Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 26 - Evidence - Afternnon meeting
OTTAWA, Monday, September 28, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 2:05 p.m. to examine the state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: This is our second session today with the chairman, the vice-chairman and their staff from the Task Force on the Future of the Financial Services Sector. This morning we discussed the part of the report that deals with the structure of the industry, the structure of the market, and the matter of competition and competitiveness. This afternoon we will turn to a consideration of the regulatory environment, or regulatory framework, and what the mandates of various and sundry agencies ought to be and how they ought to interact. Then we will move on to discuss the issue of the corporate responsibilities, or what is sometimes called the social responsibilities of financial institutions; if they differ from other corporations, we will ask why they differ, and we will discuss how they differ and what ought to be done to ensure that they behave in a responsible fashion.
We have asked Mr. MacKay to begin with a few comments on those topics.
Please proceed.
Mr. Harold MacKay, Chairman, Task Force on the Future of the Canadian Financial Services Sector: In the overview of chapter 9, which is a discussion of the regulatory framework and the pieces of it in which we examine whether changes might be profitably made, we did look at a number of issues. In some cases we made recommendations; in others, as the report makes clear, we decided to stand back from recommendations, and rejected certain ideas that were put on the table to us.
We did take a close look at the role of OSFI and its structure. We concluded that Canada had done well by putting together the insurance and banking function some ten years ago; in some respects we got ahead of the curve, with other countries doing much the same thing now in response to the convergence of various parts of the sector.
With respect to OSFI's structure and mandate, we essentially have two sets of proposals. In the first place we believe that OSFI's mandate should be changed.
The Chairman: For clarification, I should point out that OSFI is the Office of the Superintendent of Financial Institutions, which is the regulator of all federally regulated financial institutions, whether they are banks, trust companies or insurance companies.
Mr. MacKay: Our suggestion is that the mandate, which was added to the act only a few years ago, should be examined to ensure that it accurately reflects the responsibilities we should like to see OSFI have in the time ahead. One responsibility is the need to balance competition and innovation with safety and soundness, the point we discussed this morning. There is, however, a need for some affirmative statement of OSFI's role in administering consumer protection legislation at the federal level. It performs that role at the moment, but it has no statutory mandate to do so. We think that should be clarified.
Finally, there is a mandate at the moment for protecting depositors, policy holders and creditors; that appears to be a confusing reference in the mandate. We see no reason why any regulator should protect creditors if they are not policy holders or depositors.
We recommend those three mandate changes to clarify what it is that OSFI is to be concerned about. We also recommended -- and it is an important recommendation -- that a board of directors for OSFI be put in place. We would see it functioning in much the same way as the Bank of Canada board, approving major strategies and policies, monitoring progress against strategic plans, and having a strong role in human resource policies. However, as to operational decisions, it would operate after the fact and review decisions after the fact; the accountabilities of the superintendent and the minister would not change, but important sounding board and strategic oversight power would be added by the board.
That is what we are suggesting for OSFI. We considered whether to recommend that OSFI and CDIC should be amalgamated and we decided not to make that recommendation.
For the most part we reviewed governance questions on financial institutions only peripherally. We have appreciated and have commented on all the work that has gone on in improving the governance in financial institutions and its importance in this era. Good governance will ensure the safest and soundest financial institutions. We have suggested that there be a further consideration of looking at separating a non-executive chair and the CEO. We have not pressed that as a hard recommendation because it came up late in our deliberations and we had not canvassed it with the various people we had spoken to in a way that made us comfortable in actually putting it out as a hard and fast recommendation. However, we believe it is probably the way to go.
We examined questions relating to the governance of the payment system. We recognize that the Canadian Payments Association is a central body in the Canadian financial services system and that, as time goes on, ensuring that it is acting in the public interest is important.
Currently, the Governor in Council has the power to approve by-laws.
We have suggested that this power be placed with the minister and that the minister have the power to review and revoke rule changes as well as by-laws, because we do not always know whether a particular matter will be dealt with by way of a by-law or a rule, and it may be offensive to public policy and create monopolistic or anti-competitive effects. We have also suggested that there should be a power to issue directives to this body, should the public interest require it in the interests of competition and competitiveness. We have suggested that there be periodic stock-taking of the progress in the payment system by a committee with broad representation to ensure broader public input.
We had a hard look at streamlining regulation. We have a number of recommendations to eliminate intergovernmental overlap. Among other things, we think it would be in the interests of the country if the provinces were to delegate, so far as they could, solvency regulation to OSFI. In some instances that is already happening. Manitoba, for instance, has OSFI do its solvency inspection of its trust companies.
We recommended that there be common capital-adequacy tests for regulated financial institutions, whether federal or provincial, and that there be a centralized electronic data base for filings to get rid of the multiple filings that presently occur, and that OSFI should take the lead in doing that.
We have suggested, in the interests of good business practices that, where there is an supervisory function overlap between OSFI and CDIC, the overlap should be eliminated by that function being only in OSFI and not in two federal agencies.
Finally, we picked up on a number of recommendations that OSFI itself had made for streamlining approvals.
In this chapter, we have recommended that there be an integration of CDIC and CompCorp. We made that proposal in light of the quite rapidly changing environment. The payments system is now regulated and protected in a different way, with the large value transfer system, collateralization, and other mechanisms that are being put in place by the Bank of Canada. We no longer believe that the case for deposit insurance should be premised on keeping the system from collapsing but rather on the need to protect smaller depositors as the principal rationale these days.
There are other things going on in the marketplace that we think create a compelling reason for integration. More and more, similar products are being offered by banks, on the one hand, and insurance companies, on the other. In particular, once the payments system is opened up and deposit-like products in the billions of dollars are held by insurance companies, it will be a competitive disadvantage if they are not on a similar or equal plane with the products being offered by the banks. We set out a couple of different models for that integration, one being the Crown corporation model and the other being a non-Crown corporation model, and either model would achieve the level playing field, equal competitive position, and reduction of consumer confusion that we think are important.
Finally in this chapter, we have had a look at financial services being provided in Canada from outside the country. We have not decided that Canada, or that we at least as a task force, felt bold enough to make recommendations cutting across the board in the field of electronic commerce which transcends borders. Most countries are still waiting to see how this develops in order to understand what kind of national regulation can be in place and what kind of international regulation has to be in place.
However, we have proposed a mechanism by which companies which wish to lend moneys into Canada -- not take deposits but lend moneys -- from outside the country and to mass market in Canada would be able to be accredited to do so, without being regulated in Canada, on agreeing to fulfil Canadian consumer protection standards and on agreeing that, in the case of a dispute, Canadian courts and not the courts of their home jurisdiction would decide the dispute. In other words, if a lender wants to provide a lending product from outside Canada, then there should be a means for that to be done. Currently, there is not, which leads one to the confusion that faced Wells Fargo when they attempted to enter Canada.
That is a very brief overview, Mr. Chairman, of what is contained in chapter 9. I do not know if you would like me to pause there or give you an even briefer overview of chapter 8.
The Chairman: Perhaps you could comment on the chapter on corporate social responsibility, and then we can deal with questions on both.
Mr. MacKay: The reason I thought I could be even briefer on chapter 8 is that, in the question period this morning, we actually discussed much of the framework for our suggestions in chapter 8.
We took a hard look at whether the high expectations for financial institutions, particularly banks, were justified. For the reasons we discussed this morning with a number of senators, we concluded that they were justified. They were certainly present and they were justified.
We felt there were two types of expectations. One set of expectations had to do with the banks doing quite well in certain kinds of business activities. However, they are business activities, they are not being done for a social purpose. The expectation is that these business activities will be performed, and will be well performed. The three we have discussed are: the business activities engaged in providing financing to small- or medium-sized enterprises; the newer emerging business activity of dealing effectively with knowledge-based industries as that sector grows and emerges; and, finally, the emerging business needs of the aboriginal community, and we have a small piece on the financing of aboriginal businesses. Those we view, though, as expectations which relate to business needs and not to social needs.
In regard to the social expectations, we examined access issues, both in terms of access to basic banking services by low-income Canadians and access to branches. Some mention has already been made of our recommendation. We also examined the potential for more fruitful partnerships, both microcredit and voluntary sector partnerships between financial institutions and the voluntary sector. Finally, we discussed a made-in-Canada community accountability model which would both collect comprehensive business data with sectoral and regional breakdowns and, in addition, be a vehicle for continuous dialogue between institutions and the communities on the broader subjects of community service, ranging all the way from transparency and documentation through philanthropy and other forms of community relationships.
We would suggest that those approaches should not just apply to banks but also to all other federally regulated trust companies and life insurance companies, because we believe that, as the sectors converge, the idea that banks should have special responsibilities that are greater than these very similar institutions with a different name on them is not really sound.
I have not yet delved, Mr. Chairman, into the nitty-gritty of our recommendations on any of these. I will mention just two.
On the small-business side and on the knowledge-based industries side, we have recommended this comprehensive data collection scheme, and we have done that in part because we found, somewhat to our surprise, that there was inadequate data on a number of small-business issues in Canada. From my days on the board of the Federal Business Development Bank, I had thought that virtually every subject related to small business had been studied, restudied and studied yet again.
We found that there were no serious studies or a serious data base in Canada at all in relation to the equity financing needs of small business. There has been quite a bit of work on access questions, on the debt side, but the data is fragmentary. As I mentioned earlier, the banks have only about 50 per cent of the market and they have been producing data for two or three years. It is quite clear that our data base is inadequate for good public policy.
We have recommended that we get the data base in place. We should have a more focused effort inside government for a dedicated small business finance group in Industry Canada. The data should be well analyzed and brought forward. These initiatives are similar to initiatives taken in recent months and years in the United States and in the United Kingdom, where a similar lack of data has caused the U.S. Federal Reserve and, in the U.K., the Bank of England, to focus much more squarely on the sector to try to get better data before the policy makers. That is an important recommendation. It is not technocratic and it is certainly not wheel spinning.
