Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 11 - Evidence
OTTAWA, Tuesday, February 24, 1998
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-9, respecting depository bills and depository notes and to amend the Financial Administration Act; and Bill C-5, respecting cooperatives, met this day at 9:30 a.m. to give consideration to the bills.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we have two bills before us today. The first item of business on the agenda concerns Bill S-9, and then we will deal with Bill C-5.
Our first witnesses, from the Department of Finance, are Mr. Frank Swedlove, Director, Finance Sector Division; Mr. John Grace, Economist; Ms Kristina Knopp, legal counsel; and Clyde Goodlet, from the Bank of Canada.
Honourable senators, we have a brief opening statement before us. There is also a technical amendment which the department would like to have made to the bill. Take us through your opening statement and then we will ask whatever questions there are and, while you are going through it, you might explain the purpose of the technical amendment.
Mr. Frank Swedlove, Director, Finance Sector Division, Department of Finance: The proposed Depository Bills and Notes Act is a technical piece of legislation, but one that is needed to support continued improvements in the efficiency of capital markets in Canada. The proposed new act brings federal legislation into line with the way that trades and financial instruments are processed in financial markets today.
A key element of modern market practice is the holding of financial instruments in central depositories. This allows ownership to be transferred from seller to buyer by means of an entry on the books of the depository rather than the physical transfer of the instrument from one party to another. The use of securities depositories increases both the safety and efficiency of transactions in financial markets.
While transfers of many financial instruments are already handled in this way, the proposed Depository Bills and Notes Act will help modernize federal legislation dealing with the transfer of ownership of certain financial instruments -- primarily bankers' acceptances and commercial paper.
The proposed legislation creates two new financial instruments -- depository bills and depository notes -- that will both be eligible to be held in a securities depository. Bill S-9 also establishes that changes of ownership of these instruments will be effected by making the appropriate entries in the records of the depository by "book entry."
This legislation is necessary because the existing rules governing these types of instruments, as set out in the Bills of Exchange Act, were written well before the establishment of central depositories and still refer to being in physical possession of a financial instrument when describing the rights of the parties involved in a transaction. Clearly, these rules are not readily applicable to instruments which are held in a depository and change owners without physically changing hands.
In contrast to the provisions of the Bills of Exchange Act, the proposed Depository Bills and Notes Act sets out the rights and responsibilities of buyers, sellers and holders of negotiable instruments in a way that is compatible with the use of depositories and "book entry" transfer of ownership. The introduction of these new financial instruments in no way precludes individuals or institutions from purchasing and holding other bills and notes that still fall under the authority of the Bills of Exchange Act.
Finally, a related technical amendment to the Financial Administration Act has been included in this legislation. The Financial Administration Act permits negotiable instruments such as T-bills and government bonds to be traded in the market. However, there is a technical legal issue as to whether the definition of "negotiable instrument" includes government debt for which there is no physical certificate. The amendment will make it clear that government debt of this kind can be traded.
That concludes my opening remarks. My colleagues and I would be glad to answer any questions that honourable senators may have. Before that, perhaps I will ask Clyde Goodlet, from the Bank of Canada, to explain the amendment that we are suggesting senators consider.
The Chairman: Copies of the amendment are being made at this time. May we have an explanation of what the amendment is about?
Mr. Clyde Goodlet, Regulatory Policy Adviser, Bank of Canada: The amendment is to clause 17 of the bill. It replaces the word "pays" with the words "makes final and irrevocable payment". This is a technical amendment to ensure that the party who issues a depository note or a depository bill is discharged of his liability for payment of that bill at the appropriate time and not earlier. The clearing-house needs to know that it has received final and irrevocable payment from the issuer of the bill so that it will be able to discharge the issuer.
This is technical. It comes down to the use of paying agents. I hesitate to get into this, but perhaps an example would be helpful. Most issuers of depository bills and notes use private sector paying agents to make payment on their behalf. When a bill comes due, they will use typically a large bank to make payment on their behalf to the holders of the bills. In some depositories, the rules are set up so that funds accounts -- that is, amounts payable to the holders of the bills -- may be debited or credited during the day and those participants in those systems can use those funds accounts to purchase other securities. However, there has actually been no payment or discharge of the obligation of the issuer at this point. Typically, that occurs near the end of the day when everyone's payment obligations are netted and then settled on a final basis.
This amendment makes clear that payment must be on a final and irrevocable basis, using the rules of the clearing-house, to ensure that the issuer of the instrument has discharged his liability. In the event that the paying agent were to fail -- an extremely unlikely circumstance -- this would permit the clearing-house to go back to the issuer of the instrument and ensure that the clearing-house gets paid so that it may make payment to the ultimate holders of the instrument.
The Chairman: As a matter of curiosity, since this bill deals with pieces of paper, is it about to be outdated by the whole movement to the cashless society and electronics? I have no objection to updating a process, but is it about to be outdated as well as updated?
Senator Angus: Perhaps it does not deal with a piece of paper but, rather, book entries.
The Chairman: You may want to comment on Senator Angus's observation as well as my own.
Mr. Goodlet: We use two terrible terms here: immobilization and dematerialization. This bill basically deals with immobilization. A physical instrument will be issued, but it will be held in custody by the clearing-house or some other custodian, and then book entries can occur in terms of transferring the ownership. As I understand it, this does not address dematerialization, which is the ability to issue an obligation in other than a physical form.
The Chairman: Is it your guess that, in the reasonably foreseeable future, you will need a piece of legislation dealing with dematerialization?
Mr. Goodlet: I would think somewhere down the road it possibly would have to be addressed, yes.
Senator Angus: I must admit that I am not up to speed on these technicalities bill, but I do remember the difficulty I had with bills and notes in law school. The teacher was Gerry Le Dain, who became a judge of the Supreme Court. He certainly demystified what was already an obscure subject.
I remember the expression "holders in due course". I would take it that, pursuant to your explanation, you will not have holders in due course of these two instruments because they do not move around?
Ms Kristina Knopp, Counsel, General Legal Services, Department of Finance: Yes. That concept is more akin to a paper world where an actual certificate is being transferred.
Senator Stewart: Are we talking about the amendment?
The Chairman: We are talking about the bill in general.
Senator Austin: I am curious about the legal nature of the order for transfer or deposit or withdrawal of funds. The instrument will be held in a depository, and changes in the value of that instrument will be noted in the depository. What is the legal character of the order? Is it expressed in a document? Is that order also a tradable instrument?
Mr. Swedlove: The concept is that one does not need any kind of physical transfer in order to enact the trade; it can be done through a book entry. I am not sure that necessarily changes the underlying value.
Senator Austin: There must be a message or direction of some kind. Is there any evidence of that direction? Is the only evidence of that direction what is done by the depository, or is there something else? Is there an electronic order, for example?
Mr. Goodlet: The way most depositories work is that the agreement to do the deal is actually done outside of the depository. Both the buyer and the seller, or one or the other, will agree to enter the details into the system of the depository. Let us suppose the seller enters the details of the trade into the depository. That will include the instrument, the amount, and the price. The purchaser will then confirm all of those transactions with the depository. There will be a record in the depository of the trade on both sides. Both sides must agree to the trade. Trades which are unconfirmed never settle in the system. One party must enter the details of the trade, and the other party must confirm all of the details of the trade. Those records are available within the depository. It is not until both sides have done what they have to do that the trade will then move into what we call the clearing and settlement phase.
Senator Austin: This is quite fascinating. In legal terms, does the transfer of the right take place when the buyer and the seller of the right conduct the transaction or when they register it?
Ms Knopp: When you use the word "register", do you mean confirm?
Senator Austin: Yes, when someone gives notice to the depository of the transaction. When does title to the money pass?
Mr. Goodlet: When it is confirmed and executed by the depository.
Senator Austin: Does this legislation says that?
Mr. Goodlet: No. When the actual trade occurs typically is governed by the rules of the depository itself.
Senator Austin: Equitable title is transferred between the two parties when they enter into an agreement to do these things.
Ms Knopp: That is reflected in subsection 8(3) of the act, which indicates that the transaction, including the time it takes effect, is governed by the laws of the jurisdiction agreed to by the clearing-house and its participants. It is specified that the actual book entry has the same effect as delivery of a bill of exchange would under the Bills of Exchange Act. We are saying that the fact of making a book entry in the records of the clearing-house in some sense replaced delivery of a paper certificate.
Senator Austin: I understand that. What happens before notification? What is your view of the law if Senator Stewart and I enter into an agreement that his interest, to a defined extent, is to be transferred to me and then the depository is never told until just before maturity? What equitable right is being created in the interim, or is there no right? If I am the purchaser, do I have no right unless I have actually ensured that the depository has been notified and has undertaken the transfer? Do you have an opinion on that?
Senator Stewart: I think the term of art is "limbo".
Senator Austin: An equitable right is being created.
Ms Knopp: I think the depository would need to be notified for this transaction to take effect. It would be in some sense a failed delivery. Unless the records of the depository reflect the transaction, it would not be complete.
Senator Austins: Are there equitable rights between the two who have created the transaction before they notified the depository? Or is there no legal consequence unless the depository is advised?
Mr. Goodlet: You can think of it in the physical sense. Transactions done between market participants are recorded. Sometimes they are just telephone transactions, but they are recorded and used as the basis for sorting out disputes as to whether trades were made and as to prices and delivery dates.
