Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 21 - Evidence - Afternoon sitting
OTTAWA, Tuesday, June 2, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 5:40 p.m. to consider the present state of the financial system in Canada (Comparative Study of Financial Regulatory Regimes); and to consider Bill C-28, to amend the Income Tax Amendments Act, 1997.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we are here to have a videoconference discussion, with Professor Ian Harper, who is a professor at the Melbourne Business School. He appears before us in order to talk about his work as a member of the 1996 Wallis Inquiry into the financial system in Australia. In particular, he will speak about the Wallis Report, which deals with the regulatory structure of financial institutions and financial services markets in Australia.
Thank you for agreeing to be with us, Mr. Harper. A number of the issues and policies with which the Wallis report dealt -- and a number of the policies that are now in place in Australia partly as a result of its recommendations -- are currently the subject of hot political debate in this country.
Mr. Harper, the floor is yours.
Mr. Ian Harper, Professor, Melbourne Business School, University of Melbourne: I will be speaking about decisions which our government is in the process of implementing. The government, in fact, accepted 114 of our 115 recommendations. The one that was left out, of course, concerns mergers, which will be the topic of our discussion today.
All of the other recommendations have essentially put into legislation which is presently before our Parliament. It has passed the lower house, and it stands now before our Senate. It would appear as though things will go pretty smoothly, and by July 1 the new regulatory arrangements that we recommended will all be up and running.
The Chairman: We will doubtless want to get into some specifics, but perhaps we can look at the broad principles behind your report. We must bear in mind, as you said, that 114 out of 115 recommendations are being implemented, and that the one that is not being implemented is the merger question. Inevitably, we will return to that one.
When I read the report, I got was the sense that a handful of underlying principles were the fundamental driving force behind your specific detailed recommendations. For the purposes of the committee here, perhaps you might highlight the nature of the underlying philosophical principles that ultimately led you to the detailed recommendations.
Mr. Harper: I am happy to do that. I like to explain the logic of the report as taking three essential steps. As a commission, we were firstly asked to consider the nature of the forces for change bearing on the Australian financial system. In light of those forces, we had to determine how it would be appropriate for the government to reconfigure the regulation of the Australian financial system. We needed to maximize the ease with which our financial institutions could commercially meet those forces for change, while at the same time meeting the government's legitimate public policy objectives in the area of financial services.
Imagine three boxes. In the first box we put the fact that the financial system is changing. There, we talk about the main forces behind changing customer needs and preferences. These would include the aging population, changes in work patterns in favour of part-time work, and the government's gradual retreat from the welfare state obligations which it had held since the late 1940s. These things are changing the way that Australian society is working, and they bear directly on the financial system, because the financial system will be asked to pick up many of the burdens which the government is laying down. In addition, it will be asked to help people to meet the demands of changing work patterns and longer periods spent in retirement. In other words, the world is changing in ways which are increasing the call on the financial system, rather than reducing it.
In the second box we note that, in light of those new demands, our financial institutions need to be able to minimize cost and maximize efficiency in order to meet them. There is, of course, a slightly different point. We are saying that there will certainly be an increase in the demands on the financial system. Why must those demands be met by Australian financial institutions?
In the end, if our institutions cannot compete with institutions elsewhere in the world by providing the same services then we would, of course, simply import all of the financial services that we need. I am not saying that that is a good idea or a bad idea. We just recognize that that is what would happen if our financial institutions were not able to compete. The logic then, is for us to say that if they do not compete, if they cannot make it, it ought not to be for reasons of inappropriately configured public policy. If they cannot compete, then let it be for the right commercial reasons.
As a commission, and as a government, we can eliminate unnecessary public policy or public policy regulations which are inappropriately configured. This will allow us to maximize our institutions' chances of meeting the objectives through appropriate commercial decisions. We do not second-guess the commercial decisions; we just ensure that the public policy is met with a minimum amount of fuss.
In the second box, then, we put the idea that we have to maximize efficiency and minimize cost for our institutions, at least to the extent that it is imposed by public policy.
In the third box, we put the requirement of meeting financial safety. That is, let us reconfigure the financial regulatory system so as to maximize the efficiency of the players in the system, while at the same time maintaining system stability, not walking away from the legitimate role of public policy in this area.
That is how the whole report is structured. You will find, in fact, that it is actually divided up into sections which reflect that overall logic.
The Chairman: I would like to pursue your third point first. Earlier, you talked about meeting legitimate public policy objectives. You actually commented on only one objective, however, which is financial stability. Presumably, it is your only legitimate public policy objective. You did not comment, for example, on ensuring adequate financial services everywhere in the country. You did not comment on branch distribution, nor did you comment on the question of unemployment, or on costs to consumers. You only commented on stability. Is that the only legitimate public policy objective with respect to financial services?
Mr. Harper: The other points that you mentioned are questions of distribution and access. While these are certainly important issues, they are not issues which one would seek to address through regulation of the financial system.
Questions of distribution are to be separated from questions of efficiency. In our view, questions of distribution and access can be dealt with through the tax transfer system, and we set those issues to one side. Our focus was on maximizing the efficiency of the financial system, while at the same time maintaining its stability.
We asked ourselves the following questions: On what grounds is it legitimate to argue that the public sector can intervene in the financial system? Where is the market failure? The market failure arises as a result of information inefficiencies. These are detailed in our report quite clearly, and they justify an intervention on the part of the public sector, in order to ameliorate their impact on the stability of the system. That is what we addressed.
The Chairman: Therefore, you were prepared to leave issues of distribution and access to market forces ameliorated -- in part -- by what you call the tax transfer system. Who is transferring taxes to whom? I do not understand how you use the tax transfer system.
Mr. Harper: The tax transfer system is an economist's expression for the combination of the tax system and the social security system, which is moving money around.
Let us be quite specific. We did not believe that the government had asked us to address concerns over the access to banking services of people in certain social circumstances. We did not mean to imply that this is not a problem, but the commission did not address the issue because it was not perceived to be the focus of our inquiry.
If there are concerns about access to the banking system, they need to be addressed through the social security system. Indeed, our Department of Social Security has been investigating mechanisms for doing just that, such as setting up its own card system, or possibly even getting its own financial system up and running. Those are the ways in which it could ensure access on the part of the disadvantaged. These are not issues which came before our commission.
The Chairman: What about geographical access? You have the same problem with remote communities in your country that we have in ours. Did you also take the economist's view that that is a distribution question?
One of the problems with politics, of course, is that economics does not deal with the problems which are of greatest interest to politicians. Economics does not deal with questions of distribution, which obviously are of huge importance politically. Did you deal with the geographic issue, or did you set that aside also?