On the question of access to bank accounts, we think quite a significant amount has been done. The agreement struck between the government and the banks is a positive step forward in terms of ensuring that bank accounts will be made available to low-income Canadians. However, it is far from clear that that agreement, informal as it is, will have the force it is supposed to have. It is difficult to change the culture of a large organization over time. The work that has been done on the ground to test how well it is being followed suggests it is not being followed terribly well yet.
We did an anecdotal experiment of our own in which we sent out a junior researcher from the task force into the Jane and Finch area of Toronto to try to open a bank account with the correct types of identification and with a government cheque in hand. He succeeded in three of the seven institutions in which he tried to open an account. The other four declined the account, notwithstanding that he did meet the conditions of the informal agreement between the Canadian Bankers Association.
Senator Oliver: What reasons were given?
Mr. MacKay: A whole host of strange reasons were given, including one in one institution that he did not have a telephone.
What we have said in this area is that, first, the government should think about providing, as it does in some jurisdictions, low-cost identification for people who cannot get identification. Second, a standard basic bank account, which would include electronic access that banks would offer, could be developed. We considered whether we should mandate such an account. We do not suggest it be mandated; we suggest that it be voluntarily worked up.
We found that most Canadian banks offer a cheaper basic bank account than is offered by banks in the State of New York where legislation requires a mandated basic bank account. We think Canadian banks have a basic account available; it is just that no one can figure out that it is available. We are asking that the fact of its existence be posted in all branches, in particular where the need is present. We suggest further work continue to try to homogenize that product.
We are urging a greater use of direct deposits and indemnity agreements, which will prevent the need for holds on government cheques, as well as stepped-up training programs and some regular monitoring of the "unbanked" or "unbankable" in Canada assess whether we are making some progress.
We have also said that, if we do not continue to make progress and there continue to be substantial numbers of Canadians who cannot get access to basic banking services notwithstanding the agreement, then we should legislate the agreement to try to give it some teeth. However, we should first try to make this voluntary-effort work.
Senator Austin: Mr. MacKay, I view your report as a holistic report in that one issue leads to the other and back again to a third, and then around the circle. I say that by way of excusing myself at least from seeming to be circular in my questioning.
I am concerned with your submission, as it relates to governance, which is part of our current agenda, that the Canadian regulator should move to add the element of competitiveness to the checklist of supervisory duties. You mentioned the proposed new U.K. agency which will be called the "FSA" if it is ever created by legislation. The debates in the British House of Commons are quite fascinating. In any event, it will try to understand more clearly how the well-known notions of safety and soundness are blended with the question of competitiveness. Here, you are asking the regulator to move from relatively objective tests, safety and soundness, to subjective tests such as the assessment of entrepreneurial skills and a general assessment of the competitive environment, asking such questions as: Is there enough competition? What does the pricing structure look like? Is a region being properly served? Could we have policies that differentiate, for example, between our assessment of the competitive environment in British Columbia and the competitive environment in Nova Scotia? You are introducing a set of questions that are so subjective that one wonders whether you are not threatening the question of systemic risk. In looking at governance, the idea that one, two or three institutions can fail is part of the competitive environment and part of the price of entrepreneurial risk development. However, it concerns me that one or two institutions cloud the judgment of the international financial community with respect to the safety of the Canadian system.
As a matter of public policy, do we want to open up the entrepreneurial activity while, as a matter of systemic risk, we may be misunderstood in the system? Could you comment on these concerns?
Mr. MacKay: In making this recommendation, we have tried to make it clear that OSFI would remain, first and foremost, a prudential regulator focusing on safety and soundness. On page 178 of our report, we have tried to spell out that we are not trying to derogate from that proposition. That proposition, taken by itself and to the extreme, could certainly mean: "Do not take any new entrants in, let us just stay safe and sound with the same small group we have because better the devil you know than the one you do not."
We have tried to suggest that, in the balance, should also come some recognition of the facilitation of new entrants, new products. You would still have to pass a fit and proper person test. You would still have to demonstrate a safety and soundness recognition. However, for instance, we are suggesting that, if you are in a business where the capital needs are small, perhaps negligible, OSFI should have the ability to not be bound by a rigid $10 million figure, or any other number, but should have some flexibility to examine on a case-by-case basis a proposition that is put in front of it.
We do not believe it is likely that systemic risk to the Canadian system will be caused by the failure of small institutions. In response to making OSFI aware that it is to facilitate competition and not stifle it, we do not think we are likely to have new $5 billion-plus institutions coming into the market who would shatter the nation if they were to fall.
We do not think we have tilted the balance too far. We have tried to make it clear that promotion of competition is not what we are talking about, but that the facilitation of competition, the recognition of competition as essential in this environment will enhance regulation. A better balance is all we seek, not a tilting of the balance too far the other way.
Senator Austin: I am happy to have you put that on the record of this committee. Thank you.
My question then moves to the issue of the governance of too-big-to-fail institutions. In the opinion of the task force, do we have such institutions in Canada today?
Mr. MacKay: The task force did not discuss that topic and, therefore, has no view to provide to you. We do have some very large institutions that would obviously cause a significant ripple in the pond -- a wave, actually -- if one of them were to fail. Whether that invokes something called a "too-big-to-fail" doctrine is another question.
Senator Austin: There is a sense that the failure of any of our five largest banks would cause more than a ripple -- a tsunami, I would suggest -- and would involve the taxpayers in a very direct way.
If we turn four banks and the retail market share into two, we have perhaps a larger systemic risk, in theory at least.
I am not trying to ask you questions on the merger. I am proceeding to something else.
Has your committee looked at the result of reducing the number of players buying government Treasury Bills with regard to the competition for products?
I noticed, for example, a rather interesting story in the Financial Post of September 24, 1998. It says that new rules to control Treasury Bill and Canada bond auctions to take effect before the end of September will lower the percentage of T-bills that can be purchased by a single buyer to 25 per cent from 33.3 per cent, and therefore the question of limiting the buyers and the migration of that particular service to foreign financial centres.
Mr. MacKay: Senator, we did not examine the issue of the competitive market for particular products. We have taken the view that the more players we have in the market, the more robust competition will be for all products in all markets. However, apart from that obvious generalization which was on the table this morning, we did not examine the specific case you mentioned.
Senator Austin: My understanding is that the question of the specific mergers that are proposed by four banks is something to be examined in another process, not your process, and perhaps not even this process.
Finally, I would like to ask you a question about hedge funds and Canadian exposure to them. Is this something that you looked at as part of the task force?
Mr. MacKay: No.
Senator Austin: So you have no idea what the Canadian bank exposure is to the international hedge fund system?
Mr. MacKay: No.
The Chairman: Picking up on Senator Austin's last question, I will remind senators that the Governor of the Bank of Canada will be with us on October 19. In the meantime, the CEOs of all the major financial institutions in the country, both banks and insurance companies, will be before us. I would presume that an overview will be available from the Bank of Canada and that a more specific response will be available from each of the institutions.
Senator Angus: If I may revert, Mr. MacKay, to the line of questioning of this morning, I was talking about it being a privilege to be in the financial services industry in Canada, and I indicated that the industry was fairly large. My sense, from your answer, is that your orientation, vis-à-vis banks at least, and consumers, is more retail banking and the consumer as a depositor, as opposed to someone in the money market or a consumer of some of the sophisticated products that banks are offering today in the global capital markets such as derivatives and things like that. Is that a fair conclusion?
Mr. MacKay: In our report as a whole, we have used the term "consumer" in parallel to "customer" which indeed would include large business enterprises as well as small business enterprises.
We have concluded that large business enterprises are by and large well served by our system and that, when they are not, they have ready access to global providers of financial services of all sorts. It is a very robustly competitive marketplace.
In chapter 8, we addressed Canadians' expectations and corporate conduct. Our focus in that chapter was not on large business. Throughout the report, the focus has been on getting the most competitive marketplace we can, getting more players into the marketplace, and so on. On examining these expectations, we found that they relate primarily to small- and medium-sized enterprises and not large business.
Senator Angus: In doing a comparative study in preparation for dealing with your report, it rapidly became apparent to this committee that the Canadian banking system is quite unique, particularly when viewed in the context of our geography and our demographics.
There is a great risk of comparing apples and oranges. We would see something that would perhaps be attractive to have in the Canadian system, but we would then be reminded that we do not have a large second-tier retail sector. I imagine that is one of the reasons that you have looked for ways to encourage more players.
I realize that you have indicated a number of ways in which we could make it more attractive, and we both agreed this morning that that is always subject to individual initiative, leadership and the human element.
I am wondering how realistic it is, without changing our system radically, to imagine that it would change the way you are hoping it would.
Mr. MacKay: There are two things I want to say in response to that. First, we agree with the premise that there is no existing model on which we can seize. Every country is unique, in our view, in the financial services world. Each is a product of its own history, geography, population, and socio-economic traditions, et cetera, and certainly Canada has a unique perspective in every one of those areas.
Having said that, it is our view that there is no reason for us not to try to have a competitive marketplace. Wherever we find illogical barriers with people who appear to want to be participants, we should cast those barriers aside. We should continue to look for safety and soundness in the marketplace, but we should try, where we can, to find extra competition.
We have talked in particular about expanding the powers of the credit union movement in Canada. I think that is crucial. As you would know, in parts of this country the credit union movement has a larger share of the deposit-taking market than any bank. There are other parts of this country where that strength does not exist, which is no reason for us to deny the credit union movement the capacity to try to convert itself into a fulsome provider of retail financial services everywhere, which is what they want to do.
So, while the second-tier institutions that we would like may not currently exist, we do not did despair of building some, starting with the credit union movement.
Senator Angus: That is interesting. If, hypothetically, we were successful in encouraging new players in the retail banking sector, would it not follow that we should force the large players who are there now -- that is, the five major chartered banks -- to be active in the retail sector, if they want to be active in another area where they can have competition from around the world? There are two sides to this issue.
Mr. MacKay: There may come a day when that will be an easy statement to make in Canada, but I do not think most Canadians think it is that easy to say today.
Senator Angus: Do you think it is, today?
Mr. MacKay: I agree with most Canadians.