Transactions fail in the physical world these days because people do not show up at the appropriate time with the appropriate security. I am not a lawyer, so I do not want to speak to this directly but, as I understand it, the transaction itself is governed by the trade in the agreement to sell the instrument and to purchase it at an agreed set of terms and conditions. In the book-entry sense, we are taking care of the delivery part of that but not affecting the agreement to deliver an instrument from one party to the other. Failure to deliver the instrument, either because you have not confirmed the trade in a book-entry environment or because in the physical world you have failed to deliver the instrument, would mean that one party has not performed on one part of its contract. That would be up to the parties to resolve. There are accepted practices in the market for dealing with failed deliveries of securities. There are fees or costs which are usually associated with that.
Senator Stewart: Will the regime which is now being sanctified by legislation create new problems for the Superintendent of Financial Institutions?
Mr. Swedlove: No; there would not be any impact.
Senator Stewart: The superintendent does not have to perform a surveillance function to assure that the registry of the bill or the note has been done and done properly?
Mr. Swedlove: No, he does not have a role with respect to the depository system.
Under the new Payment Clearing and Settlement Act that was passed two years ago as part of Bill C-15, the Bank of Canada has the ability to get involved with respect to any clearing system. I will ask Mr. Goodlet to explain that relationship.
Mr. Goodlet: Under that legislation, the bank has the responsibility for oversight of clearing and settlement systems. This responsibility does not cover all clearing and settlement systems but, rather, those in the governor's opinion are systems which could pose a systemic risk following the failure on the part of any one of the participants. We call those designated systems.
Within those kinds of systems, we are responsible for carrying out an audit as part of our oversight responsibilities. One type of issue that we would raise with them would be operational issues such as how they would manage the custody of instruments, the integrity of their system for recording trades and confirmations of trades, and their backup arrangements. The superintendent would have an interest if the institutions he supervises were participating in those systems but not directly for the operation of the system itself.
Senator Stewart: I find the language that is being used difficult to understand because the word "physical" is being used in a new way and the word "material" is being used in a new way. For someone who has been corrupted by some study in philosophy, I find this difficult.
You talk about a depository bill. Can you give me an example?
Mr. Swedlove: We are talking here, generally, about commercial paper and bankers' acceptances.
Senator Angus: There will be a new name for these; is that correct? If you are going in the money market to put out $200,000, say, on Tuesday at 10 o'clock and you phone up for a $200,000 CIBC banker's acceptance, would that have a new name now? Would it be known as a depository bill?
Mr. Swedlove: The institution could determine that it is a depository note or a depository bill under this legislation. That would allow the note to be subject to trades through a central depository.
Ms Knopp: Certainly there would have to be an intention to issue the document as a depository bill or note. The definitions in clauses 4 and 5 state that the instrument must state on its face that it is either a depository bill or a depository note which is subject to the act. Certainly this is not something that would just happen. The issuer must want to bring the instrument under the regime of this act and must clearly indicate that either prior to or at issue. This is something that could not be added down the road.
Senator Stewart: Let me demonstrate how innocent I am in this field by asking this question. In the event of the failure or bankruptcy of the holder of the bill or the note -- that is, the holder with whom it is deposited as implied by the adjective "depository" -- what is the effect on the equitable interest of the owner of the value symbolized by the bill or the note?
Mr. Goodlet: If I understand your question, you are asking what happens if there is failure of one of the two parties, either the purchaser or the seller?
Senator Stewart: If the legal entity with which the bill or the note is registered -- if that is the proper term -- as a depository bill or note, for one reason or another is unable to meet its own financial obligations, how does that affect the monetary interest of the owner of the value represented by the bill or the note?
Mr. Goodlet: Your concern is about the issuer of the note and whether the issuer is able to pay when the note comes due, for example?
Senator Stewart: Yes.
Mr. Goodlet: There is a section in the legislation that would require the clearing-house to attempt to enforce payment of the note or the bill, but the clearing-house will not make payment if it does not receive payment. The registered owners of the instrument would be in the same situation as they are currently. They would have a claim on the issuer, but when and how that would be paid out if the issuer were to become insolvent would be the subject of other actions not within the depository. There is a requirement within the act that the depository must attempt to enforce payment of the instrument.
Senator Stewart: How would it carry out that attempt?
Mr. Goodlet: Presumably, it would register its claim and then you would be going through some sort of insolvency regime. I am now beginning to get outside my area of expertise.
Senator Angus: The bottom line is that, just because it goes to the depository, it does not upgrade the quality of the paper or the security that you have.
Mr. Goodlet: That is correct. The depository is holding the note on behalf of the owner.
Senator Angus: It is an administrative function?
Mr. Goodlet: That is correct.
Senator Angus: I am trying to demystify the issue. This legislation results from a call by the securities industry to handle commercial paper and bankers' acceptance instruments. Is that correct?
Mr. Swedlove: Yes. There are a number of instruments that are now traded through depository systems. It is very much what occurs in the modern financial environment. The problems with banker's acceptances and commercial paper was that the Bills of Exchange Act did not permit that to take place.
Senator Angus: That was to be my next question. What has been happening? It has been many years.
Mr. Swedlove: They have not been traded because of the requirements of the Bills of Exchange Act. The Canadian Depository for Securities is gearing up, once this legislation is passed, to be able to handle bankers' acceptances and commercial paper. They are planning on starting, hopefully, in September of this year.
Senator Angus: That was my next question because I understand that CDS is supposed to be ready in September. You have no reason to believe that it will not be?
Mr. Swedlove: No. Once this legislation has passed, then they will be able to proceed with this. It is strongly supported by users, issuers and purchasers of commercial paper.
Senator Angus: Have the terms of this bill been cleared with the industry? Are they comfortable with it? Have there been protests in the other place on the way through?
Mr. Swedlove: This subject was part of our discussion paper on financial sector reform for the 1997 exercise. We did not introduce this as part of Bill C-82, which brought forward all the other changes in the financial sector legislation last year, because it was a new piece of legislation.
The view of the Department of Justice was that it had to go as a separate bill. It was introduced in the last Parliament as Bill C-92; however, it was not passed before the adjournment and has now been reintroduced in the Senate.
Senator Angus: You have explained the amendment that you have put before us.
Was this an oversight? I know you explained it a moment ago, but in terms of the flow of my thinking, did it evolve as a result of scrutiny by the industry?
Mr. Swedlove: That is correct. The amendment was actually proposed by CDS. CDS suggested that this would deal with the problem. They support it, as do we, to clarify precisely what was the intent.
Senator Angus: The chairman raised the issue of electronic money generally. Are you the people who are addressing the issues of how to deal with the legalities, obligations and rights that will be affected or will flow from the use of smart cards, and so on?
Mr. Swedlove: I am afraid so. Last time I appeared before this committee, you asked a similar kind of question.
I chair an interdepartmental group that is looking at regulatory issues associated with smart cards and other forms of electronic payment. The Department of Finance, the Bank of Canada, the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation all participate in this group. We liaise with the industry and carefully review the progress of the test programs that are ongoing. We also have consultations with our colleagues in other countries who are considering how best to regulate in this area or, indeed, if regulation is necessary.
It is very much an ongoing issue for us. We continue to look at it closely to determine where we may need to proceed with regulation or legislation in the future.
Senator Austin: Is the depository entity the same entity that deals with possession of certificates of equity and share certificates?
Mr. Goodlet: Yes.
Senator Austin: Therefore, the transfer system will be similar. In many cases today there are companies that do not issue share certificates, but simply make entries in the depository. Are you familiar with that practice?
Mr. Goodlet: We are less familiar with that. CDS runs a number of systems. The one that this legislation will address primarily is called the Debt Clearing Service which currently has on it all of the Government of Canada debt, direct issues and provincial debt. Federal and provincial guaranteed instruments are eligible for that system at the moment.
As Mr. Swedlove mentioned, bankers' acceptance and commercial paper are not eligible because of the lack of support for book entry transfers of ownership.
CDS also runs systems in which it processes trades in equities for the TSE and for the Montreal exchange. It also has some corporate bonds on a system called the Securities Settlement Service. Those systems have not been large enough, in terms of systemic risk concerns, for us to have wanted to designate or address that issue. It is clear that the market is thinking about trying to move to the kind of world that would see ownership of most financial instruments transferred via book entry.
Senator Austin: I am sure there will be a much more commercial use of these types of instruments once the electronic transfer system is permitted by this legislation.
Can you speculate that the industry will try to securitize or sell pieces of deposit certificates as part of a new product securitization? Can you see that?
Mr. Goodlet: The history of moving Government of Canada securities certainly lends support to the view that there was an increase in the volume of trading activity. Getting securities into a depository deals with the operational risks, the worries about theft or loss of securities, and solves many operational problems in the delivery and coordination of delivery of securities and payments. Transactions costs will be lowered quite considerably in doing a securities transaction. Once those costs were lowered, the volume went up considerably. We think some of that will be occurring here as well.
These are fairly large markets. The bankers' market is between $40 and $45 billion in outstanding securities; the commercial market is just over $29 billion. It could be that these markets will become more actively traded, which will provide additional liquidity simply because we have reduced the transaction costs in an environment that we are convinced is legally sound. So that there are no additional or unacceptable risks coming into the system.
Senator Austin: Does anything you are doing in this legislation affect the current payment system in Canada? Do you see any impact in terms of the settlement process amongst financial institutions?
Mr. Goodlet: There are two parts to how the depository works. First, getting the trades in and processed in an acceptable manner; and, second, how the payment obligations which are generated by those trades are settled in the payment system.
Part of our responsibility that I referred to earlier under the Payment Clearing and Settlement Act in our oversight capacity is to satisfy ourselves that, first, payment will be made; and, second, it will be done in a timely, final and irrevocable fashion.
CDS has circulated changes to their rules to the participants. We hope these will be approved by the board in April to take advantage of the Large Value Transfer System or LVTS which is expected to become operational towards the end of May or June.