Mr. Harper: We were not expressly asked to focus on that. I have a little familiarity with the terms of reference of your own task force in Canada. All of these issues came up when I was visiting your country last November. It was a surprise to the members of the task force, as it obviously is to you as well, that we were not asked to look at those issues. Those questions do not come up in this country as often as it would appear that they do in Canada. That is fair enough. It is just a different set of circumstances.
We certainly asked questions and took submissions from people in remote areas who claimed that they were no longer able to get access to banking services. Upon further inquiry, however, it usually appeared that this was not really the case.
I well recall having a discussion with a gentleman who lived on a remote property 300 miles north of Tennant Creek, in the middle of the Northern Territory. It is a long way away from anywhere. This gentleman conducted his interview with us over the telephone. The nearest bank was 300 miles away, as was the nearest post office, and yet he was speaking to us on the telephone. He had a telephone connected via satellite. We asked if he realized that, apart form actually getting notes, he could conduct all of his banking services over the telephone. When pressed, he agreed that that was the case, but he was just irritated that they were going to close this branch 300 miles away. We were not going to change public policy just for the sake of that.
I will make the same point about our indigenous people, which is another issue which came up in the Canadian discussion. In our case, all of the benefits which are supplied to the Australian Aborigines are supplied using cards. The benefits are directly credited to accounts to which the elder of the tribe, or whoever the responsible adult person is, has card access. He or she can access the benefits directly by going to the nearest store, which might be 400 miles away, and using the card to get the benefits in the form of cash or goods and services, whichever he or she prefers. In our case, these issues do not have a great impact, because they have been fixed, if I can put it that way.
Senator Austin: Was the community which supported the Wallis report troubled by the government's very quick rejection of the recommendation that you made on mergers? Was that because there was a debate in advance of that recommendation which thoroughly aired the issue amongst Australians, or was there a political decision? What was behind the rejection?
I would also like to know what prompted your recommendation. Why did the commission believe that this would be good policy?
Mr. Harper: I need to clarify exactly how this recommendation works, and what we were asked to do, and what we were not asked to do. To begin with, let me make the point that most people thought the Wallis commission was actually about bank mergers.
There was a lot of press comment in the lead-up to the establishment of the commission. The press argue that, whatever else was written into the terms of reference, this was essentially about whether or not the banks would merge. We always rejected that because, as we pointed out to the press on numerous occasions, the word "merger" did not appear in our terms of reference at all. Our role was as I have already described it; to take a look at the regulatory framework and to reconfigure it, as appropriate, to meet the forces for change.
In the report itself, you will see that the issue of mergers only comes up for the one reason. In this country -- and it is still true because the government rejected our recommendation -- the banking industry and the insurance industry are unique in at least one respect. They are the only two industries where the treasurer, or finance minister, has a right of veto over the decisions of major banks and insurance companies to merge.
Ordinarily, the Australian Competition and Consumer Commission reviews the case for a merger, and makes a recommendation to the government, which is then basically rubber-stamped. In the case of the banking and insurance industries, however, the office of the Treasurer has the final say. We argued that this veto was inappropriate. We could see no reason that the banking and insurance industries should face a separate regime than firms in other industries would face.
In our report, we recommended that that the Treasurer's veto be removed, and that the decisions on bank mergers be made in the same way as decisions on mergers in other industries. That is, the Australian Consumer and Competition Commission would took a look at the issues, and would make a recommendation on the basis of that. The merger would then either proceed or not proceed, without any further involvement of the office of the Treasurer.
The government rejected that recommendation, however. Obviously, the import or the effect of that rejection was to enable the Treasurer to make a statement, and this is precisely what happened. It took the government a week or so to make a comment on the report from the time that the Treasurer received it. In that statement, the government announced that it would not be accepting the recommendation on the Treasurer's power over bank mergers. The Treasurer went on to say that, for the time being, he would not approve mergers amongst the four major banks. In other words, he was saying that he would keep the power of the veto, and he would exercise it.
In saying this, he removed the prohibition which had existed on the large insurance companies merging or, indeed, the large insurance companies and the large banks merging. He also lifted the prohibition on foreign banks taking over large domestic banks in Australia. These things were all consistent with our recommendations. For the time being, he did hang on to his right to refuse to allow mergers between the four main banks. This is what is known as the "Four Pillars Policy."
I need to make it clear that the Wallis inquiry did not recommend bank mergers. It was not our role to do that. We had quite a lot of comment about the conditions which we believe the competition regulator ought to consider when thinking about this problem, but there were no proposals for major bank mergers. There still are no proposals for major bank mergers. Of course, the Treasurer has indicated that, even if there were, he would reject them. I want to say that we did not say "X" bank should merge with "Y" bank.
Let me be quite clear. In exercising this power -- and this was one the reasons that we asked for the removal of the veto -- the Treasurer need only claim that bank mergers would not be in the national interest. He need not make any argument about lack of competition, et cetera. All he need say is that it is not in the national interest.
In this instance, the Treasurer said that some pockets of the banking industry were not sufficiently competitive. Again, let me be clear, this was not subject to any formal analysis on the part of the Consumer and Competition Commission. This is a view expressed ex cathedra, as it were, by the treasurer, and which indicates that he believes that he has the right to do this under this act. He simply claimed that there were pockets that were not sufficiently competitive and that, for the time being, in the government's view, to allow bank mergers to go forward would not be in the public interest.
Senator Austin: Thank you very much for a very clear statement. As you know, our Minister of Finance ultimately retains the same power to decide whether a merger of our large banks is in the public interest. As Senator Kirby said, that issue is currently in play politically in the country.
I want to be clear that you were referring essentially to retail banking in Australia.
Mr. Harper: No sir; I am referring to the four major banks.
The Chairman: Unfortunately, it appears that we have temporarily lost our video connection.
The committee continued in camera.
Upon resuming.
The Chairman: Let us move to Bill C-28. Everyone is aware that Bill C-36 will go to the Finance Committee, and not to this committee.
Senator Tkachuk: We want to make our point about ministers appearing; it is very important to the public policy process. Therefore, Mr. Chairman, I move that we invite the Minister of Finance to appear before our committee on Bill C-28.
Senator Oliver: I second that motion, Mr. Chairman.
The Chairman: Any comment?
Senator Stewart: I have a question. Is this motion based on the supposition that this is a government bill and that, consequently, a minister ought to be heard? Alternatively, is the argument that, given the nature of this bill, the minister ought to be heard? Which is it?
Senator Tkachuk: I think it is both. Let me clarify that. I did not make the argument that a minister ought to come simply because it was a government bill. My argument is that a minister should not deny the senators if they wish him to present the bill before the committee.
