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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 29 - Evidence - October 6, 1998 (a.m.)

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OTTAWA, Tuesday, October 6, 1998

The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 a.m. to examine the present 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: Welcome to the morning session of our continuing set of hearings into the recommendations of the MacKay Task Force on the Future of the Canadian Financial Services Sector.

Our first witnesses this morning are from Great-West Life Assurance Company.

Before we begin, I should like to put on the record that I received a letter from Senator Joyal this morning. As some of you know, he works as a consultant, not on insurance-related issues but on other related issues, for Power Corporation, which is the principal shareholder of Great-West Life. Accordingly, Senator Joyal will not participate in this morning's session. He will attend, however, to hear the witnesses from Sun Life.

Mr. McFeeters, the President and CEO of Great-West Life, is with us this morning. Thank you, sir, for taking the time to be with us. As you know, our format is a relatively brief opening statement followed by questions. We would be delighted to begin with your opening statement.

Mr. Ray McFeeters, President and Chief Executive Officer, Great-West Life Assurance Company: I am also President of London Life, and I thought I should mentioned that as well.

With me this morning is Sheila Wagar, our senior vice-president and general counsel. Her job is to make sure I do not say anything I should not. Inevitably, when I do, her job is to deny I ever said it. Also with is Mr. Allan Edwards.

I would offer my commendations to Mr. MacKay and the members of the task force who quite obviously invested considerable effort in the production of the report released on September 15. It will serve as the basis for much discussion surrounding the evolution of financial institutions in Canada.

While the report makes a number of useful recommendations, it is clear that much additional work needs to be done before some of the recommendations can be implemented. It is clearly Mr. MacKay's intent that the outcome of the recommendations be oriented in favour of consumers. However, a number of recommendations, if implemented, would be counter to the interests of all Canadians.

Despite the fact that the debate over ownership was resolved in 1992 to the satisfaction of all interested parties, the task force has now recommended that financial institutions having shareholders' equity of more than $5 billion must be widely held. Essentially, that means no one could own more than 10 per cent of a class of shares. This recommendation, if implemented, would discriminate against Great-West/London Life in that it would prevent us from growing in the future by way of making a substantial acquisition. In effect, it would relegate us to dealing in trading in tinker toys.

It is interesting to observe that the largest Canadian bank is larger in terms of total assets than the three largest Canadian insurance companies combined; yet, four out of the five major banks are currently seeking to merge, supposedly to remain competitive. I believe that the success of Great-West/London Life demonstrates that consumers of financial products are not at all adverse to dealing with large, closely held stock companies.

Further, it appears to be both arbitrary and unnecessary to limit in this way the competitive marketplace for the purchase and sale of financial institutions. I question how the imposition of this arbitrary freeze on future growth of Great-West/London Life could be in the best interests of Great-West/London Life policyholders.

There is ample evidence to demonstrate that financial institutions, whether widely held or closely held, can fail. The major determining factor in the success or failure of any business is the strength of management. Ownership structure is not relevant. What counts is the quality of ownership. In the case of Great-West/London Life, the quality of ownership adds tremendous value to the enterprise in terms of management support, capital support, and liquidity support. Indeed, the capital markets would not have supported Great-West's acquisition of London Life were it not for the presence of a strong majority shareholder.

In the past, concern has been expressed that closely held financial institutions might be influenced to take decisions that were not in the best interests of all shareholders, policyholders, or depositors. At one time, this was possible. However, the self-dealing rules introduced in 1992 prevent any such potential abuses.

The task force expresses a hope that strong financial institutions, presumably Canadian-based and controlled, will emerge to challenge the hegemony of the banks. If Great-West/London Life is foreclosed from pursuing major acquisitions, this lofty goal will almost certainly be thwarted. The result will be that the banks will become the only buyers of large financial institutions. The demutualized mutual companies will be prime take-over targets.

I suggest to you that if, as Canadians, we want to have real consumer choice and Canadian-controlled financial institutions, we should not be arbitrary and, in advance, legislate ownership limits. If we do as Mr. MacKay proposes, we will be essentially conceding control of the entire financial services sector to the banks. In short, I believe that this proposal would severely restrict competition in the Canadian financial services industry and that this proposal should be reviewed carefully by the Competition Bureau.

Accordingly, we recommend that no change to ownership rules be made other than to provide the minister with the discretion to set ownership limits as he deems appropriate, depending upon the circumstances.

Perhaps not surprisingly, we are also very concerned by the task force's proposal to allow banks to retail insurance directly and to use customer information to target market consumers. We believe that, while the intent of the task force was to increase competition, there is an enormous risk that competition will be lessened substantially as a result of this recommendation and that consumer choice will ultimately be reduced.

I would start by pointing out that competition is currently very strong in the insurance industry with approximately 130 companies active in the market. Consumers can choose their agent and insurance carrier based on the ownership structure of the company, whether stock or mutual; price; product features; financial strengths; and distribution channel. They can make choices independently of other financial service relationships.

Furthermore, competitors' pricing information is easily accessible by agents. This independence of agents and consumers creates significant competitive pressures. Companies like Great-West/London Life must earn business from their distribution channels and customers.

For many years, companies have responded to these competitive pressures by continually refining products, for example, the introduction of universal life, expanded segregated products and guarantees, and new small-business disability income products. Regarding prices, there are steadily declining term insurance rates. We provided you with some information which demonstrates that decline in prices over time.

All segments of the market are well served, including small businesses which have a need for employee benefit plans and customers with relatively modest insurance needs. Great-West/London Life in particular have focused efforts in those markets and have a significant market share.

We believe that the end result of this proposal will actually be decreased competition. If banks are allowed to use customer information to sell insurance through their branches, banks could quickly grow market share for commodity-type products like term insurance. This would drive up unit costs of non-bank insurers in their remaining markets. Pricing in those remaining markets would have to go up and investment in them, for instance, in product, design and development and technology, would go down.

Those markets remaining for non-bank insurers would involve longer-term liabilities and present the greatest risk. The combination of smaller market share, higher unit cost and greater risk would create potential concerns and ultimately would reduce the number of non-bank insurers in the business. Clearly, this outcome would reduce consumer choice.

We saw nothing in the MacKay report to indicate that they considered consumer preferences in the area of distribution channels. Our research shows that as much as 50 per cent or more of the population want and need personal advice on financial services and products. We think it is very important to preserve a financial services sector in which this need continues to be served.

We consider that, as a result of these proposals, there is a real risk that the advice distribution channel, which provides a valued service to consumers, will be considerably reduced. Thus, again, the consumer will be disadvantaged.

The task force identified coercive tied selling, privacy of customer information and licensing of intermediaries as areas in which the public and consumer interest would be at risk with the introduction of bank branch insurance retailing.

While we endorse the recognition of these matters by the task force, we are disappointed that the task force has essentially disregarded those concerns in making this recommendation.

We note that the task force has proposed that these expanded powers be given to the banks even in the face of their own consumer survey that shows an alarming number of consumers feel they have experienced or are concerned about coercive sales practices with their banks.

This seems to us to be inconsistent with one of the basic thrusts of the proposals -- to empower the consumer -- in that it completely disregards the hard evidence of consumer experience and reaction in favour of the hope that future conduct will be better as a result of strengthened privacy and tied selling rules.

I suggest to you that mere laws of men will not be sufficient to overcome the influence of credit-granting institutions. Bankers, like doctors, elicit tremendous emotional response in all of us. Indeed, my doctor-acquaintances tell me they would like to have the influence of bankers. The reality is that obtaining or having a loan causes many of us to want to be liked by our bankers. To obtain this approval, we are more than willing to offer up transactions that we know will win favour with the bank. I know. I do it myself.

Therefore, the only effective way of giving consumers real choice is to limit in law the number of types of financial products a bank might offer. Each new product offered up to the banks only serves to reduce the amount of time it takes until the banks control all the financial products in the country.

We note that the task force was concerned with the matter of providing access to insurance by lower-income Canadians and that it proposed that banks be allowed to retail insurance in order to provide greater access in this market.

First, this market is currently well served by the insurance industry. A 1996 study showed that 23 per cent of individual life insurance policies were purchased by individuals with incomes of less than $20,000.

I also note that the report itself acknowledges that the banks are not effectively providing lower-income Canadians with their existing products, despite a commitment from them to improve their performance in this area. Again, it seems unreasonable to disregard the evidence of experience in favour of hope.

We believe that implementation of the proposal to allow banks to sell insurance using bank customer information through their branches would result in an erosion of consumer choice, decreased competition, fewer products being offered and reduction of the advice distribution channel.

Insurance cannot now, nor is it proposed that they be allowed to, take deposits. Insurers can participate in the deposit-taking industry by owning a bank. We believe that banks should participate in the insurance industry in the same way -- by owning an insurance company, as they are currently allowed to do.

Should the banks choose to actively participate in the industry on this basis, competition would be increased and not threatened.

In summary, we believe that these proposals would ultimately result in consumers having less choice in terms of insurance provider, product and price. On the other hand, if banks were required to continue to compete in the insurance industry through a subsidiary, there is no increased concern about tied selling or privacy, and competition would be significantly increased.

It is clear that if these proposals are implemented and if, as a result, an independent insurance industry disappears, as happened with the trust industry and the security industry, there will be no going back. There will have been a fundamental, irreversible change. Particularly if this process is done quickly and without careful study, the result could prove to be very disadvantageous for Canadians.

We were pleased to see the task force express support for opening up access to the payments system as soon as possible. This is necessary to allow the industry to take advantage of some of the expanded powers with which it was provided in the 1992 introduction of the Insurance Company Act. As electronic commerce grows in importance in Canada, we will need this access to keep our products and services current and competitive for our customers.

While we support this approach and would like to see the necessary changes as soon as possible, we must recognize that it would take significant time and commitment of capital for the industry to use this access effectively. We simply do not have the in-house expertise in this area and will need to make large investments in systems and business process development.

While this will benefit the industry in the long term, we should not overestimate its significance in the competitive marketplace. This will not mean that we can now compete with banks in their core business. It only removes a barrier to us in the evolution of our core business to the age of electronic commerce.

We support the objectives of the task force in serving the interests of consumers through increased competition, protection of privacy, freedom from coercion and access to basic financial services. We note that the specific recommendations are very ambitious and that some require further definition and direction. As well, it will be important to ensure that the various proposals prove both beneficial and obtainable and not overly cumbersome for industry or consumers.

It will also be critical to ensure that there is a need for any particular change. We think that it should also be pointed out that there are currently significant processes in place to protect consumers. Many of these are the subject of provincial legislation, raising the issue of the significant practical hurdles imposed by provincial-federal jurisdiction issues in dealing with these matters.

We see as a fundamental flaw in the task force report the view that banks and insurance companies are created equally and we take issue with that. They are not presently equal, nor will these recommendations make them equal. While banks would be able to retail insurance, insurers would not be able to take deposits.

The vision of the task force outlined in chapter 4 calls for increased competition with the major banks. The task force states its belief that life insurance companies can become very significant forces in the Canadian financial services sector, operating in more product lines and offering much greater competition to deposit-takers, including banks, than they have in the past. Over time, some insurers are likely to become leaders of major financial service conglomerates, as has been the experience in other countries.

We hope that the task force is right in these views but we very much fear that the reality will be that the large banks have too great a size advantage already. Further, we are concerned that the recommendations of the task force will ultimately result in less competition as the banks strengthen their position by acquiring their largest competitors in the industry and by squeezing out the smaller competitors by making their business unprofitable for them.

We believe that the end result will be a bank-dominated financial services industry.

