Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 25 - Evidence
OTTAWA, Thursday, April 17, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-82, to amend certain laws relating to financial institutions, met this day at 11:05 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we are here to examine Bill C-82, being the bill emanating from the white paper on which this committee held hearings last fall. We issued a detailed report which focused heavily on foreign banking issues. The report also supported many steps proposed in the white paper with respect to such issues as consumer privacy and easing the regulatory burden on Canadian financial institutions.
It is important to say for the record that this committee has a very clear policy of not jamming legislation. Our policy is that if groups want to be heard, they have every right to be heard. I do not mean giving them five minutes to make their case, but having a genuine hearing. On the other hand, a number of associations which would have appeared before this committee on this bill recognize that a lengthy set of hearings of this kind or amendments emanating from this committee would result in the bill not being passed before dissolution, which, according to the newspapers, is widely rumoured to occur at the end of next week. As a result, it is my understanding that some groups have opted not to appear because they view that this legislation in its current form is preferable than to delay the bill and not have it go into effect sometime in early 1998.
Given the position that other witnesses have taken on this bill, our only set of witnesses represent the Department of Finance.
Mr. Hamilton is familiar to all members of the committee. He is the ADM responsible for policy in the Department of Finance. Before I ask him to make some opening remarks, Senator Kelleher wishes to make a brief comment.
Senator Kelleher: Mr. Chairman, I would like the record to show that I have a conflict of interest this morning. This particular bill deals in part with foreign banks. As I sit on the board of a foreign bank, I wish to declare that interest. While I will sit here and listen, I will not take part in any vote at the end of the meeting.
The Chairman: That is again consistent with the policy of this committee.
Senator Angus: Should we have the record show, as well, who is present today? In view of your opening remarks, Mr. Chairman, that would be quite relevant.
The Chairman: I think it is the usual group which runs the committee.
Senator Kelleher: It certainly presents a unique opportunity.
Senator Angus: It seems that the government is very anxious to get this bill through.
The Chairman: I would ask Mr. Hamilton to proceed.
Mr. Bob Hamilton, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance: Mr. Chairman, my opening remarks will be relatively short.
The 1997 review of the legislation has been a rather long process. The starting point was the paper we did in September of 1994 for this committee which looked at the changes done in 1992. It basically came to the conclusion that those changes were working well and that we needed to look at modifying those changes and building on the basic framework contained in the review.
In 1995, we called for submissions. We put out a white paper in June of 1996. We appeared before this committee last fall. The house finance committee had extensive consultations with the industry, and it has all led us to the point where we are now with Bill C-82 in front of us. This bill reflects the culmination of all of those papers and discussions, including the valuable input this committee provided.
While I said that this bill largely builds on the 1992 framework and introduces changes that we think are important if not spectacular changes, we feel they are important. That is the message which has come through clearly from the industry.
We recognize that the financial sector and the environment within which it is operating is changing out there. It will continue to change over the near future. A task force has been set up to look at the broader issues on how we position the framework for the Canadian financial sector looking forward over the next years and into the 21st century. It is in that context that we need to consider our work today to make the changes to build on the 1992 framework. We are also looking forward to looking at broader issues.
As well, a payments advisory committee has been set up to look at payments issues, again reflecting the changes that have gone on in that area, both technological and global in nature.
In the context of the bill in front of us, we have obviously taken into consideration carefully the review that this committee did in the fall. I will point to a couple of changes embedded in the legislation here today.
The first is in the area of tied selling. Bill C-82 includes an amendment to prohibit coercive tied selling. This amendment responds directly to the committee's recommendation in this area to prohibit undue pressure to buy financial products from a particular supplier.
We have indicated that we propose to bring this amendment into force in September of 1998, but before taking that action, we want financial institutions to adopt a policy on tied selling. We want to ensure that their staffs are aware of what are unacceptable sales practices, and we want to ensure that there are good procedures for reviewing tied selling complaints.
Before the proposed September 30, 1998, proclamation date, we want this committee and the House of Commons finance committee to review the situation as it develops over the coming months to see if what financial institutions are doing in response to this is acceptable and to help us grapple with the admittedly complex question of dividing tied selling into what is actually beneficial to the consumer. There are some aspects of tying products together and giving discounts that are actually beneficial, versus the other side of tied selling, which is the coercion and the undue pressure.
We will be looking for a process over the coming year to help us grapple with those issues, leading to the proposed proclamation date for the amendment we have included in the legislation.
The second area is on foreign bank entry. As the chairman noted, this was an area of emphasis in the report the committee prepared.
As we noted in the February 14 press release which tabled the legislation and indicated the changes we were proposing, we will be working on a proposal to allow foreign direct-branching in Canada. Our plan at this time is to have that legislation developed by the end of this year. Of course, that is a very complex issue. We did not feel that we could undertake that exercise in time for this review, but we will be spending the balance of this year in consultation and analysis trying to develop an acceptable regime. That is another area where we have responded in light of the report prepared by this committee.
The other area relates to institutions which have come in and are proposing to operate on an unregulated basis providing limited financial services and not taking deposits. The proposals we originally put forward would have caused those institutions to come within the regulated system.