Senator Simard addressed a number of important issues of general government policy last week, and you took them under advisement, Mr. Chairman. Senator Simard's point was that we do not have the opportunity to talk to the minister about the broad general parameters of the budget. You had suggested that this could, perhaps, take place. My understanding is that the minister may appear on Bill C-36, and that we may address some of the broad general public policy issues on the budget. It may be done at a different committee, but it will nevertheless be a Senate committee, which is a positive point. We were making the point on that basis, Senator Stewart.
Mr. Chairman: Your summary of what I said is not inaccurate, but I was somewhat stronger in a positive response to Senator Simard. Budget bills typically go to the finance committee, not to us. In any event, as I said last week and as I repeated again this morning, I am very enthusiastic about having the Minister of Finance appear annually before this committee, much as the Governor of the Bank of Canada does. I think that that is a terrific idea, and I am happy to do that. That is a good extension of the role of this committee. On that principal issue, I am 100 per cent with Senator Simard.
[Translation]
Senator Simard: Two weeks ago, I made a critical examination of Bill C-28 in the Senate following the speech given by Senator Carstairs, the Deputy Leader of the Government in the Senate. I then tried to review one by one the basic and major elements of her presentation. I would have liked that a discussion be held on that matter both in the Senate and in committee.
Last week, I had the pleasure to be invited to this committee as critic of this bill. When I noted that, apart from the department officials, there was only one witness, I could hardly imagine that, with such a procedure, the Banking Committee could serve the best interests of Canadians.
I know that the officials usually want to protect the government and to speak in favour of legislative amendments. My suggestion to the Banking Committee would be that we invite the Minister of Finance to come and debate not the details but the principles of the bill. We could ask him what guides the government in his philosophy. We could talk about interest rates and tax options, inquire about the decisions the government could make to reduce its expenditures, and compare that with tax increases.
The officials reminded us that Bill C-28 includes a number of technical amendments to the law. Those amendments affect all taxpayers, including students and retired people, those who are earning $30,000 and under, Canadians who earn between $30,000 and $50,000, $60,000 or more, or as much as $100,000 and over. The government might choose either to reduce or to increase taxes.
I still hope that the committee will recognize the need to have the Minister of Finance appear before us so that we can discuss with him and actually debate available options. If the Minister of Finance was to meet with us, we could ask him to specify his own options, and to tell us which arguments he has made to justify the employment insurance surplus.
Three years ago, the Minister of Finance, Mr. Paul Martin, told us that we needed a surplus of 5 billion dollars. Last year, he referred to the actuary of Canada and claimed that a 12 billion dollar surplus was then needed. If the projections are maintained, we are going to have a 20 billion dollar surplus at the end of this year: 25 per cent of that surplus, that is of that amount of 20 billion dollars, could be used to reduce the deficit.
We could discuss with the Minister of Finance, Mr. Paul Martin, ways of using 25 per cent of that surplus. It is going to be used for new commitments. We could address the issue of new expenses, ask him at which target the government is aiming to make the Canadians benefit of that new 25 per cent surplus.
I am very disappointed. Last week in the Senate, my colleague Senator Forrestall expressed his concerns about the scope of section 241 of Bill C-28. That section deals with "international shipping operations." It would have been interesting to question the Minister of Finance, Mr. Paul Martin, about the proposed amendments to that section. Does he really want to have fleets of ships built overseas by non-Canadians who do not pay taxes in Canada?
We could question him about the brain drain of Canadian students, of our university graduates who are leaving Canada for the United States. We could suggest him amendments, new policies, options.
Last week, following the publication of a headline in The Globe and Mail, the Minister of Finance, Mr. Paul Martin, explained to us that he had made decisions regarding that use of that 20 billion dollar surplus from the employment insurance fund. I would like to have a discussion with him about his choices and I wish other senators could have that opportunity as well. I support the motion of my colleague, Senator David Tkachuk.
The Liberal government could invite the Minister of Finance to appear before the Senate so that he can discuss openly with Canadians about his choices, his new policies and his philosophy.
[English]
The Chairman: Let us recognize two things. First, I have agreed to try to deal with the broader issue of debating budget policy with the Minister of Finance in the future. Second, any senator is entitled to appear before any committee, and to ask questions. The Minister of Finance is going to appear on Bill C-36. A number of the issues that you raised are part of the bill as well -- specifically, the UI surplus issue. Senator Simard, would your concerns be met by debating the issue with the Minister of Finance in the context of Bill C-36, rather than in the context of Bill C-28?
Senator Simard: Yes. If it is the intention of the committee not to approve this bill until later, we could use the Committee of the Whole to invite the Minister of Finance to appear before us next week. I am sure that the government could arrange a discussion and a debate on those bills.
The Chairman: There are two issues. Bill C-36 would be before the Committee of the Whole -- not Bill C-28. If both leaders on both sides decide to go that route, we would report this bill unamended. I would certainly be prepared to make the argument that, if there is to be Committee of the Whole on Bill C-36, the Senate should not vote on the committee report until the minister has been heard. We would still dispense with the bill in this committee, however.
I would certainly be prepared to make that argument to our leadership. I cannot believe they would find it unreasonable for this bill not to be voted on until the minister had finished his presentation on Bill C-36. I am quite prepared to make that argument and to support it in the chamber, as well as privately.
Senator Kolber: I do not understand this at all. You want to talk to the minister, and to question him about broad policy. That is fine. Who could be against that? The point of the matter is that Bill C-28 is not about broad policy. It is about a bunch of technical matters.
Senator Simard: I do not agree with that.
Senator Kolber: You are talking about apples and oranges. You have it totally mixed up.
Senator Simard: No. Bill C-28 deals with many technical amendments. Bill C-36 deals with transfers to the provinces to the extent of $12.5 billion.
The Chairman: I will put the proposal I made a moment ago back on the table. I propose that we report the bill without amendment. From there, we have two options. Firstly, I could not formally table a report in the Senate. Alternatively, if I do table a report, it could include a statement acknowledging that this is only the report stage of the bill, and that the committee is of the opinion that third reading stage should not proceed until the minister has appeared before the committee on Bill C-36. I am happy to do that. In effect, I have control over it because, frankly, if the leadership will not agree to that, I simply will not table the report. If I did not table the report, they could not vote to adopt it.
Senator Simard: I want to add something. When Senator Kolber spoke to this committee last week, he recognized that it is nonsense to hear one witness from the civil service for two hours.
The Chairman: Is my proposal a reasonable solution to our problem?
Senator Simard: If I understand your reasoning and your possible solution, you are going to delay third reading debate on this bill, in order to allow Paul Martin to appear before us to deal with Bill C-28 and Bill C-36.
The Chairman: That is what I am offering to do.
Senator Simard: I will take you at your word.