The Chairman: At the beginning of your opening statement you spoke about the ownership issue. You talked about it strictly from the point of view of companies with over $5 billion in shareholders' equity. You did not comment on the MacKay proposals with respect specifically to smaller companies with under $1 billion in shareholders' equity, where the rules would be changed to allow close ownership. You argued for the status quo. Were you arguing for the status quo only with respect to the big players or, in other words, are you prepared to accept the change with respect to firms with under $1 billion in shareholders' equity?

Mr. McFeeters: I take no issue with the proposed regime for acquisitions under $1 billion, nor, indeed, for the regime between $1 billion and $5 billion.

The Chairman: You talked repeatedly about the concentration in the banking industry versus that in the insurance industry. I believe that I should put on the record some data from the MacKay report that is intriguing. It shows that the top five banks have 66 per cent of total deposits, and the top five life insurance companies have 60 per cent of group life premiums and 59 per cent of individual life premiums. Indeed, sir, your company has a larger share of the life market than any bank has of the deposit market.

I thought I ought to put that on the record to illustrate that the degree of concentration appears to be approximately the same in both industries.

Mr. McFeeters: That is an interesting point, Mr. Chairman. We have a saying in the business -- statistics never lie but statisticians do.

This kind of thing arises because of a lack of understanding of the nature of the liabilities of insurance companies.

The Chairman: Are you saying that the data is wrong?

Mr. McFeeters: It is not wrong, but it is misdirected. It directs you to interpret it as you did.

The Chairman: I was just reading the graphs. I was not interpreting them.

Mr. McFeeters: Let me explain them.

The Chairman: We can come back to that. I am concerned about the time.

Mr. McFeeters: It is an important point.

Senator Tkachuk: Could you explain?

Senator Oliver: Please give an answer.

Mr. McFeeters: Life company liabilities are very long term. We have been in business for over 100 years. We typically write an individual insurance policy when people are 25 or 30 years old. That stays on the books for 30 to 50 years. Therefore, you are seeing the accumulation of many individual life premiums over 100 years of operation. Bank liabilities are very short. Banks are an oligopoly. The evidence for that is very clear. Under an oligopoly, an individual firm cannot change prices without creating a reaction in the industry. You see that with the banks.

In the literature we distributed to you this morning, we showed the price of an individual term insurance policy. Of the 30 or 40 companies listed, no two have the same price. It is a huge difference. It is true that over a long period of time, there is concentration with the premium on the group side. However, at the margin, there is great variety and huge competition for new business.

The real test of concentration is to look at the concentration of household assets and liabilities. We have had research done for us which shows that, excluding pensions and insurance, the banks control about 70 per cent of household financial assets and liabilities. If you include pensions and life insurance, which is a very small part, that figure drops to about 50 per cent or 60 per cent. I believe that that is the truer test of the concentration in the financial services industry.

The Chairman: I am happy to have you use the test that works for your numbers and your answers.

Senator Kolber: We have a real challenge in the Banking Committee. The MacKay task force worked for almost two years putting together 124 recommendations. We have about two and a half months to come up with a report. Our challenge is whether to spend that time whittling away at those recommendations -- and we will have to do some of that -- or to spend it establishing what we think is the proper vision of the future of the financial services industry.

I will try something a little different. I have five questions. I will ask them all and perhaps you can make a note of them and then respond.

The task force report outlines its vision for the financial services industry in Canada. Can you comment on that vision and your assessment of its relevance to the public interest?

Does the task force vision facilitate your company's strategy? If so, please tell the committee in what ways this is the case.

Can you tell us how the current policy framework for the financial services industry has constrained your company from carrying out, in one way or another, activities in which it wished to engage?

Can you tell the committee how institutional size, say above a certain threshold level, affects economies of scale and scope? Is there a greater opportunity for such economies when similar institutions merge or where institutions engage in different lines of business?

Finally, they say that the status quo is not an option. It seems to some of us that the status quo is pretty good. The huge profits being made by financial institutions and the very fat returns on equity suggest that all is not bad. With the turmoil going on in the world, do we really have to rush into decisions?

Mr. McFeeters: Mr. Chairman, those are good questions.

With regard to the vision, I think it is an incomplete vision. While there are many good theoretical thrusts in the report, it is short on practical application. Some of the things being suggested are difficult, if not impossible, to implement. That probably arises from the fact that not many members of the task force had operating experience with financial institutions to enable them to advise on whether these things were doable. I think the vision is less than perfect in that regard.

The thrust for more competition and growth is good. I do not think the recommendations of the report will deliver that result. I agree with your latter comment. I think you ought to proceed cautiously. Chances are that the outcome would be much different from that predicted in the report if we proceeded with it in its entirety.

Your second question was whether it facilitates our strategy. We have been able to grow under the existing regime. We were able to acquire London Life in a competitive marketplace with competitive bidding. There are some areas which, over time, would be helpful.

Access to the payments system is held up by some companies as a great objective. I think it is a bit of a Pyrrhic victory. The trust companies had access to the payments system and were not able to make successful businesses out of it. They were gobbled up. It is sort of a necessary, although not sufficient, condition to build a good financial services business. You do need access at some point, but just having access will not make you into a successful financial services business. I do not think too much weight ought to be given to that.

With regard to current policy framework limits, again, other than minor things around the edges, there is not a lot limiting us. We cannot get into the banks' core business of deposits but, on the other hand, I do not think we could do a good job of that. That business is not contestable in Canada. Even if we were given that power, we could not be successful in it. Others have tried. There are many examples of people who have tried to build a successful banking business in Canada and failed. It is just not a contestable market. While we do not have it, I do not think it would be a great advantage to have it.

On institutional size, there is some scale advantage in our business, up to a point, in our ability to build technology, particularly in the employee benefits side. You need very large systems to provide the kind of service that major corporations want. You need scale in order to be able to afford that, because it is generally a low-margin business.

Beyond a point, I think that the best financial literature probably suggests that it is problematic. At some point, there are diminishing returns. You get to a certain scale where additional size will not add much benefit. However, you certainly want to be of a size where you can compete with your major competitors.

With regard to the status quo not being an option, I cannot argue with you. Financial results of banks and insurance companies, or most of them, have been good during a period of strong economic growth. It is a fairly good regime. We have a great banking system in Canada and, I suggest, a very good insurance industry. Could we continue to live with it? I think we probably could for quite a while. However, there are forces to be dealt with. Businessmen do what businessmen do. They always seek more power and wealth and more product to distribute. You will always have that kind of "disequilibrium" or those kind of forces at work. However, the role of government should be to manage the economy for the interests of everyone. I think we could live with the status quo for quite a while yet.

Senator Stewart: What about the global influence that Senator Kolber mentioned?

Mr. McFeeters: There are many global influences. The largest banks in the world are in Japan, and they are all failing. I am not sure that is a particularly good model to emulate.

There is consolidation. It is becoming, increasingly, a global marketplace in many things, not only in financial services but also in telecommunications. We must compete on a global scale. We have businesses that can grow and compete globally.

Certainly, for years, the life insurance industry has been operating outside Canada. On an industry average, a high percentage of the profits of the industry are made outside Canada. Our industry has been in the forefront of that. We compete very well. We export management talent, product knowledge, and marketing skills. We compete with the United States everywhere.

Senator Oliver: In response to Senator Kolber's first question, you said that one of the problems with the task force is that not many of the members of the task force had operating experience. They were not people who had actually run companies. You said, therefore, many things they recommend are not too practical and probably could not be done.

Can you give me concrete examples of two of the things they said could be done that you say cannot be done?

Mr. McFeeters: They advance the notion that access to the payments system will make life insurance companies competitive with the chartered banks. I think that building a business out of access to the payments system is a non-starter. It is like having access to the Trans-Canada Highway. You do not build a business by being allowed to drive on the highway. That is basically what the payments system is. It simply allows you to move money around the country and retain money on deposit. I do not think you can build a business out of that, but the implication is that, somehow, that is a great advantage to the industry.

As well, they argue that there will be an emergence of a life company as a financial conglomerate that would compete on a scale with the banks. I do not think that is realistic. Particularly with the demutualized mutual, it will be years before they have the credibility and the strength in the marketplace to raise a lot of capital. One or two might be able to do it, but not all four. The chances of them being in a position to be an acquisitor on a scale that would rival the banks are not realistic.

Senator Oliver: I believe they were thinking of you being the financial conglomerate.

Mr. McFeeters: They take it away from us because they say you cannot buy anything with more than $5 billion of equity. That is the biggest misdirection in the report. If we cannot do it, it is left to the banks. They are the only ones left with the resources to do it.

Senator Angus: Thank you for coming here to help us understand this issue.

I should like to address several questions on the size aspect of the problem. First, I gather you were pretty happy when you were permitted to acquire London Life.

Mr. McFeeters: Happy? We thought it was in everyone's best interest.

Senator Angus: In your shareholders' best interests.

Mr. McFeeters: And policyholders; and our distribution channels; and the distribution channels of London Life; and their policyholders.

Senator Angus: Let us say that, after consideration, you decided it was also in the best interests of your policyholders and shareholders that your enterprise acquire another company, say demutualized Manulife, just as a hypothetical example. Do you think that, if you felt there were good business reasons for doing that, you should be allowed to do it?

Mr. McFeeters: Absolutely. Subject to the Competition Bureau constraints, but yes.

Senator Angus: Subject to there not being any substantial diminution of competition. That would be the only public policy condition.

Mr. McFeeters: I think there are legitimate competitive issues that must be addressed. Us acquiring Manulife would not put us on a scale with the Royal Bank.

Senator Angus: Let us assume you accomplished that combination. Do you feel you should still be allowed, if your business judgment said it would be good for you from a competitive point of view and for dealing in the global marketplace, to acquire even another company?

Mr. McFeeters: It is a hypothetical question, sir. If we acquired another company the size of Manulife, given the current size, the breadth and depth of the market, I could not see a reasonable case being made for something beyond that at this point. Twenty years from now, who knows?

Senator Angus: I want to ensure that I understand where you are coming from. I think I do.

You feel there should be no regulatory restrictions or government interference with your market-driven considerations on an acquisition strategy. Do I understand you would be against the banks merging? There are two proposals out there now, as you know. Do you feel they should be allowed to go ahead?

Mr. McFeeters: I do not have a point of view. The industry is concentrated now. If you go from five to two-and-a-half, does it really matter? It is so heavily concentrated already that two or four of them merging will not change the nature of the oligopoly, pricing or anything. It will be the same.

Senator Angus: On the public policy issues, I am assuming the same criterion that you would apply to yourselves should be applied to other financial institutions, such as the banks.

Mr. McFeeters: Yes.

Senator Angus: We have just issued a report following our comparative regulatory study, and we talk about our bias, not unlike MacKay, that to the extent it is reasonably workable, we should get the government out of the regulatory business and let the market be the regulator, subject to certain key public policy issues, one being competition. We have the Competition Bureau in place to deal with it.

What about being too big to fail? We keep hearing that, whether it be in a combination of life insurance companies or other financial institutions, you reach a stage where it might be too big to fail. This raises the public policy consideration of what to do, because obviously that implies the use of public funds. Do you have some thoughts on that?

Mr. McFeeters: Clearly, there is a point where that happens. Look at the hedge fund in the U.S. There are many examples in the economies of Canada, the United States, and probably the U.K., where governments have felt that the pain in letting an operation fail is greater than continuing. In the case of Confederation Life, a judgment was made that that was not too big an issue, so the government of the day allowed that company to fail. It turned out that it was the right decision, and I thought so at the time.

However, there may well be a case in the future where it would be very difficult to allow a financial institution, be it a bank or an insurance company, to fail, considering the systemic risks that would be involved. So it is a concern.

Senator Angus: If the first public policy matters of healthy competition and viable alternatives in the system are satisfied, the too-big-to-fail issue takes on less importance, it seems to me.