In the rules that they are setting up there is a requirement that payment obligations be discharged by using the Large Value Transfer System, which will eliminate overnight settlement risk. That is not part of this legislation, but it is something that is occurring within the depository and its rules. That is something we are promoting quite strongly because it will eliminate settlement risk overnight.
The Chairman: Are we agreed that it does not require legislation because it can be agreed to by CDS as part of its operating regulations?
Mr. Goodlet: That is correct. The existence of the LVTS provides the means for making the payment. LVTS payments will be risk-free to the recipients of funds. They will be able to use them on a non-conditional basis. Those who have payment obligations payable to the clearing-house will be able to use the LVTS system to discharge that payment obligation.
Senator Austin: Are you satisfied that this system is free of year 2000 risk?
Mr. Goodlet: I do not think any one will be able to say that it is completely free of year 2000 risk. CDS has a plan in place for dealing with the year 2000.
Senator Austin: No one can absolutely guarantee it?
Mr. Goodlet: No.
Senator Austin: Are you not creating a new system here that creates a new systemic risk because of the year 2000 issue?
Mr. Goodlet: No. The Debt Clearing Service that I referred to is essentially year 2000 compatible. They have gone through approximately one and one-half million lines of code and made 14 changes in it. That addresses their individual system. They have other systems such as the Security Settlement Service, which was not year 2000 compatible and which they are undertaking considerable effort to bring that about.
CDS is also at the centre of an industry-wide coordination activity to ensure -- because it is important here as we talk about the trades -- that participants who enter into trades, either the seller or the buyer, are able to communicate with the CDS systems. A lot of coordination will be done within the industry, primarily through the first three or four months of 1999, in which industry-wide tests will be conducted to make sure that networks and communication systems are all compatible, one with the other, for the year 2000. CDS is one of the first depositories I am aware of worldwide that has actually issued a public statement on what its plans are and how it intends to deal with this. They are working hard on it.
Senator Stewart: I am interested in understanding the concern of the Bank of Canada for this new regime. I can understand that there will be an indirect interest, but I am interested in the direct. Is it primarily because the depository would take deposits, either in the form of federal bonds or instruments based on federal bonds? Is that the primary direct interest of the Bank of Canada? If not, what else is?
Do you know the intention of provincial governments with regard to their debt instruments? Do they intend to accept this new arrangement and, in any specific case, why not?
Mr. Goodlet: With respect to your first question, the Bank of Canada's interest comes out of its responsibility under the Payment Clearing and Settlement Act. Our responsibility there is to worry about systems which could pose systemic risk. By "systemic risk", I mean systems in which the failure of any one participant could cause the subsequent failures, or at least extreme financial difficulties, of other participants in this system or for the clearing-house itself.
To give you an example, in the current DCS system, payment obligations on a daily basis, on a gross basis, amount to between $100 billion and $150 billion in Government of Canada securities. Those are netted down, typically, to around $4.5 billion per day payable by participants.
From our point of view, we want to make sure, first, that that netting is legally valid. If it were invalid and undone for any reason, participants would have a much larger exposure than they originally had thought. Second, we want to make sure there are arrangements in place so that if any one participant fails to make its payment when due, typically at the end of the day, it will not cause problems for the clearing-house or for other participants. We have dealt with that by putting limits on the size of exposures. We have required the use of collateral to underlie the payment obligation so that if someone fails to make a payment, we can use collateral to generate the necessary liquidity to make payments for everyone.
Senator Stewart: What you are saying now seems to run contrary to what you told me earlier, namely, that OSFI had no great concern in the operation of this depository. You are talking now about risks, and so on.
Mr. Goodlet: That may have been the result of my poor explanation.
OSFI will not worry about the system per se in terms of the system's integrity; the Debt Clearing Service, for example. It will be concerned about the participation of institutions for which OSFI supervises participating in systems, for example, if they were unsafe or posed extreme risks. It would have some concerns from that perspective, as one of the gamut of risks that financial institutions might face, and it would be concerned about it in its supervisory activities.
Indeed, we use mechanisms like FISC, Financial Institutions Supervisory Committee, to ensure there is communication between OSFI, ourselves, CDIC, and the Department of Finance on clearing and settlement system matters. It will be aware of our views.
Senator Stewart: Will you go on to the question concerning provincial governments?
Mr. Goodlet: In order for securities to come onto the Debt Clearing Service, they must be declared as eligible securities. To become an eligible security depends on the nature of risks that the securities can pose. Government of Canada securities carried no default risk with them, so it was a relatively simple matter to bring in these securities. It was deemed that there could be no default on these securities so we did not have to worry about that. The Bank of Canada acts as the paying agent and pays, on behalf of the Government of Canada, either interest payments or amounts that come due on maturity, and there is no risk of default here.
In the case of provincial governments, those securities are coming on, again on the view that there is no default risk. However, there was a difference in the sense that they use private sector institutions to make payments on their behalf -- again, either interest or maturity payments. The use of private sector institutions as paying agents raised a small risk that we had to be concerned about, namely, that the paying agent might fail, particularly, for example, after it had received funds from a province to make payments on its behalf but before the payment had been made to the clearing-house. That risk was dealt with in amendments to the Debt Clearing Service rules. We are satisfied with those arrangements, so those securities are now eligible.
There are what I would call non-systemic issues in the relationship between the paying agents and the provinces themselves that are being discussed between the parties outside of the clearing-house arrangement. I would suspect that when those things are sorted out, provincial government securities will come into the system.
Senator Stewart: You suspect that all of the provincial governments will participate?
Mr. Goodlet: That is my expectation, yes. There are some advantages to having that happen from an issuer's perspective because it increases not only the ability to trade in their securities but also the liquidity in the market for their securities.
Senator Austin: Regarding the issue of recovery of expenses, how does the depository charge for its services? Who pays for those?
Mr. Goodlet: The depository is a privately incorporated entity but it is set up as a non-profit entity. Participants sign an agreement, when they become members of the depository, for particular services. You do not have to be a member in each service, only for those services for which you sign on. There are agreements within that as to what the fees will be charged for. For example, if a new system is being put in place and there is a particularly large charge, there are ways to assess members for those fees as well. There are also rebates that occur, depending on volume usage.
Senator Austin: So that each side of this transaction will have to have an agreement with a depository to be a member for whatever service they participate in?
Mr. Goodlet: Each of the participants will. That is not to say that everyone who participates in the bankers' acceptance market, for example, must be a member of the depository, in the same way that everyone who participates in the Government of Canada market does not have to be a member of the depository. You can act through someone who is a participant in the depository.
Senator Austin: I understand.
The other point I wanted to ask you about is probably very picky. In clause 19, I see that the clearing-house does not have a beneficial interest in the bill or note. That is understandable. It is acting as an agent for one or both of the parties. However, in the proposed amendment the phrase used is "makes final and irrevocable payment of the amounts owing to the clearing-house." I wonder whether the word "owing" is the correct word. As an agent, it is not owed to the clearing-house; it is owed to another party. "Payable" to the clearing-house would be acceptable. Something neutral like "payment of the amount due to the clearing-house" or "payable to the clearing-house" would be acceptable but "owing" stands in the face of the entity not having a beneficial interest.
Ms Knopp: CDS, the clearing-house, is actually the holder of these instruments. They are made payable when they are issued.
Senator Austin: Would you say that they have a bearer legal title?
Ms Knopp: A trustee bearer legal title, yes.
Senator Austin: They have a bearer title, but not a beneficial title.
Ms Knopp: That is correct.
Senator Austin: Is that clear from clause 19?
Ms Knopp: I think it is. When one looks at it in terms of liabilities, the acceptor is liable to provide the clearing-house. There is a liability by either the acceptor or the drawer and endorser, if need be, to make payments to the clearing-house. The clearing-house can then make payments to the actual holders. Yes, I think that is covered.
Senator Austin: The question is this: Do they have a legal title or are they simply fiduciaries? Are they agents?
Ms Knopp: I would say they are bearer trustees. Yes, they would have legal title, but not beneficial title.
The Chairman: If there are no further questions, is there a motion to amend clause 17 in light of the amendment before us?
[Translation]
Senator Hervieux-Payette: I would have an excellent amendment.
That Bill S-9, in clause 17, be amended by replacing line 36 on page 5 with the following:
"makes final and irrevocable payment of the amounts owing to the clearing-house"
This is a short amendment. Since I am the one who made the presentation that had been prepared for that legislation, I did not ask any question, because I had understood what I had to say.
[English]
The Chairman: Is the motion acceptable, honourable senators?
Hon. Senators: Agreed.
The Chairman: Carried.
Do we have agreement on the other clauses of the bill?
Hon. Senators: Agreed.
The Chairman: Carried.
I will then report the bill back to the Senate with that one amendment. Is it agreed?
Hon. Senators: Agreed.
The Chairman: Carried.
Our next witnesses are here with respect to Bill C-5, An Act respecting cooperatives.
This bill has been around for awhile. It did not get to us before the election or before Christmas, but it has finally arrived.
Please proceed, Mr. Gill.
Mr. Lee Gill, Acting Director, Corporate Law Policy Directorate, Department of Industry Canada: Honourable senators, Bill C-5, An Act respecting cooperatives, is a legislative reform project initiated and developed primarily by the users of the legislation, namely, the cooperative sector.
This bill is important for Canada. There are 7,295 non-financial cooperatives in Canada either incorporated federally or provincially. In 1995, these cooperatives had a reported membership of over 4.5 million, and they have more than 70,000 employees.
Non-financial cooperatives are located across the country. From an employment perspective, 50 per cent are located in Western Canada, 7 per cent in Ontario, 29 per cent in Quebec, and 13 per cent in the Atlantic provinces.