During the interim period while we develop the foreign branching regime, we will be taking a look at the entire foreign banking regime and developing a consistent policy. Those institutions which have already begun to operate and are preparing to operate will be allowed to operate in Canada unregulated during that interim period. Once we have developed the regime that I spoke about earlier in a consistent manner, then we will take stock at that stage and decide how to treat everyone consistently and accordingly within that framework.
The final point I would mention in response to areas highlighted in your report is the cooperative credit union area. We had originally made a proposal that would see us get out of the regulation of provincial central credit unions. Both this committee and credit union representatives recommended that we not proceed in that area, and we will not be proceeding with that proposal.
As well, your committee proposed also that the Canadian centrals and the provincial centrals be given more flexibility for joint ventures to provide services to their credit unions and their clients, and we have included some amendments in the bill which will accommodate those proposals.
That is by way of a quick overview. I have not touched on all the individual areas of the legislation because we have been through that ground, but we are prepared to answer any questions that you have on Bill C-82.
The Chairman: I have three process questions. First, with respect to the coercive tied selling clause in the bill which will, as you say, not be proclaimed until 1998 and on which there will then be hearings in advance of the decision to have proclamation, your exact words were "in advance of proclamation". I assume that you meant in advance of a decision as to whether to proclaim. There is not much sense in having hearings if you are guaranteed to do the proclamation; am I right?
Mr. Hamilton: That is correct. In fact, that was one of the reasons for having those discussions, to make a decision as to whether one should proclaim or not.
The Chairman: I wanted to make sure I understood that.
Concerning foreign banks, between now and the passage of legislation respecting foreign branching, you will allow a number of activities to take place in the unregulated market. Am I correct in assuming -- and I should like to be very clear on this -- that one is not faced, then, with the grandfathering argument if the policy is different from the activities that foreign institutions are allowed to do in the unregulated market in the next few months?
I am trying to avoid a situation where someone says, "I started to do something in May, and it was unregulated according to the stated policy", but then we introduce a bill in January, and they say, "Canada has a history of grandfathering previous activities, so you must grandfather me." I assume that is not correct in this case.
Mr. Hamilton: That is correct. I am looking at the press release in front of me to see how explicit we were in that area. We have indicated that although you can operate in the interim period, there will be another decision point at the end of that period, and it will not be automatic. There could be some grandfathering, but it is not automatically the case.
The Chairman: I understand that grandfathering may be a consequence, but the argument -- and this committee has made it in the past -- that we should do it simply because of grandfathering should not be applied when grandfathering is obtained in this way.
Mr. Hamilton: That is fine.
Mr. Frank Swedlove, Director, Finance Sector Division, Department of Finance: For those companies that would be applying under section 521 for approvals to establish a non-bank affiliate, as a matter of course, we are informing them during this interim period that the legislation is under review and they may be affected by any change in policy. They are getting fair warning up front that there could be a process change.
The Chairman: Regarding your new foreign bank regime, you said that you hoped to have legislation drafted or ready by the end of 1997. I think those were your words. To avoid a lot of grief, there may be some advantage to this committee having hearings on a draft bill. Otherwise, we may get back into a ping-pong game with the House of Commons. Based on past history of that issue, instinct tells me that the odds of the first draft of this legislation getting by this committee are pretty small. That is a piece of advice.
Mr. Hamilton: I will take that advice, thank you.
Senator Oliver: I have a couple of questions about clause 55 of the bill and proposed section 459, which deals with providing authority to make regulations requiring the banks to establish procedures governing the collection or intentional use and disclosure of customer information.
For a number of years, I have been concerned with the issue of privacy and disclosure of information on the part of the banks. The government has had the power to regulate banks' use of client information since 1992, and this power has never been used. What are you really trying to do with this new, proposed section? What evil are you trying to cure with this new language, and what will your regulations contain?
Ms Annette Gibbons, Policy Analyst, Finance Sector Division, Department of Finance: There has been a lot of work in the financial sector to deal with the issue of privacy because it is an issue of growing concern to consumers. We decided to build on that work. We want to introduce regulations requiring financial institutions to have procedures in place which deal with the collection, use, retention and disclosure of information to ensure that they have something in place that tells consumers how they will use information and to whom, if anyone, they will disclose it outside the institution.
Senator Oliver: Do they not have that now in the model standards code?
Ms Gibbons: They generally do, yes.
Senator Oliver: Why this amendment, then?
Ms Gibbons: We are going further. You must have not only those procedures in place but also procedures for receiving complaints on privacy. You also must inform customers about the code. It is our intention to bring in regulations that would require financial institutions to inform customers about the code and about complaints-handling procedures. As well, we would like to require them to report annually on the kinds of complaints they are receiving and what they are doing to deal with them. It is more than requiring them to introduce procedures, which, as you state, is already taking place in the industry.
Senator Oliver: Do you have draft regulations or guidelines which you will be suggesting to the institutions? If so, what do they say specifically?
Ms Gibbons: We are in the process of preparing draft regulations.
Senator Oliver: Apart from reporting at least once a year, what else will be required?
Ms Gibbons: They will be required to have complaints-handling procedures to inform their customers about their code and the complaints-handling procedures.