Mr. McFeeters: It is less likely to come to pass; the issue is less likely to be tested. That is probably right.

We have very good regulation. We have an excellent regulator in the country. It is the quality of the people more than the quality of the legislation, frankly, that will determine success or failure.

Legislation is a very helpful tool, but you need good people interpreting it and managing it. Nothing is perfect. I am fond of saying that we are creating laws of men, not laws of nature.

Senator Angus: That is a trend that we are finding in our own studies. In the U.S., it is a totally different system. They have a much greater demographic mass and much greater occupation of all the fields. They seem to be fixed on a rules-based regulatory system. In the global marketplace of today, where things happen so quickly, it is impossible to regulate or supervise properly on a strictly rules-based system. I take it you would agree with that.

Mr. McFeeters: There is a large element of that. As I said, it is the quality of the people who run it that is determinative of how successful the system is. This country has done extremely well.

Senator Angus: Following on Senator Kolber's five questions, which I think put a framework around the broader issues on which we are trying to get a handle, we keep hearing as well that if we do not start changing right away and start going in the direction of the MacKay proposals, we run the risk of suddenly finding our major institutions being owned by the Americans.

Even though you say there is healthy competition in your industry, I see fairly evident consolidation in the last six to eight years. I see a diminution of foreign players in the market place here. I certainly wonder why that is happening. Are you guys driving them out? Is it not perhaps a good idea to change the playing field to encourage others to come in?

I do not fully understand why they say that if we do nothing there is a risk that in a very short time our major institutions will be owned by the Americans.

Mr. McFeeters: Clearly that outcome is impossible because we have the 10 per cent legislation. At the moment, a bunch of mutual insurance companies are going to demutualize and the demutualized regulations say that you have to be widely held. So that will not happen overnight. No one should be stampeded. Some things move fast, but this is not one of them. The only sure things are death and taxes. I do not think it will move that fast.

One of the reasons there is some reduction in competition in this market is that a couple of major life companies have exited the market. In part, that was a reaction to things like this report; the anticipation that the banks were going to continue to erode market share and capture more and more of the financial services pie. They saw their role diminishing and they could not compete in that market. They would rather take their money and go to Asia, where they have a more purely competitive market. Also, they were not making a lot of money.

Senator Angus: There is quite a bit of verbiage in the task force report about structures -- the parent-subsidiary model and the holding company model. We know there is a big debate in the U.S. and we think we understand what it is about, but could you give your view on that?

Mr. McFeeters: We have a holding company structure and it has been very beneficial for us in terms of raising capital. All a holding company does is hold the operating companies, but it raises capital. It allows us to do the kinds of deals we did, for instance, in acquiring London Life where there was an exchange of stock. It became part of the currency of the transaction. It performs a useful role and MacKay recognizes that.

Senator Angus: Do you think there are watertight compartments between the various held entities within the holding company structure?

Mr. McFeeters: In our operation it is very watertight. Again, it has to do with the quality of ownership, not the structure. Any structure can work. It is the quality of ownership that counts.

The Chairman: Mr. McFeeters, you have said that three or four times, and I am not disagreeing with your statement. However, our frustration is that we have to set policies that put in place a regulatory system. We cannot set policies that, in some sense, talk about the quality of ownership. That is not a variable over which we have any influence. Therefore, while I do not disagree with what you are saying in the slightest, it is not helpful because that is not a variable that we can do anything about.

Mr. McFeeters: In fact, you already have control over that. You say you do not look at quality, but in fact the minister does look at "fit and proper". He has the final call. That is where it ultimately has to reside. Someone has to make a judgment. You cannot make laws. As with coercive, tied selling in banking, you cannot legislate that. It is an emotional thing. You can write all the laws in the world, but it will not work. Those things will still happen.

You can write laws about structure of ownership and you can restrict things from happening, but what you want to do is build viable companies. It all comes down to the minister and his advisors, and legislation already contemplates that type of thing. I think it can be done.

Senator Angus: You are saying that you have the holding company model. Would you call it an unregulated holding company?

Mr. McFeeters: It is unregulated, yes.

Senator Angus: Under our system it works well and there is no need to change anything, and there are other models in Canada, I believe, of parent subsidiaries that are analogous. Could you explain to us the fundamental difference between a holding company and a parent subsidiary in our current system as you see it?

Mr. McFeeters: With a parent subsidiary, typically, if it is a regulated entity, everything below it will be regulated; whereas a holding company above the operating company is unregulated and might do some other things.

Senator Angus: This is the sort of functional versus institutional regulation concept?

Mr. McFeeters: By function, by institution, yes.

I have a great deal of respect for the superintendent. He is quite concerned, as was his predecessor, about things running amok in holding companies, because there were some examples of it. It is a balancing act. MacKay talks about that quite a bit too. You give up a bit in potential regulation by doing some of those things but, on the other hand, you may get some benefits in growth and viable companies. It is a trade-off, as are most things.

Senator Callbeck: On page 3 of your brief, you indicate that Canadians are well-served by the insurance industry. Yet on page 89, Background Paper #2 of the task force report, it indicates that there is a problem for low-income Canadians in obtaining insurance and that there are statistics which show, from experience, that when deposit-taking institutions sell insurance, the overall size of the insurance market increases. Do you have any comment on that?

Mr. McFeeters: The paper does make reference to that, but it also says something to the effect that they are not convinced that the evidence can be interpreted to say that low-income Canadians are not well-served, even in the background paper to which you refer.

Yes, there is evidence out of the U.K. that with bancassurance there was some increase in the size of the market, so there may be some validity to that. It is not a proven fact, but I would suggest that it might well be the case that the market might increase a bit.

London Life has an entire distribution channel that caters to low-income Canadians. That is a big part of our trade, and we think that they are very well served.

How does this increase in market share come about if the banks are retailing it? Again, I suggest to you that there may be some of this increased demand brought about by the nature of the credit-granting institution. For instance, in credit insurance, when you go into a bank and get a mortgage today, the banker says to you, "Well, congratulations, madam, here is your mortgage. Now, would it not be a good thing if that mortgage was paid off in the unfortunate event that you died? It will only cost you an extra $9 a month." You say that is a good deal.

The reality is that the cost of that insurance is a fraction of what they charge you for it. If you came to one of the insurance companies, you could get that same insurance for just a fraction, a few cents a thousand, of what they charge. However, the banks take it one step further. They go and reinsure it offshore so they pay no taxes on it. It is quite a process, and it is very expensive. The same thing will happen with life insurance. It is not a question that bankers will coerce you.

It is the same as when you go into a doctor's office. You go into the office and you have high anxiety. There are pictures on the wall of a dreaded disease, and they always keep you waiting. By the time you get in there, you are frustrated. You get undressed. The doctor pokes and prods and says, "The good news is that you are going to live, but you have to take these pills." You are so relieved that you will do anything.

It is the same with a banker. When you get that loan, you are relieved. You want to do whatever you can to help that guy. That is the way it works. It is an emotional thing. It has nothing to do with coercion, necessarily, although that happens every day, too.

Senator Callbeck: You indicated that your company has a division that is geared towards low-income Canadians. Has the percentage of low-income Canadians that have insurance of various types, whether it is life or whatever, increased?

Mr. McFeeters: We said in the report that a study showed that about 23 per cent of insurance sales are to individuals with incomes below $20,000. I think that has increased over time. I do not have the numbers in my head.

Senator Callbeck: I wondered if it has increased dramatically.

Mr. McFeeters: Counsel tells me it was 20 per cent in 1993 and 23 per cent today, so it has increased. That market has been penetrated more.

Senator Callbeck: If I understood your comments properly, you said that if the task force recommendations were implemented, the outcome would be very different than what is expected by the task force members. I would like to hear you comment on that. If these recommendations are implemented, where will the financial services sector be in 10 years?

Mr. McFeeters: I think it will be in the hands of the banks. The task force is optimistic that financial institutions will emerge to challenge the banks. I do not think that it is very practical to build a business that will compete with the banks and the trust companies. People have tried it. They cannot succeed because the market is really not contestable. You have the brand identity. The low-cost deposits are all in the hands of the five chartered banks. Those things do not move. People do not change their bank accounts all that much. You really cannot contest that market.

If this went through without change, I do not think any of the life companies would be successful in challenging the banks. The result would be that ultimately some or all of the life companies would be absorbed by the banks because they would be the only ones with the capital, the wherewithal, and the structure to do it. I think that would be the outcome.

Senator Meighen: I wish to finish a line of questioning that Senator Angus started, the question of a holding company versus a parent and subsidiary relationship.

If I am not mistaken, the MacKay report talks about a regulated holding company. If that is so, what difference would there be for you if your holding company were regulated as opposed to a parent and subsidiary relationship?

Mr. McFeeters: I do not think MacKay said entirely regulated. He said they would give access to information to the holding company and, perhaps in exceptional circumstances, to subsidiaries of that holding company, but they would not be purely regulated in the sense that life companies are regulated today.

There are rules now as to what regulated companies can invest in. Those rules are not there for holding companies. Counsel points out that MacKay proposes or suggests, as he does, that those permitted investments might be expanded. However, there is still a prescribed list as to what you can do, whereas the holding company has unlimited powers. Whatever its articles say it can do, it can do.

Senator Meighen: Except if someone decides they should be prescribed as well.

Mr. McFeeters: If your question is whether the law could be constructed in such a way that it would be indifferent to whether you had a holding company or a parent subsidiary, yes, you can write laws any way you want. They are not now. That is the issue.

Senator Meighen: With regard to the question of ownership, as I understand it, MacKay suggests that you be grandfathered?

Mr. McFeeters: Partially, that is correct.

Senator Meighen: In terms of ownership, he is also saying that since you are not widely held, you could not buy a widely held institution. In your view, that would unfairly constrict you.

Mr. McFeeters: Right.

Senator Meighen: I get a little lost as to the type of regime you would like to have. Do I read you correctly that you would like to be grandfathered but be unrestricted in terms of who you can buy and that the 10 per cent would only apply to the banks?

You recommended that no change to ownership rules be made other than to provide the minister with the discretion to set ownership limits as he deems appropriate, depending upon the circumstances. Does that mean if the minister wakes up this morning, and I am being facetious, obviously, and decides that, in this particular instance, 20 per cent ownership is the appropriate percentage, that is what it will be? If he wakes up tomorrow and decides it will be zero per cent, that is fine too?

Mr. McFeeters: You express it in a pejorative way.

Senator Meighen: I do, because it worries me. I am sure that is not what you meant. Is it what you meant?

Mr. McFeeters: I think the minister should have the latitude, as he does today. He has power.

Senator Meighen: To exempt the 10 per cent ownership rule?

Mr. McFeeters: Not for banks, but for other things, he can make a judgment.

On the first part of your question, senator, if the grandfathering for us extended the definition of widely held now to a 30-per-cent float or a 35-per-cent float, we could probably live with that. That would allow us to make acquisitions of whatever size. We are fussed because, in time, we will be forced out of the market because we will not be able to make a major acquisition. There are not very many small ones now in which we would be interested, and over time there will be even fewer. That is our concern.

One answer is to let the minister do it. Another way would be to grandfather us totally, as we are now.

Senator Meighen: What would your reaction be if the minister woke up tomorrow morning and said, "Off with this 10 per cent limit. It is all gone. Free for all. Away you go"? What would happen, in your view, to the financial sector, if anything?

Mr. McFeeters: Nothing will happen overnight. To buy any of these companies takes quite a bit of capital. There are huge market caps on all these major companies.

Senator Meighen: It would not take much capital for Citibank to do it because they have so much.

Mr. McFeeters: Would they buy one of the major Canadian banks? I am not advocating, necessarily, the 10 per cent rule. Other countries do not have rules like this; but they do have ministerial approval.

