Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 32 - Evidence, October 22, 1998 (p.m.)
MONTREAL, Thursday, October 22, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 1:30 p.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Honourable senators, we will continue our study into the present state of the financial system in Canada, specifically the report of the MacKay Task Force on the Future of the Canadian Financial Services Sector.
We have Mr. William Podmore with us.
Mr. William Podmore, Executive Director, Insurance Consumers Group: I am appearing with Mr. Yves Lauzon, my legal counsel and the lawyer who represented me in my class action suit against Sun Life, which dealt with vanishing premium policies.
I appreciate the opportunity to present our comments and concerns regarding the financial services sector, particularly the concerns that we have regarding consumer protections within the financial services sector, and our thoughts and concerns relating to consumer protection in insurance.
Over the past eighteen months, we have attended a number of meetings with representatives from the Office of the Secretary of State for Financial Institutions -- including the Honourable Jim Peterson -- and we have also met with representatives from OSFI and the Department of Finance.
In October 1997 we made a presentation to the committee of the Task Force on the Future of the Canadian Financial Services Sector, expressing our views of the insurance industry, from a consumer's perspective. The additional material that we have given you describes some of the numerous insurance consumer protection initiatives that our group has been involved with, some of which have been remarkably successful.
Prior to the release of the task force paper, we prepared a discussion paper to be given to Mr. Paul Martin, with copies to be distributed to specific government parties. This document, although ultimately not communicated to Mr. Martin, did contain some thoughts that we felt were of some merit. It reads as follows:
We are issuing this communication to you as a follow-up to conversations held regarding issues discussed at meetings between representatives from the Office of the Secretary of State for Financial Institutions, the Department of Finance, and OSFI.
As we await the much anticipated Task Force Paper, its ensuing examination, and eventual end result, we take this opportunity to express to you what we consider to be key areas for concern for all financial services consumers.
D In our review of the financial services industry, (and governmental framework), we have kept in mind the key overriding principles of responsibility and accountability.
D For financial services consumers we emphasize the need for appropriate education and awareness.
First, and as suggested by you, there is a real need for an effective international financial regulator. The risks of worldwide financial turmoil cannot be justified (that is bad loans in Japan and Asia et cetera, et cetera). Financial Services, as a continuous and ever evolving industry requires a measure of safety which is not yet serving all people of all nations. The ability of any particular nation or region to adversely affect the financial well-being of billions of people worldwide, due to poor and dangerously unsound business practices, cannot be justifiably permitted to continue.
Current structures of "accountability" and "responsibility" of management and boards of directors have time and again proven to be all too inadequate. Real penalties for lack of business ethics and prudential management have proven to be severely deficient, which has caused a ripple effect throughout the world's economies.
The development of Financial Services Task Forces such as those in Australia and now Canada is commendable, and due to their existence also indicates the larger global dilemma. Our international reputation of successful initiatives and interventions (the Montreal Protocol, et cetera) would tend to favour and enhance Canada's ability and credibility in presenting unbiased support of the establishment of the type of financial regulatory organization that you suggest.
Second, and in reference to the issues above, it would seem that, as a priority, Canada should "clean up its own backyard." The rapidly and constantly evolving financial system as now exists in Canada clearly does not serve all Canadians fairly and adequately. There have recently been very serious issues regarding the financial services industry including:
D Insurance regulation and supervision, the "Vanishing Premium" class action lawsuits and much more product-sales-process litigation to follow.
D Banking regulation and supervision, the tied selling battle to influence legislation, and issues regarding credit cards.
D Securities regulation and supervision, the BreX lawsuits and others.
As one of our insurance industry advisers has suggested, "If you are looking for mistreatment of consumers perpetuated upon them by the insurance industry, it is like shooting fish in a barrel." We, and a remarkably growing number of irritated Canadians, are deeply concerned that the insurance "barrel" is not the only one that may soon be shot at.
Primarily, as a concerned Canadian, and as an ordinary financial services product consumer seeking to achieve a level of fairness and equitability for all financial product consumers, and through my own involvement in initiating vanishing premium class actions in Canada as class representative against Sun Life, my launching of the Insurance Consumers Group and our role in the protection of participating policyholders' legal rights and interests in the demutualization process, we would submit the following:
Would Canadians be more fairly protected in their financial dealings if:
1. Financial industry lobby groups were less influential in defining government policy and legislative outcomes? Are the intensifications of profit seeking opportunities of industry more important than the short and longer term financial well-being of all Canadians?
2. The financial services industry were self-regulated, provided that there existed a heavily supported and legislated Consumers Advocacy Organization? (As established in the State of Florida and Texas.)
3. The financial services industry continued to evolve in its current largely unregulated and ineffectively supervised form, and faced, on an ongoing and consistent basis, the potentially more financially and publicly damaging aspects of litigation. (See current class actions against Canadian insurers regarding "vanishing premium" policies, one flawed product of many to be litigated in the near future.)
Note: Sun Life agreed to settle their "vanishing premium" class action out of court, relatively quietly, while clearly convinced that they would have won the battle in court (this was also alluded to in one of the judgments rendered in this case). Bad publicity clearly has a great influence on the superintendence of financial industry players, and clearly influences profitability and ultimately market share.
It would seem apparent that all Canadians would benefit from fair and equitable treatment by the financial industry and this primary consideration cannot be invalidated given the ultimate cost to industry, government and consumers.
A structure and process to achieve the necessary safeguards is urgently needed. The initiative and responsibility for this process must clearly be that of the federal government, with significant support given by provincial governments where areas of responsibility and accountability overlap and are clearly dissimilar.
Government must fully take on, as a priority, its primary responsibility of protecting the Canadian population fairly and adequately, and not, as the former Secretary of State for Financial Institutions stated at the release of the 1996 white paper, "be frustrated at the limited scope" (of results), and, as Mr. Peters at the time stated his concern "that the process whereby the government was vulnerable to extensive lobbying by financial interest groups, whose views might be motivated by self-interest rather than the health of the Canadian economy and the interests of Canadian businesses and consumers as a whole by the financial services industry."
I have some additional comments on that letter, although I never actually sent it to Mr. Martin. I was much too occupied with demutualization issues.
The recently released task force paper indicates nominal support for some form of financial consumers organization, and encourages the continued funding of consumer group project initiatives, primarily by Industry Canada. The report fails, however, to accurately review the role of consumer groups and their ongoing support by government.
We have serious doubts that a financial consumers organization, as outlined in the task force report, will be a successful, ongoing and effective entity if the principle source of financing is dependent upon consumer contributions.
As the playing field now stands, there are clearly mutually beneficial alliances between government and industry players, one of which includes a fragmented and unorganized consumer protection movement. The proliferation of like-minded consumer and pseudo-consumer protection industry players, who often duplicate each others' efforts, does not produce effective results and does not serve the consumer fairly and well. A structure for fulfilment is clearly needed.
The level playing field concept which is so often referred to by financial institutions, and which includes all three players, must be established and governed by the federal government. Recent models for legislated consumer representation in Florida and Texas, and the proposed legislation for a Massachusetts association for insurance consumers, all have merit and should seriously be considered as starting points towards a realistic and obtainable consumer protection system for Canada.
With regards to bank mergers, we believe that a complete overhaul of the financial services sector is required. As Mr. Peter Godsoe from Scotiabank recently stated, Canadian banks are already very successful. They have effectively taken over the trust business and the securities business. Soon they may also be able to sell insurance in their branches, on top of providing leasing services.
The monopolistic control that banks have over financial products and services is now to be increased, and will have detrimental effects on competition. In addition, some of the banks wish to become even more monopolistic through mergers. Their intention to merge was very questionably announced prior to the completion of the work of the task force and the release of its report. As a concerned Canadian, I ask if that monopolistic control will include the Canadian government.
As Mr. Godsoe expressed, it is far more important to get the policy framework right than it is to get it done quickly. We do not yet have a clear policy framework, and reviewing the task force recommendations while concurrently reviewing the proposed mergers is, at best, a risky proposition for all Canadians.
How can four major banks merge into two industry giants without severely lessening -- and ultimately eliminating -- competition? Banks are in business for one reason only; to make profits. Profits are now seen to be quite dependent upon size. Size, however, is driven by the growth requirements that shareholders put on their stocks.
There is a danger that a self-perpetuating cycle will drive an uncontrolled wave of financial services mergers, which will necessarily include the demutualized insurance companies. Stock prices may then reflect growth expectations which are beyond the companies' capabilities to achieve, thus leaving no option but to continue to carry the merger process to some questionable and potentially dangerous outcome for all concerned.
Should bank mergers be approved, consumers must have clear and legally binding assurances that, amongst many issues, capital standards will be considerably increased to protect consumers if losses exceed expectations. There must be a clear, no-risk policy for all consumers. The U.S. thrifts were bailed out at taxpayers' cost to a tune of $150 billion U.S.
The larger the new company, the greater the consequences should the company fail. Who will bear the responsibility and assume the accountability? What must be put in place in order to protect consumers, governments, and ultimately the businesses themselves?
The merging mega-banks must guarantee mega-responsibility as well as mega-accountability. We have not clearly seen this to date -- for example, as late as 1996 political pressure was necessary in order to establish the national banking ombudsman.
In 1994 the House of Commons committee on industry recommended that an independent national ombudsman based on the British model be established, but the government opted to let the banks proceed on their own. Why?
Although our group is primarily concerned with insurance matters, we strongly endorse the British model as an example on which to base a fair and impartial financial services ombudsman system. It would be paid for by industry, and it would act as an independent adjudicator, with the power to make binding decisions and to grant financial awards where merited.
OSFI has also requested sweeping changes as to how financial service providers are supervised. This, in our view, can only underscore the seriousness and urgency of the requirement.
Senator Kenny: It is very helpful to have a new point of view and to get a different perspective. I had a couple of questions as you were making your presentation, and it might be helpful if you could elaborate on some things for the committee's benefit.
Your first recommendation had to do with the real need for an effective international financial regulator. The MacKay report talks about trying to harmonize regulations so that we have an approach in common with our neighbours and our trading partners. How would you like to see an international regulator structured, and what sort of mechanism would you need to put in place to make an international regulator effective?
Mr. Podmore: Obviously it would need a great deal of work. It would be a very large task to set up an international regulator. I believe that the size of the task is not too great, given the consequences of what may happen within the financial arena globally.
Senator Kenny: Could you give us some specific examples of what powers you would give an international regulator, and what authority you would propose national entities give up to this international regulator?
Mr. Podmore: From what I have read in the newspapers and so forth, one of the major causes of the serious problems that are occurring in Japan is basically due to bad loans. If that is the case, then obviously there is a need for some sort of entity that can hold the management of the banking industry responsible for that.
Senator Kenny: If, in fact, we accept your premise that the major economic problem in Japan is bad loans, what would you see an international regulator doing to cure that problem?
Mr. Podmore: An international regulator should set the standards in each individual country. I feel that the leeway that the banking industry has in setting its own standards is what is getting it into trouble.
Senator Kenny: Rather than having someone in Tokyo regulate Japanese financial institutions, you believe it would be more effective to have someone in Geneva or New York establish standards for the 180-odd countries around the world?
Mr. Podmore: In the airline industry they have the International Civilian Aviation Organization, or ICAO, which has been very successful in defining issues such as safety for the whole airline industry. Why can the same sort of organization not exist in the financial industry?
Senator Kenny: You believe there is a close analogy between the two?
Mr. Podmore: It just shows that there is workability.
Senator Kenny: In your brief, on the fourth page, you say: "Would Canadians be more fairly protected in their financial dealings if..." You then go on with points 1, 2, and 3. You note that:
Sun Life agreed to settle their "vanishing premium" class action out of court relatively quietly, while clearly convinced that they would have won the case in court...
You say: "This was alluded to in one of the judgments rendered in the case." You then state that:
Bad publicity clearly has a great influence on the superintendence of financial industry players and clearly influences profitability and ultimately market share.
Are you advocating that we move away from the sort of legal system that we have in Canada now? I am putting forward a personal opinion here, but it seems to me that there is much to be said for dealing with legislators or changing laws by using public opinion. If we are to settle court cases or matters that are already covered by laws through public opinion, however, I feel that we are going a fair ways down the road away from rule by law.
Do you have any comments on that?
Mr. Podmore: There are a number of issues, actually. With the Sun Life case -- and it is not just Sun Life, it is an industry problem -- they realized that this particular type of product was a bad product, and should not have been put on the market.
That being said, early on in the game I also did extensive research to see if there were any governmental or non-governmental levels of responsibility for the quality of products issued by insurance companies, and there were none. They can sell anything to anyone.
I was both upset and angered that there were no areas of responsibility and accountability for these products. I thought that was why my board of directors was there; to protect me, and to protect my interests. That obviously was not the case, however. Again, it just underscores what I said earlier: the financial industry is clearly profit-driven, and has little regard for consumer interests. I really wonder why the government has not put forward solid, well-supported consumer protection legislation.
Senator Kenny: You mentioned "profit-driven" a couple of times. Perhaps I will ask a two-part question. First, are you against profit as a concept?
Mr. Podmore: Not at all. I am not against profits, but my major focus is fairness. I do not mind profits, as long as they are fairly earned. If they are earned unjustly from consumers, however, then I do take issue with them.
Senator Kenny: The second part of my question is: Is it not conceivable that a company that serves customers' needs well and fairly might, in fact, get quite significant profits and deserve them?
Mr. Podmore: I do not know of any such company.
Senator Kenny: In the whole world?
Mr. Podmore: No.
Senator Kenny: You made the reference at the end of your remarks to "no risk for all consumers." Do you really believe that consumers should be insulated from all risks?