Cooperatives are an important force across a wide range of sectors of our economy, including agriculture, fishing, housing, retailing and public services sectors.
Some cooperatives are very large. In 1996, 17 of them were included in the The Financial Post top 500.
Why do we need legislative reform? The cooperative sector itself identified this need. The current federal cooperative statute was enacted 28 years ago and has not been significantly amended since that time. Cooperatives, however, have evolved during the past 28 years. They do business in an increasingly competitive domestic and foreign marketplace. Many need a modern, flexible and efficient law under which to operate.
[Translation]
Cooperatives appear to be anxious for reform. The two national associations representing cooperatives in Canada, the Canadian Cooperative Association and Le Conseil canadien de la coopération, spent the last several years developing draft model legislation.
In September 1996, Industry Canada, in collaboration with the Cooperatives Secretariat of Agriculture and Agri-Food Canada, released a discussion paper describing the model act. The cooperative sector, provincial governments, securities commissions, and numerous other stakeholders were asked to submit comments and questions about the discussion paper.
Industry Canada and the Cooperatives Secretariat then went across the country and consulted with interested stakeholders. This bill is based on the model act prepared by the associations, the comments received during the consultations, and the policies developed internally in collaboration with the cooperative sector.
The overall aim of this legislative reform is to respond to the needs identified by the cooperative sector, in three primary ways.
It will revitalize the corporate governance rules relating to cooperatives, provide cooperatives access to new financing opportunities, and strengthen cooperatives' distinctive features.
Concerning the revitalization of the corporate governance rules, the proposed legislation would, for example, simplify the incorporation procedure, thus reducing the cost of incorporation for both cooperatives and government. It would simplify the statute and the articles of incorporation, give members additional remedies and rights so that they don't have to rely on enforcement by government administration, clarify the fiduciary duties of directors of cooperatives and make directors subject to due diligence test.
[English]
Concerning financing, this legislative reform allows cooperatives to choose to maintain the traditional par-value membership shares or to issue no par-value membership shares, which can rise in value over time. This puts cooperatives on a level playing field with other businesses, enabling them to finance more easily investment and expansion opportunities.
The proposed legislation also protects the distinctive features of cooperatives in a number of ways. Under the proposals, cooperatives are required to operate, be organized and administered on a cooperative basis before they can incorporate. Members themselves make the by-laws as opposed to the directors. Members can also apply to the court for an investigation if the cooperative is believed not to be operating on a cooperative basis. At least two-thirds of the board of directors must be members of a cooperative. The bill emphasizes and protects the differences between cooperatives and business corporations to ensure the uniqueness of the cooperative organization at all times.
In conclusion, this legislative reform process has been driven by the cooperative sector. It has broad support across the country. The overhaul of this legislation will give cooperatives a level playing field on which to compete with other businesses and the new legislation will allow Canadian cooperatives to carry on business effectively, thereby creating more opportunities for investment, for economic growth and for job creation in many communities across the country.
The Chairman: Mr. Gill, before I turn to my colleagues for questions, I wish to ask you a couple of things. I do not know if I should be directing these questions to you or Ms Elliot. I am not sure whether it is a legal question or a legal policy question, and I do not know that I know the difference between the two.
In clause 111 of the bill, you have adopted a recommendation that came from this committee's 1996 our corporate governance report. Directors' liability under clause 111 is limited to a general due diligence defence, which has not historically existed in the CBCA and was one of the major recommendations that came from this committee. I am delighted to see that you took our advice on that.
Since you have lifted that one recommendation from our report -- and, given the fact that we understand that the vast majority of our corporate governance recommendations will be included in the revised CBCA when it comes forward later this year -- why is it that the other pieces were not also included? Or is it true that when the CBCA comes forward, it will in some sense be an omnibus bill which will then incorporate the other corporate governance provisions of the CBCA into this act?
Mr. Gill: I have gone through each of the 21 recommendations in your 1996 report and I am ready to respond to each of those in terms of what we have and have not applied. There are only a couple of examples where it is applicable. In certain cases, some of those recommendations were not applicable to this particular bill.
The Chairman: They are not applicable to cooperatives.
Mr. Gill: Exactly. In other cases they are and we have tried to apply them, where possible. In a couple of cases, because we have not yet decided what to do in terms of the reform of the CBCA, the Canada Business Corporations Act, we have not applied what was recommended in the bill yet. We would hope to do so at some point in time in the future when we decide what to do. An example of that would be with respect to insolvency tests. There are a couple of things in there where it is not clear where we will go yet.
The Chairman: I will not ask you to go through the 21 recommendations now, but what about my broader question? Let us take whatever unresolved policy issues remain within the department and say that the department decides to make a change to the CBCA -- which is consistent with our recommendations -- in order to keep the Cooperatives Act up-to-date. Would you include corresponding amendments to the Cooperatives Act in the act amending the CBCA in order to keep the Cooperatives Act as closely consistent with the CBCA as possible, recognizing that they are different institutions?
Mr. Gill: That would be my intention.
Senator Angus: I have a question concerning the standards for directors' liability. I understood that you would be clarifying and expanding on those standards in this bill. Could you summarize for us on that?
Ms Jennifer Elliot, Legal Policy Analyst, Corporate Law Policy Directorate, Department of Industry Canada: Basically, we are adopting your recommendations from that paper and following what will eventually be contained in the CBCA. The current Cooperatives Act is very vague. It is not as up-to-date as the CBCA is at this point in time. With this act, we are bringing it up to standard with the CBCA and even a little further, in terms of your recommendations, to use the due diligence defence on that kind of thing. The rules are much more clearly set out in this piece of legislation than they are in the current act and, again, we are going that further step.
Senator Angus: Is there any provision exempting directors of cooperatives from a liability for wages and fringe benefits in the case of an insolvency?
Ms Elliot: Yes.
Senator Angus:Is it correct for me to understand that your ultimate goal is that after the CBCA amendments are brought in and, hopefully, adopted, there will be harmony on this issue?
Ms Elliot: Exactly.
Senator Angus: Exact harmony?
Mr. Gill: Yes, there will be.
Senator Angus: Last year, we looked at the Bankruptcy and Insolvency Act and suggested a number of amendments to it. We were unable to put forward one of our amendments because it would have triggered a lot of other amendments to other acts. This involved the subject of directors' liability for wages, and so on. I am quite interested in that topic.
Ms Elliot: It involves proposed section 102 of this act. We have put in what we hope will be a CBCA amendment as well. Again, we have gone that one step further.
Senator Angus: Is there an exemption?
Ms Elliot: Yes. Basically, it states that a director is not liable for any amount in respect of statutory or contractual termination of employment for severance pay or punitive damages related to termination of employment.
Senator Angus: There has been talk, in theory at least, about making directors' liability insurance compulsory in some areas. Have you reviewed that or considered that in this regard, especially given the nature of cooperatives?
Mr. Gill: No, not to my knowledge. My understanding is that insurance is generally available. We have not had any complaints that it is not available in the case of cooperatives.
Senator Angus: I was not thinking about the availability. I know it is available. My question concerns whether it will be made compulsory.
Mr. Gill: No. We have not examined that at all.
[Translation]
Senator Hervieux-Payette: First of all, I would like to know how many of the 7,000 cooperatives are federally incorporated versus the number of those which are provincially incorporated?
[English]
Mr. Gill: There are only 51 that are federally incorporated now. Those are some of the bigger ones that are in the top 500. Most of the cooperatives are provincially incorporated.
[Translation]
Senator Hervieux-Payette: I am talking more about the Quebec context than about the national one, and I am thinking of the problems the cooperatives might pose, of the risk, for example, that credit committees come into conflict of interests. Within small communities, people who sit on a credit committee are like members of the same family. Does this bill include some amendments to deal with that?
We are always thinking of cooperatives as institutions which are closer to people than banks. Members of cooperatives are also part of the administrative structure of their cooperative. Based on my regional experience in small towns, I must say that everybody knows everybody else around there, and that people who have to make decisions are often in conflict of interests. Have you proposed any modifications to overcome that problem, or are there no provisions in that bill to address that issue?
[English]
Mr. Gill: To my knowledge, this has never been raised as an issue. I stand to be corrected by my colleagues who were there through the whole process; I was not. I think the answer is "No".
[Translation]
Senator Hervieux-Payette: It would mean that there are no such conflicts of interests in English Canada, but only in Quebec. You have not dealt with that at all in the new legislation? I didn't see anything.
[English]
Mr. Gill: I am told it is clause 103.
Mr. Irving Miller, Legal Counsel, Legal Services, Department of Industry Canada: There are general rules governing conflict of interest in clauses 103 and following. They require that directors and officers must disclose any conflicts that they have in any material transaction. Those are the general rules that are normally found where you have a board of directors.
[Translation]
Senator Hervieux-Payette: So, that's the status quo.
Mr. Miller: Yes, there is no change. Those are the same provisions.
Senator Hervieux-Payette: My last question is about privacy in relation to the different services which may be provided. Can we find the same level of concern for privacy, because it is said in that bill that cooperatives may build up electronic data banks and keep very sensitive records about their members or customers. Are there any new special provisions on that matter or is it simply the same old song?
I come back to my example of small communities where everyone is aware of everyone else's financial status, but if the cooperative gets growing, it might want to use its lists to try to sell either RRSPs, or insurance or virtually about anything through direct mail. Anything in the world can be sent by mail. Are there any restrictions to such practice right now?
[English]
Mr. Gill: Under the bill, members can go in and observe lists of the cooperative members, but the lists are not to be made available to the public at all. The information is held within the nature of the cooperative, the state of the cooperative.