Senator Meighen: That is what MacKay noted in his report.

Mr. McFeeters: Right. That is all I am really saying there.

It is unlikely that the minister would ever wake up in the morning in such a mood. It does not happen in Holland, for instance, or other countries. Therefore, I do not suppose it would happen here either.

Because of free trade and all this sort of stuff, you cannot do something different domestically compared to what you would do for foreigners. That is the way they get around it.

Senator Meighen: While we are on this topic, do you, as a citizen and as an important player in the financial services industry, have any concern as to who owns our major players in the financial services sector?

Mr. McFeeters: It makes a lot of sense, for reasons that MacKay articulated well, to have Canadian owned and controlled financial institutions for community leadership, community philanthropy and employment. Those are lofty and desirable goals to have. We should pay some attention to it.

The reality is that the world is moving against us. Everything is becoming internationalized. You cannot fight the forces entirely. You can, up to a point, but ultimately you will concede something. We are doing it all the time.

Senator Meighen: You said in an earlier response to a question that you have to be big in order to fight globally. That does not mean you will succeed.

Mr. McFeeters: You have to be big up to a point.

Senator Meighen: Is it not difficult to set that point?

Mr. McFeeters: Yes, for sure. These are not easy things to figure out.

I know the chairman will take umbrage with this comment; but, again, it comes back to quality management. Better management can do better things. You cannot arbitrate that.

Senator Meighen: If you extended that, you could almost say that if you were the minister you would say, "My decision as minister as to whether the proposed bank mergers should go through will depend on my assessment of the quality of the management of those institutions." Is that fair?

Mr. McFeeters: In part. He might make that decision already. He will make the call. Who is to say what variables he will consider and what weight he will give to them? If I were him, I would look at that.

Senator Meighen: You have made it abundantly clear that the payments system is not a big deal. It will not change the world for you.

Mr. McFeeters: No, it will not.

Senator Meighen: Perhaps we are putting too much emphasis on it. However, it is something that some people feel is important. Have you given any thought to this: If the payments system were enlarged to encompass more people -- for example, life insurance companies -- would you expect that there would be two notional groups, the clearing banks and others; and the life insurance companies, for example, would look out for themselves and cross-insure, if I can use that expression, or would everybody who is in the club be responsible for everybody else?

Mr. McFeeters: Those things already exist. There are direct clearers and indirect clearers now. The major banks are all direct clearers with clearing centres across the country. The smaller trust companies are not direct clearers. They jitney off the banks.

We do have an industry association that supports the policyholders, that is, CompCorp. The banks have CDIC. There is that kind of back up. The systemic risk was a big issue. For the industry, however, if you ask the people who advocate access to the payments system what they would do with it, they do not know. They just know it is a good idea to be able to get on the highway. However, they do not know to where they are driving. When you do not know where you are going, any road will get you there. That is the problem with it.

Senator Stewart: One of Senator Kolber's questions raised the conundrum of whether we ought to be proceeding with a major restructuring of our financial services sector in a time of international instability. You, Mr. McFeeters, referred to the internationalization of the financial services sector. However, you did not go on to say that our experience at the moment, in the last year or so, is that this has resulted in both economic and political disasters in places such as Indonesia, even in Japan; and now Brazil is a possibility. We know all about Russia, although there is another complication in the case of Russia.

Given the existing situation around the globe in the financial services sector, do you think that the government today would set up the MacKay task force; or is the MacKay task force the product of a period before the instability that attended this globalization, was known to us? Has the MacKay task force been overtaken disastrously, in a sense, by events?

Mr. McFeeters: That is a very insightful thought. It had not occurred to me in that way.

Factually, what happened, of course, is that MacKay rose out of the debate that went on incessantly before and after 1992 -- with no resolution -- on some of these issues. I think it was sort of a continuation of that, when Doug Peters was junior Minister of Finance and instituted this to try to get a resolution.

It is dealing with historical things. As you mentioned, and as I think about it now I agree with you, it really is not very prospective as to what the future might hold or how things might evolve. It is somewhat limited in its vision.

Senator Stewart: That answer anticipates what I expect might be your answer to my second question.

Your argument seemed to imply that the vision of the task force was biased in favour of the banks -- for example, what you have said about tied selling.

You have said the task force -- and these are my words, not yours -- was long on hope and short on experience. If that is true, surely the credibility of the task force is very badly undercut. How do you explain the presuppositions of the task force, which seem to be quite removed from what experience has taught us?

Mr. McFeeters: It is not consistent. There are many things in the report that are useful and practical. One of the things that do not work, for instance, is the payments system. There is a hope and expectation that somehow access to that will build very large businesses that will compete with the banks. I do not believe that. It requires a huge investment in the systems to get there and to build the expertise. It will not really be a business then, but a common carrier. Those are the kinds of areas in which I think they were weak and where experience would have been helpful.

Another area that I did not mention was the suggestion concerning the ombudsman. It is a grand idea with which you cannot argue. To say they are wrong is like saying the RCMP does not have pepper spray. They are self-evident truths.

The implementation of them is very much more problematic, however. I do not think it will be effective to build these huge, bureaucratic ombudsman services. At a minimum, it will be expensive. That is one thing of which you can be sure. Whether it will be effective, I am doubtful. These are tough issues.

Senator Tkachuk: I agree with Senator Stewart that what we are struggling with in this report is the degree of competition in the financial services industry. We tend to lump those services together, but I like to separate them because one area can be quite different from another.

In the insurance industry you compete with many foreign insurance companies. How big a share of the marketplace do they have?

Mr. McFeeters: It is growing. This is where we started. Because companies like ours have been around for 110 or 120 years in Canada, we have built up a huge portfolio of individual insurance premiums, so it looks like we have a large revenue flow, which we do. However, at the margin are NN Financial, ING and TransAmerica; all the companies that are selling universal life. They are the major purveyors of insurance products.

Our sales in pure insurance are less now than they are in wealth accumulation or retirement products, segregated funds or annuities. That is the biggest market for us now. We are tied much more into the retirement market, although we still manufacture all the insurance products. Disability insurance is a large, relatively new product for companies like ours. The largest is a U.S. company, Paul Revere. There are some smaller Canadian companies. These are the products of today. It is a very competitive market.

Senator Tkachuk: Do you have breakdowns of sales figures for 1996 or 1997 of new products for new holders who have never done business before, disregarding past sales where you are accumulating premiums?

Mr. McFeeters: I do, although I do not have them with me. I think NN Financial is the largest generator of new premiums, by face amount, in Canada today.

The Chairman: I know you do not have the data here, but it would be helpful if you could send it to us.

Mr. McFeeters: Yes, we will do that, sir.

Senator Tkachuk: Who is NN Financial?

Mr. McFeeters: That is the Dutch company.

Senator Tkachuk: The MacKay task force report talks about opening the borders and allowing more competition in the banking business. From what we have been able to garner, it seems that the banking business is where we have the least amount of competition.

How difficult do you think it will be for U.S. and other foreign banks to be significant players in the marketplace in Canada at the retail level?

Mr. McFeeters: If a U.S. bank wanted to be a significant player at the retail level in Canada, it could do it. I do not think they have any interest in being a significant player at the retail level in Canada. They may come in and deal in niche markets such as commercial loans or wholesale banking where they can achieve good spreads and have a net interest cost that makes sense to them.

Senator Tkachuk: Would there be not much bricks and mortar?

Mr. McFeeters: I would say there would be none. There is a great hue and cry about keeping branch banks open in Canada. One wonders whether that is really in the best interests of consumers, or whether they would be better off with more electronic services. Maybe that would be more efficient and allow them access to more services than they get at a bank branch. I do not know. However, I cannot see any U.S. banks coming in and building those.

Senator Tkachuk: If we do not have the competition from the foreign banks at the retail level, we must rely on the credit unions to provide a little more competition. We see no new, significant players in the marketplace. You said that insurance companies will not get into the bank business directly in the near future and neither will the foreign banks. You see no one else competing for that business on the retail end, the consumer end, in the future.

Mr. McFeeters: Insurance companies are prohibited by law from taking deposits directly, so we cannot do it. As I said, the payments system will not make that much difference. That question would be better put to some U.S. bankers, I suppose, but I cannot see what would motivate them to set up a bank branch in Holland, Manitoba to service 250 wealthy farmers.

Senator Tkachuk: From your perspective as a leader in the financial services business and the insurance business, do you believe the banks when they say that they have to merge to compete?

Mr. McFeeters: That is the question. As I have said, whether or not they merge is rather irrelevant. There is huge concentration in that part of the sector already. Whether we have five banks or two and a half banks, it will not change the driving force. I do not think it matters whether there are more. It is just concentration. It is there.

Senator Tkachuk: How do you envision increasing competition in the banking business?

Mr. McFeeters: One way not to do it would be to foreclose companies like ours from acquiring large financial institutions. In the long run, we have a shot at being a major competitor to the banks if we are allowed to expand. If we are constrained, it will never happen.

Senator Tkachuk: When you say "large financial institution", are you talking about another bank?

Mr. McFeeters: The Royal Bank is three times larger than we are today and its profitability is probably six or seven times more than ours today. We aspire to those lofty numbers, but we must be able to make acquisitions. You cannot do it through normal growth. You must be able to make acquisitions or mergers, and you have to be able to do it with large institutions. Limiting us to below $5 billion in equity is counterintuitive.

Senator Tkachuk: When you say "acquire larger institutions", are you talking about acquiring a bank? I am trying to get a handle on the meaning of: increasing the competition for consumers in the marketplace. You say you can be helpful there by removing this impediment, but what exactly are you talking about?

Mr. McFeeters: As someone mentioned earlier this morning, if Great-West/London Life wanted to acquire Manulife after they demutualize, we could not do that under the MacKay proposal. That is wrong. It does not serve anyone's interests. We are precluded solely because of our ownership structure, which I believe has served the industry and the country very well. I think we should be able to make those acquisitions and others. That is the only way we will start to approach the scale of the banks.

Senator Di Nino: You said you would not be able to acquire a demutualized Manulife. Is it correct to say that you would not be able to make that acquisition unless your company became more widely held?

Mr. McFeeters: That is correct.

The Chairman: The proposal under MacKay and also under the demutualization proposal rules, which I presume you have seen, is that the four large demutualizing companies would have to remain widely held for some period of time. Under MacKay, those above $5 billion would have to remain widely held permanently.

Is it your view that they should not have to be widely held? Forget about your own case. Should all of those companies be allowed to be closely held?

Mr. McFeeters: I do not argue that they need to be closely held. I am not arguing the converse, that we should be going to a closely held regime. I am only arguing that because we are not widely held, we should not be precluded from acquiring a large institution, even though it happens to be widely held.

The Chairman: That does not answer my question. My question was simply this: Should any one of the four be allowed to be closely held? You clearly think they ought to be allowed to be closely held in the sense that you ought to be able to acquire them. At least you ought to be able to hold them closely held. Should someone else be able to hold them closely held, or is there something special about your case?

Mr. McFeeters: No. The other major financial institution of which I am aware that falls within our particular structure is Canada Trust. I should say they should have an opportunity.

The Chairman: Should an American have an opportunity to buy it?

Mr. McFeeters: MacKay suggests that, in certain circumstances, Americans should.

The Chairman: He suggested it for the same reason we allowed the Hongkong Bank to buy Bank of British Columbia. It was a difficult situation. Take that off the table. I am trying to understand generally who ought to have the right to buy big insurance companies. Which closely held company ought to have the right to buy big insurance companies? Is it just you, which is an interesting competitive advantage, or is it in fact other people?

Mr. McFeeters: Whatever the domestic rules are, I think you must say they apply to foreigners as well.

