be some key that says that Deutsche Bank is big enough to be all right but a small one-branch bank in Mississippi is not. What is the key to a regulatory scheme that would screen out those that you do not want in, simply for safety or security reasons?
Mr. Buhler: There are two. We would be prepared to provide more information to you in writing. It is a fully regulated institution in its own market, first; and, second, its home regulators agree that this bank is sufficiently staffed from a management perspective and sufficiently capitalized to make international investments.
The Chairman: That means that there would be an exchange of information between the Canadian regulator and the home country regulator.
Mr. Buhler: Yes.
The Chairman: Does that now exist with respect to subsidiaries?
Mr. Buhler: Yes.
The Chairman: It was my understanding that it did not.
Mr. Buhler: The regulators in Canada work closely with regulators in a number of other countries.
Senator Perrault: In the United States, for example?
Mr. Buhler: The United States, the United Kingdom and Germany.
Senator Kenny: When you talk about looking for small- and medium-sized-loan opportunities in Canada, the message I am getting indirectly is that you see a lot of room there. You see opportunities there, and you are telling us that our home-grown folks are not as competitive and aggressive. Do you think, by virtue of the fact of you going there, that you can do a better job of it?
Mr. Buhler: Thank you for asking that question, because that is an important point to clarify, if that is the impression we have given you. I do not agree with that. That is not my perception at all. In fact, some of us already are in the small- and medium-enterprise business. Deutsche Bank has a subsidiary in that area, and some of the smaller Schedule II foreign banks whose businesses are focused on a national identity with their home country -- for example, some of the Italian and Greek banks which work with more of a national focus -- are already in that market. It may not be in a huge or aggressive way, but they are in that market. It is important that we recognize that.
We made the point in our submissions and discussions with members of Parliament and the government that foreign institutions, as domestic institutions, will move into unserved parts of the market.Several finance companies in Canada are working in the SME area. I do not believe that foreign banks in Canada, or in the United States or any other advanced market, will ever come in and take over huge portions of market-share. It is not in the nature of our strength to do that. In fact, the domestic banks, in the case of Canada, the United States, Germany and all of our home markets, are strong, well-developed banks with many years of experience in their home markets. It is very difficult for a foreign bank to go into another country and expect that it will take over significant portions of market-share. However, they operate in a complementary fashion to the domestic bank, and from time to time they will see niches, as we have seen in Canada, to develop business, to focus on specific business opportunities. I would be misleading you if I were to suggest that this implied enormous market-share shifts from the domestic to foreign banks.
Senator Kenny: Are you talking about taking on more difficult risks, or are you saying, "No, we think we probably know how to finance plastics companies better than other folks"?
Mr. Buhler: I would say the latter. Certainly in our own business plan in Canada, the niches we have gone after have not involved taking higher risks as much as providing services that were perhaps not already provided in the marketplace.
Mr von Romberg-Droste: There is another more complicated issue at work here as far as we are concerned. Mr. Buhler already alluded to the fact that we do have an operation, which is about a $500 million business, that caters to about 1600 customers, and approximately 90 per cent of that volume is below $1 million.
The trick here is that this used to be a near bank -- that is, a finance company which was unregulated. Now, as a result of the regulatory regime here, we were requested to merge this non-regulated business into a regulated bank. The result of all this was that we had to put up $50 million or $60 million in capital to support these assets, whereas, as a non-regulated financial institution, we could have run this business with approximately $100. That is why we made clear in our presentation that there must be a clear, fine description of how we run these businesses, and only if that regime is there would I invest heavily if the opportunity were to be there in that market. However, if that regime were to be part of a fully regulated bank, I would not do that.
Senator Meighen: I wish to take advantage of the experience that we have before us, particularly of Deutsche Bank. In Germany, as I understand it, banks such as the Deutsche Bank sell a full range of financial products, including insurance.
Mr von Romberg-Droste: Right.
Senator Meighen: As you are aware, this has been the subject of some controversy here. It raises issues such as privacy -- Chinese walls, in-house processing of data as opposed to processing in subsidiaries, and so on. Could you tell me how you address the privacy concerns, given the fact that you do sell insurance and thereby collect all kinds of personal data that could be useful in selling other financial products, and whether that is an issue at all?
Mr von Romberg-Droste: It is a very serious issue indeed. The privacy of our customers is our prime concern. I hope it is the objective of every financial institution in the world to protect the privacy of their customers.
However, as a more general answer to that question, these businesses are all in distinctively different business areas. The insurance business is not necessarily sold through the same person who does investment advice or savings accounts. These businesses are distinctively separate from each other, although you may decide to sell the same product over the counter to that person. Nevertheless, they are not all in one pot. Your question regarded the sharing of information, did it not?
Senator Meighen: Yes. The concern was that you get a vast amount of information on an individual, for instance, when you sell insurance, which could then be passed on for the purpose of assessing what other products might be offered to that individual.
Mr von Romberg-Droste: That is the basis of a confidential agreement between the customer and the bank. That is not happening.
Senator Meighen: Is that the law of the land in Germany?
Mr von Romberg-Droste: I am not sure of that.
Mr. Munholland: We have tried to market Canadian dollar products through the Deutsche Bank network worldwide. We have been in Germany trying to convince them, and successfully convincing them in some cases, to make the Canadian dollar part of their portfolio, thus widening their holdings of the Canadian dollar. It is the same experience I have had walking in to see a completely unrelated corporate customer. While we all know that we own a mutual fund in Frankfurt, when I walk in there it is really as a banker to a customer. The only interface I have is with the people that run that fund. Beyond that, I have no access to any of the information regarding their clients, the type of funds that they are running or what percentage of their portfolios is held in currencies. Nor do they have access to any of the customers that we have access to in Canada to whom they might want to sell their products. That wall exists in fact. Whether it is enforced by law or not is a question I will have to research for you. In practice, it does apply.
Senator Meighen: What about tied selling in your areas? Is that a problem in the United States?
Mr. Buhler: That is a difficult issue for me to respond to. Tied selling is regulated by two sets of laws in the United States. There are antitrust laws and banking laws.
In preparation for our testimony this afternoon, I looked into it and quickly realized that it is an extremely complex subject. If there are some specific questions on it, I would be pleased to arrange for counsel to work with us in addressing it. However, I would not represent myself as an expert on that material this afternoon.
Senator Meighen: I understand. It is complex.
Mr. Buhler: It is a tough one.
The Chairman: Thank you for appearing this afternoon. It was helpful to us.
Our next group of witnesses come from several organizations. I would ask them to come up to the table. They are from the National Anti-Poverty Organization, the Task Force on Churches and Corporate Responsibility, as well as a couple of other organizations.
Mr. Bill Davis, Manager, Dossier on Banking Access for Low-income groups, Task Force on Churches and Corporate Responsibility: Mr. Chairman, our intention is to make a brief opening statement in the hope that we will have lots of time for questions. The brief is there and we do not intend to go through it in detail.
The Chairman: First, will you describe what the Task Force on Churches and Corporate Responsibility is?
Mr. Davis: There is a short description in the first paragraph of our brief. We are the arm through which the Canadian churches deal ecumenically with the corporate world. It is important to understand that we are not a special interest group. We do not pretend to be representing the poor or consumers. We are a church body reflecting on the role and responsibility of corporations in the world and attempting to influence those corporations both as church and, often, as shareholders.
Senator Perrault: Are all major denominations represented?
Mr. Davis: Yes. They are listed in the first paragraph of the brief.
There is a history in our brief of how we became involved with this particular issue. Mr. Jantzi will say more on that since he has spent some time on the front line.
The task force has over a 20-year history of dealing with the banks. We know them and their people. We decided this particular issue was one on which we could make a contribution. We had managed to bring the banks to the table with consumer groups and in particular with the poor themselves. It is out of that activity that we have prepared this brief.
We sense a genuine concern in the banking community among the people with whom we met. We have been meeting with them intensively for more than three years.
Part of our beginnings go back to November 1993 when the Social Investment Organization sponsored a major conference in banking in Toronto. The task force had the opportunity to bring low-income representatives to that conference to speak for themselves. It was interesting to see the extent to which individual bankers who were present were moved by their presentation.
When we wrote to the Superintendent of Financial Institutions and the Canadian Bankers Association in terms of following up that conference, the response was a brush-off as far as we are concerned.
There has been quite a flurry of correspondence and communication in the last three months from the Canadian Bankers Association, something which is welcome. We think it is more than just the result of our efforts to stimulate activity. We think it might have a remote connection to the fact that possible revisions to the Bank Act are coming up.
We start from the premise that there is genuine concern and good intention in the banking community. We are aware that there is a lot of local action that is helpful and promising. However, we are concerned that this does not add up to lasting progress.
We conclude that bankers, by nature, are very cautious. They focus first on risk. When they see problems, the intent is to play it safe in order to control the problem.
As you are aware, our submission deals with access to banking for low-income people. The banks see problems first.
The message at the top of the bank is certainly corporate citizenship and responsibility. That is understood and it is sincere, and they are going about it as forcefully as they can. The message often in the branch system is: If you want to move ahead in the bank, you will be judged on the bottom line and productivity -- short-term bottom line at that. Those are the things that get you ahead in the bank. Soft areas such as servicing the poor are pretty hard to measure and it becomes very difficult to translate corporate citizenship from the top of the bank down to the operation where the poor actually appear at your teller's wicket and want to cash a cheque.