Senator Oliver: In other words, it will track the language of clause 55.
Ms Gibbons: It will track that closely, but there will be more details.
Senator Oliver: In doing this, did you receive many complaints in the policy branch of finance saying that you had better extend this further and put more regulations on the industry because customers are complaining about privacy issues?
Ms Gibbons: I would not say that. It is not an area where we get volumes of letters, but it is something about which we do hear from individual consumers and we certainly hear about it from consumer groups. This issue is relevant to the financial sector and to the private sector in general. We wanted to take action on that. At the same time, the government is considering broad privacy protection legislation. That is something the ministries of industry and justice are shepherding.
The issue is one of growing importance to consumers of financial services. We wanted to act on that. At the same time, the government generally wants to look at a comprehensive privacy protection regime for the entire private sector. This is a step.
Senator Hervieux-Payette: There is a global attitude with regard to the information. When we devised these mechanisms, did you think about having them applied to the federal government? Lately in Quebec, some civil servants were selling information on people from the bank of the government. They were receiving a certain amount of money, depending on which bank they had access to. That is where the suspicion emanates. People are not naive enough to know that everything will be done. It is important to be in line in a global, comprehensive way, so that everyone is aware of the rules.
We should have the same protection wherever we are with regard to personal data and information so that we do not devise one set of rules for this law and for these banks and then devise another one for ourselves. We must ensure that we respect the same standards so that when they are applied to the private sector, we should be ready to apply them to ourselves.
That is some advice. It is good to go vertically in government, but sometimes going horizontally does not work that well.
Senator Angus: Regarding the task force which has been set up, what is its status? For the purposes of our committee and our future planning, where is it at?
Mr. Hamilton: The task force has been struck. The chairman and all of the task force members have been named. They have met several times to talk about the tasks in front of them. We have set out the terms of reference that they are intended to follow. They are to report by September of 1998. That gives you the time frame.
My understanding is that the task force hopes to put out a discussion paper which would be not a position paper but would try to set the issues forward as they see them, which would then spark public reaction to which they can respond. That would help them set their agenda as they look at the research they need to do to prepare a report for September of 1998.
Presently, they are at the stage of sorting out the issues in front of them and questioning how best to proceed to address those issues and to come up with a report in September of 1998.
The next immediate step, as I see it, although I have no specific timing for it, would be to issue some form of discussion paper. I hesitate because it would not be a discussion paper in the context that I used earlier of putting forward options, et cetera. It would be meant to put the issues in front of people and get some reaction to help guide the task force in its work.
Senator Angus: I am thinking of the profile of this task force. A decision obviously was taken at some point by the government and the department that, rather than proceed right away with some things which our committee felt were important, they would wait until they completed a macro-examination of the financial services industry at large and the system in general. To what extent will this be done in private? Will there be hearings?
Mr. Hamilton: No, it will not be done in private. It is my understanding that the task force will not hold hearings, per se, but they will certainly hold meetings where they will try to get input from all regions of Canada and different participants. It would not be a private process. They intend to be public, but it is my understanding that they do not intend to hold hearings.
Once they submit their report to the government, my expectation is that there would be hearings and discussions based on that report as the government decides what the next steps should be.
The task force, as I understand their plans at the moment, will certainly not be private, but will not have hearings. They will definitely seek good input from the public. Indeed, that is one of the reasons they want to put out a discussion paper, to ensure that they do solicit the proper input.
Senator Angus: As I understand it, it is not definite yet when or whether the discussion paper is coming out.
Mr. Hamilton: I suppose it is not definite, but I know it is the strong view of the task force that they want to put one out. I expect that they will, but I think the timing on that is unclear.
Senator Angus: I have seen some draft terms of reference and there has been discussion. Were they published at the same time as the names of the commissioners?
Mr. Hamilton: Yes, they were. We could forward a copy to you.
Senator Angus: Thank you very much.
Mr. Hamilton: We will forward to you the whole press release.
Senator Angus: I would like to get on to the foreign bank situation. I am also interested in it, but not for the same reasons as Senator Kelleher. I have no conflicts of interest there. In this committee, we gave a lot of thought to the matter. We did recommend an opening up of the doors in Canada. We were disappointed to see that it was not in this bill.
In other words, there are a lot of good things in this bill. You heard the chairman's opening comments. There are also a lot of good things that are not in the bill. I am disappointed and would like to know the real reasons. Let us start with the foreign banks. Why have you decided to proceed with a separate act and, I gather, only at the end of the year?
Mr. Hamilton: In the report that you put forward and in the commentary we received from others, it is true that the foreign banking received a lot of attention in the context of this bill. We did take a very hard look at what to do. We came to the conclusion that really it does raise some fundamental and structural issues within the act.
Once we decided, yes, these are changes with which we should proceed, two things struck us. We probably need to make sure that the foreign bank regime at large makes sense. There are a number of different components. We felt we needed to take the opportunity to make that regime consistent. As people noted, there were some inconsistencies within the regime. There were some piecemeal things that could be done. We wanted to take a good look at it and come up with a consistent policy regime because this will be an important part of the financial system regulations. It has been in the past and will become more important as we move forward.