Again, though, you come back to the ministerial approval. Are they fit and proper? He has the final call, just as it is in other countries. That is the way they control banks. I would say the same kind of regime could well work here.

Yes, I would say foreigners could acquire them, if they were not widely held, subject to tests of fit and proper as determined by the Minister of Finance.

Senator Kroft: Mr. McFeeters, I should like to take advantage of your being here to help us with a broad view of the MacKay report, because I found myself in a bit of a dilemma as I listened to you.

MacKay predicates his view of the new financial era as being one in which all sorts of things are possible, built on a foundation of new levels of competition. Things can be done because they move toward competition. A fundamental foundation of that competition, he says, are the existing major financial institutions, very much like yours. He even went so far as to say before us that there would be almost-banks under another name at one point. He blurred the distinction on gathering of capital. You get yours in one way; banks get theirs in another way. Basically, you would all be like banks and there would be one great world of competition serving the Canadian people.

In that environment, he would not by definition rule out necessarily a merger of banks. He would not say it is okay, but he would remove the by-definition prohibition of that. However, it is predicated on all those assumptions.

You now say that the assumptions are not valid because MacKay is misguided in terms of the importance of the undue weighting of the payments system, access to capital, and other restrictions, that in fact it is not realistic to see the attack on the banks' position as being as aggressive or as competitive with the banks, as MacKay suggests it is. On the other hand, I hear you say that you have no problem with the idea of the merger of the banks.

I am caught because he is setting the threshold of competition necessary as a precondition for that, and you are saying, "I do not think his foundation is right, but I do not care. I am not too worried because the concentration is all there anyway."

I realize this leads you a little bit out of strictly your industry, but you are an important player in the financial world of this country so I would like to know your view. Do you say that in spite of the fact that we will not get the competition that MacKay thinks we will, bank mergers are probably okay? Is that what you are telling us?

Mr. McFeeters: No, I did not think I was.

Senator Angus: I did not hear that answer to my question.

Mr. McFeeters: Again, I would say that there is a great deal of good stuff in the report, good research and useful information to create discussion.

I think he is overly optimistic in predicting that there will emerge financial institutions, particularly out of the life insurance sector, that will compete with the banks even on the scale they are at today. I do not think the tools are there to do that. I have cited a particular example of our case relating to ownership that would preclude us from getting there.

I am not expressing a point of view on the mergers either from a business point of view or from a public policy point of view. I am just observing what I thought was factually correct, that the banking system is an oligopoly today. It will be an oligopoly tomorrow whether they merge or not. You are building much larger institutions. I am sure that will improve their profitability. Whether it will improve their capability to deliver products or services remains to be seen.

Senator Kroft: Will it make tougher competition the next time you go up against the Royal Bank trying to buy an insurance company?

Mr. McFeeters: They are tremendous competition now. They are dominant. It is pervasive everywhere you go. Banks are great franchises. I would love to own one. They have added a lot of value to the country. You cannot knock the banks. They get a lot of criticism, some of it unjust, but they have added a lot of value to the country for many years. We have given them a lot of public policy preferences, but we have received a lot in return. The question is about going forward from today.

I am not expressing a point of view for or against the mergers. I am just saying that I do not think that it will change the economic reality of what the Canadian banks are today. They are an oligopoly, and they will be so tomorrow regardless of what happens. We must live with that. Oligopolies are common. Everyone takes it as a pejorative term, including the banks, but it is not. Oligopolies exist everywhere: automobiles, petroleum, glass. That is very much a common form of economic activity.

What is not common is pure competition. The banks sometimes like to argue that they are not an oligopoly but pure competition, which is foolish. Pure competition almost never exists in an economy, and it certainly does not exist with the banks.

Senator Oliver: You have told us how your company has changed in the 100 some odd years that you have been in business. You no longer go out and sell strictly whole life insurance policies. You have moved to term and group and disability and other things. Finally, you said you have now moved to a set of wealth management, and that is where your money is.

A life insurance agent goes to someone's home and says, "Look, you are husband and wife; you are married; you have a child. Here are some insurance proposals for you." As part of your umbrella, you also have Investors. Does your life insurance salesperson also talk about investments, and where do you draw the line? Do they say, "If you are interested in a form of mutual fund, we have a company called Investors that is also closely held"? How do you manage to get around that problem, and how many of your London Life sales people sell Investors products?

Mr. McFeeters: None. We have an intercorporate agreement with Investors that allows them to sell our Great-West Life insurance product, and they sell others. I think they have Aetna on their shelf and maybe one or two others, perhaps Canada Life. Investors's representatives also come to clients who need not only mutual funds but insurance protection.

We have intercorporate agreements with a number of people. However, it does not go the other way. Investors is what we like to call a modern, exclusive advice distribution channel. Investors' products are for Investors' representatives, not for representatives of Great-West or London Life.

We have our own small mutual fund company inside London Life called Maxim. Of course, we also have segregated funds that are the economic equivalent of mutual funds, but with some additional benefits.

Everyone needs a safe fund. Not everyone needs a mutual fund.

Senator Oliver: Is there any relationship between Maxim and Investors in terms of shareholders?

Mr. McFeeters: No, not at the moment. It is owned by London Life.

Senator Oliver: Assuming for the moment that there is no MacKay task force report, and assuming you accept that today in Canada we have a pretty good financial services industry, but because of technology, global pressures and other things, we have to change. Would you agree with me that one of the things that legislators should be looking at is finding a way to get more global banks into Canada so we can have more competition in our banking sector; or is that important?

Mr. McFeeters: I am probably the wrong guy to have an informed view on that.

Senator Oliver: You have given a lot of thought to banks as possible competitors.

Mr. McFeeters: You cannot argue with competition. Competition is a good thing. However, as businessmen, we all seek larger market share. If we had our way, we would all want monopolies. The ultimate aim of all businessmen is to achieve a monopoly in their market.

It has not been possible, since the days of Rockefeller, to achieve that. Those things do not happen any more. From a business point of view, I would say, no, I do not want any more competition.

Senator Oliver: Would Canadians be better served by having more competition in Canada provided by some large foreign banks?

Mr. McFeeters: That is a difficult question. The Canadians who will be served by large foreign banks coming in will be businesses.

Senator Oliver: Is that not good for Canada?

Mr. McFeeters: That is what I say. Large banks will not be interested in operating small retail outlets. They might be interested in getting your credit card business. There are many of them trying to do that. Are you talking about credit granting?

Senator Oliver: I am talking about corporate commercial banking.

Mr. McFeeters: In corporate commercial banking, yes, we could use more competition, as we could in investment banking. There used to be more competition in investment banking, but there is none today. The price is the same.

Many Canadian institutions do have access to foreign capital markets. The Yankee bonds have been around for years and there are many institutions, like ours, that are now routinely raising money in the States.

Senator Oliver: You are a company of about $80 billion. You are a little larger than most.

Mr. McFeeters: Many companies raise money in the States.

On another subject, I would just say that the Canadian Institute of Chartered Accountants think that they do write the laws of nature.

The Chairman: This committee has twice been on record as favouring the change. We will have some fun this afternoon because our last witness is the CICA.

Mr. McFeeters: You will not convince them. They do think that, somehow, they commune with God. We have the toughest business combination accounting rules in the world. I submit to you that we do not need that and cold weather, too.

The Chairman: In all your comments about the mergers that you might or might not do, but would like to have the opportunity to do, you have said the test that you think you should meet should be the Competition Bureau test, along with the "fit and proper" test of ownership by the minister. You made no comment whatsoever on the public interest review process test that a company of your size would be subject to under the MacKay task force rules.

Am I to infer from that that you find it acceptable, or that you just wish it would go away?

Mr. McFeeters: You can infer either of those things. It is not something that I feel particularly offended or threatened by. I went through such a process, which was an informal, ad hoc process, when we were acquiring London Life.

The Chairman: That is quite right. However, it was not the kind of public, formal review process that MacKay proposes. You are the one company in Canada in the last year that would have been subjected to it had it been in place.

Had you known that you would have to face that hurdle when you went into discussions with London Life, would it have had an impact?

Mr. McFeeters: Yes, it would have had an impact. There are many hurdles that you have to jump in any large acquisition. These are not trivial matters. They are difficult issues to face. This would be another test. It is not one that I would particularly welcome, but I certainly believe that this was in the public interest. It certainly was not against the public interest. We added a lot of value to the enterprise; but I would not welcome it.

The Chairman: You would not welcome it, but you are not adamantly opposed to it.

Mr. McFeeters: You cannot oppose such things.

The Chairman: You would be surprised what people can oppose.

Listening to your answers on a number of the questions, particularly from Senators Angus, Stewart, and Kolber, and noting your opening comment about why would we substitute experience in favour of hope, my sense is that, on balance, you would be quite content if the government did nothing with MacKay but simply stuck to the status quo. Is that a reasonable assumption?

Mr. McFeeters: I had not thought of it in those terms. I did not think that it was all or nothing. I was trying to identify areas that, for my company, would have restricted our growth and success in the future.

Could we live with the status quo? My view is you could continue for quite a few years without any significant changes. I do not think the world would come to an end or anybody would be particularly hurt, if that were the case.

You cannot close your mind to change. Change happens whether we like it or not and we must evolve. The thing is to evolve in a way that is measured and sensible and does not produce unexpected outcomes. Part of the problem with it is that from a businessman's point of view, in terms of the outcomes projected, it is unlikely that we would get that kind of optimistic output.

The Chairman: Thank you, Mr. McFeeters, for taking the time to be with us. We appreciate it.

Mr. Stewart, we appreciate you taking the time to be with us this morning. Please proceed.

Mr. Donald A. Stewart, President and Chief Executive Officer, Sun Life Assurance Company of Canada: Mr. Chairman, honourable senators, I am delighted to be here this morning. With me is Christopher Barry, Assistant Vice-President, Government and Industry Relations.

We very much appreciate the opportunity to share Sun Life's perspective on the key issues identified in the task force report. I commend Mr. Harold MacKay and the members of the task force for producing a very valuable and comprehensive road map for the future of the financial services sector in Canada.

Notwithstanding our overall favourable view of the quality of the report, we have some reservations about the application of aspects of the recommendations as they apply to Canadian international life insurers. Given the dominance of the large Canadian banks, which have an aggregate share of total financial sector assets of 37 per cent, it is not surprising to find the commensurate emphasis on banking issues throughout the report.

Although we are encouraged by the belief of the task force that Canadian life insurance companies can become a very significant force in the Canadian financial services sector, there are major competitive challenges to making this vision a reality. It is our view that the background report, "The Changing Landscape for Canadian Financial Services: New Forces, New Competitors, New Choices", has a noticeably less optimistic tone and places greater emphasis on the competitive challenges faced by the life insurance industry.

My principal point is that if Canadian life insurers are to fulfil their potential, they will need the full support offered by those proposals and recommendations which remove restrictions currently applying to our industry.

I need to place my remarks in perspective by briefly describing Sun Life's market position as this has an important influence on our views.

Last week, the Wall Street Journal published its annual list of the world's top 50 insurers. Once again, Sun Life was the only Canadian company to appear on the list, coming in at number 46. This indicates that we are a large company by worldwide standards. However, the majority of our business is international as opposed to global. Hence, for Sun Life, day-to-day competitive realities are based on individual country standings and not on the aggregate of multinational business presences.

Based on these realities, Sun Life faces significant competitive pressures within Canada. We currently rank number five in the Canadian life insurance marketplace, with a market share by premium of 8.4 per cent. This is approximately 50 per cent of the market share held by the market leader. So we speak to you today as a company that has a mid-market insurance operation in Canada and which welcomes the new opportunities that the task force report recommends.

We are focused on having an ongoing ability to operate as a successful international financial services company meeting the financial security needs of our customers in all of the countries where we operate.