I do want to say something about our ability to spawn financial entrepreneurs in the financial services sector in Canada. The Newcourt Credit Group is a good illustration of a highly successful Canadian firm of recent vintage that has done very well in the unregulated sector. It is in what we are calling now, in the broader sense, the retail sector. They are a significant supplier to small- and medium-sized enterprises.
I believe in Canadian entrepreneurship. It exists, but you must remove some of the barriers if you are to realize it.
Mr. Pierre Y. Ducros, Vice-Chairman, Task Force on the Future of Canadian Financial Services Sector: We have been working together for 20 months now. I want to talk about the credit union movement, les caisses populaires, which has 40 per cent of the retail markets; that is followed by the National Bank, with about 16 per cent. The rest is shared among the large Canadian banks, merging or not. The market is very dominated by these two financial institutions. It is the same thing in Saskatchewan, where the credit union movement is very strong. That could become a major second-tier organization.
I believe that foreign banks will not come here through building a network of branches. They will come through technology in a monoline-type of environment in which they will try to cream off the top of the most profitable types of business and, thus, will become significant competitors here.
Senator Meighen: With respect to the caisses populaires in Quebec, there are many communities where the only financial institution is the Caisse Desjardins. This morning we heard a suggestion that perhaps it would be advisable to consider a requirement for the banks to issue a three- or four-month notification if ever they want to close a branch. Would you support that in the case of the caisses?
Mr. Ducros: Perhaps this group should look at communities in which a caisse populaire is the only player to see if the spreads between the loans and the savings are higher or are in line with the competitive environment. That should be looked at, because when there is no competition that is not at all at the service of the consumer.
Senator Meighen: There may be no service, but expensive service is better than no service.
Mr. Ducros: We did not look specifically at the provincial area because we do not want to go into the area of provincial jurisdiction. We recommend that it be applied to the federal regulations and we urge provincial governments to consider similar requirements to ensure that everyone is on the same playing field. I would refer you to page 166.
Senator Meighen: I take your suggestion that, in the equivalent of one-horse towns in the financial services world, it might be interesting to know what the spreads are and what the difference is, if any. I suspect you know the answers, but we will have to do a study to find out.
Senator Kelleher: As we are discussing second-tier types of financial institutions and perhaps having the credit unions, and so on, filling in as part of the second tier, I might say that when our committee was in Washington and in New York there was quite a bit of discussion about the community banking system there, how the banks worked and how easy it was for them to start up with a minimum amount of capital. They have a different tax regime and filing regime. When we were in New York, the U.S. Federal Reserve Board told us how they had beaten the big banks down there. The big banks were given the opportunity to move in and around the various states in which they thought they could go and clean up. However, it turned out that that was not the case at all, because the small community banks stood up to them and were quite successful.
Our committee was impressed with that kind of banking system that permitted small, local banks to start up. We do not say too much about that. That word -- at least I have not found it in your report -- does not seem to be used. Is there any reason for that? Do you have any thoughts on community banks?
Mr. MacKay: As we have discussed, we have not used the phrase "community bank." We have spoken about new start-ups and the fact that some of them would be local. What we have in mind are local community banks spawned in the Canadian community.
Senator Kelleher: A Canadianized version?
Mr. MacKay: Yes; without, perhaps, the name. We have an idea for cooperative banks, which is a little different, being directly linked to the credit union movement. We have a notion that non-cooperative, private sector banks at the community level would be a natural response to taking off the 10 per cent rule for small institutions.
In my own province, I have watched the farming community respond and set up grain terminals with equity on the ground to meet the fact that there would not be competition in the grain services business. A number of farmers or other business people, in a surprising way -- a way that once would have been thought impossible -- have come together and set up a significant community grain storage business. I think exactly the same thing will happen in financial services; there is no reason that it should not.
Senator Kelleher: I was enamoured with the idea of community banking. Apparently, you seem to care for it, too.
Mr. MacKay: Yes.
Senator Kelleher: However, I am somewhat disappointed that you have not placed more emphasis on this area. It is just touched on lightly. Knowing government as I do, if something is touched on only lightly, it never sees the light of day. I was hoping that there would have been more emphasis here and some positive thinking towards it, because otherwise it might get lost in the shuffle.
Mr. MacKay: We would applaud any emphasis you would like to give it.
The other facts you mentioned, namely, tax services, and so on, will be important if there are start-ups. We have recommended a 10-year tax holiday for new start-ups. If you do not do something like that, you almost condemn a new community bank to a slow death spiral at the front end when profits are not likely to be there for a few years in the start-up period. You can really erode the fundamental capital base.
From our side, we agree with having local institutions. I do not know whether the term "community bank" necessarily has to hang on it, but I think it will happen, it can happen and it should happen; it would be good for the country.
Senator Kelleher: You would be supportive of that?
Mr. MacKay: Yes.
Senator Angus: On the issue of community banks, would you favour a modest granting of monopoly status in a defined local? I believe that that is prevalent with the U.S. system.
Again, I am saying this in the context of my earlier suggestion that it is dangerous to compare apples to oranges. You set up these standards and competition is to be of the essence. It seems to me that the American system sounds great, but it is very complicated and it has evolved over many years.
The Chairman: To clarify the monopoly status raised by Senator Angus, we did discover when we were in New York that, in a number of states, if a group of individuals gets together to form a community bank, they are protected by an agreement that provides that for a certain period of time -- three or five years; I cannot remember -- no other community bank can be set up within a prescribed radius of that bank. It does not stop other national banks, obviously, from being there, but other community banks could not immediately enter the area and begin to compete for business.
Mr. MacKay: We gave no thought to that; I cannot respond to it. We did not really discuss it.
Senator Angus: On the subject of the retail sector and your continuing theme of competition, would it be fair to conclude that you have not directed your attention to, say, competition amongst investment counsellors or amongst merchant bankers? This is competition with and for the big banking institutions as they now exist; correct?
Mr. MacKay: No, that is not exclusively so. We wanted, within our mandate, to look at any barriers to a competent provider providing a financial service to any class of customers.
It may be that we have not, for instance, reached out to investment advisors and thought about that. If we did not, it is because nothing came to us from any of the submissions that made us think that there were barriers we needed to address in that particular area.
As far as we were concerned, we took a whirl at any barrier to competition that existed. Where it did not make any sense, we have asked that it be knocked down. That was true whether it was a big or small business examined in the study.
You may be interested in looking at the study done for us by the Conference Board. It is one of our 18 background studies. They surveyed CFOs of medium- and large-sized Canadian businesses. They tested, first, the availability of financial services. The answer was that those are readily available. They then measured the big Canadian banks against others in the foreign banking community.
By and large, in terms of reliability, stability, and all those kinds of things, Canada ranked very well. They did not rank as well in the area of innovative products and being able to carry the flag to some other parts of the world.
When we looked at competition, we were prepared to take on any issue that related to competition across the board. We did not just have eyeglasses at the retail consumer level.
Senator Angus: Turning to the chapter on the governance and the regulatory system, as the chairman said, we were happy to note that you picked up on our recommendation in terms of OSFI -- that there should be a board.
What has governed your thinking in terms of the composition of the Board? I have read in Background Paper #5 what you have written about that.
It seems to me that we are talking about here is management's accountability. Today, from what we have heard at this committee, the management of OSFI really does not have anyone to whom it is accountable. OSFI acts as a sounding board on the one hand and they are to be held to task on the other.
Senator Oliver: Except for the Minister of Finance.
Senator Angus: Parliament responds through the Minister of Finance.
If one were to propose a board, as you have suggested and with which we agree, is it not important that there be not even a perception of a conflict of interest on that board?
I notice that you have got the deputy minister and many other ex officio seats on that board.
Senator Oliver: There are four of them.
Senator Angus: It is a very small board in terms of the independents. Can you elaborate somewhat on your thinking? I got a chill when I looked at that. When you get to that level, why would you not have a completely independent board?
Mr. MacKay: I see. There is no one from the Ottawa financial establishment. Is that where you are asking me to address my attention?
Senator Angus: Yes. I am breaking my own rule about comparing apples to oranges, but in looking at the FSA in the U.K., new bodies are being set up there and they are trying to keep it all very independent, as far as I can see.
Mr. MacKay: In making that proposal the way we did, we were influenced by the fact that other boards, such as the CDIC board -- which is part of the regulatory apparatus with another perspective -- have a set of ex officio appointees. Perhaps we went a little too much by rote; I don't know. We wanted to have a parallel structure and to ensure effective cross-knowledge amongst the people who need it. We see that as an advantage of a CDIC-type of board.
There is another case that says we should not have any of those people, in which example one must ask whether the knowledge transfer would be sufficient? Will we not suffer in order to gain some theoretical independence in terms of having a lack of co-ordination amongst agencies that must effectively cooperate with each other?
Having debated the two things, we came down with the proposition that we would leave the same ex officio members in place on both boards in our recommendations. However, there is a case to be made that would roll them back across the front, across both boards.
Senator Angus: Under your report, OSFI would add some new strings to its bow, in effect, with a modestly widened mandate.
Mr. MacKay: Yes.
Senator Angus: Insofar as bank supervision itself is concerned, where the object is to monitor the players and to ensure certain standards, a risk of conflict develops. There may be political considerations or other issues which might cause a hesitation to move in. There are examples such as Confederation Life.
Mr. MacKay: That is true. Our view was that the input of the chair of the CDIC and the governor of the bank would be more positive than negative on those fronts.
We do not see the OSFI board as making operational decisions as to whether to move in now or not to move in now. We would leave that as a management decision with after-the-fact audit responsibilities in terms of strategic direction, effectiveness and efficiency. Our opinion is that it would be wrong-headed to provide the board with the need to approve action over some level. That should be left with the superintendent, as it is now.
Senator Angus: I wanted to elicit your thinking on it and I take your answers to mean that you are still open-minded. It seems you could go either way. Thank you.
Senator Oliver: I have two questions that deal in part with regulation. Throughout your report, the importance of safety and soundness in our banking system is mentioned, thus ensuring security for Canadian consumers. You have said that our banking system can be stronger through enhanced competitiveness, which means more competition. The report seems to support minimal regulation where possible, but on reading the entire report, one sees creeping regulation and creeping ministerial discretion throughout -- indeed, ministerial discretion with very little, if any, reference whatsoever to the Parliament of Canada.