Having said that, we had to look at what was realistic and feasible to get into this bill in time to pass it this spring. We felt we could not do justice to the foreign banking issues, either branching or more broadly, in time for this bill. We felt we would jeopardize the other good aspects of this bill.
The decision was to proceed with the good elements in Bill C-82, get those done, and then take the time that we need to get the foreign branching and foreign bank policies correct. That is why we made that decision. We felt we could not do it properly in the time required to put it into this bill.
Senator Angus: At the risk of asking you to be repetitive but to be absolutely clear, at what stage are you presently? Can we be comfortable that this is a priority with you and that this will move forward regardless of political considerations and other things that may happen in the next couple of months?
Mr. Hamilton: Perhaps I will ask Mr. Swedlove to tell you precisely where we are.
I do not know how much assurance I can give you to the second part of your question. I can say it is a priority. We have been limited to the amount of time we can place on it given some of the other task force issues and the fact that we must put Bill C-82 forward. However, we have started to meet on this issue and plot out how we might meet our time frame. What are the issues? How will we consult? A key part of the process will be getting input from others and making sure that we feed that input into our policy process.
Yes, it is a priority for us. It is one of the major items on our work plan as we look over the course of this year.
I will ask Mr. Swedlove to lay out specifically where we are at this stage.
Mr. Swedlove: Senator, this is a priority for us. We have established an inter-agency working group -- ourselves, OSFI, the CDIC, and the Bank of Canada -- to review all of the policy elements that arise. We have met several times already. Our intention will be to start consulting with stakeholders very shortly on the issue.
Senator Angus: One of the things this committee found quite distressing was the shrinking number of foreign banks which were carrying on business in Canada as a result of the regulatory environment here, which we were told was very restrictive vis-à-vis other OECD countries, for example. Have you noticed any change just because of the announcement that there will be new legislation?
Mr. Hamilton: I will let Mr. Swedlove elaborate, but there has been a good response to the announcement, if I can put it that way. A number of foreign institutions and foreign governments have announced that they are looking forward to working with us in the development of this regime. I can only extrapolate their interest in working with the regime once it is in place. That response has been positive. I am not aware of anything more tangible than that.
Mr. Swedlove: To my recollection, I believe no Schedule II banks have left Canada over the last several months, certainly not since the announcement. Indeed, a number of banks are looking at ways of increasing their operations in Canada because of the possibilities of branching that are arising. Those are the messages they are giving to us.
Senator Angus: Will there be a consultation process other than the normal legislative committee hearings, and so on, once you have the bill available at the end of the year?
Mr. Hamilton: At this stage, I cannot say where we will go once we have a draft bill -- or whatever form it takes -- at the end of this year. There will certainly be consultation leading up to that. We are quite interested in that. We have many requests from institutions and governments abroad to ensure that we get their input as we try to draft that bill. There will certainly be a lot of consultation.
We know this is a complex area, and we need to think hard in order to get it right and factor in all the considerations. The history of changes in this sector suggest that there will have been a great deal of consultation by the end of the day.
Senator Angus: Are we talking about amendments to the Bank Act, or are we talking about a special hybrid statute?
Mr. Hamilton: There would have to be amendments to other acts as well.
Senator Angus: To which other acts would you be referring?
Mr. Hamilton: The Winding-up Act is an example. I am not sure which others would be affected, but it is certainly more than the Bank Act.
Senator Angus: We have discussed the foreign bank issue, what is a foreign bank, and whether the parent of a financial service is a foreign bank as defined. We had as an example the Wells Fargo case. They made representations here. Informal talks were held subsequently between the committee and your officials about this. What exactly was decided on that? This U.S. bank had a lending scheme. They did not need to be established in Canada. I suppose they would communicate with small business borrowers electronically or by mail. This would be either allowed or not allowed.
One of the things which frustrated this committee was that when the paper came out, some of the regulators were acting as if this was a new law, whereas it was a white paper for discussion. They were issuing rulings and directives. We were upset about that. Would you comment on how that was resolved, if it has been resolved?
Mr. Swedlove: The Wells Fargo situation is different because Wells Fargo intends not to operate in Canada in the sense that they have all their activities in the United States, but to serve Canadian clients, as you say, through mail or whatever.
In that situation, there is a question of the legal interpretation of the Bank Act as to whether they are carrying on business in Canada. There have been ongoing discussions with the Office of the Superintendent of Financial Institutions and Wells Fargo on that issue. It relates to what Wells Fargo plans to do, which is simply, legally, whether or not they are carrying on business in Canada.
Senator, what you are referring to in terms of actions are related to what we call section 521 approvals and to foreign banks wanting to establish in Canada as non-bank affiliates to carry out limited types of activity, not in the deposit-taking area, but in other traditionally banking-type areas. The preference of these companies was not to operate as a regulated bank but to operate generally unregulated.
The June 1996 paper proposed that they become regulated institutions. The decision we have taken is to consider this in the context of this broad, foreign bank, entry review that we are doing, and the results will be known by the end of the year.
For banks which wanted to establish after the June 1996 period as a section 521 operation -- a non-bank affiliate -- there was consideration at that time as to whether the Governor in Council should exercise his discretion in terms of permitting that activity, if the stated policy direction was to require them to operate as regulated institutions. The question asked was to what extent you wanted to create a whole series of grandfathering situations when you knew or thought that the policy would be changed.