[Translation]
Senator Hervieux-Payette: But the cooperative itself might be used to promote some activities, to sell other products or services offered by the cooperative. Is a cooperative allowed to use its list of members for such purposes?
[English]
Mr. Gill: For the purposes of putting their own product to cooperative members, the answer is "Perhaps". It can be used for the democratic functioning of the cooperative itself, but not for other purposes.
[Translation]
Senator Hervieux-Payette: Is that limitation specifically mentioned in the bill?
[English]
Ms Elliot: We heard concern about that in consultations with members. There is a restriction contained in the act that says any member who wants access to the members' list must sign an affidavit stating how the list will be used. For some members, that was not enough protection. We have added a provision -- and this will likely be a CBCA amendment, too -- that members who wish their names removed from the list can specifically request that. The members' list will be incomplete and the list itself will state that it is incomplete, but each member must take that step to have their own name removed.
[Translation]
Senator Hervieux-Payette: Why didn't you use the opposite approach, namely that people wouldn't receive the list unless they specifically accept that their name be on it? That would have been much more sound as a protection for people than requiring each and everyone to fill a form stating that he is not interested in any solicitation whatsoever. This is a provision that I find extremely soft as a means to protect those lists. I guess my suggestion would rather be that the written consent of the person be compulsory to have his name released. In my opinion, it would be much stronger.
[English]
Ms Elliot: We did consider that. There is some balancing to be done. One reason we decided to take that route is the importance of the list among members and shareholders to facilitate contact for purposes of voting or communication with your fellow members. Despite the fact that there are dangers with the list, there are also positive aspects of the list. Again, there is some balancing between the two.
[Translation]
Senator Hervieux-Payette: But we should be careful not to confound voting with soliciting for products. You must certainly be aware that when I talk of controlling the list, I mean preventing it from being used for the promotion of new products or for any other commercial purposes. That is quite different from using it to facilitate the operation of the cooperative itself. It presupposes that everything is fine, if we are in a small town of 3,500 people. But where a cooperative is operating in the whole province, that's not the same, and you won't make me believe that among members of a cooperative which has branches in 75 communities, people will all contact each other by letter. They are not that much acquainted.
Ms Elliott: I agree.
[English]
Ms Elliot: Having talked to the cooperative sectors, I agree that there are two different purposes for this list, one good and one not so good in some members' eyes. Unfortunately, they both exist. We are trying to strike a balance between the two.
Mr. Gill: In developing some of the proposals for the Canada Business Corporations Act, for example, we have talked about this aspect quite a bit. Primarily, we have talked with our provincial counterparts, the Canadian Securities Commission administrators. They are moving towards using these lists to send information out to people unless they indicate clearly that they do not want their name on the list. As much as possible, we want to keep our laws harmonized with what is happening elsewhere.
We have talked to the securities commission administrators quite a bit about this. We seem to be in agreement. There are certain provinces that initially had some problems with that.
I understand that they have since obtained legal opinion that would put them on-side with that move. They no longer have problems. What we are doing in the Canada Cooperatives Act would seem to be consistent with that general thrust.
[Translation]
Senator Hervieux-Payette: Mr. Chairman, I will address my next comments more to the committee members than to the witnesses. One of the main criticism in Quebec, when we draw a parallel between banks and cooperatives, is about the barriers which exist between the different functions. If, on the one hand, the Bank Act prohibits the sale of the whole range of services and the amalgamation of lists to offer all those services, and if, on the other hand, cooperatives are not subjected to such restrictions, then we are favouring one group over the other. That creates enormous discontent not only at the level of institutions but, unfortunately, in all sectors. As a result, there is less activism and less resources within consumers associations to ensure consumer protection. I have some reservations regarding privacy. I feel that there should be a parallel between the two. Our witness tells us that a parallel is made between federal and provincial cooperatives. I am quite prepared to accept that, but we are working at the federal level, we are responsible for the Bank Act. I think that we should harmonize federal laws. That's my concern.
[English]
Senator Tkachuk: I am somewhat confused on this issue. Are you saying that the credit union list should not be used by the credit union itself to sell its own product, or other people?
[Translation]
Senator Hervieux-Payette: I am saying that in Quebec, the whole range of financial services are integrated under the cooperative's umbrella, which means that a cooperative may offer you not only your RRSP, but also your car insurance, your home insurance, your life insurance, your equity holdings, et cetera. As a result, the walls are very thin between the various services that are offered by the cooperative organization, but if every member has access to that list unless one states that he doesn't want to see his name on it, you can imagine the outcome. In a cooperative such as one of them in Quebec, which has a membership of around 600,000, it would mean that any member could ask for the 600,000 members list simply by signing an affidavit stating that he will use it only to contact the 600,000 members. In my opinion, that rule was meant for small cooperatives, but when you deal with a large commercial entity which generates a turnover of one billion dollars, privacy issues become more important.
In a small town, everyone is aware of about everyone else's life, knows the revenues of almost everyone else. It is not the same when a whole province or several provinces have access to the same cooperative.
There should rather be a parallel on the issue of privacy between the Bank Act and the Canada Cooperatives Act. We should use a similar approach in both legislations.
[English]
Senator Tkachuk: The concern was that if I were a member of the credit union, I would sell more of my own product or that the credit union would sell more of their product to me as a customer?
[Translation]
Senator Hervieux-Payette: If the Bank Act does not allow the sale of life insurance over the counter while the Canada Cooperatives Act does permit it, its gets complicated. After all, since banks and cooperatives are competitors in the financial sector, I think there should be some consistency between the Bank Act and the Canada Cooperatives Act regarding the marketing of products. So, if we allow a complete decompartmentalization within the cooperative sector, we should afterwards offer the same opportunity to banks. As far as I know, banks are not allowed to use their lists of customers as it is permitted under the Canada Cooperatives Act.
[English]
Mr. Gill: First, let me indicate that this legislation does not cover credit unions. Bill C-5 addresses non-financial cooperatives. If there is an issue with respect to the credit unions, that is another piece of legislation that will be handled by the Department of Finance.
Senator Hervieux-Payette: Is it housing?
Mr. Gill: Housing, agricultural, cooperatives, food, fishing, and so on. It is non-financial cooperatives. Financial cooperatives are dealt with in another piece of legislation.
The cooperatives sector has felt that it is necessary and useful for them to have this list to be able to use it to provide information to their members and to inform their members as to what is available. Part of being a cooperative is to want that information and to work together to sell your product and to improve the members' well being.
You may ask the cooperative sectors if they have a problem with that. I do not think they do. I think they want it. I do not feel that there is an issue here. If changes are to be made to other acts, in general, perhaps we should examine that; however, I do not think there is a need at this point in time.
Senator Tkachuk: Does the credit union movement have any difference in applicability of federal taxation law to a private corporation under Revenue Canada? Do they pay the same taxes and are they dealt with in the same manner?
Mr. Gill: Credit unions would not be covered under this legislation.
Senator Tkachuk: I meant a federated cooperative.
Mr. Gill: No. My understanding is that there is a slight difference. I am not totally familiar with the intricacies of taxation.
Basically, the funds are paid back to the members if there is a surplus, and that is then taxed as personal income.
Senator Tkachuk: It is taxed on the person who receives distribution of the income rather than the corporation, which would be taxed at a particular percentage level and then their dividends would be distributed to their shareholders?
Mr. Gill: They would receive a dividend tax credit. They do not get that sort of thing as a cooperative.
Senator Tkachuk: When a cooperative enters the market place to gain access to capital, would they be issuing shares or memberships?
Mr. Gill: I am not familiar with the intricacies of that area. My understanding is that you issue equity in the cooperative and you get a return on the increased value of your share.
Senator Tkachuk: People would receive shares, not memberships, that would trade on the market?
Mr. Gill: They would be getting non-voting shares.
Senator Tkachuk: You mention that some people in the cooperative movement are troubled by this legislation. There was controversy with the wheat pool actually going to this system of operation. What is your sense of the feeling across the country?
Mr. Lynden Hillier, Executive Director, Cooperatives Secretariat, Department of Industry Canada: There are differences of opinion on this subject. In the final analysis, the decision that was taken was that the act should not preclude a member of a cooperative from deciding to go in a particular direction. The cooperative sector agreed with this.
If we had an enabling piece of legislation, and if within that enabling legislation the members themselves in the cooperatives had to make the decision on whether the cooperative went to the public markets or stayed traditional, that would be consistent with the co-op principles of member ownership. We have enabling legislation and the members decide where they want to go within that.
Senator Tkachuk: In clauses 163 to 170, though, proxy voting by members would not be allowed but shareholders would have proxy voting rights. Clarify that for me. Would shareholders who were investors in the co-op be issued non-voting shares or voting shares? You told me non-voting shares but from this it is obvious they would be voting shares.
Ms Elliot: They are issued non-voting shares, so there is a distinction between a shareholder and a member at all times. The members are the owners of the cooperative, and each member has a vote as a member. That is the basic structure. They can set up investment shares, which they can then issue on the market. Those investment shares will be non-voting investment shares. However, there are certain times when investment shareholders will be given rights to vote.
Investment shareholders would be able to vote, first, if their shares are affected by, say, an amendment to the articles. That would affect their share price. The actual calculation of their share dividends would be affected, so they would automatically have a right to vote.
The second instance would be if the members decide to give investment shareholders a right to vote for a certain percentage of the directors on the board, up to 20 per cent. In that way, the shareholders are given some right to a voice on the board if the members decide that that is how they will do it. If those shareholders are then given those rights to vote, that is when the proxy provisions would be applicable.
Senator Tkachuk: So that when the dividends are distributed to shareholders after a particular offering in a credit union, are they compelled to distribute an equivalent percentage of the profits to the membership as well, or can they hold that? Let us say there is a profit. The investors get dividends for their investment, but is there anything here that would compel a credit union, when it distributed dividends to investors, to distribute dividends also to members?