The Chairman: If that is a reasonable consensus, I would ask that we proceed as follows: First, I would like a vote that allows us to report the bill without amendment, but with some observations. Second, because we have not dealt with the observations, I would ask the committee to delegate the authority to deal with the observations to Senator Tkachuk and to myself. The observations summarize what we did last week.
Senator Simard: I would so move, Mr. Chairman.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: I have a commitment we will not proceed to third reading debate on this bill until after Mr. Martin's appearance on Bill C-36.
Honourable Senators, our videoconference link with Australia has been re-established.
Senator Austin: Did the government decide not to allow mergers because of concern about the negative impact of mergers in the retail sector?
Mr. Harper: The concern was over particular segments of the banking market that I can broadly describe as "non-contestable" -- primarily small business lending and the transaction services sector. Whether or not you refer to that as retail is a matter of definition.
The concern was over the division of transaction services and small business lending. In those two sectors, the Treasurer was of the view that, at this stage, there was insufficient competition for him to feel comfortable allowing the banks to merge. At the time he said "for the time being," and there is speculation over whether or not that time will be up sometime soon after the next election, should this government be returned.
Senator Austin: I am asking you questions that we are also asking of ourselves. In Canada, one of the concerns is the degree to which Canadian-owned institutions should have control of the domestic depositor base. That is, should Canadians control Canadian savings through the banks?
I wonder whether your 15-per-cent rule for ownership and the stipulation against mergers are both designed to deal with the control of domestic savings. Could you explain why it is within public policy to allow a merger of one of the four banks with a foreign bank, but not with another Australian bank?
Mr. Harper: You put your finger right on it. The 15-per-cent rule, as it will become when the legislation passes, has nothing to do with foreign ownership. The question of foreign ownership is completely independent. The government has made it quite clear that, in principle, it has no objection to foreign ownership of one of the major banks or, indeed, more than one of the major banks.
The only other restriction placed on foreign ownership is through something called the Foreign Investment Review Board, whose main guideline is that the investment be "in the public interest." Thus far, the policy of that institution, which acts only in an advisory capacity, has been very liberal in terms of foreign investment. The government made it quite clear when it responded to the Wallis report that foreign ownership was not a problem.
The 15-per-cent rule has much more to do with controlling conflicts of interest between related parties when it comes to borrowing or lending money through the banking system. Whether they are domestic individuals or foreigners is of no concern in the application of that rule. They issues are quite separable.
The government was comfortable with the concept of foreign ownership, but not with a domestic merger. Again, the issue turns on the degree of concentration and potential market power which domestic merged entities might be able to exert in the non-contestable segments of the markets. The expectation would be that a foreign takeover, for instance, of one of the domestic banks would not alter the degree of concentration in those segments.
It must be said that these things are dealt with on a case-by-case basis. While the Treasurer appears to be very brave at this time, no one knows what his attitude would be if one if one of our major banks were to be approached by a foreign bank.
Senator Austin: On the question of bank mergers, four banks control 70 per cent of your retail market. Our situation is identical to yours. As you know, however, our four banks have applied to merge into two banks, but they would still control 70 per cent of the retail market. Would the Treasurer determine it to be against the public interest for two Australian banks to control 70 per cent of the domestic market?
Mr. Harper: The Treasurer has indicated he would not even contemplate the possibility of three banks, let alone of two. If I understand your question, the expectation is that, if and when the ban is lifted, our four banks would seek to become two, as is happening in Canada.
The central bank has some concerns, and they were expressed at the time of its submission to the inquiry. It comes at the issue from a slightly different perspective, namely, the prudential dimensions of this problem. The Treasurer has also indicated that there are two things on his mind: One concerns the competitive implications in these non-contestable segments, and the other, frankly, is what the government would do if one of the remaining banks were to get into trouble. The central bank simply describes that as uncharted prudential waters, and that is all that it will say.
Senator Austin: It is basically touching the issue of "too big to fail," I take it.
Mr. Harper: It certainly is, although I think most observers would recognize that our four banks are already too big to fail. The issue of whether that is exaggerated by a move to two banks is a moot point.
There is an additional concern, however. If we were to move to three banks, there would still be two banks which could be strong-armed into coming to the aid of the third, if it were to have difficulties. As that number shrinks, however, so do the chances of finding a domestic party large enough to supply the necessary capital. The situation which results is the one in which the New Zealanders find themselves. That is, either a foreigner must be convinced to help, or the failing bank must be capitalized with public funds. I think the government regards that as the devil's choice.
Senator Austin: I am sure that you reviewed the issue of deposit insurance. Why did you not recommend that a deposit insurance scheme be established in Australia?
Mr. Harper: As you are aware, we are one of a very small number of countries that do not have a formal deposit insurance scheme. We are in the minority. There is nothing wrong with being in a minority if you think that you are right, but it is madness to be in a minority of one. We are not quite there yet, but it is close. Most other countries, including Canada, have a formal deposit insurance system.
We have a system of what we call "depositor protection." This essentially means that the central bank -- our OSFI -- will become our new prudential regulatory equivalent. The legislature will ask it to protect the depositors of financial institutions. Not to guarantee them, nor to offer any formal insurance, but to protect them. It will also be the case and the law that depositors will rank first amongst creditors, ahead of the central bank, and arguably even ahead of the tax man, but that is a separate question.
We looked very carefully at whether we should adopt a deposit insurance scheme. When we went to see the Americans, we were originally very critical. That is, members of the committee were very critical of the deposit insurance experience in the United States. Our friends in the United States asked us what kind of system we had. When we had explained it to them, they told us that we had the worst of all possible systems. They pointed out that our system had no explicit fund, no explicit premium charging -- and yet everyone thought that deposits were guaranteed. That set us back on our haunches.
After speaking to the Americans, we came to Canada. We were told by various parties that, if we were to move to a deposit insurance system, we would have to watch banks fail. I have to tell you that you Canadians were of no help. We went elsewhere, looking at different alternatives.
We ended up in Germany. The German system was the one that most attracted us. It seemed to us, as you went down the card, that you could rule out all of the one-line objections to deposit insurance schemes by looking at the German system. It is a voluntary system, but every bank in Germany belongs.
According to a friend of mine in Germany, Der Speigel magazine discovered, quite to everyone's surprise, that one small bank in Hamburg was not a member of this system. It did not have to be a member, because it is a voluntary system. The bank was very well-run. It had no problems, but as soon as the magazine informed the public that this institution was not part of the scheme, it was destroyed. This is a very interesting lesson. The bank is gone. It did not fail, but it was liquidated by the public as a result of the discovery of this fact.