At that time, we were not particularly welcome to new entrants establishing these non-bank affiliates in Canada. As we stated in the February 14 press release, we are permitting that activity to take place in that interim activity as long as they meet certain conditions.
Senator Angus: Bill C-82 includes the CDIC opt-out provision for wholesale banks which we recommended. The bill also contains a provision prohibiting a bank which has opted out of the CDIC from affiliating with a CDIC-affiliated institution. Why is this? Our committee did not recommend this.
Mr. Hamilton: The idea behind implementing the CDIC opt-out was to find a way to streamline the regime in this area, and there are good reasons for that. We did decide under certain restrictions to allow institutions to opt-out of the CDIC.
Allowing that opted-out institution to be affiliated with a CDIC member raises broader, more fundamental issues of whether one wants a situation where a bank has a separate retail and wholesale side and whether that is something which should be allowed within this system.
Without prejudging what one should think about that, we felt that was going beyond what we were trying to accomplish here, which was simply to find a way to allow wholesale institutions to opt out of the CDIC for reporting requirements and premium purposes. Taking that extra step of saying, "Yes, we would also allow an opted-out member to be associated with a CDIC member," raised more basic policy issues. We thought we would leave that for broader consideration by the task force as we look at the kind of regime we want in place as we move forward.It took us beyond what we wanted to accomplish with this bill, and we felt uncomfortable taking that step at this time.
Senator Angus: Does that not effectively reduce competition? I am thinking of the consumer losing by this restriction.
Mr. Hamilton: Not as far as I can see.
Mr. Swedlove: The objective was to reduce regulatory burden. We think the institutions that would be interested in opting out of the CDIC are those which are already in the wholesale market and do not carry out retail activity. If they carry out retail activity and it is at all successful, then their preference presumably would be to remain under the CDIC. We believe that we are simply reducing the requirements of filling out all the forms and meeting the regulatory requirements of the CDIC with which these firms had to comply, notwithstanding the fact that they had little or no retail deposits.
Senator Angus: The new act proposes to transfer the authority to make a decision away from the Governor in Council to the minister on the advice of the Superintendent of Financial Institutions. What is the rationale for this change?
Mr. Swedlove: I believe that exists in several places, and the objective is to reduce the time required for approvals. It was felt, in these circumstances, that the minister could properly make a decision with respect to these cases.
Senator Angus: There is no deep, dark reason for it, or some major structural change.
Mr. Swedlove: No. It is consistent with reducing regulatory burden, effectively.
Senator Angus: Are we talking about expedience and flexibility?
Mr. Swedlove: That is right.
Senator Angus: The bill also seems to permit financial institutions to carry on both information processing and specialized financing activities in-house rather than through subsidiaries. In the absence of a defined rationale for such a change, our committee recommended no change to the present subsidiary requirements. What is your rationale in this regard? Why are the provisions provided for ministerial approval and regulatory-making authority to deal with privacy concerns?
Mr. Hamilton: As we looked at this area, we came at it from the other side in the sense that there were restrictions which forced these activities to take place through subsidiaries and that there at one time might have been prudential concerns in an attempt to separate the core activities of the institution from the ancillary.
When we looked at this, we asked if we needed it. Were we comfortable with these activities taking place in house, or did we need to preserve this restriction? On the basis of the work we did and our consultations, we felt there was no longer a need for this. Institutions told us that this would lower their operating costs. There was some question raised about that assertion by the committee, but that was the message we heard. Faced with those two motivations, we decided to move forward.
Senator Angus: We noted that the bill was amended in the other place to provide for authority to require disclosure of certain information in credit card application forms. What was behind this amendment? What type of information do you contemplate should be disclosed?
Ms Gibbons: This is part of the federal-provincial agreement on cost of credit disclosure that was reached last fall. Under that agreement, there is a requirement that financial institutions or anyone issuing a credit card indicate on credit card application forms and related documents what is the interest rate. If they do not want to put it on the form because it is subject to change, then they must provide a phone number where the person can get that information. This is to ensure that some basic information about credit card costs is available either on the form and related documents or that a number is given where the person can get that information.
Senator Angus: In a way, this came up after the fact; is that right?
Ms Gibbons: This was to provide the explicit authority. In going through the process, there was some question of whether we had the appropriate authority to do that. Thus, we wanted to make it explicit in the act.
Senator Austin: I have a question on stored-value money cards. Can anyone, under the present regulations, offer stored-value money cards to the public? Is there any restriction on my incorporating a business that offers stored-value money cards to the public?
Let us say someone comes in, pays me money, and I store a certain amount of that money on their card on the presumption that the retail trade will accept the card. Is there any restriction on this?
Mr. Swedlove: No, there is no restriction. If you are effectively taking a deposit and holding that out as a deposit, then it becomes a regulated activity.
Senator Austin: Am I effectively taking deposits if I do this? If I offer a stored-value money service, am I in the business of banking? Am I taking deposits or am I simply offering an electronic money transfer service?