Ms Elliot: No. They can have completely separate structures. They can set them up however they want. They can have members getting patronage dividends as opposed to straight dividends every year, which means a whole different financial structure for the members than for the investors.
Mr. Hillier: Members can also be investors.
Senator Tkachuk: Regarding financial disclosure, clauses 247 to 265 state that shareholders would be entitled to have annual financial statements placed before them at such an annual meeting only if they could elect directors. That is to say, although the credit union goes to the public market and issues non-voting shares for investment, it has no obligation to make its financial statement public? In other words, it must make them available only to the membership?
Ms Elliot: Yes. The basic requirement is that they must place it before the members at an annual meeting.
Senator Tkachuk: Do they not have to file it with some department?
Ms Elliot: If they are a distributing cooperative, they do have to file it with the director. If they are a distributing cooperative, which means they have shares on the market, then they have a structure set up for shareholders, but shareholders will not have an annual meeting unless they are given that right to elect directors. There is no automatic right that shareholders have to an annual meeting. They are given a right to call special meetings the same way they are in the CBCA, but, in terms of an annual meeting, they only get an automatic right to an annual meeting if they are given the right to vote for directors. In that case, if they have an annual meeting, then the statements will be placed before them as well.
Senator Callbeck: The investment shareholders can elect up to 20 per cent of the directors. Do they have to come from the shareholders or can they be outside?
Ms Elliot: They can elect whomever they wish.
Senator Callbeck: They can be from outside. They do not have to own shares.
Ms Elliot: Outside directors are fine, yes.
Senator Callbeck: I was looking over the briefing note on the bill. Under clauses 117, 118, 123, it says that membership shares will not confer the right to vote. Voting rights are part of membership but membership shares will confer on their holders equal rights to receive declared dividends in the remaining property of the cooperative at dissolution unless the articles provide otherwise. Membership shares will not confer the right to vote.
Ms Elliot: That is correct. The vote attaches to the member. Each member has one vote, but does not attach to the share itself.
Senator Stewart: To how many of the 7,295 cooperatives in Canada will this particular bill apply? Is it just to the federally incorporated part of the cooperative sector?
Mr. Gill: Just to the federally incorporated cooperatives at this point, yes.
Senator Stewart: So that figure of just over 7,000 is really misleading as to the significance of this particular bill.
Mr. Gill: Yes and no. Many of the provinces will probably adopt much of what is here over time, so the impact of this will be much greater than just to the 51 that are included right now.
Senator Stewart: In terms of business done, roughly, what part comes under federal incorporation and what part comes under provincial incorporation?
Mr. Gill: In terms of business done?
Senator Stewart: Yes. We might have some large, federally incorporated cooperatives, and one of those would count for perhaps a few hundred provincially incorporated cooperatives in terms of the volume of business actually transacted -- that is, bottom-line transactions.
Mr. Gill: I do not have that precise figure with me right now. I am not sure whether the 51 constitute 10,000 of these employees or 5,000. A large number of the federal ones are the national groups for cooperatives, and a lot of the provincial cooperatives are associated with that. It gets a little messy if you start to cut and paste it.
Senator Stewart: Could you give us some examples of federally incorporated cooperatives?
Mr. Hillier: You are quite correct that some of the federally incorporated cooperatives are among the largest in the country. Some of the co-ops covered under this bill are: Federated Co-operatives Limited in Saskatoon, which was sales in the neighbourhood of $2.4 billion per year; Dairyworld Foods in Burnaby, British Columbia, which is a large cooperative covering the dairy cooperatives in western Canada; and Co-op Atlantic, in Moncton, New Brunswick, which is a wholesale cooperative to the consumer co-ops through that region.
Senator Stewart: Is this particular bill simply designed to bring the existing law up-to-date with changes in notions of corporate governance, and so on, or have there been specific problems in the federally incorporated cooperatives to which some of these amendments or provisions are thought to be remedies? Have there been causes of business problems in any of these cooperatives? If so, what are the nature of those problems? Is it a case of the directors not paying enough attention?
Mr. Hillier: It is a combination of the issues you are raising. A part of it is to bring it up-to-date. Another part of it is that the existing federal act is very cumbersome in terms of incorporating new cooperatives under the act. In the new act, we have established it as a right. As with business corporations legislation, it will be relatively easy for people to form cooperatives. We anticipate there may be more use of the federal legislation because it is fairly user friendly.
There have been specific problems in the act. Some of the large cooperatives have had to use legal counsel to work around these problems. I think the cooperative sector may be in a better position to go through some of those items. I do not recall them right now, but there were operational problems in the old act that also gave rise to the changes we are dealing with here.
The Chairman: Thank you for attending today.
Our final witnesses today are from the anglophone and francophone cooperative societies.
Please proceed.
[Translation]
Mr. Magella St-Pierre, President, Conseil canadien de la coopération: I am the President of Le Conseil de la coopération du Québec, but I have been for seven years a member of the Board of Directors of Le Conseil canadien de la coopération which is appearing before you today.
I have with me Ms Sylvie St-Pierre-Babin, who is the Executive director of Le Conseil canadien de la coopération, and Mr. Réjean Laflamme, who is the Director of our Cooperative Development Program.
I would like first to thank your committee for giving us this opportunity to discuss that bill which is important for the Canadian cooperative movement.
As you were told earlier, the Canadian cooperative movement, after all, constitutes a major group of business organizations. On the francophone side, for example, there are 3,700 cooperatives, of which 40 per cent are part of the Caisses populaires and Caisses d'économie networks established in the various Canadian provinces.
I guess you must be very well aware of the presence of the cooperative movement in the financial sector through the Caisses populaires and the Credit Unions. You certainly know also about the important role that agricultural cooperatives have been playing for many years in Canada, but there are many cooperatives in other areas of economic and social activity too, and I would like to take this opportunity to mention the presence of the cooperative movement, for example in the housing sector. The Canadian cooperative movement plays an important advocacy role with the underprivileged, particularly in the area of social housing. It also brings a major contribution to job creation, particularly in such sectors as forests. It is very active in the food sector, mostly in rural areas. Additional sectors of activity are now emerging to meet new needs of Canadians, for instance home support services for the elderly who are loosing their ability to self-care, some new services at the experimental stage in the areas of health and professional services. It's something new to see professionals and university graduates pooling to offer and exchange services, thus developing a new type of cooperatives which is becoming extremely important.
This bill -- I must mention that because some questions were asked earlier relating to that aspect -- does not apply to Caisses populaires, Caisses d'économie or Credit Unions. The Canada Cooperatives Act applies to all cooperatives in any sectors of activities except the financial one.
Caisses populaires and Credit Unions come under provincial jurisdiction and are subjected to provincial laws. I also want to take this opportunity to indicate that in Quebec, the Caisses populaires no longer have credit committees. Senator Hervieux-Payette addressed the issue of privacy relating to the work of credit committees. After what she said, those committees were sometimes having problems with relevant rules, and I would personally rather qualify her remarks. Anyhow, credit committees have been abolished in Caisses populaires at the end of 1997.
This bill applies to different cooperative sectors and it results from a long process initiated in 1992 by our colleagues of the Canadian Cooperative Association. As you were explained, it was meant to bring remedies to a number of problems relating to the corporate governance of some cooperatives and also to update the Canada Cooperatives Act in order to harmonize it with other new legislations.
During four years, an intense discussion process has been conducted between the Conseil canadien de la coopération, the CCA, and the provincial boards whose mission is to bring together the cooperatives of the different provinces and the members of the CCA.
In short, it is in the spring of 1996 that ministers Manley, who is responsible for the Canada Cooperatives Act, and Goodale, who is responsible for cooperatives, decided to introduce a bill which would meet the expectations of the cooperative movement.
The Department of Industry and the Department of Agriculture and Agri-Food have both conducted a consultation process with all stakeholders of every regions of Canada which resulted in the introduction of a bill into the House of Commons in March 1997.
Let me say that this bill is actually the result of discussions and compromises between francophone and anglophone cooperative movements. So, it's with a full solidarity, though, that we have fought in favour of the passage of this bill in the House of Commons and that we are now appearing before you.
In conclusion, I would like to thank you and tell you that we will readily answer your questions.
[English]
Mr. Bill Turner, President, Canadian Cooperatives Association: The Canadian Cooperatives Association is the umbrella organization for cooperatives in Canada that conduct their business primarily in English. I am also President of the Saskatchewan Credit Union Central. In my non-cooperative life -- or, as my wife likes to say, my hobby -- I am a farmer northeast of Regina, Saskatchewan. I am still active in that community as a member of the local retail cooperative and a member of the Saskatchewan Wheat Pool.
I thank you for the opportunity to be here today to address the Senate committee on a very important bill for cooperatives in Canada.
I will not be long in my remarks. I do not want to repeat the presentation given by Mr. St. Pierre, who eloquently described the presence of cooperatives in this Canadian economy. He also clarified for you the fact that credit unions do not come under this legislation but are dealt with mostly by provincial legislation, although some of their central branches do come under the Canadian Cooperative Associations Act, which is a federal act.
With me today are two people who will share this presentation. My remarks will be brief. I will then ask Ms Mary Pat MacKinnon to provide you with some of our views in terms of the features of Bill C-5 and its applicability to cooperatives, and to describe for you the consultation process we went through in bringing the bill forward to the house.
With me this morning also is our legal counsel, Joe Dierker, who has worked hand-in-hand with Industry Canada in drafting the bill. I will ask him to clarify for the committee some of the issues raised in the last question period.