Mr. Podmore: There are a number of issues with regards to protection in that area. Consider insurance products and the way that they are sold to customers. Let us look specifically at life insurance policyholders in Quebec, 60 per cent of whom earn less than $30,000 a year. They are clearly at a disadvantage when a very knowledgeable seller goes to see them, and the policy they are sold is written such confusing language that 90 per cent of policyholders do not even know what they have.
Senator Kenny: I do not dispute that consumers need some protection. What I am really asking you is to elaborate on your phrase "no risk for all consumers." That seems to be all-encompassing.
Mr. Podmore: Corporations are unwilling to assume the risk, and that risk is always passed on to consumers. Most of the financial services sector players are either unregulated or self-regulated. They have their own ombudsman, who is obviously paid by the firms for whom he or she works. The banking ombudsman, for example, is paid for by the banking industry. The risk is not covered by that industry, however.
Senator Kenny: What responsibilities do you believe consumers should then assume?
Mr. Podmore: I believe consumers generally need to have the protection of a centralized financial services agency. To protect consumers, such an agency needs to be established by government, and largely funded by industry.
Senator Kenny: With respect, sir, that was not my question. My question was: What responsibilities do you believe consumers should assume?
Mr. Podmore: Consumers need to become more educated with regards to the products that they are buying. To do so, they need complete disclosure of the products and complete transparency of the process. Otherwise, how could they make an appropriate decision?
Senator Kenny: What level of diligence would you expect a consumer to exercise?
Mr. Podmore: I cannot really say what would be the most appropriate level. In my case, I was fortunate. Before the vanishing premium case developed, I had concerns regarding my financial position, and I went to see an independent financial adviser. I gladly paid the $350 for him to provide an unbiased review of my financial picture. The only advice he had regarding my situation was for me to check out this vanishing premium issue, and to get a guarantee that it would pay off in the time they had told me.
Given the lack of comprehension that most Canadians have of financial products, I would advise them to get in touch with a truly independent financial adviser who would be paid a set free, and who would not sell them any products.
Senator Kolber: I am slightly mystified by some of your thoughts. There are certain things that you are ignoring. For example, you talk about the risk that the consumer takes. In the banking system there is the CDIC; the consumer is insured.
Mr. Podmore: To a certain extent, yes.
Senator Kolber: The consumer is insured for up to $60,000. These are the people you are trying to protect.
Mr. Podmore: I know some people who had very serious money in Confederation Life.
Senator Kolber: Which has since been paid back.
Mr. Podmore: Finally, yes.
Senator Kolber: What you are envisaging is an incredibly large bureaucracy to oversee everything that goes on. I am somewhat surprised that you ignore the whole concept of caveat emptor. I do not think that Canadians are universally idiotic, and consumers must assume some of the responsibility for their own well-being.
You mentioned things like Bre-X. I do not know how you would ever begin to regulate a thing like that. You keep talking about the vanishing premium, which I agree is not a nice thing. It would seem that, from your point of view, the best -- and indeed only -- answer is for the government to nationalize all the insurance companies and sell insurance directly from the government. Then you would want someone to regulate the government, I imagine.
I frankly do not know where you are coming from. What I am saying is that I am having difficulty with your testimony.
[Translation]
Senator Hervieux-Payette: At the beginning of your presentation, you mention the issue of the impact of what was happening on the international scene when the committee submitted its report. The international situation is becoming more and more chaotic. Last week, the International Monetary Fund practically put the five big accounting firms, including Ernst&Young, Arthur Andersen, KPMG and Price Waterhouse, on notice. It asked them to voluntarily apply international standards in all the countries where they are active. They play a very important role among all consumers of financial products. Every country has different standards.
When they do analyses and audits, they take samples to measure, for example, the assets financed by banks in Japan. Do they use exactly the same measures for Canadian banks? For the consumer, it is essential to know that the Big Five play an important role.
Could the International Monetary Fund ensure that the players in questions establish with governments standards such as those that exist, for example, in the area of aviation?
Do you believe that that body, which understands very well the international financial situation, could play a valuable role by establishing certain criteria, knowing that they would be applied voluntarily? Canadians have to be sure that they are comparing the same things if these criteria are applied here when financial statements are being audited by these big five firms.
[English]
Mr. Podmore: The international standards would be based on basic business ethics and principles, and would not detail how each organization pursues its business.
[Translation]
Senator Hervieux-Payette: I am talking about accounting principles. I am not talking about anything vague. Accounting conventions exist and are used by the Americans and most Western countries. Would the recent warning the International Monetary Fund gave the Big Five be a way of examining the issue so that governments would ratify the International Monetary Fund's request that these accounting principles be applied in all countries?
Mr. Podmore: I think it would be. It is a question of standardizing norms.
Senator Hervieux-Payette: Let us get back to your proposition. Your association represents consumers. You do not seem to think that consumers, if we give them the means, could support a few national consumer associations in the financial sector. There, as elsewhere, there are perhaps too many players. There would probably have to be two or three in the country so that there would at least be some competition.
I asked most of the players in the areas of insurance and banking if they would be prepared to send out a membership form for a consumer association with their monthly account statement. As a consumer, when I get my bank statement or I have to renew my insurance, I could also get a document prepared by the consumers association. I could join, become a member and support these consumer associations whose role and mandate it is to represent me in everything relating to finance. They are people who specialize in that field.
That model is also used in the United States. Does that approach not seem to you to be closer to the one that would still involve the government directly in this issue?
[English]
Mr. Podmore: The model in the United States has limited success. I believe that the process of asking consumers to support a consumer organization does not fulfill governmental responsibility. From my point of view, the government has a responsibility to take this issue of consumer protection in hand. The government represents the population; it is not supposed to be there to benefit industry.
In my view, there are two possible ways to go. First, the sector continues in an unregulated and unsupervised fashion. That is fine with me, and there will be lots of very happy lawyers around. Alternatively, it can agree to a structure of regulation and supervision that is workable for everyone.
[Translation]
Senator Hervieux-Payette: So, you insist that the State should be there to finance consumer associations and what is more, to work within consumer associations?
[English]
Mr. Podmore: The problem with asking consumers to fund particular organizations is that it is not an ongoing process on which you can rely. You may get many members the first year, because it is a new and interesting thing. The next year, however, you may get 5 per cent or 10 per cent of what you got the first year. It is not a viable and strong entity that will ultimately benefit all of Canadians by providing them with the protections that they need.
[Translation]
Senator Hervieux-Payette: In Canada, we cannot count on a leader -- like Ralph Nader in the United States -- in the area of consumer affairs who will ask for the support of consumers to protect them, even against the government and corporations. In other words, we cannot have a neutral position from which establish a specific consumers' agenda, to know what issues they want research done on.
Mr. Yves Lauzon, Legal Counsellor: If I might make a clarification, it seems to me that you want our opinion on the importance of maintaining a certain tradition of watchfulness through consumer associations that are independent from the State. I think that is very important as long as the means the associations have at their disposal correspond to the needs and the complexity of the challenges of these modern times.
The "vanishing premium" question, the self-financed policies was essentially a complexity problem. It is not, as your colleague said a while ago, because Canadians are not intelligent, or even because they are not careful. But, we have presented a situation in which a financial product evolved that is quite complex, very sophisticated.
I am not before a court here. I do not want to make demeaning comments. In my experience as a lawyer in the area of class actions and consumer affairs, and more particularly in insurance, I have seen that educated people, smart people, business people, lawyers and judges had similar products and did not really have the information or the technical help to interpret all kinds of tables and so on.
It is very important that, in Canada, we modernize certain ways of financing certain associations in sectors that are as crucial as the financial sector. You mentioned Ralph Nader. The State cannot do everything and it must encourage the utilization of human resources and the taking of initiatives that are both beneficial and not too costly.
As Mr. Podmore pointed out, the disequilibrium could be too great in any case. Even if consumer associations have a minimum of tools and can explain to consumers of insurance the workings, the advantages and the disadvantages of self-financed policies, why they will not work like they think they will, there are still other issues to be resolved before even consulting consumers, such as how those products are designed and how the people who sell them act.
We still have to think about another area of a certain regulation. I think I understand your reservations about increasing the number of bureaucrats. It is a matter of adapting or complementing the regulations and their application without necessarily requiring more government.
Senator Hervieux-Payette: In the case of issuing share, the Securities Commission approves the prospectus and ensures that it meets the requirements of certain acts and regulations. So, let me draw a comparison: the insurance product could benefit from the creation of a similar organization capable of evaluating such products or putting people on their guard when such sophisticated products are offered to the public. Often, the prospectus sells -- and this is certainly the case with Bre-X and others -- things that are more dream than reality.
Mr. Lauzon: Right on.
Senator Hervieux-Payette: Warnings are necessary and that is noted in the paper. It is up to the consumer to take the necessary precautions and to read the text. We say all the time: Go see your financial advisor before investing in this new issue. From there to saying I agree with your idea of an additional organization in that area is quite another thing.
I envisage a consumer association that would have experts on all kinds of products and these experts could pass on information on the product, by Internet or otherwise, and say if such and such a product is not worth the paper it is written on or the screen you read it on.
You have the school of thought where there is a regulating agency; the other is where the problem is to ensure adequate financing for consumer associations. We have two models. We will have to choose the one that seems to best protect the public interest.
Mr. Lauzon: What you just said is in line with my way of thinking. We have to distinguish between these two models and they are more easily reconciled.
[English]
Senator Oliver: As a committee, we are here to study the MacKay task force. Chapter 7 of the task force's report spends a great deal of time dealing with consumers, and, indeed, the chapter is titled "Empowering Consumers." In that chapter, the task force talks about the various reports which it commissioned to deal with the many issues that you have outlined and discussed today.
On page 1 of that chapter it says that they have looked at the following characteristics:
D Choice, with the absence of both coercion and the perception of coercion;
D transparency, with clear, easily understood and timely disclosure of product terms and conditions, risks and conditions of sale;
D easily accessible and effective redress mechanisms;
D and access to and control by consumers over personal information.
As you know, the report goes on to talk about the need for legislation -- for example, in the recommendations against tied selling, and the affirmation of the need to protect the privacy of information, particularly medical information.
Having read and studied that chapter, do you have anything you wish to warn the committee about? Are there any deficiencies? Is there anything which is clearly wrong or inadequate and, if so, what is it?
Mr. Podmore: Some of the initiatives in the report are quite commendable. The major issue that I have is that there seems to be a lack of clear, governmental support for a financial consumers' organization, apart from the task force suggestion that Industry Canada continue to support the consumer protection movement, and that perhaps the industry itself should share in some of the costs.
My group has a certain amount of funding through Industry Canada to look at the demutualization process, and to consider policyholders rights and interests through that process. We were also successful in obtaining funding for a review of life insurance policyholder protections in Canada.
Senator Oliver: One consumers' group told us that, if you accept money from governments or from companies, you will be beholden to them. You are saying, however, that there is nothing wrong with having the government finance you, and that you can still be independent.
Mr. Podmore: We welcome the financing as long as we are not prevented from making our views known through the media. These days the media is just about the only real weapon that consumers have.
Senator Oliver: In the last paragraph of your paper, you said that the group you represent is primarily concerned with insurance matters, and you talked about the vanishing premium problem that you have dealt with. You also said that you agreed with the idea of an independent adjudicator.
When we were in the U.K., we heard about a personal investment authority that the U.K. is considering. It is a kind of advisory panel that is mandated to advise and comment on governmental policy developments, and to report on the effectiveness of those policies in relation to consumers. Is this the kind of thing that you would also envisage?
Mr. Podmore: Was that welcomed by industry?
Senator Oliver: This is in the U.K., and this is the new U.K. model.
Mr. Podmore: That sort of entity would obviously assist in resolving some of these issues.
Senator Oliver: Is there any way that your organization has thought of -- other than taking money from government -- that would allow the fund to be self-financing?
Mr. Podmore: One option would be to advertise our cause in the media through the various actions in which we are involved. Again, there is very limited funding out there. My group has a newsletter that goes out to our members, but the source of our funding is our members, period. We cannot really afford to send even a flyer to the 400,000 or so Sun Life vanishing premium policyholders.
It would be a wonderful thing for the whole consumer protection area if industry were able to work together with consumer groups. Flyers and information could then be included in industry mailings. These publications would provide consumers with information about a particular consumer group. That group would be able to give them clear answers to their problems from a consumer's point of view, rather than from a corporate, legal, actuarial point of view.
Senator Oliver: Do you agree with what the task force report proposes about tied selling and privacy, and with its suggestions for possible legislation? Would you add anything to it, or take anything away from it, in terms of the protection of consumers?
Mr. Podmore: If I went to a bank and I felt I was being coerced into purchasing another product, I wonder how I could prove that, and what evidence would be admissible. I do not see how I could prove it, unless I had a tape recorder and a lawyer beside me.
Senator Callbeck: You have mentioned that we should have the British model of ombudsman, and I am wondering why. The MacKay report indicates that 16 per cent of the people they polled felt that they had been forced into buying product, yet the number of complaints that go to the bank ombudsman is very low, apparently. I think there was one in 1996. There was not a complaint in 1997. There was one in 1998 regarding tied selling.
My first question is this: Why are there so few complaints? Secondly, if we had the British model, would it be more consumer-friendly? In other words, would there be more complaints?
Mr. Podmore: The lack of complaints probably points to a weakness in the structure of the banking ombudsman system in Canada. Since the ombudsman is basically funded by the banks, consumers probably assume that they cannot really expect a fair deal.