When you move to the non-financial affiliates of foreign banks, these entities are capable of entering our stored-money economy market at some future time and offering, perhaps, a lower-cost service in this area. For them, the cost is incremental to their home base operation. Do you have any concerns? Is this simply hypothetical and unreal, or could we be dealing with this issue?
Mr. Hamilton: I will ask Mr. Brossard from OSFI to comment on that specific issue.
However, more generally, it is timely to ask that question about stored-value cards. Right now, pilot projects are operating in Canada that banks and various organizations are putting forward. As we go forward, depending how they go, we could be looking at a situation where others are trying to come into the field and could be regulated or unregulated institutions. While, at the current time, it may be a hypothetical situation in that it does not actually exist, it is something that, as we look forward at the legislation, we have to be conscious of and try to build into our system the proper regulations to handle these eventualities.
Mr. André Brossard, Director, Legislation and Precedents Division, Office of the Superintendent of Financial Institutions: Mr. Chairman, I am not aware that at this stage there is specific federal legislation prohibiting non-federally regulated financial institutions from offering these stored-value cards.
As was pointed out earlier, a question may arise, depending on the service included in those cards, whether that could include a deposit-taking type of service. If so, some provincial legislation may come into place as to whether this is the equivalent of offering securities, for instance.
Generally, the services could be provided by institutions other than federally regulated financial institutions. That is the case now in the credit card business. A number of issuers of credit cards are not necessarily regulated financial institutions.
Senator Austin: Credit cards are not clearly deposit-taking as are stored-value cards. A store can issue a stored-value card. People can buy a credit at the store. Is that deposit-taking? In defining banking, I am curious about how much you build on the deposit-taking function of banking. I am trying to find out more.
Mr. Swedlove: This is an extremely important area. A lot of work is now transpiring in looking at this issue. There is a view that if it is for a single purpose, it does not create a lot of difficulty. For instance, if your phone company allows you to pre-pay for long distance or local phone calls, then that is not so bad. However, in the world of a card which provides multi-use capabilities, it becomes potentially a substitute for money. It then raises a lot of interesting issues.
We have a group in Ottawa looking at these issues. Internationally, this is an area at which summit leaders have asked officials to look. It is my understanding that there will be a report at the Denver summit regarding the E-money issue and the problems it might create internationally.
This is very much an important issue which we are trying to address.
The Chairman: I was intrigued by your line of questioning, Senator Austin. In light of the report which will be forthcoming from the Denver summit, we should make a note on our calendars that when we come back in the fall, we should discuss with officials from the Department of Finance the whole issue of electronic banking. A policy discussion with the committee would be helpful.
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Senator Hervieux-Payette: This week we heard that the Finance Minister of Quebec would request the transfer of the insurance portfolio from a federal corporation to a provincial corporation. I imagined he would have wanted us to include this in the bill. It may be a little late to draft another bill. What is the department's position? I know that the finance minister has refused, but are discussions being held with the other provinces? Has equivalence between the two been sought? Equivalence has been requested for some Quebec corporations that cannot transfer. Since there is a national agency responsible for eliminating market barriers between the provinces, I presume that the financial division will study this matter.
Where are we in the study? Is there an answer other than at this time we lack the appropriate mechanism, that the bill is not before the Senate and that this would require sending it back to the House of Commons. What is the situation?
Mr. Hamilton: You are quite right, it is too soon to amend the bill. Nevertheless, the matter will be discussed with officials from the province of Quebec.
Mr. Claude Gingras, Special Advisor, Finance Sector Division, Department of Finance: Mr. Chairman, I have just taking part in discussions to solve this problem. The Finance Minister, Mr. Martin, has asked that we examine this complex problem since it is a matter of risk management, with representatives from the Office of the superintendent and Quebec officials. A team will be examining this matter in order to find a solution as quickly as possible.
As you mentioned, there is no certainty that this matter will be solved within the framework of Bill C-82. Nevertheless, the will exists to solve the problem as soon as we have examined every aspect presented by this complex problem. Discussions are in progress in the hope of arriving quickly at a solution.
Senator Hervieux-Payette: For the corporation involved, since this is a real transaction of a portfolio of 8,000 policies and since there is an agreement in principle between the two corporations, they should put their project on ice until we amend the act. Is there any possibility of an arrangement that would avoid harming a company's business?
Mr. Gingras: The president of the affected corporation attended this morning's discussions. We may be able to delay in order to arrive at a viable solution. I am not familiar with every detail of the agreement since obviously, it is confidential, but it might be wise to play for time in order to allow us to find a solution that could save this transaction. I don't know the details.
Senator Hervieux-Payette: Therefore reviewing the act in order to allow transfers, both ways, is still on the agenda. There is a transaction in progress, that is a specific case. From a policy point of view, is the department holding discussions in order to set up a system that would allow reciprocal transfers? There is a provincial act that also stops the transfers to federal corporations. Is this aspect also being discussed?
Mr. Gingras: Yes, this is an issue in the provincial act as well as the federal act. Both the federal and the provincial governments will be participating in the discussions. Obviously, we must study these issues. Discussions are in progress.
Senator Hervieux-Payette: Mr. Chairman, I think this matter is of interest to all of us and I would appreciate being kept informed of any development since I could very well have questions on this matter.