The German scheme is a voluntary one. It has its own fund, of course, and it charges risk-rated premiums. This seems to be the sort of system with which we would like to go. We had that system in mind when we ranked the alternative against our present scheme.
In the end, we could not bring ourselves to recommend that we move to such a scheme for two reasons. First, our major banks are vehemently opposed to any form of deposit insurance scheme. They believe that they would have to pick up the losses for all of the tiny institutions in such a scheme. One might argue that, even though they are too big to fail, they need to make a contribution. They are vehemently opposed to doing so, however, and made that very clear when this issue arose during the hearings of this committee.
We would have recommended that this be a voluntary scheme. If that were the case, however, the major banks quite clearly would have politely refused to participate. We would have had to run a deposit insurance system based on all of the other institutions. We were advised by various parties, and our conclusion was that the scheme was both too big to be re-insured privately and too small to be the basis of a genuine voluntary deposit insurance scheme. Without the participation of the major banks, we could neither re-insure what was left commercially, nor construct a voluntary mutual scheme. Therefore, we were hamstrung.
At this point, we decided that the best thing to do was to reassert the basis of our existing system, and then to go one step further. This was a very important link in the argument for separating our central bank's prudential function from the central bank itself. That is, moving it to a separate institution, as is the case in Canada.
If we were to stay with our existing system, we had to acknowledge the criticism that it was exposed to moral hazard. At the very least, we had to do two things. First, we had to make it quite clear that the deposits in Australia are not guaranteed, and that there is no formal insurance system. The act says this in black and white. Second, we had to move the administration of that system out of the hands of an institution that has a balance sheet. The system had to be given to an institution that did not have a balance sheet; at the very least, that would provide one further line of defence.
In the event of failure, our prudential regulator has to go to the central bank and ask for money. The central bank is only obliged to give money in the event of systemic problems, however. If the problems are not systemic, the central bank cannot open the coffers. Of course, the government could get involved in it wanted to. That is a political issue. The system is structured so as to minimize what we acknowledge to be the moral hazard inherent in our system. That is why we did not go with deposit insurance.
Senator Meighen: We recently had the opportunity to travel to the U.S., the U.K., and continental Europe, in order to look at their financial systems. One difference that struck all of us is that there are second, third, and even fourth level financial institutions in many of these countries.
In our notes, there is a reference to credit unions and building societies in Australia. Control over those institutions is to be transferred from the states to the federal system?
Mr. Harper: That is correct.
Senator Meighen: We have a similar situation in Canada. It is even more complicated, because some of our credit unions are under the jurisdiction of both the federal government and the provincial government in question.
We do not have second or third level financial institutions, other than the Caisse populaire movement in Quebec, and the credit unions. In Ontario, there is a real dearth of second or third level financial institutions. If they chose to go elsewhere, they could presumably look after many of the day-to-day needs of most of the large chartered banks' retail customers.
What was the debate in Australia over the transfer of control about? In Australia, what alternatives for day-to-day banking do these other institutions offer?
Mr. Harper: As I mentioned earlier, our aim was to restructure the regulatory arrangements in order to cope with the forces for change. These forces were eliminating the significance of particular institutional categories and, indeed, our new regulatory arrangements are built not on the existence of particular institutional categories, but rather on functions.
When we looked at the building societies and credit unions we found that these institutions were, in many cases, providing identical functions as the mainstream banks, yet they were regulated differently. This is partly due to constitutional reasons, which is something with which you will be familiar in Canada. With one or two exceptions in the case of the building societies, these organizations are all cooperative institutions. Therefore, under the Constitution, they are regulated by the states, and registered by them under state legislation. That is the why they were separately regulated. In moving them to the federal government, our concern was not so much to take them out of the hands of the states -- it was not a constitutional issue -- it was to try to provide them with a level playing field.
We wished to even the regulatory burden on the different providers of identical financial services. In our view, the way to do that was to move everyone across to the federal sphere, which is what we have done. As a result, credit unions and building societies will no longer be regulated or treated differently than other institutions.
There will be a deposit taker's licence, and the same deposit taker's licence will be held by the smallest credit union in the land as by the largest bank. It is true that the conditions imposed on that licence will very likely differ. However, an individual institution will be unable to solicit customers by telling them that it has a banking licence, but that another institution does not. That will no longer be the case.
The credit unions and the building societies feel that they have been given a leg up, because they have been one of the major beneficiaries of what we have done. That was not our primary goal, however. Our primary goal was to level the playing field.
This change has enabled these institutions to fill any gap in particular corners of the retail market that may be left by the large banks. It is certainly the case that our Treasurer is very fond of the credit union movement. Whenever a bank closes a branch in a remote location, he immediately recognizes the fact that the credit unions will move in to fill that void. To some extent, they have done so.
This was not a matter of concern for us. In our view, as I indicated to you before, retail access likely will increasingly be handled without the use of branches. A large bank or a credit union -- or any financial institution, for that matter -- can offer these services by using electronic mechanisms to deliver services to remote locations.
Senator Meighen: I get the feeling that Australia's population is made up of people under 40 years of age. In Canada it seems axiomatic that, the older a person is, the more concerned he or she will be with things such as electronic banking and the like. People want to deal with a human being rather than with a machine. Good for you if people of advanced age, such as myself, are quite accustomed to dealing with electronic means in your country.
Mr. Harper: Let me say that we are, for the most part, talking about the telephone. One should not forget that. We are not necessarily talking about the Internet. Elderly folk find it quite congenial to bank over the phone. They want the ability to talk to somebody, and to explain their particular needs to that person, rather than pushing buttons. A telephone can do that and, of course, it can do it in very remote locations.
Senator Meighen: I notice that your committee recommended, and the government apparently agrees, that holding companies should be permitted to own banks in Australia. Our regulator has made it clear that he does not believe that to be a good idea. He has expressed great concern about that. What was the debate in Australia?
Mr. Harper: We did not come down hard and fast on this one. We did not say that all banks should adopt this structure. We only said that we felt that there was scope to facilitate this model. Let us be clear -- it has already been adopted once. Even before our committee sat, the existing regulator, the central bank, found a way of allowing a bank and an insurance company to form a single financial institution under a holding company structure. Various firewall restrictions had been put in place, and the regulator was satisfied that this would work.
The difference is this: Under the system that the central bank had put in place, the bank was the holding company. We recommended that a non-operating holding company sit at the top. That is something which even the central bank had not contemplated at that stage. We argued it would not only make sense to have a non-operating holding company with subsidiaries underneath, but also that it could be managed.
We did not mandate that, nor did we suggest that the government mandate it immediately. We simply suggested that the regulator be asked to find ways to facilitate the non-operating holding structure if it could. We believed that that type of mechanism would be much more likely to facilitate mergers amongst different types of institutions which, in general, we felt would be desirable. In principle, there should not be any regulatory objection to that, but we were not second-guessing the role of the regulator in laying down the conditions under which that will happen.