I was reading through some of the documentation from the Canadian Bankers Association. Had I gone to the office of the banking ombudsman with a problem that I thought was very serious and had them review the whole issue with me, I could not use any information in pursuing it if I was in a legal vein.
What is most important and appealing for consumers about the British system is that the ombudsman is totally independent and has the ability to make separate, binding decisions involving cash awards or whatever settlements are negotiated.
Senator Callbeck: You believe, then, that if the ombudsman were independent more people would come forward; it would be more consumer friendly.
Mr. Podmore: Absolutely.
Senator Callbeck: In relation to tied selling, you said, "How do you prove it?" What do you think should be done here? The government has brought in legislation, which was proclaimed a few weeks ago, but above and beyond that the MacKay task force suggests strengthening it for other means.
Mr. Podmore: Probably some sort of legal document related to the sales process, signed by both the bank employee and the consumer, would be in order. It could cover items such as what the customer is buying, what the customer is refusing to buy, what the customer agrees to be approached on as a financial package, and what the customer does not agree on as part of the financial package. I do not think customers should be coerced into switching all of their financial services to one particular bank just to buy one particular product.
Senator Callbeck: What good would signing an agreement do?
Mr. Podmore: It might not suffice, but at least there would be some legal document that would be presentable in a court of law.
Senator Callbeck: The other question I wanted to ask you related to the consumer advocacy organization in Florida. Is it funded by the government?
Mr. Podmore: Yes, and it is funded by the Department of Insurance.
The Deputy Chairman: I would like now to call upon Mr. Normand Lafrenière who will proceed with his brief.
Mr. Normand Lafrenière, President, Canadian Association of Mutual Insurance Companies: The Canadian Association of Mutual Insurance Companies is an association of Canadian wholly owned and policyholder owned small insurance companies. They are property and casual mutual insurance companies and most often operate under provincial charter. The only interest that we have at the federal level is that the regulations in place are working in the interest of consumers and that, therefore, we are operating in a level-playing-field competitive system.
The Canadian mutual and trust industry promotes a strong, healthy and competitive insurance market. It supports regulatory efficiency and legislative change that is in the interest of the policyholders.
In the press release that invited stakeholders to participate in your committee's hearings, you indicated that, in the consumers' interest, the objective of the hearings is to best determine how to ensure the future stability, soundness and competitiveness of Canada's financial services sector. We concur with your indirect statement that the protection of the consumer is best achieved by a stable, sound and competitive financial services sector.
In our view, the stability of the financial sector is ensured both by government regulation and by the private sector's self-regulation. The efficiency of the sector is brought about by technology, but we disagree with the MacKay report on the number of competitors that are necessary in order to provide the competitive system. We feel that the larger the number of competitors, the more likely it is that we will have a competitive market.
In the 1992 and 1997 reviews of the financial sector legislation, we asked the government to take a long-term look at the future of the Canadian financial services sector, a look that would reflect the situation 5 years, 10 years, 15 years down the road. The establishment of the MacKay task force pleased us, and we are pleased with most of the report; we think it is very good, with the exception of recommendation number 18, which relates to the possibility of banks selling insurance in their branches and using customer information in order to target their marketing of insurance products.
As evidenced by the MacKay report, the banking industry has successfully argued that, if it is given additional insurance-retaining powers, a more competitive insurance industry will emerge. Unfortunately, the task force report did not provide evidence that bank insurance would bring about more competition in the insurance sector and, therefore, would be in the consumers' interest.
Further, the task force failed to provide full assessment by product of the current level of concentration in the banking industry. It also failed to provide an assessment of the level of concentration we could expect should the banks be given the power to sell insurance in their branches and use the personal information of their depositors.
The reform of 1992 and the revision of 1997 of the financial services legislation increased competition in the insurance industry and the number of insurance products offered, while maintaining the consumers' ability to choose freely among a large number of suppliers. These two objectives were achieved by allowing banks and other deposit-taking institutions to engage in insurance activities through insurance subsidiaries and by requiring that the insurance marketing function be separate from the core activities of the deposit-taking institution. Our association believes that these regulations have achieved their purpose in the past and should continue to do so in the future.
The banks claim that they would reach larger economies of scales and penetrate foreign markets if they were given the additional insurance-retaining powers they seek. However, banks have not demonstrated how, or to what extent, they could reach larger economies of scales on the domestic market, or how such economies of scale might help them acquire a large share of the international financial services market.
Size is not always a precondition to increasing market share and penetrating foreign markets. The farm mutuals that I represent are small compared to the average property and casualty insurance company under federal charter. However, in spite of their limited size, they succeed in occupying an increasing share of the insurance market in rural Canada. The farm mutual insurance companies have a strong expertise in the evaluation of risk. When they identify safety problems, they bring them to the attention of the policyholder. As a result, the losses are lower, and our cost of doing business overall is lower than that of larger companies.
A deposit-taking institution has significant information regarding its customers' financial affairs and business relations. The transactions a customer makes as well as reasons cited for borrowing money provide insight into a customer's affairs. Deposit-taking institutions are acquiring increasingly sophisticated information-processing technology to facilitate their ability to access vast amounts of personal data in their possession. That technology will enable banks to find out who may be in the market for a given product or service at a given time and, thus, target them directly.
We need to put in place regulations and infrastructures that effectively prevent deposit-taking institutions from exploiting unfairly a competitive advantage that might ultimately reduce competition and consumer choice.
When marketing their insurance product, traditional insurance companies just like ours have to market their product widely, with the hope that enough consumers will be interested. Banks, for their part, would like to use personal information related to individuals and small businesses, obtained in the course of their banking activities, to market their insurance product only to those who most likely would be interested in purchasing that product. Needless to say, that would give banks an important competitive advantage over traditional insurance companies, who do not have access to personal information on potential individual customers and small businesses. The 10 per cent ownership rule and the former 25 per cent foreign ownership rule have allowed Canadian banks to generate large profits and grow sizeable assets without having to face international competition.
While the solvency of the Canadian banking industry may have been a compelling reason for implementing the 10 per cent- 25 per cent ownership policy, the negative effect of that policy, in terms of foregone competition, has been significant. The current level of concentration in the banking industry and the level of concentration that will be reached if the bank mergers are approved give us cause for concern.
The level of concentration is now such that Canadian deposit-taking institutions effectively form an oligopoly in a number of the provinces. These oligopolies could have the power to influence the price of the service that the banks provide.
CAMIC expressed concern about potential coercion and undue influence, in the context of the 1992 and the 1997 reviews of the financial services legislation. While there is no doubt that the policies towards coercion and undue influence carried out at the level of the head office of deposit-taking institutions would be sound, we are concerned that those policies might not be well implemented at the branch level by front-line personnel.
Indeed, regardless of the sound policies adopted at the head office of a bank, the potential for coercive practice increases as the number of bank branches that operate as separate profit centres increases.
While the lender will not openly require that the borrower purchase insurance from the bank's insurance company as a condition of issuing the loan, the borrower could easily feel uncomfortable declining the lender's suggestion to apply for the insurance within the premises of the financial institution.
Senator Austin: Our committee has already heard from others in your industry the arguments you are putting forth. The point I am trying to get clear in my mind is this: At what point would the banks have access to their customers? Do you envisage the banks going out and making cold calls on their customers, or do you envisage the banks identifying the opportunity to sell P and C insurance when the customer comes in for some other product? How do you see the moment of opportunity?
Mr. Lafrenière: A couple of opportunities are possible. If a customer comes in for a mortgage, the bank can offer one year of free insurance on the house, and that is tough to compete with. As a result of the mortgage transaction, the bank has privileged information as to the insurance needs of that customer. The rest of the insurance industry does not have access to that information, and that is what we are against.
Senator Austin: Your next point would be that they could cross-subsidize in putting that package together.
Mr. Lafrenière: Absolutely. Not only would they cross-subsidize with the financial products coming from the deposit-taking sector, but they would use that personal information, which nobody else has, in order to target the right person at the right time. In other words, even if the customer does not show up at the branch, technology is now such that a message can be displayed at the automated teller machine, so that that customer -- the right person at the right time -- can be contacted through the ATM and invited into the bank. Obviously, that function is not available to the insurance industry. In our case we have to make cold calls or cold approaches to the potential client -- and, on their side, the banks do not want to do that.
Right now we are competing with them on a level playing field, because, with their subsidiaries, they do not have that information either, and, therefore, they have to make the very same "cold" phone call, if they want to reach the client. The reason they want something separate is that they want an advantage over us. They already have an advantage by virtue of the fact that they were subsidized for 30 years with the 10 per cent-25 per cent ownership rule, but now they want even more: they want to use that asset, that richness that they have, in order to better penetrate the rest of the financial sector.
Senator Austin: In the situation where the banks are directly offering competitive insurance, can you compare the expertise in your industry with the kind of expertise and information that the bank manager or the designated selling officer would have? What kind of expertise is necessary in this field to advise a client properly?
Mr. Lafrenière: The only requirement we have is that those people be licensed, and, indeed, that requirement is proposed by the MacKay report: People selling insurance should be licensed. We cannot ask for more than that, because those people who sell insurance on our side are only required to get a license. They may have more expertise because of the experience, but the kind of regulations covering our people right now would be exactly the same as those required for the banks; therefore, we cannot be against that proposal.
Senator Austin: Can you envision a situation in which the person in the bank, who is licensed and handling the P and C file, could have a conflict of interest between the responsibility to the bank and the responsibility to the client?
Mr. Lafrenière: No, I cannot. I can tell you, though, that our problem is with the other people in the bank -- the loans officer or the bank teller. They have access to the client; they have access also to the discussions, and they have information on that client. When a person has just got a loan and needs collateral, and needs some insurance on the collateral, they can easily take that person to their insurance representative within the same financial institution, inside the same building. That is a tremendous advantage compared to letting that person go and having that person come back to a subsidiary of the bank.
Senator Austin: I was thinking of the case where there might be a loss reported; say the house burns down. There are many issues to be decided as to the compensation to the insured. In your current situation are you in a position to give objective advice to the insured? And would the banks be in the same position, or do you think they might be in a more compromised position?
Mr. Lafrenière: I think it would be the same. I do not have any problem with that. I think the banks, in order to maintain their clientele, have the same problem as we do. We need to pay exactly what we owe. We do not want to pay more than we owe, but we want to pay every penny that we do owe. I suspect that the banks, in order to maintain their clientele, would be in exactly the same position.
Senator Oliver: On page 135 of the task force report, MacKay actually talks about the tied selling issue, describing it in very much the same terms as your description today. The task force were so concerned about this issue that they made four recommendations for protecting the consumer against the abuses that you have outlined. For one thing they recommended "...that section 459.1 of the Bank Act be proclaimed after amendment in two respects." As you know, it was proclaimed three or four weeks ago. I would like to refresh your memory about those amendments and ask you if you think they go far enough; if not, what else you would like to see?
The report states:
The offence of coercive tied selling, which now applies only to ties to a "loan" should be extended to apply to ties to all credit products and to insurance products. Further, in view of the pace of change in the marketplace and the desire for flexibility in regulation, regulators should be given legislative authority to designate other specific products or services to which the coercive tied selling prohibition would apply. This would ensure that flexibility exists in the regulatory framework to respond to unacceptable marketplace practices.
Practices that you have so eloquently described here today, I might add. The report goes on:
Third, we recommend that as a matter of good business practice, where suppliers offer tied products as well as the components, they should itemize and price the different components in the package so that consumers can make comparisons to stand-alone products and other combinations.
By the way, those are not the actual recommendations; this is just the working paper itself. The recommendations are much more specific, but the question remains: Do these recommendations go far enough? If not, what else would you like this committee to consider?
Mr. Lafrenière: The task force did go far enough. What we are afraid of is not the coercion aspect of it. We know that the bank employees would most likely not do any coercing; they know their limits. What we are afraid of is the undue influence. There is no undue influence when the insurance section of it is operating out of the subsidiary right now. They do not talk to each other; they do not have access to the information; therefore, we do not need any policing of that. We know that it is safe by virtue of the fact that they are operating through a subsidiary.
However, if all these things start operating within the same branch, then it will be easy to have undue influence. Undue influence, contrary to coercion and tied selling, is much more difficult to prove, and that is all they need to increase their market share. You can see the result of that in Quebec in the caisses populaires' improvement in market share. They now have, I believe, 11 per cent of the market, and that is not because their prices are better; in fact, they are just average. We feel that it is because undue influence is exercised by the employees of the caisses populaires.
Senator Oliver: One witness told us, however, that even if it were all done in the same branch there would be a complete barrier -- the Wall of China, I think he said -- between the insurance component and the loan and mortgage components.
Mr. Lafrenière: It is just impossible to police them. The comparison that comes to mind is with the way people exceed the speed limits on the roads. The opportunity is there because the chance of being caught is so low that it is worth taking it. That is exactly what would occur within the banks. It would be so difficult to catch somebody, because the policing would not be there, that it would be worth taking the chance. Let me repeat that it does not need to be coercion or tied selling; all it needs to be is undue influence.
Senator Oliver: I wonder if we should add the words "undue influence."
Mr. Lafrenière: I think we should, but it is extremely difficult to prove. The only way to maintain that level playing field is by keeping those subsidiaries separate. Right now there is no complaint, or there are very few complaints, but we could expect far more complaints if they were operating within the same branch.
Senator Kroft: I want to take Senator Oliver's point just a fraction further, because it has been weaving in and out of our discussions with various witnesses on various subjects.
Given the various financial functions, and here we are talking about banking and insurance, presumably even if you were wearing a different hat the subjective view would be the same -- namely, that we are really dealing with a subject that is beyond effective regulation.