Mr. Gingras: We will be happy to do so, Senator Hervieux-Payette.
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Senator Oliver: I have another question similar to my previous question, again arising from clause 55 and regarding tied selling. You are saying that your regulations will provide authority to make regulations specifying what constitutes or does not constitute undue pressure or coercion. I am sure you have had a lot of discussion about this because there are a number of things that you can do in encouraging a customer to take another product from your institution, which is not coercion.
Can you tell us today what your thinking is, what your regulations will look like, and how you are answering this question about coercion?
Mr. Swedlove: Again, we give ourselves the ability to define in regulation what is undue pressure or not. It is an extremely difficult area. In that clause, we do talk about areas where we believe there can be beneficial tied selling.
Senator Oliver: Give me an example of a beneficial tied selling. What were you thinking of?
Mr. Swedlove: In the legislation, we were talking about an example where you would receive a discount for purchasing two services. A few months ago we saw in the selling of RRSPs that a number of banks offered to provide loans at prime if you purchased RRSPs from that institution. That is a situation where we think the consumer has benefited by a lower cost of funds and by effectively tying those two products.
Senator Oliver: You say there is no coercion in the example you just gave. That would not be caught by your new regulations.
Mr. Swedlove: We believe that is not a coercion, and that is why we specify in that clause the ability to provide that kind of situation.
It was interesting to note in the hearings of the House of Commons committee on this issue that the president of Midland Walwyn noted he thought that that was an acceptable kind of tied selling.
It is always difficult to define where the line is, and this subclause provides us the ability to work at defining what would be appropriate.
Also I think it would be extremely useful, if the decision is taken to proceed with proclamation of this clause, that this committee provide suggestions of what might be beneficial and not beneficial tied selling.
Senator Oliver: Can you tell me a little more about where your thinking is now on coercion? Where are you starting to draw the line and what are your policies behind where the line will be? That is what I want to know.
Mr. Swedlove: We have not gone that much further than what I have just described in subclauses (2) and (3) of the clause where we define what we think is beneficial tied selling. Clearly, situations where an individual is denied the right to a service because they refuse to purchase another service seems to us to be undue pressure associated with tied selling, but that probably, too, needs to be more clearly defined.
Mr. Hamilton: To elaborate on what Mr. Swedlove said, we can see the spectrum in front of us, and we probably identified a couple of things at each end of the spectrum that would differentiate between beneficial tied selling and coercion or bad tied selling, if I can use that phrase. Probably over the next year, before this clause is proclaimed, we hope to have input from committees and others to find where to draw that line. The experience in the U.S, as they have tried to draw that line, suggests that we will have our hands full as we try to draw that line in the proper place.
As Mr. Swedlove said, we are not much farther than really having defined maybe the ends of the spectrum. Over the course of this year, we will try to narrow down this issue.
Senator Angus: Back to tied selling again, I realize this is a difficult area for you, but it seems to be the main matter of substance which has found its way into this bill, following the white paper and hearings we conducted.
I, for one, was very surprised that it only deals with the banks. If you are worried about the banks engaging in this and you want to protect consumers in some way with this legislation, what about these other federally regulated institutions, such as insurance companies and mortgage companies?
We see it all the time. Either you believe it is happening or you do not, and if it is, certainly the banks have no monopoly on it. You should see what some of the brokers that are owned by banks are doing. You can hardly get insurance or do anything any more unless you do it all in one place. Could you address that?
Mr. Swedlove: We recognize that the banks do not have a monopoly on tied selling. Therefore, we asked all federal institutions to establish procedures to deal with the tied selling issue.
In a sense, it will be a challenge to all financial institutions over the next year to establish procedures, deal with what is perceived to be the tied selling problem, and have your committee and the house finance committee review how those institutions have responded.
The reason that we are proposing a tied selling provision in the Bank Act is because of the views we have received from the Department of Justice about the difficulty of including such legislation in the other acts because of the constitutional and federal-provincial dimension. Their recommendation was that we should only proceed with this type of provision in the Bank Act.
Senator Angus: Do you agree with that?
Mr. Swedlove: I am not a lawyer, so I do not think my opinion is particularly valuable in that regard on constitutional matters.
The Chairman: Some of us value the opinion of non-lawyers over lawyers.
Senator Angus: Even those of us who are lawyers.
I am still not comfortable with the response on why it will be, in the interim, more onerous on the banks as a result of this bill. Am I right that it will be more onerous?
Mr. Swedlove: Not in the interim period. We are asking all institutions to respond and to deal with the tied selling issue. If it is determined that we proceed with the legislative step, the matter is to what extent it will apply to the banking sector. Of course, constitutionally, we have the heads of power dealing with banking and with the other parts of the financial sector, such as insurance companies, trust and loan companies and cooperative credit associations. It is an issue of incorporation as opposed to heads of power.
Senator Angus: Will it be a voluntary thing in a way? Is that basically it? What sanctions are there?
Mr. Swedlove: Over the next year, we are asking them to deal with it voluntarily. At the same time, we will have discussions with the provinces. I will have a meeting with my provincial counterparts tomorrow where we will discuss this issue.