I should like to allow as much time as possible for questions and dialogue with the committee.
The Canadian Cooperative Association is the national umbrella organization for anglophone cooperatives. We worked closely with our counterpart at the CCC in designing this bill and we bring it forward as a partnership here.
We support cooperative development in this country. We actively advocate on behalf of cooperative interests. That is the main role we play for our member organizations.
We have 35 member organizations that are active in many sectors of the economy, agriculture and agri-food, finance, insurance, retail and wholesale merchandising, housing, health, child care, and in the service sector. Collectively, our member organizations have assets in excess of $56 billion, and we serve more than five million Canadians.
Through our membership in the International Cooperative Alliance, we network with cooperatives in over 100 countries, with a total membership of around 750 million people. It is a vast worldwide network in addition to the network of cooperatives in Canada.
Our cooperative members, like any other business in this country, are doing business in an increasingly competitive domestic and foreign market-place. For some time, our members have indicated the need for federal legislation that puts them on a level playing field to compete in this new market-place. We are simply not able to operate in our provincial boundaries anymore.
The existing federal Canada Cooperative Associations Act of 1970 has grown increasingly outdated. Unlike the Canada Business Corporations Act, it has not been amended in any significant way since its introduction. It is also based on rather a paternalistic approach to cooperatives. Quite frankly, it demands complex, time-consuming and costly procedures for cooperatives to align themselves in today's marketplace.
Bill C-5 enables cooperatives to modernize while enhancing and enshrining the statute of cooperative principles. It certainly strengthens members's rights and protections and provides cooperatives with the tools they need to grow and development in today's globalizing economy. New legislation will facilitate the expansion of cooperative within Canada as one of the truly domestic alternatives to the ever present multi-national organizations and to help sustain an alternate form of economic participation that emphasizes equality, democratic principles and mutual self help.
Ms Mary Pat MacKinnon, Director of Policy, Canadian Cooperatives Association: From our perspective, the key features of the new legislation are, first, that it modernizes the corporate statute law for cooperatives.
Second, it strengthens the members' protection and members' rights and control over business decisions.
Third, it provides a greater flexibility and choice to the members in the method of financing the cooperative, including the choice of issuing equity in the market. This has been a particularly important issue for the cooperatives. They have been debating this over the last 10 or 15 years. It is key provision in the act.
Fourth, it provides an array of modern corporate tools such as amalgamations, reorganizations and arrangements that our competitors use in carrying on their business efficiently and effectively.
Fifth, it makes directors subject to a statutory duty of care and fiduciary care.
Sixth, it requires that at least two-thirds of the cooperatives' directors be members of the cooperative, while permitting up to one-third of the board to be outside directors.
As you have heard earlier this morning, if the cooperative issues investment shares to non-members, the members of the cooperative have the right to authorize the non-member investment shareholders to elect or appoint up to no more than 20 per cent of the board of directors.
Seventh, it requires that a cooperative must carry on its undertaking in two or more provinces and have a fixed place of business in more than one province to be eligible for incorporation. That is the status quo situation.
Eighth, it enhances the cooperative nature of cooperatives by strengthening the cooperative basis test. This is important because it is this cooperative basis that tells us whether or not the cooperative is behaving as cooperative.
What is that cooperative basis? It has eight elements. It involves open membership; one-member, one-vote; no proxy voting; and limited interest on member loans and on member shares. To the extent feasible, members are to provide the capital required by the cooperative. Surplus funds from the cooperative are to be used for a variety of purposes, for example, to develop the co-op's business, to provide or improve common services to members, to provide for reserves and payment of interest on member loans or dividends on member shares and investment shares and for community welfare or the propagation of community cooperative enterprises, or as a distribution among members as a patronage return. Finally, there is a requirement that it educate members, officers, employees and the public on the principles and techniques of cooperative enterprise. For us and for our members, those are the key features of the act.
As you have heard Mr. St. Pierre say, over the past decade, CCA, our members and our colleagues, le Conseil Canadien de la Coopération, have collaborated to develop consensus among our respective members on what we think are the essential features of a new act.
We have participated in extensive internal consultations on the development of a series of draft proposals and our consultations extended to other interested parties such as provincial cooperative regulators and cooperative academics. The culmination of this process occurred when a draft proposal from the two associations was submitted to the federal government through Industry Canada and the cooperative secretariat in the spring of 1996. We have been at this for a while.
In the autumn of that same year, the federal government then undertook its own consultation across the country, using a discussion paper that was based on the sector's draft proposal. CCA and CCC member organizations participated in those consultations across the country. After that process, the two national associations met again with the government and reviewed the outcome of these consultations and re-discussed revisions. We then submitted a joint memorandum which provided the cooperative sector's response to the policy issues raised in the course of those consultations.
Following this consultation process, the new Canada Cooperatives Act was first tabled as Bill C-91 on March 25, 1997. This bill died on the Order Paper with the federal election call but was subsequently reintroduced, with some minor technical amendments, as Bill C-5 on September 25, 1997.
We emphasize the important role played by the cooperative sector itself in developing a policy framework for new legislation as well as the positive relationship the sector has had with the federal public service throughout the process of bringing in the new act. We believe that this collaborative process has served both the public interest and the cooperative sector interests itself.
We should like to acknowledge the support and cooperation of the cooperative secretariat, Industry Canada officials and the commitment of Ministers Vanclief, Manley and Goodale in supporting the creation of new federal cooperative legislation. We have also certainly appreciated the support this legislation has received from all political parties within the House of Commons and the Senate.
With the event of this new legislation, we believe that the cooperative sector will be able to make an even larger contribution to the economic and social well-being of Canadian communities.
We are now available for any questions or discussion you may wish to have.
Senator Stewart: Collectively, your membership organizations have assets in excess of $56 billion and serve more than 5 million Canadians. I am trying to sort out how much of this membership and how much of this business is under the federal statute as distinct from provincial legislation. I assume you mean that, indirectly, your organizations have this volume of assets. Is that correct?
Mr. Turner: Much of it concerns the federated nature of organizations such as cooperatives. They organize themselves into larger interprovincial organizations.
Ms MacKinnon: Yes, to appreciate that CCA's member organization includes financial and non-financial cooperatives. The $56 billion figure that we use is our collective membership base. That would include the provincial credit union centrals, The Co-Operators, which is the large insurance cooperative, plus our federated structure such as Co-op Atlantic and Federated.
When Co-op Atlantic and Federated submit their annual financial statements, that is their asset base. Underneath them -- and this is what you may be asking about, Senator Stewart -- if you take the local retail cooperative in Antigonish, Braemore Co-operative, it is a retail member of Co-op Atlantic. Its asset base is in the local community but when Co-op Atlantic does its financial statements, it acts as a wholesaler to the local retailers. A number of our larger members such as Federated and Co-op Atlantic, two of the consumer cooperatives, are structured that way. You must kind of pull them apart a bit.
Senator Stewart: We were told earlier -- and you have repeated it here -- that this bill will not apply to credit unions yet you said "financial institutions" just now.
Ms MacKinnon: CCA is an umbrella organization for the anglophone sector.
Senator Stewart: Does it include credit unions?
Ms MacKinnon: Our membership does include credit unions, but this act does not apply.
Senator Stewart: The act does not apply to that aspect of your membership?
Ms MacKinnon: That is correct.
Senator Stewart: All right. In the opening statement we were told that the bill, if enacted, will help the cooperative organizations compete with the increasingly concentrated and powerful forces of ordinary private enterprise. Do you anticipate that more and more of the cooperatives will incorporate federally -- that is, undertake to have the legal status required to do business in more than two provinces?
How, structurally, will you gear up to compete with the big chains, let us say, in the grocery business?
Mr. Joseph Dierker, Canadian Cooperatives Association: There are two aspects to your question. If you look at the present legislation, you must go back to 1960 legislation, and that is the status of the present legislation. There are many larger cooperatives in Canada that would very much like to use the federal legislation but, because of its antiquated nature, find that they cannot do so. An example would be the wheat pools. It would be of great advantage to the western wheat pools if the legislation were such that they could use the legislation. The present legislation will not accommodate that. The new legislation will permit them to use a federal legislation, a modern piece of legislation, and to structure their operations both as a cooperataive and as a large commercial operation.
This act has really embedded the cooperative principles within the structure and it has allowed it to carry on a commercial operation in a fully competitive manner.
Senator Stewart: Yes. These cooperatives would, as your answer implies, be doing business in more than one province.
Mr. Dierker: They are all doing business in multiple provinces, that is correct.
Senator Stewart: I asked earlier if there were business problems which led to the proposal for this bill. By "business problems" I do not include the kind of problems to which you recently referred. Have there been cases where, because of the legal structure of these federal cooperatives, directors have not been under adequate control, where annual meetings have not been conducted in the most efficacious way or where cooperatives have got into business trouble because of their legal structure?
Mr. Dierker: There has been an increasing concern with the present Cooperatives Act and the fact that, because of the lack of controls in the present Cooperative Act, it is open to abuse. We have known that for some years. I am happy to say that there have not been significant areas of abuse under that act. Many of the cooperatives that are under the act want the new legislation, if for no other reason than to ensure that there will not be abuse. The present act leaves open many areas of abuse. We do not need to get into a discussion on that today, but they are there.
Senator Stewart: Perhaps you could give us an example so as to be able to point out the sections of the bill which will provide for the present lack of control.
Mr. Dierker: The fundamental cooperative nature aspects of the present act can be totally overridden by appropriately and sophisticatedly drafted by-laws. The concept of cooperative basis that is embedded in this legislation for the protection of members can be totally overridden in the present act. The present act has absolutely no governance roles that would set rules for director compliance such as exists in modern legislation. It is by the good faith of the directors who serve the cooperatives that there is a compliance. There are no legal compliance rules at the present time that would meet the standards that you are addressing.