I will comment on seven specific issues: consumer compensation, the Canadian payments system, corporate structure, capital taxes, demutualization, insurance retailing, and consolidations and mergers.

I begin with consumer compensation arrangements. As described in the task force report, some aspects of the Canada Deposit Insurance Corporation confer competitive advantages upon deposit-takers relative to Canadian life insurers. We welcome the task force recommendation on eliminating the competitive imbalance between these two entries which results from differing compensation arrangements and we hope the government will act on this in the near term.

We have a modest preference for CDIC and CompCorp to be amalgamated into one independent organization, rather than seeing CompCorp folded into CDIC as one Crown corporation.

On the lively topic of the payments system, we are encouraged by the task force's consideration of the regime presently governing the Canadian payments system. Developments in technology, consumer expectations and increased competition now make access to the payments system a necessity in dealing with customers. Canadian life insurers will be in a better position to compete if their customers can make payments on the basis of funds held with the insurer without having to first convert these funds into accounts at another institution.

As the task force report points out, maximizing the competitive potential of existing players requires open access on reasonable terms to other networks. In particular, we very much support the proposal that functionality in the Interac system be broadened.

Finally, we recognize the need to preserve the safety of the system and, as such, we support the access criteria as identified by the Department of Finance in its July discussion paper. We urge the government to implement changes to allow insurance companies to participate in the payments system as soon as possible.

In the area of permitted corporate structures, we support the recommendation already reflected in the Department of Finance's August consultation paper proposing a demutualization regime for Canadian life insurance companies that are presently mutual. Under this proposed regime, converted companies would be permitted to establish a holding company regulated by the Office of the Superintendent of Financial Institutions.

We believe that there are potential significant business advantages to the holding company structure, including more efficient regulation, greater flexibility for raising capital, and the potential for greater value for shareholders of the holding company.

We recognize that from a regulatory point of view, there are legitimate concerns associated with holding companies in the financial services sector. However, we support the conclusion of the task force that increased organizational flexibility is attainable without unduly compromising safety and soundness.

On capital taxes, we are pleased that the task force has acknowledged the inequitable tax burden faced by the financial services sector vis-à-vis other business sectors and competitors abroad. For example, in 1996, regulated financial institutions paid nearly $1 billion in special capital taxes not levied against other sectors. Moreover, these capital taxes are almost unique to Canada. Sun Life strongly endorses the recommendations of the task force that these special capital taxes be eliminated or, at the very least, reduced.

Sun Life also supports the call for the federal and provincial governments to work together to alleviate the negative impact of double taxation, such as sale and premium taxes that significantly increase the cost of insurance products.

With respect to the proposed demutualization regime, we support the task force recommendation that life insurance companies should become subject to a general, size-based ownership regime. We endorse the 10-per-cent ownership rule proposed for large, demutualized life insurers.

As Sun Life proceeds to consider demutualization further over the next year, subject to board, regulatory, and policyholder approval, the regime proposed in the task force report, and in the recent federal consultation paper on demutualization, has the potential to provide a strong basis for ensuring the fair treatment of policyholders and added flexibility for Canadian life insurers to grow and compete.

Sun Life applauds the task force's emphasis on the consumer and on competition. As previously mentioned, a number of initiatives are designed to assist the Canadian life insurance industry to compete, including access to the payments system and the levelling of the playing field with respect to compensation arrangements. In keeping with the overall goals of the task force report, it is consistent that consumers have broad access to insurance products.

If insurance retailing is to be permitted in bank branches, we place great emphasis on the need for common licensing requirements across the entire financial services sector, as well as for the protection of privacy for consumers and strict rules prohibiting tied selling.

On the general question of mergers, we very much support the view expressed by the task force that mergers need to be assessed on their individual merits, taking into account the overall context in which they are put forward. The insurance sector has seen significant merger activity over the recent past, resulting in some major shifts in market ranking. For example, the precedent-setting acquisition of London Life by Great-West Life in 1997 has created a very strong, new market leader in Canada.

Given Sun Life's current position in the Canadian market, it will be essential for us to be able to acquire other companies if we are to become one of the life insurance competitors envisaged by the task force report. The same may well be true of mergers.

In conclusion, we have concerns over any perception created by the report that Canadian banks and Canadian life insurers possess similar levels of competitive powers. While we do not actively oppose the granting of additional powers to Canadian banks on the basis of promoting increased competition, it is of vital importance that these be accompanied by strong safeguards as described in the report. In addition, effective access to the Canadian payments system and to electronic financial services networks will be critical if life insurers are to meet the industry challenge laid down by the task force.

The Chairman: Thank you, Mr. Stewart, for a well-organized, clear, concise statement which touched on all the central issues.

Senator Meighen: Welcome, Mr. Stewart and Mr. Barry. In this day and age of galloping globalization and change, it is nice, as an old Montrealer, to see that the Scots still run the Sun. Things are in good hands in that area.

Mr. Stewart, I am interested in your very measured comments, as compared perhaps with other people in your industry, with respect to the possible ability of banks, as recommended by MacKay, to sell insurance products out of their branches. As you are well aware, others have been somewhat more vociferous than the statement I see on the last page of your submission. You do say, of course, that that is fine as well. You include the caveat that there must be strict rules for the protection of privacy for consumers and for prohibiting tied selling.

I would like you to amplify why you are not as concerned as I perceive some others in your industry to be with the possible granting of the right for banks to sell insurance products in their branches. As well, with respect to the protection of consumers, you are advocating, and it is a fair position, strict rules with respect to tied selling and the like.

In your industry, with respect to the problem of the so-called "vanishing" premium, it is my understanding that the industry moved after the controversy arose to make it mandatory for member companies and their agents to explain the risks and variables involved in a sales illustration. Is that, in your view, sufficient to solve the problem of the vanishing premium, or would it require strict new rules from the legislator to prohibit it?

Mr. Stewart: In terms of the degree of measured comments on insurance retailing in bank branches, it seems to me that our fundamental position is driven by what is best for the customer, as a foundation.

We have taken great pains to emphasize we do not have a large presence in the Canadian market. The corollary of that is that we have a lot of business overseas and do business in countries where banks do retail insurance. We have not found that to be a competitive impediment. We are driven by the interests of the customer and by our international exposure and experience.

In terms of tied sales and the measures that are being proposed, I must say that I am perhaps less knowledgeable about the specific details, because some of these get into banking practice. However, the measures I have seen, both in the report and as recently been published, seem to me to be going in the right general direction.

Given our foundation of coming at this from an international perspective, I would say that benchmarks from other countries would also be relevant.

On the third part of your question as to rules and safeguards respecting sales illustrations and the problem of the vanishing premium, I am sure you would appreciate that, up to the recent past, and indeed currently, events have had a profound influence on the life insurance industry in North America. We believe we have put in place the necessary safeguards today to respond to both the events of the past in terms of life insurance illustrations and also the foreseeable future. We believe that we have in place the necessary comments, caveats, and explanations that will provide the customer with what he or she needs to know going forward.

Senator Meighen: You may have answered this, but for purposes of clarification: What if representative of the banks were to appear before our committee and say, "We understand your concern about coercive tied selling. We have an industry-wide regulation, and we have told all our members that they must not do that. We think we have solved the problem." They would then repeat the same words you just used with respect to the life insurance industry.

Do you have a preference? In other words, are either of these problems ones which cry out for legislation as opposed to self-regulation?

Mr. Stewart: It seems to me that it will be difficult to plot the evolution of any challenges that might emerge from this. However, if you view business from an international perspective, it is difficult to understand why the issues around this are unique to Canada, because in our experience they are not.

I do not want to comment on what the specific response of the banks might be. I retreat to the foundation that we look on this as one country where we do business, we experience the forces elsewhere, and we have the customer interest driving a response.

Senator Meighen: I should like to turn to the question of corporate structure. I believe you indicated that you applauded the possibility of having the alternative of a holding company structure. My question is one which we have asked of other witnesses. In your view, what is the difference between a holding company structure and a parent and subsidiary? Is it solely the degree to which the holding company is regulated, or is there something else we are missing?

Mr. Stewart: The structure we envisage has, perhaps, a clarity of separating parent and subsidiary chains where there are business units within the parent and business units within the subsidiaries. On the other hand, the holding company structure, as envisaged, would clearly be an ownership entity and would not get mixed up with the different businesses.

In our view, it is primarily an issue of clarity. We believe you can accomplish the necessary corporate structure to compete effectively in the marketplace under a variety of structures, but this particular structure, we think, has a clarity that is positive in the marketplace. Our investment bankers advise us it would add value to a prospective demutualization. That is where we come from, but it is not a unique requirement.

Senator Meighen: So there is the possibility of that added value plus a marketing advantage.

Mr. Stewart: It is a marketing advantage. Also, in some instances, it is a little easier to raise capital through this structure.

Senator Meighen: Do you have any particular comments on the ownership rules, 10 per cent and the like, as proposed by MacKay?

Mr. Stewart: My only comment is that we are in agreement with the proposals as presented.

Senator Meighen: As compared to our previous witness, although he is from the same industry, you seem to put more stock in and attach greater importance to having access to the payments system. I do not know whether you heard his testimony, and you may or may not wish to comment on that, but I gathered from your presentation that it was something of significance to you. Can you amplify that and, more important from my point of view, how would you see the new payments structure? Would all the players in the system cross-insure each other? Would the insurance industry be a thing unto itself and under the same umbrella as the banks, for example, and would the banks have no responsibility for the financial well-being of their fellow insurance company who is a member of the payments system?

Mr. Stewart: I had the pleasure of hearing the previous testimony. I am aware that the position presented by ourselves is somewhat different. I think the difference is perhaps not as great as it might appear. Let me explain.

First, we see the report as having an important future orientation. Technology, in particular, is driving enormous changes in the financial services sector. We see the report as endeavouring to capture that and look forward. My comments about the payments system have an important future dimension.

I should make it clear to the committee that, as we speak, we own two deposit-taking institutions. One of these has access to the payments system. It is clumsy and awkward to achieve that access through a subsidiarized separate legal entity. The direct access is an important component of what we are seeking, and we are seeking it for the future, but I share entirely the previous speaker's assertion that access per se does not bring a great deal. In fact, we have in place today an important part of the technology infrastructure through our deposit-taking subsidiary to enable us to utilize that access.

However, when you look at it from the future perspective and you envisage, as you have seen from the banking testimony, the enormous increase in debit card volume, and you envisage a future world that is more electronically driven, then you begin to see why access to the payments system will be a necessity for doing business. Although, as I thought was extremely eloquently expressed previously, it is by no means a sufficient condition.

With respect to the players who would participate, because of our exposure to the payments system and our ownership of deposit-taking entities, we do have some sense of the necessity for the extreme reliability associated with the mechanisms of clearing. I would be of the view that opening up the payments system should proceed quite quickly, but also quite cautiously, so that those institutions that are able to come in are also able to fulfil their obligations to run the kind of non-stop and fail-safe technology, as well as have the financial resources, that will not put that system at all in jeopardy.

Senator Meighen: If I understand you correctly, there would be no distinction between the players. If you are a member of the club, you are a member of the club and you have the same responsibilities.

Mr. Stewart: At presentl as you are well aware, there is a two-tier system within the deposit takers. Some extension of that would be acceptable to us where the front tier has the resources to be a front-tier player.

Senator Meighen: Are you referring to the clearing banks?

Mr. Stewart: I am referring to the volume-based requirement that you must satisfy in order to be a front-tier player. On whether the life insurers are some kind of separate class, or whether it is large players with resources, I hold no particularly strong views.

Senator Meighen: Would you mind identifying the deposit-taking subsidiaries?

Mr. Stewart: The deposit-taking subsidiaries we presently own are called Sun Life Trust Company and Sun Life Savings and Mortgage Corporation.