We start with good intention. When we read parts of the brief from the CBA, we see all sorts of future orientation, lots of statements such as "We intend to do this. We plan to do that. We are working at that." Somehow, those good intentions must be monitored after the Bank Act has been revised. It cannot fall simply to groups like ourselves to do that.
The thrust of our brief is that certainly some legislation or regulation would be welcomed, as far as the churches are concerned, and if you do not choose to regulate, there must be some way in which the government, as the representative of the public, does not abdicate its responsibility for the common good. That is the thrust of our brief.
The Chairman: Thank you very much, Mr. Davis.
[Translation]
Ms Louise Rozon, Director General, Association coopérative d'économie familiale: Mr. Chairman, honourable senators, we wish to thank you first of all for the opportunity you have given us today to share these brief observations concerning the proposed amendments to the banking legislation submitted by the Secretary of State for Finance, Mr. Peters.
I should begin by recalling that ACEF-Centre is a consumer association based in Montreal. We have about 2,000 members. We are interested in a broad range of consumer issues. Since 1989, we have been concerned about banking services.
Though sensitive to the needs of all consumers, we are better acquainted with low-income consumers in urban areas. We will address ourselves primarily to the issues concerning the actual banking practices of both banks and trust companies.
We know that your work is focused mainly on the proposed amendments tabled by the government, but we feel nevertheless that it is important to recall that these proposals cannot be studied without taking account of the profound developments that will affect the banking sector in the coming years and that will inevitably transform relations between consumers and their bankers. It almost means replacing branch bank tellers with Internet wickets. Not everyone will be able to make the adjustment easily.
In this context, however, we must not lose sight of the basics: consumers want to have access to banking services, particularly deposit and payment mechanisms that are safe, efficient and inexpensive.
Consumers also want quality services. They wish to have a choice of services and to be well informed. As they develop, institutions must take account of the interests of their shareholders, and also those of their customers, employees and the community as a whole.
It is also essential for them to keep the trust of consumers, who unfortunately sometimes doubt the banks' ability to cope with the challenge facing them.
We had some surveys conducted by CROP in 1994 and 1995. They showed in particular that 55 per cent of Quebeckers distrust making payments by such means as automatic debit, and that 11 per cent of consumers have already filed complaints with their financial institutions, or indicated a problem they regarded as serious. Nearly half of the consumers who indicated a problem felt that it had not been settled to their satisfaction.
A survey conducted recently for the Mouvement québécois de la qualité indicates that 19 per cent of Quebeckers say they are not very satisfied or not at all satisfied with the quality of services provided by financial institutions. These are worrying findings.
Another survey too mentioned that nearly 20 per cent of Canadians are extremely concerned about the handling of personal information by banks.
This is the background against which we will take a brief look at some of the proposals submitted by the Government of Canada, with particular emphasis on the proposals that have a more direct effect on low-income consumers. Thus we will be talking about access to banking services, service charges and protection of personal information.
With regard to banking services, we commissioned another survey from Environics. This one is a cross-Canada survey, which was conducted in the summer of 1995, and which indicates that 8 per cent of households having an annual income of less than $25,000 in Canada do not have a bank account. The percentage is even greater outside Quebec. In all, this means that more than 660,000 Canadians, or 3 per cent of the adult population, do not have access to any banking service. The situation is most serious in the Atlantic Provinces and British Columbia.
Further information is available in a report that we published this year about access to banking services and that we submitted to the committee.
Several banking practices exacerbate the problem of access. For example, three pieces of identification are required to open an account, or to cash a cheque. Or photo ID is required, although it is known that not all consumers have photo ID, and that it is mainly low-income people who do not have this type of identification.
Financial institutions also place holds on funds for periods which we feel are far too long. A low-income person cannot wait 5, 10 or 30 days to have access to his account.
In the surveys we conducted of financial institutions, some of them -- though not the majority of course -- said they held back funds for more than 30 days. This is quite unacceptable.
Another debatable practice (two cases have been seen in recent weeks) is a bank taking possession, without prior notice, of a retirement or disability pension payment deposited directly in someone's account, as a refund for an amount owing. In the case of these people, this was their only income.
Such practices discourage low-income consumers from dealing with banks. The closure of branches in under privileged neighbourhoods and their apparent scarceness in some rural areas also complicates the situation for consumers.
Banking services are constantly increasing, however. Electronic transactions are on the rise and, for the time being, require people to have a bank account. Governments also wish to go ahead with, and have already gone ahead with, direct deposit of government benefits. This obviously requires consumers to have an account so that they can take advantage of this service.
Furthermore, low-income consumers without bank service have to pay a high price to cash their cheques in cheque-cashing facilities or at the local corner store. For instance, a welfare recipient pays $14.50 to cash a $500 cheque at Insta-Cheque.
Financial institutions can change some of their practices, and we have been discussing such changes with them for the past few years. Progress is sometimes slow, however.
We feel that access problems will not be settled until the requirements of bank identification and the practice of holding back funds are regulated and an obligation to serve the whole population is established, as has been done in Europe and several U.S. states. We feel therefore that the government's proposals are headed in the right direction, but that they do not go far enough.
Another factor limiting access to services is bank charges. Many Canadians find them too high. An investigation we conducted last spring for our quarterly magazine, Consommation, showed that a fairly ordinary service package cost between $10 and $22 a month, depending on the institution and the type of account chosen. This investigation also showed that the institutions' rate schedules are extremely complicated, and that there are even people working for financial institutions who make mistakes explaining their charges to us.
The government therefore has all our support when it comes to simplifying these rate schedules. So that they can go shopping, consumers need to have access to clear and simple information, without having to decipher a dozen notes at the bottom of the page.
It may also be asked to what extent these charges are really reasonable. What the financial institutions tell us is that about 40 per cent of their customers do not pay any bank charges, but these are mainly customers with high incomes who can generally maintain a balance of at least $1,000 in their bank accounts. So, most of the people who pay bank charges are people with lower or low incomes.
Questions concerning transparency may also be asked about the profits financial institutions make on the charges. More information should be given about the profits made by financial institutions on the charges debited from consumers' accounts.
Finally, consumers are concerned with the issue of protection of personal information, as I mentioned earlier. The banks' competitors are also worried about the use banks may make of the information they have.
The Minister of Industry and the Minister of Justice have already announced that Canada will introduce parent legislation to ensure protection of personal information in the private sector. This law will be under federal jurisdiction.
The protection of personal information in the banking sector must be broached in relation to this context. It will not be enough to reinforce the very inadequate measures already found in the Bank Act. Generally applicable legislation must be adopted as soon as possible.
Experience shows that moral commitments and codes of conduct are not sufficient for governing the behaviour of financial institutions. Self-regulation actually only works in some cases.
In banking, self-regulation is not producing much in the way of results right now. Adherence in principle by the banks to the OECD guidelines took years to materialize. The latest edition of the model code adopted by the Canadian Bankers Association still does not cover everything.
We also regularly find that the banks do not comply with the codes they subscribe to, such as the Canadian Code of practice for consumer debit card services, and that their personnel are poorly acquainted with the rules laid down in these instruments.
Actually concerning the Code of practice for consumer debit cards, a complaint was received recently from a consumer whose debit card was stolen. The person had not divulged his PIN, nor had he written it on his card or a nearby document. It was someone who managed to determine his PIN during a sales transaction who stole the card. Two hundred dollars was withdrawn from his account.
To settle the problem, the Code of practice was invoked. It specifically provides that, in such cases, it is the bank and not the consumer that assumes responsibility for the loss. An official letter from the bank in question was received, saying: "Listen, it is the service agreement that is applicable. The consumer is responsible until he calls us to tell us his card has been stolen."
We have a copy of those documents. This is a very concrete illustration that codes of conduct are not enough and this code has been in effect for a few years, after all.
Another drawback with codes of conduct is that they do not bind third parties. Only legislation has universal application. The law is also an appropriate tool for governing basic rights, in our opinion, like the right to protection of privacy and personal information.
Numerous other important issues are dealt with in the government's proposals. For example, suggestions which do not seem desirable to us are made for amending the deposit insurance system, and the development of mechanisms for handling bank complaints, which in our opinion remain inadequate.
There are other issues which have been referred to advisory committees for study, such as development of payment systems. This issue involves many aspects, such as the development of electronic transfer systems, which are gradually replacing cheques, but which are not subject for the time being to any particular regulation.
In short, we are just in the early stages of our thinking about the future of banking services.
In this context, Parliament has a major role to play. It is twofold, in our opinion: Parliament must listen and must act.
First of all, we hope that your committee will continue its work in this area and that you will give Canadians another opportunity in the coming months to express their opinions about the shape things are taking.
Furthermore, we feel that Parliament should provide legislation. Laws of course do not settle everything. Codes of conduct can sometimes play a complementary role. The technological choices made will also be of great importance and major efforts should be made by the industry, notably, to train its employees better and do a better job of informing consumers. In our opinion, it is Parliament that should set the tone.
The government has indicated that the Task Force on the Future of the Financial Services Sector should propose some amendments to be put in place by 2002 at the latest. We believe, however, that five years is too long to wait to determine the directions the banking industry should take with regard to regulation of access to banking services, electronic transfers of money and protection of personal information. Neither the industry nor consumers stand to benefit from a continuation of the present situation, in which uncertainty undermines confidence and the quality of banking services.