This change does not require any change in the law. It just requires a change in policy on behalf of the regulator. The government has basically indicated to the regulator that it has accepted our argument, and suggested that the regulator explore this issue to see if a way through can be found. At this stage, of course, we do not know what the attitude of the regulatory authority will be. It is possible that its position may be similar to your regulator's position, in which case it would not be in conflict with the findings of the committee. The regulator would have looked at the issue, and decided that it could not live with the situation. We only ask that it take that look.
Senator Tkachuk: Senator Austin raised a question on the 10-per-cent rule. He also mentioned the 15-per-cent rule, which relates to ownership of a Schedule I bank by any single shareholder. You said that that was more for purposes of conflict of interest. For the purposes of our committee and the record, could you expand on that point?
Mr. Harper: Perhaps I can best do that by recounting a conversation that I had about a month ago in Indonesia with a journalist from Jakarta. He rang me up and asked how we regulate our banks in Australia. This, of course, was in the context of the problems in the Indonesian banks. I told him that we have a rule which prevents anyone from owning more than 15 per cent of a bank. The journalist interrupted me and asked if that meant that no family, nor any single person, could own a bank in Australia. When I told him that that was true, he asked "Why not?" I responded, "You should be the last person on earth to ask me that question."
We have a rule in place to prevent precisely the sort of situation that occurred in Indonesia. Our Wallis commission took about three minutes to decide that this regulation was a very good one. It prevents one group of related shareholders from using depositors' funds to finance their own ventures. That is the conflict of interest that it is designed to prevent.
There are two groups in any financial institution: the debt holders and the equity holders. In the case of a bank, the law stipulates that the depositors have first claim. The law exists to protect the interests of the depositors. Against whom? Against rogue equity holders. Given the high level of gearing in a bank, there is an incentive for equity holders to dispossess the depositors. That is the tension in a bank. Therefore, we have a rule which states that the regulator should protect the depositors of banks. To enhance that, we imposed the limit of 15 per cent as a way of trying to minimize the influence which any group of related equity holders could have on the board of the institution against the interests of depositors. That is what it is supposed to achieve.
Senator Tkachuk: Are your insurance companies all mutuals or do you also have publicly held insurance companies?
Mr. Harper: They are in the process of changing their spots. The largest insurance company in the country, which, incidentally, is also the largest financial institution in the country, the Australian Mutual Providence Society, has just demutualized, after 150 years. The other large insurance companies, in spite of their names -- the National Mutual and the Colonial Mutual -- are now shareholder limited corporations.
Senator Tkachuk: Do they fall under the 15-per-cent rule?
Mr. Harper: They are subject to the same rule.
Senator Tkachuk: What about a foreign bank?
Mr. Harper: These requirements, senator, are imposed under the Banking Act. If you want an authority to take deposits in this country, then you abide by that rule or you do not get an authority: full stop. Of course, foreigners can establish an operation here and not take deposits from retail depositors, or from any depositors in Australia. If they want to do that, that is fine; they need not meet the requirements of the rule. It is to protect depositors in the case of banks, and to protect policy holders in the case of insurance companies, people who hold debt obligations.
Senator Tkachuk: Thank you for your clarification.
One of your recommendations related to the competition bureau being the body which should decide on bank mergers rather than that being decided by the minister himself. My view is that you are interested in providing competition within the system.
How difficult or easy is it to start a new bank in Australia? Is it a difficult, onerous process?
Mr. Harper: You need an authority, and to get an authority, you must demonstrate to the central bank, at the moment, or the new regulator that, first, you have a capital of $50 million Australian; second, that you can obtain an exchange settlement account, that is to say, a cheque account with the central bank, in order to clear your funds; and third, it must be demonstrated that you have risk-management systems in place which the regulator regards as adequate to the lines of business in which you propose to engage.
It was the case, certainly, for a lengthy period after the Second World War up until 1980, that the industry was effectively closed. From 1980 onwards, following the Campbell inquiry, we have had a large number of new entrants. Nowadays, I think it is fair to say that it is relatively easy for banks to enter the Australian market, but they must abide by the conditions. A number of foreign banks in particular, for various reasons, have not been prepared to stoop to meet this 15-per-cent rule, for example, for deposit taking, in which case the central bank has decided that they could not have a full banking authority to take deposits. You are welcome to put your shingle out, but you cannot call yourselves a "bank."
The Chairman: I will say, parenthetically, as I listen to you, I realize that many of the issues you are addressing so clearly and in such an entertaining fashion will be issues that this committee will be addressing again in the fall when we hold our hearings. We will then submit to the government our advice on the basis of the task force report. You may well expect to receive another call from us asking you if you would focus specifically on our task force report. Your comments have been extremely helpful.
Over the years, on at least a couple of occasions, this committee, and some of us more recently in public statements, have argued for substantially opening up the payment system to effectively take the position that any major financial services company, mutual funds, insurers, et cetera, ought to have access to the payment system. Many of those now in the payment system, as opposed to those currently excluded, would make the argument that we have such a good payment system that a risk element is being introduced if we open the system up, and that stability ought to be the paramount consideration of public policy objectives under any circumstances. The litany goes on.
Given the focus of your response to the first question from me quite some time ago about the importance of stability as the overarching public policy objective, and given what we have been told in this country, how do you reconcile your dramatic opening up of the payment system with your stability objective?
Mr. Harper: That is a very good question. Where the current incumbent members of the payment system are absolutely right is that the payment system is the nerve centre of the financial system. When there are major financial seizures, they occur in the payment system. It must protected. That is clear.
However, that does not mean that the only people who can join this club are those who happen to be there. That is not clear at all. In fact, provided people meet the necessary stability criteria for admission to the payment system, they should be admitted. What we said on Wallis was the following: There are basically two requirements which, in our view, would be sufficient to guarantee the integrity of the participant in the payment system. The first is that you have a deposit taker's licence, and that deposit taker's license will impose upon you various capital requirements, and those capital requirements will be taken into account in an application for membership of the payment system. I would point out that you can have a deposit taker's licence and not hold an exchange settlement account, so you could issue deposits but not be able to allow those deposits to be used as a means of payment. That is technically possible under our arrangements. The expectation, of course, is that most deposit takers would seek admission to the exchange settlement system.
I would make the point that the exchange settlement system, the core of the payment system, will continue to be under the thumb of the central bank, not the regulator. The regulator will be imposing capital standards generally to protect the holders of deposits. The central bank provides a second view on this, and it must satisfy itself that holders of its liabilities, namely, those who have exchange settlement accounts, have enough protection in place not to threaten the central bank's position. More to the point, it must satisfy itself that there is enough protection in place as to not force the central bank to bail them out.