Having read this, I would remind you that the Parliament of Canada is where the laws are made and where they get the authority to make the rules to govern these things. I received the impression that you would like to see this new, invigorated banking sector in Canada being run by bureaucrats. That might cause some serious problems. The danger is that government bureaucrats might implement many of the ingredients of your recipe for enhanced competitiveness, but, on the other hand, they might just pick the ones that require regulation and leave the ones that would help competitiveness. Nowhere in your report did I see anything that would prevent that from happening.
The Chairman: As an old bureaucrat, to strongly support Senator Oliver's position, part of my reaction on reading it was that it was the rebirth of the old Department of Finance in terms of awesome and unregulated power vis-à-vis the system. I certainly got in spades the exact tone that Senator Oliver just described.
Senator Oliver: Mr. MacKay, even before you begin, I must say as a follow-up to what Senator Angus was asking --
Mr. MacKay: Do I get to give a follow-up answer?
Senator Oliver: I too looked at what you recommended by way of the composition of the OSFI board, and I too was struck by the fact that you wanted all those ex officios in there. I was also struck by the comment that any of the people who finally get on that board must meet the comfort level of the Minister of Finance. I thought, "Here we go again with this tremendous ministerial discretion even as to the names and the composition of the board." It struck me that the parliamentary sector had been ignored and that you were going with a strong bureaucratic system to run this new operation.
Mr. MacKay: Let me deal with that series of issues.
There was mention in your remarks, senator, of creeping regulation. Stand back from the report and look at all of the recommendations. We have actually recommended that regulation be eliminated, that there be a streamlining of the approval mechanism and the elimination of duplication. Look at another piece where there may be some new regulatory suggestion. In the last two weeks I have heard some people saying, "This is terrible; you have deregulated the sector," while other people have said, "This is terrible; you have over-regulated the sector." I was glad to have both criticisms because it may be that we have just more appropriately regulated the sector, which is what we think we have done.
To turn to the ministerial discretion issue and our basic premises, in chapter 1 of the report we did discuss some basic premises that we had arrived at in our work. We believe we are in a time of very significant change in the sector. We think there is a need for some flexibility in the regulations, without having rigid rules that require you to return to Parliament, where it may take a year and one half to be able to respond if you do not get the rule perfectly right the first time.
Currently in this sector, every major or minor acquisition, disposition, or merger requires the approval of the Minister of Finance. That is not new. In some cases, the approval of the Governor in Council is required for foreign bank entry. We think that foreign banks should be welcomed; therefore, it should not be necessary to have this highest level of approval for foreign bank entry. We recommend that that be dropped down to ministerial approval, like the several dozens or hundreds of approvals presently in the Bank Act. Yes, we are enhancing ministerial discretion, but it is to allow foreign banks to enter Canada.
What other ministerial discretion are we introducing into the piece? We are trying to make a more flexible "wide ownership" policy, and we discussed that this morning. Therefore, someone must make the judgment call on whether to extend to the 20 per cent. In other countries, the minister or the regulator is essentially responsible to make that decision. We have left it with the minister and have not dropped it down to the regulator. In other cases, however, OSFI has proposed that approvals that are presently at the ministerial level could be dropped down to the level of the regulator because they are minor matters, and we have agreed.
We believe there must be flexibility. There are some cases where discretion must be in the game. The three we have added are all in the ownership area, the 10 to 20 per cent rule. We have said the demutualized life insurance companies essentially need some time to adjust but should be able to do transactions of a certain nature subject to someone's approval. We have selected the Minister of Finance because it must be done promptly. It will be a takeover or an amalgamation or a business transaction that cannot await a parliament.
Finally, as we have already discussed, there is the exceptional case where, subject to Governor in Council approval, when there is a failure of a large Canadian institution, we have created the ability for a foreign, widely held institution to do the acquisition. That could be done to significantly enhance the competition or competitiveness of the Canadian financial services sector.
These are the principal cases that would see some sort of new approval inside the government. Either you do not permit these things, which we think are good things, to go on, or you find someone in whom to vest the power to make those decisions. We have added these three cases to the several hundred that are already in the Bank Act, and we do not think we have substantially over-bureaucratized the system. Indeed, to the contrary.
Mr. Gorbet reminds me that we have suggested that there be guidelines published in all of these instances, so it would not be done in a vacuum but against published guidelines.
Senator Oliver: Would those guidelines be vetted by Parliament?
Mr. MacKay: We have not specified that, but it could be specified in the legislation that they be tabled with Parliament.
If you return to our premises, it is important in this time of change not to put strait-jackets around ourselves, but rather to accept some responsibility, and then you must find a repository for the flexibility, and that is what we have suggested.
Senator Oliver: I should like to ask a question that is like arguing the opposite to the case I just made to you. Page 105 talks about foreign banks. The section calls for the lightest possible regulation on the activities of foreign financial institutions that present no prudential concerns, and you state that you "are not troubled by any potential competitive anomalies between foreign and domestic banks created by such a regime." You state that the task force "believes that the objectives of greater competition are a higher priority."
If such anomalies make such domestic institutions non-competitive, is that not unfair?
Mr. MacKay: We do not think that there is any serious risk that that will occur. There is a strong entrenched Canadian financial services sector in both the insurance industry and the banking industry. I think one can plead "level playing" field too much. All playing fields are not level when you are trying to improve the level of competition in the market. As a Saskatchewan person, I can tell you what a level playing field is, and I can also tell you that all playing fields need not be level.
In the Canadian marketplace today, where the criticism tends to be that it is too concentrated or that there are too few competitors or they are too big, if some players wish to come into the marketplace who are modestly regulated, because that is really what it would be, who are more lightly regulated than their domestic counterparts, that imbalance is a small price to pay to have the competition. We do not agree with you that it creates an imbalance. We would argue that the virtue overcomes the vice. You have seen the result. You have just read it.
Senator Oliver: I would anticipate that, when the five banks you have spoken about come before us, that is one of the things they will say is unfair, that this lack of regulation does create such an unlevel playing field that it gives a tremendous advantage to the foreign banks. I was previously saying there is too much; now I am saying the opposite.
Mr. MacKay: Such institutions will have real trouble making that contention, given the tilt of the playing field derived from the many advantages that have built their compelling branch structure. That is a fact that cannot be undone. If someone else has a modest advantage respecting how many pieces of paper must be filled in on the regulatory burden, I cannot get too excited.
Senator Oliver: In the same paper when you dealt with the federal government's consultation paper outlining the conditions under which foreign banks can do banking in Canada, you listed what they held to be their criteria. You only commented on one of the criteria. I would like to hear your views on a couple of others to try to understand why you did not consider them to be important.
For the -- and I will just paraphrase -- you stated that: a foreign bank must have $25 billion in assets worldwide, and then you commented on that; must be widely held; must have international banking experience; must have the consent of the regulator in its home jurisdiction; must demonstrate favourable performance in the last five years. Would you comment on the last criterion that a foreign bank must be regulated and supervised in a suitable manner by the bank's home jurisdiction?
Mr. MacKay: We commented on two criteria, senator. We suggested that the government review the $25-billion-asset suggestion and the requirement that there be international banking experience. Our premise was that domestic American banks, perhaps positioned along the Canadian border, with no international experience, might be strong and well-capitalized. Perhaps we should welcome them into the country, and perhaps international experience ought not to be required.
The remainder of the items all struck us as having the flavour of safety and soundness considerations -- normal prudential considerations, including the one to which you referred. I recall no extensive discussion inside the task force on any of these criteria other than the two I have just mentioned, which seemed unduly narrow. The others are a basket of legitimate safety and soundness principles.
Senator Oliver: If it is not to be $25 billion worldwide, what did the task force have in mind?
Mr. MacKay: We were not sure that assets were the right focus. A strong, small, well-capitalized bank is the kind of outfit you would like to have doing business here. Size of asset base did not strike us as a terribly significant test.
Senator Kenny: I note recommendations 99 and 108 are referred to Commons committees -- in one case the Industry Committee and in the other case the Finance Committee. Is there some reason why you felt these issues should not come to the Senate?
Mr. MacKay: No.
Senator Kenny: If you could turn to page 179 and the section relating to enhancing OSFI's governance, you make a case for the board. You refer specifically to human resource policies, to staffing and to compensation. In the course of your examination, did you arrive at any conclusions about whether OSFI had adequate resources now and whether the compensation policies there were appropriate?
Mr. MacKay: At that level of detail, senator, no. At the level of discussing with officials and examining problems with regulators elsewhere, it became clear that retaining good people in the most sophisticated jobs is a problem in all regulatory agencies in the financial services sector. It became clear that getting well-motivated people with the correct compensation policies in place will be a significant issue over the next decade. We did not examine the current adequacy of resources or the current salary levels as such. It was on a more general basis.
Senator Kenny: That is the issue I was asking you to address, sir, because it seems to be a problem. People reflect on it everywhere we go, and yet no one seems to have a solution that works particularly well.
Mr. MacKay: My colleagues point out that, in our background paper, we did refer to OSFI's annual report which focused on this issue and noted the difficulty of attracting and retaining qualified people.
I think it has been demonstrated in other public institutions that people who work in those institutions do so only in part for the money and in part for the sense of public service, commitment, lifestyle, or they like the job.
A series of things happens inside significant institutions such as OSFI that mean you can get good people without necessarily paying top dollar, but neither can you pay bottom dollar. You must be as competitive as possible, particularly at the level of the superintendent, deputy superintendents and the senior people in the organization. Getting the right people in those jobs and retaining those people will be an increasing challenge for the government.
We see the board as playing a significant role in helping the institution craft appropriate policies, but recognizing that they will never be able to compete with the big hitters on the street.
Mr. Ducros: As the products become much more sophisticated, especially in the areas of market risk and derivatives, we see large financial institutions all around the world hiring individuals with doctorates in mathematics. They specialize in defining exactly the type of products that have to be met. OSFI does not have that in place.
The subject you are raising can be broadened to the issue of governance. If we cannot have these resources within OSFI, should we change the framework to enhance the governance of financial institutions themselves, and/or at the same time hire good people internally and get some help from the outside, such as an outsourcing of resources to be brought to bear on specific projects?