Senator Stewart: Reference was made earlier to the taxation. Is the present method of taxing the profits of cooperatives conducive to the cooperative mode of business? Is it overly conducive to the cooperative mode of business? Is it satisfactory from the viewpoint of the cooperative movement?
Mr. Dierker: The discussion of cooperative taxation takes in a number of areas of taxation. The principal method of distribution of earnings by a cooperative is by paying patronage returns to the members based on the service that they have with the cooperative. That payment is a deduction to the taxable income of the cooperative and it is fully taxed in the hands of the recipient. You must remember that there are no credits given on that payment such as you have in dividend tax credits. So that there may be significantly higher tax paid on that income, depending on the taxable rate of the recipient.
Senator Tkachuk asked about the manner of distributing dividends by the cooperative. They will be distributed out of tax-paid surplus accounts on which the cooperative will have paid the full levy of income tax. There will be tax credits applicable to them in the same manner that they are for corporations, except that for smaller cooperatives there is a tax penalty for paying dividends.
If a small business corporation pays a dividend, there is an enhanced dividend tax credit. That does not apply to cooperatives. There is a structural, systemic disincentive for smaller cooperatives to pay dividends. There is a penalty tax in the tax system that has existed since 1972. People looking at starting small businesses often elect to use a corporate structure, rather than a cooperative structure, if they intend to pay dividends.
Someone asked whether there was an incentive to model the cooperative structure in a cooperative distributing mode. The tax system does provide for that. Insofar as capital taxes are concerned, the federal capital tax structure makes no distinction.
Senator Tkachuk: Suppose a co-op has a $100,000 net profit at the end of the year. It may also be less. If there is a net profit at the end of the year, it is only taxable if you send cheques out to the membership. It is not taxable as it sits in the co-op, right?
Mr. Dierker: That is not correct. It is fully taxed as taxable income in the hands of the cooperative unless the cooperative pays a patronage allocation. The cooperative pays a patronage allocation to the members and the members then include that in their taxable incomes. To the extent that they do not pay out a surplus, it is fully taxable as in any corporation.
Senator Callbeck: In this legislation, the cooperatives have the advantage of accessing new sources of capital. Do you think in the next five years we will see a big expansion in co-ops?
[Translation]
Mr. St-Pierre: A number of large cooperatives will certainly take advantage of the new ways of capitalization which will be available in the new legislation. It's even likely one of the main reasons why the cooperative sector kept asking for changes to the old Cooperatives Act.
I guess I won't unveil any secret if I tell you that in Quebec, very few cooperatives come under the federal legislation, but there are a number of large cooperatives, especially in the area of agriculture, which could possibly take advantage, in terms of capitalization, of the provisions contained in the new legislation regarding an additional way of getting funds. I haven't got a crystal ball, but we all know that large cooperatives will need to find new ways of doing business if they want to be able to compete with major players in the international market, especially in the area of agriculture. I will let my colleagues tell you more about that.
[English]
Mr. Turner: It will apply more at this point in time to the existing cooperatives as they try to meet their capital needs. It will be another option to consider that they have not had before. From that perspective, as they assess their capital needs, it is one option to access that which they have not had before. I would expect, as I heard this morning at the agri-food symposium being held over in the Conference Centre, that when you look at the large cooperatives in the grain and oil-seed sector and in the dairy sector, those facing a competitive reality will see this as a real option for them.
Senator Callbeck: You think that the existing cooperatives will expand quite a bit because of this?
Mr. Turner: Yes.
Senator Callbeck: Mr. Turner, you said you were the president of the credit union in Saskatchewan.
Mr. Turner: That is correct.
Senator Callbeck: Does the credit union in your province sell insurance?
Mr. Turner: We have some exemptions. We can sell some creditor life insurance, some travel insurance. You would not describe us as being generally in the insurance business, no. We are restricted from in-branch delivery of insurance and from owning an agency and those kinds of things.
Legal counsel may have some other comments. He is also our legal counsel on a proposed credit union act.
Mr. Dierker: In fact, the credit union system in Saskatchewan presently has more restrictions on the distribution of insurance than would apply to the banking industry. They are very restricted in the delivery of insurance products.
Senator Callbeck: Why is that?
Mr. Dierker: Perhaps Mr. Turner should speak to that. That is more due to the political structure in Saskatchewan than anything else.
Mr. Turner: We are presently in discussions with our provincial government over a credit union act that would have broad-based business powers and would allow us to respond to changes in the marketplace such as we are seeing in the banking sector. It is very broad-based. We await the net result of that discussion.
Senator Stewart: You say the explanation may be somewhat political but what is the rationale given for the distinction? I suspect that there is some argument which is adduced. Is it perhaps because the credit union might not be able to carry out the commitments entailed by the sale of insurance? In other words, the bigger institutions would be in a better position to deal with the uncertainties of the long-term future. Is that the argument that is given?
Mr. Turner: No. From my perspective, it is clearly an issue that, in Saskatchewan, the insurance marketplace has unfolded in a lot of small communities. We have about 500 communities for 1 million people. Present in some of those small communities are independent insurance brokers. The market is limited. There is some consideration at this point in time as to how they protect that market for those people.
That is my cut on it. It defies the reality of how things are changing in the world and the way that consumers, even those like me who live in a town of 600 people, will access services in the future, be it through the Internet or otherwise. At this point, that is the reality in my province.
Senator Angus: My question flows from that of Senator Stewart. I address it to both groups. The officials stated earlier that there were 7,295 non-financial cooperatives in Canada with 4.5 million members. They gave some other numbers. I have difficulty reconciling that data with your numbers. You say there are only 35 member organizations in the CCA. You might clear that up for me.
They also said that only 7 per cent of these 7,295 cooperatives are in Ontario. That number stands out starkly. I am curious about the reason for that.
Mr. Turner: I will respond in the same way that Ms MacKinnon responded to Senator Stewart. We have 35 member organizations. The federated cooperatives operate in four provinces in Western Canada.
Senator Angus: In turn, there are many individual coops that belong to that group.
Mr. Turner: That is correct. As well, many cooperatives in Canada are incorporated at the provincial level under provincial legislation but would be counted in statistics in the overall cooperative community in the country.
Senator Angus: In your 35-member organizations, for example, how many individual, non-financial cooperatives are there? Would it be 2,000 or 3,000?
Ms MacKinnon: The pools have thousands of members. The three prairie pools are all members of the Canadian Cooperative Association and their membership base is in the thousands. That is one kind of organization
However, if you look at the federated structures, they are the wholesaler and the hundreds, probably thousands, of individual, smaller retail cooperatives. That is how you can get up to the 7,000 across the country; you take the two national associations together. It is a three-tier structure with a primary tier, a secondary tier, and a tertiary tier. We are at the tertiary level.
[Translation]
Mr. St-Pierre: Let me give you a bit of information about the francophone cooperative movement. There are altogether 3,700 cooperatives which comprise both Caisses populaires and other types of cooperatives. The whole network of Caisses populaires must hold around 87 billion dollars of assets within French Canada. To that figure, you have to add the assets of a number of non-financial cooperatives which amount to approximately four to five billion dollars.
A very small number of cooperatives come under federal legislation. However, in response to a concern expressed by senator Stewart, let me tell you that in Quebec, Caisses populaires are owners of life insurance as well as general insurance agencies, trusts, and security distributing enterprises. Under the current legislation, Caisses populaires are not allowed to sell directly to their members financial services other than savings and loans. For example, in the area of general insurance, they may offer their products, but they have to do so elsewhere than on the Caisse populaire premises. Thus, we have here a rather odd situation where a cooperative, the Caisse populaire, owns an insurance company.
Senator Angus: Are banks subject to the same restrictions?
Mr. St-Pierre: Yes.
Senator Angus: As for my question concerning Ontario, no one seems prepared to give me an answer.
[English]
Why are there only 7 per cent?
Senator Tkachuk: They are not as enlightened, Senator Angus.
Senator Angus: That is what I thought when I saw the results of the last election.
Senator Tkachuk: I just want to tell Senator Stewart that the insurance business in our province, like everything else, is political. Not only is there the problem of the brokerage community, as Mr. Turner said, it is complicated by the fact that the provincial government also has it is own insurance company, a Crown corporation. It makes life interesting.
How do you see the growth taking place with the new legislation? Would Federated Co-operatives, for example, be looking at merging with cooperatives in other provinces, or would they be expanding themselves in competition with other co-ops in other provinces?
Mr. Turner: That is a question you need to ask of Federated Co-operatives, senator. There are some restrictions under the present act regarding amalgamations, and they would be removed, which would open up that option for them. That will be another important arrow in their quiver that they can consider. I would think that the Federated Co-operatives would likely focus on their business in Western Canada and seek ways to be competitive with the other businesses that are entering the market, whether it is the Price Clubs or the large super stores, or whatever. That whole retailing sector is changing dramatically. I would think that would be the focus of their competitive approach.
The Chairman: I thank the witnesses for attending. Mr. Turner certainly knows this committee has been a very passionate supporter of the credit union movement. This is the first time we have had to deal with legislation related to cooperatives but we have been a strong supporter of the movement over the years and have done everything we can to increase the probability of its financial success as a competitor to other financial institutions.
With that same spirit, the committee is very much in favour of this legislation. It is nice to see a piece of legislation on which the industry which will be affected by the bill has worked so closely with the government in developing it.
We appreciate your taking the time to be with us.
Could I then have a motion to report the bill back to the Senate unamended?
Senator Stewart: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: The motion is adopted. Thank you.
The committee adjourned.