There are, of course, other places in the MacKay report where with respect to things that might be difficult to achieve they say, "Yes, it is difficult, but we will impose very severe penalties." I am trying to get my own mind at a comfort level on this, but is it your view that, severe penalties or not, when these various functions start operating in the same building, in the same space, then no matter what you do, human nature being human nature or reality being reality, you cannot keep them separate, because the walls, or the regulations, are simply not workable, and the only practical answer, short of some sort of excessive policing, which is something I do not think any of us would welcome, would be physical and legal separation of these roles?
Mr. Lafrenière: Yes, like we have now. The best form of policing we can ask for is to have those separate marketing functions that we have right now through subsidiaries.
Senator Kroft: This is a very fundamental issue.
Mr. Lafrenière: By the same token we see no good reason for the banks to be asking to sell insurance within their branches; that is something they know will give them an advantage over the rest of the insurance industry, because they will have access to the depositor's information and will be able to better target their marketing. That is an incredible competitive advantage as compared to the rest of the industry. That is what they are asking for, and incredibly the task force has come up on the side of the banks on that and we just cannot live with it; that is why I am not surprised that many of your witnesses have talked about it.
Senator Kroft: Every time there is more than one function, where somebody else's function is being performed in that physical situation, the same question comes up.
The Deputy Chairman: Honourable senators, our next witnesses are from Capital One Financial Corporation.
Would you proceed, please, Mr. Cooper.
Mr. Matthew Cooper, Senior Vice-President, Capital One Financial Corporation: Honourable senators, my colleague is Chris Curtis, Associate General Counsel.
This is actually our second appearance before you. We spoke to the committee two years ago responding to the government's 1996 proposal to cut back the legal authorization we had just been granted, and that would have at that time required us to establish a Schedule II bank.
It is really amazing what a difference the last two years have made. Two years ago we were talking about our desire to do business in Canada; in fact, we were probably not yet doing business here at all. Today, however, we have several hundred thousand credit card customers in Canada and we have just begun our second line of business here, which is the instalment lending business.
As a result of reports issued by the committee in the House of Commons and by this committee, criticizing the white paper proposal which we objected to at that time, the proposal was withdrawn, and for that we are also very appreciative. Instead, newer and more progressive proposals have been made. Spurred on by this committee and the House of Commons Finance Committee the government has proposed adoption of a foreign banking regime for the first time, and Canada has committed itself, in the WTO process, to implement that regime by next year, which is something that we are really excited about.
I want to continue by giving you a little background on Capital One and the business that we do outside Canada. Capital One Financial Corporation is a financial services company. Our principal subsidiary, Capital One Bank, issues credit cards in both the United States and the United Kingdom; as of September 30 we had about $25 billion Canadian in outstanding receivables, and we had just crossed the 15-millionth-customer mark. We are one of the top ten issuers of MasterCard and Visa in the United States, and, in fact, worldwide; that is our main line of business.
We also are involved in the instalment loan business both in the United States and in the United Kingdom. Beyond that, we are not just an issuer of Visa and MasterCard -- there are many such issuers; we do our business a bit differently. In the late 1980s we saw that products were largely standard in the United States, typically with interest rates of about 19.8 per cent, annual fees of $20 being typical, and we saw an opportunity to bring a different kind of approach to the business. We began by diversifying products and applying predictive statistical modelling techniques to the business, and that began to shape a different sort of marketing and credit policy; it allowed us to provide products that were targeted to individual consumers, to offer lower rates to many customers and, in fact, to give access to credit markets, to many people who had not qualified under traditional credit criteria, but who, in fact, were very creditworthy.
The consumers in the United States have benefited greatly from that. We have brought increased competition to the market along with some of our competitors, again lowering the pricing, diversifying and increasing the product attributes that are available on credit cards, and increasing the availability of credit to many creditworthy households that were not able to access the product before.
We are not the largest of U.S. issuers. We are smaller than folks like Citibank and MBNA, but have taken a lead in changing the competitive landscape in the U.S. credit card market, and that is acknowledged in the task force report, the subject of this hearing; you will see this at page 75 of Background Paper No.1.
We began issuing credit cards in Canada late in 1996, shortly after we appeared here for the first time. We have developed since then a rapidly growing and significant credit card business in Canada, which we are very excited about. We have recently initiated the instalment lending business here as well; however, in contrast to much of the good policy news of the last two years, I would note that the government, although it has allowed us to carry on our credit card business, has imposed a $200 million cap on the instalment loan business, which is a bit more restrictive on the way in which we will do business.
I hope partly as a result of our entry and the entry of other competitors, the Canadian market has changed dramatically since 1996. At that time, much like the U.S. market that I mentioned, there was not a lot of product variety here. You saw a lot of high-rate credit cards with not very many attached features and services. Canadian banks were typically charging interest rates in the high teens, and sometimes higher. There were not very many low-rate cards; those were not aggressively marketed.
In the past couple of years, however, there has been a dramatic change; you see a much wider diversity of products. We were the first to introduce a Platinum credit card with a higher credit line, and now every issuer has that among their staple of products. Many of the issuers now not only have low-rate cards, but they market those aggressively. There has been a proliferation of other product services and features attached to the credit card, and I think that is a direct result of increased competition.
We have seen rates on the standard card drop as well. Many of them now offer introductory rates of 6 or 7 per cent, and even long-term rates that are several percentage points below where they were a couple of years ago.
It is important to recognize also that these products are not just offered by new entrants; it is not just a matter of Capital One or MBNA, as issuers, coming in from the United States. There has been a dramatic change in the offerings of the existing players as well in competitive response. Again, it is a lesson, just as in the United States market, of what happens when competition begins to increase. Again we see products and services improve, the diversity of products increase, consumers benefit from greater access, lower rates and more beneficial products.
As a result, in many respects we support the liberalizing proposals of the MacKay task force.
Having a liberal foreign bank entry regime is important to us. In the first place it permitted us, a smaller company -- both smaller than the largest issuers in our industry and also much smaller than the Canadian banks -- to enter the market in an experimental way, to come in and offer a variety of products, to try to learn what consumers were looking for, and again to increase competition that way. Continued liberalization will facilitate that for us in the credit card business and, as I mentioned, potentially in the instalment lending business and other financial services as well.
I would like to focus on three particular recommendations that we are supporting.
First, the task force endorses the government's proposal to establish a foreign banking regime; we endorse that strongly. Banking in Canada dramatically increases our access to flexible vehicles for entry. Especially if it is available to both commercial banks and savings banks. Those are financial vehicles which in the United States really are regulated in much the same way. We, in fact, own a savings bank in the United States, and a branch of that savings bank would very likely be our preferred vehicle for doing business in Canada, of course depending on the details of the branching regime. We submitted our comments on that to the Department of Finance last year, and can certainly provide a copy of that report.
Second, we endorse the task force's admonition that prudential regulation should not be imposed where it is not needed, in other words to non-financial concerns -- for example, the level playing field concerns or other reasons that are sometimes cited. Unnecessary regulation impedes business and it deprives consumers of full competition; and I have talked about some of those benefits.
Specifically, the task force advises that significant prudential regulation is not really needed with respect to an entity that does not take retail deposits, and we do not take retail deposits in Canada.
An example of how that precept could be applied can be seen in the Department of Finance's recommendation that a foreign bank not be permitted to establish both a regulated and an unregulated presence in Canada. Such a prohibition, for example, precludes an entry like ours in the United Kingdom, and we do not see that that is supported by any prudential concerns.
Finally, we endorse the task force's recommendation to remove withholding taxes on cross-border borrowing. Again, we do not take retail deposits in Canada; that reform, we worry, would substantially limit our access to funding for the businesses that we perform in Canada, would probably dramatically increase our cost of funds and would, we worry, do that for many of our businesses.
In short, we are really excited about the change in regulatory environment that we see. We are pleased by the task force's recommendations and we hope that the committee will urge the government to move forward on the implementation of many of those recommendations.
We very much appreciate the opportunity to talk about that with you today.
Senator Callbeck: On credit cards, you are certainly very successful in Canada; what share of the market do you have here?
Mr. Cooper: At the moment it is quite a small share; we are below 2 per cent; but see a lot of opportunity. We are very early on in the process so we have been excited about what we have seen. We have been excited about the Canadian consumers' response to some of the products we have offered, but in many respects we feel like we are just beginning.
Senator Callbeck: What products have you offered that have really gone over well?
Mr. Cooper: We offer a wide variety; that is the hallmark of what we do. We find that the platinum product is appealing to consumers. It comes with greater benefits attached to the card, better travel accident insurance, and things like that. It often comes with a higher credit line, which makes it more functional for purchases which otherwise might not be possible. We have also found that a variety of cards targeted around people's passions and lifestyles lets them reflect what they care about. For example, the products that have pictures of Canadian National Parks and are dedicated to the park services division have been appealing, and fundamentally that is what makes our company different.
We want to provide an array of products that will give individuals what they need in a financial product, but will also in some way enable them to contribute to causes they care about, display passions that they are excited about, and so forth; so we found that a wide variety appeals.
Senator Callbeck: When you charge interest at the end of the month, is that on the outstanding balance?
Mr. Cooper: It is on the average balance over the course of the month, and it only applies if the previous month was not paid in full. In other words, if a customer is paying their bill in full each month there is a grace period such that as long as that continues to be the case no interest at all is incurred.
Senator Callbeck: If you owe $2,000 and you pay it all off except for five dollars, the following month are you charged on that five dollars which is outstanding, or you say the average?
Mr. Cooper: If you did not pay in full the month before that you would be charged for the average during the course of the month. You would be charged for the average time during which you held each piece of the balance.
We find, though, typically, that consumers either pay the whole thing in full, and habitually use it as a transactional vehicle as opposed to a revolving debt instrument, or pay only small payments -- minimums are typically 2 or 3 per cent of the outstanding balance -- and use it much more as a line of credit. We do not find very many people treating it that way.
Senator Callbeck: When you explained why you are successful, you mentioned that some customers would not have qualified under traditional bank and lending standards; can you give some examples of that?
Mr. Cooper: Yes, but I can give you examples more specifically in the U.S., since we are just starting to learn about that in Canada. Historically, in the United States, for example, people that had a post office box as an address or folks with a military address would have been screened out of the process; that was because issuers typically used simple judgmental criteria. For example, if you took the population of people with post office boxes as a whole, you might find that the credit risk was too high to offer a credit card to them. If instead you bring other information into the mix as well, you find that there are many post office box customers for whom there is a lot of other information that tells you that they are good. For us that means not that we go out to more risky customers, but only that we are more complete in our evaluation of risk and we try to avoid using single variables to knock people out of the credit process.
Let me give you another example. Traditionally, it is hard to get credit for the first time, because an issuer wants to see a good credit history in order to provide you with more credit. Well, that is fine once you get started, but typically in the U.S.A., and I think to some extent Canada as well, if you do not establish credit early on, say as a student or shortly thereafter, it is quite hard to access the process. However, we have found that, based on income or the job they hold at the time of application, it is possible to designate those people who are creditworthy.
Senator Callbeck: So you do a better analysis. You are not in Canada? There is no presence here?
Mr. Cooper: There is a small presence at the moment; we have some office space in Toronto and we have hired a number of Canadians who are splitting their time between Washington, D.C. and Toronto. We have not yet built an operational presence; there are a couple of reasons for that. The biggest is that we are still early in our learning process and so we are focused on the marketing side of the business and not yet ready to undertake the expense on the learning side.
I can give you an example in the United Kingdom, where we have been in the business for about three years. We spent the first two with all of those functions outsourced, and recently we purchased a building and began hiring people. It is our view that once we understand the business well, once we get past some of the market learning curve, that is the time to start having a presence operationally and to begin to focus on the back end of the business; but it can be a bit of a distraction and take us away from what we are trying to learn in the short term.
Senator Austin: I just want to establish how you raise your capital; is it depositor capital in the U.S. or wholesale capital? What is your capital base?
Mr. Christopher Curtis, Associate General Counsel, Capital One Financial Corporation: We have a diversity of fundraising sources in the United States. The largest single source, which is about 70 per cent of our operation, is securitization of our credit card receivables; of the remainder there is a mix of primarily wholesale funding sources. There are bank notes, which are medium-term securities. There are wholesale deposits, certificates of deposit. That is another program we have. There is a $1.7 billion line of credit that we have with a number of banks, and also in our thrift institution, which Mr. Cooper mentioned, we have a growing retail business, which is something we started over the past year or two.
Senator Austin: Is the whole business regulated in the United States? Who is your regulator?
Mr. Curtis: Nearly all of the business is regulated directly and everything that we do is at least indirectly regulated by the financial institution regulators. The bulk of the assets are in Capital One Bank, which is a regulated bank.
Senator Austin: So is this the office of the currency comptroller?
Mr. Curtis: It actually has three regulators, not including the Office of the Comptroller of the Currency, because it does not happen to be a national bank. It is what is called a state member bank in the United States. Its regulators are the Virginia Banking Commissioner, the Federal Reserve Board and the Federal Deposit Insurance Corporation.
We have a thrift institution that is a savings bank, which is regulated by the Office of Thrift Supervision and by the Federal Deposit Insurance Corporation. If you take those together, the vast bulk of the company is there. We also have a non-banking business of cellular telephones and also some long-distance wire-line telephones. That is not a regulated financial institution business, but because it is an affiliate of our bank and our thrift, all of the banking regulators that I mentioned have examination-enforcement authority over it in the event they think that something going on there is posing a risk to the regulated institutions.