Senator Kenny: When you mention enhancing corporate governance itself, could you give the committee an example of what area of corporate governance you would alter to compensate for this?
Mr. Ducros: We did not go into the details of the governance issues of financial institutions, except to say that we think there should be a major emphasis in this regard in the future to ensure that financial institutions have the proper governance.
Senator Kenny: Your answer to me just now, sir, was that one of the ways to deal with the lack of resources and staff at OSFI is to alter the model of corporate governance in the institutions that they oversee. Do you have an example you would care to give us?
Mr. Ducros: I am not saying we should alter it. I am saying that we should put more emphasis on the governance issues of financial institutions.
Senator Kenny: I see.
Mr. Ducros: Look at it as being, perhaps, the best way of regulating, that is, through their boards, instead of you getting involved directly in the regulation issues.
Mr. Fred Gorbet, Executive Director, Task Force on the Future of the Canadian Financial Services Sector: This process has been underway for the past two or three years. We now have extensive reliance on SARP, the Self-Assessment Reporting Program, in deposit-taking institutions where directors must assess each year and sign off against standards of risk management that have been developed by the regulator. That is about to be introduced by the insurance sector in cooperation through OSFI and CompCorp.
The general point being made is that as risks become more complex, there will have to be increasing reliance on those kinds of approaches by regulators all over the world. It is happening.
Senator Kenny: Turning to page 181, you said that you took a quick pass at corporate governance but that you chose to highlight the desirability of a separate, non-executive director. You say, "We understand that most, if not all --" With respect to the phrase "if not all", the outstanding exception is the major banks.
If you were taking a quick glance at corporate governance, why did you not focus on, for example, the size or the composition of boards? Why did you focus on this particular issue?
Mr. MacKay: We reviewed the response that the large public corporations in the financial services sector, including the banks, had made to the Dey recommendations, including board size and other issues -- really a comprehensive list of governance issues.
We found that the major financial institutions had, indeed, addressed, and were in the course of addressing -- because you do not address those overnight -- such recommendations. These included the board size recommendation, where there has been a very significant reduction in board size in an effort to get more focused, harder-working boards.
Some banks have done a little better than others and seem to be ahead. However, much has been done and we did not want to leave the impression that the institutions had not been responsive to good corporate governance. We started out in our discussion paper by saying that since so many people had been dealing with corporate governance, we were not going to deal with it. However, as Mr. Ducros has just indicated, as we did our work we became more and more persuaded that effective regulation really depends on good corporate governance. It also depends on the regulator's ability to assess good corporate governance and to nudge it forward to being even better corporate governance.
Towards the end of our work, we took a look at the response to the Dey report. We looked at the other matters that have been mentioned here, in terms of the steps taken by OSFI and CDIC, to enhance the attention of boards of directors and to respond to some of the new rules in the legislation.
Having said that, the task force's view was that the banks had responded to Dey on the issue of who should lead the board. They responded not by selecting the split of the chairperson and the CEO, which was one option, but by selecting the second option, which was the designation formally -- or perhaps, less formally -- of a lead director. This mostly refers to the banks. Most of them view themselves as having a lead director, someone who is not the chair but an independent director who is viewed as a more significant director than the others.
We had not been back canvassing the institutions on on a very aggressive basis. The task force thought that that was a half a loaf and that corporate governance would be enhanced by having an independent board chair. They felt that leg one of Dey would be better than leg two, which has been the selected leg. We felt, because of our absence of in-depth review and dialogue with the institutions, that it would be inappropriate to push the edge of that envelope too far.
As mentioned here, though, we hoped that that would be discussed further in the public debate that was now to come. The unanimous view of my colleagues is that it would be better to have an independent board chair.
Senator Kenny: Is this the most important element of corporate governance that requires addressing? It is the only one you single out.
Mr. MacKay: We think it is.
Senator Kenny: Thank you. Lastly, I wanted to raise the question of consumer protection. You gave the example of the Jane and Finch branch and sending out your representative. This is not something that has just popped up, and yet you seem to be in favour of a voluntary approach towards it.
Did you debate the question of coming forward with a bill of rights for consumers right now? Why do you want to delay that and take a voluntary approach, given that this issue has been around for years?
Mr. MacKay: It would have been easy on many issues to suggest that we legislate everything: Let us legislate forms; let us legislate transparency; let us legislate access; let us just legislate across the board. However, we realized that there was a spectrum of responses one could make to a problem. Sometimes it is to exhort some further voluntary, collaborative approaches. Sometimes it is to say, no, that has not worked or it probably will not work for whatever set of reasons and, therefore, we need the legislative action.
This is one area where we think the voluntary approach has begun to work. The two agreements we are discussing between the government and the bankers were made in 1997. One was made in February and the add-on was made in December. That is not such a long time ago when you think about the leadership having made the agreement and now having to train the people and get the culture at the branch level to change.
When we did our mystery shopping tour, it was not terribly successful. The Department of Finance and the Canadian Bankers Association were both out apparently doing the same thing, probably on a more extensive scale. Their reports, to the best of my knowledge, have not been published. We should not be too patient with this. We should give it the old college try because we actually do believe that people of good spirit should be able to solve this problem without the hammer of legislation. This is one issue where we felt that legislation is a kind of last resort.
We also said that we should not wait too long. We have not defined "soon" but we said that if you cannot make progress soon, do not hesitate to legislate it. Progress is being made. We believe that goodwill is being shown. Training courses are being run. The anti-poverty groups are relating to the banks, not only at the senior level but also on the ground. That is all to the good. We do not want to destroy that atmosphere by a legislative intervention unless we must.
Senator Meighen: Is it fair to ask you whether the proposals for strengthening OSFI and repositioning its mandate have been discussed with them and have received their approval?
Mr. MacKay: We received commentary from them on these issues. I think the one disappointment they would have is that we have left the administration of the consumer statutes with OSFI and not suggested a separate administration. Otherwise, I believe they would find favour with our proposals, or not object strongly. But you will have the chance to chat with them. That is the one issue that they wish could be otherwise.
Senator Meighen: Maybe it can be. Could I take you back to competition and competitiveness just briefly? As we all know, small- and medium-sized businesses are continually complaining about insufficient loan offerings by banks. The problem seems to reside simply in the fact that the banks do not price to risk. I for one have never really received an answer that I can understand as to why they do not.
My question has about four parts. First, have you ever received an answer?
Second, do you see the creation of things like the Business Development Bank of Canada and the Farm Credit Corporation as a response in some way to this problem?
Third, under your suggestion, if we open up this sector to foreign and other new Canadian initiatives, is that going to change this unwillingness or inability to price to risk, because if it does not, it is going to create more inefficiency and less satisfaction for small- and medium-sized businesses.
Mr. MacKay: One of our recommendations is that they do price for risk. It was not your question but I want to make it crystal clear that we have said that.
In making that recommendation, we mentioned that we are a little concerned that implementing it might become an excuse to raise everybody's rate. If that were the case, you would not feel good about being the architect of that recommendation.
Notwithstanding that, we believe that people in Canada are currently being denied credit because of the failure to price for risk. We are watching with interest, as I am sure your committee and the government are also, whether Wells Fargo is or is not successful. For they are pricing for risk, along the risk curve up to prime plus eight. It will be interesting to see the response to this in the Canadian marketplace.
As to whether we have received a clear answer as to why they do not price for risk, no, we did not. I am not sure that we pushed it quite as squarely onto the table as you just have and as we probably should have. The impression I have is that it sounds usurious to go too far up the risk curve and that is the reason, but that may not be correct.
You asked whether BDBC and FCC are part of the problem or the solution and how that works. They are pricing for risk. They have higher risk packages, which are a response to the absence of pricing for risk. It is my impression that both are vigorously reassessing what they do so as to do it in a way that more effectively addresses the niches in the marketplace where they should be, as opposed to being in places where they should not. Part of it is probably a response to this pricing-for-risk dilemma.
Senator Meighen: Are you giving an opinion as to whether these organizations should be in that business?
Mr. MacKay: I am saying that pricing for risk is logical for them because there is apparently no such service in Canada.
Senator Meighen: If they do price for risk, do you have any opinion as to whether they can fill the niche and whether the problem will be solved?
Mr. MacKay: I do not know. Our theory has been to get as many players into the game as possible and to get a competitive marketplace. Not only will you price for risk, you will have people competing against each other to provide the best pricing for higher risk credit. I do not say that the problem is solved. They supply credit in those zones and such suppliers are needed.
Your last question related to the extent to which new Canadian entrants and foreign entrants would likely address this problem. I am not sure. I would prefer to encourage the Canadian institutions to price for risk and to change their own attitudes rather than to bet on the newcomers.
Mr. Ducros: Pricing for risk does not automatically mean increasing interest rates. It may mean going into the quasi-equity market or the equity market. Especially in a subset of small businesses -- which is the knowledge-based industry -- the new economy, the equity market and the quasi-equity market are areas that we would like to see more developed.
Senator Meighen: Have you made recommendations as to how to do that?
Mr. Ducros: It should be done.
Senator Meighen: By legislative encouragement?
Mr. Ducros: No. the financial institutions should encourage this to be done and report on it in their annual reports, and yearly to the government.
Senator Kroft: Mr. MacKay, you gave me a bit of a lead-in by referring to an experience you and I shared earlier in the very institution that is being discussed. I am a great admirer of the institution. As you pointed out, the need is greater than ever in terms of servicing the accounts that require, perhaps, not only money but a good dose of imagination in order to construct the kind of assistance needed, whether it is creative debt, equity or a fair dose of business planning advice. I am not up on the current attitudes surrounding that institution.
The Chairman: Is the institution to which you are referring the Business Development Bank, the old FBDB?
Senator Kroft: Yes.
The problem I have always associated with it is not the creativity or the availability of packages from the bank, but the ambivalence of the government's attitude toward that institution, often expressed in the term "mandate." Is the institution's mandate now clear? Does it, indeed, have the opportunity, the go-ahead, the resources, the flexibility and everything it needs to fulfil the task that is being asked of it?