We are in effect asking the government to demonstrate leadership with respect to the questions we have raised. We hope that your work will encourage it to act so as to ensure adequate protection of consumers' rights.
Obviously, we would be happy to answer your questions.
[English]
Ms Lynne Toupin, Executive Director, National Anti-Poverty Organization: I am here today to speak primarily to the issue of access to basic financial services on behalf of the National Anti-Poverty Organization.
We are a national, non-partisan, non-profit organization whose aim is to alleviate, if not eliminate, poverty in Canada. We have been in existence for 25 years. Our 22 board members, who come from all regions of the country, know firsthand the issues and the impacts of living in poverty, because in order to be board members they must currently be living below the poverty line or have lived in poverty in the past.
In addition to getting direct input from them on issues that are directly affecting their lives, we are also in regular contact with over 700 grassroots organizations who have a direct interest in poverty alleviation.
One of our key functions is to advocate the concerns, values and wishes of low-income Canadians so that they are reflected in public policy. It is this function that brings me before you today.
Having access to basic financial services has gained prominence as an issue for low-income Canadians in recent years. The nature of the problem has been clearly identified in both ACEF studies.
In this day and age access to basic, affordable banking services is not a frill; it is a necessity. While most of us have a range of options when it comes to cashing a cheque, too many Canadians have only one option available to them: The cheque-cashing outlets that gouge poor people with excessively high fees. To us this is an unacceptable option, especially in light of the fact that low-income Canadians need every penny of their meagre cheques to pay for the basics of shelter, food and clothing.
Those of us who have bank accounts, credit cards and access to banking machines never have to stop and think about what it would be like not to have ready access to cash. It is generally not a significant barrier for most of the population. For poor people, it can be an insurmountable problem.
For example, when we organize any committee meetings, it is imperative that we send cash advances and that we have cash on hand to pay for participants' out-of-pocket expenses up front. Poor people have neither the flexibility in their personal budgets to pay up-front costs nor, in some cases, access to automatic banking machines if we give them cheques on site as opposed to cash. If we were not able to provide this money up front, many of our members would simply be unable to attend our meetings or to represent our organization at other functions.
Thanks to the initiative undertaken by the Task Force on the Churches and Corporate Responsibility, NAPO was able to work collaboratively with other organizations which understand the problems that many-low income Canadians face when they want to cash a cheque or open an account.
We have been participating in this initiative for over two years now, and there have been meetings and correspondence to attempt to rectify the problems of access with the banks, but I must admit that we have achieved little real progress in terms of bank policy changes that would eliminate the barriers to access that have been identified.
While we are pleased that the issues of the availability of basic financial services and the cost of basic financial services are now being raised here, we have serious concerns that the federal government may be leaning towards voluntary compliance as opposed to introducing the necessary legislation to correct the problems of cheque cashing, opening accounts, and shortening the delays on the availability of account funds. It would seem to us that the federal government would be neither overstepping its limits nor imposing undue hardship on the banks if it were to introduce legislation to rectify the existing problems of access. It is for this reason that NAPO would like to go on record as fully endorsing the declaration of principles regarding access to banking services that was prepared by l'ACEF-Centre. I have a copy here, if you do not have one.
We would like to see the three final recommendations enacted in legislation: that financial institution legislation be modified to create an obligation to open any account to any person making a legitimate request; that financial institution legislation be modified to create an obligation to cash, without charge, with or without an account, any cheque issued by government or municipal bodies situated in Canada; and that financial institution legislation be modified so as to make funds deposited by cheques issued by a government, a public body or a municipality in Canada available immediately and to shorten the delays for the availability of funds in other cases.
We do not believe that time, or further protracted discussions with the banks, will effectively resolve this ongoing problem of access for poor people. In fact, as more and more people are falling below the poverty line and banks continue to pursue the profit motive without regard to the questions of access, we have reason to believe that the number of people without accounts and having to resort to paying exorbitant cheque-cashing fees is in fact likely to increase significantly.
There would be no cost to the federal government to enact legislation of this kind and we believe that the cost to the banks would be minimal, especially when put in the context of their current profit levels.
If legislation proves to be impossible at this time, at the very least the federal government must attempt to put in place necessary mechanisms that would continue to put pressure on the banks to deal effectively with the problems of access. Our fear is that while the banks are currently putting time and energy on these issues, this may not be the case once these hearings are over, especially if there is no legislation to compel them to act.
I have two final points. First, we would like to make the committee aware of the growing incidence of discrimination based on lack of income or source of income that is being reported by low-income people who have attempted to cash cheques or open accounts at recognized banking institutions. We have received reports of people being treated contemptuously and being humiliated in front of other clients. In certain cases, there seem to be unwritten policies of refusing to serve persons with welfare cheques or unemployment cheques. We have examples that we can cite, if you wish. I have two specific examples that I could read later, if you are interested in this matter.
The problem of discrimination against persons based on lack of income or source of income cannot be separated from the issue of access to banking services. While you cannot legislate against discrimination per se in the context of making changes to legislation, we believe that legislation in the aforementioned areas would in fact help to alleviate this growing problem that we have commonly come to call "poor bashing."
Second, if you choose not to recommend legislation and go with voluntary compliance, please be aware that a lack of financial resources will be an effective barrier to the continued participation of our organization in the attempt to resolve this problem with the banks. With continued federal government cutbacks to core funding, it is virtually impossible for us to attend meetings on this important issue. Yet, we feel that it is essential that the voice of the poor be heard on any further discussions relating to both costs and access to basic banking services.
The Chairman: On behalf of the committee, I wish to thank all of you for your presentations taken together as a set. They are very comprehensive.
Ms Toupin, you referred to a set of principles from ACEF-Centre which I have not seen. If we have one copy, we can then distribute it to the committee.
Ms Rozon, I had not read any of your documentation. This is as good and comprehensive a piece of analysis as I have seen in a long time. I wish to compliment you and your staff on the quality of the documentation that is contained both in your magazine, which has been circulated, and in your two documents.
With respect to the cheque identification problem, a couple of you mentioned that there have been ongoing discussions with financial institutions concerning how to deal with that. How are those discussions going? Are you making any progress?
My second question is that the federal government and certain provincial governments have requirements that a cheque cannot be cashed unless an individual has certain pieces of identification. How much of the cheque identification problem is caused by government as opposed to the financial institutions themselves?
Mr. Sidney Ribaux, Project Coordinator, Association coopérative d'économie familiale: You are right. There are different guarantees from governments when banks cash cheques issued by the federal government. If they follow the procedure of asking for two pieces of identification, the banks are guaranteed that if for some reason the cheque ends up being fraudulent, they will be reimbursed.
Senator Meighen: How do they know they have asked for two pieces of identification?
Mr. Ribaux: There is a procedure. They have to write it down.
The Chairman: Only certain pieces of identification are allowed; is that right? My memory tells me that it is not only two pieces of identification; it is two pieces from a list of three or four potential pieces.
Mr. Ribaux: Exactly. In the case of the federal government, it is two pieces of identification, which most people possess. For example, if you had a health card and a social insurance card, that would be sufficient.
The Chairman: Some provinces will not allow you to use a health card for identification; is that correct?
Mr. Ribaux: Legislation in Quebec and Ontario prohibits companies from requiring a client to ask for a health card. The legislation does not make it illegal for a client to offer it. We have always said that we need a list of acceptable ID, and the bank simply says "Present two pieces of ID from this list."
We are asking for two pieces if ID that everyone has, which are a medicare SIN card and a birth certificate, cards which are accepted under the federal rule and which are also accepted by various financial institutions, including the Caisse Populaire Desjardins in Quebec.
The Chairman: The answer to my question essentially is that governments have to clean up their acts on this issue, not merely financial institutions.
Mr. Ribaux: The answer to the question is that right now banks and Caisses Populaires are meeting what we are asking for in certain cases.
The Chairman: But it is not uniform.
Mr. Ribaux: It is not uniform, no. In certain cases, the government needs to clarify. It is obviously not clear to the banks whether the client can show his health card, but that does not seem to be a problem in other cases. Even in Toronto and the rest of Ontario, certain banks do accept the health card.
The Chairman: The task force touched upon the issue of branches closing in low income neighbourhoods. As you may be aware, in the United States there is a law called the CRA, which requires that you must get clearance from the regulator before you can close a branch. That law has been used to pressure financial institutions in the United States not to, effectively or collectively, abandon a neighbourhood. That direction has been resisted in Canada, largely because it does not seem to work very well in the United States and it is excessively regulatory.
First, have you had any comments on the U.S. procedure? Second, in discussion with financial institutions, have you thought of any other ideas about how to pressure all branches so that a neighbourhood does not get denuded of financial institutions?
Rev. Dalton Jantzi, Ordained Minister, Mennonite Church of Eastern Canada, Task Force on the Churches and Corporate Responsibility: The neighbourhoods that I am familiar with have felt powerless to effect any kind of pressure whatsoever in having financial institutions recognize why they should remain in the communities. It is almost a given at this point. Maybe there is a sense of apathy that flows that says that we cannot do anything about that.
The Chairman: It is giving up in a sense, is it?
Mr. Jantzi: Yes, unfortunately.