Senator Kroft: I should like to try to get an idea of the opportunity you see in Canada in the future for your particular business. My approach on that will begin by trying to obtain clarification of some of the numbers you have given us, and one you did not, unless I have missed it.

You pointed out that you are one of the world's top 50 insurers, being number 46 on that list, and that, by premium, you have an 8.4 per cent market share in Canada. A number that would interest me is the percentage of your overall business that is in Canada. I do not know if that number is available. Can you give me some idea of that? I would also like to know how important the Canadian market is in the total scheme of things for you.

Mr. Stewart: There are many measures of our business, and Canada would have a different ranking depending on which measure is used. The measure we tend to use for total business, because it captures all our business activity, is assets under management. By that measure, Canada is 20 per cent of our business.

Senator Kroft: We are being encouraged to be forward-looking and to try to see the new millennium in the world of financial structures. How do you see Canada as a business opportunity when compared with other jurisdictions in which you do business? The way things are going, do you see Canada as a place that, in your business plan, will get greater and greater weight, or would that depend on some of the decisions being made now? I am trying to get a sense of how important we are in the future thinking of Sun Life.

Mr. Stewart: Clearly, being domiciled in Canada has an enormous influence and makes Canada very important to us. However, your question, as I understand it, is more directed to the markets. In that particular dimension, Canada is a mature market by most measures. However, it is also a politically and economically stable market, and the rush of a number of United States and United Kingdom insurers to Asia is perhaps a more sobering example today than it might have seemed when these events took place a year or two ago.

In terms of the way forward, we have subscribed to the Michael Porter view of the world that a strong domestic base is an important enabler of competitive ability elsewhere. In that regard, Canada is and will remain important to us.

We also experience intense competition just about everywhere we do business, so the idea that there is some financial haven lurking out there as yet undiscovered whereby a business is much less competitive is not one that we have experienced or indeed subscribed to.

Senator Kroft: Putting some sense of immediacy or priority on the things we are looking at, one of the things we have to decide is whether all of this is critical in the next six months or whether none of it is critical in the next 10 years.

Are there any elements in the recommendations that you would consider as being, if not essential, at least of a very high priority in affecting the decisions you have to make in terms of the resources that you, as a company, would be prepared to commit or would look to commit? Are there any critical elements that must be dealt with that will affect your forward planning as a dynamic part of the financial community in Canada?

Mr. Stewart: Given that the report places some future dates on some of the recommendations, we are, in large measure, accepting of the report in its entirety. I would first draw the distinction that the report, as presented, has some differing dates. My prepared remarks urge, in a number of instances, earlier changes to the present structures rather than later, and I would stand by these. I also do so in view of the fact that these are enablers rather than things that will automatically happen. So I stand by the urgings that I made in the opening statements which were primarily, as you will recall, around the payments system and the levelling of deposit-taking guarantees, et cetera.

Senator Kroft: There is nothing here that, if we do not do it in a very tight time frame, you believe will put your industry under immediate pressure or difficulty?

Mr. Stewart: From an international perspective, I would say that, driven by many forces, not the least of which is technology, things are changing rather rapidly. Therefore, I generally have a sense of urgency in most things associated with the report, and indeed in anything that will directly affect the business. Philosophically, I would not be of the view that things are not changing very quickly. They are. We need to move ahead expeditiously, albeit carefully. Therefore, I do have some sense of urgency about moving ahead with the recommendations.

Senator Kroft: All we need do is figure out which is the right "ahead."

Mr. Stewart: The future is extremely challenging for everyone, but we have been specific in our urgings to move forward. That is where our focus would be.

Senator Angus: I commend you very much for the clarity and precision, not only of your opening statement but also of your responses to senators' questions. I would like to speak in more general terms.

I believe you were in the room when Mr. McFeeters spoke with us this morning. I do not sense that you have any material disagreement with his answers.

Mr. Stewart: On a number of issues, we would be in strong agreement. We might have some differences in view about the evolution of the financial services sector, as to who should own whom in the future.

Senator Angus: In other words, we would all like to own a bank. You do not have that sort of wish?

Mr. Stewart: There was a prominent life insurance company mentioned, and I had the feeling that it might have been Sun Life, had I not been in the room.

Senator Angus: I should like you to clarify a couple of terms that you used. You talked about the difference between being an international operator in this field and being a global operator. Some of us use these terms interchangeably, but you clearly make a big distinction. Could you explain that, please?

Mr. Stewart: I would be happy to. From our perspective, an international business is one which is quite highly country-specific. I would use individual life insurance as a strong example of an international business where, while the business done in Indonesia or the Philippines might have some recognizable common characteristics with individual life insurance as transacted in the United States of America, there is almost no synergy or common element from a management perspective, so that these essentially operate as separate and disparate businesses.

A global business, on the other hand, and to some extent the evolving money management business around the world, is having some global characteristics. We in fact operate in other countries through our United States money management business where essentially the same business is done in several, or perhaps many, countries, without any substantive distinction. So you can in fact operate that business as one business from a single headquarters.

Senator Angus: Again, these are general terms that get bandied about and your clarity of expression is helpful in bringing them into focus.

We hear about globalization with regard to financial and capital markets and their complexity today. In the area of corporate finance, would that be more a global type of business, as opposed, as you say, to life insurance?

Mr. Stewart: Yes, indeed, that is a global business in our view.

Senator Angus: That makes the distinction?

Mr. Stewart: Yes.

Senator Angus: So these are products that, to people in the banking-type business and related fields of corporate finance, are more global, and life insurance and specific types of businesses that differ from country to country are international?

Mr. Stewart: Yes. The essential difference, as it comes back into Toronto headquarters, is whether you can leverage your business in one country into another. To the extent that the business is global, it is much easier to do that and it is much more effective to do that. If the business is international, you are essentially operating a set of separate businesses, albeit with some commonality in intellectual capital.

Senator Angus: I understand now. That is very helpful.

On Sun Life itself, the name of the mutual company, the principal vehicle or entity is the Sun Life Assurance Company of Canada?

Mr. Stewart: That is correct.

Senator Angus: And whereas you do 20 per cent of your overall business in Canada, I think you said, that mutual life insurance company is the same entity that operates in the other countries?

Mr. Stewart: Today, we operate through approximately 70 subsidiary companies, of which something like half a dozen are important operating entries.

The parent company, Sun Life Assurance Company of Canada, does business in most countries through branch operations. That is to say, it does business in these countries under its own name and corporate powers. Most of our subsidiary companies are in addition to the parent company, especially in the United States of America, where we operate two large subsidiaries in particular, and in the United Kingdom, where we have several subsidiaries of some size.

Senator Angus: Therefore, the policyholders in the U.S. or the U.K. are not policyholders of Sun Life Assurance Company of Canada; am I correct?

Mr. Stewart: The individual life insurance policyholders around the world are, in almost the entire measure, policyholders of Sun Life Assurance Company of Canada. These subsidiaries are generally devoted to other business than individual life insurance.

Senator Angus: That was my point. In the event of demutualization, these individual policyholders around the world in all these other countries in which you sell your product will become shareholders, in effect.

Mr. Stewart: Yes, and the majority of these individual participating policyholders are outside Canada.

Senator Angus: You have mentioned in a vacuum, almost, not only in your opening statement but in response to Senator Meighen's question about the 10-per-cent rule, that you favour it. Can you elaborate for us? Why do you make that statement and repeat it?

Mr. Stewart: I did not intend to, and forgive me if I have appeared elusive. We favour the more detailed explanation laid out in the report, or at least we are in agreement on that.

Senator Angus: Did I understand that you said that one of the answers to my question is found in the MacKay report?

Mr. Stewart: Yes.

In terms of potential demutualization for a corporation presently operating in a number of markets with 127 years of tradition, demutualization could be viewed as a seismic event and will take some very considerable time both to accomplish and to work through. We see the ability to accomplish that successfully as an important short-term reality, where some form of ownership protection will result in avoiding the potential for the policyholders not achieving full value for their policies.

In the longer haul, we think its aims are more consistent with the Canadian institution, and therefore we support the longer-haul 10-per-cent rules for institutions of over $5 billion in equity capital.

Senator Angus: Whether it is in the short-term or over the long haul, you would still favour the retention of that restriction.

Mr. Stewart: Indeed we would, for the reasons given.

Senator Angus: I asked a question earlier of Mr. McFeeters on the larger issue of "bigness" and where we reach the point where the regulator should become involved. If, for good business reasons, you and your colleagues at Sun Life, decided that you wanted to buy Manulife, do you feel that that should be permitted, that there should not be some veto power by a governing body? In other words, should the marketplace dictate? If it makes good business sense to you, should you be allowed to do it?

Mr. Stewart: In the context of your question, which is primarily within the life insurance sector --

Senator Angus: Yes, and I am sticking to that for now.

Mr. Stewart: We are speaking to you from the background that the life insurance industry in this country is quite small relative to the banking sector. As well, we completely support the review by the Competition Bureau.

Subject to these two points, we would see, in principle, that mergers among existing life insurance players should not be precluded from happening. They should be freely permitted.

Senator Angus: As I think you heard earlier, I was observing that some of these large U.K. companies, for example, have moved away from the Canadian environment. Prudential is a good example, and Met Life and so forth. I do not know whether we should be concerned about that or not. Even though there are 120 of you in the playing field, it seems that there are only two or three large ones. Even though you are smaller than the banks, there is only a small number in the oligopoly mode.

Mr. Stewart: We think the number is a little more than two or three. We think there are approximately 10, if I might stretch the point a little, reasonably significant players in the Canadian life insurance market today.

Senator Angus: You said that you rank fifth in terms of market share in Canada, even though you are the largest in a worldwide sense, I gather. At what point do we become concerned from a public policy point of view about "too big to fail"?

Mr. Stewart: All these discussions about mergers must have a very close look through at what is happening within the entities being merged.

By that, I mean it is easy to see companies such as Sun Life Assurance Company of Canada as an aggregate, uniform, large entity which conducts a single business, namely the individual life insurance business. The reality is that we have many businesses, and these businesses differ enormously, both by country and by product line. Therefore, when you look through a company such as ours, you are not merging this uniform, large entity with another uniform, large entity. You are merging, in our case, perhaps two dozen very different businesses with, in the other company's case, one dozen or two dozen very different businesses. In order to assess the combined result, you must look at the differing characteristics of these component businesses before you make any judgment about being too big to fail.

In our case, some 60 per cent of assets under management are in the United States of America, and unless you are postulating some kind of North American, cross-border catastrophic event, "too big to fail" has some limited application in that regard.

We believe that when you bring two large organizations together, you must look at the component businesses in order to have a realistic assessment of what is happening. We feel that is particularly true in an international business such as ours because of the differing country presences.

Senator Angus: To take the hypothesis further, we had the privilege of being down in Washington and New York and talking to large players there. We heard largely anecdotal evidence about Citicorp and Travellers, which was that they are crossing the lines between life insurance and banking, bringing together what was to be called the City Group or something. Let us say that they decided to spread their wings up into the north and came to see Mr. Stewart, after getting together in the States. Would that make some sense to you? Is that something that free market forces should allow, or is that where the 10-per-cent rule would come into play, in your mind?

Mr. Stewart: We would see the 10-per-cent rule coming into play on any such event. As to who might make an effective international partner, it would be inappropriate for me to be specific, but clearly some organizations would fit our multiple businesses and some would not.

Senator Angus: Let me conclude on the bank issue. You have said that, subject to public policy and the decision of the Competition Bureau, you agreed with MacKay that each case must be judged on its own merits. Can you see any public policy reason at the moment that you should be allowed to get together, if it makes business sense to you, with another big life insurance company, and the CIBC and the TD should not be allowed to get together?