Senator Angus: Can you tell me a bit about the provisions you put in Bill C-82 on insider reports? You have authority to make regulations that would exempt, in certain circumstances, an insider from filing an insider report, and further extends his authority to subsequent insider reports. What is the background and the need for this measure?
Mr. Brossard: Essentially, we are trying to position ourselves to harmonize our approach with provincial regulators in this regard. We have been fairly successful in doing so. That would include the type of people who could receive exemptions as well as the forms they have to file. This would ensure that people who do have to fill in reports are not faced with diametrically different approaches in this regard.
Senator Angus: Was there a specific situation that arose which provoked this need for an exemption, or is this just in the normal course of harmonizing?
Mr. Brossard: This was just done in the normal course of ensuring that we are harmonized.
Senator Angus: Can you tell us about clause 57(2) which seems to broaden the regulation powers of a bank to invest in non-corporate form entities? There is particular reference to permitting more joint ventures. Why did you choose to address the joint venture issue through regulation rather than following the white paper proposal? It seems that the white paper proposal was to delete subsection (3) of the minority investment regulations in the Bank Act.
Mr. Brossard: Again, there is obviously a need to coordinate the provisions in the act itself and a set of regulations dealing with the abilities of financial institutions to enter into joint ventures.
Again, we are attempting to streamline that regime and do away with the requirements that a federally regulated institution had to be in a controlling position whenever there were such joint ventures. There is no particular intent here other than to streamline that regime and ensure that all the necessary amendments are made both to the regulations and to the specific clauses in the act itself.
In fact, we will be circulating the amended regulations in this regard. I expect that to be made public very shortly. We had very good consultation with the industry in this regard, and it is my understanding that the industry is happy with the outcome of those consultations. However, we will further pursue the exact wording of the regulations.
Senator Angus: Were you targeting a particular type of joint venture on which the banks were seeking broader investment powers, or was a new vehicle out there?
Mr. Brossard: These provisions are designed to streamline the whole regime of joint ventures. It is not aimed at one particular form of joint venture.
Mr. Swedlove: A number of institutions raised the issue of opportunities for investments abroad. In a number of countries, there are either explicit requirements or a great deal of pressure for our institutions to take a less than 50 per cent position. The institutions find this to be an attractive opportunity for investment in these countries. This change will facilitate more opportunities for our institutions internationally.
Senator Angus: That is what I thought.
Clause 44 of the bill talks about the bank guaranteeing the subsidiaries. What is that all about? Why are you adding that provision? Is this a way to transfer the banks' leverage to the subsidiaries? What is the specific reason for that?
Mr. Brossard: It is meant to streamline the regime and ensure that in cases where the parent financial institutions wish to guarantee the liability of a subsidiary, it is not precluded from so doing.
There are certain instances where that can be quite legitimate and acceptable. If, in other cases, it is not so acceptable, the discretion is left to the regulators to issue a direction for compliance, for instance, if it was regarded as an unsound business practice.
It is felt that there are sufficient mechanisms in place to deal with instances where this would be an unsound practice. However, as it stands now, the provision in the legislation is for an overall prohibition, and we think that is going too far. The amendment suggested here is just recognizing that such guarantees should be allowed.
Senator Angus: In the documentation and the press release, you talk about the bill implementing a proposal to streamline the self-dealing regime. Can you explain that in layman's terms?
Mr. Brossard: Essentially, the streamlining amounted to reducing quite significantly the number of people who would be affected by the regime. That refers to those who are considered to be, if you like, insiders. The second aspect is to do away with the requirement that a committee of the board, the conduct review committee, has to pre-approve all transactions that were otherwise subjected to the regime.
Now, the regime being proposed is that that committee would have a duty to ensure there are proper mechanisms in place to monitor these types of transactions but not necessarily, again, to pre-approve every single transaction. The industry was concerned about that as a rather inefficient way to conduct one's day-to-day business.
These are the two major changes to the approach on self-dealing.
The Chairman: Senators, seeing no other questions, I will thank the witnesses for appearing. I cannot resist saying that we look forward to holding hearings on the draft bill on foreign banking sometime this fall.
Honourable senators, can I have a motion to dispense with clause by clause?
Senator Angus: I so move.
The Chairman: Is it agreed?
Some Hon. Senators: Agreed.
Senator Kelleher: I abstain.
The Chairman: Carried.
Can I have a motion to report the bill back to the Senate unamended?
Senator Angus: I so move.
The Chairman: Is it agreed?
Some Hon. Members: Agreed.
Senator Kelleher: I abstain.
The Chairman: Carried. We will report the bill unamended.
Senators, you will have received in your office a draft report on the HST hearings. We reported the bill with the amendment, but because there had been 40 hours of hearings and some 200 witnesses, we felt we needed a summary of that evidence.
A draft has been prepared. If you can phone any comments on that draft to our researcher, Mr. Goldstein, by the end of Tuesday, April 22, we can hopefully table that summary next week. I know the witnesses want copies of it.
Senator Oliver: Would copies sent to senators such as Senator Buchanan, for example, who are not on the committee but who were involved?
The Chairman: We will send copies to everyone who participated in the hearings. On the assumption that a writ may be issued at the end of next week, I want to table it before then.
The committee adjourned.