To pick up on your comment about the U.S., the issue for some of the U.S. banks is that, in order to get reaccreditation or continued accreditation, there is a requirement that 3 per cent of their profit go back into the local community in development. That is getting a lot of attention in our communities, and they would certainly wish very much for this group and the policy makers to look at that seriously.
Ms Toupin: It is also my understanding that Democracy Watch is working on this issue on a more specific basis. From the briefs that they have presented, I know that they have made some comments about it . We will be following their work and probably working more closely with them on that particular issue.
Mr. Jantzi is quite right. It is difficult to mobilize low-income communities to make that kind of response when banks are closing. It is significantly more difficult these days to organize low-income people, period.
The Chairman: Because I know you have been in this field a long time, do you mean by "these days" that it is more difficult now than it was 10 years ago?
Ms Toupin: Yes, because we are finding that more and more people must meet their basic needs. They are struggling on a daily basis to do that. To engage them in any kind of community action is increasingly difficult as opposed to five years ago.
Senator Meighen: I agree with the chairman that congratulations are due to all of you on the clarity of your presentations. I am sorry that I did not receive them earlier so that I could have read them thoroughly.
I do not instinctively favour legislation as a means of solving problems. I am sure you have heard that before. I am sure you will shake your head -- and, quite understandably; if I were in your shoes I would, too. However, I wish to pursue a line that the chairman started off with, because the solution to the problem lies in making the government and the financial institutions more sensitive to the problem. I know you have tried. You said you tried.
You sounded as if you were about ready to throw in the towel for a bunch of reasons, including that you did not feel that they had moved significantly. Can you help me with the nature of the objections you ran into? That is what I want to know; what did they say? Did they say it would cost us too much? Did they say, "We do not have the resources for that," or "That will not solve the problem?" What did they say?
Mr. Ribaux: We have been doing this for four years, trying to talk to the banks and the governments -- provincial and federal -- to try to find solutions to these problems. We have had various arguments from the financial institutions. One of them was that there was a high risk of fraud with this clientele. We did a study to demonstrate that there was no fraud with this clientele.
At one point they told us that there were certain pieces of ID that they could not take. So we went out and proved to them that they were permitted to take this identification. It has involved various things.
It is difficult for financial institutions to all move as one block. There are various financial institutions and banks, and not all of them want to move at the same speed.
Senator Meighen: Without naming names -- that is, unless you insist on so doing -- have you noticed any variance in the degree of movement as between credit unions, Caisses populaires, trust companies and banks? In the other context of small loans to individuals and small businesses, the Caisses populaires and the credit unions seem to be starting to fill a vacuum that the banks have left there. Maybe they are more attuned to what you are suggesting than the larger financial institutions such as banks.
Mr. Davis: It would be difficult to identify leadership in this area because the banks themselves would resist being seen as a leader. This is business that they would define as losing money. No bank wants to be in a leadership position in servicing low-income people. If you get a reputation for leadership, that is the last thing you want.
I can identify individual banks and individual bankers who have been most cooperative and have given enormous amounts of energy to this, but when it comes to actually getting things implemented across the board, they want very much that everyone move together. They have this enormous task of negotiating betwixt them what they will all accept and what they can all implement, because they are massive organizations. To get a set of practices that can be implemented universally throughout the banks is extremely difficult. It breaks down all the time, and they admit to this.
Looking for leadership, I do not think you will find it. That is why we say that leadership must be found outside the system.
Senator Meighen: You are probably right, because the facts speak for themselves. But I am astonished at that, in that any institution in this day and age, to a greater or lesser extent, seeks goodwill in the community. There are those who might suggest that the banks need it more than some others. I am not seeking to stigmatize them in any way, but I would have thought that low-income people's financial needs are not as complicated as IBM's financial needs. Accordingly, the amount of physical facilities needed are minimal. They could provide the services out of a travelling van. They could provide the services through semi-retired bankers. They could do a number of things, to which I have not given a great deal of thought, to reduce costs so that they would not lose as much money as they tell you it would cost. Why would Bank "X" not want to be seen as a leader for low-income people and seniors? In many cases, of course, seniors are also low-income people, but they also have the difficulty, as they get older, of fear and trepidation of electronic systems and confusion over techniques to which they are not accustomed. I would have thought that that would have been a sell that would not be impossible.
Mr. Davis: We have dealt with that somewhere. I was trying to find where we tried to address that in our brief. Low-income people tend not to leave money in their account. They tend not to adapt as quickly to automated banking. They may take longer to fill out forms and place greater demands on tellers. They are not comfortable with some of the things that many of us take for granted. Those are the reasons that the banks are not finding that to be profitable business.
It is quite true that it is with big companies like IBM or other major corporations that the banks can have their major losses, and where major problems come up in terms of where they really lose money. But it is also on those big accounts that they make their money.
Senator Meighen: I would have thought there were ways to cut costs in providing relatively uncomplicated services.
Mr. Ribaux: We looked at the problem of access to banking services on a pan-Canadian scale. We went to Vancouver, Toronto and Halifax. We found that there had been individual banking outlets that had initiated various projects to try to make services more accessible. Inevitably, one bank takes the initiative in one very particular community and ends up having all the clientele, which, as the task force was pointing out, have specific needs, one of them being, for example, that they all receive their cheque on the same day. Therefore, they all go to the bank on the same day. This creates a problem for the manager of the bank, other clients, et cetera, which is understandable, but which would not be a problem if these people had the option of opening a bank account in any of the other branches in that neighbourhood.
We can look at individual cases over the past 10 or 15 years where individual banks have done this. Inevitably, after a few years they say, "No more. Every month I have 500 people at my door and the bank next door has no one at its door."
Various groups have proposed various solutions over the past 10 or 15 years. In every case, we have come back to this same problem. That is why we are saying that we need legislation which would make opening a bank account a basic right; that would solve this problem. In that case, someone could open his or her account in whatever branch they chose.
Mr. Davis: You will notice that we try to deal with this issue in paragraph 12 of our presentation.
[Translation]
Senator Meighen: One last question, if you will, for the people from Quebec.
Now that I am a resident of Ontario, I am less familiar with the situation in Quebec, but if my memory serves me well, legislation respecting consumer protection is more developed in Quebec than elsewhere in the country.
Mr. Eric Fraser, head of the consumer assistance department, Association coopérative d'économie familiale: Yes.
Senator Meighen: Does that also apply to the area we are looking at today? Are there any lessons to be drawn from the Quebec experience for the rest of the country?
Mr. Fraser: I think actually that there may be something to be learned from Quebec about the problem of access.
The Consumer Protection Act prohibits cheque-cashing facilities from charging for cashing government cheques. Low-income persons who receive government cheques do not come to rely constantly on cheque-cashing facilities, and have to do what is necessary to open an account.
Combined with that is the phenomenon of the Mouvement Desjardins in Quebec, which is very well established throughout the province -- even in low-income neighbourhoods--and which has much more flexible criteria for opening an account than the banks do.
Senator Meighen: More flexible, you say?
Mr. Fraser: Yes, more flexible. It is easier to open an account in a Caisse populaire Desjardins than in a bank, usually.
So, the combination of these two factors would suggest that the problem of access is not so great in Quebec.
Senator Meighen: Thank you.
[English]
Senator Kenny: This is a very useful panel. Are we covering expenses for these folks here?
The Chairman: We always do.
Senator Kenny: I was just making sure.
Like Senator Meighen, I am not sure that the issues you have raised, although they are all very interesting issues and all ones on which this committee should be spending a lot of time, are all amenable to legislation.
Having said that, this committee has the capacity to revisit issues fairly frequently. We do not have to wait for five or ten years to talk to you folks. You have raised enough issues today for us to have a study on this by itself. One of the fun things about being in the Senate is that if you are having problems getting the banks' attention, and if you think that having these meetings gets the banks' attention, you can have more of these meetings. That is part of our function and that is one of the reasons we are here.
I just flag that as a tool you should put in your kit to think about.
I would like to go back to some of questions that arose as a result of your comments.
Mr. Davis, how are the ombudsmen working? All the big folks have them. There is one for each of the banks. Perhaps you could lead off on that and anyone else could comment after. Is that a PR gesture or do ombudsmen perform a real service for the folks you are talking about?
Mr. Davis: I am not sure that I am in a position to tell you how the ombudsmen are working. This is a very recent addition to the bank structure. In the experience that we went through, we started with the public affairs officer of a major bank. It was a pretty long and tedious process. We ultimately resolved one particular case in one particular branch, and that took some doing in terms of principle, when we set about to discover, in one bank in the country, how the complaint mechanism was functioning.
We went in and visited branches to see if the pamphlet that was described was visible. In some places it was; in some places you could not find it. In other places, when asked, the person behind the counter said, "Oh, I remember; we have something like that." It is a very mixed operation, and that is going back before the advent of the ombudsman.
One of the things that make an ombudsman effective is independence. If this committee will be sitting regularly and will be available, maybe the ombudsmen should report to you. Anyone appointed by the bank certainly could be helpful, but our objective is to push for an ombudsman that is independent of the banking system.
The Chairman: Your idea of having the ombudsman appear before us, once he has a few months of experience under his belt, is one that we will seize on. That is a very interesting idea.
Senator Kenny: That is not what he said. He said "all of the banks' ombudsmen", if I heard him correctly.
The Chairman: But there is one for the industry.