We would expect that a combination of the capital requirements imposed by the regulator and any other requirements imposed by the central bank would be sufficient to meet the central bank's concerns in the case of settlement accounts, but those requirements, whatever they are, should not be contingent upon the institution having a particular form. In the past we said to the central bank: "You have only admitted banks. That should no longer be possible. You satisfy yourself as to the integrity of these participants and you do not ask whether they are banks, non-banks, insurance companies. Who cares? Do they meet your criteria or do they not? That is the issue at hand. You are no longer regulating banks, so you cannot just let in those people you know."
Another argument we made was: "What about people who just want to offer payment services and have no interest in a deposit-taking licence? These would be people who would offer card-based payment systems, and have no interest in taking deposits or in any other financial services. They just want to do that. Should we allow them in?" Our answer to that was: "Certainly, but on conditions which insure the system against any inappropriate behaviour on their part."
We recommended that the central bank demand that these issuers of cards, smart-card services and the like, should simply be asked to hold 100-per-cent collateral against their obligations. They are not bringing forward any capital standards, which is entirely appropriate because they are not offering deposits, but they are holding out to the public the right to transfer balances from one party to another. We said to the central bank that they should be asked to hold 100-per-cent collateral, that is to say, to hold in an account with the central bank 100 per cent of the value outstanding. We said that if they were not prepared to do that, then they should not be given a licence.
The Chairman: How did the central bank respond to this? In your answer, you referred to the bank setting the rules and conditions that determine an entity is sufficiently viable to be able to be part of the payment system and, as you said, ignoring the fact of whether it is called a bank, an insurance company, a mutual fund or whatever.
Mr. Harper: Absolutely.
The Chairman: How did you ensure that the central bank did not, in fact, use its rule-making power to eliminate certain players? It seems to me it would not be too difficult to design a cluster of criteria masked as rules -- which is, in part, what has happened in this country -- which successfully eliminates those you do not want. The rules might not state: "You cannot come in," but they could be designed is such a way that only those people you want to qualify under the rules could qualify.
Mr. Harper: That is obviously a possibility, senator. No amount of rule making will stop that sort of process if they are determined to do it. We have tried to break the nexus. As I indicated we removed the supervision of banks by the central bank. We would not be at all surprised that the central bank would admit only its mates, namely, those it has known and trusted over many years. We took bank regulation away from them, and we have another body looking after that exercise.
Let me just back up a step here and say that the criteria for admission to the clearing system as opposed to the settlement system has basically been handled by the banks themselves. The central bank has had far too little influence over who is admitted to the clearing system. It has had influence over who is admitted to the settlement system because, of course, that involves its own balance sheet but, effectively, the authority of the central bank has been undermined, if I might say so, by other bank participants in the system who have said that the only ones who can get settlement accounts are those who are participants in the clearing system. Of course, the other bank participants determine who gets into the clearing system because the central bank has only one vote on that board That, effectively, closed the payment system to allow only banks to participate.
We gave the authority for admission both to clearing and to settlement to this new board of the central bank, the Payment System Board. We created, under the central bank's board, a subsidiary board with independent membership, apart from the fact that it is chaired by the governor as is the main board. With the Payment System Board we no longer have the cat in charge of the creamery. That board, on behalf of the public, will determine conditions for entry both to the clearing system and to the settlement system. The government has stipulated that they must do this on the basis of guaranteeing competitive neutrality, and ensuring that there are appropriate safety standards put in place which vary according to where the person is coming from. No longer is this decision to be made by the participants in the markets themselves.
My answer to you is that it is still possible that the payment system board could exercise favouritism. However, it has to separately account to Parliament through the Governor of the Central Bank. The Governor of the Central Bank would have to answer questions put forward by ladies and gentlemen such as yourselves in the Parliament as to why it is the case that, curiously, only people of a certain colour seem to be admitted to this club. In the past, that could not be done because these decisions were made behind closed doors by a private body which was beyond the reach of the public process. We have now changed that.
The Chairman: I, for one, very much laud your change because we have exactly the same problem that you used to have.
Senator Meighen: In some notes I read ascribed to your committee hearings the suggestion was made that the mergers would not necessarily yield big efficiencies but would provide some advantages if the Treasurer gave up his authority to block the mergers of big banks in Australia.
Our big banks tell us that one of the great advantages of merging would be their ability to invest "big time," as they say, in technology and, by implication, be able to fight off so-called "category killers." Does that argument commend itself to you in any way? Can category killers best be dealt with by subcontracting out to third parties?
Mr. Harper: The whole purpose of allowing mergers is to achieve cost efficiency gains where available. The mergers taking place around the world are very large-scale mergers. The reason for that is, although the scale economies are available, they are relatively small over long ranges.
We learn two things from the fact that large banks like Bank America and Nations Bank, large institutions like City Bank and Travellers, and your own banks in Canada, are anxious to merge and that they do so on a large scale. First, the scale economies, if they are there, must be relatively minor and over a large range. You will not catch them unless you make a big leap in scale.
Second, these institutions feel, rightly or wrongly, that they are obliged to do this. The alternative is to lose market share to the so-called "category killers." The whole motivation of merger is about cost reduction.
As an aside, I thought you were going to go down the track of the national champions argument which we rejected on the Wallis commission.
Senator Meighen: We dealt with that.
Mr. Harper: That is not an issue as far as we are concerned. That argument does not hold. This is about being efficient. If you are cost efficient, you can meet the world's best practice without becoming global.
It is true that the market is becoming global. That does not mean every player has to become global. However, you must be able to meet the costs of the global players. In particular, the category killer issue simply means that, in certain single lines of business, it can be possible for a one-shot player, as it were, to replicate the costs of a full-service bank in that dimension.
The only answer to that by the full-service bank is either to turn itself into a category killer, which is not possible, or expand its scale dramatically to realize the same scale efficiencies as the category killer, plus the scope economies of being a full-service bank. Faced with the category killer, that is the only answer, and that is why they are pursuing this strategy.
We did not say to the government that they should immediately rubber-stamp particular merger proposals. We said that the government should treat these people's application for a merger on the same basis as they did any other. Ask the hard questions: Where is the public benefited here? The banks will answer that it is all about cost reduction. We suggested that they should press them by getting evidence, and so forth. We suggested that they should satisfy themselves that the public interest is being served through the normal procedures of the competition bureau. We said that they should not try to second guess these people with an override on the part of the Treasurer. That creates uncertainty in the market-place.
There is plenty of power in our competition regulator to block these mergers. The act is a very powerful act, but there are no justifications, in the view of the committee, for any further override above and beyond that.