Mr. Stewart: We have emphasized two fundamental principles. The first is that each case should be considered according to its individual circumstances. The second is that any two large organizations coming together are not uniform entities. I think this is almost as true in the case of the banks, in that they are in effect multi-businesses, although they are not as international as the life insurance companies so they may be larger component businesses. However, assessing these on the impact of the multi-component businesses, then we see that, if we espouse them, these principles have to apply equally to ourselves and to the banks.

Senator Angus: Mr. McFeeters said they are large oligopolies, and that in itself not being a bad thing. Have the five major banks reached a point where they are too big to fail?

Mr. Stewart: I would come back to my component observation -- and I am quite clearly less familiar with the specific details of the component businesses of the large banks. However, it would seem to me that my earlier comments have application there, that some of their businesses would have a more profound effect on the financial system in terms of whether they are more likely to run into trouble than others. I could not judge at what size that becomes an issue. I would not be able to comment on that.

Senator Stewart: I have quite a different question. You have described the Sun Life Assurance Company of Canada as an international rather than a global player in the financial services sector. You said something earlier that leads me to believe that you have or are doing business in Indonesia and the Philippines. You did not mention Japan but I would like to hear about Japan.

What we read about and hear about is that in some of these countries the financial services sector is in grave trouble, and this is leading to general economic trouble which, in turn, is leading to social and political instability.

So far, what impact, if any, has the financial instability and its consequences in these countries had on Sun Life? Do you anticipate any impact?

Mr. Stewart: To address the opening part of your question as to where we do business, we have, as of the beginning of this month, opened a small eight-person office in Tokyo, through our United States subsidiary, MFS Investment Management. However, that office has no exposure to Japanese financial conditions.

We are the number two player in the Philippines. We have a small operation in Indonesia and a small operation in Hong Kong. We have two representatives' offices in China, one in Beijing and the other in Chunxi. That is presently the primary extent of our Asian activity.

In terms of the economic and, in some cases, the social turmoil that is taking place and the impact of that on Sun Life, it varies country by country.

In the case of the Philippines, we have been in business three years longer than the nation has existed. This is the centennial of the country. I just came back from a trip to Manila. We were there not in 1898 but in 1895.

Our business there has been rather resilient over a long period. However, currency depreciation gives it a smaller value in Canadian dollars, so that impact is there. In the case of Indonesia, we have suffered quite a serious setback because, in effect, the rupiah's devaluation is so serious that the value of our business in Canadian dollars is seriously depreciated. It was not a large investment to begin with. The underlying operation is surprisingly strong. We still have several hundred agents, and a staff of over 100 in Jakarta.

In the case of Hong Kong, that operation is doing quite well, although people were complaining about 5 per cent unemployment when I was there 10 days ago.

The impact on Sun Life is, at this point, small, which is my only negative. We see some opportunities for the future, depending on how things evolve.

Senator Stewart: Would you go on and tell us a little bit about your company's operation in South America?

Mr. Stewart: We have offices in Buenos Aires. We have a 32 per cent share in a pension fund management company in Santiago, Chile. The 32 per cent share is a joint venture with a local partner, which is about the third largest pension fund management company in Chile. Economic events in Latin America are, perhaps, depreciating the value of that investment in the short term. However, we believe, given the continued emphasis on the private pension fund system in Chile, coupled with some of the emerging reforms, that that will work out in the longer term.

In the case of Argentina, our business there is primarily to sell offshore funds and to sell United States funds. So the local economic conditions are only indirectly having an impact by depreciating or depressing demand.

Senator Callbeck: I wish to refer you to a comment on page 2 of your presentation under "Consumer Compensation Arrangements". You state:

We have a modest preference for CDIC and CompCorp to be amalgamated into one independent organization, rather than seeing CompCorp folded into CDIC as one Crown corporation.

Would you explain the preference?

Mr. Stewart: We see the preference expressed as being, perhaps, a stronger belief in markets as opposed to necessarily a government-sponsored event. I would underline the word "modest." The degree of preference is 51 per cent in one case and 49 per cent in the other. It was not hugely strong. It was to give an indication of which side we come down on.

Senator Callbeck: You were probably in the room when I asked the previous witness about the insurance industry and low-income Canadians. Do you feel this group of Canadians is adequately served by the insurance industry as it exists today, or would it be better served if banks were able to sell insurance?

Mr. Stewart: Our experience in other countries suggests that it is the broad market that the banking system tends to serve when it markets insurance.

For example, in the United States, our business is entirely the upper end of the market. That really is one of the factors in the lack of opposition and, indeed, degree of support for the recommendations in the task force report.

The Chairman: I wonder, Mr. Stewart, if I might explore for a minute the insurance retailing question. Although your statement was very clear, I would like to do that in a bit more detail than your statement, simply because of the extreme nature of some of the other statements that have been made by people in various parts of the insurance industry, whether it is P and C or life insurance, with respect to the inability of effective regulation to constrain coercive tied selling. The statements on that issue have been quite extreme and in quite significant contrast to your statement.

You mentioned, in an earlier response, your experience in other countries where banks are allowed to retail insurance. You made the observation that that experience had not led, in your view, to any significant degree of unfair competition. There was competition, but you were able to compete reasonably well with it.

Can you help us to understand why we get such extreme emotional reactions from some players in the insurance industry on this question, in contrast to your experience, which would indicate that retailing insurance by banks introduces another competitor but not an impossible obstacle?

Mr. Stewart: I am not sure I can be of as much help as I would wish to be on this question. I primarily come from the background of a corporation that has important parts of its business outside the country. I tend to focus my attention on the relative pieces where we do business, subject to the important governance questions that affect any Canadian company.

I am unfamiliar with some aspects of insurance retailing in Canada. You have to appreciate that individual life insurance, world wide, is less than 10 per cent of our business. Therefore, I am not well qualified to discuss the nuances of why these positions are so strongly held. All I can tell you is that, where we do business, they are not major driving forces.

The Chairman: Do you ever receive from your agents, or those doing the selling for you in other countries, the kind of complaints one might receive here, or the kind of picture that has been painted here?

Mr. Stewart: No, we do not.

The Chairman: I was quite stunned by your comment that only 10 per cent of your business worldwide is individual life insurance. That may be because I grew up in Montreal looking at your building. I had thought that was the cornerstone of your business. What is the other 90 per cent?

Mr. Stewart: It is absolutely not the cornerstone of our business.

The Chairman: Was it at one point?

Mr. Stewart: Yes. Without appearing to be flippant, obviously when we began it was 100 per cent of the business. When we completed mutualization in 1962, life insurance was roughly half the business.

The previous speaker alluded to most of the business of the corporation being retirement- and investment-focussed. If you define protection as involving individual life insurance, involving all forms of health and disability insurance and involving group life insurance, by some measures about 13 per cent of our business is protection. The other 87 per cent or so is investment management, retirement savings, mutual funds and various forms of guaranteed accumulations.

The Chairman: So you are really in the retirement, advisory and product-selling business?

Mr. Stewart: Yes, we are in an important way, although protection remains an important cornerstone of delivering to the customer a lifetime of financial security.

The Chairman: On the proposed accounting changes as proposed by the MacKay task force and the issue of how goodwill is dealt with, this committee has argued for that, and the previous speaker argued for it passionately. I assume that everyone in your industry is of the view that it is time that change got made. Is that correct? I know you did not comment on it, but do you think it should happen?

Mr. Stewart: We would support the views as expressed in the report. I do not speak for the industry, but that is our position.

The Chairman: Finally, on the "consolidation and merger" question and its linkage to the 10 per cent rule, you did argue that you are in favour of the "widely held" rule for yourself after demutualization. I took that to mean that it would not be a transition measure, but would, as a much as anything in public life is permanent, be a permanent feature of the landscape.

You went on to talk in your opening remarks about the fact that you need to make acquisitions in order to grow. It is true that MacKay does recommend that any widely held company will be able to acquire some or all -- any percentage it wants -- of any other company in the financial services sector. Therefore, in a sense, your growth would not be constrained by the rules of MacKay. Your role as a take-over target would be limited to widely-held companies that are larger than you. You could not have a dominant shareholder going after you.

Is it that a sort of protection? Is that one of the reasons why you favour the widely held rule? In other words, it limits the number of people who could attempt to buy you?

Mr. Stewart: I would strongly emphasize that, for the foreseeable future, given the pace of change that is taking place, it is difficult to support something on a forever and absolute basis. You did qualify that, but I wanted to emphasize the point that for at least the next five years or so, based on what we see happening, these rules as expressed have our support. We understand that would limit the number of candidates who could take us over or merge with us. That is, importantly, in line with our thinking.

The Chairman: That is on the understanding that, presumably, five to ten years from now, when one has experience as a demutualized company and one looks at the market, then obviously one looks at the question again.

Mr. Stewart: Indeed, yes.

Senator Di Nino: If we have a couple of moments, I would like to inquire about the two financial intermediaries that Sun Life owns as subsidiaries. Is the way I have put that correct?

Mr. Stewart: That is correct.

Senator Di Nino: How big is that in relation to the whole Sun Life operation?

Mr. Stewart: We also own deposit-taking intermediaries in the United States and in the U.K., but the size of the two Canadian deposit-taking intermediaries is a little over 10 per cent of our Canadian asset base. In round numbers, in dollars, it would be about $2.2 billion. It is very small in relation to the large banks, but, nonetheless, it is 10 per cent of our Canadian assets, roughly speaking.

Senator Di Nino: Are there any regulatory or legal obstacles to your growing those two subsidiaries to sizes beyond what they are today?

Mr. Stewart: We have great respect for the competitive abilities of the Canadian chartered banks. I think they have proven to make it quite difficult to expand these businesses successfully, but if there is an issue, it is in terms of the regulatory friction that we experience. I was at pains to emphasize that we have access to the payments system and that we have deposit insurance, but to deploy that effectively and seamlessly, without putting obstacles both in the way of doing business and in the way of our customers, is an issue.

We have to come at you through a separate corporate vehicle and that adds overhead and takes away value. The regulatory obstacles are more useful in easing the way forward to behave as a single entity and to present a united face to the customer, rather than putting any limitation on powers or anything of that nature.

Senator Di Nino: Let me see if I understand you correctly. Are you saying in effect that if Sun Life Assurance Company of Canada could operate as one entity, without having to have the subsidiaries, and you could, in effect, cross-sell all of your services throughout all of your outlets, that would make life easier for you. Is that what you are saying?

Mr. Stewart: I agree that that is an interpretation of my statement. I was not so much focussing on the cross-selling as on the ability to offer a product without having to go through a completely parallel stream of paperwork and customer relationships. It is more that dimension than necessarily cross-selling.

For example, a customer might have a choice between buying an accumulation product with or without deposit insurance. Then we would subject that customer to some additional paperwork. We cannot easily present to you a unified, easy-to-read, total relationship. It is more that dimension.

Senator Di Nino: If my interpretation is not quite correct, then how would you like to see it happen? How can we improve the competitiveness, in effect, in the financial services sector by Sun Life and allow the consumer to get a better deal? What would you like to see changed?

Mr. Stewart: We would like to see a change to give the parent company direct access to the payments system and to align what I will call the deposit insurance of CompCorp and CDIC so that they are in fact entirely equal.

We have been at pains to say that we have these, but it is not a value-added exercise to explain in detail the difference between them. It does not add much.

Senator Di Nino: If that happened, there would be nothing stopping you from buying the Bank of Nova Scotia, if you wanted?

Mr. Stewart: Buying the Bank of Nova Scotia, if I may be so bold as to pick up on that, is an entirely different set of considerations, compared to the things of which I have been speaking, I believe.

The Chairman: Thank you, witnesses.

The committee adjourned.

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