Senator Kenny: I know that, but there is also ones for the other banks. I have talked to a bank ombudsman who says that he is independent, that he resolves 80 per cent of his cases within five days and that he gets an answer back pretty promptly. Now, it is a new institution.
Let the record show that some of the panelists are smiling and some are not. However, that is the story they are giving us.
Are those of you who have had to deal with ombudsmen getting results in four or five days and are you finding that 80 per cent of the cases are resolved? I am not talking about bank clerks. I am talking about the people who have the title "ombudsman."
Mr. Davis: When you say the person is independent, who is paying the person's salary?
Senator Kenny: I understand that and I follow that, but the point is that, if the person gets results for you and solves your problem, you do not much care if the problem is solved in four days.
In other words, if the bank is working right, dealing with customers fairly, resolving customers' problems as they would for someone with a whole lot of money, then you would say, hey, that works.
Mr. Davis: But the churches cannot give you an answer because we have not tested that with current ombudsmen. Others may have.
Mr. St-Amant: We did try. In the past couple of years we have made two studies, one regarding complaint mechanisms as they now exist and one regarding ombudsmen schemes elsewhere. We will be happy to come back and discuss these with you in detail if you so wish.
Rapidly, we are becoming dissatisfied with the way the Canadian banking ombudsmen have been set up. They are not independent, whereas the British schemes are far more independent in the way they are structured. Our ombudsmen do not seem to have much bite; but we have not had much experience in the last few months on how they will work out. My colleague Mr. Fraser has been trying to deal with a few ombudsmen. Frankly, his experiences have not been very convincing.
Mr. Fraser: I have been dealing with the banking ombudsmen over the last three weeks on three cases involving two financial institutions. On the oldest cases, I am still waiting for the written answer from the ombudsman.
One particular case regarded seizure of a non-seizable disability pension. This was a very important problem for the consumer because he was very ill and needed all of his money basically to live and to buy his medication.
It took about two weeks to solve the problem, which meant putting some pressure on the branches; on a particular division of the bank, mostly the credit card division; and on the ombudsman. I am still waiting for his letter to have a clear answer. I had to speak with his secretary.
I am wondering myself if the small-consumer ratio, with problems of $50 or $200 or $500, will be taken seriously.
In dealing with the other institution, it took about two weeks to have a response, not from the ombudsman but from a division of the vice-presidency of the institution. They said they would not follow the Canadian code of practice regarding debit cards. That is the extent of our experience right now with ombudsmen.
Senator Kenny: That is the question I was asking. Hopefully, we will see you folks again. If you can collect any information on how ombudsmen actually function, I would appreciate it. I am not convinced an appointed, outside ombudsman will necessarily get you any faster action than a guy who is inside. Whatever information you can collect would be interesting and useful.
Mr. St-Amant: We also found that most bank employees are not aware of the policies and procedures inside their own institutions, so they cannot even inform consumers as to their recourses.
Senator Kenny: Mr. Davis, you mentioned earlier that banks play it safe with depositors' money. You do not think that is a bad idea, do you?
Mr. Davis: No, I am a depositor myself. I am rather pleased with that.
Senator Kenny: Identification is a big item, which no one has discussed thus far. No one has talked about a universal identification card. Is anybody here in favour of that proposal?
Mr. St-Amant: I participated two weeks ago in the International Conference of Privacy Commissioners, which was held in Ottawa. Questions relating to identification were at the forefront of the discussions. These are very tough issues to solve. I do not think anybody right now has found "the" solution for a way to identify people that is both efficient and respectful of policy protection principles, which are fairly basic.
I am far from certain that having one so-called universal card would be of any help. First, when you talk with the people who work with the homeless, for example, you learn that many of them have lost their wallets or, for whatever reason, do not have a card. All cards, without any exception, are susceptible to fraud or counterfeiting.
I do not wish our society to evolve to the point where everyone who goes into a bank must put his fingerprint on a cheque. That is happening already in some branches in the United States. There is an evolution. There is a tendency by the banks to say we must identify, over-identify and identify again. I am far from sure that there is any rational basis for all of those policies. There is a need for identification up to a point, but we must define that point.
Senator Perrault: A very interesting experiment is taking place in our community out in the West coast. With the support of the provincial government, effort is being made to establish a low-income user's bank to correct many of the problems that you have identified. Obviously, you know Jim Green of the Downtown East Side Residents Association.
Mr. Fraser: Yes.
Senator Perrault: I have a lot of respect for him. I am not of his political party, but he has done some good work in downtown Vancouver. No one has made reference to this experiment, this concept of establishing a "people's bank" to service the needs of the low-income groups. Does that have potential? Are you studying the issue? Have there been any meetings with Mr. Green and his associates to find out if this is an option?
Mr. Jantzi: I would respond by saying that it has potential to further stigmatize a group who already feel at the bottom end of society.
Senator Perrault: So you do not agree with the idea?
Mr. Jantzi: Not particularly, but some versions of it might work.
Mr. Fraser: We do not necessarily disagree with the idea, but we think it may be a good idea in the downtown, east end of Vancouver, since there is a socio-demographic particularity to that area of Canada which does not necessarily exist anywhere else. There is a very big concentration of poverty there.
Senator Perrault: It is a unique situation of poverty, you suggest?
Mr. Fraser: In the access file on which I have been working, it is a unique situation due to the poverty being concentrated in roughly the same area. So maybe that kind of institution is a good idea in those areas, but if you go to Montreal, the poverty is just about everywhere in the city.
Senator Perrault: It is endemic?
Mr. Fraser: It is endemic in some areas where it did not exist five years ago, and I do not think it would work. It costs a lot for the government of British Columbia.
Senator Perrault: It will cost a lot. That is why it is important to get your views.
Mr. Fraser: We also believe that financial institutions have the obligation to service those people.
Senator Perrault: I agree with you on that point. You would rather move in the direction of providing an adequate ombudsman service and of ensuring that each one is treated as well as the next.
Mr. Ribaux: That is an interesting project.
Senator Perrault: It sure is.
Mr. Ribaux: In that neighbourhood, there are five or six banks. Chinatown has developed enormously over the past few years and is, literally, two or three streets over, just a five-minute walk. All the banks have moved over two or three streets to Chinatown and now refuse to service the people who are left behind. That is why there is a problem.
The question is, does the government, whether provincial or federal, want to invest money in creating financial institutions in this type of situation, or should it be the banks that are already there with the infrastructure in place?
Mr. Jantzi: If you are suggesting, senator, that the banks should be challenged to do innovative kinds of responses to particular communities with particular needs, then I would be in favour of that.
Senator Perrault: That is the nature of my query.
Mr. Jantzi: However, to create a separate bank for those people --
Senator Perrault: You think these people would be labelled as pariahs in society; that is your concern?
Mr. Jantzi: Yes.
Ms Toupin: I want to make it clear, because you have a whole team of very good people in one particular community, in Montreal, and we have some work going on in Vancouver. However, it would be misleading to leave people with the idea today that there are a number of low-income consumers associations across Canada that are actually dealing with this problem; it is not the case.
What you are seeing in Vancouver and in Toronto, with Jane Finch and with the people here, is about it. I would not want to mislead anyone into thinking that we have the capacity to gather information on a national basis and that this is an issue for consumers groups, because it is not. For the regular kinds of consumers groups, with these exceptions, it is not the case. I want to make that clear, because it could prove to be problematic.
Senator Perrault: I am pleased that you make that point.
Senator Kenny: Can you tell us about your experience in terms of the education that you generally receive from the big five or with any banking-related groups in respect of educating low-income consumers? How effective are they at telling people how to use their services, how to work their way through the process?
Mr. Jantzi: At individual, local, branch levels there is an attempt at more sensitivity, particularly around the automation issue. Some of the other things that are referred to in the task force document are upcoming training events and workshops, which the banks and community groups can attend together. The jury is still out on that. We see it, though, as a door that swings both ways.
Senator Kenny: It is not just PR; you say it is working?
Mr. Jantzi: I am saying the jury is still out, and that it is reassuring to know that we can come back to this table.
Senator Kenny: When you come back, you will tell us more about it.
Ms Toupin: Conversely, it is more important for the low-income constituency to be able to educate front-line workers in the banks around the issues relating to poverty. I know that, as an organization, we are interested in pursuing that. If you could give support to that idea in an active way, that would be useful as well.
Senator Kenny: I assume education is always a two-way street.
Mr. Fraser: I agree with Ms Toupin. There is the problem of identification and policies; however, there is also the problem of attitudes towards poverty. When we speak about education, it is not the low-income people who have to be educated on those issues, but the people working in the banks.
Senator Kenny: That is not unique to banks, though.
Ms Toupin: No. To be fair, the CIBC has addressed this issue in giving us some funding assistance in preparing a series of modules. We would like to see that expanded with the other banks.
Mr. St-Amant: I would add also that, for the time being, banks are mostly communicating with people through paper, yet we know that a huge proportion of Canadians are functionally illiterate.
In a study we made last spring on banking fees and charges, we also found that their leaflets are impossible to understand; even the people in the headquarters of the banks could not tell us what a particular account would cost.
Mr. Jantzi: I sounded pessimistic in response to your comment; let me rephrase that.