Senator Kenny: You said that when you first entered the Canadian credit card market the rates were typically 19 to 20 per cent. When I have made inquiries of credit card issuers in Canada, their rationale for the rate was that they were experiencing very high losses in the business. Are you folks creaming the market or have you figured out a better way to identify credit risks? Or how do you folks manage to not charge the 19 to 20 per cent that so many others seem to think is appropriate?
Mr. Cooper: There are several parts to my answer. First, those rates have come down typically amongst most of the major issuers. While I do not think that there is any sign that the loss rates have come down, perhaps one could argue that the rates are justified. There certainly seems to be room in the profit margin. For example, if one were to look at the Visa and MasterCard reported figures in Canada, I think you would see a loss rate reported of about 2 per cent. That leaves quite a lot of room in a P and L that is charging 19 per cent. There is room to drop rates even without being better on the risk side.
My belief is that the customer was not getting the lowest possible rates because there was not a lot of competition. I think the same picture existed in the United Kingdom until a couple of years ago, and certainly existed in the United States through the 1980s.
That said, we also focus very much on the risk side of the business, in much the same way as I mentioned. We look at more information to make credit decisions so that we do not try to paint a picture of a person with a single variable. We try very hard to make the best assessment of credit that we can, using all the information that is available.
We believe that as a company we have become expert in the use of that information so that at the time the customer applies, we are able to take the information that he or she provides. Sometimes, on an application, we ask for things that other folks do not ask for. We are able to take the credit bureau information as well at that time and make a more integrated, more sound decision.
We also find that by offering better products we are able to attract the best customers. It is a well known tendency, which you certainly see in every lending market, that as a market matures and competition intensifies, if one continues to offer the same not very attractive products, one tends to pull the not-quite-as-creditworthy customers out of the marketplace. For the others already have what they need or are not attracted to those products. Thus, we find that we are able to find a better segment of customers by using better information at the decision-making stage to select the best customers out of those who apply and by offering attractive products that actually appeal to the best customers that are out there.
Senator Kenny: Other credit card issuers seemed to be implying to me that they are offering credit cards as a service to quite a broad range of people, and that therefore the postage-stamp rate, if you like, has to be higher.
And is your rate better because you have made a decision not to offer it to a broader range of people and because, quite legitimately, you have decided that you are not just going to go after a certain segment of the market?
Mr. Cooper: No, that is not the primary reason. Certainly there are people that we would decline for credit that someone else might approve. We think that is because we are bringing extra knowledge to the table. We believe that we offer credit to a wider spectrum of people. It is one of the things that we are proud of in the United States and in the U.K. and I think we will be here, too. We are able to find the good people who are typically being turned down.
My assessment is that the higher rate is charged not because credit is being offered to a broader array of people. That higher rate is significantly, at least, a result of the market not being competitive. You will see that those folks bring their rates down without particularly tightening people's credit criteria. You will find that we are able to offer lower rates and at the same time have a broader spectrum of people as clients. This is partly because we are bringing more knowledge and information to bear, and partly because we believe that we are sort of doing away with perhaps unreasonable spreads in the business.
Senator Kenny: When you apply for a credit card, you get a form. The fine print says that the applicant is authorizing the issuer to seek almost unlimited information about the applicant. The fine print also provides the issuer with the opportunity to share that information almost without any restriction. My question to you is: How do you use that information? Do you ever sell it? Do you use it to market other products? Tell us where the information goes that you get granted to you virtually every time someone signs up for one of your cards.
Mr. Cooper: It is an important question. As a company, we try very hard to balance the individual's need for privacy against our desire to be able to provide better products and services by knowing our customers. That is a constant tension.
The first thing I will say is that we never sell the information. That is not something we are interested in doing. We provide the products and services of other companies to our customers; so we act as the middle man. We will never sell Chris Curtis' information to someone else so that they can do what they like with it.
Senator Kenny: You would see a profile of a certain customer and you would say to, for example, L.L. Bean, "Look we think we have a profile that fits your type of customer, so we will sell some of your products through our offerings. We will send out a little brochure with the bill each month." Is that what you are telling me?
Mr. Cooper: Sometimes we will do things like that. We collect that information, again not only to choose good customers, but in time to be able to provide them products and services that they either cannot get, or can get only at a higher price, elsewhere.
For example, by having a large collection of customers and buying power, we will endeavour to be able to provide our customers with, let us say, L.L. Bean products at a better price. But we do not do that without customer permission. You mentioned fine print, and we try very hard to make sure that that process is not in fact and does not feel like fine print, because we do not want out customers to be surprised by what we are doing. We want to give them the choice. We want to be able to say to our customers, "Look, let us tell you what we are gathering information for. We are gathering it to so that we can provide you with goods and services. If you do not want us to do that, we will not do it."
We do mailings every year, asking our customers whether they want to drop out of that process, whether they do or do not want to be cross-marketed. Our goal is to be able to serve them better, certainly without intruding on their privacy.
Senator Kenny: Do the customers have to write and tell you that they do not want it, or is the cross-selling cut off automatically?
Mr. Cooper: In the United States, we determine on the initial applications whether or not a customer wants it. We then give them several chances a year to say that they do not. We do outbound telemarketing to them as well on that same subject. You must also understand, though, that that is a subject of ongoing consideration in Canada, and at the moment we are not doing any cross-marketing to our customers here. We do not fully understand all of the issues as they relate to the Canadian consumer.
Senator Kenny: This is an open-ended question. What other uses do you make of the information that you collect when someone applies for a credit card?
Mr. Cooper: We use that information, first of all, to make a credit decision; do we or do we not approve that customer? We use it again when determining what credit line, if any, we are willing to provide to that customer. We use it for an assessment of credit risk.
Some of that information, as I mentioned, can potentially be used for cross-selling purposes. Typically, it is not used for much else, because at that point the applicant becomes a customer and we start accumulating more detailed, individual-specific information. For example, we know whether he or she is paying bills. We use that kind of performance information to make continued credit decisions. Do we collect aggressively or not? Do we enlarge the customer's line or not? Typically, that application data's significance declines as we get more specific information from a customer.
Senator Kenny: What would you think of a piece of legislation or a regulation that required you to tell customers what information you were providing credit companies any time you provided them with information about the customer?
Mr. Cooper: I am sorry, but when you say credit companies, are you talking about credit bureaus, credit recording agencies?
Senator Kenny: Yes.
Mr. Cooper: I think it would difficult to tell them every time. We do not have any desire to keep that from a customer, but, for example, each month we report to the credit reporting agencies on whether a customer is paying on time or not and what their current outstanding balance is. I think those things are important to know so that other lenders or ourselves can make smart lending decisions. That information allows those worthy of credit to obtain it, while denying access to credit to those who are not. I think it is very important that customers know that.
In fact, I think it is essential that they know that. I think it is an incentive for people to understand the need to handle credit responsibly. However, it would not necessarily be vital information to the customer to be notified every month of what we are telling a credit reporting agency.
It is absolutely crucial that they understand what the credit reporting agencies are, what kind of information they hold. Did they understand they have to get access to that information? We take our obligations very seriously, to make sure that that information is accurate, and we go to incredibly great lengths to make sure that is so. We are supportive of all those things, and yet I think that we would not support informing the customer of their credit status every month. You can tell them that you have sent their current status, though.
Senator Kenny: Would I be misrepresenting your position, sir, if I suggested that you sounded like you were in favour of sending it out the first time. Then, if there was a change in their position, or a change in how you were reporting on them, you would send it out then, and perhaps even send it out once a year thereafter?
Mr. Cooper: I would be more inclined to periodically let them know what the information is that goes out, rather than say, "Okay, now my customer has become delinquent. I will now tell him that I told the credit bureau that he is delinquent." I would want the customer to bear some of the responsibility of understanding what credit reporting agencies are, and what responsibilities they have towards credit.
I do not find that to be particularly onerous. I do not have a strong negative reaction. I am used to that process because my goal is for the customer to understand very much the need to handle credit responsibly, to understand what the reporting agencies are and what information they hold. I support making sure that that is the case while at the same time not creating an overly large expense or an overly large process. There are lots of possible ways to do it.
Mr. Curtis: It would not be difficult to give the kind of regular disclosure that you are suggesting if they went out every month, but they would acquire the nature of boilerplate and would not be attended to by the customer in any event.
In the United States there is no such mandate. The credit card industry in the United States has developed well enough that everyone knows that their transaction history is passed on to the credit bureau, so it is not an issue as to whether they are being adequately informed of that. The issues in the United States rather turn around the nature of the access that the consumers have and the information that is at the credit bureau, and hence being able to check whether it is accurate and to correct errors.
There has been a good deal of legislation on that subject. It was amended extensively a couple of years ago. I would recommend that as a model except that the statute has grown so complicated that it may be hard to understand.
Senator Kenny: Is it absent in Canada?
Mr. Curtis: There is not comparable legislation in Canada. There are provincial requirements, province by province, but not at the level of detail that there is in the United States.
Mr. Cooper: While the legislation has been aggressive in the U.S. about urging customer access, credit bureaus are hard to read. If I were to show you a United States or Canadian Credit Bureau check on yourself or somebody else, you might find that hard to interpret.
Many issuers in the United States have taken to selling, often at a significant fee, a translated, plain English version of your credit bureau check. We do not view that as appropriate. We are committed to making sure customers know what information is being reported on them. We are one of the few issuers that offers customers the opportunity at no fee to make sure that in fact the information is accurate. We frequently remind customers that it is available. We do not think that it makes any sense to tell them that they have access and then to send them something that they cannot figure out.
Senator Kolber: What sort of a presence do you have in Canada?
Mr. Cooper: We do not have a substantial presence at the moment.
Senator Kolber: How much money have you invested in Canada, or put into the Canadian economy?
Mr. Cooper: All of the providers that we use for printing material and so forth are Canadian. That is important to us. I wish I had a number. It is certainly in the millions of dollars at this point.
Senator Kolber: How many people do you employ in Canada?
Mr. Cooper: We employ one right now and have another one coming.
Senator Kolber: Do you think that the Canadian people should be at all concerned that because of the huge capacity that companies like yourselves have in the United States, adding Canada to your roster is a fairly simple addition to your mainframe, I assume? There are people who have appeared before us who believe that the credit card industry in Canada is in danger of being squeezed out of business. Is that something that should concern us?
Mr. Cooper: It is not. First, as we have entered other countries and as we have caused competition to increase, for example in the U.K., the existing issuers have in fact accelerated their rate of growth because they have been forced to provide more attractive products.
Senator Kolber: How do they accelerate their rate of growth when people like yourself are coming in and are taking huge amounts of business? Where does the growth come from? Are more people borrowing?
Mr. Cooper: It comes primarily from giving access to people where access was not available before. It comes from offering products that are attractive enough that people are willing to take them when they were not willing to sign up for the less attractive products that existed before.
Senator Kolber: Are you saying that Canadian credit card issuers have been asleep at the switch?
Mr. Cooper: They have not been as competitive as they could have been. The history in several marketplaces indicates that that is the case. Products do not get diversified and competition does not increase oftentimes until there is a bit of a shock to the system.
Senator Kolber: Are you comfortable with saying that you have added something to Canada?
Mr. Cooper: I am, in fact. We have added several things. We have already increased competition in the market. The impact is obvious in the proliferation of products.
Senator Kolber: You do not think the Canadian credit card industry is in any difficulty?
Mr. Cooper: I am not sure that I would say they were not in any difficulty. They are not in any difficulty that is not entirely fixable through looking out for the customer, through providing products that people want to buy at a price that they are willing to pay.
Senator Hervieux-Payette: Do you sell goods to direct marketing using your credit card invoice every month?
Mr. Cooper: We do, and I would like to spend a minute on this because at the moment we have one employee in Canada, and that makes it sound like we have no intention of having employees in Canada. That is far from the case.
We are primarily a credit card marketing company. When we look at a marketplace and think that it might be an attractive one for our business, the first thing we want to do is try to find out whether it is. We spend a lot of time focusing on the marketing side of the business, trying to find out what products people want to buy, and through what channels. Does direct mail work, or maybe television or newspaper advertising?
In the short term, operations capacity is expensive and time-consuming to set up. It is different in every country. It takes a lot of time, effort and dedication. That does not mean that we do not want to build it. It means that in the short term, we are trying to make sure that there really is a business for us.
When we started looking in Canada, all of the existing issuers were very happy to tell us that our ideas, approach and way of doing business would not work. We thought that it would, but there is only one way to find out, and that is to try. During that time of trying, it is dangerous to build operational capacity and hire hundreds of people whose continued employment depends on our assertion that our way of doing business works.
We looked at our experience in the United Kingdom where we spent the first two years not building operational capacity ourselves, outsourcing it in fact. We did not want to make a mistake and wake up one day with a big building full of employees that belonged to Capital One and no business, no way to keep them employed, no way to maintain a vibrant business for ourselves.
In Canada, we did not have the added source because we had the capability of leveraging our U.S. operations during that learning period. However, that is not the same as saying that we intend over the long term to do our operations in the United States. We do not think that makes sense. We cannot gain access to Quebec, for example. There are not very many francophones in Richmond, Virginia. Ultimately, if we pursue business here, if the regulatory regime makes it easy and possible for us to do that, it is inevitable that we will have a large-scale operational presence in Canada.
Senator Hervieux-Payette: When you send your invoice every month, do you include a flyer offering me a camera, vacuum cleaner, any kind of nylons, or steel battery?
Mr. Cooper: We are not doing any of that right now. We are not doing any cross-selling to our Canadian customers. We are interested in doing that. Car batteries and nylons are not the kinds of things we sell. Many issuers in the United States sell space inside their credit card statements to any provider who will give them one penny per piece to have that space. That is not the business we are in.