Are we accepting the fact that, the SBLA aside, the commercial banking structure is not leaping with enthusiasm any more than it has in the past?
Mr. MacKay: In terms of the submission or the discussions we had with BDC in the course of our work, we didn't hear about any problems on mandate, as far as I am aware. In fact, it has been fairly recently touched up in statutory form. We learned in talking with both BDC and the private sector institutions -- and we have noted this in our report -- that BDC appears to be a leader in knowledge-based financing for small enterprises. It is pricing for risk with more innovative financing packages. It seems to enjoy a very good relationship with the private sector and has many partnerships, which are spoken of highly by people on both sides. All appears to be quite well in Business Development Bank of Canada land, which is not to say that there will not always be issues and problems. We have noted in the report, especially in the knowledge-based industries area, that they are a real leader and are apparently doing an effective job.
Senator Kroft: You referred earlier to level playing fields. I do not know that anyone from Manitoba should argue with someone from Saskatchewan, whose playing fields are more level. I know the report has generally taken the position, as have you and your colleagues, that fundamental tax issues are not part of your study, that there is a parallel study and that, basically, you are urging us not to expect too much in that area.
I have two specific questions in this regard. One is in terms of the credit unions. Again, I am reminded that you said that every playing field does not have to be level. Does tax structure affect competitiveness with the credit unions and other institutions in the financial services area, and is this a problem? I plead complete ignorance on this next subject. Virtual banks send their money in electronic form back and forth across the border. I have no idea how they are taxed, if at all. Perhaps you might enlighten us on that matter.
Mr. MacKay: You are quickly getting me out of my depth, senator. We commissioned, along with the task force on business taxation, which was chaired by Mr. Mintz , a joint study on taxation of financial institutions. That study was not ready by the time Mr. Mintz reported. He would have been the more logical person to talk about the technical tax matters. It was prepared shortly after that and we have included it as one of our background working papers.
In that study, there is commentary about the credit union taxation model. I think our only comment on it in the report is to note that, in Quebec, the National Bank drew our attention to a disparate overall tax burden that it faced compared with the caisse movement. Some steps had recently been taken in the Quebec budget to ameliorate some provincial capital taxes.
We have urged the governments to continue to keep a close eye on the situation to ensure that there is relative competitive balance, particularly in that province where there is such a strong caisse movement. The problem can arise in other jurisdictions as well because of the different tax approaches, both on the income tax side and on the capital tax side, as between private sector corporations and credit unions. However, that was the only manifestation of the issue in our review and the only comment we made on it in the report.
The second matter you raised, the taxation of virtual entities, is not one that we have considered at all.
Mr. Gorbet: The task force did not spend a lot of time looking at it. ING is a virtual bank that operates here in Canada through a subsidiary. It would be taxed as any other Canadian incorporated business. If the bank is not physically present in Canada, like Wells Fargo, it would not be taxed under Canadian tax law. The withholding tax would apply to the loans that it made.
Senator Tkachuk: I have a follow-up to Senator Meighen's question on the servicing of small business, on the offering of credit and pricing for risk. Did the task force members discuss this matter with the banks?
Mr. MacKay: We have talked along the way about credit policies and practices, but not precisely in terms of what their loan ceilings were.
Senator Tkachuk: Did they offer any opinions as to why they do not necessarily offer that service at present?
Mr. MacKay: I understand from the several discussions that high interest rates leave the impression that they are engaging in a bit of rapacious conduct. If they have bad relations with a community or they are trying to build better relations with it, appearing to charge too much is not a good thing.
The small business community and their representatives are a little unclear as to whether they would really like to exhort the Canadian banks to price for risk or whether they are getting a better deal because there is a tentativeness to go beyond certain rates. It may be that certain people are getting prime plus three, when, in another world, they would get prime plus four or prime plus five.
There is no consensus in the small business community that it would be a good idea to push all the lenders into a price-for-risk scenario. We think it would be helpful if there were at least some lenders in the marketplace who were focussing on that kind of market and pricing for that kind of risk. It does not necessarily follow that everyone in the market must do that.
Senator Tkachuk: The banks currently price for risk for consumer loans. If you are a prime customer, they will give you prime plus one or prime plus two. Is that what the banks are doing with consumer loans?In other words, do consumers have to be wary and argue with the banks that they deserve the prime rate rather than prime plus one?
Mr. MacKay: I think negotiation would always be in order.
Senator Tkachuk: So banks are now doing to consumers what business people are afraid they may do to them; in other words, price more for product than what they should be paying.
Mr. MacKay: The best way to guard against that is to have the most competitive marketplace possible; to have lots of choice and to have ways to comparison-shop in that marketplace. Again, as I mentioned earlier, we think technology will provide an ability to compare prices that did not previously exist.
Senator Tkachuk: I want to get to that because that is the banks' argument for getting into other forms of business. A decade ago, they were allowed to get into the brokerage business. Only the Toronto Dominion Bank started a new brokerage firm. The rest bought existing brokerages. We therefore did not get a new brokerage industry; we got the same old ones under new ownership, and now they are going to be merging.
I know that your task force members did not discuss the question of merger, but this issue came up last January and your entire premise is based on competition to help regulate the financial service industry. If the mergers are accepted, not only will the banks merge, but perhaps the subsidiaries will also merge. RBC will merge with Midland Walwyn and CIBC will merge with the discount brokerage, although they may keep two different names because they are two different businesses. Management may merge, as well as particular supervisory services.
This goes against the grain of what you are talking about. Our financial services industry is collapsing into larger and larger pieces, which means less competition.
Mr. MacKay: We have said that we would expect that no merger would be allowed that resulted in an uncompetitive marketplace. That is what the Competition Bureau is supposed to do. We believe that the Competition Bureau has the tools to do that job. We have made some suggestions in the report about that part of the analysis. However, at the end of the day, the merger sponsors must be able to demonstrate that their merger will leave sufficient competition in the marketplace, both now and in light of the players who are logically on the horizon. Without this, no mergers will be permitted. That is how the Canadian competition system works. On the merger side, we have tried to say that, in a time of such radical change, it would be a bad policy for Canada to be unprepared to assess the mergers on their own merits. We must take a hard look to see whether a win-win strategy can be produced for the consumers, as well as for the institutions and the country.
Senator Tkachuk: The whole task force report is based on the premise that we need more competition now.
Mr. MacKay: The whole task force report is based on the premise that the more competition we have, the better it will be for consumers.
Senator Tkachuk: Do you think that we have enough competition now, or do we need more competition?
Mr. MacKay: I think that our marketplaces are competitive. That is the conclusion we have drawn, and the customers themselves made the same comment in a survey that we did. They said that they believe that they are addressing competitive marketplaces.
If you were to ask whether we can roll them all into one big bank and have a competitive marketplace, of course you cannot. Perhaps we could in five years, with other forces of competition in the marketplace, but it is situational.
We have said that you should look at a merger proposal very hard to see what the impact will be on competition. If there will not be sufficient competition remaining after the merger, then it will be up to the merger sponsors, in dialogue with the competition regulators, to find a solution before the merger goes ahead. That might require divestitures of whole lines of business or divestitures of numbers of branches. That is what has happened in other jurisdictions. It happened in Switzerland and the United States, and Canada is no exception. It would be hard to believe that there will be absolutely no competition issues thrown up by these merger proposals. They should be dealt with in that fashion.
Senator Tkachuk: I am a little bit confused because I believe that your report is premised on the fact that competition is good and that it is currently pretty competitive. So the status quo is not bad.
Are you saying that, in order for the government to approve the mergers, this report should be implemented?
Mr. MacKay: There are many balls in play at the same time.
Senator Tkachuk: I am trying to get you to hold on to all of them.
Mr. MacKay: Most of them are marketplace balls. You do have new entrants. ING has set up a new company and is selling new products into the market. On the one hand, new players are coming in with new products. On the other hand, some of the older players are attempting to merge. We are recommending public policy changes that would open some markets further.
The players in the markets are in rapid transition. The phenomenon of consolidation is part of the transition and turbulence that is out there; however, it is only one of the many balls that are in play.
As far as we are concerned, all balls can remain in play at the same time, without damaging the competitive environment on the merger side, provided that you look at the mergers carefully in light of the situation in which they are presented.
Someone asked me if it would be easier to present a merger proposal if all of these things were already in place and have already been responded to. There will be more competition in the marketplace, but that is not to say that a merger cannot be presented today and tailored to maintain a competitive marketplace.
Senator Tkachuk: We spoke this morning about the banks being at higher risk being involved in the brokerage industry. We see what is taking place now vis-à-vis the banks seeking permission to merge. There will be fewer banks and brokerage firms of the size and magnitude that there were before.
With banks stepping into the insurance and leasing areas, do you view them as Amway salespeople? Are branch managers becoming brokers? Will they have their own insurance companies where they will handle only one insurance? Are we changing these branches into little depots that will sell different services?
Mr. MacKay: The risk profile of banking institutions has changed. Whether it is a higher risk or a lower risk depends upon the situation of the various product lines at any point in time.
The point I was trying to make this morning is that a bank that has multiple businesses has a different risk profile. In a way, diversification has taken place, and that is a risk-minimization technique. On the other hand, some activities have been taken on that can be more volatile and, thus, will increase risk. This is a significantly different risk profile.
The point I was trying to make on the insurance -- and we have some recommendations that might assist here in responding to the concern you have -- we have basically said that our concern is not that customers will rush down to their neighbourhood bank to buy insurance. What we envisage is that options will be presented at the banking counter.
First, whoever sells the insurance should be fully trained and licensed as an insurance salesperson would be. Therefore, we would not be putting unqualified people into positions.
Second, we suggest that the same protections should be adopted, as has been adopted in Quebec, which would basically say that the people selling the insurance in the branches will be separate and distinct from the people offering the credit product. Therefore, there will be a distinction in personnel and in the information that is provided.
The risk of converting a credit-granting bank manager into an insurance salesman does not exist in the system that is proposed. As to whether customers will move to the banks, our studies show that in other countries where this has been done, the penetration rate for insurance by banks is generally somewhere under 20 per cent.