I am optimistic about the work we are initiating locally and are together on as players and partners. I think some good learning is coming out of that, where the door swings both ways. My optimism, though, is clouded by the question of who, or what, outside of legislation, can assure us that this kind of learning is universally applicable? Who shares the conviction and the commitment of some key players, of some key banks we are presently working with, to do it locally? Who shares that commitment and conviction to take it across the country?
Senator Kenny: Without getting into a debate about legislation, there are real problems in relation to enforcement. There are real problems in relation to making it work. No one here has ruled it out; however, it is just that you should know that some of us have a degree of scepticism about how effective it is.
Can you tell us about the cheque-clearing system? Are improvements in the cheque-clearing system going to assist in the problem you were describing, where folks cannot get their cheques cashed in a hurry? Do you see that as being a technical problem that will be resolved when the clearing system speeds up?
Mr. St-Amant: I think there are two different issues there. We do have a fairly efficient clearing system in Canada. Obviously, it could always be improved and the task force on the payment system will probably have to look into that, among other topics.
What we do see, however, is that banks and other institutions do take lots of time to allow money to become available -- much longer than the period of clearing. The delays are sometimes absolutely impossible to understand. We have seen banks saying to consumers who want to cash a cheque, "We are going to freeze your funds for 30 days." This is not a clearing problem; this is a bank problem. There is no logical reason for that.
Senator Kenny: What do they say? What is the rationale?
Mr. St-Amant: There is no rationale most of the time. This is the policy.
Senator Kenny: "We take your money for 30 days and we can use it."
Mr. St-Amant: Exactly. If you are talking to a bank teller, the person probably does not know better and the person tells you, "Our policy is this. Period." Obviously, that is not acceptable. That situation leads us to think that perhaps Canada will have to follow the example of the United States and go towards legislation that sets the maximum time frame for funds to be available.
Senator Kenny: How can someone simply cash a cheque, if he does not have an account with a bank, and not be charged an exorbitant rate for it? Money Mart will take you in, although you do not have an account with them, but they charge a terrible rate for it.
How can you expect a bank, if you do not have an account with them, just to let you wander in and expect them to absorb the cost of processing a cheque? That would be the first part of my question.
The second part of my question is, why should a customer not call in and report a debit card when it is stolen? Is that not a reasonable action? When it is stolen, should it not be reported back to the bank? Perhaps I did not understand how the evidence was coming.
Those are the two questions that were left outstanding in my mind, because those are proposals that I had difficulty with. I have no difficulty with the proposal that a financial institution should open a bank account. I think that is a pretty legitimate request if you have some money, and they should be required to do it. I am comfortable with that.
I am also comfortable with saying that government cheques or public-body cheques should be done right away. I am not quite as certain about saying that the legislation should be modified to create an obligation to cash a cheque without charge or, without an account, cash any cheque issued by a government or municipal body. You know, these folks have to stay in business, too. However, I do not think they should hold up the money. I do not think they should make you wait 30 days if it is a Government of Canada cheque. However, if you do not have an account with them, should they do it for free?
Mr. St-Amant: Actually, that is the undertaking they took with the Government of Canada as far as federal items are concerned. Rule G-8 adopted by the Canadian Payments Association is straightforward. If people can present one or two pieces of identification, depending on the requirement, the banks have to cash the cheque.
Senator Kenny: Is that fair?
Mr. St-Amant: The banks seemed to agree that it was.
Senator Kenny: Do you?
Mr. St-Amant: Yes.
Mr. Fraser: The example about the debit card was that the Canadian code of practice for consumer debit cards stipulates that a consumer should not be responsible for his losses if he has not contributed to the fraudulent use of his card. Not to be held responsible, he must advise the financial institution in a reasonable time, and he must collaborate in the inquiry related to the stolen card.
In the case we submitted to you, the consumer advised the financial institution 45 minutes after it was stolen; we think that is a reasonable amount of time. She also collaborated with the police inquiry. They found who stole the card and who used it to take the money from the account. Still, the response we received from the bank was that they were not responsible because the agreement they signed with the consumer stipulates that they are not responsible until they have been advised of the robbery or the--
Senator Kenny: I thought you said they were advised.
Mr. Fraser: They were advised, but after the robber took the money from the account.
Senator Kenny: I thought you said they were advised within 45 minutes.
Mr. Ribaux: But the robbery took place before the 45 minutes.
The Chairman: On behalf of the committee, I thank all of you. I should point out that your appearance before the committee has been not only the longest but probably double the length of that of every other group of witnesses. Thank you very much for attending. We appreciate it.
I would now ask the representatives of the Retail Council of Canada to come forward.
Ms Brisebois, we have read your brief. As you can tell, we are running late. Given the fact that the payments association issues are, in a sense, off the table for purposes of the current changes to be made in March, since they will be dealt with by the CP task force, and given the fact that your brief focuses overwhelmingly on the payments association issues and then on a series of other specific issues, I would ask you to make your comments brief and not focus on the payments issues. You will have lots of time to come back to us when the task force reports and as the payments task force gets into its business. Please focus on the other issues that are covered in your brief.
Thank you very much for attending. For the record, please identify your colleagues that are with you for the purposes of Hansard reporters.
Ms Diane Brisebois, President and CEO, Retail Council of Canada: My colleagues are Mr. Ray Bird, the vice-president, credit, for Sears and chairman of the Retail Council's Banking Committee, and Mr. Ken Morrison, president of Ken Morrison and Associates, our banking consultants.
There is an underlying problem with your suggestion simply because most of our concerns today are in respect of payments issues. In fact, we are asking the committee as well as the chair of the committee to consider the viability of the advisory committee's looking at payments and the fact that that committee will be asked to report only in 1998. Thus, several major issues regarding the Canadian Payments Association, the act, and the system itself will not be, we believe, addressed until probably the year 2000.
Our biggest concern, obviously, is that we have been told that most of the changes will be housekeeping changes.
The Chairman: Just so we are clear, the change is next March.
Ms Brisebois: That is correct. The other concern that the Retail Council has is the quality -- I should not say "quality" since we have been asked to sit on the advisory committee. We are concerned that we will be facing the same problems and issues we have faced in the past, which is many people bringing their own agendas or wanting to support the status quo versus, as we would say, thinking outside the box and looking at the system and how it is provided today and how it should be provided in the future.
The Chairman: My dilemma is that knowing the procedure the government has adopted, and having talked at some length to the people involved, it is very clear that, however difficult it is from your point of view, no significant change to the payment system will be made in the legislation between now and March 31. It will await the outcome of the CPA task force, and no amount of pressure will change that. That is the direction the government is adopting.
I know the makeup of the task force, and I know you are represented on the task force. At least that gives you the opportunity to have a direct input into what its ultimate report looks like.
Since you touched on two or three other issues in your report, I thought it would be more useful for us to focus on those now, simply because they are the ones that will be dealt with between now and March. I am not belittling the other issues that you touched on in your report; I am simply saying that from a practical standpoint they will not be changed until after the task force on the payment system reports.
Ms Brisebois: I am trying to recall the other two issues since most of our presentation was on the payments issue.
The Chairman: At the back of your report you had something on the cost of financial services, a bit on information privacy, and a piece on competitiveness or the lack thereof.
Mr. Ray Bird, Chairman, Banking Committee and Vice-President, Credit, Sears Canada Inc., Retail Council of Canada: Mr. Chairman, perhaps I can speak to that. What you are referring to when you talk about the cost of financial services is the area in which the banks have a tendency to introduce different payment systems, and over a period of time those systems are introduced at no cost to the consumer. Once the retailer has built the demand up to the point where it becomes of benefit to the financial institutions, the financial institutions impose tariffs, tariffs in most cases which, if you follow the process through, are actually what we might call money grabs. Particularly in a large retailer, we are passing those transactions to the bank at no cost, but the banks are reaching down to our point of sale or our cash terminals and tariffing those transactions.
The Chairman: Just for illustrative purposes, this could be a debit card transaction?
Mr. Bird: A debit card transaction or a credit card transaction and the new cash-less transactions that are coming in the future. The banks are reaching out of their realm and into the retailers' realm to control the customer at the point of sale and tariff that transaction, which we think is unfair both to the consumer and to the retailer. The banks should be only tariffing transactions when they reach into the bank's computer system, into the realm of the banking world.
The Chairman: Just to play that through, you are saying that they introduce new conveniences for free, get people "hooked" on them, and then at that point they introduce a fee, and in fact you end up paying part of that fee?
Mr. Bird: In most cases, the retailer ends up paying the fee, but we all know in the end result it is the consumer who pays the fee.
The Chairman: But direct payment of the fee --
Mr. Bird: Is paid by the retailer.
The Chairman: For example, with a debit card transaction, the holder of the debit card does not pay the fee; the retailer paying the sale for which the debit card was used pays the fees.
Mr. Bird: The holder of the card pays a fee to the bank on the back end. The retailer pays a fee for every transaction that goes through his point of sale terminals.
The Chairman: Is that different from a credit card? You pay a fee on a credit card, too, do you not?
Mr. Bird: It is not different, but why should banks be able to reach down into the relationship between a retailer and his consumer and tariff the transaction? Eventually, every transaction that takes place in the Canadian retail environment will be tariffed by the banks. We suggest to you that that is not where the banks should be getting their revenue. The banks should be getting their revenue from transactions that are taking place within their own infrastructure and their own four walls.