We are in the business of serving our customers, so we want to provide products of value that are unique and that are not otherwise accessible to customers, or that are not accessible at the same price because they do not have the bulk buying power that we do. First of all, we do not sell the space, so we do not let people put what they want in there. We try to provide products that are tied to the needs of the customer.
Senator Callbeck: You say that you have 2 per cent of the Canadian market. How do you get your Canadian customers? You mentioned newspaper, TV, phone?
Mr. Cooper: At the moment we are not doing any telemarketing. At some point, perhaps we will. Right now we get our customers through a combination of direct mailings and through media, newspapers primarily, magazine inserts and so forth.
Senator Kirby: You stressed that you brought into the country a significant number of new products. You also stressed that your credit card has a lower interest rate on outstanding balances than other people. Can you give me a couple of illustrations of what constitutes a new credit card product? It is hard for me to envision anything other than that a credit card is a credit card.
Mr. Cooper: I can give you some examples both in Canada and the U.S. I mentioned examples of gold cards, platinum cards. They still have the same functionality. You buy things with them. You pay that off immediately or you borrow. Significantly, they have that same basic functionality. They all do that.
Beyond that though, different things begin to appeal to different people. The prestige of a platinum card may appeal to one person. It is not just prestige. It often comes with significantly enhanced benefits, which may range from better customer service to discounts on purchases for travel and an assortment of other things.
Mileage cards are quite prevalent in Canada. Accumulating travel points may appeal to people. We did not bring that to this market.
Senator Kirby: Affinity cards of any kind may appeal.
Mr. Cooper: Again, there are Canadian parks cards, ethnic heritage cards. If you care about your ethnic background, you not only advertise it with a bumper sticker or a T-shirt, but you perhaps give to relevant charities and ethnic groups.
Other products and services are tied to the credit card. The credit card is the vehicle that carries those things, in many cases.
Senator Kirby: On page 3 of your brief, you discuss your interest in foreign bank branching, making the argument that it would increase your flexibility in the country. Are you talking about foreign retail branches or foreign wholesale branches?
Mr. Curtis: We are not talking about retail branches in the sense that the Canadian banks have branches across Canada. We are speaking of the branch as a legal vehicle, a way to establish business in Canada.
Senator Kirby: This is what we would call a wholesale branch. Explain to me, given the nature of your business, why you care whether you have a branch or not? You claim that it adds flexibility; what flexibility does it add?
Mr. Curtis: There are two important aspects of it that could be valuable to us. One is that a branch would give us the ability to take wholesale deposits and add to our funding base, the funding options that we had. The second is that it would allow us to be a principle member of the Visa or MasterCard associations in Canada, and hence not be dependent on a local institution for sponsorship, as we now are.
Senator Kirby: It would get you a seat at the table, as it were. Are you a member of Visa or MasterCard in the U.S.?
Mr. Curtis: We are a member of both in the U.S.
Senator Kirby: Your U.S. membership does not entitle you to the same privileges in other countries? You must join in each country?
Mr. Curtis: We must join country by country or region by region, depending on the by-laws of the association. Canada has its own set of by-laws and membership criteria that you must make.
Senator Kirby: Would the foreign branch proposal that this committee recommended a couple years ago and which is coming into legislation in fact solve that problem?
Mr. Curtis: Yes, it would.
Senator Kirby: Do we conclude from that, that if that law passes, you will create a form branch?
Mr. Curtis: We would strongly consider it. I hesitate to say absolutely yes because the proposals that we have seen so far are at a fairly high level, and there is a good deal of detail that would need to be added about taxation and eligible investments and that sort of thing.
Senator Kirby: You talk about having submitted your comments to the Department of Finance. We would love to see them if you have them with you.
Mr. Curtis: I have a handful of copies. In those comments that are a little less significant to us than they were at the time, one of the aspects of the branching proposal was a minimum consolidated asset base of $25 billion Canadian. The MacKay Task Force recommends that that not be held as a rule, which we think makes sense, but it is not so important to us anymore because we are at that level now.
Senator Kirby: You talk in a subsequent paragraph on that page about not liking the Department of Finance's current proposal, which is that a foreign bank must choose between a regulated or an unregulated presence in Canada. If you go the wholesale branch route, you are into the unregulated case. Why would you want to do both? Given the nature of your business, why is that a constraint?
Mr. Curtis: Just to clarify my understanding of what the Department of Finance's proposal was, they would regard a wholesale branch, meaning a branch in Canada of Capital One Bank or Capital One FSB, which is our savings bank, as a regulated institution. That is what I took from the Department of Finance's proposal. If that is not the case, it greatly simplifies the situation for us.
Senator Kirby: I think you are correct. Suppose it is a regulated institution, why does that cause a problem? You are still a wholesale branch, so you are out from a whole pile of other regulations.
Mr. Curtis: The problem for us derives from the nature of our operations and legal status in the United States. Our bank in the United States is what is known in U.S. law as a limited purpose credit card bank, which means that credit cards are its only business. This leads to a structure in the U.K., for example, where Capital One Bank has a branch which issues credit cards. But it cannot do other types of lending like instalment lending, which we also do in the U.K. and for which we must use a different entity. We use a non-bank subsidiary, and we would like to be able to do that if we had to in Canada, as well.
Now, that is actually not the ideal structure for us. The ideal structure would be to establish in Canada a branch of our other financial institutions in the United States, Capital One FSB, which is a savings bank. Capital One FSB can both issue credit cards and make instalment loans, and a branch of that institution in Canada would solve that particular problem.
This gets to the point that I made a moment ago, that before the branching regime is actually introduced and we can see what all the details and ramifications are, it is hard to know how we would fit into it.
Senator Kirby: Assuming that it was a wholesale branch, you are not interested in getting into taking retail deposits. You are quite prepared to stick to the wholesale level, is that right?
Mr. Curtis: It is not a significant interest of ours in Canada. We are exploring it in the United States to a significant degree. We have not focused on it in Canada because all of the proposals to date for branching have made it clear that it would not be possible to take retail deposits.
Senator Kirby: You have no interest in doing a "sub," which would allow you to take retail deposits.
Mr. Curtis: Our interest in that line is not great enough to warrant a schedule.
Senator Kirby: When you get the details of the branching, please let us know. I understand why you said what you said. You might let us know if you are still having problems with it because it will depend on the exact details.
Mr. Curtis: I would be happy to do that.
Senator Kenny: I did not understand the differentiation between commercial and savings banks. In the context of retail branches, I had assumed that when you said "savings bank" you were talking about a retail branch. As I listened to the conversation, it appears that perhaps you are not. What is the difference between a commercial bank and a savings bank for the purposes of this letter?
Mr. Curtis: I will try to condense about 100 or 200 years of banking history in the United States. Traditionally in the United States, a commercial bank takes demand deposits and makes commercial loans. The savings banks or savings and loans in the past have gone by other names as well, traditionally. Their focus has been on residential mortgage lending. I say "traditionally" because, as time has gone on, especially in the past 20 or 30 years, the functions of those two types of institutions have substantially merged. So we have Capital One Bank, which has a charter which is indistinguishable in the state of Virginia from a commercial bank charter, though in fact this bank neither takes demand deposits nor makes commercial loans. In fact, because it is a limited-purpose credit card bank, it cannot make commercial loans. That is one layer of complication.
Another is that although a thrift bank is a savings bank in fact, it does not make residential home mortgages, although it does have a substantial portfolio of mortgage-backed securities. That is one way of saying that although there is a traditional distinction between the types of institutions, it is getting less and less significant. From a regulatory perspective, the regulatory regime applicable to those institutions is almost the same. They are both subject to Basel capital standards, for example. They are subject to similar restrictions on transactions with affiliates and other types of safety and soundness regulations.
The principle distinction between the regulatory regimes is that there continues to be a focus for savings banks on, not just residential mortgages and lending anymore, but on consumer lending generally. This would include residential mortgages, although it also includes credit cards and instalment lending, which is what our thrift primarily does.
Senator Kenny: For clarity, should we just read wholesale bank, for our purposes?
Mr. Curtis: I think the answer is yes for the purposes of thinking about a branch in Canada. In both cases, we would assume that a branch of each institution would not take retail deposits in Canada, although it would certainly do a retail business on the asset side, meaning credit cards and instalment loans.
Senator Kroft: I want to understand a little better how your business works. I want to know more about the elements of competitiveness because we are conscious of the fact that Canadian financial institutions seem concerned about the entry of foreign credit card operations and the impact that may have on the market. You have described yourself as a credit-card marketing company. Do you in effect have a franchise? Is it a franchise that you lease or do you have an equity position that gives you the right to use these various named cards? How do you acquire the right to issue the Visa or MasterCard?
Mr. Curtis: We acquire the right by being members of the Visa and MasterCard associations.
Senator Kroft: And that costs you money?
Mr. Curtis: There is a small application-processing fee. Their main concern is not that we pay them, but that we be the right kind of member.
Senator Kroft: I am trying to understand what advantages, cost or otherwise, one credit card marketing company may have over another. And let us leave scale aside for the moment.
Mr. Cooper: All these companies are members in Visa or MasterCard in whatever jurisdiction they are. As a result, they get the right to market Visa and MasterCard for "ended" products and to use the payment infrastructure that allows the merchant who accepts the card that routes the transaction such that it gets paid.
Senator Kroft: Do some have to pay a greater cost?
Mr. Cooper: The cost is the same. The major cost, in addition to a nominal application fee, is a percentage of the charges, and that is actually paid by the merchant.
Senator Kroft: That is not a competitive element?
Mr. Cooper: No. In fact on most of the concrete competitive elements, we would be at a disadvantage. We are a smaller company than most of the players, so we do not have the same amount of money to put into marketing as they do. We do not have a branch infrastructure, so we do not have customers who can walk in and buy a card or pick up an application at any one of either hundreds or thousands of branches. We do not have a customer base of people that hold other products with us.
We do have a set of skills that we have developed over the course of the last 10 years. We are very good at marketing. We are very good at using direct marketing. We are good at product differentiation.
Senator Kroft: You have described to us your various sources of capital. I do not know what a Canadian bank as an issuer of a card would have as a cost of capital compared to your cost of capital, but that would be another competitive element. What about at the merchant end? Is that a free market in terms of how you set that apart?
Mr. Cooper: First of all, our funding cost is actually typically higher because we do not have a large retail deposit base. We suffer a disadvantage in both the U.S. and in Canada, which is only made up through marketing sophistication.
On the merchant end, there are other companies in the business of merchant acquiring. We are not in that business. Banks, typically, but not always, provide the merchant with a terminal and charge a price for that merchant's right to be in business. That is not a competitive advantage across the different issuers because they are all then obligated to accept every Visa and MasterCard interchangeably. That is part of the system that is created and one of the requirements of Visa and MasterCard. It is essentially available to any member of the Visa and MasterCard institutions at the same price.
Senator Kroft: In your point of view, as compared to what we have heard from the Canadian bank's point of view, what are the benefits of scale? At what point does the competitive advantage really begin to shift through scale? Choose whatever reference point you would like.
Mr. Cooper: I do not see scale as a source of major competitive advantage. We are at best medium-sized in the U.S., in scale of infrastructure, in scale of employees. We do not bring outrageous scale to the table.
It is true that if you or I went and started up our own small credit card company, we would incur substantial costs, investment in technology and so forth.
Senator Kroft: Assume that you are up and running.
Mr. Cooper: If you get to any substantial size, it is not so much a scale of size but an amount of time and investment in learning. It takes time to learn how to provide different products. It takes time to learn how to use new marketing channels, and we have a head-start on those things.
Senator Kroft: As Canadians, we have the idea that there are monster credit card companies in the U.S. or elsewhere that will come into our market and put our institutions at an enormous disadvantage. You are putting a bit of a question mark over that.
Mr. Cooper: I would put a big question mark. We look at banks in the U.S. Canada and the U.K. as monster institutions. If they approached the business in our way, if they were willing to put the time and energy in and to bring the kind of people they need in, they have much greater depth of resource than we do to do so. When competitors like AT&T and Citibank in the United States or Barclay Card or the Bank of Montreal start to do the things that we do, they become the monsters in size and capability and capacity, and not us. Our competitive advantage is that we approach the business in a different way. We try to provide the consumers with better products and services, but we do not bring a cost or scale advantage.
Senator Kroft: How much does your ability to work smarter derive from your singular market fixation, your product fixation?
Mr. Cooper: Some of it arises from the fact that we chose a place to focus. We actually chose that place because of the skills. In other words, we believed that it was possible to differentiate products and use information to determine what customers approve and not approve. So we found the credit card business. Most of the people in our company did not come out of that background.
In the United States, we do some business in telecommunications for the same reason. We focus on a way of doing business as opposed to focusing on a product line. As a company, we believe that the skills that we have are broadly applicable. In the United States, we are spending a lot of time and energy looking for other businesses to pursue.
Senator Kirby: What you are saying is that by essentially becoming specialists, you have found the ultimate, most efficient way to do something. Are you saying that a multi-product, diversified company does not focus that degree of expertise on any one thing because it is more broadly based?
Mr. Cooper: No, we believe that we will become a diversified multi-product company. That is our aspiration. We do focus on one thing, which is providing good and differentiated products and services to customers, typically through arms-length distribution channels. So if that is what we talk about by focusing on one thing, I absolutely agree that we have become good at that.
However, banks or other financial institutions certainly have the capability to bring that same focus to bear. It requires building technology or hiring different people. In the United States, there has been dramatic progress in the past few years in banks starting to build those kinds of technologies and approaches. We are more likely to lead that process because we do not have anything else. We do not have a branch network to rely on, so we cannot fall asleep at the switch. We do not have any laurels to rest on. There is dramatic movement in that direction even by a multi-product organization, even by much larger institutions.