Senator Tkachuk: You answered the leasing question well, but not to my satisfaction. On the leasing and insurance end, banks do have an advantage in the sense that the bank knows a significant amount about a particular customer. The bank employee knows how much money a customer has on deposit or has borrowed from the bank. A bank that is selling life insurance may know a customer's medical background. Banks know everything about a person because a significant amount of private information is given to a bank that is not given to anyone else. How do we ensure that banks do not use that information?
I am concerned about tied selling. People may feel obligated to buy life insurance on a mortgage from their bank rather than going over to their life insurance company and increasing their life insurance to pay for that mortgage, which is what they now do. We are turning banks into huge, powerful institutions that I do not think we will be able to control.
Mr. MacKay: First, we recognize the legitimacy of arguments related to privacy and tied selling, however, that ought not to be a reason to deny institutions the ability to compete. We say, "Solve the problems of tied selling and privacy."
We have recommended very clear legislative regimes for privacy, regimes that would allow customers the clear right to require banks not to use information for the purpose you have described. Similarly, we have recommended a tougher tied- selling regime than is presently in place, with very strong personal rights if it were abused.
On the leasing and insurance issues, we have said that deposit-takers -- and by deposit-takers we are talking about banks, trust companies and, we assume, credit unions, although that will be a provincial decision -- ought not to have the power unless and until appropriate privacy and tied-selling regimes are in place to address those same points you have made.
As to your point about having medical information, all of the jurisdictions that would permit deposit-takers to sell these products have aggressive rules to prevent the deposit-taker from having the medical information that flows in to an employee and off to the insurance company. The insurance company is forbidden to provide that information to the bank, even with the customer's consent. We have made that same recommendation in our report.
These steps will insulate the information and provide protection for customers. These customer rights are completely consistent with what has been done elsewhere.
In Quebec, Caisse Desjardins are in the business of both selling insurance and leasing vehicles from their branches. The Laurentian Bank and National Bank are two nationally chartered banks who would like to compete with the largest financial institution in Quebec but are unable to do so because of federal law.
Senator Callbeck: We talked about small business obtaining capital this morning. From reading the report and what you said, you feel that one of the first steps is the community accountability statement. What will that entail if this recommendation comes into force? For example, as a resident of Prince Edward Island, would I be able to find out how much each financial institution invested in my province in the way of investment, support or donations? What are we talking about here?
Mr. MacKay: I will break it into its two pieces. You mentioned the small business finances side. The key recommendation there is not so much the community accountability statement but the delivery of data by financial institutions to Statistics Canada, which would also be made publicly available. In Canada, you in Prince Edward Island would have two documents to look at when speaking with financial institutions about how it fits with Prince Edward Island. One would be the delivery of data to Statistics Canada -- that is, the small business data. You have it not only from banks, but also from other providers of data to islanders. That would be done by region and by sector. Currently, the delivery by sector in the United States under the CRA does not happen. In your example this morning of tourism, you would not get that data in the United States; however, you would get that data under the proposal we made. That is under the Statistics Canada Information Delivery Program, to which you will have access.
There will also be a community accountability statement. We would not expect it to repeat all the data that is delivered in another form, but if the institution chose to do so, we would leave it open to them. We are trying to spur the institutions to demonstrate their corporate citizenship by open and, in a way, competitive community accountability exposure. We see the institutions as having a strong interest in presenting themselves in the best possible light to the communities they serve because if they cannot do so, they will be the losers in those communities.The focus for those statements will be through the Minister of Finance, and they will be tabled in Parliament. We have a spotlight and scrutiny that will be an excellent backdrop to a discussion between institutions and the communities. It is not a bureaucratic exercise. We are opting for something that has the capacity to be an open, interested and collaborative dialogue as opposed to being a report card in which, if you merely pass, it is good enough. We do not need to talk or to try to talk any more. That is not what we should have.
Senator Callbeck: I have another question on access. Everywhere today we see technology taking over more and more functions. You often hear the public complain that when they go into a bank, there is no one to help them use the available technology. I read today that 38 per cent of Canadians have trouble with basic written instructions. How do you see financial institutions dealing with this? Is this statistic something that concerns them?
Mr. MacKay: This whole area is quite interesting and important. The task force believes that we are in a transition period. Technology will empower all consumers. It will be particularly empowering to consumers in remote and rural communities who have never had the same access to financial services in the centre of large urban communities. In a number of years, interactive financial services will be available from your home in an extremely user-friendly fashion, for example, by employing voice activation. It will be user-friendly in the extreme.
The movements are extraordinary in terms of moving from branches to other forms of transactions. Approximately 38 per cent of transactions took place in a bank branch about three or four years ago; now it is only 21 per cent. Generally, Canadians have opted to use as much technology as they can. We are up there with the best in the world, but a number of people are still feeling extremely uncomfortable in this transition period. We are not yet at the point where it is cheap, user-friendly and interactive. This will be an awkward time. Consumers must be able to adapt because financial institutions now must run several transaction services at once, namely, a branch, an electronic means, telephone call centres, and so on. In about 10 years they will get that right and then it will be cost-efficient. It will be up to consumers to become technologically adept and for the financial institutions to show sensitivity and not slam the branch's door too quickly. We are in the transition stage and branches will close. It will not be business as usual, and the status quo is not an option.
The Chairman: I happen to agree with everything you said about the transition and about where technology is going. Yet, on the point that Senator Callbeck is raising, I came away with the feeling that there was a tendency in one or two places in the report to shelter the consumer who was slow at adapting to change and slow at accepting change. Change is always a problem for some segment of society, including a lot of us in this room. Should government be in the business of saying, "We will shelter you from that change."
The analogy that came to mind when I was reading the report is the self-service gas stations in Nova Scotia. Nova Scotia was 10 years behind other provinces in the country getting self-service stations based on two arguments: the employment of individuals who pump gas, and senior citizens who do not like self-service gas stations. For 10 years, all other consumers were denied the benefits that come from the lower prices that result from self-service gas stations. There was a touch of that in a couple of places in your brief. Is that unfair?
Mr. MacKay: Can you give me an example of the type of thing you are talking about?
The Chairman: At the bottom of page 165, Report of the Task Force, you state that the loss of a branch can cause serious dislocations within communities, particularly for customers who are not comfortable with electronic alternatives. You then talk about the need for a waiting period for branch closures.
Picking up on Senator Callbeck's question, what is the extent to which the government, rather than the marketplace, should be regulating that kind of change?
Mr. MacKay: That is a minimalist kind of thing. We have chronicled here that, according to our calculations, about 119 communities lost their last branch, of which 40 were in my own province.
I can speak with some authority to the dramatic community erosion that is presented by that last branch closure. Any branch closure in a small community presents a sense of trauma. However, I am not sure if the self-service gas stations in Nova Scotia had the same effect -- perhaps they did. There is a serious issue of the loss of something significant to the community.
The Chairman: You are equating it with post offices and grain elevators?
Mr. MacKay: It has that flavour, but it is much more significant. It is at the very heart of one's commerce.
Consider the example of Lynne Lake, Manitoba, which was reported in the newspaper. Their branch is closed. Their branch may have had to be closed, but the impact upon small business people who may need a Brink's truck to drive 50 miles is significant.
We are suggesting that a consultation period may provide some constructive alternatives. We do not view it as a shelter. We do not consider that we have held off the inevitable for four months. That is not what we think is the important part about this. It is an opportunity for constructive dialogue to see what might happen. Might that institution provide some sort of branch? Might someone in the community step up to the plate and offer something to that institution? Might you find another institution so there is no pause in availability?
The Chairman: I understand it in that context, where it is the last branch in the community; I frankly do not understand it at all in the heart of a major city. I understand that you might want a policy that deals with rural communities and the last branch and so on, but I do not see why the same policy should apply to a community where you have four different institutions, one on each corner of an intersection, and someone opts to close one.
Mr. MacKay: If you are in the heart of a low-income retirement community and the branch closes, you might find some people who would argue with you.
Mr. Ducros: Four months is not the end of the world. We suggest that it will take four months to adapt.
Mr. MacKay: This is intended as a way of seeing if something else needs to be put in place, and, if so, what it is and whether it can be put in place. It is not intended as a significant intervention in business decisions. It is intended as another means for community accountability by institutions which do not do themselves any service, whether in big cities or rural Canada, by abrupt closure of branches.
Senator Callbeck: I know we are not here to talk about mergers. However, when we were in Washington, the acting comptroller of the currency indicated that there was a study going on regarding consumer fees to see whether, after mergers, fees actually increased or decreased. The comptroller indicated that the study was not completed, but that initial reports were showing that fees had actually gone up. In your study or in your findings, do you have anything to say about that?
Mr. MacKay: I am not sure we have anything to offer on that. The data in respect of mergers on almost every subject is either dated or somewhat inconclusive. The main data on mergers, which we have analyzed in some depth, relates to whether size can be demonstrated to be conclusively of benefit, and we have concluded that the analysis does not show that to be the case in all instances, or even in a persuasive way. Size is no panacea. We have not done any analysis that I am aware of on the issue of fees or any sort of residual charges post merger, and I am not aware of having read any such studies either.
Senator Austin: Mr. MacKay, I noticed in reading page 90 of your report just a sort of throw-away comment. You were referring to the recommendation on a proposed financial holding company act. My question is as tangential as your reference. In the last two lines of the first four lines of page 90, you talk about providing "an effective way of moving closer to a system of functional regulation." I looked at that and was puzzled.
This committee was in London talking to Harold Davies of the proposed FSA. If I recall the discussion correctly, that is exactly what the U.K. wanted to move away from. We heard the story of their system between 1985 and today and the disasters that they saw in their domestic financial regulation, particularly in the property trust sector, which gave rise to this initially highly popular decision by the new Blair government to move to a single regulator incorporating virtually every regulated function, with its declared focus as regulation by institution rather than by function.
Have you given thought to the question of how the regulator should regulate? Is it the overall health of the institution? Is it purity by function, with multiplicity of purity being equal to good regulation?