The Chairman: Explain something to me. A debit card transaction clearly impacts on the bank. The nature of a debit card transaction is that the transaction moves money out of the customer's account into your account.
Senator Kenny: It is painless.
The Chairman: In theory. My point is that that is surely reaching into the banks. Surely, banks are entitled to charge something for that.
Mr. Ken Morrison, Banking Consultant and President, Ken Morrison Consulting Inc., Retail Council of Canada: Mr. Chairman, the issue around costs is that when the financial institutions instituted debit cards as a new service, that required retailers to incur a number of additional costs. For instance, another telephone line into the store was required. The terminal that sits on the counter had to be rented.
The Chairman: That is if you wanted to take a debit card.
Mr. Morrison: That is right.
The Chairman: That decision was yours.
Mr. Morrison: That is quite true. The decision is up to the retailer. If you look down a row of retailers on a street, if one or two accept them, then the majority are almost forced to accept them in order to remain competitive for selling products to consumers in that particular area. One could say that it is not truly something that is up to a retailer to do. They are almost in a position of having to do it, once one or two retailers start to accept it.
The Chairman: I have grave difficulty with that argument, because that is precisely the argument that retailers have used against extended shopping hours originally into nights and then on Sundays. It was on the ground that if one or two people did it, then everyone had to do it and, therefore, the law ought to prevent one or two people from doing it. If someone wants to offer a new service, he is entitled to offer the new service. If people do not want to take it, they do not have to take it. If competitive pressure forces them to take it, then they take it.
Ms Brisebois: I should like to address this point, because you have asked us not to speak about the Canadian payments system. In fact, we are speaking about the payments system indirectly since debit is part of that system.
The point we are trying to make here, which is very much part of the position paper, is that we are not against the debit system or against electronic payments systems. However, we are quite concerned about the costs related to the provision of those services to retailers and consumers, specifically because consumers and retailers are not part of the process. They were not invited at the beginning to discuss the technology or the costs. That is the reason why, for many years, you could walk into small convenience stores and see two or three machines on the counter and not just one, while in many other countries that technology had already been integrated.
You should also be aware that the machines you see on retail counters are purchased or leased through financial institutions. Retailers cannot purchase or lease those machines through anyone else. The average cost is between $35 and $50 per month per machine.
Mr. Chairman, I would like to respond as well to what you just mentioned about store hours and two or three retailers. I think it would be naive for us to really believe that retailers have a choice. If you are a convenience store and you have a Wal-Mart and a Loblaw's across the street, I can assure you that you have little choice. However, it would be refreshing if those retailers who are delivering the debit payment service to the consumer could be involved in the discussions at the beginning.
Retailers certainly have not been reporting profits, and I think that is pretty clear. What they have been doing in the last 10 years, though, is looking at the supply-chain management, the way they deliver the product to the consumer. They have tried to take the cost out of the supply chain so that the product is competitively priced. That is simply what we are asking the financial institutions to do. We are saying there are cheaper and more cost-effective ways of delivering this service.
The last point I would make on the debit issue is that, if we are not involved in developing that system and if we do not have some say in how it is delivered to the consumer, then we can have a real problem. For example, if you are in a store two days before Christmas and you have your debit card and you want to pay for your merchandise and then that machine does not work, you will walk away convinced the retailer does not know how to use the technology or that he is having a problem in the store.
It is extremely difficult, because we are living in an electronic payments environment. If it is to be delivered at the retail level, then there must be some way to ensure that retailers as a group have some say in how the technology is developed and how costs can be taken out of the system so that no one suffers because of having to deliver the service.
Senator Kenny: Obviously, it is in the banks' interest to see that they resolve your Christmas rush problem, because if that debit system is not functioning right, then they are also not collecting the fat fees that you are complaining about. I have a feeling that that is simply a question of you folks having a chat and talking about your volumes at Christmastime. You are shaking your head, but I am telling you that the banks like to make money just as much as you folks do.
I have some concerns about debit cards that I do not really understand, and perhaps this committee can assist me with them. When debit cards were brought in, I thought they were a terrific idea, until I learned that there were charges at both ends. Both the user and the store are charged. I have no difficulty with the stores being charged, because I can see where tremendous savings will accrue to the stores. They do not have to have people counting cash or processing credit card slips. I can see where there are certainly potential economies for a merchant using a debit system over cash or other forms of payment.
However, I have never quite understood how the banks priced this thing. There is no question in my mind that a debit card is a terrific deal for the banks. My view at least to date has been that I have not understood why they have been dinging the consumer. I would be happy if you folks could expose for the benefit of the committee what you think the real cost on this exercise is to the banks. What are the capital costs to the banks of putting in this equipment compared with your capital costs? What are their operating costs compared with your operating costs? That would give me some insight into how debit cards function.
Mr. Bird: I heard you say, senator, that retailers save money because they do not have to count cash or process credit slips. The reality is that we are not sure in the debit card environment at this point whether our cash requirement will go down or up, simply because of the fact that we still have cash sales and we still have to count that cash. The reality is that the banks are now proposing, on a very limited scale, but it is growing on a daily basis, that consumers be afforded the opportunity when they do a debit card transaction to be able to receive a cash advance as part of that transaction.
I suggest to you that as part of that process they are in effect shifting the transactions that are taking place from their brick and mortar to our brick and mortar. In the end result, most retailers -- and I am particularly concerned about the smaller retailers who do not have significant cash flow -- will be required to carry more cash on their premises in order to take care of these cash advances.
Senator Kenny: The banks have put the case to me that the typical grocery store which once had five or six people who sat upstairs to count the tens and the twenties no longer have those people doing that. They have just two. That is because folks are using these debit cards and so there is a real saving to the merchant in that respect. Are you telling me that is not true?
Mr. Bird: I am telling you that that is not true in the department store environment. I am sure it is not true in the "mom and pop" store environment. I am telling you I am sure it is true in the case of telephone companies that do not have to count the cash through their pay phones. It is true in the case of grocery stores, because 99 per cent of their sales transactions are in cash. It is probably true in some transit systems that allow debit transactions, but that is only a small proportion of the transactions we are talking about.
Senator Kenny: So it is a mix. It depends on where you are.
Mr. Morrison: While there is some saving in some of those institutions, it is just outgoing. The costs of accepting the debit cards are also high. This is what we are saying with regard to the 1997 legislation. It requests of financial institutions that there be some degree of depth in the inquiry into the costs behind their service charges.
Senator Kenny: When do they get a payback? Can you help me out on that? When does a bank get a payback, if they put one of these things in?
Mr. Morrison: For financial institutions, a lot of their payback came when they installed automated banking machines. Exactly the same cards that were used in banking machines are used for Interac direct payment when customers use them in stores, so there is no additional cost at all for the card or for managing the card and the account. What the financial institutions are doing is saving more costs, because every time the card is used it is an electronic transaction through the account in the bank and is therefore of less cost to the bank.
Senator Kenny: It is much cheaper than a cheque.
Mr. Morrison: Correct. They are also passing on costs to the retailers, because the retailers are renting or leasing the communication line. The retailer is paying the bank a rental charge for the terminal that sits on the counter.
The Chairman: Are these services priced the same in Canada? I do not mean the amount, but is the pricing method the same in Canada as it is in the States? Does the retailer pay a fee?
Mr. Morrison: No. Canada has a rather unusual pricing system now. I will use Australia as a good comparison. In Australia, when a retailer accepts a debit card issued by the bank, the retailer is compensated by the bank for accepting that card. If there is a 15 cent charge, let us say, to the consumer at the bank end for that transaction, five cents of it would go to the bank and ten would go to the retailer.
Senator Meighen: Is that a legislated requirement?
Mr. Morrison: No.
Senator Meighen: Or is that something that competitive forces brought about?
Mr. Morrison: It was brought about by competitive forces. In Australia, as the system developed, there was the same type of argument that we have had in Canada. There is an equivalent of the Canadian Payments Association in Australia.
Senator Kenny: Why does the consumer not get the discount? The consumer is not writing the cheque and causing the costs. The consumer, by using the debit card, is really simplifying the task for you folks, because there is no credit risk involved for you. The consumer is also simplifying it for the bank.
Mr. Morrison: The costs are lower to the bank, clearly. We are suggesting they should be lower all around, to everyone involved.
Senator Kenny: But they are lower to you too.
Ms Brisebois: In Australia, the cost is lower as well to the consumer.
The Chairman: I realize these issues will be dealt with by the terms of reference to the Payments Task Force and I recognize this question cannot be dealt with between now and the revised act at the end of March, but as I listened to you and as I read your brief, part of your argument seems to be that one ought to legislate or regulate, however you want to put it, the kinds of fees that financial institutions can charge retailers. In other words, we ought to say, "Thou shalt not, in this case for this kind of transaction, allow the banks to charge the retailers a fee."
Mr. Morrison: No, we are not suggesting that there be any legislation to that effect at all. What we are suggesting specifically is that the proposed changes in the 1997 legislation do, in fact, deal with the cost-pricing issue of financial services to consumers.
The Chairman: What does that mean?
Mr. Morrison: Looking at the costs behind the pricing of these services to consumers, we are suggesting that that same approach be included in looking at the costs of financial services to businesses, including retailers.
Senator Kenny: Why does the market not solve this thing?
The Chairman: Of all the sectors of the Canadian economy that I would have expected not to come before us and say that we should look at the price-cost issue, it would have been the retail sector. What am I missing here?