Senator Kirby: Would it not be true, given the R&D you put into developing new products and services, that it is a scale of significant help in this sense? R&D is a fixed cost that must be recovered from the products you sell, to the extent that you are making a much larger number of sales than other people. The amount of R&D you must allocate to individuals is thereby smaller, and does it allow you to get a benefit of scale in that sense? The fixed costs are distributed amongst a much larger number and do they thereby allow you to charge much lower prices?
Mr. Cooper: That is true, which is why I used the silly example of one of us starting up a bank. To reach that kind of scale does not require tens of millions of customers, it requires only hundreds of thousands. In the U.K., for example, we are much smaller than our competitors and we do not leverage our U.S. infrastructure in any way. We still have that advantage. You cannot be tiny, but you do not have to be huge.
Senator Angus: You have told us what you are about and you have elaborated on that with the questions. You have not told us who you are. Do you have a diagram with you of your corporate structure or a family tree of your different businesses like you have described, or would it be hard to get one?
Mr. Curtis: We do not have one with us. We could provide it. I could give a brief oral rendition, however you want to approach it.
Senator Angus: Could you send us a diagram later on? It would be helpful. As you say in your document, you folks are from Capital One Financial Corporation. I have been assuming for my comprehension of your testimony that that corporate entity is an operating business, or is it a holding company?
Mr. Curtis: It is a non-operating holding company.
Senator Angus: It in turn has various entities that it owns that do separate business like the ones you have described, the Capital One FSB lending bank, is that correct?
Mr. Curtis: Yes.
Senator Angus: There is just the one holding company?
Mr. Curtis: Yes.
Senator Angus: With respect to the holding company, who owns it?
Mr. Curtis: It is a widely held company traded on the New York Stock Exchange.
Senator Angus: Is there a controlling or dominant shareholder?
Mr. Curtis: No.
Senator Angus: Is it owned by the public?
Mr. Curtis: Yes.
Senator Angus: Do you know how many shareholders you have?
Mr. Curtis: No, but we have a large number.
Senator Angus: No one owns 10 per cent, say?
Mr. Curtis: I think everyone is below 10 per cent, which, by the way, is not a magic threshold. There is a magic threshold at 15 per cent. It is either for SEC or for the banking regulatory consequences under the so-called Change in the Bank Control Act. There was an instance in which one of our institutional investors was in danger of crossing that line, and when they found out about it, they immediately scaled back. So there are some institutional investors. They are basically mutual fund groups who, when you take the funds in the group together and add them all up, they can be fairly substantial and on the order of 10 per cent. Those are all passive investors, however. None of them seeks to influence or control the management of the company.
Senator Angus: If I understand correctly, there would be a board of directors of the holding company, and that is the head company that you folks are employed by. There would be the usual statutory officers and so forth. How many of the directors are outside directors, non-management?
Mr. Curtis: Perhaps three or four out of six. I do not personally attend the board meetings or manage the board functions, but I believe that is the order of magnitude.
Mr. Cooper: I think it is five out of eight. The majority of them are outside. I am probably embarrassingly forgetting someone.
Senator Angus: We are in the big time up here in Canada in the corporate governance issues. We focus on the independence of the board from management. On the board, are there groups who have the right to elect directors? How do you select your board or are there shareholding groups that nominate one or the other of the board's outside directors?
Mr. Curtis: Our board membership has not changed for the past couple of years, so I have not had to become familiar with the intricacies of how you do that. Our board is governed by American corporate law, which in the case of Capital One Financial Corporation, like other corporations, is Delaware law. So the directors are up for a vote at the annual shareholders' meetings. As with most companies, it is a staggered system where they serve for a number of years. The whole slate is not up for re-election every time.
There is also the ability of the board to fill vacancies between meetings. In fact, the board's composition has not changed recently. As a practical matter, directors are found through a search. A search committee is formed to comb the corporate landscape, or at least the landscape in the vicinity of where we are headquartered, for people who are deemed fit to be directors. The general standard that the company applies is that we want to propose directors to our shareholders, who are themselves the leaders of companies that are both substantial and innovative. When we find those directors, we propose them to the shareholders and it is up to the shareholders to vote.
Senator Angus: The slate gets voted in by the shareholders in the usual way. No group then -- for example, Fidelity -- gets to name a director.
Mr. Curtis: No, there is nothing like that. It is an aspect of our being a widely held company.
Senator Angus: In terms of the holding company, how many businesses come down below the line?
Mr. Curtis: I do not know off the top of my head how many boxes are on our organization chart. Organization charts tend to be driven as much by legal and tax considerations as they are actually by business lines. As a result of encountering more and more legal and tax considerations in the three years that I have been at Capital One, the number of boxes has increased by several multiples. The principal boxes are Capital One Bank, which has our credit card business and which has a branch in the U.K. in London also doing credit card business, and Capital One FSB, which is a savings bank. Its principle purpose is to do lines of business that the bank, because of its status as a limited-purpose credit card bank cannot do, and that includes instalment lending as well as some retail deposit taking now.
The other biggest box -- leaving aside how you define "bigness" -- would be Capital One Services Inc. which is a servicing affiliate that actually employs most of the people at Capital One and owns some of the facilities as well. It then makes those resources available to the regulated entities through service contracts.
Another box that I should mention, in light of our discussion this afternoon, is one called America One Communications Inc., which is where our telecommunications business is carried on.
Senator Angus: You have presaged my other question when you mentioned the regulated entities. The holding company itself is not regulated, is that correct?
Mr. Curtis: It is a question of defining what constitutes regulated and what does not. It is not regulated in the sense that it is subject to the whole panoply of safety and soundness regulation, capital requirements, et cetera, that are applicable to Capital One and Capital One FSB. It is subject to regulatory control because it owns those institutions. Hence, from the point of view of the offices of thrift supervision, it is a savings and loan holdings company. From the perspective of the Virginia banking commissioner, it is a financial institutions holding company. From the perspective of both of those as well as the Federal Deposit Insurance Corporation and the Federal Reserve Board, it is an affiliate of insured depository institutions, and is then subject to examination on enforcement authority in that status.
Senator Angus: We were exposed a little bit to this environment that you are in when we were down in Washington and New York doing a comparison study of the regulatory regimes. In our travels, we learned that there was some controversy between the regulatory agencies as to whether the holding company model you have just described or a parent subsidiary model, which we are more familiar with in Canada, is safer and sounder and more appropriate. I take it you have chosen the holding company one for a particular reason. We are just seeking some guidance here as to what is the best structure.
Mr. Curtis: That is a major issue in Canada right now. I have my personal views on that subject, but I am afraid that Capital One Financial Corporation is not itself an example of either type of model that those regulators are talking about.
This is because of the limited nature of business that our insured institutions carry on. Although the holding company has the various statuses that I just described, one thing that you did not hear me say is that it is a bank holding company for the purposes of the U.S. Bank Holding Company Act, administered by the Federal Reserve Board. You would have heard about this when you visited Washington.
That dispute goes on between the Federal Reserve Board, which administers the Bank Holding Company Act, and the OCC, which administers the National Bank Act, neither of which is a statute to which we are subject.
Senator Angus: Your competitor or the other large credit card company -- you mention MBNA in your paper -- they are here. I have had personally just this week 11 letters in direct bulk mail. I have received them under David Angus, Willy Angus, Q.C. Angus. I got them big time and I keep wondering who they are.
Mr. Curtis: Are these from us?
Senator Angus: It is the same letter and it is in French.
The Deputy Chairman: Check all your magazine subscriptions.
Senator Angus: Do you know who they are?
Mr. Curtis: We have heard of them.
Mr. Cooper: Do we know who MBNA is?
Senator Angus: Yes. You have said that you are a widely held, publicly traded corporation on the New York Stock Exchange. Is that the same thing for them?
Mr. Curtis: As far as I know, yes it is.
Senator Angus: They are not a held, regulated entity of some other well-known organization?
Mr. Curtis: No. MBNA is unlike our other competitor, First U.S.A. which is owned by Bank One now. MBNA is not owned by anyone else. MBNA, no doubt, has its own organization chart, which is at least as complicated as ours because it is a much bigger company and has been around longer. One other difference between MBNA and us is that their holding company is, unlike ours, a bank holding company under the U.S. Bank Company Holding Act.
Senator Angus: Can you give us any hints as to where these MBNA letters come from?
Mr. Cooper: They were once a piece of Maryland National Bank and spun off as a separate entity at some point. I would hesitate to guess how many years ago, six or eight years ago.
Mr. Curtis: It was in 1990, I believe.
Mr. Cooper: I believe the letters come from that Maryland Bank.
Senator Angus: Do they come from the state of Maryland?
Mr. Curtis: Originally they came from Maryland, although I do not think they are there anymore.
Mr. Cooper: They are headquartered in Wilmington, Delaware. I believe that is where the letters come from.
The Deputy Chairman: Thank you gentlemen. Next witness, please proceed.
Senator Michael Kirby (Chairman) in the Chair.
[Translation]
Mr. Robert Ballard, President of the Insurance Brokers Association of Canada: Mister Chairman, we would like to deal with an issue raised by the Insurance Brokers Association of Canada and the political approach recommended in the Mackay task force report.
Like the Association of Canada, we believe that the banks are in unfair competition with damage insurance brokers, mainly because of their privileged status that forces us to deal with them for most of our financial and credit operations.
What are my chances, as a small business operator, of getting the help I need to support my business or expand it when the institution I am counting on is trying to take away my customers? Can you imagine what the future holds for independent brokers whose survival depends on their direct competitors?
Deposit institutions resort to intimidation and use their dominant position to put us on the street. They will be in a still better position to do that if they get still more special privileges. That represents a serious threat to our ability to compete with them on equal terms.
There is no doubt that the banks can compete with independent brokers without it necessarily being in the public interest. Someone told me recently that an independent broker was refused credit to develop his commercial operations because his bank was getting ready to take away his customers. The bank said that its competition would probably have a negative impact on the broker's revenues. Now that is a lovely example of competitive equality, is it not?
Despite all that, the task force clearly favors the banking sector but does not explain how that would benefit consumers and financial and economic services as a whole. Ultimately, we would like for the banking sector to be subject to the same competitive forces as damage insurance brokerage companies. That is the point federal policy should be concentrating on now.
We urge the members of your committee and the federal government to stop and think and to examine this important point before adopting the measures in the MacKay report. There is no hurry. In fact, our biggest competitors on the world scene, the American banks, have told us that Canada is light years ahead of the rest of the world. Do not rush your decisions. Once a decision is made, there is no way of going back; that is the danger. We know that most Canadians are not aware of the problems raised by the Mackay report.
Moreover, the report recommends major changes, not only for banks but for Canadian businesses as a whole. We have to be aware of this. In this regard, we ask you to make the decisions that have to be made.
Senator Hervieux-Payette: You talk about unfair competition by banks if they enter this market by selling through their branches. This competitor would have all the information about your business and vice versa. I understand that.
The dilemma that comes up is that of insurance companies; you do not consider them as your competitors when they sell directly to consumers. What is the difference between a bank selling an insurance product and an insurance company that, when all is said and done, does not go through a broker's office?
Mr. Ballard: We consider that insurers who do business directly with the public are our competitors and that they compete on an equal footing. The Insurance Brokers Association of Canada and the Regroupement are not against the fact that banks sell insurance. Banks have been able to sell insurance through subsidiaries since 1992.
We would like for that to continue, that banks obtain or buy insurance companies and have their subsidiaries. We do not want customers who take out a mortgage or borrow from a bank to have to buy insurance when they take out their loan.
When you ask for a mortgage, you are not in a position to negotiate. You are in a position of weakness. It is easy for the banks to insist that you take out insurance with them.
Senator Hervieux-Payette: Is Quebec ahead of the rest of the country or is Quebec going to be left behind with Caisses populaires that sell all kinds of products?
Mr. Louis Proulx, Insurance Brokers Association of Canada: One thing is certain. If you are referring to Bill 188 that has just been adopted in Quebec by studying the amendments to the old Bill 134 and by trying to gauge the intentions of the present government, it is a decision that was not taken in the interest of the consumer. In my opinion, the decision was taken to promote a political ideology, to give a Quebec deposit institution advantages over other organizations to make it still more solid.
So, they passed a law that was made to measure for a specific deposit institution. They granted it all sorts of advantages that the federal government, in its wisdom, did not give the banks. They gave it advantages that, over the short and medium terms, will greatly reduce the number of small companies specializing in providing insurance services in Quebec.
This process was started, in 1987, in the grey zones for that deposit institution. Bill 188 made a clean sweep and they said: We will forget that, now you are allowed to do it. Moreover, we are going to give you the legal right to do it and we are going to give you other advantages too. That is what is happening now. It is ironic that Robert Ballard arrived here from the brokerage companies conference that is taking place right now in Quebec City. The Liberal Party of Quebec recognized the injustice that was created. In his electoral platform, Mr. Charest promised insurance brokers and the insurance industry that he would correct those injustices.
Insurance brokers -- including our competitors, the Bélairs, the Wawanesas, the Allstates of this world -- want fair and equitable rules of the game for everybody. We think that selling insurance in a bank branch is not fair and equitable. They use information from their bank files. They can easily influence people and promote extra products when they make loans. Those things are uncomfortable for the consumer.
I would go even further. Before the adoption of Bill 188, a common front was created and consumer associations in Quebec were against Bill 188 in its present form. Moreover, the Canadian Federation of Independent Business was against it. Those are not insurance brokers. That is Mr. and Mrs. Everybody. The government of Quebec has always said that its policies should meet the needs of consumers. Why is going against these associations?