Senator Meighen: On the "national champion" issue, as you called it, Australians are known to us to be particularly proud of being Australian, and well they should be. Perhaps "nationalistic" would be the word. Many Canadians feel the same way.
There is a body of opinion that argues forcefully that, since Canadian companies are increasingly doing business around the world, they need at least the alternative of dealing with a Canadian bank. It is also argued that, as far as internal questions are concerned, fundamental issues in the financial area should be decided by citizens of that country rather than foreigners.
You have said that those sorts of arguments did not carry much weight in Australia. Can you help me understand why?
Mr. Harper: There are two issues there, senator. First, obviously, every Australian is very proud to see Australian businesses succeed on the global marketplace, and we applaud that. Second, the national champions argument is a slightly different one. That argument is that the precondition for success in the global marketplace is to be large-scale in the domestic market. Some might even go so far as to say there should be some sort of monopoly or market power in the domestic market. The only way we can succeed globally is if we can soak the local citizens. This is an argument which simply appalled us. We reject it. It is a false argument. If you are efficient enough, you will make it in the global market-place. We would love to see that, of course, on the part of every Australian institution. All we are rejecting is the idea that you need some sort of special facility, locally, in order to achieve that success. We do not see that connection.
When we raised this issue with your own bankers, one person whose name I forget but it was a very effective interview, said that, frankly, to become a global player in this industry, you must be active in a global currency. He said that not only is the Australian dollar not in that category, neither for that matter is the Canadian dollar. Global financial institutions will require global operations in global currencies. If that is true, and I think there is a lot of truth in that, it is totally independent of your domestic operations. One is not saying that such institutions could not have their respective domestic operations, but whether they do or do not would not drive their success in the global sphere. Their success in the global markets will be driven by a combination of efficiency and the fact that they are efficient and active in the global currency markets.
Senator Meighen: Are we talking about five to 10 players?
Mr. Harper: Quite possibly. We would hope one of those would be an Australian, but there is no reason why we should suffer domestically in order to facilitate that, at least not that we can see.
Senator Austin: Let me change the topic and ask you for a snapshot-type of response on the question of gross real time settlement. You have considered that. What is the condition of that gross real time settlement in the Australian environment?
Mr. Harper: Are you asking, senator, when it will kick in?
Senator Austin: When will you introduce it?
Mr. Harper: I think on July 1, is the answer.
Senator Austin: In a little while, we will ask you how it is going.
Mr. Harper: You would be advised, of course, to ask the central bank as well, but my understanding is that the system is very far advanced and is about to be introduced.
The Chairman: An issue that is a politically popular one in Canada has to do with the use of information, essentially, the privacy conditions attached to information and the extent to which that information can be used by the bank to sell other services. An example of this would be the information that a retail consumer gives a bank manager in a loan application.
When members of this committee raised this question, for example, in the Netherlands and in Switzerland, and raised it in the context of: Does this not lead to tied selling, the response on behalf of the government representatives in those countries was, "Of course it does, and is that not good for business?"
Tied selling and the use of information as a potential tied-selling tool, or at the very least a networking tool, has been a hot consumer item here. Do you have rules with respect to how information given to one part of the financial services sector can be used by another part of the same conglomerate for selling services?
Mr. Harper: Yes, we do, senator. We have the Privacy Act which establishes the Office of the Privacy Commission. The Privacy Act is quite restrictive in terms of the use of information in the way that you described, even within an organization, let alone across organizations. An organization can find itself on the wrong side of that act if it facilitates the transfer of information from one division to another.
In our view, we felt that this was a little restrictive. In the report, you will see that we make general comments suggesting that there be further thought given by the privacy commissioner to the potential advantages to consumers of having one information bank, so to speak, held by an institution which can then be drawn upon by different parts of the institution in order to build packages of products of which that particular consumer might like to take advantage.
It was part of our terms of reference in the sense that we were given carte blanche to think about regular obstructions to good business practice. We acknowledged that there were potential concerns about privacy, for obvious reasons, and that information could be abused. We also accepted that there were potential advantages, not through tied selling which, of course, is a discriminatory practice, but through the ability to offer customers different packages. I do not know where that has gone. We just left it that the privacy commissioner would be asked to review the case and consider the possibility of individuals opting in or opting out, whichever is the easier of the two. It could be that the information will be released unless people ask the institution expressly not to release it. At the moment, it is the other way around.
The Chairman: You do not know what has happened to that recommendation? Has the privacy commissioner changed the practice?
Mr. Harper: I do not know. Perhaps you could ask one of your assistants to contact the privacy commissioner on the Internet and make a direct inquiry.
The Chairman: When you visited the U.S., I am sure you heard about their CRA, Community Reinvestment Act, which is the act which rates institutions on the basis of their community performance.
Mr. Harper: Indeed.
The Chairman: Did you as a group form any views on that? Did you contemplate the benefits or the liabilities of such a proposal in Australia, where you only have a limited number of banks? Do you want to share your thoughts with us on the usefulness or not of a CRA-type mechanism?
Mr. Harper: I come back to the original distinction I made when we started out on this, and that is, we, as a committee, saw a fairly clear line distinguishing questions of distribution from those of efficiency. In the final analysis, we do not regard banks as charitable institutions. They are not. To ask financial institutions, particularly banks, to carry out what we would regard as legitimate government responsibilities in the area of social questions such as a Community Investment Act, we believe it would be like, frankly, whistling Dixie to ask a bank to do that. They may go through the motions, but if you try to force them to do it, you will create all sorts of distortions and, in any case, they will do it badly. They are not designed to do that.
If you have concerns about the community dimensions of various things that are happening in the economy -- whether it be access, community reinvestment, how to deal with those who do not speak English, and so forth -- these should be addressed through the public policy process.
We believe we should let the banking system make money for this country and then they should be taxed. We should spend those taxes on, say, access programs if that is a concern. However, those decisions have to be made by the public, lined up against all of the other claims on the public revenue for these types of assistance.
If you ask the banks to do it, all you will end up doing is getting the job done badly.
The Chairman: Thank you, Professor Harper. I must tell you one of my colleagues just said parenthetically while you were answering the last question that the real problem with your report is that it makes too much sense for those of us in Canada. We would agree with almost everything you said today. We truly appreciate you taking the time to be with us. I apologize for the interruption. I would like to reserve the right to commandeer another couple of hours of your time when we have to give our advice to the government in response to the task force report sometime this fall.
Mr. Harper: Thank you. I would be delighted to make myself available. I very much enjoyed my time in Canada last year when I had the chance to talk to the task force members. I wish you the very best of luck. These are important issues, and we have a lot to share.
The committee adjourned.