Mr. MacKay: Somewhere in the report we say that institutions fail, but functions do not. We understand the need for regulation to be on an institutional basis. We are not intending to suggest here that there should be separate regulators for separate functions. Our intent was to say that, if under the holding company an activity was being separately financed -- not by deposits or by poaching on the bank -- and it was a wholesale banking activity directly analogous to what Capital or someone was doing in the Canadian marketplace, then the holding company might be a means of persuading OSFI to treat that function as not requiring much if any regulation because it is typically an unregulated function. It gets regulated in a financial institution because it gets mixed up with deposit taking. We did not intend to suggest separate regulators, nor did we intend to suggest that we were not well aware that you had to watch institutions as a whole.
If you have the financial institution as a sister company as opposed to having it in its present line structure, there may develop a comfort level, and I emphasize "may", so that that affiliate can be lightly regulated, or perhaps not regulated at all, because it is a function that does not need to be regulated.
Senator Austin: I understand your answer. With respect to your recommendation on financial holding companies, the question that arises in my mind is whether, in your view, you thought that was a proposal that would be widely useful or very narrowly useful, or perhaps more an objective that perhaps no one will strive for. What is your view?
Mr. MacKay: As we went through this exercise, we started with the question whether it would be possible to achieve almost every goal we wanted in terms of lightening the regulatory burden within the financial institutions' present parent model. We eventually concluded that there were two good reasons to pursue the holding company model. One was that it did provide an opportunity for the coming together of small and medium-sized institutions in Canada with identity retention to solve a few other problems like accounting and so on to make that work. It can be a vehicle for that, leaving aside the goals of large institutions to get out from a perceived unnecessary regulatory burden. We think it has some worth for that purpose.
Whether large institutions will find the possibility of having a lightened burden or a more flexible regime for a sister company than a subsidiary is a track that will depend entirely on a dialogue they will have with OSFI as to how far OSFI is prepared to go. We were not prepared to recommend unregulated holding companies. We felt that only a regulated holding company regime made sense. The take-up I cannot really entirely predict.
Senator Austin: We discovered in our pre-studies that unregulated holding companies exist only in theory; they do not exist in practice, whatever the rules.
Mr. MacKay: That is probably quite right.
Senator Austin: However, the model we saw in the Netherlands was ING, a very large institution, an institution larger than any single Canadian banking or financial institution.
Mr. MacKay: It would be after the mergers, would it not?
Senator Austin: I am not sure, but it would be close. We discovered that Dutch policy found itself very comfortable with a holding company, with an assets business on one side and a liabilities business on the other. We found ABN, for example, complaining to us that this gave ING an unfair advantage in its business. That model seems to work. It would progress us towards a larger Canadian owned and controlled financial institution if we could put together one of our major banks with one of our major insurance companies in an ING structure. Have you considered that, or is your financial holding model limited only to domestic institutions of medium size?
Mr. MacKay: It is available for all. We are not certain that a large bank in our version of the rules would have the ability to purchase a large insurance company without the holding company model. Whether it would be more comfortable operating that business or would want to proceed through the holding company model would be an option we would have as well. It could do either, under the proposals we have on the table.
Senator Austin: If you want to regulate by function, would it be somewhat easier to regulate if we had it in the holding company and the two businesses were not integrated in quite the same way in an operating sense?
Mr. MacKay: That was the general thrust of his comment. It would permit, perhaps over time, a more regulation-by-function driven result.
Senator Austin: I wish to make clear to my colleagues and you that I have not come away from our meetings with the FSA in London convinced that that model is the way to go.
Mr. MacKay: OSFI did an extensive study on holding companies. It was very helpful work. We reviewed it and, to a large degree, the model we present here is derived from that work.
Senator Austin: In the payments system part of your discussion, there is a suggestion that a two-tier payment system would materialize if you included the insurance mutual funds and other investment dealers in the payment system. Do I have the right impression? We wanted to go to a large value transfer system that is as risk proof as it needs to be. Do you see a second-level risk structure?
Mr. MacKay: The large value transfer system would continue to exist as it is.
We do not see a two-tier system. There is currently a two-tier system in the Canadian Payments Association way of doing things. They have direct clearers and indirect clearers. We have not assessed whether that distinction should or should not continue. We have, however, assumed that it might continue. If it did continue, we have not drawn any judgments that one of the insurance companies or money market mutual funds might eventually meet the criteria to be a direct clearer. We simply have not crossed any of those bridges. We do not intend to create two tiers or two classes any more or less than exists at the moment.
Senator Austin: One of the characteristics of an insurance company or a mutual fund is that their business is dependent on the employment of capital and, therefore, the leverage they get on the existing capital to the extent that that capital is required to secure liquidity and settlement. Those businesses are put at a competitive disadvantage to businesses that have, by their nature, substantial liquidity, and it matters not where they locate that liquidity. Did you address that problem?
Mr. MacKay: Liquidity is one of the three or four issues to be resolved referred to in the Department of Finance and Bank of Canada discussion paper. We recognize that this is an issue.
However, it should be no issue at all on the mutual-fund side. The suggestion we are making is that money market mutual funds, not the manager of the fund, should be the member of the payments system. That means there is no liquidity capital deployment issue of the sort you just mentioned.
With respect to the life insurance industry, there is an issue of that sort that has to be solved, but it is not beyond the wit of man to solve the problem. That is our conclusion.
The Chairman: At pages 184 and 185, you talk about the integration of the Canada Deposit Insurance Corporation and the Canadian Life and Health Insurance Association compensation fund. You appear to have accepted the argument that the Canadian Life and Health Insurance Association made to this committee at least twice before, that I recall. Their argument, a view with which you agree, is that insurance products are at a disadvantage relative to deposit-taking products on the grounds that the CDIC is a government institution that can borrow from the government and the government stands behind it, whereas the private insurance fund does not have that protection. At a footnote on the bottom of page 185, you say you received some evidence. It would be interesting if the committee could get that evidence. The evidence that we considered in the past related to, in part, the extent to which the market responded differently, for example, in the purchase of GICs and other investment vehicles. All the market-based evidence, even immediately following the collapse of Confederation Life, indicates that there was no market impact. We would be curious to see why you reached a different conclusion, other than accepting the assertions of the industry.
One of the reasons this committee is sceptical is that, in June of 1994, the industry appeared before this committee and passionately argued against any CDIC form of construction of CompCorp. We accepted that view.
In August, Confederation Life collapsed. We were asked by the government to hold hearings on Confederation Life. By the middle of September, some 90 days after they had appeared before us in June, they had reversed their position 180 degrees based on market evidence, when clearly there could not have been any market evidence there at the time. You can understand our degree of scepticism. I think it would be helpful if you could provide us with the evidence you heard as opposed to the rhetoric.
Mr. MacKay: We would be happy to provide you with the evidence we have. However, let me provide some more rhetoric.
The Chairman: I was hoping you would take me up on the invitation.
Mr. MacKay: The proposal we have made here is not the proposal the CLHIA made to us. They did not propose integrating the two plans. They proposed a leveling of the two plans by a mechanism which would have created a new CDIC and a new CompCorp, both with a certain defined access to the Consolidated Revenue Fund.
We did not accept that suggestion. However, as we looked at the convergence of the two sectors, the further products that are being sold by the insurance sector, the entry to the payments system, and the changes that have been made through the LVTS, we thought the world had fundamentally changed since the last time it they appeared before this committee.
One has to go back to principles and look again at why there should be deposit insurance at all. If there is deposit insurance, should there be the same deposit insurance for all deposits, or different deposit insurance for different kinds of deposits? If so, why?
At the end of the day, we concluded that it would be most rational to bring together the two plans, that this would ensure that all deposit-like products have similar coverage. It will be a growing problem, not a shrinking one. It is not that insurers are getting out of deposit-like products; they are getting into them. The confusion which I think genuinely exists about what CDIC does and does not do can also be minimized. Here, I guess I am coming from levelling the playing field -- not from not giving a damn whether it is level or not -- which is where I was somewhat earlier.
The Chairman: I am glad to see you exhibit the same kind of flexibility that members of our profession have found extremely helpful over the years.
Mr. MacKay: The critical thing is that we have large banks in Canada, and we want to have significant competition from the insurance industry. The insurance industry, we think, can provide some of that competition. This would be an important piece to that end. We think that the issue of priorities will need some sorting out right across the agenda: trust company priorities, bank priorities, insurance company priorities. We think that an integrated plan would be an excellent way to get at that job. We urge you to take a very serious look at this. This is not the recommendation of the insurance industry. This is the view of the Task Force on the Future of the Canadian Financial Services Sector with regard to what will make this sector work best in the future.
The Chairman: The argument you just gave is much more plausible than the argument at the top of page 185 of the report. It deals with the market realities that create a kind of disadvantage for life insurance companies. Your current argument has nothing to do with the so-called current market reality. It is an argument based on moving toward an integrated, uniform system, which is consistent with the rest of your report. Our problem has always been with the so-called market evidence, not with the kind of argument that you have made, which is completely different.
Mr. MacKay: We will provide you with the evidence we have. You may or may not find it as persuasive as the argument I have just made.
The Chairman: I will just make three other comments for the record. First, we have not commented on your recommendation regarding the OSFI board of directors because it is completely consistent with the recommendation that this committee has made previously.
Similarly, you have two recommendations on the Canadian payments system: one, on opening up the system; and the second on getting the payments system out of the rules-making business and requiring that the rules be approved by the minister. They are also in agreement with things that this committee has said in the past.
We have also commented, and I agree with you completely, on the notion of getting CDIC out of the standard-setting process and turning that over to OSFI. So we are very happy with all of that.
May I say, in conclusion, that in spite of all the questions and comments the committee has had, we feel that in 18 months you did a remarkable piece of overview work. It will stimulate public debate in Canada. We probably agree with 75 per cent -- although individually we probably agree with a different 75 per cent -- of your recommendations. We think you have done a terrific job.
Thank you for taking the time to be with us today. We have leaned on you a lot and we would like to reserve the right, if at the end of our hearings we have a few follow-up questions, to ask you to come back on our last day of hearings in mid-November. We may want you to respond to new ideas. We will be in touch with your staff to reserve a tentative date in November.
The committee adjourned.