We are talking about a regulation that is not fine tuned. Did the government of Quebec make the right decision for the interest of consumers? As brokers, I am an insurance broker in Laval, we think they acted out of ideology. That is a totally different debate.
Senator Hervieux-Payette: Your colleagues in the Maritimes told us about a conflict of interest when settling claims. It is not necessarily at the time of sale that the conflict exists. Rather, it is when a consumer's claim is being settled. When you buy a car financed by the bank, if there is an accident, it has to settle the claim. Your colleagues told us that the consumer has little chance of winning because the person who is defending his cause is the same person who was party to all stages of the transaction.
How is it that this argument did not hold up in Quebec since, in any case, we are the only ones to come out ahead? In a way, that is the question that arises in the only province in Canada where they have that situation. In our report, we go a bit further. We say that we would even like for the Caisses populaires to become banks. That means they would begin the transaction with the rights acquired in the field of automobiles, in the field of insurance, if they acquire the status of banks. They will ask us, as legislators, to grant them the rights they acquired before.
This equation is difficult: If we say no to those who are governed by the Bank Act, and to those who will be subject to the new rules, the former will say to us: Listen, we have to keep our acquired rights because we have a tradition to back us up. When a business is subject to another jurisdiction, when it has enjoyed certain advantages, it keeps those privileges. That means we would have two kinds of institutions in Quebec.
We are facing up to the dilemma. You prefer the MacKay report recommendations of having conglomerates with independent structures and mechanisms for delivering independent services.
Mr. Ballard: As Mr. Proulx mentioned, the Liberal Party has promised to amend Bill 188.
Senator Angus: That is because of the arrival of the good Conservatives in Quebec.
Mr. Ballard: The person who presented it this morning is a Conservative. He told me: I am red in the head when I get up, but my body is still blue.
Mr. Proulx: He is a good federalist, we can all agree on that.
Mr. Ballard: Before the caisses get the right to sell insurance in their branches, the government should pass a new Bill 167 in which their constitutions would be amended. If the bill is passed, the Regroupement des cabinets de courtage d'assurances will probably question the constitutionality of the Caisses populaires precisely because it does not want a precedent, a grand-father clause and an obligation to keep the insurance.
Senator Hervieux-Payette: If Bill 188 does not apply tomorrow morning in its entirety, you will not have a brokerage firm or a broker that will sell insurance in the caisses populaires. That is not possible at this moment. There is another step to be taken.
Mr. Ballard: Only 60 of the 583 sections of bill 188 have been accepted. Moreover, if we talk about Bill 188, I think that in the annals of Canadian politics, no bill has ever contained 583 sections, more than 300 amendments and 250 sections that have not been discussed. Suddenly, we are gagged and the bill is passed. So, 250 sections were not even discussed. It will be at least two years before these sections are applied. We hope these changes will help us.
In insurance, the sale really materializes when there is a claim. That is when the contract materializes. When we met with Quebec legislators, we talked, for example, about the situation where a person has financial difficulties and has his house insured with the Caisse populaire. If that house burns down, the caisse or bank would know immediately that the owner has financial difficulties. It would delay payment just to make him eventually accept a settlement. We discussed that at length with Minister Landry.
Senator Hervieux-Payette: You recognize that there is a risk of conflict of interest.
Mr. Ballard: Yes.
Senator Hervieux-Payette: The structure proposed in the MacKay report will allow financial conglomerates to sell different services independently. By sharing technology, a service company can help the various branches, on a technological level, to provide quality services while reducing costs and conserving the independent integrity of each structure. Does that the proposal of the report match the philosophy of your organization?
Mr. Proulx: What is important for us is that the rules of the game be fair. That is the first thing for everybody since we are not talking about pillars of finance. I am a businessman with about thirty employees. I think I am pretty big in Laval, but in the metropolitan region, I am tiny. When I compare myself to a Caisse populaire, I am still tinier. Compared to a bank, the caisse is very, very tiny.
If the rules are not fair, small businesses will disappear. The first thing to do is to give financial mega-organizations the means to distribute products that they distribute well. The second very important thing is the professional qualification side of things. We have a problem if the people who advise you in large conglomerates are not competent, if, on the ethics level, they cannot be reprimanded for the bad advice they give customers.
We have to pay attention to the machine. The machine replaces the person when we get into advising clients, as insurance brokers do, on the best product available to suit their needs, it is very obvious that we have to be careful. The third point concerns personal information.
I still have not found out what an NBNA credit card is. I would love to know. I would not want that, in insurance, such things happen with my customers, that is, insure themselves with companies they do not know and wonder where they are at when things go wrong.
Those mega-machines make it possible to exchange information and if we do not control that, we have a problem. In your wisdom, you have studied the problem in the past. You said: You can sell insurance, go ahead with branches, things that CIBC does now. It sells, it has an insurance company called CIBC. To my knowledge, it does not do much business in Quebec. It gets by ok as the business part. That brings me to Desjardins.
They gave Desjardins the power to do sales. They have cornered up to 11 per cent of the market since 1997. Before getting into insurance, I was in a highly competitive business -- food. Getting 1 per cent of the market cost a fortune. They did it in just about 11 years. They took 11 market points and their share is still growing. They seem to be levelling off at the moment because the industry has adapted and has corrected its aim. Many brokers and insurers are proactive and show customers the validity of what they do. They have a marketing problem. They forget to tell what they do well.
They are starting to wake up and do that. When we compare advertising among insurance brokers, insurers and Caisses populaires, I can tell you that they spend money on advertising to promote what they do. Compared to them, I would hold out for a week. They can advertise all year long with their money. It is incredible what they spend on advertising.
It is important for us, when you give additional advantages to banks to sell insurance, that we can play by the rules of the games that you are going to set up as business people because we have been here for quite a while.
Senator Angus: I would like to know if both of you are insurance brokers for little firms. Mr. Proulx, you are in brokerage in Laval.
Mr. Proulx: I am an insurance broker. My father was an insurance broker. When I started 15 years ago, my father worked in the basement of our business and he had three employees. My brother and I took over the business. I am proud to say that we have 35 employees, we are 100 per cemt independent. We took over from our father because we benefited from the education our father gave us to build up our business and to provide work for 35 employees.
Mr. Ballard: He is one of the big agencies. We are a bit smaller. We have a dozen employees in the Montreal area.
Senator Angus: You say you represent 850 brokerage firms. I would just like to know if big firms like Marsh & Mack, Johnson & Higgins and little ones like yours see the MacKay report and its conclusions differently.
Mr. Proulx: Yes, when you talk about Marsh & Mack, Johnson & Higgins, after having seen what has happened over the last year, we are talking about American multinationals. We are no longer talking about Canadian brokers. I have to be careful because I am not an expert on figures but, as I see it, there are no more Canadian megafirms. Dale and Parizeau, the jewel of Quebec brokerage was sold to an American multinational. You should see the insurance those guys sell. It is like an NBNA; you wonder where it comes from, but they do sell marvellous policies. It is extraordinary; they give consumers everything. You wonder where the money goes. Aon and Marsh & Mack have a credo that is strongly orientated towards big companies. Those insurers specialize in corporate insurance.
Senator Angus: Big companies.
Mr. Proulx: Big companies.
Senator Angus: Factories, global industries.
Mr. Proulx: That is right. We, on the other hand, insure Mr. and Mrs. Everybody, small- and medium-sized businesses, businesses that serve their home province very well. In certain cases, when you are authorized and your professional quality is equivalent at the provincial level, you can insure companies that do business in Ontario, in Quebec, in the Maritimes.
The big agencies do not employ the same number of people as the small and medium insurance brokerages. You know, we are from Laval, we are small, we are completely different.
Senator Angus: That is another kettle of fish. The big agencies are not afraid of the banks.
Mr. Proulx: No, Aon, Reed, Stenhouse are as big as some small banks in our area. You are not talking about the same thing. If we draft a law that suits them, they will get still bigger and we will slowly die off. We cannot beat Aon, Reed, Stenhouse and the medium-sized businesses at their own game. When you talk about Aon, you are talking big bucks.
Senator Angus: That having been said, at Halifax yesterday, a securities broker has a small company. Unlike you, he loves the idea of bank mergers, where more services will be sold by banks. Given Canadian mentalities, more little companies can set up with no problem because the market would like to have new players.
Mr. Ballard: You are talking about bank mergers. We are talking about insurance. I do not know what mergers have to offer us.
Senator Angus: No, but by analogy, you had mergers between Aon, Reed, Stenhouse and Parizeau, then Marsh, Willis and Sedwick. That gives you, if I understand the situation correctly, lots of chances to do business. You are doing more business. There are other things. Your association has grown. I wonder whether such mergers might not be the best thing that could happen to you.
Mr. Ballard: Mergers make it possible for big companies in the Montreal area to get bigger. But in the Gaspé, in Lac Saint-Jean, on the North Shore, there are no Aons, no Marsh & Macks. Since the Caisses populaires Desjardins have been selling insurance in Quebec, 42 per cent of the agencies have disappeared. In the rest of Canada, there has been an increase.
Back in 1987, there were 2,700 brokerages. Now, there are only between 1,500 and 1,700 left. We do not have the exact figures. We think that, if the MacKay report is adopted as is, there would not be more than 600 to 800 left.
Senator Angus: Do you know that, in England, there is no problem with selling insurance in bank branches. They have all sorts of brokers, all sorts of small brokerage businesses and things work very well there. You presented briefs to the MacKay commission and the points you raised were not accepted. I wonder why.
Mr. Ballard: I do not have the exact figures for England. In France, there are more than 600 banks, in the United States, more than 10,000. In France, in England, banks have to merge to do what they do best: financing, credit, investment. They have to take care of their customers. In Canada, there are six banks and they want to drop that to two or three. They do not put any effort into helping their customers.
Senator Angus: Many other banks are going to come before we allow bank mergers.
Mr. Ballard: Yes, but I do not know whether the banks will apply pressure to prevent others from entering. I can tell you that, in other countries, the banks are so busy competing, serving their customers, that they do not have time to sell insurance. That is why in France, they do not have to go looking for 5 per cent of the market. But here, they do not have to compete, to provide service. In some areas, the Caisses populaires make you pay when you want to do business with a teller. They want people to use the machines. They do not want people to go see them.
Senator Angus: I would like to be sure, Mr. Ballard, that you are not crying crocodile tears. In English, we have an expression: "Me thinks ye protest too much." Your colleagues in the Insurance Brokers Association testified and they pleaded that the thing would be terrible, that they would lose their businesses, that it would be a damned disaster.
You say in your brief -- and I do not understand that -- on page 6:
Deposit institutions resort to intimidation and use their dominant position to put us on the street.
With all the respect I have for insurance brokers, I think you are overstating the case.
Mr. Ballard: There was a case in Alberta where a bank refused to lend money to an insurance broker and told him -- the broker testified in Alberta -- they would not lend the money because they were going to take away his clientele.
Mr. Proulx: In Quebec -- I hate to use this argument -- we are distinct from the rest. Since 1987, the Caisses populaires can sell insurance. They got the right to sell it in their branches.
I was referring to this gray zone. They took 11 per cent of the market. There were about 2,500 brokerage firms, give or take a couple of hundred. Today, there are about 1,500; 1,000 have disappeared. The Caisses populaires, compared to the six big Canadian banks, are nothing. They spend fortunes to dress up their image but if you compare them to the Royal Bank or the Bank of Montreal, they are very small. They are real lightweights, but they have managed to shut down the businesses of 1,000 of my fellow brokers. So, imagine the six big banks! It is okay to tell us to go out and fight, they will tell us on the streets: You are nice guys, so we will lend you some money.
In Quebec, we asked Desjardins to create a Society of Caisses populaires. They refused and we fought with our Finance Minister for the right to fight in the same arena, to offer deposit loans.
You should have seen them try like the Devil to take back the slogan they are using now to stop us from starting up because they saw us as a threat. We could have given their customers mortgages and taken market share from them. If you call that fair competition, it is not. They want to come after what we sell well and what we provide well but, in exchange, they do not want to give us anything.
If you let banks sell insurance with their data banks in their branches, using all their financial power to advertise to attract customers and if I cannot go after new products for my clients, sooner or later I am doomed to disappear.
If that is what you want, you will have the same result as when I was President of Brokers of Canada. We walked the streets of every little village only to find empty streets and closed businesses. By supporting such positions, by giving rights to the strongest with the most means, you will close down the little regions. I do not know what region you come from but I have visited just about every province in Canada and seen a lot of empty streets, closed businesses and automatic tellers. I see fewer and fewer open banks. So, if that is what you want to do in insurance, go ahead, give them all their powers.
Senator Angus: I thought banks went after bigger fish and had not any interest in selling insurance in their branches.
Mr. Proulx: No, but that is not what they wanted to sell.
Senator Angus: The MacKay commission did some studies. It surprises me, given the nature of its recommendations for the public interest in Canada, that it ignored your arguments.
Mr. Ballard: The report is 1,000 pages long. In Canada, insurance employs 100,000 people. In the 1,000-page report, three pages deal with general insurance.
If you say it did a major study and devoted just three pages to an industry that employs 100,000 people, that there will probably be job losses. I think it forgot to study a little something.
Senator Angus: That is why I asked the question.
Mr. Proulx: That is very true, look at the capital of the six big banks, then look at the entire insurance industry: three pages out of a 2,000-page report. We are not talking about the same economic weight. Those people want more powers so they can come and get the last three pages we have left.
The committee adjourned.