Ms Brisebois: The CPA is a perfect example. We propose in our paper that it be more like the retail sector, where there is competition, and where all of the different stakeholders are at the table. That is the key. If you look at the board of Interac or at the board of the CPA, the analogy, unfortunately, that is used in the retail sector is that the prisoners are running the correctional facilities.
The Chairman: Around here they usually talk of inmates, and they are referring to a different kind of institution.
Ms Brisebois: I am sure they do. Regardless of the different expressions that are used, what we are saying, senator, is that we need more competition within that market, specifically within the Canadian payments environment. Obviously, we do not seem to be able to convince you, but we do not think that more regulation is necessarily the answer. We are saying the system should be opened up and there should be more competition.
The Chairman: On the issue of the CPA, I think this committee was the first one in Ottawa to start a debate by saying that the CPA needed to be opened up. We have been on record for a long time as saying that. Unfortunately, we cannot deal with that issue today, simply because of the legislative process the government has embarked on. The issue of opening up the CPA has been something that this committee has advocated for at least a decade.
All I am saying is that the government has embarked on a policy development process, which you yourself are part of, that will lead to those changes not coming for probably another three years, I would guess. We are sympathetic on that score. We do not have any problem on that. It is just some of your individual comments that I would have some difficulty with, and I would guess, from his questions, so does Senator Kenny.
Ms Brisebois: I think, senator, it is a misunderstanding more than anything else, because, on the contrary, we would like to have more competition in the marketplace. We have become experts at taking costs out of the system and at trying to deliver the most competitive pricing to the consumer, not passing it on. So I think we agree. We are basically asking the financial institutions to live within the reality of the marketplace.
The Chairman: Which they are not doing because they control the CPA.
Ms Brisebois: Yes, and they control a lot of other environments.Interac is another issue. I think that makes it more difficult for stakeholders and consumers to get more services at a more competitive price.
Senator Kenny: Is Interac part of the CPA?
The Chairman: No, but it is controlled by the same people. By the way, who is the member representing the retail council on the issue of the CPA?
Ms Brisebois: I am.
The Chairman: Has that task force met yet?
Ms Brisebois: No.
The Chairman: I know it has been named but I did not know if it had actually started.
Ms Brisebois: They are having problems setting up the date for the first meeting. It will probably meet around the end of November or early December for the first time.
The Chairman: It was announced in August. That is an interesting observation in and of itself.
Ms Brisebois: Before we leave, senator, I do not know how this could be done, but we would certainly appreciate your support by way of having a keen interest on the progress of this advisory committee, and whether indeed it is dealing with the issues in an objective manner.
The Chairman: We will attempt to do that. As I say, for some time, we have argued that the CPA should be opened up and it should not simply be controlled as it is, recognizing that the payments system needs to maintain the security element. There should be a way of opening it up while at the same time maintaining the security of the system. I will, on behalf of the committee, attempt to talk to the co-chairs and find out how it is going.
Senator Kenny: Does the Retail Council of Canada communicate with us regularly? Do you write to our chairman and keep him apprised of how it is working? If you do not, why not?
Ms Brisebois: This is not a new issue. We have been preparing briefs and speaking about the problems within the CPA since its inception.
The Chairman: It goes back a long time.
Ms Brisebois: Yes.
The Chairman: Thank you very much for appearing here this afternoon.
Senators, our final witness is from Trimark Investment Management Inc. Mr. Badeau is Senior Vice-President and Chief Financial Officer.
Mr. Badeau, your brief also focuses primarily on changes to the CPA. You have built your brief around the chapter in the white paper which deals with reviewing the payments system.
As I read your paper, it was hard to tell if anything specific could be dealt with between now and the end of March when the acts are revised. Your main issue, which has to do with payable-through drafts for non-CPA members, will be dealt with by the payments system task force. Is there anything specific, other than those broad payments issues, that we can help you with today?
Mr. Badeau: We feel that the issue of payable-through drafts is subject to the interpretation of the CPA. It is not something written in the act itself.
The Chairman: Could you explain it then, please?
Mr. Badeau: We, as Trimark, recently purchased a trust company, Bayshore Trust.
The Chairman: You are a member.
Mr. Badeau: Yes. We now in theory have access to the payments system for our money market funds to put chequing on our money market funds. The way that works mechanically today is that, in our trust company, we will need to set up a bank account which will be identical to the account that exists at our mutual company. In other words, we will have duplicate records in both organizations.
If you take some of the major life companies, they issue what are called payable-through drafts. That means there is only one account set up at the bank to handle all of the activity. You are not dealing with a duplication of efforts. For instance, if Canada Life has a dental claim or a prescription expense claim, it can write a payable-through draft which clears through, I believe, Canada Trust in one omnibus account. In theory, you are handling the record-keeping in one place, which is at Canada Life. The bank is acting as a facilitator for that transaction, and you are not in a situation where you are duplicating costs and where you are providing your client lists to that competing financial institution.
The issue of payable-through drafts has been in existence for quite some time. Through historic arrangements, there are examples of life companies and other companies using payable-through drafts. It is our position that we, as Trimark, should be able to access the payments system using a similar type of mechanism rather than having to duplicate the efforts and therefore the costs of having an equal and offsetting bank account and a money market fund account.
This is not a situation where we are asking for a change to the regulatory environment and to the Canadian Payments Association Act. It is a request that the administrative policies that are being followed by the CPA are dealt with. We are particularly concerned with one section in the white paper, basically three lines in the white paper that say, in summary form, that payable-through drafts present some risk to the clearance system.
The Chairman: It is the paragraph on page 26, which states:
As part of its work on payments system issues, the Department of Finance will further explore its concern with unregulated entities--
that is, Trimark <#0107>
issuing payment items permitting them to have indirect access to the payments system.
That is the sentence you are concerned about, right?
Mr. Badeau: Right.
The Chairman: I think you gave the example of Canada Life or one of the health and disability companies using Canada Trust -- as an illustrative example -- to do the bulk clearing.
Mr. Badeau: Right.
The Chairman: What has enabled Canada Life to do it and prevented you from doing it? Why can you not make a deal with the Bank of Montreal or Canada Trust and do the same thing?
Mr. Badeau: Since 1987, we have been attempting to do that at Trimark.
The Chairman: What has happened?
Mr. Badeau: I believe what has happened is that the banks have closed rank in terms of the interpretation of this particular issue. Two of our competitors can do it because they were grandfathered, and we cannot. Since 1987, with two major financial institutions, we attempted to go forward with this and have been stymied every step of the way.
The Chairman: You say two of your competitors have that type of arrangement. Who are they?
Mr. Badeau: MacKenzie Financial and BPI.
The Chairman: They have them because they had them pre-1987, 1987 being the last time the Canadian Payments Association Act was changed.
Mr. Badeau: I am not sure whether the Canadian Payments Association Act changed then or whether the interpretation changed.
The Chairman: Is that a CPA interpretation or an OSFI interpretation?
Mr. Badeau: It is my understanding that it is a CPA interpretation.
The Chairman: I take it that the present interpretation is different from the interpretation they gave previously, or that previously they never gave an interpretation but just did it; right?
Mr. Badeau: Right. This is an administrative practice that takes a situation that should be allowed according to the act, and now, because of the risk or perceived risk to the payments system from having a non-regulated financial institution accessing it, they really do not want people to do that.
The Chairman: You cannot use Bayshore Trust because the administrative policy is applied on a deposit-taking institution; it is not a policy applied on the applicant.
Mr. Badeau: Exactly. At Bayshore Trust, I must mechanically set up a system that for all intents and purposes will be a mirror system to what I have on my fund system, which makes absolutely no sense to me.
The Chairman: For my part, on behalf of the committee, I am more than happy to enter into a dialogue with the CPA to find out why the administrative policy is the way it is and why it was changed. It was obviously changed.
I understand the notion in Canada that, when you change the rules, you do not roll the clock back. That is standard procedure in Canada. That does not surprise me. The point I do not understand is why the rule was changed.
Mr. Badeau: Exactly.
The Chairman: Obviously, you do not totally understand it either.
Mr. Badeau: We have at this point received a letter from Doug Peters. We addressed this issue specifically after the white paper was released. The letter did not say a whole lot other than to say that one of the risks would be that people would perceive these payable-through drafts to look like cheques. I do not for the life of me understand why that should be an issue. People perceive these things to look the same, but we are really not adding an increased risk level to the payments system. It is not something that we are asking to change in terms of the act.
The Chairman: Obviously you had correspondence with the minister, and you received a reply from the minister. To avoid our reinventing the wheel, perhaps you could give our researcher, Dr. Goldstein, a summary so we can attempt to understand this issue. We cannot guarantee that we can achieve any change, but we would like to understand why this policy exists. On the basis of the evidence that has been presented, it seems to be somewhat arbitrary and at least a little bit discriminatory. We are happy to try to understand it better. Obviously, we cannot guarantee that we can get anything changed.
Mr. Badeau: It would not be prudent for me to try to ask today for changes to the act itself.
The Chairman: That is the point I was trying to make. This fixes the administrative policies and practices.
Mr. Badeau: Yes, or interpretation.
The Chairman: Thank you for bringing that to our attention. It is a situation that I would never have known about had you not appeared before us today.
The committee adjourned.